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Financing Your Municipal Stormwater Operations

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Presented at the Pennsylvania State Association of Boroughs Annual Municipal Legal Update on August 8, 2018, in this presentation we review the current state of the law regarding boroughs' ability to pay for stormwater infrastructure, and recent case law regarding stormwater payment systems.

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Financing Your Municipal Stormwater Operations

  1. 1. www.mcneeslaw.com Financing Your Municipal Stormwater Operations August 8, 2018 Salon CDE PENNSYLVANIA STATE ASSOCIATION OF BOROUGHS Pennsylvania Municipal Legal Update Timothy Horstmann Adeolu Bakare McNees Wallace & Nurick LLC
  2. 2. www.mcneeslaw.com Financing Your Municipal Storm Water Operations  Covered Topics:  Municipal Legal Background  Storm Water Fee Structure – Legal Concerns and Litigation  Financing Structures and Considerations 2
  3. 3. www.mcneeslaw.com Municipal Legal Background  Borough Code, Chapter 22 – Authorization  “Any borough may ... acquire, operate and maintain areas for the infiltration, detention or retention of storm water and for other methods of storm water management authorized by the Department of Environmental Protection.”  Authorizes special assessments against benefited properties in accordance with Chapter 21A of Borough Code 3
  4. 4. www.mcneeslaw.com Municipal Legal Background  Borough Code, Chapter 21A – Assessments  Must first identify the properties benefited by the improvement – only those properties may be assessed the cost  Two options for assessment o Front-foot basis, i.e., based on amount of linear feet of street frontage for each benefited property o Equal basis assessment 4
  5. 5. www.mcneeslaw.com Municipal Legal Background  What about User Fees?  Second Class Township Code – amended in 2016 by Act 62 to, among other things, authorize imposition of storm water management fees  House Bill 914 – would amend the Borough Code to authorize boroughs to impose storm water management fees o HB 914 is essentially identical to Act 62 of 2016  HB 914 was introduced on March 22, 2017; passed House on June 12, 2017. Senate has yet to consider. 5
  6. 6. www.mcneeslaw.com Municipal Legal Background  Fee Structure under House Bill 914  Fee must be “reasonable and uniform” based “in whole or in part” on the characteristics of the property benefited by the facilities, systems and management plans  Must include “appropriate exemptions or credits” for properties that have installed and maintain facilities meeting best management practices  Only use for storm water purposes (no reallocation to Borough general fund) 6
  7. 7. www.mcneeslaw.com Municipal Legal Background  Fee Structure under House Bill 914  Three Methods of Fee Assessment: o Assess all properties in the Borough (broadest) o Assess all properties benefited by a specific project (similar to existing law) o Assess all properties located in a storm water management district established by the Borough 7
  8. 8. www.mcneeslaw.com Municipal Legal Background  What about a Municipal Authority?  Act 68 of 2013 – amended Authorities Act to explicitly permit the creation of an authority for the purpose of “storm water planning, management and implementation” as defined by the articles of incorporation  Act 68 also gave retroactive blessing of any authority that was operating storm water controls as part of a combined water/sewer/flood control project 8
  9. 9. www.mcneeslaw.com Municipal Legal Background  Act 123 of 2014  Amended Authorities Act to explicitly permit the imposition and collection of “reasonable and uniform rates” in connection with the performance of storm water planning, management and implementation  Rates must be based in whole or in part on property characteristics, which may include installation and maintenance of best management practices o i.e., similar to Act 62 of 2016, HB 914 9
  10. 10. www.mcneeslaw.com Municipal Legal Background  Should I Use a Municipal Authority?  Under current law, funding of storm water expenditures under Borough Code is tied to special assessment process (can only assess benefited properties)  No authority to impose a broad, flexible storm water management fee like in the Authorities Act  A municipal authority may be an attractive option due to greater flexibility in establishing the fee structure to finance projects 10
  11. 11. www.mcneeslaw.com Municipal Legal Background  Considerations in Forming a Stormwater Authority  Regionalization – if talking with other municipalities, an authority is ideal vehicle to build a multi-jurisdiction solution  (Political) Liability Isolation – transfer responsibility to implement (and pay for) plan to separate entity  Spread the cost among more properties  But consider the drawbacks – chiefly, loss of municipal control 11
  12. 12. www.mcneeslaw.com Storm Water Fee Structure 12  Two basic rate structure options  Flat Fee – Simple per-parcel fee for all  Dual Fee – Separate fees for Non-Residential and Residential o In dual-rate situations, Residential parcels typically pay a flat fee o Non-Residential parcels may pay a higher flat fee or a fee based on the individual parcel area, as determined by Geographic Information System (“GIS”) measurements
