Court Opinion

ID: 4362950
Source: CourtListenerOpinion
Date Created: 2019-01-30 10:08:11.52262+00
Date Added: 2024-06-11T14:48:47.984856
License: Public Domain

If this opinion indicates that it is “FOR PUBLICATION,” it is subject to
                 revision until final publication in the Michigan Appeals Reports.

                         STATE OF MICHIGAN

                          COURT OF APPEALS

DEERHURST CONDOMINIUM OWNERS                                      UNPUBLISHED
ASSOCIATION, INC., and WOODVIEW                                   January 29, 2019
CONDOMINIUM ASSOCIATION, Individually
and as Representatives of a Class of Similarly
Situated Persons and Entities,

              Plaintiffs-Appellants,

v                                                                 No. 339143
                                                                  Wayne Circuit Court
CITY OF WESTLAND,                                                 LC No. 15-006473-CZ

              Defendant-Appellee.

Before: MURRAY, C.J., and SERVITTO and SHAPIRO, JJ.

PER CURIAM.

        Plaintiffs brought suit alleging that defendant’s water and sewer rates violated several
provisions of law including MCL 123.141(1) and Const 1963, art 9, §§ 25-34, popularly known
as the Headlee Amendment. Plaintiffs appeal the trial court’s order granting defendant summary
disposition. For the reasons set forth below, we affirm. 1

1
  Because the trial court considered materials outside the pleadings, we will review the trial
court’s grant of summary disposition to defendant under MCR 2.116(C)(10). A trial court’s
decision whether to grant summary disposition is reviewed de novo. Pace v Edel-Harrelson, 499
Mich. 1, 5; 878 NW2d 784 (2016).

              In reviewing a motion under MCR 2.116(C)(10), this Court considers the
       pleadings, admissions, affidavits, and other relevant documentary evidence of
       record in the light most favorable to the nonmoving party to determine whether
       any genuine issue of material fact exists to warrant a trial. Summary disposition
       is appropriate if there is no genuine issue regarding any material fact and the
                                       II. BACKGROUND

        Defendant City of Westland (the City) operates and maintains a water and sewer system.
By law, the rates charged to users of the system must be based on the water and sewer
department’s (the department) actual costs of providing those services to its inhabitants. Among
the department’s expenses is the amount it transfers to the City’s general fund to cover its
proportional share of the City’s administrative costs.2 Plaintiffs agree that the City may make
such transfers to the general fund in order to compensate the City’s other departments for the
goods and services they render to the water and sewer department. However, plaintiffs maintain
that the City has “grossly inflated” the costs of those goods and services by allocating a
disproportionate amount of the City’s administrative costs to the department. Plaintiffs allege
that doing so violates the Headlee Amendment as well as MCL 123.141(3), common law
ratemaking rules, and the City’s Charter. Accordingly, plaintiffs seek a refund of what they
deem to be overcharges paid in the previous six years, in addition to declaratory and injunctive
relief.

        Plaintiffs’ claim rests largely on the testimony of their expert witness, James R. Olson, an
analyst for MGT of America Consulting Group. MGT specializes in “indirect cost allocation”
and primarily works with municipalities to identify “overhead” costs that can be allocated to
specific departments. Olson reviewed the City’s cost allocation sheet, the deposition testimony
of City officials, and the City’s balance sheet and budget. He took issue with the City’s
allocation methodology, asserting that it is not based on “actual cost data.” For example, he
pointed out that the City allocates 30% of its annual attorney fees to the department, but could
not provide documentary support for that allocation. Similarly, Olson opined that the City
improperly allocates 50% of the rent for the City’s DPS garage to the water and sewer
department and that the allocation should instead be based on the building’s depreciation
expense.

