Court Opinion

ID: 2900042
Source: CourtListenerOpinion
Date Created: 2015-09-09 14:08:50.519411+00
Date Added: 2024-06-11T11:36:59.615837
License: Public Domain

THE STATE OF SOUTH CAROLINA 

                         In The Supreme Court 

            Joseph Azar, Frank J. Cumberland, Jr., and Michael A.
            Letts, Individually and as Class Representatives,
            Appellants,

            v.

            City of Columbia, Respondent.

            Appellate Case No. 2014-000032

                          Appeal from Richland County
                    J. Ernest Kinard, Jr., Circuit Court Judge
                   G. Thomas Cooper, Jr., Circuit Court Judge

                              Opinion No. 27573 

                 Heard April 7, 2015 – Filed September 9, 2015 

                       REVERSED AND REMANDED

            Charles D. Lee, III, of McLaren & Lee, of Columbia, and
            Gene M. Connell, Jr., of Kelaher Connell & Connor, PC,
            of Surfside Beach, for Appellants.

            M. McMullen Taylor, of Mullen Taylor LLC, of
            Columbia, for Respondent.

JUSTICE KITTREDGE: The City of Columbia generates approximately $110
million in revenue from user fees each year by providing water and sewer services.
For more than a decade, the City has been allocating substantial amounts of this
revenue to its General Fund and for economic development purposes. Appellants
filed this action contending the City's practices violate sections 6-1-330 and 6-21­
440 of the South Carolina Code. The trial court granted the City summary
judgment. Because there are genuine issues of material fact as to whether the
City's expenditures of water and sewer revenues were lawful, we reverse and
remand. Specifically, we remand to the trial court for further proceedings to
determine whether the funds transferred into the City's General Fund were properly
considered "surplus revenues" under section 6-21-440 of the Revenue Bond Act1
and could therefore be spent for unrelated purposes and whether the City's direct
economic-development expenditures bore a sufficient nexus to its provision of
water and sewer services such that they would be considered "related"
expenditures under the terms of section 6-1-330(B) of the South Carolina Code.

                                         I.

The City owns and operates the state's largest water and sewer utility. The City
provides water and sewer services to residents and non-residents by way of a
service contract. Pursuant to the contract, the customer pays a minimum base rate
plus any additional water or sewer use as measured by a meter. The rates the City
charges for water and sewer services are set by ordinance. The revenue generated
by the City in water and sewer fees is deposited into the Water and Sewer
Enterprise Fund (Enterprise Fund).2 Each year, the City transfers $4.5 million
from the Enterprise Fund to its General Fund.

Joseph Azar, Frank Cumberland, Jr., and Michael Letts (collectively, Appellants)
brought this action to challenge the City's practice of using water and sewer
revenues for unrelated purposes. Specifically, Appellants sought an injunction to
prevent the City from transferring revenues from the Enterprise Fund for these
uses, and a refund of all such transfers from the past three years.

The parties filed cross-motions for summary judgment. Following a hearing, the
trial court issued an order granting summary judgment for the City. Appellants
appealed, which this Court certified pursuant to Rule 204(b), SCACR.

1
    S.C. Code Ann. §§ 6-21-5 to -570 (2004 & Supp. 2014).
2
 The City allocates monies from its water and sewer enterprise fund to pay for all
or part of the costs of City economic-development functions, including its
economic development department, economic development special projects, the
office of business opportunities, and four development corporations.
                                         II.

Summary judgment is appropriate where there is no genuine issue as to any
material fact and the moving party is entitled to a judgment as a matter of law.
Rule 56(c), SCRCP. Zurich Am. Ins. Co. v. Tolbert, 387 S.C. 280, 283, 692 S.E.2d
523, 524 (2010) ("Summary judgment should be denied where the non-moving
party submits a mere scintilla of evidence.") (citing Hancock v. Mid-South Mgmt.
Co., Inc., 381 S.C. 326, 673 S.E.2d 801 (2009)). When reviewing a grant of
summary judgment, this Court applies the same standard applied by the circuit
court pursuant to Rule 56(c), SCRCP. Stevens & Wilkinson of S.C., Inc. v. City of
Columbia, 409 S.C. 568, 576, 762 S.E.2d 696, 700 (2014).

