This picture has been making the rounds since at least 2012, when it first came out in a news report from New York. Since then the original description has been convoluted throughout different posts and articles, all either half true or completely incorrect. The original memo apparently came out from the Indianapolis Metro Police Department and included a picture from a confiscated source, while the news story in New York included an actual example. Either way, Snopes has the full story on it.
It looks as if the water gun has been hollowed out, to fit an actual Mossberg inside of it. Thus instead of being able to operate the firearm from inside the fake gun, the intent would be for a criminal to transport it in this form without raising any suspicions from the public or Law Enforcement officers while enroute. It looks like they painted or taped up the grip to make it better fit with the colors of the water gun as well, it taking the place of the actual water gun grip. But then again, the Mossberg pump isn’t present, and it almost seems as if the water gun pump is being used in place of the Mossberg one. How that all works on the inside, I’m not entirely sure.