Arizona Supreme Court clarifies test for determining whether municipal development fees are lawful.

A municipality adopted new water and sewer impact fees to pay for an upgraded wastewater treatment system. The municipality assigned all the costs associated with those fees to future users. The development agreement assigned half of the costs to future water customers. The agreement assigned the other half of the costs to future sewer customers in the form of development fees. A homebuilders association filed a lawsuit, arguing that the development fees were unlawful because they disproportionately targeted future development—even though the upgrades to the wastewater treatment facility benefited current users. The Town argued that the fees were reasonable because the upgrades largely benefited future users.

The trial court and court of appeals ruled in favor of the Town. Applying prior Arizona Supreme Court authority, both courts explained that the municipality’s development fees were entitled to a presumption of validity. Under that test, the association had to establish that the development fees were “arbitrary and without a rational relation to a legitimate state interest.”  Both courts concluded that because the new wastewater treatment facilities largely benefited future users and development, the allocation of fees was not arbitrary, and therefore not unlawful.

The Arizona Supreme Court reversed and remanded. The Court focused on two errors that the lower courts committed in light of the amended statutory text. First, the Court clarified that a municipality’s allocation of development fees is not entitled to a presumption of validity. The Court explained new statutory language clarified that municipal powers are to be construed narrowly. In addition, the Court pointed to section 9-463.05(B)(5)(d), which excludes from development fees the cost of “[u]upgrading, updating, expanding, correcting or replacing existing necessary public services to provide a higher level of service to existing development.”  The Court explained that the municipality erred by failing to consider what portion of the development fees fell under that category.

Justice Bolick authored the opinion for the unanimous Court.

Posted by: John Bullock