Opinion ID: 1454695
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Heading Rank: 2

Heading: connection fees as a tax

Text: First, we must determine whether the connection fee constitutes an impermissible tax. Secondly, we must determine whether the connection fee is appropriately and reasonably assessed. In Brewster v. City of Pocatello, 115 Idaho 502, 768 P.2d 765 (1989), we held that the Idaho Constitution, art. 7, § 6 allows the legislature to `invest in the corporate authorities ... the power to assess and collect taxes for all purposes of such corporation.' Id. at 503, 768 P.2d at 766 (quoting from Sun Valley Co. v. City of Sun Valley, 109 Idaho 424, 427, 708 P.2d 147, 150 (1985)). While the Idaho Constitution permits municipal corporations to impose taxes, such authority is limited by the taxing power granted by the legislature. Id. Municipalities may impose fees pursuant to its police powers to enact regulations for the furtherance of the public health, safety or morals. Brewster v. City of Pocatello, 115 Idaho 502, 768 P.2d 765 (1989); see also Caeser v. State, 101 Idaho 158, 610 P.2d 517 (1980); Rowe v. City of Pocatello, 70 Idaho 343, 218 P.2d 695 (1950). It is well established that fees imposed under this police power must bear some reasonable relationship to the cost of enforcing the regulation. Brewster v. City of Pocatello, 115 Idaho 502, 768 P.2d 765 (1989). There is, however, a difference between the exercise of the police power and the proprietary functions of a municipality. In Schmidt v. Village of Kimberly, 74 Idaho 48, 256 P.2d 515 (1953), we stated this difference as follows: There is no inconsistency between the holding herein that in the operation of a public utility the village exercises a proprietary function, and the holding that in requiring connections to be made with the sewage system the village is exercising its police power, which is a governmental function. The fact that an ordinance, providing for the establishment and operation of a municipal water and sewage system, may also contain regulations within the police power, is not conflicting, inconsistent, or an improper comingling of the two recognized functions of a municipality. The one is regarded as complimentary of the other. If the water and sewage system were privately owned and operated, unquestionably the municipality could by ordinance regulate the operation in the interest of public health, and, in so doing, require residents to connect with and use the system. Id. at 63, 256 P.2d at 524. Pursuant to this proprietary function municipalities may construct and maintain certain public works. The Idaho Constitution, art. 8, § 3 [1] allows municipalities to impose rates and charges to provide revenue for public works projects, and pursuant to this section of the Constitution, the Idaho legislature enacted the Idaho Revenue Bond Act, codified at I.C. § 50-1027 through § 50-1042. It is pursuant to this Act and a municipality's proprietary function that the City of Hailey derives its authority to charge water and sewer connection fees. The Idaho Revenue Bond Act grants municipalities the right to operate public works for the use and benefit of those served by such works and for the promotion of the welfare and for the improvement of health, safety, comfort and convenience of its residents. I.C. § 50-1028. In order to accomplish this task, cities in Idaho are given the authority by the legislature to issue revenue bonds ... to finance, in whole or in part, the cost of the acquisition, construction, reconstruction, improvement, betterment or extension of any works ... Idaho Code § 50-1030(e). In addition, municipalities may prescribe and collect rates, fees, tolls, or charges, ... for the services, facilities and commodities furnished by such works ... Idaho Code § 50-1030(f). In Schmidt v. Village of Kimberly , this Court upheld the validity and constitutionality of the Idaho Revenue Bond Act and stated: The charges made for water and sewer service are not taxes. (Citations omitted.) These charges are imposed upon, and collected from, all of the residents and users in the village, regardless of whether or not they are taxpayers. By the 1950 amendment to the constitution, by the Revenue Bond Act, by the provision of the ordinance and the bonds themselves, neither the village nor its taxpayers are obligated for the payment of the bonds. Hence the provisions of our statutes, governing elections on the question of issuance of general obligation bonds, have no application. Id. 74 Idaho at 65, 256 P.2d at 525. Thus, when the rates, fees and charges conform to the statutory scheme set forth in the Idaho Revenue Bond Act or are imposed pursuant to a valid police power, the charges are not construed as