Tax or a fee?
|By Andy Balaskovitz|
The $5.5 million question at the heart of Mayor Bernero's budget proposalThe central piece that balances Mayor Virg Bernero’s budget next fiscal year may not even be legal.
Bernero’s proposal to charge Lansing Board of Water and Light customers for streetlights and fire hydrants could be interpreted as a tax, according to two attorneys and based on case law from 15 years ago.
If it is, then it would have to be submitted for voter approval.
Indeed, it appears that is the central question: Would those charges be a fee or a tax? And we may not have to look beyond our own backyard for precedent.
Bernero wants to assess those charges on residential, commercial and industrial customers as part of his budget, which could be enacted by a vote of the City Council, not put before city voters. It’s intended to raise $5.5 million to go directly to BWL, freeing up that money from the city’s General Fund, where it’s paid from now. The city faces a projected $5 million deficit for the fiscal year starting July 1.
In 1998, the Michigan Supreme Court ruled against the city 4-3 in Bolt v. City of Lansing. The majority said a storm water service charge the city imposed on property owners was a tax — and unconstitutional because it was not approved by a majority of voters.
The Bolt case, brought by a now-deceased Lansing resident named Alexander Bolt, also established three criteria for determining whether a charge is a fee or a tax: A fee must serve a regulatory, not a revenue-raising, purpose; the fee must be proportionate to the service costs; and the fee must be voluntary.
East Lansing attorney Jeffrey Zoeller, who helped argue against the city in Bolt, disputes that the hydrant and streetlight charge would be voluntary and proportionate.
“By making property owners pay for lights and fire hydrants, there is no voluntary-ness there,” he said. “And the cost is way higher than it would be if spread out over all people who benefit from it.” For instance, as an East Lansing resident, Zoeller may benefit from streetlights while visiting Lansing but wouldn’t have to pay.
BWL spokesman Steve Serkaian said in an email Tuesday — when asked if the fee would be voluntary and whether customers could opt out — said: “Any added hydrant/streetlight fee would be part of the utility bill that is owed by the customer by the due date stated on the bill.”
Final details about the proposal are still being worked out between the administration and BWL. This could include resolving the legal question, but also whether customers would be charged a flat rate or a percentage of their bill based on usage. The Council has until May 20 to adopt a final budget, based on the City Charter. The mayor then has veto power up to three working days after it’s adopted, which can be overridden by six Council votes.
When asked Monday if the city is looking at whether this would be a fee or a tax, City Attorney Janene McIntyre said her office is looking at the issue as a whole.
“We are reviewing the proposal. I don’t want to make any legal speculation at this point,” she said.
BWL General Manager J. Peter Lark also declined to comment on the legal issue at hand.
“I really don’t have an answer to the question. That (Bolt) decision is several years old, and decided 4-3. It would be inappropriate for me to opine. It’s a question that’ll have to be determined.”
But what about the five jurisdictions served by BWL that already have user fees for hydrants? Also, in the city of Livonia, some neighborhoods are charged special assessments for streetlights in areas not served by Detroit Edison.
“It’s in place, but it’s never been challenged,” Lark said.
In fall 1978, Michigan voters approved the Headlee Amendment, which, in part, requires voter approval for local tax increases that weren’t authorized before the amendment’s passage.
“This is where local governments are really bumping up against the Headlee Amendment: The amount they’re collecting from property taxes decreases with declined valuations of properties,” said Pat Gallagher, who’s also based in East Lansing. “This will be an important case for the state of Michigan because municipalities, townships, counties all are considering trying to cover these costs, whether through fees, taxes or otherwise.”
He called the situation a “pretty close call” and that the city or BWL may defend it as a fee that is charged only to the people using that service. On the flip side, though, is Zoeller’s argument that more than just Lansing BWL customers benefit from the services. Say, perhaps, your friend visiting from Seattle gets lost on Michigan Avenue at night, but feels safe to be traveling down well-lit streets.
Speaking of Seattle, a nearly identical situation happened a decade ago. The city adopted an ordinance in 1999 that transferred the costs of maintaining streetlights from the General Fund onto the city’s publicly owned utility’s customers (sound familiar?). Four years later, the Washington Supreme Court ruled that such services are a “basic governmental function” and the public utility, Seattle City Light, was ordered to refund those costs.
“If you don’t have explicit authority to impose a tax, it’s illegal, unless you went to voters” said Ed Cebron of FCS Group, a Washington-state-based utility rates and finance consulting firm. The same limit is reflected in Michigan law in the Headlee Amendment.
Randy Hannan, Bernero’s chief of staff, told the City Council Monday night that the reason for the proposed cost-shifting is what Gallagher noted: declining property tax revenues and the need for local units of government to get creative in fixing budget structures.
“Streetlight and fire hydrant fees are already being used by townships and cities across the state, so we’re comfortable moving forward,” Hannan said in an email. “The precise mechanism for assessing the charges is still open to revision, and we are working with the Board of Water and Light to finalize those details. Mayor Bernero remains confident that our residents and taxpayers support keeping the lights on and providing vital services in Lansing. This is a necessary step toward that goal.”
Perhaps, but in Zoeller’s view, it’s unconstitutional.
“Yes, I do see what some people call a ‘Bolt problem,’” Zoeller said. “Alexander Bolt is now deceased, but I bet he just rolled over in his grave.”
For more details on how customers could be charged under the scenario, check out Monday’s edition of “Kids in the Hall” at lansingcitypulse.com.