Impact Fees “A Paper Napkin Calculation?”

A special report by Adam Kaufman

Whether the $1500 “impact fee “imposed upon new water customers established by the City of Fernandina Beach to pay for “futures” as part of its purchase of its Water Utility from Florida Public Utilities in 2002 was illegal and an illegitimate finance mechanism constructed by the City’s consultant “on the back of a napkin” in order to “do the deal” or an appropriate exercise of the City’s power pursuant to the Florida constitution is the question that remains before Judge Brian Davis at the conclusion of the second and final day of hearings in the City’s “bond validation” case.

Closing Arguments

The Intervener

In the final argument to the Court, attorney Thomas E. Bishop representing Joanne Conlon the intervener in the proceeding, called Fernandina’s “impact fee” an illegal tax and contended that the actions of the City in imposing this fee violated the Florida constitution, statutes and legal precedent.

Acknowledging that “impact fees” are permissible, he maintained that these fees must be established in a “methodical process” upon a determination of need resulting from new growth. Bishop emphasized that Florida’s supreme court has approved of a local government’s use of impact fees to raise “expansion capital” by setting fees “which do not exceed a pro rata share of reasonably anticipated costs of expansion” when expansion is “reasonably required” and “the money collected is limited to meeting the costs of expansion.”

That is not what occurred here Bishop argued.

Gerald Hartman, the City’s consultant, Bishop suggested, knew full well that he could not move the Fernandina City Commission to borrow and pay more than $18,000,000 to $19,000,000 in cash to FPU and he knew that FPU would not sell for a price not in the mid $20,000,000 range. Faced with pressure to complete the purchase and sale, what Hartman cobbled together “to fill the gap” and fund the purchase of the existing system as a whole was the fallacious “futures” prescription establishing an initial payment by new water customers for service from existing “excess capacity” charged as an “impact fee.”

Bishop showed the Court Hartman’s handwritten notes and calculations with lines drawn around numbers and arrows pointing to other numbers, some crossed out, generated by Hartman during the purchase negotiations which allegedly created, modified and adjusted the “impact fee” calculation. The amount of the fee, number of “new customers” and number of years in the calculation to estimate the funding sufficient to complete the purchase varied: totaling first $5,000,000 and finally, the $7,500,000 “futures payment” that was factored into the $26,450,000 sale price.

What is completely absent in the record, Bishop maintained, is any demonstration that Hartman, the City, or the City Commission did the “dual rational nexus” analysis required for imposition of “impact fees” and further, there is no evidence that the City Manager or the City Commission ever saw Hartman’s specific “futures impact fee” calculations until 2013. Bishop stressed that it is clear that there was no reasonably required system expansion related to growth or benefit to new customers to be paid for, nor would the fees generate the $7,500,000 over 7 years needed to meet FPU purchase price and the “futures payment.” At the time of the acquisition the City, in fact, recognized there would be a $5,000,000 short fall, but, it had, in effect, delayed borrowing to complete the purchase.

Bishop highlighted the evidence in the record that a representative from Hartman’s firm informed the City Attorney in 2003 when he provided “some financial calculations” related to the drafting of the ordinance setting rates and fees that the “calculation methodology [for the “impact fees”] should not be included or referenced” in the ordinance “in order to avoid opening the ordinance up to scrutiny of the calculation methodology.”

The payment of “impact fees” for new customers for existing or excess capacity based upon the “futures” equation, suggested Bishop, was just a device and canard to make the purchase “politically palatable.”

Bishop underscored that there is no dispute that current customer water rate payments can pay for the debt obligation at issue.

Bishop called attention to the timing of the “bond validation” proceeding and the City’s motivation, calling it “an end run around the class action case” and a legal tactic to “stop” a lawsuit.

This was Hartman’s deal and what is apparent Bishop contended is that “the deal drove the impact fee” not growth or the costs of expansion.

The City

Susan H. Churuti gave the closing argument for the City.

Churuti told the Court that it should uphold the City’s 2002-2003 action unless it could be found to be “patently erroneous.” She maintained that the Court should not apply in its review of the financing agreement and the impact fees supporting the bond the provisions of the 2006 Florida Impact Fee Act. The Act specifies that burden is on local government to prove that the fee meets the requirements of legal precedent and prohibits the Court from presuming that government action was correct and deferring to local government decisions.

