No. 89-486
IN THE SUPREME COURT OF THE STATE OF MONTANA
1990
JAMES F. LECHNER, THE HOME BUILDERS ASSOCIATION OF BILLINGS,
MONTANA, INC., a Montana corporation; KUMMERFELDT CONSTRUCTION,
INC., a Montana corporation; DARWIN JOHNSON CONSTRUCTION, INC., a
Montana corporation; HARLEY G. HOVEN; JERRY T. RAY, d/b/a Jerry T.
Ray Development; S.D. HELGESON, INC., a Montana corporation; MACE
REALTY and INSURANCE, INC., a Montana corporation; SCHOONER REALTY
AND DEVELOPMENT, INC., a Montana corporation; KOBER CONSTRUCTION
CO., a Montana corporation; MARK JOHNSON; PERFECT HOMES, INC., a
Montana corporation; GERBASE, INC., a Montana corporation; PIERSON
CONSTRUCTION, INC., a Montana corporation; MORA BROTHERS,
INCORPORATED, a Montana corporation; J. JUNKERT CONSTRUCTION,
INCORPORATED, a Montana corporation; WILLIAM KALE; RON WILLIAMS;
DAUGHERTY CONSTRUCTION, INC., a Montana corporation; REDINGER AND
SON, INC., a Montana corporation; GREENBRIAR CONSTRUCTION COMPANY;
HARDY INC. BUILDERS, a Montana corporation; GLASSER CONSTRUCTION,
INC. , a Montana corporation; HANK C. GLASSER; STAN D. HELGESON; and
RAY WEBER,
Plaintiffs and Appellants.
-vs-
THE CITY OF BILLINGS, MONTANA,
Defendant and Respondent.
APPEAL FROM: District Court of the ~hirteenth~udicial ~rstrict,
In and for the County of Yellowstone,
The Honorable Robert W. Holmstrom, Judge p r p
COUNSEL OF RECORD:
For Appellant:
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d ' ? r i [ g 2/
ai- 3t.1,.:;--~;:
CLERK COURT
ci'n'rs C. ,,,A,vrr
Joe Gerbase argued, Anderson, Brown, Gerbase,
Cebull, Fulton, Harman & Ross, ~illings,~ontana
For Respondent:
James L. Tillotson argued, City Attorney, Billings,
Montana
Submitted: ~ p r i l17, 1 9 9 0
Decided: August 20, 1990
Filed:
Justice William E. Hunt, Sr. delivered the Opinion of the Court.
Plaintiffs and appellants, property owners who reside within
the City of Billings and general contractors who do business within
the City of Billings, brought this declaratory judgment action,
seeking to strike down a funding system for the expansion of water
and sewer facilities that was adopted by the City in 1985.
Following submission of the case on stipulated facts and issues,
the Thirteenth Judicial District Court, Yellowstone County, ruled
in favor of the City, holding that the funding system was lawful.
Plaintiffs appeal. We affirm.
The following issues are raised on appeal:
1. Whether 5 5 7-1-111(5) and -113(1), MCA, preempt the City
of Billings from implementing new utility fees under its self-
governing powers.
2. Whether Montana statutes governing municipal utilities
prohibit the City of Billings from collecting and accumulating
system development fees for the purpose of funding a portion of the
cost of future expansion of the water and sewer systems.
3. Whether the system development fee is a sales tax, the
adoption of which is prohibited by 5 7-1-112(1), MCA.
In April, 1985, the City of Billings, a municipal corporation
with its own governmental charter, adopted a resolution that
established a new system for funding the expansion of water and
sewer facilities for the general benefit of the City. The new
funding system called for the assessment of "system development
feesM upon customers who requested new water or wastewater services
or an upgrade in existing water or wastewater services. The City
implemented the funding method for the water facilities in 1985,
however, it delayed implementing the funding system for the sewer
facilities until 1989.
The fees are due and payable at the time the customer applies
for the service; the City will not provide new or expanded water
or wastewater services unless the fee is paid. The amount of the
fee is based upon the size of the meter. Users of larger meters
pay larger fees.
