Fink v. Municipality of Anchorage

          Appeal from the Superior Court No. 3AN-15-06925 CI of the State of Alaska, Third Judicial District, Anchorage, Eric A. Aarseth, Judge.

          James N. Reeves, Holmes Weddle & Barcott, P.C., Anchorage, for Appellants.

          Robert P. Owens, Assistant Municipal Attorney, and William D. Falsey, Municipal Attorney, Anchorage, for Appellee.

          Before: Stowers, Chief Justice, Winfree, Maassen, Bolger, and Carney, Justices.

          OPINION

          BOLGER, Justice.

         I. INTRODUCTION

         Owners of real property (Property Owners) appeal special assessments that the Anchorage Municipal Assembly levied on their lots to pay for recently constructed road, water, and sewer improvement projects benefiting the lots. The Property Owners claim that the special assessments improperly include nearly $ 1 million in costs from another municipal utility project unrelated to the improvements built for the benefit of their lots. They also claim that the special assessments exceed limits set by ordinance and that the assessed costs are disproportionate to the benefits provided by the improvements, violating municipal ordinance, charter, and state law.

         We conclude that the Assembly's allocation of costs among these projects was supported by substantial evidence and that the ordinance limit the Property Owners rely on does not apply to these assessments. We also conclude that the Property Owners have not rebutted the presumption of correctness that attached to the Assembly's proportionality decisions. We therefore affirm the superior court's decision affirming the Assembly's special assessment determinations.

         II. FACTS AND PROCEEDINGS

         The present appeal concerns lots located in an Anchorage residential neighborhood called Turnagain Heights. This neighborhood was destroyed by the 1964 earthquake and remained undeveloped decades later. In 2002 some Turnagain Heights lot owners petitioned the Municipality of Anchorage to establish road, water, and sewer improvement districts. The Municipality produced cost estimates for the projects, and a majority of the property owners in the proposed improvement districts approved the estimates. The Assembly consequently enacted ordinances in 2004 creating three special assessment districts: a road improvement district (RID), a water improvement district (WID), and a sewer improvement district (referred to as a "lateral improvement district" or LID).^[1]

         The Municipality hired an engineering consulting firm to do the design work for the three projects. Based on a geotechnical analysis of the area, the firm recommended that subdrains be incorporated in the projects' designs to remove groundwater and ensure soil stability during seismic activity.^[2] These subdrains were to be placed in "the sewer utility trenches[, ] ... the deepest utility trench[es] that [are] graded to drain." The proposed subdrainage system significantly increased the cost estimates for the RID, WID, and LID projects, and the Municipality issued revised estimates in 2006. A majority of the property owners in the improvement districts approved the revised estimates. The Assembly amended the 2004 ordinances accordingly.^[3]

         The Municipality consolidated the RID, WID, and LID projects with an unrelated project by the Anchorage Water and Wastewater Utility (AWWU) to replace Pump Station 10, an aging sewer pump station in the area that had needed to be replaced for years. The contract manager for the RID, WID, LID, and Pump Station 10 projects characterized the Pump Station 10 project as "a basic infrastructure upgrade" that benefited users outside the improvement district area as well as within it. The Municipality believed consolidating the projects would "allow maximum cost and schedule efficiencies."

         The Municipality created six work schedules for the consolidated projects, lettered A-F. Schedules A-C included all the work necessary for the Pump Station 10 project, as well as some work needed for the RID, WID, and LID projects. Schedules D-F included the balance of the work needed for the RID, WID, and LID projects. The Municipality invited contractors to submit a "base bid" comprising work identified in Schedules A-C and bid on "deductive alternates" comprising work identified in Schedules D-F. The Municipality divided the work and solicited bids in this manner so that the Pump Station 10 project could go forward without the improvement district projects in the event that none of the bids was compatible with the cost estimates that the district property owners had approved.

         The Municipality received an acceptable bid for the entire contract (Schedules A-F), and all four projects were built. In November 2011 the Municipality submitted proposed resolutions to the Assembly to levy special assessments on the improvement district properties to pay for the completed work. The Assembly held a two-day public hearing, and in February 2012 it issued resolutions levying the assessments.^[4] The RID, WID, and LID assessments included not only costs from Schedules D-F but also some costs from Schedules A-C.

