A special report submitted by Adam Kaufman

The City of Fernandina Beach v. the State of Florida, and the taxpayers, property owners and citizens of the City of Fernandina Beach

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Judge Brian Davis

A hearing to determine whether it is lawful for the City of Fernandina Beach to issue $5,000,000 in “refunded” bonds that are secured by revenues received from “impact fees” started Monday before Circuit Court Judge Brian Davis in the second floor court room in the Historic Court House building on Centre Street.

City Manager Joe Gerrity who was Mayor at the time the impact fees were established and Gerald C. Hartman, a City consultant who participated in the “impact fee” formulation testified.  The hearing continues Tuesday, December 3, at 10:00am.

The City imposed the “impact fees” in question upon new water customers as a result of the purchase in 2002 of its Water Utility from Florida Public Utilities. The “impact fees” were charged to fund the City’s binding obligation to the payment of $7,500,000 in “futures” to FPU over a period of seven years as part of that purchase after an initial cash payment to FPU at closing of $18,950,000 making the total cost of the acquisition of the Water Utility $26,450,000.

In its negotiations with FPU to purchase the Water Utility the City hired the engineering firm of Hartman & Associates, Inc.  Hartman appraised the Water Utility at $19,400,000.  John Mandrick was employed by FPU and operated the Water Utility before the City purchased it.  After the purchase, Mandrick continues to operate the utility as the City’s Utilities Director.  In a deposition in 2012 Mandrick testified that the City agreed to pay $7,500,000 in “futures” to FPU because FPU “wanted” it.

By the end of 2009, the City had not paid the full “futures” obligation to FPU. The City issued bonds in February 2010 to raise necessary funds for the payment of $5,125,000, the remaining portion of the $7,500,000 “futures” payment, to FPU.  The City is now proposing to issue $5,000,000 in “refunded” bonds to refinance and satisfy that debt obligation.

The “bond validation” hearing before Judge Davis that began Monday is litigation brought by the City.

It is not the separate, but related, class action suit commenced in August, 2011 by city resident Joanne Conlon and others who paid these allegedly unlawful “impact fees” charged by the City. In that litigation, the City has appealed Judge Davis’ August 2013 order granting class certification and that appeal is pending.

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Conlon’s attorneys view the “bond validation” proceeding as a calculated counterattack by the City on the Conlon class action suit in the hope of an expedited determination as to the legality of the “impact fees” pledged in repayment of the bonds. Both Gerrity and the City’s Bond Counsel acknowledge that the core issue to be addressed in the hearing is the legality of the “impact fees.” Conlon, as a property owner and taxpayer, has “intervened” and is a party to this “bond validation” case.

BOND VALIDATIONHistoric Court House - Hutchins

Florida law permits a municipality to institute an action against the state and the taxpayers, property owners, and citizens of the municipality, including nonresidents owning property or subject to taxation by that municipality to “validate” and “determine its authority to incur bonded debt.”

In bond validation proceedings, courts determine: (1) if a public body has the authority issue that bond or obligation; (2) if the purpose of the obligation is legal; and (3) that the authorization of the obligation complies with the requirements of law. The Court can review the legality of the financing agreement upon which the bond is secured, here the legality of the “impact fees” that guarantee the repayment of the bonds.

Any party to a bond validation action dissatisfied with the judgment rendered as a result of the hearing may appeal as a matter of right to the Florida Supreme Court.

THE BONDS

In August the City Commission approved Resolution 2013-106 which provided for the issuance of “Utility System Refunding Revenue Bonds” of an amount not to exceed $5,000,000 for the purpose of refunding the remaining portion the debt resulting from the $7,500,000 payment the City made to FPU attributable to the purchase of the Water Utility system. It is these bonds which are secured by revenues received from the “impact fees” established at the time of the purchase of the Water Utility that the City is seeking to validate.

The Resolution recast, as part of a section setting forth “findings,” the details of the purchase of the Water Utility and the elements of the establishment and authorization of the rate structure associated with that acquisition.

