Local in Ann Arbor

An Update, July 2021 (scroll down to see it)

Ann Arbor’s Plymouth Road water tower

Years of questionable use of utility fees are coming back to bite the City of Ann Arbor and millions of dollars are at stake. How will they be paid and how will this affect the affordability of our water system?

Water is necessary, not only to life, but to human civilization. It is also critical to the success of a city, both as a place of habitation and also to conduct business and industry. Many of us living in Ann Arbor have been accustomed to taking our well-run water system for granted, even though daily life would be unimaginable without it.  Now we may become more aware of the cost and complications of maintaining a water utility that provides clean drinking water and eliminates sewage, while it also exerts environmental controls in order to safeguard the health of surface waters in the Huron River watershed. We are facing a crisis that may affect the affordability and quality of our critical water system.

The Class-action Lawsuit against the City of Ann Arbor

The crisis is this: a class-action lawsuit has been brought against the City which alleges that the City has illegally overcharged the customers of the City for use of its water utilities. The monetary amounts involved are not certain, but are in the tens of millions. The lawsuit, which was filed in August 2020 via a Royal Oak law firm (Kickham Hanley PLLC) with a track record of successful class-action suits, alleges that (a.) utility customers have been overcharged for water and sewer; and (b.) the stormwater utility charges are largely unwarranted and illegal. The remedy suggested is that both the signed plaintiffs (two Ann Arbor residents) and the entire class affected (all utility customers as of six years ago) should be reimbursed, and legal charges (to the attorneys) should be paid. Typically, class-action suits like this are undertaken on a contingency basis, which means the attorneys will be paid their fee only if the suit succeeds. All members of the class (all of us users) can expect to receive a modest sum based on our overpayments. (Don’t plan any extensive vacations.)

Here are the actual court documents.

Original complaint: Hahn-v.-City-of-Ann-Arbor-Plaintiffs-Class-Action-Complaint-and-Jury-Demand

City of Ann Arbor response: City of Ann Arbor response to Hahn

Hahn amended complaint: Ann-Arbor-First-Amended-Complaint-10-29-20

Ann Arbor’s Municipal Water Utilities

Our water system is really three systems, operated mostly in isolation from each other and with a separate financing mechanism. Fees and charges are based on usage to some extent, though Ann Arbor’s fee system has gotten more and more complicated over the years. Here is the sample water bill as displayed on the City’s website.

Note that there are two types of charges for water and sewer: the Customer Charge (fixed) and an amount based on volume usage. Volumes are measured in “Centum Cubic Feet” (CCF), namely 100 cubic feet of water. (Sewer usage is based on the water usage.) The charge is calculated as (CCF x rate). Sewer usage is calculated based on the water used. (What goes in, must come out.)  The fixed customer charge is supposed to pay for administrative costs, and is levied according to the size of the water meter.

A Question of Rates

Some years ago, Ann Arbor introduced a tiered system of rates for residential water use. There are also varied rates for “water only” (irrigation) usage, and different user classes such as multifamily, commercial, etc. (A detailed description of the water fee schedule will have to wait for a different day.) Each year for more than a decade, the rates have been going up consistently, which is causing more and more comment each year. The increase each year is by a relatively modest percentage, but with compounding the rate really goes up over time.

The controversy became more pronounced with the Cost of Service (COS) study launched in 2017.  This was followed by an analysis of rates( Water and Sewer Cost of Service Study) by a consultant (Stantec). The result, as the Stantec study notes, was that costs were transferred from multifamily residential users to single-family users. A particularly high rate was assigned to users in a fourth tier which was thought to represent people who watered their lawns. This angered a number of residents. CM Jane Lumm, who represented a number of them, was instrumental in bringing in a second consultant group to review the rate structure. The Arcadis “alternative analysis”  was presented to Council in March 2019. Meanwhile, overall rates continued to increase. In June 2020, with the COVID crisis afflicting many Ann Arbor residents, CM Lumm successfully offered a resolution that delayed an increase in water rates for the remainder of the year. However, the increase will be made up after the final passage of a resolution on December 21, 2020. The water rates will now increase by 7% as of January 1, 2021 and by 6.5% as of July 1, 2021. Here is a calculation of rates that might affect most homeowners. As this shows, the cumulative rate increase is nearly 14% (13.94 %). So if you are in the third tier (not too atypical for many households), your rate for the highest tier has increased by nearly a dollar per CCF. Let’s suppose you use 20 CCF per quarter. After the two increases, your water bill will have gone up about $8.06 per quarter. (Corrected amounts)