  13. 13. www.mcneeslaw.com Storm Water Fee Structure 13  More detailed variants  Equivalent Residential Unit (“ERU”) o ERU = average impervious area for a single family residential parcel  Equivalent Hydraulic Area (“EHA”) o EHA = combined impact of impervious and pervious areas o Fees based on estimated runoff flows, with a higher per-unit rate for impervious area and a lower rate for pervious area  Tiered/Development – Fees based on sliding scale from vacant/light development to heavy development
  14. 14. www.mcneeslaw.com 14 Legal Concerns  Litigation over storm water fees generally concerns three issues  Statutory/Regulatory Authority to form storm water utility  Distinction between fees properly collected by the utility and taxing power limited to the state  Rate allocation to customers  Although many municipalities have created storm water utilities without litigation, some have faced significant legal challenges
  15. 15. www.mcneeslaw.com 15 Legal Concerns  Statutory authority to establish storm water utility  Northeast Ohio Regional Sewer Dist. v. Bath Twp., 44 N.E.3d 246 (Ohio 2015) o Supreme Court of Ohio rejected Bath Township’s allegation that the Northeast Regional Sewer District lacked statutory authority to implement a storm water management program and collect storm water fees o The court found the governing statute defined “wastewater” to include storm water, thereby authorizing the Sewer District to regulate and assess fees for both services
  16. 16. www.mcneeslaw.com 16 Legal Concerns  Fee v. Tax  City of Lewiston v. Gladu, 40 A.3d 964 (Me. 2012) o Supreme Court of Maine found the City of Lewiston’s storm water assessment charge to be a valid fee and not a tax o Court applied the following four-factor test: o Regulatory purpose or revenue generator? o Direct or indirect relationship between fee and benefit? o Voluntary or involuntary fee?  Court found credit program allowing for 100% fee reduction conferred voluntariness o Fair approximation of costs and benefits?
  17. 17. www.mcneeslaw.com Legal Concerns  Fee v. Tax  Jackson County v. City of Jackson, 836 N.W.2d 903 (Mich. Ct. App. 2013) o Court of Appeals of Michigan found the storm water management charge implemented by the City of Jackson met no regulatory purpose and was intended primarily to increase revenue o Court also found the charge did not reflect usage of the storm water sewer system and therefore constituted a tax for the public benefit rather than a fee for services rendered 17
  18. 18. www.mcneeslaw.com Legal Concerns  Rate Allocation to Customers  Mint Mgmt. v. City of Richmond, 2017 Ind. App. LEXIS 66 (Ind. Ct. App. 2017) o Court of Appeals of Indiana upheld a storm water service charge imposed by the City of Richmond on all property owners regardless of whether storm water runoff from each parcel flows into the City’s storm water system o The court determined that all parcels benefit from the City’s storm water infrastructure because the storm water infrastructure included combined sewers carrying both storm water and sanitary sewer flows18
  19. 19. www.mcneeslaw.com Legal Concerns  Rate Allocation to Customers  City of Key W. v. Key Golf Club Homeowners’ Ass’n, 2017 Fla. App LEXIS 7804 (Fla. Dist. Ct. App. May 31, 2017) o Court of Appeals of Florida overturned a lower court order authorizing the City of Key West to recover storm water fees from a group of customers o Court initially found that storm water runoff from customer properties did not flow through the City’s storm water system and that assessing a storm water fee to such customers would shatter the distinction between a tax and a utility fee o On rehearing, the court found in favor of a voluntary fee because properties could receive an exemption if the owners improved the property to retain all storm water19
  20. 20. www.mcneeslaw.com Legal Concerns  Litigation in Pennsylvania  Pennsylvania courts have not addressed stormwater fee/tax or rate allocation issues  However, recent suits place court decisions on the horizon o Jan. 2018 - Property owner in New Castle, Pennsylvania filed a complaint against the City of New Castle in the Lawrence County alleging the city’s stormwater user fee to be an illegal tax o July 2018 - Lehigh-Northampton Airport Authority filed a complaint against the City of Allentown alleging that the city’s stormwater user fee to be an illegal tax and alternatively, an unreasonably high fee 20
  21. 21. www.mcneeslaw.com Legal Concerns  Litigation in Pennsylvania o Jan. 2018 – Various entities filed Complaints against the City of Chester alleging its proposed stormwater user fee to be an illegal tax and alternatively, an arbitrary and unreasonable fee o Complainants include:  Widener University  Chester Charter School for the Arts  Best Homes DDJ LLC  Chester Historical Preservation Committee  Several homeowners 21
  22. 22. www.mcneeslaw.com Legal Concerns 22  Lessons Learned?  To minimize potential for legal challenges to storm water fees, municipalities must: o Develop equitable fee structures based on customers’ use of storm water infrastructure o Engage in community outreach campaigns to secure public support
  23. 23. www.mcneeslaw.com Questions?  Timothy Horstmann thorstmann@mcneeslaw.com  Adeolu Bakare abakare@mcneeslaw.com 23