Water district braces for $18.8 million payment

Originally published in the Texarkana Gazette and writeforarkansas.org on Dec. 16, 2011.
 
Southwest Arkansas Water District has less than five years to pay $18.8 million to the federal government.

The payment, which represents the district’s remaining share of construction costs for Millwood Lake, is due Sept. 15, 2016, when a 50-year repayment agreement with the U.S. Army Corps of Engineers ends.

The water district, which was created under Arkansas law to sell and market water from Millwood to cities and industry, has been paying down the debt for most of that time. But the math going forward is bleak.

The remaining balance in 2016 will be nearly three times what the district will have paid on the project during its five decades of existence.

Under current conditions, the debt is far out of reach.

“We don’t have the income to pay it off,” said Bob Ransdell, SWAWD executive director.


• • • •
The cause of the water district’s predicament is simple: It hasn’t sold enough water.

Southwest Arkansas Water District was organized by a coalition of business and civic leaders in 1956 to lobby for and eventually sell water from Millwood Lake, which they touted as a prerequisite for economic health in the region, according to the district’s official history.

“Unless this Millwood Dam is constructed and a large supply of reservoir water storage include, this area will continue to lose population and income to the extent that it will be a liability to the State of Arkansas and the United States. … We are ready, willing and able to pay for the greatest amount of water that can be stored in Millwood Dam,” district member Vincent Foster wrote in a report presented to the Corps in the 1950s.

The Corps’ final plan for Millwood included 150,000 acre- feet of storage space dedicated to water supply—the equivalent of 265 million gallons per day—which it sold to SWAWD in a contract signed in 1960.

Under the contract, the district agreed to pay the share of Millwood’s total construction costs dedicated to water supply, which was based on the percentage of water in the lake devoted to water supply, as opposed to recreation and flood control. The water district’s portion of costs was $14.4 million, repayable over 50 years after the impoundment of water at a 2.6 percent annual interest rate.

The district receives no direct tax funding and would repay the money entirely through the sale of water. What the district does with the water and how much it charges for it is entirely up to the water district, said Chad Dulaney, a water supply official with the Corps’ Little Rock District.

“We provide them storage,” Dulaney said. “What they do with the natural resource, which in this case is the water, is up to them.”

The lake was filled in 1966, and, days later, the district signed a contract with its first customer—Nekoosa Edwards paper mill in Ashdown.

The paper mill, now operated by Domtar, was a large water user, initially contracting for 25 million gallons of water per day. That figure has since nearly tripled to 70 million gallons per day.

SWAWD board President Jim Kirchoff said district officials expected other large industrial water users to sign on.

“At that point, I think it looked like the water was going to be gone … in 20 years,” Kirchoff said

The district operated and priced its water on the assumption that the water would be quickly sold, which would need to happen to fully pay off the debt in 50 years. Those early predictions, however, turned out to be wildly optimistic.

It would be 28 years before the water district signed contracts with the cities of Texarkana, Ark., and Hope to supply a total of 8 million gallons per day and another eight years before the Little River County Rural Development purchased 700,000 gallons per day.

Even with the addition of Southwestern Electric Power Co., which contracted for 21 million gallons per day for the John W. Turk Power Plant in 2008, the district has sold just 99.7 of its 265 million-gallon-per-day-contract, leaving a debt of $18.8 million.

In hindsight, the district’s assessment of future water needs was unrealistic, said Gary Nutter, SWAWD attorney.

“It’s a euphoric-type situation when you have landed a major industry like a paper mill,” Nutter said. “They were elated and overly optimistic from an economic development standpoint.”

Southwest Arkansas Water District was not alone in overestimating water needs. According to the 2010 Water Supply Database, published by the Corps’ Institute for Water Resources, water districts, municipalities and other users owe $201 million in unsold water based on contracts with the Corps.

Nor does the district have the largest bill. The state of Kansas will owe $32.3 million in 2024 for Hillsdale Lake, and the city of Denton, Texas, will owe $29 million for Lake Ray Roberts in 2030.

Closer to home, the Tri-Lakes Water District will owe $19.6 million in 2026 for water reserved in Dierks and De Queen lakes.

• • • •
The district’s management and board of directors have long been aware of the large cache of unsold water, but it wasn’t until relatively recently that they began to deal seriously with the issue.

