Twenty-five years ago, Frank Jaeger envisioned a solution to break the region free from its dependence on rapidly depleting aquifers. What he did not see coming was the funding for that solution drying up just as quickly.

The Parker Water and Sanitation District’s longtime manager knew the ability to store excess water for use in drought years would be critical to the area’s future vitality, and began to plant the seeds for the most important water project in Douglas County’s history, Rueter-Hess Reservoir.

The water district, with Jaeger at the helm, laid out plans for a reservoir with a capacity for 16,000 acre-feet of water; it was later expanded to 72,000 acre-feet. Customers agreed that the district and surrounding water providers needed a backup plan, and voted 93 percent in favor of using tap fees from new development to pay for the reservoir.

Tap fees are collected by the district from developers when new homes, offices and stores are connected to the town’s water system. The fees ranged from $10,000 to as much as $30,000, and based on the many thousands of Parker homes built in 2004 alone, the revenue generated by growth was sure to pay off the $105 million debt load that would have to be incurred to build Rueter-Hess Reservoir. At least that was the plan.

Fast forward five years. When the housing market began its long slide into the abyss in 2006, district officials immediately began to notice the impact. The number of tap fees collected went from 1,700 in 2005 to suddenly 600 the following year. Last year, just more than 300 taps were connected. This year, as of June 4, only 18 taps have been sold.

“All of our planning was based on a worst-case scenario of 600 taps per year,” Jaeger said during an interview in late April. “This thing has escalated on us.”

There were few who could have predicted the sudden collapse of the real estate market, but as recently as November 2007, the district ran a story in its monthly newsletter, “The Waterline,” with the headline “Promises Made, Promises Kept.” An excerpt from the newsletter did not indicate anything out of the ordinary. In fact, it assured customers that new development was doing exactly what it was expected to do.

“PWSD has stood behind the commitment we made during the 2004 bond election and no new taxes have been placed upon the tax and rate payers of the district,” the newsletter says. “Even with the current downturn in the economy, PWSD has made its loan payments using tap fees from new development, as promised.”

Less than 18 months later, the headline on the district’s April 2009 newsletter aptly read, “Dude, Where’s My Tap Fee?”

The article, written by Parker water board vice president Jason Mumm, went on to point out that the average number of annual housing starts was increasing by 12 percent in 2004, when much of the planning for Rueter-Hess was taking place. When you factored in Parker’s astronomical population boom, the $105 million needed to build the first part of the reservoir almost seemed like a drop in the bucket, especially when considering the importance of the project in supplying water for future residents and businesses.

“The good times were in full force, and in 2004 there didn’t seem to be an end in sight!” Mumm’s article says.

Unfortunately for the district — and for its customers, it turns out — the end came into sight much quicker than ever thought possible. Between 2005 and 2008, Parker water collected $65.9 million in taps fees. The money funded capital projects, built up reserve funds, and was also used to pay debt service on the $105 million in revenue bonds issued in 2004. (Money for the expansion was paid up front by Castle Rock, Castle Pines North and Stonegate, who entered into a partnership to buy water storage in Rueter-Hess, which is still under construction just southwest of Parker’s town boundary).

Counting the 5.118 percent interest rate on the bonds, Parker water is responsible for paying $12 million per year on its debt. To date, according to its finance director, the Parker Water and Sanitation District has paid only $4.1 million of the loan principal. That means the outstanding principal for Rueter-Hess alone stands at $101.3 million. And there is little in the way of revenue coming in right now.

Enter last December’s proposed rate and fee increase of 28 percent on the water district’s 12,900 customers.

Tax and rate increases

When customers first learned that the district board was considering a rate increase that would raise their monthly bills by an average of $15, many were understandably upset, especially considering the shaky economic situation. Jaeger told the public that the rate hike was necessary to offset inflation, pay for the rising cost of electricity and water treatment chemicals, and to fund ongoing maintenance operations. The district’s top-in-command also blamed “four years of poor management” for the sizable increase because previous board members failed to approve the annual rate hikes he had recommended.

Public backlash caused officials to trim the proposed increase to 20 percent, but customers continued to resist and began planning a recall election to unseat the district board. The board members approved the increase in the face of opposition on Dec. 22, but rescinded the resolution two weeks later and decided to conduct a water rate study to determine exactly how much of an increase would be required.

Although part of the proposal was to increase tap fees, which would help pay off the reservoir debt, district officials knew it wouldn’t do any good if taps were not being sold. Jaeger conceded that one of the primary reasons for the sweeping 28 percent rate and fee increase was to enable the district to pay its debt obligations “because we’re already dipping into our reserves.”

