ATTORNEY SAYS CITY OWES $20 MILLION: Idaho Supreme Court rules that Pocatello charged residents illegal utility fees for years

January 8, 2019

POCATELLO — The city owes its utility customers more than $20 million in damages and interest to repay collections made over several years through fees the Idaho Supreme Court deemed to be illegal, according to an attorney involved in the case.

Every day the city delays in repaying its municipal service users, it incurs another $3,000 in interest, Nathan Olsen, an attorney representing the plaintiffs in the class-action suit, recently estimated based on discovery documents furnished by the city.

The city implemented the fees in 2005, seeking to address a revenue shortfall resulting from a high percentage of tax-exempt entities in town. City leaders have declined to comment publicly on the issue, arguing it’s a matter of pending litigation.

Olsen, however, emphasized the case has not been sealed and has been fully adjudicated, aside from calculations as to how much city utility customers will be owed for overpaying on water, sewer and sanitation bills into Fiscal Year 2014.

Olsen believes city leaders have stuck taxpayers with a bigger financial problem through their inaction, allowing the debt to continue accruing 12 percent interest, and have shirked their obligations to apprise the public of the issue.

“There are no disputed facts here,” Olsen said. “We just have to do math.”

None of the current city leaders were in office in 2005, when the city decided to operate its utilities as for-profit entities, like private utilities. The city added an extra charge on utility bills, which it called a “return on equity” fee, and moved the profits to its general fund, where they could be applied toward unrelated expenses.

The city’s former chief financial officer, David Swindell, reasoned, “These are businesses operated by the public that could and do operate as for-profit private enterprises in other communities,” according to court documents.

The city generated additional funding through a tax on its own utilities which it called “payment in lieu of taxes,” or PILOT.

“Under this scheme, the city-owned water and sewer departments were required to pay ‘property taxes’ to the city as if they were private entities, and the departments then passed this cost on to their customers,” the Idaho Supreme Court wrote in a Sept. 6, 2017 ruling, reversing a prior decision by Sixth District Judge Stephen S. Dunn that the city shouldn’t have to repay fee payers. “The property taxes were then paid into the city’s general fund.”

Former Pocatello Mayor Roger Chase wrote a letter to the Idaho Attorney General’s Office on Dec. 26, 2006, inquiring about the legality of the tax and fee.

“As I am sure you are aware, relying on property taxes for revenue will not work in Pocatello due to the number of property tax exemptions given by the state,” Chase wrote, according to court documents. “Therefore, it has been my practice as mayor to move our city away from property taxes and to a fee-based system.”

A deputy attorney general sent a response letter on Feb. 6, 2007, informing the city that the fee and tax ran afoul of a 1991 Idaho Supreme Court decision, Loomis V. City of Hailey, and was “therefore not appropriate.” Pocatello retained both the fee and tax, nonetheless, until Fiscal Year 2012, when it stopped collecting the “return on equity” fee.

On Dec. 9, 2011, the Building Contractors Association of Southeast Idaho challenged the PILOT tax, and Judge Dunn ruled it was unlawful. Dunn prohibited the city from collecting the PILOT tax near the start of Fiscal Year 2014, resulting in a 10 percent decrease in utility bills, according to court documents.

On April 15, 2014, Logan Robinson, who was the owner of Hill-Vu Mobile Home Park in Pocatello, filed suit to force the city to refund both the PILOT tax and the “return on equity” fee. His attorneys, Olsen and Michael Gaffney, both of Idaho Falls, argued the city is legally allowed only to collect fees sufficient so that its services “shall be and always remain self-supporting,” which may include reserves but prohibits transfers for unrelated uses.

On appeal, the Idaho Supreme Court concurred, ruling: “The PILOT was not a reasonable user fee to reimburse the city for the cost of government services. It was an exaction that was designed to be in addition to what would be a reasonable charge for the water and sewer systems to remain self-supporting.”

Logan Robinson died in June of 2017, but his brother, Ricky G. Robinson, who was a partner in the mobile home park, has pressed forward with the suit.

On May 18, Judge Dunn granted class certification to city user-fee payers, ruling “all class members would have a common interest in receiving compensation for the past collection of an illegal tax.”

Discovery documents show the city collected nearly $28.4 million in combined revenue through the illegal tax and fee from Fiscal Year 2006 through Fiscal Year 2014.

On Nov. 20, Dunn ruled the city must repay members of the class for damages and interest covering only the second half of Fiscal Year 2010 through the first three months of Fiscal Year 2014, based on the statute of limitations. Though the actual damages amount to roughly $10 million, Olsen said the city is on the hook for twice that amount, factoring interest.

“There is a chance at a settlement here and coming up with a plan that will work for everybody involved, including the city, but at least in my opinion, they need to prepare the public for this,” Olsen said. “It shouldn’t take five years to try to figure out a way to right the wrong here. The longer it goes on, the more it costs.”

City spokesman Logan McDougall said the city is considering all options to cover its financial obligation. City officials met in a closed session on Dec. 20 to discuss the issue.

Olsen declined to offer a range of how much he and Gaffney stand to make from the class-action suit.

Olsen said utility customers who are eligible for refunds will automatically be included in the class, unless they intentionally opt out. Olsen said he’s working with the city on details regarding how eligible customers will be notified as to what they are owed.

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