                                         III.

                                          A.

The Legislature has directed that local governments must use revenue derived from
service or user fees to pay costs related to the provision of the services for which
the fee was paid:

      (A) A local governing body, by ordinance approved by a positive
      majority, is authorized to charge and collect a service or user fee. A
      local governing body must provide public notice of any new service
      or user fee being considered and the governing body is required to
      hold a public hearing on any proposed new service or user fee prior to
      final adoption of any new service or user fee. . . . A fee adopted or
      imposed by a local governing body prior to December 31, 1996,
      remains in force and effect until repealed by the enacting local
      governing body, notwithstanding the provisions of this section.

      (B) The revenue derived from a service or user fee imposed to finance
      the provision of public services must be used to pay costs related to
      the provision of the service or program for which the fee was paid. If
      the revenue generated by a fee is five percent or more of the imposing
      entity's prior fiscal year's total budget, the proceeds of the fee must be
      kept in a separate and segregated fund from the general fund of the
      imposing governmental entity.
S.C. Code Ann. § 6-1-330 (2004) (emphasis added).

The City admits the monies at issue fall within the definition of "service or user
fee" as the term is statutorily defined. See S.C. Code Ann. § 6-1-300(6) (defining a
"service or user fee" as "a charge required to be paid in return for a particular
government service or program made available to the payer that benefits the payer
in some manner different from the members of the general public not paying the
fee"). Thus, the obvious question becomes: where section 6-1-330(B) plainly
states that revenues from service or user fees "must be used to pay costs related to
the provision of the service or program for which the fee was paid," how does the
City justify using service and user fee revenues for purposes unrelated to the
provision of water and sewer services?

Through an incorrect interpretation of the word "imposed," the trial court accepted
the City's argument and found that section 6-1-330(B) does not apply to the water
and sewer fees paid by the users. Specifically, the trial court found that because
water and sewer customers must sign a contract agreeing to pay for water and
sewer service, the service arrangement is therefore a voluntary one, in which the
City acts in a "proprietary capacity." Following the City's lead, the trial court then
reasoned the voluntary nature of the arrangement and the City's "proprietary
capacity" somehow combine to allow these revenues to escape the limitations of
section 6-1-330(B) and to permit the City to spend water and sewer revenues in
any manner and for any purpose the City wishes. We reject this construction of
section 6-1-330(B). See Catawba Indian Tribe of S.C. v. State, 372 S.C. 519, 525–
26, 642 S.E.2d 751, 754 (2007) ("The words of the statute must be given their
plain and ordinary meaning without resorting to subtle or forced construction to
limit or expand the statute's operation.") (citing Hitachi Data Sys. Corp. v.
Leatherman, 309 S.C. 174, 178, 420 S.E.2d 843, 846 (1992)).

Moreover, we do not accept the unsupported premise that these contracts for water
and sewer services are "freely entered into by resident and non-resident
consumers."3 Nor is the analysis of whether section 6-1-330(B) applies impacted

3
  See International Property Maintenance Code § 505.1 (2012) ("Every sink,
lavatory, bathtub or shower, drinking fountain, water closet or other plumbing
fixture shall be properly connected to either a public water system or to
an approved private water system.") (first emphasis added), adopted by City of
Columbia Code § 5-151(a) (2013). Indeed, the City's own budget director testified
in her deposition that "you can't live without water and sewer" and that these
by whether the City is acting in a so-called "proprietary capacity."4 Rather, the
plain language of section 6-1-330(B) speaks in terms of whether revenues are
"derived from a service or user fee," not whether the fee is charged pursuant to
contract or ordinance or whether water and sewer customers voluntarily or
involuntarily accept the imposition of such fees. Because the City has conceded
that the source of the revenues is service or user fees, we find the statute requires
that revenues must be spent on costs "related to" the City's provision of water and
sewer services. Indeed, the plain and ordinary meaning of the language in section
6-1-330(B) requires some nexus—some commonality—between the underlying
purpose of the expenditure and the City's provision of water and sewer services.

