Evidence-based environmental management requires data that are sufficient, accessible, useful and used. A mismatch between data, data systems, and data needs for decision making can result in inefficient and inequitable capital investments, resource allocations, environmental protection, hazard mitigation, and quality of life. In this paper, we examine the relationship between data and decision making in environmental management, with a focus on water management. We focus on the concept of decision-driven data systems—data systems that incorporate an assessment of decision-makers' data needs into their design. The aim of the research was to examine the process of translating data into effective decision making by engaging stakeholders in the development of a water data system. Using California's legislative mandate for state agencies to integrate existing water and other environmental data as a case study, we developed and applied a participatory approach to inform data-system design and identify unmet data needs. Using workshops and focused stakeholder meetings, we developed 20 diverse use cases to assess data sources, availability, characteristics, gaps, and other attributes of data used for representative decisions. Federal and state agencies made up about 90% of the data sources, and could readily adapt to a federated data system, our recommended model for the state. The remaining 10% of more-specialized data, central to important decisions across multiple use cases, would require additional investment or incentives to achieve data consistency, interoperability, and compatibility with a federated system. Based on this assessment, we propose a typology of different types of data limitations and gaps described by stakeholders. We also propose technical, governance, and stakeholder engagement evaluation criteria to guide planning and building environmental data systems. Data-system governance involving both producers and users of data was seen as essential to achieving workable standards, stable funding, convenient data availability, resilience to institutional change, and long-term buy-in by stakeholders. Our work provides a replicable lesson for using decision-maker and stakeholder engagement to shape the design of an environmental data system, and inform a technical design that addresses both user and producer needs.