From ORD 20-32 as amended

Stormwater, A Special Case

“Stormwater” refers to the water that enters streets and drains, ultimately finding its way to a river or tributary. It requires management for several reasons, including flooding and water pollution. Typically, pervious surfaces like lawns and wooded areas accept a fair amount of rainfall without flooding. Impervious surfaces like pavement and building structures do not absorb water, and it runs off to cause surface flooding unless captured by underground stormwater systems. The City of Ann Arbor has an extensive stormwater system. While water usage is easy to measure (we all have a meter), individual contribution to stormwater is more difficult. A stormwater rate study  (2018) by Stantec describes the system being used in some detail. It is very complex. This system has also been controversial since it was first put into place in 2007, and the scope has increased to pay for more items. It has gone from being a trivial charge for most homeowners to a substantial one.

The Point is Taxes

Taxes are the lifeblood of government. I can confidently state that this has been true from the beginning of recorded history. Although possibly not recorded, it has also always been true that the people governed would rather avoid them. Yet, we also generally recognize the importance and utility of government. So there is always a tension, or if you like, a negotiation, between the taxing entity and the taxed.

Here in Michigan, as in many other locations, the tax revolt led by California’s Proposition 13 (1978) resulted in an amendment to the Michigan Constitution (the Headlee Amendment [1978]) that limited taxation by local governments. The intent was to protect citizens from new taxes unless they voted for them. It has several sections but the take-home message is: no new taxes without a vote!  This has severely limited municipalities (cities, townships, counties) in Michigan because the only available source of new revenue has been voter-approved property tax millages.

But municipalities also offer services that can legally be supported by fees. A fee is not considered a tax. It is simply the price of receiving the service. It is not, however, supposed to exceed the cost of providing the service. When is a fee a tax? When it is meant as a revenue source, not merely a compensation for the service. This distinction became very important in what is widely referred to as the “Bolt Decision” (a ruling by the Supreme Court of Michigan in the lawsuit, Bolt vs. City of Lansing). There are summaries of this many places but it is worth reading the actual decision because there are some subtleties.  Here is the essence:

• A fee should serve a regulatory purpose, not a revenue-raising purpose. (This is a little hard to explain. It basically means that the fee is simply the price of using the service.)
• A fee is voluntary. The user of the service should be able to choose the degree to which they use it. A good example would be that if you don’t want to pay for water, you shut off a lot of taps.
• A fee should be proportionate to the cost of providing the service. (This is how the “Cost of Service” study gets born.)

The Court’s decision also addresses the question of whether the fee collected benefits the user directly.  Here is a direct quote:

The revenue to be derived from the charge is clearly in excess of the direct and indirect costs of actually using the storm water system over the next thirty years and, being thus disproportionate to the costs of the services provided and the benefits rendered, constitutes a tax.

So why is the distinction between a fee or a tax so important? Because in Michigan, because of the Headlee Amendment, a municipality must obtain the consent of the voters in order to impose a tax.

Arguments to Come

To date, the original complaint and an amended complaint with more detail have been filed. They have many separate instances and arguments to support the claim that Ann Arbor residents and users of the utility system have been overcharged. The City has filed an initial response, most of which is simply a denial of the allegations. The defense of the suit will involve a very fine dissection of many details of the rate structure and of the use the funds have been put to. A critical question is whether the City has been collecting water fees as a source of revenue (to use for purposes other than providing the service).

On December 21, 2020, the same day on which they authorized higher water rates, the Council approved an amendment that increased fees to an outside law firm to defend the City against this lawsuit. They authorized paying it from the water fund.

Next Chapter: an Update

July, 2021: Progress on the lawsuit seems to have stalled out. The plaintiff’s motion to proceed in a class action lawsuit (request for class certification) was denied by Judge Archie Brown on 5/20/2021, and a motion for reconsideration was denied on 7/12/2021. Meanwhile, the Judge also denied (on 5/27/2021) a request to file a Second Amended Complaint.

As noted, Council approved a fee to an outside law firm to defend the suit. Here is the City’s response to the motion for recertification. As you may note, it includes extensive documentation, including material from other lawsuits against municipalities.