In light of the proper construction of section 6-1-330, there is a genuine issue of
material fact as to whether the City's transfers and expenditures were lawful. As to
the economic development expenses the City paid directly from the water and

services are the "basis of life."
4
  Indeed, "proprietary capacity" is essentially an accounting concept that refers to
governmental activities for which "a fee is charged to external users for goods or
services," thus bearing closer resemblance to private businesses in terms of funding
than to general governmental activities, which are funded primarily through tax
revenues. See Codification of Accounting Standards and Procedures § 1300.109
(Gov'tl Accounting Standards Bd. 2014) (citing GASB Statement No. 34, ¶67
(Gov'tl Accounting Standards Bd. 1999)) (providing guidance on financial
reporting for proprietary funds). According to the relevant Generally Accepted
Accounting Principles, revenues derived from "proprietary" government activities
must be segregated into a distinct enterprise fund and reported separately on
financial statements if state "[l]aws or regulations require that the activity's costs of
providing services . . . be recovered with fees and charges, rather than with taxes or
similar revenues." Id. at § 1300.109(b). With no supporting authority, the City
vastly overestimates the significance of its purported "proprietary capacity" in
arguing that, when a county or municipality acts in a proprietary capacity to offer
services by contract to residents and non-residents, section 6-1-330 does not
constrain the local government's use of such funds. Nothing in the language of
section 6-1-330(B) differentiates or depends upon whether the service or user fee
revenues are deposited into a governmental fund or a proprietary or enterprise
fund; rather, that statute simply speaks in terms of "revenue derived from a service
or user fee imposed to finance the provision of public services."
sewer Enterprise Fund, there is a genuine issue of material fact as to whether each
of these expenditures has a sufficient nexus with the provision of water and sewer
services such that the requirements of section 6-1-330(B) are satisfied.5 We
acknowledge the deposition of City Manager Steven A. Gantt, in which Gantt
testified that the "overriding goal" of the City's economic development
expenditures was "to bring new businesses within the [C]ity limits so that they can
and do indeed become water and sewer customers." However, the record also
includes an April 2007 report completed at the City's request by independent
consulting firm Black & Veatch, in which the consulting firm cautioned against the
very practice that led to this lawsuit:

      Based on our cost causal analysis, of the Utility's 2006 budget of
      $94.8 million . . . approximately $7.5 million of directly funded costs
      should not be funded by the Utility Enterprise Fund and are more
      appropriately funded through the general fund budget. This includes
      $3.6 million for non-departmental, capital improvements, and
      component units (development corporations). Our analysis is not
      intended to suggest the activities and functions provided by these
      departments is not of value to the City; rather, our analysis indicates
      no direct cost causation or benefit could be attributed to the Utility for
      these services, and therefore no cost causal based justification for
      direct funding from the Utility was supported for purposes of this
      study.

Based on this conflicting evidence about whether these economic development
expenditures are sufficiently "related to" the provision of water and sewer services,
summary judgment was premature and further factual development is warranted
upon remand to evaluate the nexus, if any, between these economic development
costs and the provision of water and sewer services. See Bell v. Progressive Direct
Ins. Co., 407 S.C. 565, 575–76, 757 S.E.2d 399, 404 (2014) (stating "[s]ummary
judgment is not appropriate where further inquiry into the facts of the case is
desirable to clarify the application of the law" and "the non-moving party is only
required to submit a mere scintilla of evidence in order to withstand a motion for
summary judgment" (quotations and citations omitted)).