         The City responds that Olson’s testimony, while criticizing some individual allocations,
failed to address, let alone establish, that the final rate charged was inconsistent with the
department’s total expenses. The City points out that Olson conceded that he did not perform a
“full cost allocation study,” meaning that, while Olson looked at certain individual categories of
the City’s cost allocation, he did not perform a complete analysis of the goods, services, and
facilities provided by the City’s general departments to the water and sewer department. Thus,
Olson did not have an opinion as to whether the total amount of administrative costs allocated to

       moving party is entitled to judgment as a matter of law. A genuine issue of
       material fact exists when the record, giving the benefit of reasonable doubt to the
       opposing party, leaves open an issue upon which reasonable minds might differ.
       [Bank of America, NA v Fidelity Nat’l Title Ins Co, 316 Mich. App. 480, 488; 892
       NW2d 467 (2016) (quotation marks and citations omitted).]
2
 For instance, the City transfers water and sewer funds to the City’s general fund to pay for a
percentage of the operation of the City’s IT Department, which provides services to the
department.

                                                -2-
the water and sewer department was reasonable. Nor did Olson perform a “rate study,” which
would have required him to identify all the department’s expenses and identify the revenue
necessary to operate the utility in a sound financial manner. Thus, Olson did not express an
opinion on whether the actual rates were unreasonable in relation to the necessary revenue. In
addition, he conceded that a 10 to 15% variation between budgeted costs and actual costs is
reasonable.

        Plaintiffs also claim that the City’s calculation of water and sewer rates is improper
because it includes an expense of $500,000 per year for future capital improvements and repairs.
Plaintiffs do not dispute that the department’s budgeting must include amounts to finance current
capital improvements, but they assert that it is improper for the City to include sums for future,
as yet unspecified capital improvements in its revenue requirements.

        In the trial court, the parties filed competing motions for summary disposition. The City
filed a response to plaintiffs’ motion for summary disposition in which the City first disclosed
Mark Beauchamp, president of Utility Financial Solutions, as an expert witness. In an affidavit,
Beauchamp echoed Olson’s conclusion that a full cost allocation study was necessary to verify
the reasonableness of the administrative costs the City allocated to water and sewer department.
He further averred that he reviewed and approved a revised cost allocation study performed by
Deborah Peck, the City’s budget director, which concluded that the department’s actual
administrative costs were always within 10% of the budgeted administrative costs. Plaintiffs
then filed a motion in limine to exclude Beauchamp’s and Peck’s proposed testimony arguing
that the City failed to timely disclose Beauchamp as an expert witness and that Peck’s testimony
was inadmissible because her revised allocation study was not in the record.

        In June 2017, the trial court issued an opinion and order granting the City’s motion for
summary disposition, denying plaintiffs’ motions for summary disposition, and denying
plaintiffs’ motion in limine. The trial court determined that plaintiffs failed to overcome the
presumption that the City’s rates were reasonable. The trial court also rejected plaintiffs’
argument that the City’s rates constituted a tax that was imposed in violation of the Headlee
Amendment and MCL 141.91. Further, the trial court ruled that plaintiffs’ Headlee Amendment
claim was barred by the one-year statute of limitations set forth in MCL 600.308a(3). In denying
plaintiffs’ motion for in limine, the court stated that plaintiffs could move for an order
compelling production of Peck’s analysis, which would be a more appropriate remedy than
striking the evidence. The court also determined that Beauchamp’s analysis was reliable and that
his explanation of methods used by the City would assist the trier of fact. The court concluded
that both Peck and Beauchamp could serve as rebuttal witnesses to Olson.

