Tidewater Ass'n of Homebuilders, Inc. v. City of Virginia Beach, 900451

• Decision Date: 11 January 1991
• Docket Number: No. 900451,900451
• Parties: TIDEWATER ASSOCIATION OF HOMEBUILDERS, INC., et al. v. CITY OF VIRGINIA BEACH. Record
• Court: Virginia Supreme Court

Page 523

400 S.E.2d 523

241 Va. 114

TIDEWATER ASSOCIATION OF HOMEBUILDERS, INC., et al. v. CITY OF VIRGINIA BEACH.

Record No. 900451.

Supreme Court of Virginia.

Jan. 11, 1991.

Thomas Scott Carnes (Richard D. Guy; Cromwell, Sykes & Carnes, Shuttleworth, Ruloff, Giordano & Kahle, on briefs), for appellants.

Gregory N. Stillman (Kevin J. Cosgrove, D. Arthur Kelsey, Leslie L. Lilley, City Atty., Hunton & Williams, on brief), for appellee.

Present: All the Justices.

LACY, Justice.

In this case we consider the legality of a Water Resource Recovery Fee imposed by the City of Virginia Beach to finance, in part, the acquisition of water from Lake Gaston for use by residents of Virginia Beach.

Since 1924, the City of Virginia Beach (the City) has purchased treated water from the City of Norfolk. ¹ In 1973, Virginia Beach contracted with Norfolk to purchase the pipes comprising the water distribution system within the corporate limits of Virginia Beach. A second contract expiring in 1993 allows Virginia Beach to purchase Norfolk's "surplus" water supply.

Faced with a substantial growth in population and the expiration of its water supply contract, Virginia Beach studied various alternatives to insure a stable source of water for the future. In 1982, the City concluded that obtaining water from Lake Gaston was the best method to meet future needs. In 1984, the U.S. Army Corps of Engineers granted the City a permit to withdraw up to 60 million gallons per day from Lake Gaston.

The City planned to finance the cost of the project, estimated at $200,000,000, by increasing water rates, issuing general obligation revenue bonds, and adopting a Water Resource Recovery Fee. It is this latter fee which is at issue here.

The Water Resource Recovery Fee was imposed by ordinance adopted on January Under the ordinance, the revenues collected from the fee were to be placed in a special account and disbursed only to "pay costs of projects designed to develop sources of water supply and distribution facilities for the City, and related existing and future debt service."

6, 1986, by the City Council of Virginia Beach. The ordinance set out the purpose, policy and collection [241 Va. 117] mechanism for the fee. The fee is levied on a per drainage fixture unit (DFU) basis. It must be paid on connections to the City water system made after January 6, 1986, and on modifications to existing connections to the system, if the modifications result in an increase in DFUs. The amount of the per unit fee was phased in over three steps, starting at $32 per unit and increasing to $95 per unit, effective January 1, 1987.

In December 1986, the ordinance was amended to reduce the $95 permanent fee per DFU to $75. This change was based on revised figures showing that the City's goal of setting the fee at the "minimum amount necessary to recover the recommended average of $2,383.00 per account" could be met by the lower fee. The amount was again reduced to $66 due to an increase in the average number of DFUs per account and the participation of the City of Chesapeake in the project.

On August 28, 1986, Tidewater Association of Homebuilders, Inc. (TAB), a Virginia non-stock corporation, and its members sought a declaratory judgment that the City had no legal authority to levy and collect the fee, that the fee was an unauthorized tax, and that the timing and amount of the fee were arbitrary and capricious exercises of the City's authority. On March 18, 1988, the trial court heard oral arguments on the legal issues regarding the City's authority to enact the fee. The court conducted an evidentiary hearing in May 1988, on the issues of prematurity of the fee and its calculation methodology.

The trial court issued letter opinions on April 15, 1988, and December 7, 1989, holding that the fee was not an impermissible tax; the City had the requisite authority to levy and collect a fee to recover "capital costs incurred in securing a new water source, the construction of transmission lines with related equipment, and necessary expenses related to the project;" and that the fee was neither premature nor arbitrary in amount or application. The court entered final judgment dismissing TAB's petition on January 12, 1990.

