Asheville water fees hit legal challenges

As two states of emergency — the first to deal with COVID-19, the second with protests over police brutality — have disrupted business as usual in Asheville government, one part of the city’s business has remained relatively unaffected by the historic events. The city’s Water Resources Department continues to see consistent demand for its services, and because the department is funded by user fees instead of sales or property taxes, it won’t see much revenue loss from the ongoing economic recession.

What a viral pandemic and sustained civil unrest couldn’t touch, however, the lawyers have.

Two lawsuits filed in 2018, both of which were scheduled to reach final settlements on June 8, challenged some of the fees Asheville has used to raise money for repairs and updates to the water system. Together, the settlements could have the city pay nearly $2 million to dismiss claims that those fees were charged illegally.

But that immediate expense is just the start of the lawsuits’ fiscal implications. As part of the settlements, Asheville has agreed not to charge water users a monthly capital fee for up to five years starting in fiscal year 2020-21. That fee is projected to raise over $7.4 million in the current fiscal year; assuming similar revenues would have been collected through 2025, the total loss to the city could be as much as $37 million.

Despite this revenue reduction, Asheville officials have said that spending on the water system will continue as previously planned. The money will have to be raised another way, likely by increases on water consumption charges — and it’s unclear if residents will end up footing more of a bill that had been largely supported by commercial water users.

Making waves

Both lawsuits stem from a 2016 case decided by the N.C. Supreme Court, Quality Built Homes Inc. v. Town of Carthage. As outlined by Kara Millonzi, a professor with the UNC School of Government, the court ruled that municipalities did not have the power to charge “impact fees” for water and sewer systems. Such fees are designed to recoup the cost of infrastructure investments from the users that most directly benefit from those public projects.

Subsequent to that ruling, Raleigh-based law firm Whitfield Bryson LLP began a campaign of class-action lawsuits across North Carolina seeking judgements against cities and towns that had charged impact fees. According to reporting by Wilmington’s Port City Daily, Whitfield Bryson filed at least 10 such suits, including the two in Asheville.

Whitfield Bryson lawyer Hunter Bryson says his firm had employees working remotely in Asheville at the time of the lawsuits and actively attracted plaintiffs through “ethically approved solicitation letters.” The firm’s final attorneys’ fees had not been determined as of press time, but the North Carolina Home Builders Association estimates that fees in similar cases account for around 25% of total settlements, or roughly $500,000 between the two Asheville cases.

Asheville resident Gwen Alexander, named as the plaintiff in the lawsuit over the monthly capital fee, confirms that Whitefield Bryson initiated contact with her regarding legal action against the city. While she notes that her part in the proceedings is over, she’s pleased with the outcome of the suit: “If they were getting money they weren’t supposed to be getting, and they’re going to stop that, then that makes me happy,” she says.

Ed Holland, owner of Ed Holland Builders in Fletcher, is a named plaintiff in Whitfield Bryson’s other Asheville lawsuit, which concerns the fees assessed for connecting a new development to the water system. He says those fees drove up his home construction costs, which in turn raised the price he had to charge buyers.

“Anything that increases the construction cost makes the home less affordable,” Holland says. “If it’s a $1,000 fee, it adds $1,000 to the cost of the house: It’s just pure and simple mathematics.”

Bryson says that Holland and Greg Phillips, who owns Asheville-based Mayfair Partners, could receive yet-to-be determined service awards for agreeing to be named in the case, as well as 58% of the development fees they paid on homes constructed between October 2015 and June 2018. Nearly 1,000 other class members could file for compensation out of a $1.85 million fund through October, Bryson continues, but only 60 have so far.

Alexander may also receive a service award for being named in the capital fee case. Other members of that suit’s class, Bryson says, “will benefit from the settlement by ceasing to pay capital fees on their water bills if approved.”

Strategic retreat

Even while agreeing to the settlements, the city has insisted that its fees were in compliance with the law. Brad Branham, Asheville’s city attorney, says that all water fees were reviewed immediately after the 2016 Carthage ruling and found to be “justifiable and legally supported, a position that the city continues to maintain.” (Branham, who has represented Asheville since April 2019, was not present during those initial discussions.)

When the lawsuits came in 2018, Branham continues, Asheville defended its position. The city entered mediation with the plaintiffs in November 2019; when those efforts proved unsuccessful, he says, negotiations continued to reach a settlement instead of going to trial.

“The city felt confident that its fees were legally valid; however there is always a risk that a court could find otherwise. The two cases referenced here could have carried liability for the city in excess of $30 million,” Branham explains. “This would be in addition to the ongoing costs to continue litigation. In consideration of all these factors, it was the determination of the City Council that these settlements were in the best interests of the city’s budget and taxpayer funds.”

The settlements do protect the city against any further claims regarding its capital and development fees. Branham notes that the development fee is additionally protected by a state law, passed in 2018, that explicitly grants municipalities the power to collect a “system development fee.”

However, the General Assembly has not yet passed legislation to specifically allow the capital fee. The settlement states that Asheville can begin collecting the fee again immediately if the state does pass such a law. Otherwise, the fee can resume in fiscal year 2025-26.

Maintaining the flow

In the immediate future, Asheville plans to pay for the settlements and replace the lost capital fee revenue from its Water Capital Fund reserves. In the budget proposed by City Manager Debra Campbell for fiscal year 2020-21, the city would tap that fund balance by nearly $9.36 million; publicly available city financial documents do not indicate how much is available in that fund, and city Chief Financial Officer Barbara Whitehorn had not provided the current total by press time.

David Melton, the city’s water resources director, says that no capital projects planned for the next fiscal year will be delayed due to the settlements. Nearly $13.62 million in spending is budgeted, including close to $4.96 million for replacing small water lines, $4 million for projects tied to the N.C. Department of Transportation and $2.1 million for projects at the city’s water treatment plants.

Moving forward, however, Asheville will need to replace the lost revenue in a more sustainable way. Melton says that the city has paid $30,000 to Charlotte-based Raftelis Financial Consultants for a study of water consumption charges but that “it is too early in the process for any results.”

Unless managed carefully, these changes could place more of the burden of maintaining the system on average citizens. The canceled capital fees were much larger for commercial users than for single-family residences: last year, a user with a 10-inch meter paid $1,741.59 per month toward system upkeep, while a resident with a standard ⅝-inch meter paid just $4.26 monthly. Asheville spokesperson Polly McDaniel said city staff could not determine what percentages of overall fee revenue came from charges on different meter sizes.

In contrast, commercial users currently receive a discount on their consumption charges for using more water. Residents pay a flat charge of $4.21 per hundred cubic feet; commercial users are charged $2.21-$3.56 per CCF, while manufacturers pay as little as $2.02 per CCF.

These challenges come after a difficult year for the water system’s infrastructure. Thousands of customers were left without water or under boil water advisories in April 2019 due to line breaks, while in March of this year, the city budgeted $473,000 for emergency repairs to the North Fork Water Treatment Plant.

But Holland, the plaintiff in the development fee lawsuit, isn’t concerned about the city’s ability to meet the need. “They will maintain the water system, with the fee or without it,” he says. “If they have to raise the rates, I guess they can do it, but they have to do it in a legal manner.”