Churuti argued that under the Florida Constitution power resides in the electorate and local government. Local government actions, she contended, are therefore “self-regulating.” It is the electorate that monitors the appropriateness of the decisions made by its elected officials.

The purchase of the Water Utility and the imposition of “impact fees” she emphasized was a legislative determination and the City Manager and Commission reasonably relied upon its consultant and recognized expert, Hartman.

Churuti argued that principles of “home rule” should apply here. The funding of the purchase of the Water Utility and the imposition of “impact fees” were the choice of the community. She noted that Fernandina Beach has a history on imposing impact fees, for example, for Parks and Recreation. Further, both by the terms of the ordinance and by periodic election the public had and will continue to have the opportunity to influence City Commission action.

Churuti contended that there is no evidence in the record that the City of Fernandina Beach did not have authority to issue the bond, that the purpose of the bond was illegal or that the authorization of the bond does not comply with the requirements of law which are the limits of judicial inquiry in “bond validation” proceedings.

The decision to purchase the Water Utility and to impose “impact fees” on new customers by the City Commission, she maintained, was made as a determination of “what is in the best interest of the electorate.”

Final Day Testimony and Evidence

During the morning and early afternoon Tuesday there was additional testimony and evidence presented to the Court

John F. Guastella, a utility management, valuation and rate consultant testified on behalf of the Intervener.

Guastella, stated that in his opinion, that even with the continued application of existing water user rates, existing rate payers and new rate payers were paying their fair share and that there was no justification for the “impact fee” imposed upon new customers of the Water Utility. He maintained that his analysis demonstrated that the current user rate structure produced enough revenue to cover operating cost and debt service, including the $7,500,000 “futures” charge.

Guastella stated that when the City purchased the Water Utility it purchased all of its capacity. The cost of that capacity, used and existing but unused, was included in the purchase price. Guastella stressed that the “there is no separate cost for ‘capacity’.” The imposition of the “impact fee” in essence was “double recovery from new customers.” It is “a double and unnecessary charge” he emphasized and there is “no rational basis for a duplicate fee.” New customers, he stressed, received no benefit as a result of the payment of the “impact fee;” there was no required expansion.

If there was the political will in 2002-2003, Guastella suggested, the City and its Commission would have had the fiscal capacity to bond the full purchase price of the Water Utility.

Guastella challenged a number of Hartman’s underlying assumptions in his calculation and valuation of the utility, specifically Hartman’s not considering depreciation. “The City,” he said, “was not buying a new system.”

In the afternoon session of Tuesday’s hearing portions of the video depositions of Joe Gerrity, former Mayor and now City Manager, Robert Mearns, the City Manager at the time of the purchase of the Water Utility, and John Mandrick the City’s Utilities Director and former FPU employee were played. Mearns and Gerrity confirmed that the City administration and its Commission relied upon Hartman to structure and negotiate the purchase. They did not recall receiving any calculations or analysis that supported the “impact fee” or its imposition nor could they recall any application of the “dual rational nexus test.” Mandrick, similarly, could recall no discussion of the “dual rational nexus test” at the time of the purchase.

Mearns testified that Hartman had “carte blanche.”

Tammi Bach, City Attorney from 2007 to the present was questioned with regard to the2009 Resolution of the City Commission increasing water and sewer impact fees that has been repealed for the failure to comply with statutory notice requirements.

Bach was also quizzed with regard to the City’s motivation and timing of the “bond validation” proceeding.

Hartman returned to the witness stand. Hartman reiterated his earlier testimony that the calculation and the imposition of the new user Water Utility “impact fee” was in support of “growth paying its own way.” Hartman defended his determination to use “current replacement cost” of the Water Utility, without considering depreciation, in his calculations because the service is “perpetual.”

Next

There are almost 200 separate exhibits that have been entered into evidence appearing to total thousands of pages. There will be a transcript of 12 -14 hours of testimony and argument taken over the two days. The Intervener will be filing additional papers on December 16. Judge Davis promised to issue his judgment as to the validity of the bonds in a timely fashion. Attorneys for both the City and the Intervener have indicated that an appeal to the Florida Supreme Court is likely.

Adam 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 5, 2013 3:55 a.m.