NEW HANOVER COUNTY — A familiar name in the Wilmington development and construction industry is part of a class action lawsuit that alleges the Cape Fear Public Utility Authority has been illegally charging millions of dollars in “arbitrary” and “capricious” fees.
The lawsuit was filed in August by Mecklenburg-based J.A.C.K. Development, LLC, and the Wilmington-based Coastal Cypress Building Company, founded by Steve Swain, who formerly worked with his uncle, Wilmington developer David Swain of Swain and Associates.
The plaintiffs, who also seek to represent others potentially harmed by CFPUA’s actions, seek “collection action to obtain redress arising from the unlawful collection of ‘System Development Charges,'” according to the suit, filed by attorney Daniel Bryson, of Whitfield, Bryson, and Mason, LLP, a Raleigh-based law firm.
At the heart of the lawsuit are what CFPUA calls “system development charges,” also known as impact fees. These fees aren’t related to the direct cost of sewer or water service, nor are they related to the cost of physically connecting new properties to the utility network. Instead, they are charges issued to new customers, often as a prerequisite for a building permit, designed to help pay for future CFPUA projects.
Under state law, impact fees must be calculated for specific capital improvement projects and charged proportionately to new customers.
Plaintiffs cite state law requirements that impact fees be developed as part of a concrete plan, including a detailed breakdown of what the costs of future development will be. The aspect of the law prevents the fees from being speculative — that is, CFPUA cannot charge customers an arbitrary amount.
The suit alleges that CFPUA’s impact fees violate state law, specifically House Bill 426, passed last June, and taking effect October 1, 2017. Plaintiffs further allege that CFPUA is using impact fees as “‘operating revenue’ to pay for ‘operating expenses,'” instead of capital projects (i.e. new pipelines, expanded facilities, new filtration plants, etc.). The lawsuit is similar to one filed against the town of Leland, which operates its own utilities, last month.
CFPUA’s system development charges
According to CFPUA’s Comprehensive Financial Annual Report for fiscal year 2017, the utility collected $6,277,464 in system development charges, income CFPUA listed under “operating revenue,” separate from its capital fund.
“The principal operating revenues of the Authority are charges to customers including those for water and wastewater service, system development charges, connection fees,
penalties, and others,” the report states.
According to the report, these impact fees were the “most notable” of revenue from new customers, and ” outperformed budgeted estimates by $2,677,464.”
Alleged violations of state law
Plaintiff’s cite state law requiring utilities like CFPUA to base impact fees on the detail calculation of what it will cost to deliver a specific set of projects and services in the future; they cannot be used as a general fund for day-to-day operations.
Plaintiffs allege that CFPUA violated both of these aspects of state law.
“CFPUA’s action in collecting impact fees from Plaintiffs and Class Members shocks the conscience and/or has no rational relation to a valid state objective as the fees were charged without a pre-existing concrete plan, and/or not used pursuant to a concrete plan as provided by applicable law,” the suit argues.
Further, because CFPUA requires payment of impact fees before it will authorize a New Hanover County building permit, Plaintiffs claim their rights were violated, calling the move “arbitrary and capricious” and saying it “constitutes an abuse of discretion.”
State law sets a statute of limitations of three years for claims against public utilities for impact fees. J.A.C.K. Development seeks redress for $10,100 in water and sewer impact fees charged for three properties. Coastal Cyprus seeks $23,760 it paid for six properties.
CFPUA Chief Communication Officer Peg Hall Williams issued a statement from the utility.
“CFPUA believes the method of calculation of SDC’s referenced in the lawsuit is compliant with the law. Since this is in litigation, we cannot further comment,” Hall Williams wrote.
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