The fees are revenue-raising measures adopted to fund
construction of new water and wastewater facilities needed to meet
the demands placed on the existing facilities by new growth in the
City. They are placed in a special fund, which is used solely for
the construction of expansion-oriented, general-benefit water and
wastewater facilities or for the retirement of bonds sold for such
purpose. Once sufficient monies are accumulated to fund the
proposed expansion facilities, bids are advertised and construction
contracts awarded. The facilities built with the fees may or may
not directly serve or accommodate expansion on the property from
which the fees are derived.
In the stipulated facts submitted to the District Court, the
parties agreed that the City used the following theory to
justify the adoption of the fees:
Existing customers should not be required to finance new
capacity which does not benefit them, but instead
benefits new applicants for water/wastewater service.
That is, existing customers should not subsidize growth.
In order to address this concept, system development fees
levied on all new applicants for service were adopted,
and the revenue derived would be used to fund all or
portions of new capacity provided by the utility.
Consequently, the purpose in levying system development
fees on new water/wastewater applicants is to equalize
the new applicant's user charge obligations with that of
existing customers. The rationale used to equalize such
user charges is as follows:
In order to serve new applicants with water/wastewater
service, the City must maintain on hand a reasonable
amount of water/wastewater system capacity over and above
that needed to serve its current customers. This extra
or reserve capacity is paid for by the City's current
water/wastewater customers through their user charges.
As new applicants are connected to the water/wastewater
system they are then allocated increments of capacity
from this pool of reserve capacity. Consequently, in
order to keep from emptying this pool of reserve
capacity, the capacity allocated to new applicants must
be timely replaced by the City. However, this reserve
capacity must be replaced by the City at today's cost,
which during inflationary times, can exceed the original
cost of such capacity.
The City can recover these costs from new applicants by
utilizing both user charges and system development fees.
The original cost of the reserve capacity is recovered
by the City from new applicants through their user
charges, the same as it is recovered by the City from its
current customers. The inflationary cost increment
(today's cost - original cost) is recovered by means of
a one-time, lump-sum fee called a system development fee
which is levied on new applicants at the time of hookup.
By recovering these costs in this manner, new applicants
and current customers are placed on the same rate paying
footing. In other words, their user charges are
equalized.
Before the adoption of system development fees, customers of
the water and sewer systems paid a portion of the construction
costs of expansion facilities built to serve new growth by way of
monthly rate charges. The expansion facilities did not always
directly serve or accommodate the properties from which the funds
were derived. Since the adoption of the system development fees,
both new and existing customers continue to pay the monthly user
fees. The system development fees are levied on top of these
monthly charges.
In addition to monthly user charges, the City previously
funded and continues to fund improvements to and expansion of water
and wastewater facilities through 1) revenue bonds; 2) grants from
state and federal governments; 3) interest from utility
investments; 4) SIDs assessed for the areas served by specific
improvements or through which specific improvements have been
constructed; and 5) privately financed construction by subdividers.
The system development fees provide an additional source of funds
to be used for the construction of expansion-oriented, general-
benefit facilities.
Appellants filed this declaratory judgment action against the
City on July 16, 1985. On January 22, 1988, the parties submitted
a stipulation of basic facts to the District Court. They then
filed simultaneous motions for summary judgment. After briefing,
the ~istrictCourt issued its opinion that the system development
fees were lawful. Since the District Court opinion did not dispose
of all issues, no appeal could be taken. Therefore, appellants
amended the complaint to eliminate any issues not disposed of by
the District Court. The court then entered judgment in favor of
the City. This appeal followed.
I.
Whether 8 3 7-1-111(5) and -113 (I), MCA, preempt the City of
Billings from implementing new utility fees under its self-
governing powers.
As a municipal corporation with its own governmental charter,
the City of Billings is a self-governing unit that may exercise
any power not prohibited by the Montana Constitution, state law or
its own charter. Sec. 6, Art. XI, Mont. Const. ; § 7-1-101, MCA.
It may also provide any services or perform any functions not
expressly prohibited by constitution, law or charter. Section 7-
1-102, MCA. Its power and authority are to be liberally construed,
with every reasonable doubt as to the existence of a power or
authority resolved in favor of the power or authority's existence.