                                        III. ANALYSIS

                             A. REASONABLENESS OF RATES

                                               -3-
       MCL 123.141, et seq., governs the sale of water outside territorial limits. Because the
City purchases its water from the Great Lakes Water Authority,3 it is a “contractual customer”
under MCL 123.141(2). Accordingly, the City’s water ratemaking4 must comply with MCL
123.141(3), which provides that “[t]he retail rate charged to the inhabitants of a city, village,
township, or authority which is a contractual customer as provided by subsection (2) shall not
exceed the actual cost of providing the service.” However,

       MCL 123.141 does not alter the general standard of reasonableness applied by
       courts when reviewing utility rates. Because of the difficulties inherent in
       ratemaking and the limitations on judicial review, the phrase “actual cost of
       providing the service” as used in the statute does not mean exactly equal to the
       actual costs of providing the service. Accordingly, while a utility fee must be
       reasonably proportionate to the direct and indirect costs of providing the service
       for which the fee is charged, mathematic precision is not required. [Trahey v
       Inkster, 311 Mich. App. 582, 597; 876 NW2d 582 (2015) (citations omitted).]

        “Michigan courts have long recognized the principle that municipal utility rates are
presumptively reasonable.” Id. at 594. In general, “rate-making is a legislative function that is
better left to the discretion of the governmental body authorized to set rates.” Novi v Detroit,
433 Mich. 414, 427; 446 NW2d 118 (1989). “Courts of law are ill-equipped to deal with the
complex, technical processes required to evaluate the various cost factors and various methods of
weighing those factors required in rate-making.” Id. at 430. “The determination of
‘reasonableness’ is generally considered by courts to be a question of fact.” Id. at 431. “[T]he
presumption of reasonableness may be overcome by a proper showing of evidence.” Trahey,
311 Mich. App. at 594. It is a plaintiff’s burden “to show that any given rate or ratemaking
practice is unreasonable.” Id. “Absent clear evidence of illegal or improper expenses included
in a municipal utility’s rates, a court has no authority to disregard the presumption that the rate is
reasonable.” Id. at 595.

3
   MCL 123.141(1) provides that “[a] municipal corporation, referred to in this act as a
corporation, authorized by law to sell water outside of its territorial limits, may contract for the
sale of water with a city, village, township, or authority authorized to provide a water supply for
its inhabitants.” The City has historically purchased its water from the city of Detroit; the
GLWA was formed during the city of Detroit’s bankruptcy proceedings.
4
  MCL 123.141 only applies to sale of water and therefore it does not govern the City’s sewer
ratemaking. However, the City’s Charter requires reasonable sewer rates. Specifically, “[t]he
City may fix and collect charges for such disposal services, tap-in fees and connection fees, the
proceeds of which shall be exclusively used for the purpose of the sewage disposal system.”
Westland Charter, § 16.10. Further, “The Council shall have the power to fix from time to time
such just and reasonable rates and other charges as may be deemed advisable for supplying the
inhabitants of the City and others with such public utility services as the City may provide.”
Westland Charter, § 17.3.

                                                 -4-
        As noted, plaintiffs argue that the City allocated too great a portion of certain
administrative costs to the water and sewer department. Viewing the evidence in a light most
favorable to plaintiffs, we agree that there is a question of fact regarding those particular
allocations. Indeed, the City effectively conceded that there were errors in its cost allocation
when it presented proposed testimony regarding a revised cost allocation study.

        We disagree with plaintiffs’ contention, however, that questions regarding particular
administrative costs, by themselves, precludes summary disposition. It is plaintiffs’ burden to
establish the unreasonableness of the City’s rates, and they have failed to present evidence that
the City’s overall allocation of administrative costs to the water and sewer department is
unreasonable. Specifically, Olson testified that he did not prepare a full cost allocation plan in
analyzing the administrative expenses allocated to the water and sewer department. He also
admitted that other municipal departments could have provided more services to the water and
sewer department than reflected in the budget and that a full cost allocation plan could indicate
that the cost allocation should be higher than the amount that the City allocated in its budget.
Olson further acknowledged that rates are set prospectively, that such prospective budgeting
cannot be conducted with mathematical certainty, and that it would be reasonable if the budgeted
amount of a cost allocation was off by about 15%.5

        Most significantly, plaintiffs failed to analyze the reasonableness of the City’s overall
rates by conducting a rate study. Olson agreed that if the rates cover the actual revenue
requirements of the water and sewer department, then the rates are valid and customers will have
suffered no damages. Yet Olson was not asked to review the overall expenditures of the water
and sewer department, and he held no opinion overall concerning whether the total expenditures
of the water and sewer department were reasonable. Thus, plaintiffs made no attempt to analyze
the City’s rates in lights of the department’s revenue requirements. Nor have plaintiffs explained
how incorrect or improper administrative cost allocations in and of themselves renders the City’s
water and sewer rates unreasonable.

