The basic concept is that forest densities have some measurable effect on water supply – more trees use more water. The way the theory goes, originally the old growth forests were not very dense, had lots of fires, and had a rather stable overall evapotranspiration (ET) rate. After the old growth was logged, water supply likely increased, and logging continued pretty heavily until the 70’s or so. Then fire suppression, logging suppression, and other land use changes meant that the forests, particularly on public lands, started growing very rapidly and achieving peak ET (that happens when the trees are something like 40-150 years old, after that, when they are old growth, ET drops off). So, all the social issues and policies etc. have put us in a place where forest policy may be impacting water availability to some extent, and this effect will continue without management for the next 100 years or so. No one really knows exactly the degree of that effect, but some “back of the envelop calculations say maybe around 3 million acre-feet for the Sierra Nevada in California.Although I worry about an effort to show a "water contribution" via forests, I totally agree that these policies have impacted water flows within forested watersheds. I remember being quite skeptical of a claim I heard a few years ago from a logger ("we can have more water if we chop down trees"), but now I see the sense of this claim in the context of forests that are "unnaturally dense." The next question is trickier: who gets the "extra" water?
This is clearly not a solution, but is just another example of a piece of the problem – one of those key things that can’t be ignored as you try to fix the larger water problems. You can find out quite a bit about this just by googling “Forest evapotranspiration rates water supply.” There is also a study being done in the Sierra that has a pretty interesting water supply component to it, but the funding may be drying up for that. Another resource, sort of related, is the Forest Service's attempted estimate of the value of water it contributes.
Bottom Line: We need to carefully design policies if we want to avoid unexpected impacts and make no policy at all when the quantity and quality of impacts has the potential to overwhelm any benefits from a policy.