S.C. high court hearing debate on Columbia’s use of water revenue

Should South Carolina cities be able to spend any surplus money they make on their water and sewage systems as they please?

The S.C. Supreme Court heard arguments for and against the practice Tuesday morning in a case brought by customers of Columbia’s water system.

Mullen Taylor, a lawyer retained by the city, told justices the city should be able to spend profits from the water and sewer system on other city projects. Opposing her, lawyers Dixon Lee and Gene Connell told the high court that any surpluses should go to upkeep and repair of the system.

All five justices – led by Chief Justice Jean Toal – questioned the lawyers, with the most aggressive questioning directed at Taylor. The court had originally allotted 35 minutes for arguments, but questioned attorneys for almost 50 minutes.

Justices did not rule Wednesday. A decision could take months.

Under questioning from Associate Justice Kaye Hearn, Taylor – who is a specialist in water law issues – said the court’s decision in the case will have a wide impact. Many cities across South Carolina take money from their water and sewer funds and spend it on city purposes, Taylor said.

Columbia businessman Joe Azar, who brought the lawsuit and was in the audience, and two fellow plaintiffs argue that council members for decades have been neglecting maintenance on water lines and spending profits made by the system instead on other city needs.

It’s a hot-button issue: Customers who live inside and outside the city limits are served by the vast system, which serves some 140,000 customers, approximately 55 percent of whom live outside the the city. Non-city residents, who pay higher rates because they don’t pay city taxes, say their money is going to city projects they shouldn’t have to pay for because they don’t live in the city.

Meanwhile, Columbia customers are awaiting double-digit rate increases: The city is under an Environmental Protection Agency court order to repair and replace decayed, neglected water lines that have allowed sewage to spill repeatedly into Midlands rivers, creating a health hazard.

Lawyers said even though some justices’ questions seemed almost hostile at times to Taylor, no one would predict which way a decision might go.

When Taylor told the justices that city water and sewer services were “voluntary contractual transactions” between the utility and its customers, Toal interrupted her.

“Whoa, whoa!” said the chief justice. “If I want water and sewer, I don’t have any negotiating room. I have but one provider of that service – that’s the city of Columbia.”

Several times, Toal referred to a 1997 law passed by the General Assembly, a law she said put certain restrictions on how cities can use water and sewer revenues.

But Taylor said “common law” – law made by judges in their court decisions – has given cities various rights to set rates and use profits and that the General Assembly didn’t intend to set aside that general rule.

“Whoa!” said Toal, a former State House member. “Tell me the source of that! The General Assembly is perfectly free to enact statutes that vary from common law.”

Taylor replied that a state law must specifically take away a city’s right to use surplus utility money for other purposes. Later, Taylor quoted a state Supreme Court decision in an Horry County case that ruled it was “legitimate and appropriate” for water and sewer revenues to be transferred to offset municipal services.

To get in compliance with the EPA and stop pollution, the city is under court order to spend more than $600 million to put the long-neglected system into good working order.

The city has siphoned money from its utility to pay for various projects since 1993. Between 1999 and 2010, the city transferred $78.6 million from the water and sewage fund to use for other purposes, according to court filings. These days, it takes about $4 million each year from the fund.

In his argument, Azar lawyer Lee told the justices that under a system of accounting that took only cash flows into account, the city made a profit each year. But under an accounting method known as “accrual accounting,” when a city takes all economic factors into account, the city’s water and sewer system didn’t run a profit because the city wasn’t considering future costly repairs that would come due.

Lee’s fellow attorney Connell echoed that argument. “Moneys that could have been put in to repair the system were not being used to repair the system,” he said.

“They have to come up with hundreds of millions of dollars to comply with the consent decree of EPA,” Lee said. “The bottom line is there is no money there to pay that. ... What they’ve done is deferred maintenance on repairs and spent the money elsewhere.”

Azar said the lawsuit doesn’t seek any damages. Instead, the suit asks that the city refund the last three years’ of siphoning – about $12 million – to the water and sewer fund and to halt the practice in the future.

Afterward, Azar said he was glad at least two justices – Toal and Associate Justice Costa Pleicones – are city water and sewer customers.

“They had a better understanding – they asked about the EPA, various fees, and other things. As a result, I think they will look into it deeper.”

But he declined to say how they will vote. “How do you ever predict what judges will do?” Azar said.

This story was originally published April 7, 2015 at 11:43 AM with the headline "S.C. high court hearing debate on Columbia’s use of water revenue."