SCITUATE — The town and the Providence Water Supply Board have agreed to resolve a years-old tax dispute that could have virtually bankrupted Scituate had a pending court decision been decided in the Water Supply Board’s favor.

Both sides said yesterday they were happy with the deal, which comes with the proviso that the Water Supply Board will pay $62 million in taxes in the years 2008-2017. The town in turn will drop a tax-revaluation appeal now before the Rhode Island Supreme Court.

Instead of refunding $5 million to the Water Supply Board for the tax years 2001 through 2007, the town will establish a $5-million fund to be operated jointly by the town and the board. The money will be used to purchase land or development rights to expand and protect the Scituate Reservoir watershed, which supplies drinking water to 60 percent of the state’s residents. The town has a population of 10,000, who would have been hard pressed to hand back such an amount — or possibly a greater sum, if the town had lost in court. The Water Supply Board owns 42 percent of Scituate.

The agreement is not yet chiseled in stone. It must be endorsed by the Providence City Council, the Rhode Island Public Utilities Commission and town voters, who will pass judgment at a special Financial Town Meeting tentatively scheduled for Oct. 18.

“If they vote no, we’re back in court,” said Theodore J. Richard III, former president of the Town Council and one of the town’s negotiators.

If endorsed by all parties, the agreement erases a threat that has hung over town thinking since the Water Supply Board in 2001 challenged a town revaluation of 9,000 acres of watershed land, an act that increased the land’s taxable worth by nearly 50 percent.

The water board won in Superior Court in 2006, and the town appealed to the Supreme Court. It is that appeal that will go away if the agreement is approved.

Theodore J. Przybyla, Scituate treasurer, said on Thursday that town and water board officials had put countless hours into finding a way to end the dispute. “Everyone was weary,” he said, “realizing that no one was making any progress except the lawyers.”

“The reservoir can’t be moved,” Richard said. “We are going to be partners forever.”

“We need them, they need us,” said Robert R. Budway, president of the Town Council. “It protects the pristine nature of the watershed. If we bring lots of new people into town, it’s going to affect the quality of the water.”

Przybyla credited Budway with coming up with the idea of the fund.

The treasurer said the Town Council had a constant worry about development pressure, and that worry formed part of the negotiators’ motives in their talks with the water board.

“We wanted to limit the amount of money that was going to be returned to them,” he said. “They wanted to maximize. We reached an agreement that the money would be spent in Scituate, and that it protect the quality of the water. So everybody wins. There are no losers in this situation. Every acre of land we are able to preserve is an acre not to be developed. There will be no town infrastructure requirements.”

Under the terms of the agreement, the fund will be administered by a board of five — two appointed by the town, two by the water board, and one “neutral” member to be agreed upon mutually.

Boyce E. Spinelli, deputy general manager of the Water Supply Board, said yesterday that the $62 million that the board expects to pay in taxes over the next 10 years will be less than the tax bill that could have been expected without the agreement. He said the board will pay about $9 million less in taxes as a result.

“We really feel this is a win-win for both entities,” Spinelli said, “because it takes all the risks of litigation out. When you go to court there’s no guarantees for either side, and there’s a lot of time and money to be spent.”

Besides, Spinelli said, the court would not have dealt with future taxes, only for the years in dispute. “This puts us on a nice even keel over the next 10 years. We know what the taxes are going to be, Scituate knows what the revenues are going to be. There’s really a lot of benefit to Scituate taxpayers and Providence Water ratepayers.”

Przybyla said one consequence of the seemingly unending dispute was the effect on town finances.

“We have eliminated a substantial unknown impact to the town — its ability to borrow money,” he said. “Resolving that was essential for us to proceed. This is an important revenue stream for the town.”

The treasurer said that the water board is Scituate’s biggest taxpayer, producing about 25 percent of the town’s tax revenue.

Richard said that only one percent of land in the town has been zoned for commercial development, placing an unusual burden on homeowners who pay property tax.

“When we rezoned the town we were very concerned with protecting the watershed,” he said. “Any commercial or industrial development or large house tracts there would have been antithetical to what we both wanted.”

Said Przybyla, “This has huge implications: It maintains the quality of life. It comes at an opportune time when the real estate market is depressed. We will be able to leverage this money to acquire more property than we could before, when it was heated. That five million is going to go a long way.”

tmorgan@projo.com