Section 7-1-106, MCA.
State law can preempt a self-governing municipality from
acting in a certain area only by express statutory prohibition.
D & F Sanitation Serv. v. City of Billings, 219 Mont. 437, 445,
713 P.2d 977, 982 (1986). Appellants argue that two statutes
expressly forbid the City from regulating municipal utilities. The
first, 5 7-1-111(5), MCA, provides as follows:
A local government unit with self-government powers is
prohibited the exercise of the following:
(5) any power that establishes a rate or price otherwise
determined by a state agency.
Appellants contend that this statute preempts the field of
municipal utility regulation because a state agency, the Public
Service Commission (PSC), possesses the power to establish utility
rates. While this argument may have had some validity prior to
1981, it is no longer valid.
Before 1981, the PSC was vested with full power of
supervision, regulation and control of public utilities. In 1981,
however, the legislature passed House Bill 765, entitled An Act to
Provide for Municipal Regulation of Municipally Owned Utilities,
ch. 607, 1981 Mont. Laws 1386, which added 5 5 69-7-101 through -
201, MCA, to the Montana Code. In the same bill, the legislature
amended 5 69-3-101(1)(e), MCA, to exclude municipal utilities from
the definition of Itpublic utility.I1 The statute now reads as
follows:
(1) The term I1public utilityI1, within the meaning of
this chapter, shall embrace every corporation, both
public and private, company, individual, association of
individuals, their lessees, trustees, or receivers
appointed by any court whatsoever, that now or hereafter
may own, operate, or control any plant or equipment, any
part of a plant or equipment, or any water right within
the state for the production, delivery, or furnishing for
or to other persons, firms, associations, or
corporations, private or municipal:
(el except as provided in chapter 7 [governing
regulation of rates and operation of utilities by
municipalities], water for business, manufacturing,
household use, or sewerage service, whether within the
limits or municipalities, towns, and villages or
elsewhere. (Emphasis added.)
Section 69-3-101(1)(e), MCA.
Sections 69-7-101 through -201, MCA, as adopted in H.B. 765
placed control of municipal utilities in the hands of
municipalities. Section 69-7-101, MCA, provides as follows:
A municipality has the power and authority to regulate,
establish, and change, as it considers proper, rates,
charges, and classifications imposed for utility services
to its inhabitants and other persons served by municipal
utility systems. Rates, charges, and classifications
shall be reasonable and just, and, except as provided in
69-7-102, they may not be raised to yield more than a 12%
increase in total annual revenues . . . .
Since the passage of H.B. 765, the PSC possesses the authority
to review municipal utilities only if utility rate increases yield
an increase in total revenues in excess of 12 percent in one year.
Section 69-7-102, MCA. Pursuant to this requirement, the
municipality must annually report utility rates to the PSC and the
Montana Consumer Counsel. Section 69-7-121, MCA.
Other than the review of rate increases in excess of 12
percent per year, the PSC retains no regulatory authority over
municipal utilities. If a municipality Itconsidersit advisable to
regulate, establish, or change rates, charges, or classifications
. . .I1 it, not the PSC, is required to hold public hearings.
Sections 69-7-111 and -112, MCA. Any interested party may appeal
the decision of the municipality regarding utility rates or rules
to the district court, not the PSC. Section 69-7-113, MCA.
In sum, H.B. 765 excluded municipal utilities from the
definition of the term I1publicutilityl1 and took regulatory control
of municipal utilities out of the hands of the PSC and placed it
in the hands of municipalities. The only authority retained by the
PSC in this area is the review of rate increases that yield an
increase in total revenues in excess of 12 percent in any one year.
The appellants1 argument that the City is preempted from
acting in the field of utility regulation by 5 7-1-111(5), MCA, is
without merit. Section 7-1-111(5), MCA, prohibits the City from
exercising any power that establishes rates otherwise determined
8
by a state agency. As we have demonstrated above, however,
municipal utility rates are not determined by a state agency. On
the contrary, unless the rates result in an increase of total
revenue of 12 percent in any one year, the exclusive authority to
regulate, establish and change municipal utility rates rests with
the City. Therefore, 5 7-1-111(5), MCA, does not preempt the City
from exercising its self-governing powers in the area of municipal
utilities.
