Hill-Vu Mobile Home Park v. City of Pocatello

• Decision Date: 06 September 2017
• Docket Number: Docket No. 44074-2016
• Citation: 162 Idaho 588,402 P.3d 1041
• Court: Idaho Supreme Court
• Parties: HILL-VU MOBILE HOME PARK, on behalf of itself and all others similarly situated; and Ed Quinn, on behalf of himself and all others similarly situated, Plaintiffs-Appellants, v. CITY OF POCATELLO, an Idaho municipality, Defendant-Respondent.

162 Idaho 588

402 P.3d 1041

HILL-VU MOBILE HOME PARK, on behalf of itself and all others similarly situated; and Ed Quinn, on behalf of himself and all others similarly situated, Plaintiffs-Appellants,

v.CITY OF POCATELLO, an Idaho municipality, Defendant-Respondent.

Docket No. 44074-2016

Supreme Court of Idaho, Boise, June 2017 Term.

Filed: September 6, 2017

Nathan M. Olsen, Petersen Moss Hall & Olsen, Idaho Falls, argued for appellants.

Blake G. Hall, Hall Angell & Associates, LLP, Idaho Falls, argued for respondent.

EISMANN, Justice.

This is an appeal out of Bannock County from a judgment dismissing an action seeking to recover money unlawfully collected by the City of Pocatello from users of the City's water and sewer systems. We vacate the judgment and remand this case for further proceedings that are consistent with this opinion.

I.Factual Background.

The City of Pocatello ("City") owns and operates water and sewer systems for City residents. In 2005, the city government decided that the City should be able to operate its water and sewer systems at a profit like private utilities. By law, the City is required to charge and collect sufficient fees so that its water and sewer systems "shall be and always remain self-supporting." I.C. § 50-1032. Those fees had to be sufficient to pay when due all bonds and interest as required by Idaho Code section 50-1032(a) and "to provide for all expenses of operation and maintenance of such works ..., including reserves therefor," as required by Idaho Code section 50-1032(b). The reserves can also provide for improvements to such systems. I.C. § 50-1033.

The City wanted to obtain a profit in excess of the amounts necessary for the water and sewer systems to remain self-supporting. This profit was paid into the general fund. City officials believed that the City should be able to make a profit just as private utilities are able to do, and so the City added an additional charge to water and sewer bills. The City called this additional charge a "rate of return" or "return on equity," which was an increased charge (profit) included in the bills sent to users of the City's water and sewer systems. As explained by the City's Chief Financial Officer: "The ‘rate of return’ policy refers to city-owned public utilities (i.e. water, sewer, etc.) making a transfer to the general fund. These are businesses operated by the public that could and do operate as for-profit private enterprises in other communities." This charge was in addition to the statutorily permitted charges to cover the costs of operation, maintenance, replacement and depreciation, including creating and maintaining reserves for such expenses. The City also adopted a policy called "PILOT," which stood for payment in lieu of taxes. Under this scheme, the city-owned water and sewer departments were required to pay "property taxes" to the City as if they were private entities, and the departments then passed this cost on to their customers. The "property taxes" were then paid into the City's general fund. As explained by the City's Chief Financial Officer in 2012: "For the past two years, the rates have been re-described as a franchise fee (% of gross revenues) and a payment-in-lieu-of-taxes (PILOT) to make it directly comparable to private utilities operating in the community such as Intermountain Gas. The PILOT is calculated on the prior year city property tax levy rate multiplied by the estimated market value per the most recent financial plan prepared by an outside consulting engineer."

By letter dated December 26, 2006, Pocatello Mayor Chase asked the Attorney General about the City's policy of imposing the additional charge for a rate of return. In the letter, the Mayor stated:

Charging a rate of return is commonly used by public utilities and private sector companies, and we feel it is a fairer way to generate revenue for the City. As I am sure you are well aware, relying on property taxes for revenue will not work in Pocatello due to the number of property tax exemptions given by the State. Therefore, it has been my practice as Mayor to move our city away from property taxes and to a fee based system. The rate of return is an important part of this plan.

By letter dated February 6, 2007, a Deputy Attorney General responded to Mayor Chase's letter. In that letter, the Deputy wrote with respect to the City's rate-of-return charge: "The overall rate of return for the same utilities [Idaho's three largest electric utilities] range [sic] between 8.1% and 9.25%. According to the Robinson letter, the city's ‘rate of return’ is equal to 7% and generates approximately $3.54 million in revenues." The letter included an analysis of applicable law, and it concluded that analysis by stating: "In this instance, the revenue from the rate of return component is dedicated to the city's general fund and is utilized as a property tax substitute. Thus, it appears this practice is contrary to Loomis [v. City of Hailey , 119 Idaho 434, 807 P.2d 1272 (1991) ] and therefore not appropriate."

