Local Government Law Bulletin September 18, 2013

Municipalities Must Continue to Analyze Validity of User Fees in Light of Recent Michigan Court Of Appeals’ Cases

Two separate panels of the Michigan Court of Appeals have recently issued opinions regarding the validity of municipal user fees with one panel invalidating the City of Jackson’s storm water management fee, holding that the City’s fee is an impermissible tax, while a separate panel upheld the Village of Reese’s sewer “ready to serve charge” as a valid user fee.

In County of Jackson v City of Jackson, the Michigan Court of Appeals relied on the Michigan Supreme Court case of Bolt v City of Lansing, 459 Mich 152 (1998), to invalidate the City’s storm water management fee declaring the City-wide fee an illegal tax imposed by the City without an approving vote of City electors, in violation of the “Headlee Amendment” to the Michigan Constitution. The City charged the fee to all parcels within the City as a means to generate revenue to operate and maintain the City’s storm water system. Each parcel was charged a fee based upon the parcel’s pervious and impervious surface area, although residential parcels of less than two acres were charged a uniform flat fee irrespective of the parcel’s pervious and impervious surface area. Property owners could reduce the fee by gaining “credits” that would offset the fee, but could not eliminate the fee.

The revenue generated from the fee was used by the City of Jackson to pay for City drain and catch basin maintenance, leaf pick-up, mulching or yard waste and street cleaning, which were previously paid by the City’s general fund.

The Court noted that the fee failed all three prongs of the test for a valid user fee set forth in Bolt. Under Bolt, which also involved the validity of the City of Lansing’s storm water management fee, the Supreme Court noted that in order for a municipal fee to be considered a valid user fee and not an illegal tax, the fee must (1) serve a regulatory purpose rather than a means to raise revenue; (2) be reasonable and proportionate to the particularized benefit conferred to the user paying the fee and the costs to provide the service to that user; and (3) be voluntary.

The Court of Appeals concluded that the ordinance did not truly regulate the discharge of storm water from properties located in the City, and did not require the City or a property owner to identify, monitor or treat storm water discharge from a property owner’s property. Further, the Court noted that the stated purpose of the ordinance was to raise revenue to pay for activities previously paid for by the City’s general fund, i.e., maintenance for City drains, leaf pick-up, mulching or yard waste, street cleaning, and catch basin maintenance. As a result, the Court concluded that the ordinance did not serve a regulatory purpose.

With respect to the second prong, the Court noted that the charge imposed on property owners by the City did not correspond to the benefit conferred on the property owners paying the fee, but rather the benefit inured to the public at large. As no particularized benefit was provided to individuals paying the fee, the Court concluded that the fee was not proportionate. Additionally, the Court observed that as a result of the collection of the fee, the City was able to maintain a 25-30% working capital reserve in the storm water management fund, which indicated to the Court that the fees charged and collected were disproportionate to the services provided.

The Court further determined that the fee lacked any aspect of voluntariness under the Bolt analysis because property owners could not take any action to avoid paying the fee. As a result, the Court concluded that the fee imposed by the City was an impermissible tax levied in violation of the Headlee Amendment, and ordered that the City of Jackson cease collecting the storm water management fee and provide a refund to the Plaintiffs in the case.

In Meadows Valley, LLC v Village of Reese, the Court of Appeals upheld a challenge to the Village of Reese’s sewer “ready to serve charge” as a valid municipal fee.

The Village’s sewer ordinance imposed a ready to serve charge on mobile home units located within a mobile home park owned by the Plaintiff, Meadows Valley, LLC. The Village charge was a minimum flat fee of $18 per quarter per mobile home site within the park whether or not a mobile home was located on a site, plus a charge for discharges to the sewer system.

In upholding the ready to serve charge as a valid user fee, the Court of Appeals noted that the purpose of the fee was to regulate the collection and disposal of solid waste for public health and safety, which constituted a “regulatory purpose” not a means to raise revenue under Bolt.

The Court further determined that the charge was proportionate to the services rendered. The Plaintiff challenged the flat fee charged to vacate sites as disproportionate because no service was being provided to the vacant sites. In rejecting the Plaintiff’s argument, the Court of Appeals found the fact that the owner of the mobile home park received the benefit of the Village’s sewer even if units were not connected to the system significant because the owner of the park could lease and connect vacant sites and, once connected to the public sewer, those homes could utilize the Village’s sewer system. Furthermore, the Court noted that the Village was operating the system at a cost greater than the revenues charged and, therefore, the charge was proportionate to the services rendered.

Finally, with respect to the third prong of the Bolt analysis, the Court agreed that the charge was not voluntary; the Village’s ordinance required all properties in the Village, including the Plaintiff’s property, to connect to the public sewer system. Nonetheless, and relying on Bolt, the Court of Appeals noted that the Village’s satisfaction of the first two prongs of the Bolt analysis overcame any failure by the Village to meet the Bolt voluntariness prong.

Michigan municipalities must continually review municipal user fees and charges in light of the Bolt analysis and case law following to ensure that municipal user fees and charges comply with Bolt’s three-pronged test and are valid user fees and not invalid taxes.

Let’s start a partnership worth keeping.