Nathan Olsen

Nathan Olsen

POCATELLO — Customers who were billed for municipal utility services between April 2012 and April 2014 should expect to receive a check this fall resulting from a recent legal settlement with the city.

The city of Pocatello has reached a $4.5 million settlement to a class-action lawsuit for assessing illegal fees on its water, sewer and sanitation services from 2005 into Fiscal Year 2014.

Sixth District Judge Stephen Dunn granted preliminary approval to the settlement in a July 8 order. A hearing for final approval is scheduled for Sept. 16, and a hearing during which the court will consider the plaintiffs’ motion for attorney fees and costs is scheduled for Oct. 15. The case was originally filed in 2014 by Ricky G. and Logan Robinson, Hill-View Mobile Home Parks and Ed Quinn.

Current utility customers who had city services during the two-year settlement period and are covered by the class will not be required to file any paperwork to receive a check.

However, claims must be filed by any former customers who no longer receive city services but wish to receive settlement checks. The application process will be explained in a notice that the city must mail to everyone in the class by July 27.

Nathan Olsen, an attorney representing the plaintiffs, estimated in early January that the city owed customers who were affected by the fees, deemed to be illegal by the Idaho Supreme Court, in excess of $20 million in damages and interest.

Olsen said the number of people in the class and the potential size of individual checks hasn’t yet been determined.

“The city is working on that,” Olsen said. “They have sent us in discovery 16,000 pages consisting of all the payers during that period.”

He said class members will receive refunds for a significant percentage of the illegal fees they paid during the period, but it won’t be a “windfall for the most part.”

City officials declined to comment Monday, withholding their remarks until a formal press conference. The city implemented the fees to address a revenue shortfall resulting from a higher percentage of tax-exempt entities in town.

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 Judge 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.”

Ultimately, Olsen said he agreed in the settlement to accept repayment for just two years of collections, plus $1 million toward interest. Olsen considers it a good outcome, as it avoids the need for the city to issue bonds and tax many of the class members to repay the debt, thereby offsetting benefits.

“All things considered, this is a good result for the City of Pocatello,” Olsen said.

Olsen believes the judgment set in the case will set a precedent “not only for the City of Pocatello but for other entities in the state and maybe even in the nation, too, about the proper collection and use of a fee.”