By BRIAN WALKER

Staff Writer

COEUR d'ALENE — A district court judge ruled the city of Hayden must refund builders and homeowners nearly $750,000 due to an illegal tax from sewer capitalization fees on new homes during a six-year span.

"Just compensation is provided to make (North Idaho Building Contractors Association) whole for a taking," Judge Cynthia Meyer wrote in her conclusion, the latest decision in a five-year legal battle between Hayden and NIBCA.

"(NIBCA was) denied just compensation at the time the impermissible tax was paid."

Brett Boyer, Hayden's city administrator, said Monday the ruling is disappointing.

"The decision is disheartening and will have negative consequences on our ability to provide future sewer collection capacity," Boyer said. "From the city's perspective, it was trying to provide capacity ahead of when it was going to be needed and not spend the money out of its general fund. We believed it was reasonable related to growth. Nobody wins from this."

Boyer said the City Council will hold an executive session today to discuss the strong possibility of appealing the decision to the Idaho Supreme Court.

"We still believe there are merits to our legal arguments," Boyer said.

The case involves sewer cap fees collected from April 10, 2010, to March 4, 2016. About 335 new homes were built during that time. About 100 builders and homeowners are involved in the case.

NIBCA issued a press release on Monday stating it is pleased, but not surprised, by the ruling.

"The Supreme Court and then the trial court have consistently and repeatedly told Hayden they cannot tax and spend without approval from its citizens," the press release states. "In order to try to circumvent the law, which requires voter approval, Hayden attempted to disguise the tax as an 'expansion fee.' The ruling today once again made it clear the city's conduct was illegal … .

"In the end justice prevailed and now Hayden is going to have to refund approximately $750,000 in illegal taxes."

Meyer ruled all of the builders and homeowners are entitled to a refund of capitalization fees made in excess of $774, plus 6.5 percent interest.

Jason Risch, the attorney representing NIBCA, argued during closing arguments last month on the damages portion of the case that the association was entitled to $895,072.96, plus 12 percent interest.

However, Meyer wrote that NIBCA members received some value in the form of a connection to the city's sewer service, so the refund owed was reduced.

Hayden increased its cap fee from $774 to $2,280 in 2007. The city decreased the fee from $2,280 to $2,239 in 2012.

"The 2007 and 2012 fees were based upon the cost of expanding the system to serve future users," Meyer wrote in her ruling. "The fees were not based on the service that new users were connecting to at the time it was paid. (The city) did not have the authority to impose a cap fee based on the cost of expansion. The cap fee was an impermissible tax enacted without authority and without a basis in law."

Christopher Meyer, an attorney representing the city, earlier said he didn't believe the city owes the builders any money. He said the fee it charged was, in fact, less than what it could have charged under a formula specified by the Idaho Supreme Court. He said the city's intent was to not charge any more than what was needed to provide sewer service.

However, the judge ruled a 2015 study by the city, which was presented in the case to determine if the fees charged were reasonable, was not a credible measure of damages.

"(The city) acted outside the scope of its authority and imposed an impermissible tax upon (NIBCA members)," Meyer wrote. "It does not matter how reasonable or well-intended (the city) was; it cannot stand."

When just compensation is delayed, interest is required to make the property owner whole. Based on data provided by Risch, the judge wrote that a reasonably prudent investor could expect a reasonable rate of return of 6.5 percent for the years in question.

Hayden has spent more than $750,000 in attorney fees on the case, an expense Boyer defended.

"We were being sued for actions that were consistent with our interpretation of the rules … ," Boyer said. "If we did not defend the action, the city would have had to automatically refund approximately $900,000 in fees, most of which had already been spent to replace the capacity used by development."

The ruling does not state whether the city will be required to pay NIBCA's attorney fees in the case. Risch said NIBCA will pursue reimbursement from the city for its attorney fees, but declined to state the amount.

"The NIBCA, on behalf of the class, intends to request the court to award attorney fees so that 100 percent of the refunds collected can be passed onto those who paid the fees," the NIBCA press release states.

The original suit filed by NIBCA against the city in 2012 called into question the legality of Hayden’s sewer capitalization fees to cover the cost of Hayden’s wastewater disposal system. NIBCA contended the fee was illegal because its members paid for city services that are available to all residents of Hayden.

After the city was granted a judgment in its favor, NIBCA appealed it to the Idaho Supreme Court.

The Supreme Court vacated the District Court's decision and remanded it back to the District Court last February.

The Supreme Court ruled the city may charge a sewer cap fee and use the funds to pay for new infrastructure to expand the city's sewer capacity without burdening existing taxpayers. It also disagreed with the formula used by the city to calculate the cap fee.

The new cap fee amount of $2,306 to bring it into compliance with state law was set during a City Council meeting in March 2016. At the same meeting, the council agreed to use a formula that calculates the fee based on the value of the wastewater facility rather than the estimated cost of future expansion of the plant.

Boyer said the challenged formula formerly used by the city is one commonly being used by other cities.