The profit earned by the City from the return-on-equity charge and PILOT totaled about $4 million during fiscal years 2006 through 2011. The City apparently stopped receiving the return-on-equity charge in fiscal year 2012, and it stopped receiving the PILOT funds during fiscal year 2014.

On December 9, 2011, the Building Contractors Association of Southeast Idaho filed an action against the City challenging the PILOT, and the district court ultimately held that it was an unlawful charge. On November 15, 2013, the district court entered a judgment enjoining the City "from using the PILOT fee as part of the calculation of user and/or connection fees charged to the public." When the City discontinued the PILOT component in the bills sent to users of the City water and sewer systems, their monthly bills decreased by about ten percent.¹

This shows that the City was operating its water and sewer "primarily as a source of revenue to the city," in violation of Idaho Code section 50-1028. The City made the decision that its water and sewer departments should be operated as for-profit corporations in order to raise revenues for the City's general fund. The ten percent increase in monthly bills means that the City was earning a profit of ten percent above the amount that was necessary to ensure that its water and sewer systems would always remain self-supporting. That profit went into the general fund, not into any reserves for the maintenance and improvement of the water and sewer systems. Indeed, the rationale for the "rate of return" and the PILOT was the profit that the City would earn if its water and sewer systems were for-profit entities.

On April 15, 2014, the Plaintiffs filed this action seeking a refund of the PILOT sums that they had paid. They also sought class certification for those who had been charged and paid the illegal sum. On cross-motions for summary judgment, the district court held that the Plaintiffs' state law claims were barred under the Idaho Tort Claims Act, that there was no unconstitutional taking under the Fourteenth Amendment to the Constitution of the United States, that the decision in the Building Contractors case would not be applied retroactively, and that the Plaintiffs' motion for class certification was denied. The court entered a judgment dismissing the Plaintiffs' complaint, and they timely appealed.

When reviewing on appeal the granting of a motion for summary judgment, we apply the same standard used by the trial court in ruling on the motion. Infanger v. City of Salmon , 137 Idaho 45, 46–47, 44 P.3d 1100, 1101–02 (2002). We construe all disputed facts, and draw all reasonable inferences from the record, in favor of the non-moving party. Id . at 47, 44 P.3d at 1102. Summary judgment is appropriate only if the evidence in the record and any admissions show that there is no genuine issue of any material fact regarding the issues raised in the pleadings and that the moving party is entitled to judgment as a matter of law. Id . If the evidence reveals no disputed issues of material fact, then only a question of law remains, over which this Court exercises free review. Id . In this case, there is no dispute regarding the material facts.

II.Did the District Court Err in Holding that Recovery of the PILOT Was Barred by Idaho Code Section 6-904A ?

Idaho Code section 6-904A states, insofar as is relevant:

A governmental entity and its employees while acting within the course and scope of their employment and without malice or criminal intent and without reckless, willful and wanton conduct as defined in section 6-904C, Idaho Code, shall not be liable for any claim which:

1. Arises out of the assessment or collection of any tax or fee.

The district court held that all of the Plaintiffs' state-law claims were barred because their "state law claims—unconstitutional taking, unjust enrichment, and equitable estoppel/equitable tolling—arise out of the collection of the PILOT component, which was found to be a tax." In so holding, the district court erred.

"A municipality may collect fees considered incidental to regulation and enacted pursuant to the municipality's police powers." Lewiston Indep. Sch. Dist. No. 1 v. City of Lewiston , 151 Idaho 800, 804–05, 264 P.3d 907, 911–12 (2011). Pursuant to its proprietary function, municipalities may also construct and maintain public works, Viking Const., Inc. v. Hayden Lake Irr. Dist. , 149 Idaho 187, 193, 233 P.3d 118, 124 (2010), and charge a fee "for a direct public service rendered to the particular consumer," Brewster v. City of Pocatello , 115 Idaho 502, 505, 768 P.2d 765, 768 (1988). Finally, a municipality may assess and collect taxes if authorized by the legislature. Id. at 504, 768 P.2d at 767 ; Idaho Const. art. VII, § 2.

For a fee to be considered incidental to regulation, "funds generated thereby must bear some reasonable relationship to the cost of enforcing the regulation." Brewster...