Vol. 15 Issue No. 10 | March 11 - 17, 2009

Water rates referendum appears foiled from the gate

By Linda Bentley | March 11, 2009

To insure marketability of bonds, revenue pledged to repayment must be secure

CAVE CREEK – Carefree resident Jim Peirce was not pleased after Cave Creek Town Council passed the second reading of an ordinance on March 2, adopting new tiered water rates to go into effect April 13.

While Sentinel Rock Estates, where Peirce lives, is in Carefree, it receives its water from Cave Creek.

Even though numerous system improvements have been completed and water utility customers have not received any rate increases since 1986, many still balked at the increase, including Peirce, who went to Cave Creek Town Hall last Wednesday to obtain forms and instructions from Town Clerk Carrie Dyrek to file a referendum against the ordinance.

While he was at it, Peirce decided to pursue two other initiatives that would amend the Cave Creek Town Code to require voter approval before increases to water or sewer rates could be implemented.

Although his sewer service is provided by Black Mountain Sewer and not under the town’s purview, Peirce insisted on pursuing an initiative to amend the Cave Creek Town Code as it pertains to sewer fees.

However, Peirce could have saved himself the trouble had he consulted with former Sentinel Rock resident Ellen Van Riper, an attorney who, along with Attorney Thomas Irvine, filed a special action in 2004 on behalf of the Political Action Committee Stop Exploiting Taxpayers (SET) asking the court to order the city of Mesa to transmit a referendum petition against four municipal ordinances, setting rates for water, wastewater, gas and solid waste, to the Maricopa County Recorder for certification.

The Mesa City Clerk and Mesa City Attorney notified SET it would not forward the referendum petition to the county for certification because setting utility rates is an administrative act not subject to referendum and because it is unlawful to refer four separate ordinances in one petition.

After reviewing the cross motions for summary judgment, the trial court granted judgment in favor of the city of Mesa.

SET appealed.

Mesa filed a motion to dismiss the appeal as moot since it adopted ordinances and resolutions readjusting the utility rates that were the subject of the appeal, citing a referendum election was no longer required.

Ordinarily the court will not consider moot questions, although it can, as it agreed to do in this instance, “if the issues are of great public importance or are capable of repetition yet evading review.”

SET argued even if utility rate increases were generally administrative acts, these particular ordinances were legislative and referable, since the city passed them “to implement a general tax increase under the guise of a utility rate change.”

To support its claim, SET provided city council meeting minutes that included comments stating the primary purpose of the proposed rate increases was to generate revenue for the city of Mesa’s general fund and to balance the city budget, not just to cover increased utility operating costs.

The court concluded utility rates are not taxes even if some of the proceeds transferred to the general fund are used for other government programs, citing the significant difference between the two as follows:

“While the payment of a tax does not transfer ownership, the payment of a … utility rate … transfers ownership of water and electricity. And while failure to pay a tax results in civil, sometimes criminal penalties, the failure to pay a portion of a utility rate results in termination of services.”

SET then relied on Mesa City Charter Section 212, which states, “Ordinances levying taxes or granting, renewing, or extending a franchise or regulating the rate charged by any public utility for its services ... shall not be classified as emergency measures,” to make its argument utility rate changes were referable.

Even though that argument was not raised in the trial court, the appeals court exercised its discretion to address the merits.

Arizona Court of Appeals Judge Patricia Orozco, who authored the opinion, explained, within
the Mesa City Charter, a public utility and a city-owned utility are two different types of entities that are not interchangeable in meaning, and rejected SET’s argument as inapplicable.

She wrote, “In evaluating the relationship between setting rates for municipal utilities and Arizona statutes governing municipal utilities, we consider … the comprehensive regulatory scheme that permits municipalities to issue bonds to finance its utility services. The purpose of these statutes is to insure the marketability of the bonds. To give effect to this intent, the revenue pledged to bond repayment must be secure.”

Because Mesa voters approved the issuance of revenue bonds for the utilities to be repaid solely out of utility revenues, Mesa City Council was required by statute to “establish charges sufficient to repay those bonds at a rate not less than 125 percent of the rate in effect on the date of determination.”

The Arizona League of Cities and Towns, joined by several municipalities, filed an amicus brief supporting the city’s view and to emphasize potential problems if utility rate setting were subject to referendum.

It said freezing rates would violate statute because bond resolutions are considered contracts with the bond holders, enforceable by court action, and one of the many provisions in a bond resolution, as well as the statutory scheme itself, mandates council adjust rates from time to time to keep the utility self-sufficient.

Orozco stated the statute would be ineffective if it could be circumvented by referendum.
Unanimously affirming the judgment of the trial court in concluding the ordinances resulted from administrative action and not subject to referendum, the appeals panel declined to consider whether separate referendum petitions were required for each ordinance.

?Photo by Linda Bentley?Cave Creek Town Clerk Carrie Dyrek assembled referendum forms and instructions for Carefree resident Jim Peirce.