Fair, Equitable, and Legally Defensible Stormwater Enterprise Funds: Part Three of an Ongoing Series

Read Part One: Be Prepared With Your Funding of Expanded Stormwater Services

Read Part Two: What Is A Stormwater Utility Enterprise Fund?

More than 1,000 communities have switched from general fund revenue to a system of user fees under a stormwater utility enterprise fund to pay for stormwater services.  With a stormwater utility, everyone pays their fair share of the cost of stormwater management. Further, the legal design of stormwater fees encourages proactive measures on the part of stakeholders to reduce impacts on the overall stormwater system, such as rain gardens, swales, and detention basins, and rewards those who’ve already put these relatively simple and cost-effective measures in place. The amount that any individual customer pays is based on their demand for stormwater management services and the cost of services that are provided. Understanding how stakeholders and the courts understand these fees as “fair” will assist in implementing a stormwater utility enterprise fund.

Legal Test

Establishing the nexus between the fees that are charged and the services provided has been the basis of determining the fairness of stormwater utility fees from the beginning. A precedent-setting and frequently cited court ruling is Bolt v City of Lansing (1998).  In that case, the Michigan Supreme Court established three tests that a stormwater utility fee must pass to be fair, equitable and legally defensible: 

• Fee is for a regulatory purpose with public benefits for those charged 
• Fee is proportional to the cost of services received (or provided), and
• Fee is voluntary (i.e. there is a means to opt out of paying for the fee when no services are received).

Regulatory Purpose 

All stormwater programs, with or without a stormwater utility, serve a regulatory purpose. Therefore, this test is rarely the basis of any challenge.  Stormwater programs are all regulatory driven ranging from public health and safety; floodplain management; National Pollutant Discharge Elimination System (NPDES) Municipal Separate Storm Sewer System (MS4) permitting; and pollutant reduction targets of Total Maximum Daily Loads (TMDL). Clarity on what these goals are, and progress towards them, should be part of the utility’s mission.

Fee Proportionality 

The proportionality of the fee to the cost of services is the most common basis for legal challenges.  Fair, equitable, and legally defensible utilities establish a nexus between not only the runoff characteristics of each parcel and what percent of the cost of the stormwater program that is paid, but also between the services required to manage the volume and water quality of runoff and the portion of fee that is paid. 
Courts have been lenient in their interpretation on how a community calculates the fair share that each customer is charged.  If the logic meets the test of being reasonable, courts have ruled in favor of the stormwater utility. The most common algorithm for calculating runoff proportionality is determined by the amount of impervious area.  There are variations to this methodology and objections to these methods are few.
The public’s concerns are what are they going to get in consideration for paying the stormwater fee and are they getting their money’s worth.  Tools to assist in reducing the fee, and to see where the paid fee goes, will help address these concerns.

Voluntary Fee

To be a true stormwater user fee, courts have ruled that the fee must be voluntary.  Customers must be given the opportunity to opt out of all or part of the fee.  The courts interpret the voluntary nature of stormwater utility fees through the utility’s system of credits, rebates, in-kind services and service areas that allows the user to adjust/modify stormwater fees so that the individual pays only for the services that they receive.  Courts and utility oversight agencies have ruled that to be considered a user fee, there must be a credit given that is proportional to the cost of the services avoided by the actions taken by an individual stormwater user. 

• Credits are granted to individuals who build and properly maintain their own stormwater management facilities.  These credits are an acknowledgement of the reduction of service impact that results from the controls of the privately operated stormwater system on the municipal stormwater system and permit compliance programs.  
• Rebates are a onetime payment to customers for privately constructed stormwater facilities.  A rebate is often used with single family residential customers who receive the credit in one lump sum. 
• In-Kind Services is another method to create a win-win situation and to help develop public acceptance of the utility. This is a strategy that can be used with school districts that agree to assist with public education through their curriculum or by donating land for the construction of a stormwater best management practice (BMP) for community educational purposes.
• Service Areas allow communities to adjust fees over large multiple parcel zones that require fewer or less costly services to manage stormwater runoff.  As an example, Georgia’s Athens-Clarke County has five (5) service areas: Urban, Rural, University of Georgia, Riparian and MS4 Permits.  

A Strong Defense   

Case law on stormwater utilities demonstrates the need for municipalities to work with experts who can pass these three tests of regulatory purpose, proportionality and the voluntary nature of the user fees. A recent challenge of a Pennsylvania stormwater fee could have been avoided with more attention to the voluntary nature of setting the proposed user fees. The challenge to the proposed fees arose from strong opposition from the agricultural community. These agricultural operations claimed the fees were excessive because there was not enough consideration nor any discount given for the beneficial land management practices that were already incorporated into their farming operations.