The other statute that appellants contend preempts the City
from acting in the area of utility regulation is B 7-1-113 (1), MCA,
which provides:
(1) A local government with self-government powers is
prohibited the exercise of any power in a manner
inconsistent with state law or administrative regulation
in any area affirmatively subjected by law to state
resulation or control. (Emphasis added.)
Appellants1 argument ignores the remainder of the statute,
which in subsection (3) defines when an area is I1affirmatively
subjected to state control.11
(3) An area is affirmatively subjected to state control
if a state agency or officer is directed to establish
administrative rules governing the matter or if
enforcement of standards or requirements established by
statute is vested in a state officer or agency.
Section 7-1-113(3), MCA.
The setting of rates and charges for municipal utilities has
not been affirmatively subjected to state control within the
meaning of 5 7-1-113, MCA. The enforcement of any standards or
requirements in the area of municipal rate making is not vested in
any state agency or officer. Furthermore, no statute directs the
PSC or any other state agency or officer to establish
administrative rules governing municipal utilities. In fact, 5 69-
7-201, MCA, requires the municipal utility, with the concurrence
of the municipal governing body, to adopt rules for operating the
utility.
The PSC itself has recognized that rule and rate-making
authority over municipal utilities resides in the hands of
municipalities. It has declared that its express policy is to
decline jurisdiction over matters regarding municipally owned
utilities unless the utility requests a rate increase that will
yield an increase of over 12 percent in any one year. Sections
38.5.701 and .702, ARM.
The legislature has given the right to control municipal
utilities, including the right to establish rates and charges, to
municipalities. Sections 69-7-101 through -201, MCA. Section 7-
1-113, MCA, does not preempt the City from exercising this right.
11.
Whether Montana statutes governing municipal utilities
prohibit the City of Billings from collecting and accumulating
system development fees for the purpose of funding a portion of the
cost of future expansion of the water and sewer systems.
As noted above, a self-governing municipality such as the City
of Billings may exercise any power not expressly prohibited by the
Montana Constitution, statutory law or its own charter. Sec. 6,
Art. XI, Mont. Const.; 5 7-1-101, MCA. Furthermore, a self-
governing municipality's powers are to be liberally construed, and
all reasonable doubts regarding the existence of a municipality's
power are to be resolved in favor of finding that the power exists.
Section 7-1-106, MCA. Therefore, although Montana statutes do not
specifically provide for the implementation of system development
fees, we are compelled to liberally construe the City's power to
institute such a fee system, resolving all reasonable doubts in
favor of finding the existence of the power.
Montana statutes give municipalities the authority to acquire,
construct and maintain various undertakings, including the
authority to establish and maintain water and sewer systems.
Sections 7-7-4404 and 7-13-4301, MCA. Statutory law also allows
municipalities to I1prescribeand collect rates, fees, and charges
for the services, facilities, and commodities furnished by such
undertaking." Section 7-7-4404, MCA. See also 5 7-13-4304, MCA.
The rates, fees and charges collected should produce sufficient
revenue to pay bonds issued to finance the construction,
improvements or extension of any undertaking and to Ifprovide for
all expenses of operation and maintenance of such undertaking,
including reserves therefore.I1 Section 7-7-4424, MCA. Considering
the above statutes, we hold that the system development fee is a
reasonable extension of the City's express statutory authority to
operate and fund municipal water and sewer systems.
Appellants argue that the system development fee is unlawful
because it violates certain statutes that require the fee to be
equitable in proportion to the benefits received. For example, 5
7-13-4304, MCA, provides:
(1) The governing body of a municipality operating a
municipal water or sewer system shall fix and establish,
by ordinance or resolution, and collect rates, rentals,
and charses for the services, facilities and benefits
directly or indirectly afforded by the system, takinq
into account services provided and benefits received.