        In sum, plaintiffs argue that their claims may proceed solely on the basis of certain
selected individual expense components that they have chosen to address without a broader
evaluation of whether such allegedly improperly estimated expenses in the City’s original budget
(1) resulted in an unreasonable variance from the actual overall costs and (2) affected the
reasonableness of the rates. Given the lack of a more universal analysis, plaintiffs have failed to
provide an evidentiary basis from which to conclude that the amount of the department’s
administrative costs renders the City’s water and sewer rates unreasonable.

       Plaintiffs also fail to cite any authority to support what would be a form of active court
oversight that would amount to an exacting level of judicial auditing of only those individual
expenses of a municipal utility that a plaintiff chooses to challenge without respect to whether

5
  This testimony is consistent with established legal principles, including that “ratemaking is a
prospective operation,” Trahey, 311 Mich. App. at 597, and that “mathematic precision is not
required” when a court assesses whether a utility fee is “reasonably proportionate to the direct
and indirect costs of providing the services for which the fee is charged,” id.

                                                -5-
the overall cost allocation is reasonably accurate and without respect to whether the actual water
and sewer rates are reasonable. Plaintiffs’ argument is at odds with the limited role of the
judiciary in reviewing municipal utility rates. See Novi, 433 Mich. at 425-426, 428, 430. Nor
have plaintiffs cited any authority for their implicit contention that they are entitled to the
correction of every expense allocated to the water and sewer department that was allegedly
overestimated.

        Plaintiffs also argue that the City’s rates are unreasonable because the City uses a portion
of its revenue to create a reserve fund for future unspecified infrastructure improvements to its
water and sewer systems. Plaintiffs fail to provide any legal authority to establish that this is an
improper ratemaking procedure. To the contrary, rate-based public utilities commonly maintain
a capital reserve to provide fiscal stability. Jackson Co v City of Jackson, 302 Mich. App. 90,
111; 836 NW2d 903 (2013). According to the affidavit of Steven Smith, the City’s finance
director, the City’s water and sewer systems are comprised of nearly 674 miles of infrastructure
and have a replacement cost of approximately $674 million (i.e., it costs approximately $1
million to rebuild each mile of infrastructure). The City has existed for 50 years, its
infrastructure has an expected life of 50 to 70 years, and it experiences an average of 160 water
main breaks a year. Given this unrebutted evidence, plaintiffs do not overcome the presumption
that a $500,000 annual addition to the City’s cash reserves to fund future improvements to the
water and sewer system is a reasonable ratemaking practice.

        In affirming the trial court, we are not relying on the proposed testimony of Beauchamp
or Peck regarding the City’s revised allocation study. Even if the trial court properly considered
those affidavits, the evidence must be viewed in a light most favorable to plaintiff, and there is
clearly a question of fact regarding certain aspects of the City’s administrative cost allocation.
But Olson’s own testimony establishes the necessity of an overarching analysis of the water and
sewer department’s revenue requirements. In the absence of a complete study of the rate
structure and all of its components, it is speculative to suggest that some improper expenses have
caused the rates to become excessive or unreasonable. Accordingly, plaintiffs have failed to
demonstrate a genuine issue of material fact regarding whether the City’s rates were
unreasonable. And because we do not rely on Beauchamp’s or Peck’s proposed testimony, we
need not address whether the trial court erred in denying plaintiffs’ motion in limine. See B P 7
v Bureau of State Lottery, 231 Mich. App. 356, 359; 586 NW2d 117 (1998) (“As a general rule,
an appellate court will not decide moot issues.”).

