STEPHENS CITY – A recent report claims the town is facing financial instability and is unable to pay Frederick Water for several years of water and sewer services.
McGuire Woods, Frederick Water’s legal counsel, recruited financial expert Guy A. Davis with Protiviti to analyze the town’s fiscal condition based on financial documents the town has been willing to provide, including a statement of revenues and expenditures for the past six years.
Davis’ report claims that for the past six and a half years, the town has not had enough money to pay Frederick Water since it was not collecting enough money from its residents to pay for the water and wastewater services.
“Over the last six and one-half years, the Town of Stephens City has incurred sustained and material losses totaling over $1.4 million from the operation of its water and wastewater utility,” the report states. “It has not collected, nor has it budgeted to collect, enough revenues to cover its operating and maintenance expenses.”
The report further concludes that the town is exposed to substantial financial instability because of its decisions to:
Stop all payments to Frederick Water, its largest vendor, for almost three years.
Allow the outstanding water and wastewater debts (and late payment penalties) to accumulate to “insurmountable levels.”
Create a budget two years in a row that does not contemplate paying for water and wastewater services.
Discontinue the practice of having an independent certified public account firm audit the town’s financial records. The report claims the town “does not have the requisite accounting skills to properly record and present its financial results to its supervisors and citizens.”
“The town is in a tough position,” Frederick Water Executive Director Eric Lawrence said. “They are losing money. When they stopped paying us in 2015 it was because they couldn’t afford to pay us. Because they didn’t have adequate funds.”
Town Manager Mike Majher did not return The Star’s request for comment on Friday.
Frederick Water is still seeking more detailed financial records from the town.
In February of this year, Frederick Water filed a request with the Frederick County Circuit Court seeking a subpoena to Capon Valley Bank in an attempt to get copies of the town’s bank account records.
Later that month, the town filed a motion to quash Frederick Water’s subpoena so that it could not get the records. The town stated “the Subpoena is overly broad, unduly burdensome and is geared to annoy, embarrass and oppress Stephens City and create undue burden and expense on Stephens City and its bank.”
On Tuesday, Frederick Water filed an opposing motion to the town’s motion to quash Frederick Water’s request for a subpoena.
According to Frederick Water’s motion, Capon Valley Bank made no complaints about the subpoena being “burdensome.”
Lawrence said that the bank has been “very accommodating” and that it all of the files are ready. However, Lawrence said Capon Valley ultimately did not release the files to Frederick Water because the town threatened to sue the bank.
Frederick Water and the Town of Stephens City’s feud stems from a dispute over a 1992 contract under which the town granted Frederick Water the right to pump up to 3 million gallons of water per day free of charge from three town-owned quarries. In exchange, Stephens City received reduced water rates for two decades.
Stephens City claims the contract – and Frederick Water’s rights to draw water – ended in 2012. Since March of 2015, the  town has kept the money it collects from its residents for water and sewer services instead of reimbursing Frederick Water.
In 2015, the town filed a lawsuit against Frederick Water for continuing to take the quarry water. Stephens City is seeking $10 million. On Feb. 15, Frederick Water filed a countersuit against the town, claiming the town owes it $5.78 million in unpaid bills and penalties for water and wastewater services.
Frederick Water claims that even though the water agreement ended, it has a perpetual easement that allows it to continue to draw millions of gallons of water for free from the town. The town believes the authority should be paying for water taken from the town quarries.
The town’s proposed budget for the 2018-19 fiscal year is about $1.5 million – a decrease of about $135,000 from the current fiscal year’s budget of $1.63 million. The budget does not plan for paying Frederick Water for its water and sewer services.
Though Frederick Water is seeking $5.78 million in its counter-lawsuit, Lawrence claims that as of April 10, the town’s unpaid balance due to Frederick Water for water and sewer services is more than $7 million.

Lawrence believes that Frederick Water is in “a solid position going forward” with the lawsuit. If Frederick Water loses the lawsuit, it will have to pay at least $10 million – almost a third of the $35 million Lawrence says Frederick Water usually budgets each year.

If the town loses the lawsuit, the consequences will be more significant as the $5.78 million that would have to be paid to Frederick Water is 3.85 times more than the town’s entire planned budget for FY 19.
“If they lose, they’ve lost everything,” Lawrence said.
Majher previously told The Star if the town lost the lawsuit, it could try to get bonds to pay off Frederick Water. Lawrence is skeptical about how easily the town could do this.
“The town says they would get a loan to pay us,” Lawrence said this week. “Well, you need collateral.  If you buy a house you can use the house as collateral.  If you buy a car you can use the car as collateral. For the town to go out and get a $6 million bond, there would be no collateral. So it would be a challenge for them to get the bond.”
The next court hearing for the case will take place on April 18.