ANN ARBOR, MI — The Michigan Court of Appeals has sided with Ann Arbor in a lawsuit that claimed the city owed residents and businesses millions of dollars in fees collected illegally.
The court ruled in favor of the city’s motion for summary disposition and denied requests for relief in an order handed down Oct. 4 by a three-judge panel that included Michael Kelly, Jane Markey and James Robert Redford.
“This opinion constitutes our final judgment in this action,” their opinion stated.
Royal Oak attorney Greg Hanley brought the case against the city in October 2021 on behalf of Platt Convenience Inc., owner of the Exxon gas station at 2995 Packard Road.
They argued Ann Arbor’s longstanding stormwater fees, which are charged to property owners based on the amount of impervious land surface, constitute taxes that have not been authorized by voters and violate state law.
The lawsuit asked the court to declare the fees illegal and refund all stormwater fees collected by the city going back to one year before the filing of the lawsuit.
At the time the case was filed, city records showed stormwater charges to all city ratepayers totaled $12.5 million for the 2019-20 fiscal year, while operating expenses totaled $6.9 million. The stormwater fund ended the year with $13.6 million in unrestricted assets and $17.8 million in equity in pooled cash and investments.
The city’s capital improvement plan at the time showed tens of millions of dollars in stormwater system projects in the coming years, including new detention basins costing millions of dollars to address neighborhood flooding concerns.
City officials have maintained the city’s utility rates are set at levels to cover operational costs and to build up cash reserves to finance large capital improvements.
The lawsuit also challenged the city’s use of stormwater funds for planting and maintaining trees along city streets, which city officials argue helps intercept stormwater.
Hanley’s law firm filed similar lawsuits challenging stormwater fees in several other cities, including Detroit, Dearborn, Harper Woods, Madison Heights and Roseville. The case in Ann Arbor used Platt Convenience as “representative of a class of similarly situated persons and entities” throughout the city, but the court denied the request for class-action status.
In its opinion, the Court of Appeals examined the 1998 Michigan Supreme Court decision in the case of Bolt v. City of Lansing, in which a stormwater service charge was deemed a tax in violation of the Headlee Amendment to the Michigan Constitution. Headlee prohibits levying a new tax without voter approval.
In determining whether a municipal charge represents a permissible user fee or an impermissible tax under Headlee, the appeals court applied a three-prong test set forth by the Supreme Court in the Bolt case. It cited the higher court in stating there is “no bright-line test” to distinguish between the two, but in general a fee is exchanged for a service or benefit, while a tax is designed to raise revenue.
The first factor considered is whether the fees serve a regulatory purpose rather than a revenue-raising purpose, the second is whether the fees are proportionate to costs of service, and the third is whether the fees are voluntary. Those criteria are not considered in isolation, but in their totality.
The Court of Appeals found the first two Bolt factors favored the conclusion that Ann Arbor’s disputed charges are valid user fees, rather than unlawful taxes, while the third factor favored the opposite conclusion.
“Even so, on balance, we conclude that defendant city is entitled to judgment as a matter of law based on binding precedent,” the court stated.
City Attorney Atleen Kaur said the city is pleased with the decision because it acknowledges the city’s long-running and deliberate efforts to ensure its stormwater user fees comply with the legal requirements established in the Bolt case.
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