Municipal Water Fees Challenged as Improper Taxes in Michigan

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By Alex Ebert

At least four Detroit-area municipalities are facing class actions alleging that their sewer or water fees are actually unconstitutional under state law.

In the coming weeks, all 26,000 Waterford Township water and sewer account holders will receive notice that they may apply for refunds for sewer fees between 2010 and this year, as part of a settlement reached between the township and a citizen alleging water and sewer charges were actually improper taxes. The $1.4 million settlement in Mason v. Chartered Twp. of Waterford is one of at least four within recent years, all regarding the same fees-as-illegal-taxes issue.

In addition to those settlements, similar lawsuits are pending against Detroit and three of its suburbs: Bloomfield Township and the cities of Oak Park and Westland. Although the legal theory behind the lawsuits is more than two decades old, Michigan municipal governments still grapple with how to properly fund infrastructure for public water and other utilities without running afoul of the state’s murky rule for new taxes.

The lawsuits allege that local governments have violated a part of the Michigan Constitution known as the Headlee Amendment. The amendment, effective since 1978, requires voter approval for any local tax increases or new taxes. Since a 1998 Michigan Supreme Court opinion, all municipalities have been aware of what is called the “Bolt Test,” which requires that fees serve a regulatory purpose, be reasonable and proportionate, and be voluntary. Yet, local governments still struggle with these requirements.

“It’s hard to figure out exactly what the Bolt decision means and how to apply it,” Mark Nettleton, attorney with Grand Rapids, Mich.-based Mika Myers Plc , told Bloomberg BNA.

Fee Test: Funds Part of Improvement Plan

Municipalities can violate the test by lacking reasoning for the price of water or sewer fees. For instance, local water fees can’t be based just on a neighboring municipality’s fees, but must be calculated to provide water and fund infrastructure improvements and repairs for the water system, Nettleton said.

Although courts generally side with municipalities, if a city’s water or sewer fund accumulates money, it must be intended for repairs or infrastructure improvements in some city plan. Without a plan those growing funds make a city vulnerable to suit.

In contrast to the Waterford case, a Michigan state court granted summary disposition for the City of Taylor against a water fees lawsuit June 8. In that ruling, the court found that the plaintiff hadn’t proved the city was overcharging for water beyond its sewer repair needs, and also did not prove that sewer fees were being used for improper purposes because Taylor had plans for how to use the fees to improve and repair its water infrastructure.

The recent series of class actions are brought by Kickham Hanley PLLC, based in Royal Oak, Mich. Gregory Hanley, managing partner with Kickham Hanley and the lead attorney on these lawsuits, declined to comment on this type of litigation.

To contact the reporter on this story: Alex Ebert in Columbus, Ohio, at aebert@bna.com

To contact the editor responsible for this story: Rachael Daigle at rdaigle@bna.com

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