(2) Sewer charges may take into consideration the
quantity of sewage produced and its concentration and
water pollution qualities in general and the cost of
disposal of sewage and storm waters. The charges may be
fixed on the basis of water consumption or any other
equitable basis the governing body considers appropriate.
The rates for charges may be fixed in advance or
otherwise and shall be uniform for like services in all
parts of the municipality. If the governing body
determines that the sewage treatment or storm water
disposal prevents pollution of sources of water supply,
the sewer charges may be established as a surcharge on
the water bills of water consumers or on any other
equitable basis of measuring the use and benefits of the
facilities and services.
(3) An original charge for the connecting sewerline
between the lot line and the sewer main may be assessed
when the connecting sewerline is installed.
(4) The water and sewer rates, charges, or rentals shall
be as nearly as possible equitable in proportion to the
services and benefits rendered. (Emphasis added.)
Appellants argue that the system development fee is not
equitable in proportion to the benefits received because a customer
using an older utility asset ends up paying more than one using a
newer asset. Appellants reach this conclusion by misinterpreting
the formula used to arrive at the system development fee.
As the City points out, the system development fee system is
not designed to recover the costs of facilities that already exist
nor is it designed to recover the costs of replacing existing
facilities. Both of these costs are paid by existing customers
through their monthly user charges. Once new applicants connect
to the water and sewer systems, they become existing customers and
are also subject to monthly user charges. System development fees,
unlike monthly user charges, are used exclusively to pay a portion
of the inflationary costs of constructing new facilities needed to
replace units of capacity used up by new customers hooking into the
system.
Appellants also argue that the fee violates Montana law
because the property owned by the new customer forced to pay the
fee may not be directly benefited by the system. Once again,
appellants misunderstand the purpose of the fee.
A new customer who chooses to hook up to the City's water and
sewer systems receives the benefit of the reserve capacity in those
systems. Once the new customers use up the existing capacity, the
City will be forced to construct additional facilities to serve new
applicants. Prior to the implementation of the system development
fee funding system, a portion of the cost of such expansion
facilities was raised through revenue bonds. The revenue bonds
were paid with money raised from monthly user charges. Thus,
existing users of the systems were charged a portion of the costs
of building expansion facilities that were of no direct benefit to
them.
System development fees are no different in this respect than
monthly user charges. In both cases, properties not directly
benefited by certain improvements are paying for those
improvements. The need for expansion facilities is directly
related to the new users coming onto the systems. If there were
no new applicants for service, there would be no need for
additional facilities. System development fees are thus designed
to place a greater share of the cost of meeting that need on those
persons creating the need.
Furthermore, Montana law does not prohibit a municipality from
establishing rates and charges for water and sewer systems simply
because the benefit from the system does not directly benefit the
customer charged. Section 7-13-4304, MCA, allows a municipality
to establish and collect rates, rentals, and charges for the
services, facilities, and benefits directly or indirectly afforded
by the system, taking into account services provided and benefits
received." As pointed out by the discussion above, new users of
the City's water and sewer systems are indirectly if not directly
benefited by the construction of new facilities when the reserve
capacity of existing facilities is exhausted. The system
development fee is a reasonable response to the demand placed on
the City's water and sewer systems by the growth of the area.
Several other jurisdictions have upheld similar methods of
funding the expansion of water and sewer systems to meet the
additional demands on those systems created by new users. Meglino
v. Township Comm. of Eagleswood, 510 A.2d 1134 (N.J. 1986); Loup-
Miller Constr. Co. v. City and County of Denver, 676 P.2d 1170
(Colo. 1984) ; Coulter v. City of Rawlins, 662 P.2d 888 (Wyo. 1983) ;
Home Builders Asstn of Greater Salt Lake v. Provo City, 503 P.2d
451 (Utah 1972) ; Hayes v. City of Albany, 490 P.2d 1018 (Or. Ct.
App. 1971). As noted by the Florida Supreme Court:
Raising expansion capital by setting connection charges,
which do not exceed a pro rata share of reasonably
14
anticipated costs of expansion, is permissible where
expansion is reasonably required, if use of the money
collected is limited to meetins the costs of expansion.
