Mackinaw Area Tourist Bureau, Inc. v. Vill. of Mackinaw City

1

MACKINAW AREA TOURIST BUREAU, INC., doing business as MACKINAW AREA VISITORS BUREAU, AMERICAN BOUTIQUE INN, AMERICA'S BEST VALUE, BAYMONT INN & SUITES, BAYSIDE HOTEL MACKINAC, BEACHCOMBER MOTEL, BEST WESTERN DOCKSIDE, BRIDGE VISTA BEACH HOTEL, BRIGADOON BED & BREAKFAST, BUDGET INN MACKINAW, CABINS OF MACKINAC, CAPRI MOTEL, CLARION HOTEL BEACHFRONT, COMFORT INN-LAKESIDE, COURT PLAZA INN & SUITES, CROWN CHOICE INN &SUITES, DAYS INNLAKEVIEW, ECONO LODGE BAYVIEW, FAIRVIEW BEACHFRONT INN, GREAT LAKES INN, HAMILTON INN SELECT, KNIGHTS INN, LAMPLIGHTER MOTEL, LIGHTHOUSE VIEW MOTEL, MACKINAW BEACH & BAY MOTEL, PARKSIDE INN-BRIDGEVIEW, QUALITY INN & SUITES, RAINBOW MOTEL, RAMADA INN WATERFRONT, STARLITE BUDGET INN, SUPER 8-BEACHFRONT MOTEL, SUPER 8-BRIDGEVIEW MOTEL, THUNDERBIRD INN MACKINAW, TRAILSEND MOTEL, VINDEL MOTEL, WATERFRONT INN, WELCOME INN, MACKINAC BAY TRADING COMPANY, MACKINAW CROSSINGS, MACKINAW COFFEE, INC., FRANK & STUFF, INC., DIXIE SALOON, INC., RUM RUNNERS ISLAND, INC., ANNA LIEGHIO, INC., MACKINAC BAY WATER, INC., MACKINAC BAY WATER PARK, INC., TBWC RESTAURANT, INC., and MACKINAW DEPOT, INC., Plaintiffs-Appellees/Cross-Appellants, v. VILLAGE OF MACKINAW CITY, Defendant-Appellant/Cross-Appellee

No. 361625

Court of Appeals of Michigan

May 23, 2024

Cheboygan Circuit Court LC No. 19-008746-CZ

Before: O'BRIEN, P.J., and K. F. KELLY and M. J. KELLY JJ.

O'BRIEN, P.J.

Defendant Village of Mackinaw City (the Village), was informed by the Michigan Department of Environmental Quality (DEQ)^[1] that it was out of compliance with the Michigan Safe Drinking Water Act, MCL 325.1001 et seq. (Act 399), due to insufficient water storage capacity, and that the Village's current funding structure for its water and sewer systems was not sufficient to adequately support the systems' needs. To remedy these deficiencies, the Village increased its water and sewer rates. This led plaintiffs, Mackinaw Area Tourist Bureau, doing business as Mackinaw Area Visitors Bureau,^[2] to file suit, claiming that the water- and sewer-rate increases were a disguised tax levied without voter approval contrary to Const 1963, art 9, § 31 of the Headlee Amendment.^[3] The Village filed a motion for summary disposition, and plaintiffs responded by arguing that the trial court should deny the Village's motion and grant summary disposition in plaintiffs' favor. The trial court sided with plaintiffs. It reasoned that the Village's rate increases constituted a tax because a portion of the water-rate increase would be used to fund the construction of a new water tower. The court believed that "new infrastructure" could never be funded through a user fee, so the water-rate increase must be a tax. This was error. Increasing water and sewer rates to generate revenue to fund necessary capital improvements to the systems serves a regulatory purpose. There is no bright-line rule prohibiting water rates from being increased to fund "new infrastructure" necessary for the water-supply system's continued safe operation. Applying the three-factor test from Bolt v City of Lansing, 459 Mich. 152; 587 N.W.2d 264 (1998), we conclude that the disputed rates did not constitute a tax. We accordingly reverse the trial court's order granting plaintiff's motion for summary disposition and remand for the trial court to enter an order granting summary disposition in favor of the Village.

