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001537 ( " that it is difficult, if not irnpo~siblc. for state and local governments to finance capital ex?cnditures of all kinds, in- cluding water resources. '~he Cabinet Council's approach presupposes that increased non- federal COSt sharing, and specifically upfront financing, is necessary to augment development funds. In fact, state and local governments are struggling to continue various services under a growing financial burden which is aggravated by federal spending cuts under a wide range of programs (many of which are initiated at the federal level). They are not in a position to provide upfront financing for development of necessary adequate future water supplies. Water project COSt sharing in particular, and intergovernmental grants in general, are management tools for efficient resource allocation (among other things). Western states agree that in general beneficiaries should pay for the cost of water project services, with special consideration given agricultural water supply and flood control projects. We would further point out that water projects provide direct federal benefits and numero4s indirect benefits. The former demand federal financial partici- pation, The latter are difficult to allocate and subsequently recapture related costs and therefore some 1egree of federal sub- sidy is justified. With respect to the proposed cost sharing recommendations by project purpose: . (1) The requirement for agricultural water supply and flood control purposes is a variable with a minimum of 35%. This is quite arbitrary, ignores the irrigators' ability to pay, and sets up competition between projects and states. . (2) 50% of recreation COStS are often now advanced by non-federal interests. (3) The federal investment in municipal ,and industrial water supply and hydroelectric power has always been 100% repaid, with interest. The states see no need for non-federal interests to assume any of the upfront costs of revenue generating projects that have historically returned their construction costs to the federal government. (4) The proposal that industrial water users and power users pay more than 100% of project costs is unacceptable, and cannot be supported unless such profits are dedicated to the development and management of water resources in the affected states. The Watt memorandum fails to explain why non-federal interests would support construction of a federal project financed 100% or more with non-federal funds, .