Users "who benefit especially, not from maintenance of
the system, but by the extension of the system .. .
should bear the cost of that extension." (Emphasis in
original.)
Contractors and Builders Ass'n of Pinellas County v. City of
Dunedin, 329 So.2d 314, 320 (Fla. 1976) (quoting Hartman v. Aurora
Sanitary Dist., 177 N.E.2d 214, 218 (Ill. 1961)).
The system development fee imposed by the City of Billings
meets the basic criteria outlined in the cited cases. First, the
fee is based on reasonably anticipated future costs of the City.
Second, the revenue generated from the fees is used solely for the
purpose of funding the expansion of water and sewer facilities or
for paying bonds sold for such purposes. We therefore hold that
the system development fee is a reasonable exercise of the City's
self-governing powers.
Whether the system development fee is a sales tax, the
adoption of which is prohibited by 5 7-1-112(1), MCA.
Self-governing municipalities are expressly prohibited from
levying income or sales taxes without specific authorization from
the legislature. Section 7-1-112(1), MCA, provides as follows:
A local government with self-government powers is
prohibited the exercise of the following powers unless
the power is specifically delegated by law:
(1) the power to authorize a tax on income or the sale
of goods or services, except that this section shall not
be construed to limit the authority of a local government
to levy any other tax or establish the rate of any other
tax.
Appellants argue that the system development fee adopted by
the City constitutes an unlawful sales tax and, as such, must be
struck down by this Court.
In State ex rel. Malott v. Board of County Comm'rs of Cascade
County, 89 Mont. 37, 83, 296 P. 1, 14 (1931), we discussed the
difference between a tax and an assessment, stating:
While the two terms (taxes and assessments) are sometimes
used synonymously, there is a well recognized distinction
between them. A tax is levied for the general public
good, and without special regard to the benefit conferred
upon the individual or property subject thereto, while
a special assessment is levied to force payment for a
benefit equal in value to the amount thereof. The latter
(assessment) is not a tax of all the property within a
district for general purposes, founded upon the benefits
supposed to be derived from the organization of a
government, but is a charge upon specific property for
a specific purpose, founded upon the benefits supposed
to be derived by the property itself. (Parentheticals in
original.)
The system development fee imposed by the City is neither a
tax nor an assessment as those terms are defined in Malott. The
fee is not an assessment because it is not levied to force payment
for a special improvement to a specific piece of property whose
value has been enhanced by that improvement. It is the occupier
of the property, not the property itself, who benefits from the
expansion of the City's water and sewer systems. Nor is the fee
a tax levied for the general public good. Rather, the fee is
imposed for the benefit of new users of the water and sewer
facilities whose use of these systems gives rise to the need for
the additional water and sewer capacity.
In Montana Innkeepers Assln v. City of Billings, 206 Mont.
425, 671 P.2d 21 (1983), this Court struck down a hotel-motel bed
tax imposed by the City, holding that such a llfeell directly
was
connected to the renting of rooms and was therefore a sales tax
prohibited by 5 7-1-112() , MCA. The tax in Innkeepers can be
distinguished from the system development fee in this case. In
that case, the ~istrictCourt found and appellants did not contest
that the tax was not tied to any regulatory activity. The system
development fee in this case, however, is directly related to the
City's authority to regulate municipal utilities. O t h e r
jurisdictions have determined that similar fees are not taxes or
assessments but are more in the nature of service fees or user
charges. These jurisdictions have held that the fees are not taxes
as long as 1) they are not placed in a general revenue fund; and
2) there is a reasonable relationship between the fees and the uses
to which they are put. Hayes, 490 P.2d 1020; Home Builders Assln,
503 P.2d at 452.
In the present case, the system development fees are not held
in a general revenue fund to be used on projects totally unrelated
to the City's water and sewer systems. Instead, the fees are
placed in a special fund earmarked for expanding the city's water
and sewer facilities or for retiring bonds issued for that purpose.
Thus, the fees are not taxes but are service charges, which the
City is not prohibited from adopting by 5 7-1-112(1), MCA.
Affirmed.
Justice
We Concur: