WATER WAR: VA Supreme Court Panel Denies City’s Appeal
By GEORGE BROMLEY
Falls Church Times Staff
September 2, 2010
A three judge panel of the Supreme Court of Virginia has turned down Falls Church’s appeal of a ruling of the Fairfax Circuit Court, which found the City’s practice of transferring water system profits to its general fund unconstitutional.
“The City is disappointed with this decision and will be filing a Petition for Rehearing for consideration by all members of the Supreme Court,” said Wyatt Shields, Falls Church City Manager. While the City’s petition is pending, the stay of the Circuit Court’s ruling against the City will remain in effect until a final order is entered by the Supreme Court. If the petition is rejected, Falls Church must return $2.2 million to the water fund in compliance with the decision of the Circuit Court.
On January 6, 2010, Judge R. Terrence Ney held that the City’s practice constituted an “extraterritorial” tax on Fairfax County ratepayers, who comprise 92% of the water system’s customers. Falls Church filed an appeal on April 6 and presented its case to the Virginia Supreme Court’s writ panel in Salem in mid-July. The panel ruled on September 1 that it found no reversible error in Judge Ney’s decision and so rejected the City’s appeal.
Appellants generally do not prevail in civil cases. An analysis conducted several years ago found that petitioners had less than a one in five chance of obtaining a writ (the odds in criminal cases are far worse). However, Falls Church had little alternative than to appeal, given that it can ill afford the transfer of over $2 million from its general fund. According to the study, the odds on obtaining a rehearing before the full, seven member Supreme Court are 1 in 23.
Phil Allin, Chairman of the Board of Fairfax Water, said, “We are delighted to do our share to help bring tax relief to Fairfax County customers. ‘No taxation without representation’ still means something in Virginia . We are glad this litigation is behind us and look forward to restoring the cooperative relationship we enjoyed with the City before it sued us in February 2007.”
Falls Church sued and lost in U.S. District Court in Alexandria. The City appealed the ruling, but the U.S. Court of Appeals in Richmond affirmed the decision in April 2008.
Fairfax Water sued Falls Church on five counts in December 2008. The City counter-sued Fairfax Water and the Board of Supervisors, but this suit was dismissed in August 2009.
One count of Fairfax Water’s complaint was thrown out and the remaining four were split and tried separately. Count V, the subject of the City’s appeal to the Supreme Court, was tried before Judge Ney in September 2009. The remaining three counts were tried in February 2010, Judge Ney again presiding, but the parties reached a settlement before conclusion of the proceedings.
A copy of Fairfax Water’s April 26 response to the City’s appeal is available here. Additional documents are available at the City’s and Farifax Water’s websites.
By George Bromley
September 2, 2010
Holy smokes…if we have to transfer that 2 million it will leave a mark.
Rich, as noted in a prior Falls Church times report, the vote of the City Council was unanimous or near unanimous as indicated in a FCT article. Dave Snyder had significant reservations but ultimately voted with the majority.
http://fallschurchtimes.com/20962/snyder-voted-for-criticized-water-litigation
A big question for me is what kind of advice did they receive from the firm retained as counsel as to the litigation costs and risks and how did the City Council evaluate those risks. In particular, how did the FC City Council evaluate the risk of commencing and continuing litigation against a significantly larger jurisdiction with substantially greater financial and other resources. Even if the FC City Council believed their legal position was tenable, you have to evaluate those risks.
One of the problems I see with the City’s ownership of the water utility is that ultimately, elected officials are making business decisions that they may not be very well equipped to make. The water utility is a business, particularly to the extent that it serves non-FC City residents.
I would like to know which individuals on the City Council (at that time) were responsible for the decision to sue Fairfax County in 2007, or if others were responsible, I would like to know who they are as well. I assume the Mayor, but if others were involved or responsible, the citizens need to know the story–this seems newsworthy, but I have yet to see it reported on anywhere. Particularly important is the reasoning behind going forward with such litigation. Everyone makes mistakes but it would be nice to know as a taxpayer, “What were we thinking”.
Hi Rich. I am the furthest thing from any kind of expert on the water issue, but I believe that the fundamental notion that the City should be allowed to take a “return on investment” from its water utility dates to a time well before the previous Councils. Someone jump in here who knows the story better, but my recollection is that some time in the mid-late 1990s, Council, after study of national public utilities management practices, concluded that taking a ROI from our water business and transferring it to City coffers would be a permitted and appropriate practice. Everything going on now — the current litigation, etc. — stems from that decision back then. Apologies for oversimplifying to get the discussion rolling. For enlightenment, we really should hear on this from Sam Mabry, who was in a leadership position on Council in the mid-late 90s and more than any other Councilor was identified as an expert on the water utility and a proponent (I believe) of the ROI fund-transfer approach. At the time I recall that it was seen as a rather a brilliant move, one that significantly boosted the City’s bottom line at a time when the economy was sluggish, new development was moribund, and there were pressures to cut City spending and raise taxes.