         Some affected property owners - including most of the Property Owners in the present appeal-were unsatisfied with the assessments and the process afforded them by the Assembly; they filed an appeal in superior court. The superior court remanded the matter to the Assembly, ruling that the Assembly needed to conduct an adjudicatory hearing and decide disputed issues of fact in accordance with Anchorage Municipal Code (AMC) Chapter 3.60.^[5]

         A panel composed of three Assembly members conducted such a hearing over three days in December 2014. Following the hearing, the panel issued findings of fact and conclusions of law rejecting most of the aggrieved property owners' objections to the assessments.^[6] The Assembly approved the hearing panel's findings of fact and conclusions of law and issued new resolutions confirming and levying assessments on the improvement district property owners.^[7]

         A group of property owners - the Property Owners - remained unsatisfied and filed a renewed appeal in superior court. The Property Owners argued, among other things, that "[a]ll items of work set forth on Schedules A-C were necessary components of [Pump Station] 10" and that it was thus "improper and unlawful [for the Assembly] to pass those costs to the improvement districts." The Property Owners also argued the assessments exceeded "120% of contract construction costs," in violation of AMC 19.30.040(A)(1). And they argued the special assessments were not proportional to the benefit conferred by the improvements. The superior court rejected all arguments; the Property Owners appeal to this court.

         III. STANDARD OF REVIEW

         We review a municipal assembly's decision directly.^[8] We apply the substantial evidence standard of review to the assembly's findings of fact.^[9] "Substantial evidence is 'such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.' "^[10]

         Interpretation of an ordinance or municipal charter provision presents a question of law.^[11] We generally review such questions using our independent judgment, adopting "the rule of law that is most persuasive in light of precedent, reason, and policy."^[12] But "when reviewing questions of law that involve the [Assembly's] expertise . . . [or] fundamental policy determinations," we apply the rational basis standard, deferring "to the [Assembly's] determination as long as it is supported by the facts and has a reasonable basis in law."^[13]

         Our review of a municipal assembly's special assessment decision is also constrained by the "presumption of correctness."^[14] This presumption attaches whenever a municipal assembly acting in its legislative capacity levies special assessments.^[15] When the presumption has attached, we will reverse the assembly's decision "only upon proof of 'fraud or conduct so arbitrary as to be the equivalent of fraud, or [where a decision is] so manifestly arbitrary and unreasonable as to be palpably unjust and oppressive.' "^[16]

         IV. DISCUSSION

         A. Allocation Of Costs Between The Improvement Districts And The Pump Station 10 Project

         The Property Owners first claim that the Municipality improperly "shifted" about $ 1 million in costs from the installation of a subsurface drainage system needed by Pump Station 10 to the RID, WID, and LID projects. As a result, the Property Owners argue, "a small group of property owners" has been forced to "hold[] the bag for" expenses related to AWWU's maintenance of its sewer system - expenses that ordinarily would have been passed on to the utility's systemwide customer base.

         1. Additional background

         As explained above, the Municipality divided the construction work for the RID, WID, LID, and Pump Station 10 projects into six different schedules: Schedules A-F. Schedules D-F included work necessary for the RID, WID, and LID projects but not for the Pump Station 10 project. The Municipality charged the expenses associated with Schedules D-F to the improvement districts and included them in the special assessments.

         Schedules A-C included all the work needed for the Pump Station 10 project and some work needed for the RID, WID, and LID projects. The Municipality charged nearly $1 million in expenses associated with Schedules A-C to the improvement districts and thus included them in the special assessments.^[17] A significant portion of this nearly $1 million-namely, $834, 542 from Schedule B- resulted from construction of a subdrainage system.^[18] As explained above, the firm that designed the RID, WID, and LID projects recommended construction of this subdrainage system in order to remove groundwater and make the soil more stable in the event of an earthquake. Ensuring stability was essential because it was expected that the improvement districts would be developed for residential use.

         Pump Station 10 also needed the subdrainage system. But the Assembly hearing panel heard testimony that a subdrainage system that served only Pump Station 10 would have been more limited than the shared system actually constructed. The projects' contract manager explained that "maintaining the stability" of the improvement districts was "more important than dewatering the pump station." The primary author of the geotechnical report for the projects further explained, "If a pump station slides down the hill, the consequences are far less than a lot of houses." The Municipality charged the vast majority of the expenses associated with constructing the subdrainage system to the RID project.