“The question has been raised over the years as to what the water district was going to do about the increasing debt or liability, and the resulting approach became, ‘We will cross that bridge when we come to it,’” Nutter wrote to Russellville, Ark., lobbyist David Manns in a March email obtained by the Gazette.

The bridge came underfoot about 2007, when the district began negotiating with SWEPCO to sell water to the coal-fired Turk power plant planned for Hempstead County.

All previous customers purchased water under contracts, with repayment periods of 40 to 50 years. Little River RDA, the last to purchase water before SWEPCO, entered into a 50-year repayment period in 1992.

Approving those repayment periods was a mistake, said Tricia Anslow, chief of the planning and environmental division in the Corps’ Little Rock Office. After reviewing its agreement with SWAWD and the Water SupplyAct of 1958, the federal law that governs the contract and establishes a 50-year repayment, the Corps determined that customers should have been required to pay water costs by 2016.

“We thought basically that we could start the time clock (for repayment) at activation. … The clock (actually) started in 1966 when the contract was signed,” Anslow said.

Existing customers are being grandfathered in, meaning Little River RDA still has until 2042 to pay for water. The money still owed on those contracts after 2016 is not included in the district’s $18.8 million debt, Anslow said.

For any new or existing customer wishing to purchase an additional supply of water, however, the full amount of principal and interest will be due by September 2016.

In SWEPCO’s case, the company is paying about $600,000 annually over six years to cover the full cost of its 21 million gallons per day, but the shortened repayment window presents a potential hurdle for customers looking to buy water from Millwood.

Kirchoff said customers can circumvent high upfront costs by pursuing outside financing, though the total cost would likely be higher.

The bigger impact of the Corps’ determination was that it forced the district to confront its looming debt.

• • • •
Corps officials say the Corps lacks the authority under federal law to forgive or extend SWAWD’s debt. The money is owed to the U.S. Treasury, not the Corps, and the 50-year repayment period is established federal law, any change to which will require congressional action, Anslow said.

That leaves the water district with three options: Sell another 165 million gallons of water per day by 2016 and pay off the $18.8 million debt; sue the federal government seeking a different interpretation of the contract and Water Supply Act; or pursue legislation that would ease or erase the repayment burden.

Anslow said there are cases in which water purchasers have been successful in litigation, but that’s not always the case.

The Oklahoma Water Resources Board recently was unsuccessful in its suit against the Corps over the repayment of costs related to construction of Sardis Lake in the western portion of the state. The board took care of the $27.8 million debt in 2010 by transferring it to Oklahoma City in 2010, according to board minutes.

Kirchoff said SWAWD has ruled out the possibility of a lawsuit. Nutter expects that the district will sell some portion of the remaining water by 2016, but selling all of it will be difficult in such a short time frame.

“You don’t wave a magic wand and have a paper mill or even a SWEPCO,” Nutter said.

Instead, the district is hoping Congress will either amend the Water Supply Act of 1958 or enact new legislation to make payment of its debt more tenable.

In January, the district hired Manns for $60,000 per year to work with the Corps and legislators.

U.S. Rep. Mike Ross, D-Prescott, has expressed commitment to assisting SWAWD. In 2009, he submitted a request to the House Transportation & Infrastructure Committee to include language in a bill that would allow the Secretary of the Army to amend the water district’s contract to make repayment more realistic, Ross spokesman Brad Howard wrote in an email.

The bill was never considered by the committee, however, and Ross is continuing to pursue both legislative and administrative solutions, Howard wrote.

“Congressman Ross is committed to finding a commonsense solution that will ensure residents, farmers and businesses of southwestern Arkansas have a safe and stable supply of water for years to come,” he wrote.

With no solution on the immediate horizon, the amount of future water supply in Millwood is an open question.

The district and its customers will certainly retain access to the 100 million gallons of water per day that is already under contract, Anslow said. Beyond that, even the Corps is unsure of what might happen if SWAWD’s bill goes unpaid.

“Honestly, I don’t know what steps would be taken … other than notifying them they had a debt to the Treasury,” she said.

Water district officials are confident it won’t come to that, though they aren’t sure what a final solution might look like.

“It’s a fluid situation,” Kirchoff said.