On appeal, TAB asserts that the trial court erred in holding that: (1) the City was legally authorized to impose the fee; (2) the fee did not constitute a tax levied in violation of Article X, § 1 of the Constitution of Virginia; (3) the fee was not premature; (4) the City was "out of water" on January 6, 1986; and (5) the fee charging varying amounts over time was not arbitrary or capricious. ²

LEGAL AUTHORITY

A city, in the exercise of its police power, has the right to undertake projects to promote the health, safety, and welfare of its inhabitants, and the operation of a water system is an integral part of the process of protecting the public health. A city has the right and the duty to protect its water supply and "[i]t is settled policy of the State and of all States to encourage any reasonable exercise of this right and power." Board of Supervisors of Nansemond County v. Norfolk, 153 Va. 768, 775, 151 S.E. 143, 145 (1930). Additionally, Code §§ 15.1-873 and -875 specifically authorize the City to operate a water system in order to promote the health, safety, and welfare of its inhabitants.

Conceding that the City had the authority to undertake the Lake Gaston project, TAB nevertheless contends that this authority does not extend to the fee imposed by the City as a partial financing mechanism for the project, and therefore, that

the ordinance is illegal. TAB argues that because the fee in this case is an "impact fee," it must be specifically authorized by statute. TAB contends that imposition of this type of fee is not an exercise of the police power and is only allowed pursuant to statutory approval, citing Code § 15.1-498.1 et seq., authorizing road impact fees. We disagree.

1. Financing Authority

TAB's premise, that the financing mechanism or fee chosen by the City must be authorized separately and apart from authorization of the project itself, is flawed. Whether the primary function is undertaken pursuant to the police power or pursuant to statutory authorization, a municipality is vested with the ability to engage in actions necessary to implement that function. Newport News Shipbuilding & Drydock Co. v. Jones, 105 Va. 503, 512, 54 S.E. 314, 317 (1906).

In order to exercise the duty and authority to provide a water system then, the corresponding ability to pay for the system must exist. We agree with the trial court that the ability to finance the cost of providing this service is inherent in the authority to provide it, and the specific mechanism chosen by the City to finance the project need not be defined by statute. Furthermore, it would be unrealistic, inefficient, and unnecessary to require the General Assembly to define every aspect of each mechanism available to a municipality to finance projects such as the Lake Gaston undertaking.

While the City has the authority to finance the project, it is not completely free to adopt any mechanism it chooses. Statutory and constitutional directives must be respected. Actions undertaken in the exercise of the police power must be reasonable and cannot unduly restrict citizens' constitutional rights. Assaid v. Roanoke, 179 Va. 47, 18 S.E.2d 287 (1942). Similarly, where a power is implied from a statutory grant, the reasonable selection rule requires that the exercise of the implied authority be reasonable and consistent with legislative intent. Commonwealth v. County Bd. of Arlington County, 217 Va. 558, 575-77, 232 S.E.2d 30, 42 (1977).

2. Impact Fee

TAB contends, however, that this fee is a specific type of financing mechanism--an impact fee--which requires specific legislative authority. TAB reasons that if the exercise of the police power includes the ability to impose impact fees, there would have been no need for the legislature to enact the road impact fee statutes as provided for by § 15.1-498.1 et seq. Assuming that this proposition is correct, TAB's argument that this fee is an impact fee is unpersuasive.

TAB does not provide a definition of impact fee, but the elements of an impact fee are contained in Code § 15.1-498.2 which defines an impact fee as "a charge or assessment imposed against new development in order to generate revenue to fund or recover the costs of reasonable road improvements necessitated by and attributable to such new development[s]." ³

Yet throughout its arguments, TAB contends that those paying the fee did not generate the need for the facilities. Specifically, TAB posits that, although the fees have been in effect for over four and a half years, "the project for which [the fee payers] have been required to pay a premium has not been provided, and is not even under construction." Thus, TAB argues that the "passage of time between collection of an impact fee and payment of the cost that [the] impact fee is designed to defray" belies the proposition that the need for the facilities to be paid from the fee was generated by those required to pay the impact fee. Under TAB's own theory then, the fee does not meet the definition of "impact fee" as characterized by § 15.1-498.2.

We reject TAB's characterization of the fee as an impact fee, not only because of the inconsistencies in TAB's position, see Ring v. Poelman, 240 Va. 323, 397 S.E.2d 824 (1990), but also, as discussed below, because it is a proprietary fee and those who are paying the fee are receiving a present, particularized benefit. Having determined that the City was vested with the authority to finance the project, we now consider the remainder of TAB's complaints.

IMPERMISSIBLE TAX

TAB argues that, even if the City has the authority to impose the fee, the fee is a tax, regardless of the label the City has chosen for it. In TAB's view, the fee is not imposed in...