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Idaho Supreme Court ruling could cost Pocatello millions of dollars

September 8, 2017
Nathan Olsen
Nathan Olsen

In what looms as a possible devastating financial blow, the city of Pocatello could be on the hook for nearly $30 million following a state Supreme Court ruling this week, according to an attorney involved in the case.

The state’s highest court on Wednesday reversed an earlier decision by district Judge Stephen S. Dunn and in doing so cleared the way for a class-action lawsuit that if successful would require the city to refund nearly $30 million in revenue acquired from illegally collected water and sewer fees, said Nathan Olsen, an Idaho Falls attorney who’s representing the individuals suing the city.

“The city is aware of the decision and staff are reviewing it as well as any implications for the city,” responded Logan McDougall, spokesman for the city of Pocatello. “At this time, the city does not have a comment on the pending litigation.”

Opposed to increasing city property taxes because of the many exemptions given by the state, then-Pocatello Mayor Roger Chase penned a letter to the Idaho Attorney General’s Office in 2006 requesting information about imposing a new rate of return fee for citizens paying water and sewer fees.

Despite the attorney general’s opinion that the new rate of return fee would not be an appropriate method of obtaining additional revenue, the city implemented the PILOT, or Payment In Lieu Of Taxes, program.

The illegally collected fees went into a general reserve fund for the city as opposed to the water and sewer department fund and were collected in contradiction to Idaho law, the Idaho Supreme Court as well as Dunn ruled.

The Building Contractors Association filed suit against Pocatello in December 2011 challenging the legality of the PILOT program and in 2013 Judge Dunn ruled that the city could no longer collect the inappropriate fee that in essence was a disguised tax.

Dunn’s decision reduced most Pocatellans’ monthly water and sewer bills by approximately 10 percent. However, Dunn ruled that the city should not be required to retroactively refund the illegally collected water and sewer fees to fee-paying Pocatello residents.

In 2014, the Hill Vu Mobile Home Park and Pocatello resident Ed Quinn filed a lawsuit seeking a refund of the PILOT payments they had made to the city during the time it was collecting those PILOT fees.

“An interesting part of this decision is that once the judge found out that what the city of Pocatello was doing was wrong, (city officials) convinced the district court that as long as they weren’t doing it anymore the city shouldn’t have to pay the money back,” said Olsen, who’s representing Quinn and the mobile home park. “I’ve been involved in a number of (state) Supreme Court cases and this is a strongly worded opinion by Justice (Daniel) Eismann.”

Justice Eismann faulted the city of Pocatello for charging the excess fees and cited a long list of cases on how government fees must be related to the cost of services provided and “cannot be assessed purely as a revenue-generating scheme.”

According to Eismann, Judge Dunn was wrong for ruling that the recovery of the illegally collected PILOT fees was barred by Idaho law.

“These are issues that really have their origin before the American Revolution,” Olsen said. “This whole concept that governments cannot collect more than what they’re entitled to and they have to use what they collect on its intended purposes.”

Olsen continued, “These are some fundamental constitutional principles. I mean, the Boston Tea Party was over this same issue.”

Olsen said the class-action lawsuit he plans to file will attempt to collect the money Pocatello residents were illegally charged by the city and return it to them.

“We know how much they took illegally under the program and it’s closer to $30 million,” Olsen said. “How much we have a claim for is yet to be determined but it’s a pretty sizeable figure.”

Justice Eismann put the figure at about $4 million.

Chase said it would be difficult for the city to come up with the money, but he doesn’t believe that the city acquired anything near the $30 million figure Olsen mentioned.

“The idea there for the fee was that new construction coming into town would have to pay a hookup fee for connecting to water and sewer,” Chase said. “We wanted to find another revenue base to stray away from property taxes.”

Chase continued, “With that amount of money (nearly $30 million) they must be figuring in interest or something because we never made that much money from the fee.”

The Idaho Supreme Court has sent the case back to Dunn with a recommendation that he rules in favor of Quinn and the mobile home park regarding their lawsuit. If the city is ordered to pay back the illegal fees it collected in Olsen’s estimated amount of nearly $30 million, it’s unclear how the city would be able to afford to do so.

Once a class-action lawsuit is filed, citizens who paid the PILOT fee would receive notification of the lawsuit and the potential to obtain their respective refunds.

Considering the city’s annual budget is just more than $118 million for fiscal year 2018, a nearly $30 million hit could have serious implications.

The city plans to make a large financial contribution to the public-private partnership to construct the Northgate Interchange that will connect Siphon Road and Olympus Drive to Interstate 15 north of Pocatello and Chubbuck. The question looms whether a class-action lawsuit costing the city of Pocatello many millions of dollars could impact the city’s commitment to the interchange project.

With the case now back in Dunn’s hands — and the state Supreme Court recommending he rule the city pay back those Pocatellans who paid the illegal fees — Olsen is confident about the outcome.

“We have the greenlight now to come back with the remand to determine how much was improperly taken and then require the city to repay the fees,” Olsen said. “I have worked on this issue for more than 10 years and it has been one heck of a struggle but definitely worth it.”

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