South Carolina cities and towns can take some lessons from the SC Supreme Court’s(opens in a new tab) decision in Azar v. City of Columbia(opens in a new tab) related to utility fund transfers.
Perhaps most simply: Keep detailed records to support the rationale for transferring funds from a water and sewer system to the general fund. Utility revenue must be used for expenses with a direct nexus to the utility system or from funds surplus to the needs of the system.
In a ruling that caught the attention of local government leaders who operate water and sewer systems, the Supreme Court reversed a lower court finding and remanded Azar to the trial court to look at whether the city, which owns and operates the state’s largest water and sewer utility, had spent its water and sewer revenues in a lawful manner.
"Municipalities are going to have to take extra steps in documenting what they do and why they do it, particularly with regard to utility transfers," said attorney Danny Crowe(opens in a new tab) of Crowe LaFave, LLC(opens in a new tab). "Or you’ll be subject to perhaps the same hard look that Columbia got from the Supreme Court last fall."
Crowe presented legal analysis along with attorneys Lawrence Flynn(opens in a new tab) of Pope Flynn LLC(opens in a new tab) and Eric Shytle, City of Sumter’s(opens in a new tab) general counsel, at the Municipal Association‘s Annual Meeting.
Specifically, the Court questioned whether the revenue the City of Columbia(opens in a new tab) transferred to its general fund could be considered surplus revenues, which may be spent on purposes unrelated to the utility system. One way cities might successfully head off a challenge is to detail how they arrived at a calculation of surplus revenue.
Shytle discussed a budget ordinance he drafted for his city detailing how much money has been set aside within the city’s utility fund for operation, maintenance, system repair, depreciation and unexpected expenses. The ordinance, through the use of policy statements, also details officials’ consultations with utility subject matter experts and references the city’s scheduled capital improvement plan investments.
If a city can’t classify the revenue as surplus funds, the Court said a city’s direct expenditures from water/sewer revenues would require "some nexus—some commonality—between the underlying purpose of the expenditure and the city’s provision of water and sewer services."
Crowe stated that it will go a long way if faced with a legal challenge for cities to have spelled out in writing the reasons and purposes for transferring funds in a policy, a resolution or an ordinance.