Opinion ID: 1454695
Heading Depth: 1
Heading Rank: 3

Heading: legality of equity buy-in connection fee

Text: We now address appellants' argument concerning the City of Hailey's method of determining the amount of the connection fee. Appellants argue that the equity buyin method imposed by the city is irrational, arbitrary and unconstitutional because the new-user is charged an amount that is unrelated to the services received.
Appellants argue that I.C. § 50-1035 requires that a specific charge for the connection fee, the method of repayment of bonds, and the creation of reserves be established at the time the bonds are issued, rather than imposing or changing the structure of such charges several years later as the City of Hailey did in this case. However, contrary to appellants' assertion, I.C. § 50-1035 requires only that the municipality obtain an estimate of the system cost before a bond election is held. The statute does not require that the electors approve all changes to the rates, fees, or charges used to finance public works projects. Furthermore, I.C. § 50-1030(f) specifically gives the municipality the power to set and prescribe the rates, tolls and charges to support the system. As we held in Snake River Homebuilder's Assoc. v. City of Caldwell, 101 Idaho 47, 607 P.2d 1321 (1980), a municipality may change its user rates by resolution. Accordingly, we hold that it is not necessary that a municipality have an election such as prescribed in art. 8 § 3 of the Idaho Constitution prior to changing the rates, fees or charges imposed in establishing the cost of public works services such as sewer or water connection fees as presented in the instant case.
Appellants argue that the connection fee of $1,800.00 is excessive and inappropriately assessed because it is not based on historical costs, that no new demand or cause for an adjustment or increase in the rates has been shown, and that the fee was determined in an arbitrary manner. Idaho Code § 50-1028 sets forth the manner in which the city must operate the public works system: Grant of Authority. Any city acquiring, constructing, reconstructing, improving, bettering or extending any works pursuant to this act, shall manage such works in the most efficient manner consistent with sound economic and public advantage, to the end that the services of such works shall be furnished at the lowest possible cost. No city shall operate any works primarily as a source of revenue to the city, but shall operate all such works for the use and benefit of those served by such works and for the promotion of the welfare and for the improvement of the health, safety, comfort and convenience of the inhabitants of the city. In Schmidt v. Village of Kimberly, 74 Idaho 48, 256 P.2d 515 (1953), this Court stated: It is clear that the legislature clothed the municipality with power to make and enforce any and all reasonable regulations, rates and charges necessary to make the system self-supporting and to produce the revenue for the payment of the bonds. At the same time it has required that any such regulations and charges shall not be unreasonable, it being specifically provided in section 2, § 50-2813, I.C., [now § 50-1028], that the services are to be furnished at the lowest possible cost and that the municipality shall not operate the works primarily as a source of revenue. Id. 74 Idaho at 64, 256 P.2d at 525. In Kootenai County Property Ass'n v. Kootenai County, 115 Idaho 676, 769 P.2d 553 (1989), the property owners challenged the appropriateness of a flat fee rate imposed instead of a rate which reflected actual sewage use. We held in that appeal that the flat fee rate was reasonable even though it was possible to monitor solid waste disposal and charge a fee based upon actual use. The Court in Kootenai County Property Ass'n held that the legislature has not imposed exacting rate requirements upon localities and the law requires only that the fee be reasonably related to the benefit conveyed. It is not the province of this Court to determine how a municipality should allocate its fee and rate system. So long as the fees and rates charged conform to the statutory requirements and are reasonable, the fees, rates and charges will be upheld. The fees, rates and charges imposed by the municipality must be reasonable and produce sufficient revenue to support the system at the lowest possible cost as required by the Idaho Revenue Bond Act. I.C. § 50-1028; Schmidt v. Village of Kimberly, 74 Idaho 48 at 64, 256 P.2d 515 at 525 (1953). Appellants argue that the connection fee of $1,800.00 bears no relationship to the costs of inspecting or actually hooking up or connecting to the system. However, as noted above, a connection fee may be imposed by the police power or other statutory power and will be upheld by the courts if it is not unreasonable and not arbitrarily imposed. Kootenai County Property Assn. v. Kootenai County, 115 Idaho 676, 769 P.2d 553 (1989). In Common Council (Crown Point) v. High Meadows, Inc., 173 Ind.App. 138, 362 N.E.2d 1166 (1977), which appellants cite in support of their proposition, the Indiana Court of Appeals addressed this question and concluded that where a fee is authorized solely to carry out a regulatory purpose, the amount that may be charged is limited to the necessary or probable expense of issuing the license, inspecting and regulating the activity. However, merely because the charge represents something more than the actual cost of the actual physical hookup does not make the connection fee illegal. In Crown Point the Indiana Court of Appeals concluded that the connection fee was illegal because the municipal council did not have the statutory