On paper, the Pajaro Valley Water Management Agency will have the $13.5 million it needs to settle all claims for illegally collected fees by October.

That's thanks to state grant money that's begun to flow into the financially troubled agency. Nearly $9 million is anticipated by the end of the year, according to a budget presented Wednesday by retired Santa Cruz County auditor Gary Knudson, whom the agency hired as a consultant.

But until the checks arrive, it's just a number in a budget, said Dennis Osmer, chairman of the board of directors.

Cash flow is a different story, he said, and the agency board also would have to approve a speedier timetable for refunds than the three years outlined in a lawsuit settlement.

The agency's troubles can be traced to the loss of lawsuits that challenged a water pumping fee. The ruling cost the agency about half its $8 million annual income and is forcing it to pay back the money it collected without getting a vote of the people.

Osmer wants to settle claims as soon as possible, a first step to building confidence in the agency. Without community support, officials have little hope of tapping a new revenue source to replace the lost income.

"What's pretty clear is we're going to have to come up with some new funding, and we need to wait until we get started paying back what we owe them before we start engaging in a discussion of how much, for what, and how it's going to be voted on," Osmer said.

The agency's current financial situation has improved due to the grant funding, promised to help pay for a water distribution system on the coast and for an upgraded sewage treatment plant that will provide recycled water for irrigation. The money will enable the agency to pay itself back for funds it fronted for the projects.

But the agency isn't out of the water. Current funding streams will only keep the agency solvent until 2011-12, Osmer said. Outstanding debt won't be paid off until 2027.

The board decided Wednesday in closed session to fight the lawsuit, which seeks to force the water management agency to halt collection of a fee similar to the one ruled illegal and to make immediate refunds. Osmer, who hoped to reach an agreement without expensive litigation, was the lone dissenter.