I. BACKGROUND

The Village was established under the Michigan General Law Village Act, MCL 61.1 et seq. and operates a municipal water and sanitary sewer system. The Village was not required to operate a water system,^[4] but by electing to do so, it became a "supplier of water,"^[5] subject to Act 399.^[6]

In 2014, the Village entered into a Stormwater, Asset Management, and Wastewater (SAW) grant agreement with the DEQ and the Michigan Finance Authority under which the state provided 90 percent of the total cost for the Village to obtain a storm and wastewater asset management plan. The agreement provided, in part:

SAW grant recipients for wastewater system management are required to make significant progress on the funding structure. Significant progress is defined as a 5-year plan to eliminate the gap with a minimum initial rate increase to close at least 10 percent of the funding gap. The first rate increase must be implemented within three years of the executed grant. The applicant will need to certify that all grant activities have been completed at the end of three years. Asset management plans for stormwater systems are to be implemented.^[7]

On May 15, 2015, the DEQ, after conducting a sanitary survey and evaluating the Village's water system with respect to the regulatory requirements in Act 399, notified the Village's interim manager of a deficiency with respect to finished water storage.^[8] The DEQ said that the following deficiency constituted a violation of Act 399 and "must be resolved in order to return the water system to compliance":

1. The Village has deficient storage capacity. Part 11, Distribution Systems and Storage Tanks, of Act 399 requires the Village to have sufficient distribution system capacity to meet peak flows and emergency conditions while maintaining minimum pressures throughout the entire distribution system. Page 7 of the enclosed Sanitary Survey form provides more detailed information. Also, the Village's March 2012 Reliability Study discusses this deficiency in greater depth. Please provide a compliance schedule to address this on-going deficiency.

The DEQ also made recommendations in the "financial" area. The DEQ stated that "the following recommendations will prove useful in enhancing the operation and maintenance of the Village's water supply":

1. The Village needs to evaluate its staffing plan to ensure continued compliance with Act 399. The Village has a good preventative maintenance program started for valves and hydrants, is collecting data for its Asset Management Program, and working on a comprehensive cross-connection control program. All of these programs take staff hours to keep them updated and functioning. The DEQ highly encourages the Village to continue all of these programs to continue to provide high quality drinking water to its residents and visitors.

2. The Village needs to evaluate its current security plan for effectiveness in keeping water system facilities safe and deterring malicious activity. DEQ staff recommends the Village consider adding fencing and signage around source and tower facilities. The Village needs to ensure adequate security is provided for all of its facilities.

3. Provide a detailed 20-year Capital Improvements Plan along with budget information by no later than December 31, 2015, to meet the requirements of Act 399; specifically, Rule 1606, publicly owned or operated community water supplies; additional general plan requirements.

Later, in a May 4, 2017 letter to the Village's interim manager, the DEQ addressed the Village's "aging water supply system" and the "complexity" of the Village's service area. The letter stated in relevant part:

[T]he census population remains relatively constant. The [V]illage has four wells, a firm treatment capacity of 1.7 million gallons per day, and one elevated tank with a proposal for a second tank. In addition, it currently serves a commercial district with 3,300 hotel rooms in 38 different hotels. Based on this information, the [DEQ] Drinking Water and Municipal Assistance Division (DWMAD), is reclassifying the distribution level from an S-4 to S-3. The S-3 classification covers distribution systems serving a population of less than 4,000. This reclassification shall be effective on November 5, 2017. The Village's operator-in-charge is certified to one level above this classification. So, no action is needed by the [V]illage.

. . . The Village is also working with its engineering firm and Michigan Rural Water Association [MRWA] staff to revise its water and sewer rate structure and Asset Management Program. Based on the complexity of the Village's water supply system, and the fact it routinely serves a population greater than 1,000, the Village is required to have an Asset Management Program in place beginning January 1, 2018.

The letter included an attachment-DEQ's "Asset Management Guidance." The attachment referenced Mich. Admin Code, R 325.11606, which requires a community water supply that serves more than 1,000 people to implement an asset management program as defined in Rule 325.10102 beginning January 1, 2018. The rule stated that asset management plans shall include, among other requirements:

(d) A capital improvements plan that identifies waterworks system needs for 5-year and 20-year planning periods....

(e) A summary detailing the funding structure and rate methodology that provides sufficient resources to implement the asset management program.

On September 12, 2017, the DEQ sent yet another letter to the Village's manager summarizing the DEQ's review of the Village's water-supply facilities for compliance with Act 399. The DEQ acknowledged that the Village had addressed some of the deficiencies and recommendations since the DEQ's last sanitary study, but identified two deficiencies that amounted to continuing violations of Act 399-"Finished Water Storage" and "Financial." The DEQ explained these deficiencies as follows:

1. The Village needs to expand upon its current water storage capacity. The current capacity is in violation of Act 399 specifically, Rule 1105, as it is not of sufficient capacity to provide for the fire flow needs of the service area while continuously maintaining acceptable pressure levels throughout the system. The Village council will need to increase revenue to address the water storage capacity deficiency.

2. The rates need to be reviewed and

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