However, almost none of the discussion surrounding the hike focused on the fact that the additional revenue from an increase in water and sewer rates would help pay for the reservoir, a project that was sold on the idea that new development would pay the way.

“I thought we mentioned it,” Jaeger said. “I don’t know that it was made the primary issue because we were looking at our user fees and everybody assumes user fees only go to operations, but [debt] has always been a part of our capital expenditures.”

But during a December interview, when discussing the reasons behind the increase, Jaeger said water and sewer rate increases would not pay for the reservoir loan. Then, in the following sentence, Jaeger said, “We always promised we would expend tap fees and those revenues to pay the debt before going to a mill levy increase.”

Because of a provision in the approved bond issue, the quasi-governmental agency has the power to increase the existing mill levy on property taxes at any time without requiring a vote of the people. And, although it touted new development as the main funding mechanism for Rueter-Hess, the district worked language into the original ballot question as a back-up plan, allowing it to use “other revenues” to pay off the bonds. That includes water and sewer rates and mill levy funds.

“When it’s available we’re using only [revenues from] new development, but the reality is this reservoir is to serve the people who are here,” Jaeger said. “I mean, they’re the ones using up the ground water right now.”

While some have criticized Jaeger’s management style as arrogant and abrasive, he brushes off such suggestions and points to his sole purpose as manager of the Parker Water and Sanitation District: to provide a sustainable and reliable water supply for the customers. More often than not, there is a cost associated with such a luxury, he said.

“I know I’m pushy and aggressive and I rub people the wrong way, but to get in a fight with me doesn’t make any sense,” he said. “The property values of the people who are here won’t mean a damn thing if I can’t deliver water to them. They’ve got nothing if they don’t have water.”

What’s in store?

Indeed, property values would drop dramatically if Parker’s future water supply was in jeopardy. Defaulting on the $105 million debt is not an option if the district wants to remain solvent, not to mention maintaining a good credit standing.

Mumm said in January that the district board might consider taking out a line of credit to get through the end of the year, citing the reversal of the rate increase as the reason, but Jaeger dismissed the alternative and said there will likely be a rate hike and possibly a mill levy increase by the end of this year. The measures are being used as a last resort to stop the bleeding, Jaeger said.

“Our reserves are being drawn down to nothing,” said Jaeger, who released $5.5 million in contingency funds in April. “We’re at a point now where we won’t have a choice.”

It’s impossible to say how much the rate and fee increases will be until the water rate study results come back in the fall. Opponents have blasted the district for what they call misuse of funds, poor budgeting and a lack of transparency.

The recall petition to oust the board members was dismissed April 23 after elections officials found that information used by the group to gain signatures might have been misleading. Jaeger predicted the rate study will show that the district was close in its estimation that it would immediately need a 28 percent rate increase to continue operating at full capacity.

“Nobody’s going to like the outcome of it because it means we have to raise rates, and it’s really being driven by our capital needs for the long term future,” Jaeger said.

Parker is not the only town facing such a crisis. The scene is playing out nationwide, including the greater Las Vegas area, where home sales have dropped off the map and other major water initiatives are in danger because of funding issues. Drought is compounding the problem by increasing demand on water supplies.

Luckily for Parker, a little bit of relief is on the way. The city-like RidgeGate office development, which is slated to be built over the next several years southeast of Interstate 25 and Lincoln Avenue, is within the water district, despite being in Lone Tree. The tap fees collected when the office buildings and retail outlets hook into the system will help ease the burden on existing residents and will pay for water that will be transferred back to Parker in the future.

It’s too early to tell, however, how much of an impact the tap fee revenue would have on the funding shortfall and whether the additional demand from RidgeGate on the water system would offset any potential financial benefits.

Conversely, prospective residents have a new quandary to consider. They, along with the existing population, will be responsible for covering the remaining costs for Rueter-Hess Reservoir, plus another $80 million in outstanding district debt, unless development picks up soon. Those who eventually move into The Canyons, a massive planned residential development just north of Castle Rock that will also be served by the Parker water district, will pay the high cost of water and eat the tap fee expense that is passed on from the developer.

“People moving into Parker who haven’t got their homes built right now are in for that same surprise,” Jaeger said. “There’s no getting away from the cost of developing water.”

One study conducted by a district consultant showed that the Parker area will need roughly 31,000 acre-feet of water as an indefinite supply. Jaeger is still exploring options — some very promising — for obtaining water for the future.

“I’m looking 100 years down the road,” he said. “This community is not going to go away, and it’s going to need a water supply.”

The second installment of this two-part series will appear in next week’s newspaper and focus on what the Parker Water and Sanitation District is doing to secure water for the future.