5
  The record reveals that since 1999, the City has budgeted more than $29 million
in water and sewer funds on various economic development expenditures.
                                         B. 

As to the City's transfers of water and sewer fees into the General Fund, including
the City's long-standing practice of annually budgeting a $4.5 million blanket
transfer of water and sewer revenues into its General Fund, we similarly find a
genuine issue of material fact rendered summary judgment inappropriate.6 In this
regard, the parties concede the applicability of section 6-21-440 of the Revenue
Bond Act. Section 6-21-440 of the Revenue Bond Act sets forth in detail the order
in which service or user fees are to be expended in paying related costs, directing
that revenues must be set aside for certain purposes other than debt service and
operating costs, and allows for the disposition of any surplus funds. Specifically,
section 6-21-440 provides:

      Out of the revenues there shall be set aside a sum sufficient to pay the
      principal of and the interest upon the bonds as and when they become
      due and payable. . . . This fund shall be designated the "bond and
      interest redemption fund." Out of the revenues there also shall be set
      aside a sum sufficient to provide for the payment of all expenses of
      administration and operation and such expenses for maintenance as
      may be necessary to preserve the system, project or combined system
      in good repair and working order. This fund shall be designated the
      "operation and maintenance fund." . . . Out of the remaining revenues
      there shall be next set aside a sum sufficient to build up a reserve for
      depreciation of the existing system or combined system. This fund
      shall be designated the "depreciation fund." Out of the remaining
      revenues there shall be next set aside a sum sufficient to build up a
      reserve for improvements, betterments, and extensions to the existing
      system, project, or combined system, other than those necessary to
      maintain it in good repair and working order as herein provided. This
      fund shall be designated the "contingent fund." Any surplus revenues
      thereafter remaining shall be disposed of by the governing body of the
      borrower as it may determine from time to time to be for the best

6
  The record reveals that certain monies within the Enterprise Fund may be derived
not from service and user fees, but from other revenue sources (such as
unrestricted interest income). However, the City has conceded that all the funds at
issue are derived from service and user fees, and therefore, this analysis necessarily
assumes that all monies transferred from the Enterprise Fund are derived from
service or user fees. This issue may be further explored on remand.
      interest of the borrower.

S.C. Code Ann. § 6-21-440 (2004). It is only after the utility system's operating
and maintenance expenses and bond principal and interest expenses have been paid
and the statutorily required set-asides have been made in the depreciation and
contingent funds that "[a]ny surplus revenues thereafter remaining" may be used
for unrelated purposes at the local government's discretion.7

We find the "surplus revenues" provisions of the Revenue Bond Act can be
reconciled with the requirement of section 6-1-330(B) that all service or user fees
must be used to pay for "related" costs. See Hodges v. Rainey, 341 S.C. 79, 88,
533 S.E.2d 578, 583 (2000) ("Statutes dealing with the same subject matter must
be reconciled, if possible, so as to render both operative.") (citing Butler v. Unisun
Ins., 323 S.C. 402, 408, 475 S.E.20 758, 761 (1996)). Specifically, we find the
"surplus revenues" provision of section 6-21-440 is a limited exception to the
general rule in section 6-1-330(B)—an exception that allows disposition of surplus
funds if the specific preconditions set forth in section 6-21-440 have been met. See
Atlas Food Sys. & Servs., Inc. v. Crane Nat. Vendors Div. of Unidynamics Corp.,
319 S.C. 556, 558, 462 S.E.2d 858, 859 (1995) ("The general rule of statutory
construction is that a specific statute prevails over a more general one.") (citing
Mims v. Alston, 312 S.C. 311, 313, 440 S.E.2d 357, 359 (1994)).

Turning to the facts of this case, there is a genuine issue of material fact as to
whether the transfers into the City's General Fund are properly considered either
"related" costs under section 6-1-330 or characterized as "surplus revenues" under
section 6-21-440.