Right, Phil. I remember angrily reading a caption along the lines of “Liquid Gold” in Benton’s liberal rag when he reported on a consultant’s deliverable to Council recommending a “recovery” of monies from water customers outside the city. At the time I was outside the city and annoyed they could raise my water rates to fund the schools I couldn’t use. Council acting on that recommendation was the first shot in the fight. Even though I’m now inside the City, I think it’s well past time to drop the appeals and swallow the poison.
City Council members in 2007 were Dan Maller, Dan Sze, Lindy Hockenberry, David Chavern, Hal Lippman, David Snyder, and Robin Gardner. Only the last two remain on the Council. All discussions concerning the litigation were conducted in closed seesion, so no public record exists.
Anyone have an idea of what the continued litigation is costing us/the City?
The City’s legal bills, which are substantial, have been paid by the Virginia Municipal Liability Pool (VMLP). The VMLP did not want to pick up the tab, so Falls Church had to drag them into Arlington court last year, where Judge Alper found in the City’s favor. Had she not, Falls Church might not have appealed Judge Ney’s January 2010 decision and may have settled earlier on the three counts that went to trial last February.
http://fallschurchtimes.com/12091/water-wars-city-wins-insurance-claim/
Does anyone know whether the city’s legal bills were covered by VMLP for both lawsuits (i.e. federal and state)? If not, how much did the City spend on the federal lawsuit?
Sometimes the only thing that arrogance and ignorance have in common is hope…..Well both the smart people and those who thought they were smart didn’t do their homework, or thought their consultants or lawyers wouldn’t let them down. The fact that insurance covers legal fees is hardly relevant. Elected officials and City employees screwed up again. Are you kidding me. You genuises knew we were going to lose this appeal, and if you didn’t you are to arrogant to be in public office or too stupid to manage my tax dollars. Thanks so much for the your efforts…….
Several points to consider with emphasis on looking forward:
1. The immediate payout could be as high as $4.4 million, since the decision being appealed gave relief relating to FY09 as well FY10. The loss for each year going forward would be $2.2 million.
2. Fairfax Water has expressed desire to achieve a cooperative relationship with the City. We should pursue that immediately, even to the extent of a settlement that would drop the request for rehearing. Our focus, along with Fairfax Water should be on providing the water infrastructure needed for rapid economic development, consistent with high environmental quality, in the region served by the two water systems. Successful development of Tysons, Merrifield, and the city itself can far outweigh the loses from this tragic confrontation. Just think of the capacity required for the doubling of commercial and the tripling of residential in Tysons, which are components of the Tysons plan adopted by the County. Given the fact that the Potomac has run rather dry for extended periods in the past, wouldn’t it be prudent to consider a jointly developed new reservoir that could provide necessary water reserves as well as a new recreational venue.
3. City water system customers who live in Fairfax ought to have some voice in the setting of rates and other policy for the system in the future. A pledge by the city to develop such a mechanism can lay the groundwork for future cooperation between county and city on water and a variety of other issues, and perhaps even give Fairfax Water some reason to accept a settlement before the final shoe is dropped by the full Supreme Court.
George, I don’t think that VML is paying the cost of the City’s appeal to the Supreme Court. That’s on the City’s nickel.
As for the idea that lots of other cities use water money to fund general operations, I don’t think that’s generally true. The City tried to make that argument through its expert in the Fairfax Water trial and totally failed. The Town of Leesburg (mentioned above) keeps all of its water money in the utility fund. The issue in that case has to do with charging higher rates to out-of-towners without any cost justification.
Interestingly, the American Water Works Association has had a policy since the late 1960s that municipal water utilities (like Falls Church) should not divert water moneys to the general fund for purposes unrelated to operating the water system. You can find it on the AWWA website under About AWWA/AWWA Policy Statements/Financing-Accounting-and-Rates, and this also came out in the Fairfax Water litigation. The litigation materials posted from the Falls Church case on the Internet show that the City didn’t even know about that policy and found out about it only in the litigation. Pretty amazing.
It’s time for the City to stop taxing its Fairfax County water customers to fund purely local things. The courts were right to call this “taxation without representation.”
John, I think you answered the question I was going to ask, which was: do other water systems take a return on investment? The City seemed to be saying others do – but John suggests others don’t. I’m not sure why there isn’t a simple, clear cut answer to that question. I’m mostly just curious – even if others do I suppose it doesn’t mean it’s allowable but if we were the only water system in the country taking an ROI then I guess I’d be surprised we thought we’d be able to pull it off.
Here’s my next question – what will the water system do with an extra $2.2M per year? Will they just lower water rates? Save up the money for some future use? Spend it on something?
I know some folks have suggested just selling off the water system if we can’t take any ROI from it – but it seems like we leverage the water system to get some economies of scale related to overall City infrastructure, so that would be one reason to hang on to it.
As I recall, the City did try to point to a few other municipalities that use the same approach. But, there were not many.