City’s Response to Motion for Class Certification

It is not clear where the plaintiffs will go from here. Filing this lawsuit under any condition other than as a class action would not be remunerative.

In our opinion, a fatal flaw in the lawsuit was the emphasis on water fund reserves. The City’s response made a number of pithy comments about this claim. They showed figures to indicate that “the reserves are insufficient, not excessive”.

The plaintiffs chose the wrong hill to die on. Their case could have been very strong if they had confined themselves to the stormwater “fees” (they are, in fact, a tax, as could easily be shown). Class-action lawsuits based on Bolt against a number of other Michigan municipalities have been successful. Jack Eaton, a former Ann Arbor Councilmember who is an attorney, has been following these issues for some time. This is a summary of recent Michigan court cases relevant to the Bolt Decision which he wrote. The summary is worth reading in its (short) entirety, but these are the significant conclusions. Quoting here:

On December 11, 2020, the Michigan Supreme Court issued an order that may impact the current lawsuit against the City of Ann Arbor. The Supreme Court order was short, just one paragraph, but it vacated a Court of Appeals decision that had given some hope to municipalities whose utility charges were being challenged. The Court of Appeals had ruled in the combined case of Binns v Detroit and DAART (Detroit Alliance Against the Rain Tax) v Detroit that the City of Detroit’s drainage charge was a fee rather than a tax under the analysis of the Michigan Supreme Court in Bolt v City of Lansing, 459 Mich 152 (1998).

…Some believed that the Binns and DAART cases provided the Supreme Court a chance to address the impact of the Bolt decision with the hope that the Supreme Court might modify its approach to the fee versus tax analysis. The order vacating the Court of Appeals opinion made clear that the Supreme Court maintains its original approach.

Proportionality

One of the issues discussed in the summary cited here is the issue of proportionality. Are the fees assessed equitably across all parties? Taxes can be levied so that some parties receive a more favorable treatment than others, but fees are supposed to be assessed on the basis of cost of delivery of the service, and should be equally shared by all users. The Ann Arbor stormwater fee system is highly nonproportional. For most individually owned homes, an image obtained by infrared photography is used to declare a certain area to be impervious.  Here is the proposed image-to-impervious area relation as shown by the consultant (PhotoScience Geospatial Solutions). In their presentation to a professional group (2013), they state: “Area is directly related to runoff from a parcel”.  But rather than basing the fee directly on the impervious area, they have proposed a tiered system.

The system for commercial buildings and developments is much more nuanced and complex. Here UDC on stormwater rates are the definitions and provisions as shown in the Unified Development Code of the City of Ann Arbor. These properties are able to reduce charges by demonstrating performance (actual diversion of stormwater). But the homeowner rate structure has no such provisions, short of very minimal credits for rain barrels and rain gardens. Many homeowners in Ann Arbor will tell you how they have carefully placed drainspouts to carry water into lawn areas rather than the street, etc. In fact, impervious area as determined by remote sensing is not a direct measure of stormwater discharge, a core assumption. While water usage is measured by meter readings, these images do not actually predict how much water will be discharged from an individual property. This needs to be measured by direct assessment. Such an assessment is not available to owners of individual houses.

Another defect of this system in terms of proportionality is the tiered system itself. Here are the actual current rates.

Note that a taxpayer will be charged the same amount whether at the very bottom (for example, 2,187 SF) or top of a tier (4,175 SF). Further, since these figures are based on an image made at some elevation, it is likely that the resolution is not perfect. It would be perfectly possible to have a reading of [2, 187] instead of [2, 186], which would mean an additional quarterly sum of nearly $25 is due. This is hardly proportionate.

The complaint in Hahn vs. Ann Arbor does address stormwater fees and rightly challenges their use to pay for certain items. But the heavy emphasis on water rates and water customers has hampered their case. We noted that one of the City’s defenses is that they do not actually know who they have billed to over the years. (People come and go, students move in and out, etc.) Property ownership is surely more easily traceable, even historically.

Will the lawsuit be reconfigured, resubmitted, appealed, or dropped? Only time will tell. But there is a good case waiting here for someone to pursue.

This entry was posted on January 1, 2021 at 6:20 pm and is filed under civic finance, Sustainability. You can subscribe via RSS 2.0 feed to this post's comments. You can comment below, or link to this permanent URL from your own site.