                              B. THE HEADLEE AMENDMENT

       The pertinent provision of the Headlee Amendment, Const 1963, art 9, § 31, states:

               Units of Local Government are hereby prohibited from levying any tax not
       authorized by law or charter when this section is ratified or from increasing the
       rate of an existing tax above that rate authorized by law or charter when this
       section is ratified, without the approval of a majority of the qualified electors of
       that unit of Local Government voting thereon.

The levying of a new tax without voter approval violates this section of the Headlee Amendment.
Jackson Co, 302 Mich. App. at 99. However, a charge that constitutes a user fee is not subject to

                                                -6-
the Headlee Amendment.          Id.    The plaintiff bears the burden of establishing the
unconstitutionality of the charge at issue. Id. at 98. A court decides, as a question of law,
whether a charge is a permissible fee or an illegal tax. Westlake Transp, Inc v Public Serv
Comm, 255 Mich. App. 589, 611; 662 NW2d 784 (2003).

        “There is no bright-line test for distinguishing between a valid user fee and a tax that
violates the Headlee Amendment.” Bolt v Lansing, 459 Mich. 152, 160; 587 NW2d 264 (1998).
In general, “a fee is exchanged for a service rendered or a benefit conferred, and some reasonable
relationship exists between the amount of the fee and the value of the service or benefit. A tax,
on the other hand, is designed to raise revenue.” Id. at 161 (quotation marks and citations
omitted). In Bolt, our Supreme Court identified three key criteria to use in distinguishing
between a user fee and a tax: (1) a user fee serves a regulatory purpose rather than a revenue-
raising purpose; (2) a user fee is proportionate to the necessary costs of the service; and (3) a user
fee is voluntary in that property owners are able to refuse or limit their use of the service. Id. at
161-162. “These criteria are not to be considered in isolation, but rather in their totality, such
that a weakness in one area would not necessarily mandate a finding that the charge is not a fee.”
Wheeler v Shelby Charter Twp, 265 Mich. App. 657, 665; 697 NW2d 180 (2005) (brackets,
quotation marks, and citations omitted).

       Water and sewer rates are generally considered user fees rather than taxes because they
represent a fee paid in exchange for a service. See Bolt, 459 Mich. at 162.

                 The water rates paid by consumers are in no sense taxes, but are
                 nothing more than the price paid for water as a commodity, just as
                 similar rates are payable to gas companies, or to private water
                 works, for their supply of gas or water. [Bolt, 459 Mich. at 162,
                 quoting Ripperger v Grand Rapids, 338 Mich. 682, 686; 62 NW2d
                 585 (1954).]

Water and sewer rates are not always considered user fees, however, because they must be
proportionate to the cost of the service. See Bolt, 338 Mich. at 162 n 12. That said, plaintiffs
have presented no evidence that the rates themselves are unreasonable given the deficiencies in
their proofs discussed above, particularly Olson’s concession that he had not performed a rate
study and that he held no opinion concerning the reasonableness of the rates. Considering that
plaintiffs fail to overcome the presumption that the City’s rates are reasonable, we find no basis
from which to conclude that the rates are not proportionate to the cost of service. Instead, the
rates constitute a valid user fee because users pay their proportionate share of the expenses
associated with the operation and maintenance of the water and sewer systems. See Westland
Ordinances, § 102-61.6 The trial court aptly noted: “Those who use water and sewer services

6
    Westland Ordinances, § 102-61 provides, in relevant part:
         The amount of the rates and charges shall be reviewed annually and revised when
         necessary to ensure system expenses are met and that all users pay their
         proportionate share of operation, maintenance and equipment replacement
         expenses.