As to the $4.5 million diverted from the Enterprise Fund into the General Fund
each year, the record reveals this City practice has been longstanding8 and the

7
 See also S.C. Code Ann. § 6-21-480 (disposition of surplus in operation and
maintenance fund); id. § 6-21-490 (disposition of surplus in depreciation fund); id.
§ 6-21-500 (disposition of surplus in contingent fund).
8
  Evidently, this practice was memorialized in 1993 through a resolution of the
Columbia City Council, which provides that transfers from the water and sewer
fund to the General Fund are permitted but should not be made where to do so
would impair the City's ability to operate and maintain the system or service the
related debt or result in a rate-increase for customers, among other things.
amount of the budgeted transfer does not seem to be impacted by any sort of
periodic determination of the measurable, actual costs attributable to the water and
sewer system. For over fifteen years, the City's budget has included a blanket
transfer into the General Fund in the amount of $4.5 million, which appears to be a
pre-determined amount that is essentially treated as "surplus" revenue and
transferred into the General Fund for disposition at the City's discretion.

Although section 6-21-440 allows for the discretionary disposition of surplus
revenues in certain circumstances, we find there is a genuine issue of material fact
as to whether the City has adequately funded the ongoing operating and
maintenance expenses and satisfied the specific set-asides commanded by section
6-21-440 (including setting aside "sufficient" sums in the depreciation fund and the
contingent fund) as a precondition to diverting $4.5 million into the General Fund
each year. Although there is some evidence to suggest that the City has made
expenditures for maintenance and capital improvements to its utility infrastructure,
there is also evidence that these maintenance efforts have been inadequately
funded and insufficient to keep the utility system in good repair and working order
as required by section 6-21-440.

The record reveals that in 2013, the United States, through the Environmental
Protection Agency (EPA), and the State of South Carolina, through the Department
of Health and Environmental Control (DHEC), sued the City in federal court for
various violations of the federal Clean Water Act resulting from numerous sanitary
sewer overflows and other water quality impairments. This suit was ultimately
settled by consent decree, in which the City agreed to implement a sound
management program and to make necessary repairs and improvements to the
water and sewer system—maintenance projects that should have been, but
apparently were not, readily funded by the revenues from the set-aside funds
required by section 6-21-440.9

Accordingly, summary judgment was premature, and we reverse and remand to the
trial court for further development of the factual circumstances under which these
transfers were purportedly justified and for a determination of whether these

9
 The City also agreed to pay civil penalties in the amount of $476,400 and expend
an additional $1,000,000 in a supplemental environmental project to improve water
quality and reduce flooding in specific parts of the City's service area.
transfers complied with the law.

                                        IV.

Finally, we reject the City's contention that interpreting section 6-1-330 to apply
and limit the City's expenditure of service and user fees would effectively preclude
any water and sewer revenues from ever being spent on anything other than the
utility's direct costs. We do not construe the statutes in such a narrow and
restrictive manner. Rather, the relevant statutory scheme expressly contemplates
the unrestrained disposition of surplus funds under the appropriate circumstances.
See S.C. Code Ann. § 6-21-440 (allowing "surplus revenues" to be "disposed of by
the governing body of the borrower as it may determine from time to time to be for
the best interest of the borrower" once certain preconditions are satisfied).
However, absent the legislatively sanctioned process and progression that permit
the expenditure of user fees as "surplus revenues," the law requires some nexus
between the City's provision of water and sewer services and the underlying
purpose of each expenditure or transfer of water and sewer funds. Simply put, the
statutes do not allow these revenues to be treated as a slush fund.10

REVERSED AND REMANDED.

TOAL, C.J., PLEICONES, BEATTY, and HEARN, JJ., concur.

10
  We affirm pursuant to Rule 220(b)(1), SCACR, the trial court's denial of class
action certification and its finding that Appellants Joseph Azar and Michael Letts
lacked standing. Frank J. Cumberland, Jr., shall be the sole plaintiff on remand.