taxes. Schmidt v. Village of Kimberly, 74 Idaho 48, 256 P.2d 515 (1953). However, if the rates, fees and charges are imposed primarily for revenue raising purposes they are in essence disguised taxes and subject to legislative approval and authority. In Brewster v. City of Pocatello, 115 Idaho 502, 768 P.2d 765 (1989), we upheld the trial court's entry of summary judgment in a citizen's action to prohibit enforcement of collection terms of a city ordinance imposing street restoration and maintenance fees upon residents. In Brewster, we held that the ordinance was a disguised tax and that the constitutional grant of taxing power to cities is not self-executing or unlimited, but rather is limited by what taxing power the legislature authorizes in its implementing legislation. In Brewster we said: In the instant case it is clear that the revenue to be collected from Pocatello's street fee has no necessary relationship to the regulation of travel over its streets, but rather is to generate funds for the non-regulatory function of repairing and maintaining streets. The maintenance and repair of streets is a non-regulatory function as the terms apply to the facts of the instant case. We view the essence of the charge at issue here as imposed on occupants or owners of property for the privilege of having a public street abut their property. In that respect it is not dissimilar from a tax imposed for the privilege of owning property within the municipal limits of Pocatello. The privilege of having the usage of city streets which abuts one's property, is in no respect different from the privilege shared by the general public in the usage of public streets. .... We hold therefore, that the attempted imposition of the fee by the city of Pocatello is in reality the imposition of a tax. The city has previously recognized such principle and attempted to gain the support of the electorate for the much needed street programs. That voter approval has been denied. To some, that withholding of approval for necessary repairs may be shortsighted and/or self-defeating, but that nevertheless has been the view of the electorate, and it will not be overturned by validating the actions of the city here, no matter how well-intentioned and desirable the ultimate result may be. 115 Idaho at 504, 768 P.2d at 768. The Idaho Revenue Bond Act authorizes the collection of sewer connection fees, Schmidt v. Village of Kimberly, 74 Idaho 48, 256 P.2d 515 (1953), and it is clear that so long as the fees collected pursuant to the Idaho Revenue Bond Act are allocated and budgeted in conformity with that Act they will not be construed as taxes. However, if fees are collected under the disguise of the Act and allocated and spent otherwise, then the fees are primarily revenue raising and will be construed as taxes. Brewster v. City of Pocatello, 115 Idaho 502, 768 P.2d 765 (1989). Thus, to determine whether the sewer connection fees are in reality taxes in disguise we must determine whether the monies collected from those funds are dispersed in accordance with that Act. It is undisputed that the City of Hailey places the connection fees into a separate fund to be used for replacement of sewer and water system components, however, no monies from this fund are transferred to the city's general fund, and none are used to retire the bond indebtedness. The monthly service charges are used to pay for the bond indebtedness and general operating costs of the systems. Appellants argue that if the city finances replacement of its sewer and water systems from rates, fees or charges it will in effect circumvent the Idaho constitutional bonding requirement and the city will be able to build a completely new system without requiring voter approval. Appellants rely upon Redman v. City of Hailey, Blaine County District Court Case No. 11855, Memorandum Decision (June 4, 1984), [2] an unreported district court case, and argue that the replacement of a complete water and sewer system can never be considered a necessary expense which can be funded under the police power granted by the legislature and that the cost of replacing the sewer system is not a reoccurring expense that is necessary and ordinary nor is it authorized by the general laws of the state. In Redman, the district court found that funding a capital reserve for future expansion avoids the necessity of an unpopular bond election, and held that the development fees collected for future expansion were unconstitutional. The issue in Redman v. City of Hailey is readily distinguishable from this case in several respects including in that case the fees were to be collected and used for future expansion of the sewer system, [3] and following the Redman decision, the city of Hailey adopted Ordinance 