The Resolution states that the $7,500,000 “futures” payment obligation was “for the investment made by FPUC in building improvements necessary for the Water System to have sufficient capacity available to meet the demands of future growth and development”  which it designates as “Capacity Improvements.” These “Capacity Improvements,” states the Resolution, “provided the Water System with sufficient capacity to meet the demands for future growth and development through the year 2020” and that the Water Capacity Fee Ordinance of 2003 established “a capacity fee [“impact fee”] charged new customers of the Water System on a pro rata basis in an amount sufficient to cover the reasonably incurred costs of the required Capacity Improvements needed for those new customers.”

Resolution 2013-106 authorized the City’s Bond Counsel to institute the “bond validation” proceeding.  The City Commission has authorized legal fees of $125,000 for this litigation and any appeals.

IMPACT FEES: THE LAW

At the heart of this dispute is the question of the proper imposition of impact fees.

In determining whether the imposition of an impact fee is constitutionally permissible, the Florida Supreme Court has adopted the “dual rational nexus test.”

The “dual rational nexus test” requires the local government to demonstrate “a reasonable connection, or rational nexus, between the need for additional capital facilities and the growth in population generated by the subdivision” and  “a reasonable connection, or rational nexus between the expenditure of funds collected [the “impact fees”] and the benefits accruing to the subdivision” and to satisfy this latter requirement, “the ordinance must specifically earmark the funds collected [the “impact fees”] for use in acquiring capital facilities to benefit” new residents.

The Florida Supreme Court has observed that “in principle” there is nothing wrong with transferring to the new user of a municipally owned water system a fair share of the costs new use of the system involves. The Court has approved a local government’s use of an impact fee to raise capital for expansion “by setting connection charges which do not exceed a pro rata share” of the costs of expansion where such expansion is reasonably required and the money collected is to meet the costs of expansion.

The Florida Supreme Court has, however, made a clear distinction between the proper use of impact fees to finance reasonably anticipated costs of expansion and the prohibited use of such fees to pay for the existing system as a whole.

Subsequent to the City’s imposition of “impact fees” in 2003, the Florida legislature in 2006 adopted the Florida Impact Fee Act and as later amended, which provides, in part, that the government has the burden of proving that the imposition or amount of the impact fee meets the requirements of legal precedent.

THE QUESTIONS

Judge Davis, in certifying the Conlon lawsuit as a class action on behalf of persons who paid for the allegedly unlawful “impact fees,” found that there were “numerous issues of law and fact” that are associated with the question of whether the City’s imposition of “impact fees” are lawful under the “dual rational nexus test” including:

  • Whether the City purchased the FPU Water Utility for more than its appraised value.
  • Whether the City imposed the impact fees on new customers in order to expand the Water Utility to accommodate new growth or whether it did so to satisfy its contractual obligation to pay more than the appraised value by making “futures” payments.
  • Whether there was a rational nexus between the anticipated need for additional capital facilities for the Water Utility and growth generated by new development within the area serviced by the Water Utility.
  • Whether there was a rational nexus between the expenditure of the impact fee proceeds and any benefit to those persons who paid the “impact fees.”
  • Whether the City used the funds generated by the “impact fees” for unlawful purposes, i.e. to help pay for the Water Utility as a whole or for other indebtedness.

THE HEARING

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City’s Bond Counsel Susan H. Churuti

The hearing started with the City’s Bond Counsel Susan H. Churuti from the law firm of Bryant Miller Olive of Tallahassee and Tampa who made a lengthy opening statement, obviously intended to be comprehensive, as to why the bond should be validated.  She argued that the “impact fees” were properly and legally imposed sometimes calling the charges “user fees” or “capacity fees” rather than “impact fees” and asserting that the City Commission’s legislative determination is entitled to a presumption of correctness.

