The ruling from the District Court concerning NIBCA vs. the City of Hayden has come down. The judge ruled that the sewer capitalization fee paid by the builders was an impermissible tax and must be refunded, with interest, which amounts to over $700,000. This does not include any attorney fees that NIBCA is likely to request the judge to impose against the City. Nor does it include over $750,000 in fees paid by the City to its attorneys and consultants defending the suit over four years. The decision is disheartening and will have negative consequences on our ability to provide future sewer collection capacity.
What is this lawsuit all about?
The City was sued in 2012 by the North Idaho Building Contractors Association (NIBCA) and later by Mike Ragusa of Termac Construction (a local builder), challenging the City’s Sewer Capitalization Fee. More recently the lawsuit was turned into a class action by request of NIBCA. All builders and others that were listed as paying the original Capitalization Fee were added by the court automatically, unless they affirmatively took steps to drop out of the litigation.
NIBCA argued the fee to hook a new house or business onto the City sewer system was too high and was an illegal fee or tax, because the fee in Hayden was higher than in the surrounding cities. The Idaho Supreme Court said that the City erred in computing the fee and said we should use the “equity buy-in” formula instead of the capital replacement formula. The Court also ruled that the City had the right to collect a fee and could even use it to expand the system. They sent the case back to the local District Court to work out the rest of the details.
After determining the facts and law, the District Court has now ruled that the City’s fee was an impermissible tax because the City did not follow the right formula, and most of the fees must be returned. The estimated amount is over $700,000 in fees and interest. The City is very disappointed and disagrees with the judge on the outcome at the District Court level. If need be, the City may choose to appeal. There were numerous technical and substantive arguments that we feel have merit and are worthy of further consideration by the Courts.
Explaining the case further, it was unrefuted that the fee the City charged was actually lower than the fee it could have charged using the equity buy-in formula. It has been the City’s position that because it did not exceed the equity buy-in amount that could have been charged, it was a legal fee to collect.
The fee was charged only to that builder or owner who wanted to hook into and buy capacity on the City’s sewer line; no one was forced to buy a CAP fee. The general public was not required to pay this fee.
In addition, to the practical and fair “you got what you paid for” argument, the City also raised technical defenses that we hoped would have ended the case in our favor, and allow the parties to continue forward with the benefit of the guidance from the Idaho Supreme Court. In addition to the technical arguments, we believe the district court should have found that NIBCA did not suffer any damages as the contractors were able to hook on to the sewer and receive the benefit. It was undisputed that using the Supreme Court method to compute the fee could have resulted in a higher fee than what we were charging. In other words not only did they receive the benefit, they received the benefit for cheaper than what they paid. Now they want a whole refund. They will be able to have their cake and eat it too.
The money collected for the Sewer Capitalization Fee did not go into the City’s general fund but went to the sewer fund where it was used to provide capacity to replace the capacity used by those paying the CAP fee. The City was trying to make sure there was money to keep adding capacity to the sewer system so that new development would have capacity to utilize so they could keep building. If a refund is ordered, no one wins. The builders remove the City’s ability to add the needed capacity for the builders to keep building. If the City has to refund the collected CAP fees, the very fees used to build capacity will be reduced and the City will have less money to expand the system to accommodate future growth.
In addition, it was shown that using the equity buy-in formula to calculate the fee will probably result in a higher fee than what was challenged. In the end, there were costly legal fees paid by both parties resulting in less money available to expand the system and the resulting new fee will at a minimum be at least where it was. No one wins, and the citizens of Hayden who have to bear the cost of supporting the lawsuit and pay the sewer costs lose.
The Story behind the lawsuit
The City Council relying on consultants, engineers and their attorneys went through a process they thought was correct and would provide the necessary sewer collection for the residents at the least cost while protecting the public’s health and safety.
The method used, now determined to be an “impermissible tax”, is also used by many cities in the state. It was not a random number out of the air or meant to overcharge or fill the City’s coffers. The cost charged using the “wrong formula” actually resulted in a lesser cost to the builder/developer. The City did what it set out to do and provided the sewer at the most reasonable cost it could. The North Idaho Building Contractors Association (NIBCA) attacked the cost and lost. The cost may now actually be higher.
If the District Court decision stands the builders NIBCA represents will get a substantial refund of the fee that they paid. They will receive substantially lower cost sewer connections at the expense of the Hayden City residents and tax payers. If the fees were passed on to the subsequent purchaser of the property then it is a double windfall to the builder, paid by the city and the purchaser. The city taxpayers will have to foot the bill for the refunds through higher taxes and increased sewer costs. Additionally, the City will not have the needed funds to provide sewer collections into the future short of some alternative funding mechanism.