495 which altered the fashion in which connection fees were collected and utilized. Appellants also rely upon O'Bryant v. City of Idaho Falls, 78 Idaho 313, 303 P.2d 672 (1956). However, O'Bryant is significantly different from the facts in this case. In O'Bryant the City of Idaho Falls attempted to organize a cooperative for the purpose of constructing and operating a gas distribution system throughout the city without complying with the bonding requirements of the Idaho Constitution. Consequently, in O'Bryant the Court held that art. 8, § 3 of the Idaho Constitution precluded the City of Idaho Falls from incurring the financial obligation of constructing and operating a gas distribution system without a vote of the qualified electors. Idaho Code § 50-1033 specifically allows a municipality to use revenues collected from users of the system to provide for all expenses of operation, maintenance, replacement and depreciation of such works ... including reserves therefor; ... and (e) provide a reserve for improvements to such works .... In addition, I.C. § 50-1032 requires the system to be self-supporting and allows reserves to be accumulated for maintenance and rehabilitation of the system. See also I.C. § 50-1033. In City of Pocatello v. Peterson, 93 Idaho 774, 473 P.2d 644 (1970), we reaffirmed the proposition stated in Hickey v. City of Nampa, 22 Idaho 41, 124 P. 280 (1912), that an expenditure which is incurred for the purpose of repairing a public work is within the provision of ordinary and necessary expense exception of Idaho Constitution, art. 8, § 3. In Asson v. City of Burley, 105 Idaho 432, 670 P.2d 839 (1983), the Court stated: Comparison of these earlier cases reveals one clear distinction between those expenses held to be ordinary and necessary and those held not to be: new construction or the purchase of new equipment or facilities as opposed to repair, partial replacement or reconditioning of existing facilities. Id. at 441, 670 P.2d at 848. Article 8, § 3 of the Idaho Constitution prohibits municipalities from incurring any indebtedness or liability exceeding the income or revenue of that year unless the indebtedness or liability is approved by two-thirds of the qualified electors. Ordinary and necessary expenses are, however, expressly excepted from this provision. In this case the issue presented is whether a municipality may accumulate collected revenues from one year to pay for expenses to be incurred in the future. Since ordinary and necessary expenses are exempt from the annual expenditure limitation, we hold that a municipality may accumulate collected revenues from rates, charges or fees to fund the cost of replacement of system components in its public works projects which are ordinary and necessary. Idaho Constitution, art. 8 § 3; see generally 56 Am.Jur.2d Municipal Corporations, Etc. § 608 (1971). Idaho Code § 50-1033 allows for the accumulation of reserves for this limited purpose, and there is no constitutional prohibition to this procedure. In the instant case the City of Hailey is not incurring any indebtedness and voter approval pursuant to art. 8, § 3 of the Idaho Constitution is required only when the city is incurring indebtedness. Furthermore, I.C. § 50-1033 gives the municipality the right to appropriate, apply or expend the revenue for the statutory purposes so long as no funds are transferred to the municipality's general fund. Thus, the City of Hailey has the discretion to allocate revenues collected from rates, fees and charges so long as it complies with the purposes of the Idaho Revenue Bond Act requirements. In the present case, the fact that connection fees are specifically expended on replacement of system components is entirely within the discretion of the city government as long as other revenues allowed by I.C. § 50-1033 from the system are appropriately used to pay for the other necessary purposes including retirement of bond indebtedness. The proceeds of the connection fee for water and sewer service are dedicated to those systems. Those funds are kept in a separate, segregated account and are not used for general fund purposes. Further, only users of those services are charged and those fees are not utilized for general fund or for future expansion of the water and sewer system. Because the funds collected from connection fees by the City of Hailey are specifically allocated in accordance with the Idaho Revenue Bond Act, the fees are not collected for general revenue raising purposes and are, therefore, not taxes. We hold that under these circumstances a municipality may collect fees, rates or charges pursuant to the power granted in the Idaho Revenue Bond Act to pay for maintenance, depreciation and replacement of system components.