         The hearing panel heard testimony on the accounting practices used to ensure that costs were properly allocated among the projects. In particular, AWWU's capital program manager testified that expenses for the different projects were "tracked separately" and that multiple individuals reviewed the pertinent records as the projects progressed. A proj ect administrator acknowledged discrepancies of around $ 10, 000 total in the accounting records. She testified that the errors had been corrected and that "the total project costs that were calculated and allocated [were] accurate."

         The Assembly hearing panel found that the subdrainage system was "necessary" for the improvement district projects. The panel found that the Municipality "properly shifted approximately $1 million . . . back into the Special Improvement Districts so that [they] would pay for that part of the construction work essential to and directly benefiting the Improvement Districts." And the panel found that the Municipality "used proper accounting procedures to separately track the costs of each project individually, and that none of the costs for [Pump Station] 10 were improperly assessed against the property owner taxpayers." The Assembly approved these findings.

         2. Analysis

         In arguing that the Municipality erroneously shifted about $ 1 million from the Pump Station 10 project to the improvement district projects, the Property Owners rely on Anchorage Municipal Charter section 9.02(e). This provision states: "An account or accounts for each special assessment district shall be created and kept separate from all other municipal accounts. Revenues collected within a special assessment district may be applied only to costs incurred with respect to that assessment district."

         The Property Owners fail to show that the Municipality violated this provision. The Assembly hearing panel's findings set forth above establish that the Municipality complied with section 9.02(e) by maintaining separate accounts. The findings also establish that the Assembly complied with section 9.02(e) because the special assessments did not include any costs other than those "incurred with respect to the assessment district[s]." The Property Owners do not challenge these findings, let alone show that they are not supported by substantial evidence.^[19]

         The Property Owners point to hearing panel testimony by an "engineer engaged by AWWU and the [Municipality]... that all of the items on Schedules A, B and C were necessary for Pump Station 10, regardless of whether the Improvement District[s] were built." But the Property Owners ignore contrary testimony that the subdrainage system included in Schedule B would have been more limited had the improvement districts not been built. In any case, the fact that items in Schedules A-C were required by the Pump Station 10 project is consistent with these items also being required by the RID, WID, and LID projects. Or to use the language of section 9.02(e), the mere fact that costs were "incurred with respect" to the Pump Station 10 project does not mean that the same costs were not also "incurred with respect to the assessment district[s]."

         In the alternative, the Property Owners argue that even if the subdrainage system benefited the improvement district properties in addition to Pump Station 10, the Municipality failed to" 'fairly allocate' the costs" and improperly "forc[ed] the [improvement district properties] to pay for the entirety of them." However, the Property Owners do not cite any authority other than section 9.02(e). This provision does not impose a "fair allocation" requirement over and above its requirements that expenses be properly segregated and accounted for and that assessments "be applied only to costs incurred with respect to th[e] assessment district." To the extent the Charter and other sources of law do not fully dictate how expenses should be divided once the requirements of section 9.02(e) are satisfied - as they are in this case - such division is a policy matter that is legislative in nature. The Assembly may accordingly exercise its discretion in dividing the expenses within the bounds of the controlling law.^[20]

         If the Property Owners could show that the Municipality or Assembly acted arbitrarily or with bias or malice in dividing the costs - and thus rebut the presumption of correctness - then perhaps it would be appropriate for this court to intervene. But the Property Owners fail to do so. We thus reject the Property Owners' claim that the Municipality did not properly divide the expenses among the RID, WID, LID, and Pump Station 10 projects.

         B. AMC 19.30.040(A)(1) Assessment Limit

         The Property Owners next claim that the special assessments levied by the Assembly violate AMC 19.30.040(A)(1).^[21] AMC 19.30.040(A) states:

Generally. Except as provided in subsection B of this section or elsewhere in this title, the project costs assessed against benefited parcels shall be the least of the following:

1. Construction contract costs plus 20 percent for noncontract costs, including but not limited to engineering and design, surveys, soil investigations, right-of-way negotiations, inspection and contract supervision, and net interest, plus actual property acquisition costs;

2. The last approved estimate plus ten percent; or

3. The total cost of the improvement less the amount of any grant the municipality uses to defray the cost of the project.

         The Property Owners argue that the special assessments exceed the cap in subsection .040(A)(1) because the assessed project costs exceed the "construction contract costs" of the RID, WID, and LID projects by more than 20 percent. For instance, the Property Owners assert that the construction contract costs for the RID project were $2, 371, 707.^[22] Yet in calculating the RID assessments, the Municipality used an adjusted project cost of $4, 860, 838, a figure which far exceeds 120% of the construction contract ...