authority to charge a new connector a fee separately and different from fees charged to existing users. In Crown Point the Indiana statutes involved required the municipality to levy a charge that was either the equivalent to the expense of furnishing the services or a charge which was payable by each and every user equally. In Idaho, however, we are interpreting a much different statute, and the statutory limitations on fees and rates are not as narrow as those asserted by appellants. Although fairness and equity must be considered, Idaho statutes require only that the fees be reasonable and not be imposed arbitrarily. Kootenai County Property Ass'n v. Kootenai County, 115 Idaho 676, 769 P.2d 553 (1989); Schmidt v. Village of Kimberly, 74 Idaho 48, 256 P.2d 515 (1953). In Meglino v. Township Committee of Eagleswood, 103 N.J. 144, 510 A.2d 1134 (1986), the New Jersey Supreme Court upheld a sewer connection charge which required new users to pay a proportionate share of the original construction cost retired by prior connectors. However, the Court stated that there may be any number of ways in which computation of a fair share can be fixed and regardless of what method of financing is chosen, equality of treatment is obviously the polestar. Id., 510 A.2d at 1140. The New Jersey Supreme Court then concluded: This Court has never imposed on municipalities an orthodoxy of ratemaking. (Citation omitted.) Nor has it been enough that a court differed from [the municipality] as to the basis for the rates. This is not the function of a court in reviewing whether the fixing of rates was arbitrary or unreasonable. By their very nature sewer rates cannot be fixed so that they will apply with exactness. Id. (Citations omitted, emphasis added.) Similarly, in Idaho the statutory scheme in place requires only that the rates and charges be reasonable and sufficient to support the public works project, including the retirement of bond indebtedness and operating costs. Both Schmidt v. Village of Kimberly, 74 Idaho 48, 256 P.2d 515 (1953), and Kootenai County Property Assn. v. Kootenai County, 115 Idaho 676, 769 P.2d 553 (1989), concerned specific rates and charges imposed by the municipalities. Since rates in question in those cases were reasonable they were upheld by this Court on appeal. Thus, having reviewed the requirements of art. 8, § 3 of the Constitution, and the provisions of the Idaho Bond Revenue Act, we must analyze Ordinance 495 to determine whether the connection fee complies with these guidelines. The Ordinance drafted after receiving the engineers' report calculates the connection fee by first determining the gross replacement value of the system by using an engineering cost index to determine present day replacement cost of the system components. [4] Unfunded depreciation and bond principal are then subtracted from the gross replacement value to determine the net replacement value of the system for the current year. The final connection fee is then ultimately determined by dividing the net system replacement value by the number of users the system can support. The new user is charged the value of that portion of the system capacity that the new user will utilize at that point in time. Appellants argue that the system created by Ordinance 495 is unfair and that the city should use the historical cost rather than the adjusted replacement cost to determine the connection fees. While we note that an historical cost basis may produce a lower connection fee, the city is not required by the controlling statutes to use historical cost as a basis to determine the connection fee. As stated above, it is not for the courts to determine what methodology the city must use in determining its fees, rates and charges. The court's limited role in this situation is to determine whether the fees, rates and charges conform to the statutory requirements, are reasonable and are not arbitrary. Appellants claim that because accumulated depreciation before 1985 is not accounted for in the formula of Ordinance 495, that it overvalues the system and, therefore, requires the new connector to pay an unreasonable and excessive amount. In this case, the City of Hailey hired an engineering firm to determine various methods of ratemaking and adopted one of those valid methods which it determined complied with the Act and best met the city's needs. The method adopted by the City of Hailey attempts to define the current value of the system and then apportions a share of the value of that system to the new user. Idaho's statutory scheme does not require a new user to buy in to the system, nor does it prohibit such a program. In this case the City of Hailey, after receiving an engineering report, selected a system in which the new user buys into a portion of the current value of the system capacity. The methodology used to determine the value of the system is not unreasonable, nor is it unreasonable to charge a new user the value of that portion of the system capacity that the new user will utilize at that point in time. The fact that the connection fee may be higher in Hailey than in other municipalities will not invalidate the fee as long as it is reasonable and is not primarily a source of revenue. The Ordinance specifically states that its intent is to recover the costs of operating, maintaining, replacing, and depreciating the existing water and sewer systems and any extensions thereof. Ordinance 495, Recitals. There is nothing in the ordinance that is not authorized by the Idaho Revenue Bond Act and we find no evidence in the record that the fees charged by the City of Hailey are arbitrary or unreasonable. We affirm the decision of the district court.