                                                 -7-
derive a benefit from paying the rates imposed. Moreover, the rates correlate directly with the
amount and frequency of use by each particular user.”

       Consideration of the other Bolt criteria does not alter the conclusion that the City’s water
and sewer rates constitute a user fee rather than a tax. The first Bolt factor indicates that the rates
comprise a valid user fee because the rates serve a regulatory purpose of providing water and
sewer services to the City’s residents. Although the rates generate funds to pay for the operation
and maintenance of the water and sewer system, this by itself does not establish that the rates
serve a primary revenue-generating purpose. “While a fee must serve a primary regulatory
purpose, it can also raise money as long as it is in support of the underlying regulatory purpose.”
Graham v Kochville Twp, 236 Mich. App. 141, 151; 599 NW2d 793 (1999).

        Plaintiffs, relying on Bolt, 459 Mich. 152, contend that it is impermissible for the City to
incorporate costs in its water and sewer rates which will be used to fund future capital
improvements. In Bolt, the City of Lansing imposed a “storm water service charge” on property
owners to fund the separation of the remaining portion of its combined sanitary and storm
systems. Id. at 155. The Supreme Court determined that the storm water service charge failed to
satisfy the first and second criteria because the charge did not correspond to the benefits
conferred. Id. at 165. 75% of the property owners in Lansing were already served by a separate
storm and sanitary sewer system, but those property owners would be charged the same amount
as the 25% who would most benefit from the construction. Id. Further, the cost of this project
was $176 million over 30 years. Id. at 155. The Court noted that the charge was “an investment
in infrastructure that will substantially outlast the current ‘mortgage’ that the storm water charge
requires property owners to amortize. At the end of thirty years, property owners will have fully
paid for a tangible asset that will serve the city for many years thereafter.” Id. at 164 (citation
omitted).

        Bolt is primarily distinguishable because it involved a rate increase to fund a completely
new alteration to the existing sewer system that benefitted only 25% of the property owners.
Here, the City’s reserve fund will be used for future capital projects that will benefits all users of
the water and sewer services. Those users contribute to wear and tear of the water and sewer
system and, by including the cost of future capital projects into its rates, the City ensures that the
users will pay a fee proportionate to the necessary costs of service. And in order for the sewer
system to serve its regulatory purpose, it must be maintained and periodically replaced and
updated. For those reasons, we conclude that the first two Bolt criteria establish that the City’s
water and sewer rates constitute a user fee rather than a tax.

        As for the third Bolt factor, plaintiffs contend that the City’s water and sewer services are
not voluntary under statute and the City’s ordinances. Even assuming that the water or sewer
charges were deemed effectively compulsory in this case, “the lack of volition does not render a
charge a tax, particularly where the other criteria indicate the challenged charge is a user fee and
not a tax.” Wheeler, 265 Mich. App. at 666. We are unconvinced, in the absence of showing that
the water and sewer rates are unreasonable, that those rates should be considered a tax as
opposed to a user fee. Considering the Bolt criteria in totality, we conclude that plaintiffs have
not established that the City has imposed an unconstitutional tax.

                                                 -8-
        Accordingly, plaintiffs have not demonstrated a genuine issue of material fact in support
of their claims alleging violations of the Headlee Amendment and MCL 141.91.7 Therefore, the
trial court properly granted summary disposition to the City pursuant to MCR 2.116(C)(10).
Given our ruling, we decline to address whether plaintiffs’ claims are barred by the applicable
statute of limitations.

         Affirmed.

                                                              /s/ Christopher M. Murray
                                                              /s/ Deborah A. Servitto
                                                              /s/ Douglas B. Shapiro

7
    MCL 141.91 provides:
         Except as otherwise provided by law and notwithstanding any provision of its
         charter, a city or village shall not impose, levy or collect a tax, other than an ad
         valorem property tax, on any subject of taxation, unless the tax was being
         imposed by the city or village on January 1, 1964.

                                                 -9-