Can Ann Arbor raise water rates now to pay for a new treatment plant it hasn’t started yet?

Not according to a lawsuit that’s seeking class action status this month. Originally filed last summer by Royal Oak attorney Greg Hanley with city resident Sandra Hahn as plaintiff, the suit points out that the reserves in Ann Arbor’s water and sewer fund rose from $62 to $91 million from 2014 to 2019–and charges that the city is violating state law by charging fees that exceed its costs.

The city says that it’s banking the money for necessary improvements. “The City’s financial statements for its water and sewer funds reflect substantial capital investment projects, one of which includes a wastewater treatment plant upgrade project at a cost of approximately $160 million,” it wrote in a filing. That work is done, but now it’s saving up for other projects, including a $90 million upgrade to the water treatment plant.

In an interview, Hanley argues that instead of building reserves in advance, municipalities should borrow money to pay for infrastructure improvements through revenue bonds. “That’s what [Ann Arbor] did when about eight years ago they did all their major improvements to the sewer facility–they financed it principally through these bonds, which are being paid over time through rates,” Hanley says.

The city actually started work on the sewage plant several years earlier, and city administrator Tom Crawford reports that they paid about $32 million of the cost from reserves. But Hanley’s firm, Kickham Hanley, is not to be taken lightly. A 2018 Detroit Free Press article tallied more than $40 million in judgments and settlements from its class action suits against local governments–though in January, the state Court of Appeals reversed a $9 million judgment against Bloomfield Township over its water and sewer fees.

In a follow-up email, Hanley agrees “that necessary and appropriate capital improvements to water and sewer infrastructure assets are an allowable expense in operating a water and sewer system. The question is how to properly finance those improvements. Principles of intergenerational equity dictate that current customers not finance improvements that will disproportionately benefit future customers.”

City attorney Stephen Postema says there’s nothing illegal about banking money for new facilities. “As a factual matter, Plaintiff’s attorneys tried to argue the so-called concept of intergenerational equity in two previous cases,” he emails, “and in 2019 the Michigan Court of Appeals rejected it in both of those cases.”

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The local suit also challenges the city’s use of stormwater fees to plant and tend trees. “You don’t get to generate excessive surpluses or divert monies” to operations unrelated to water, sewer, and stormwater services, Hanley says. “They’re taking over a million dollars a year that they’re including in the stormwater rates and financing pretty much the entire forestry department.”

The issue came up at a city council meeting last October, when a contract to trim street trees passed narrowly, 6-5. According to the Ann Arbor News, councilmember Jack Eaton objected that it was “a lot of money to be pulling out of a stormwater fund for a matter that just kind of relates to the subject matter.”

Hanley appreciated the support. It’s “pretty unprecedented,” he says, for an elected official to question a municipality’s use of fee revenue. But mayor Christopher Taylor–like Eaton, a lawyer–emails that he’s “100% confident in our use of some storm water funds to support the street tree program because of the proven storm water benefits that street trees provide.”

Eaton and two other councilmembers who opposed the October motion are no longer on council, and the city is showing no inclination to settle the suit. Its legal response contends that the complaints “misunderstand and misconstrue the City’s utility rates, the manner in which water, sewer and stormwater rates are set, and the City’s procedures for accounting for its utility systems and rates … the City’s utility rates are reasonable and proportionate to the actual costs of providing the services and are thus legal and valid user fees.”

The stakes are high, because the city has other major utility projects in the works. If successful, Taylor says, the lawsuit “could gut vital infrastructure and cost Ann Arbor millions of dollars.”

The biggest project is the water treatment plant. It hasn’t had major work since an expansion in 1975, and some systems date to its original construction in 1938.

Assistant city attorney Timothy Wilhelm emails that construction is expected to begin in 2025. “The renovation project is estimated to cost approximately $90 million,” he writes, “and reserves would be one of the sources used to pay for the project consistent with City policies.”

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Hanley’s arguments are based largely on the 1998 case Bolt v City of Lansing, in which a property owner challenged Lansing’s stormwater utility fee, arguing that it was effectively a tax levied without voter approval. By a 4-3 margin, the Michigan Supreme Court agreed.

Ann Arbor and the Michigan Municipal League both filed briefs supporting Lansing. Former Ann Arbor city attorney Bruce Laidlaw, who wrote the municipal league’s brief, emails that ever since, lower courts have been wrestling with what utility expenses are and are not permissible–he recently “counted 14 appellate cases based on Bolt.”

So it’s impossible to predict how the latest litigation will play out. Laidlaw writes that only one thing is certain: “Until the Michigan Supreme Court clarifies the standards of the Bolt case, it will remain the kind of case that assures paydays for lawyers.”