Churuti asserted that the issuance of the bonds and the imposition and use of “impact fees” to secure those bonds, as well as the purchase of the Water Utility, was part of a deliberative legislative process and a public policy choice of the City Commission. One choice being whether to charge all rate payers or to have new Water Utility users pay a “capacity fee “and have “growth pay for itself.” The decision by the City, she stated, was to keep rates low. She contended that the City Commission relied upon evidence and evaluation provided by experts and used the “appropriate methodology” in establishing the fees. Churuti maintained that Hartman’s analysis provided to the City was accurate and that it supported the decision to purchase the Water Utility and impose “impact fees” and that decision was “in the public interest.”

Churuti acknowledged that the parties were on a “collision course” on the issue of “impact fees” and this proceeding could “clean up the issue for the community.” She underscored that the parties were making a record for a likely appeal to the Supreme Court in Tallahassee.

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Attorney Michael G. Tanner

Michael G. Tanner of the law firm Tanner and Bishop of Jacksonville gave a pointed opening statement on behalf of Joanne Conlon.  Tanner maintained that the Court’s inquiry should be directed to whether the City had the authority to issue the bonds and the legality of the financing agreement by which the bonds are secured.  Tanner asserted that the action of the City failed the “dual rationale nexus test” and, parenthetically, there is no evidence that it was considered by the City Commission. Tanner contended that the negotiations to purchase the Water Utility were “arbitrary” and the “futures” payment and the “impact fees” were simply a financing device not related to growth and that there was not a rational relationship between the amount of the fee and growth.

Tanner contended that the “impact fees” have been used to pay for the Water Utility as a whole, that the fees have not been used to expand the Water Utility to accommodate new customers and that the user rates paid by both new and existing customers have been sufficient to pay for the Water Utility without the “impact fees.”

GERRITY

Joe Gerrity was the City’s first witness. Mayor of the City from 2002 – 2004 when the Water Utility was purchased, Gerrity explained that he initially was selected as Mayor while serving as a City Commissioner by the citizens of the City by a straw poll on the ballot.

Gerrity recounted that from his perspective the decision to purchase the Water Utility was based on the desire to maintain water quality and control rates and that there were advantages of scale to be had since the City was also operating its sewer system.  Further, owning the Water Utility gave the City an opportunity to control and influence growth.  The acquisition, he suggested, has worked well for the City.

Gerrity could recall no opposition to the purchase. Gerrity stated that he was not concerned with the price of the purchase but needed to assured that the revenues generated by the Water Utility would support the purchase. With regard to the imposition of “impact fees” he stated that it was a vehicle for “growth to pay its own way.” He indicated that he believed that when the purchase was completed and fully paid for it would provide the City with “cash flow.”

Gerrity testified that it was his understanding that the $7,500.000 payment to FPU was for the purchase of “excess capacity.” He noted the Commission relied upon Hartman and that he did not participate in the negotiations for the purchase.

If the City “lost” the bond validation case, Gerrity stated, he would recommend new borrowing and would propose that rates for every Water Utility user should be increased. He later acknowledged that it would ultimately be the City Commission that would need to resolve the issue.

On cross examination Gerrity agreed that the revenue generated by Water Utility rate payers could pay for the bonds that are at issue in the proceeding without “impact fees.”  He also conceded that the $7,500,000 was payable to FPU “independent of any new connection.”  When questioned about the related class action litigation and the timing of the “bond validation” proceeding he allowed that it was his understanding that the purpose of this litigation “is to validate the impact fees.”

HARTMAN

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Gerald C. Hartman

Gerald C. Hartman, a Professional Engineer, Appraiser and Environmental Engineer and a City consultant, was the next witness. Hartman was integral to the negotiation for the acquisition of the Water Utility and suggested the financing design and formula that resulted in the sale and purchase.

Hartman was questioned about his interaction with the then City Commission and City Manager.  He recounted the ebb and flow of negotiations and acknowledged it was he that introduced the concept of “futures payments” supported by “impact fees.”  The “futures payment” structure was to provide the City with the ability to purchase the Water Utility since the City could only then currently fund a cash purchase of some $18-$20 million dollars.

