Fairfax Judge Orders F.C. to Halt Water Transfers

Already-Hurting F.C. Budget to be Savaged

The Falls Church City Hall was hit with a massive jolt at 4 p.m. today, as a ruling by a Fairfax Circuit Court judge rolled off the fax machine in the City Manager’s office enjoining the City against using $2.2 million in revenues from its water fund for the current fiscal year and going forward.

The impact will be crushing for the City, which already faces a $7.5 million revenue shortfall, amounting to over 11 percent of its total budget due to collapsed real estate values and associated factors related to the recession.

The $2.2 million annual “return on investment” (ROE) from the water fund, reflecting a practice the City has engaged in since 2003, amounts to about seven cents on the real estate tax rate.

“This is big. This is the biggest thing we’ve ever encountered,” a shell-shocked Barbara Gordon, Falls Church’s director of public information, intoned to the News-Press in a phone call late yesterday.

“We’re trying to figure out our options,” City Manager Wyatt Shields subsequently told the News-Press. “Honestly, we don’t yet know the full implications of this.”

He said the matter would definitely come up for discussion at this Monday’s Falls Church City Council meeting, as the Council may have to undertake emergency measures to address the court ruling.

In his 13-page written ruling issued yesterday, Fairfax Circuit Court Judge R. Terrence Ney ruled the City of Falls Church policy of taking an¬†annual ROE from its water fund is in violation of the Falls Church City Charter and constitutes an “unconstitutional tax” on its water customers, both in Falls Church and Fairfax County.

The Falls Church water system serves over 120,000 customers, the majority of whom are in the Merrifield, Tysons Corner, McLean and Langley regions of the Fairfax County.

“While the City has the utmost respect for Judge Ney, we are very disappointed in the ruling,” Shields said in a written statement issued late yesterday.

“We are reviewing the ruling with legal counsel and examining all options including the filing of an appeal,” he stated. The F.C. City Hall press release added that Shields “noted that the General Assembly has authorized cities throughout the commonwealth to transfer utility fund proceeds to the general fund, as a reasonable return on investment and compensation for the financial risk born by their tax payers.”

The dispute between Falls Church, with its 11,400 residents, and Fairfax County, with over a million, had its roots in a sudden move by the county’s water system in 2007 to violate a long-standing, if informal, boundary understanding for providing water services between the two entities. When the county began to solicit new developments for its water business in the traditional Falls Church water marketing territory, the City took legal measures to protect its interests, which failed in court.

Subsequently, just over a year ago, the county filed a countersuit against Falls Church alleging interference with its attempt to selectively provide water service for customers in Falls Church’s traditional service area. Moreover, it went further, adding the charge that the City’s practice of taking an ROE from its water system was unconstitutional. Its suit also called for $21 million in damages, a matter that the court will not consider until next month.

In the seven-day trial at the Fairfax Circuit Court last September, attorneys for the City of Falls Church charged that the county “is trying to push us out of the water business.”

Additional counts in the case, regarding antitrust claims in the suit pertaining to the county’s alleged mandate that developers receive zoning approvals from the county only if they sign up with Fairfax Water, will be heard beginning Feb. 1.

Judge Ney’s ruling cited the City Charter, noting “the Charter has always made clear that the water rates were to be set so that anticipated receipts equaled anticipated expenses without resulting in a surplus created by the rates, themselves.”

Further, he stated, “A positive difference between expenses and revenues constitutes a tax,” adding that Falls Church “imposes this tax primarily on persons who do not elect representatives or themselves sit on the City’s governing board. Indeed, 92 percent of that transfer was funded by Fairfax County customers who are not represented on the Falls Church City Council. The Court finds that the profits derived from the rates charged to Fairfax County residents violate the principle of ‘no taxation without representation,’ and thus amount to an unconstitutional tax.”

In his final decree, the judge orders that “the City of Falls Church is enjoined from transferring any moneys from its water fund to its general fund for purposes unrelated to the water system, including the ‘management fee’ transfer, for the City’s fiscal years 2009 and 2010.”

Judge Ney’s opinion letter and ruling can be found here (PDF):¬†