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New Providence Apartments Co., L.L.C. v. Mayor and Council of Borough of New Providence

423 N.J. Super. 210, 31 A.3d 958 (App. Div. 2011)

TAXATION; WATER SERVICE — The law that requires sewer system user fees to be uniform and equitable for the same types and classes of use and service of the facilities allows a municipality to exercise discretion to treat single-family homes and apartment buildings either as part of the “same types and classes of use and service” or as two different types of classes use and service.

A municipality funded its sanitary sewer services through real estate taxes. In 2009, the municipal concluded that in funding sewer services through tax revenue, single-family homeowners were paying a disproportionate share of the cost of those services. It found that the average single-family homeowner was paying about $240 per year for sewer services, whereas owners of apartment buildings were paying about $35 per unit for the same services. In order to strike a balance, the municipality instituted a hybrid funding system by adopting an ordinance that required owners of apartment buildings to pay an annual sewer user fee of $100 for each apartment in excess of two.

Several apartment complex owners challenged the new sewer user fee. They claimed that the user fee violated N.J.S.A. 40A:26A-10 which provides that if a municipality funds its sewer system through a user fee, it must be “uniform and equitable for the same types and classes of use and service of the facilities.” The apartment owners also claimed that the user fee violated the Federal Civil Rights Act and the New Jersey Civil Rights Act. The lower court dismissed the civil rights claims. The lower court also rejected the apartment owners’ claim that the hybrid funding system violated the statutory requirements of uniformity. It found that as long as the ordinance represented a well-reasoned policy decision to equalize the cost of providing sewer services to all users, then the municipality could treat users in different classes differently. The lower court noted that even with the new user fee, apartment owners would contribute only about 59% of the amount contributed by single-family homeowners.

The apartment owners appealed, but the Appellate Division affirmed, noting that a municipality has the discretion to treat single-family houses and apartment buildings as part of the “same types and classes of use and service” or as two different types and classes of use and service. The municipality could have abandoned its previous method for funding the sewer system through the general tax fund and instead elected to charge single-family owners and apartment building owners the same sewer user fee. If it elected to do so, then the user fee charged to the apartment building owners would have been $200, which was substantially more than the combined fee of $135 paid by the apartment owners through the $35 tax allocation and $100 sewer user fee. Therefore, according to the Court, the hybrid system worked out better for the apartment owners than having a strict user fee for all residential property owners. Further, the Court found the hybrid system reasonable because the aggregate fee paid by the apartment owners was about 56% of the amount payable by an average single-family homeowner for sewer services through real estate taxes. The apartment owners’ contribution towards sewer services approximated the relative usage of sewer services by tenants. On average, sewer service usage by apartments was 57% of the usage by single-family homes. Requiring the apartments to pay, in the aggregate, about 56% of what single-family owners pay was not unreasonable.

The Court also rejected the apartment owners’ argument that when a municipality elects to treat single-family homeowners and apartment owners as different classes, the only factor it may consider when establishing sewer rates is usage of the system by each class of user. The Court found that the statute does not limit a municipality’s discretion in setting sewer rates solely to consideration of usage by the different classes. Municipalities are permitted to consider any other factors that they deem proper and equitable. Here, the Court found that it was not unreasonable for the municipality to impose the user fee to reduce the disparity between the contributions towards sewer costs paid by single-family homeowners and apartment owners. The Court also rejected the apartment owners’ argument that if a municipality was permitted to impose user fees solely on apartment owners to reduce disparities in sewer payments, it could impose similar user fees for schools and other municipal services. The Court noted that there was no statutory authority that would permit user fees for municipal services other than for sewer systems.

Lastly, the Court rejected the apartment owners’ constitutional claims. It noted that, to be a valid user fee, it must “bear some rational relationship to legitimate state purposes” or be “rationally related to the achievement of a legitimate state objective.” In this case, the municipality had the legitimate purpose of reducing the disparity between what single-family homeowners paid and what apartment owners paid for sewer costs. Additionally, with the combined tax and user fee, the apartment owners were now paying approximately 40% less than single-family owners paid for sewer services and this closely approximated their actual usage of the sewer system.

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