Hartman explained that his valuation of $19,400,000 was based upon then current replacement cost of the Water Utility and that the $7,500,000 was the value of the Utility’s “excess capacity,” the value of its existing “non-used and useful” capability.

The “impact fee” of $1500, he testified, was generated by a calculation of existing water customers: approximately 8100, plus some 5400 projected new customers, divided into the value of the utility:  approximately $20,000,000, with a slight added adjustment for a then approved FPU rate increase.  Hartman conceded that, other than a hand written calculation he might have given in 2003 to the City Manager; there was no document that was provided to the City and its Commission that detailed the formula.

Documents displayed during Hartman’s cross examination appeared to indicate, that while the $1500 calculation once introduced to the negotiations for the purchase remained a constant, although how the $1500 was to be shared, if at all, with FPU was yet to be determined, the number of new customers projected per year during the seven year period of “futures” payments seemed to be a variable.

Hartman granted that no impact fee analysis was completed that would meet current statutory requirements but that it is undisputed he and his firm provided, among others, a required “Briefing Report” and a “Consulting Engineer’s Report” to the City and its Commission.

Much of the later stages of Hartman’s testimony on cross examination centered on a debate of what added value or benefits the $1500 new customer “impact fee” actually pays for. Counsel for Conlon suggesting there was no significant cost to the utility for infrastructure, not otherwise paid for by other fees or charges, when a new water customer turns on the tap. Hartman underscoring that $7,500,000 cost and payment, to be off-set by “impact fees,” was reasonable measured against the Water Utilities “excess” or “expansion capacity.”

The hearing ended close to 6:00pm.  Testimony will continue Tuesday December 3.

DIGITAL CAMERAAdam Kaufman is a city resident who is a semi retired labor arbitrator, mediator and attorney. The Fernandina Observer appreciates his outstanding coverage of this two day trial.

December 3, 2013 5:56 a.m.

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chuck hall
chuck hall
8 years ago

Good job! Thanks Adam…this was a bit more complicated than I understood.

mike spino
mike spino
8 years ago

So the bottom line is that if the City can not charge impact fees to new users then existing users will have to pay more. A lot more.

John Campbell Elwell
John Campbell Elwell
8 years ago
Reply to  mike spino

No, the bottom line is why did the City pay $7,500,000 extra to FPU and then attempt to charge users for that. Hopefully we’ll find out.

Patrick J. Keogh
Patrick J. Keogh
8 years ago
Reply to  mike spino

Mike:
That’s what the City will want you to believe. Both Gerrity and Mandrick are already singing that song. It’s just not true unless we let them do it to us again. At the trial it was clear that a municipal utility enjoys a lot of cost advantages relative to an investor owned utility. They do not pay income or property taxes. They do not pay state regulatory costs and they borrow at a tax free rate effectively at half the cost of investor owned utilities. It was clear from the testimony that had the City maintained the FPU rates they could have covered all costs including all the debt service on the excessive price without the impact fees. In fact, they would have had about a 3.2 debt service coverage when the initial bond indenture only required 1.2. Please also remember that a municipal utility gets to charge County residents a premium of 25%. I don’t like that practice but the City acknowledged that they comprise 20% of the customers and there is no cost basis for the additional charge. The citizens of Fernandina lost the protection of the FL PSC when the City took over and have been getting shafted ever since.
By the way, this outline of the proceedings is very well done
Pat

John Stillwell
John Stillwell
8 years ago

Pat,
I hope to see the day when these impact fees are gone and entrepreneurs open their doors to service the community while providing JOBS!

Charles Burns
Charles Burns
8 years ago

Very well written by an attorney who has taken apart a complicated case, which has become even more complicated since the Observer’s initial coverage. Thanks very much for your effort to explain this, Adam. A job well done!

Dave Lott
Dave Lott
8 years ago

Nice job Adam in laying all of this out. It will be interesting to see how Judge Davis rules as the City has generally not fared well in the cases that he has heard but I know he will rule based on what the law says.

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