Can an Arkansas city use city general funds to pay for water and sewer upgrades to a system that serves both residents and nonresidents?

Plain-English summary

Representative John Baine asked whether a city could use its general funds to pay for water and sewer upgrades to a system serving customers both inside and outside city limits. Attorney General Leslie Rutledge said the question did not permit a simple yes or no because the surrounding facts would control.

The AG drew two general conclusions. First, the funding analysis is essentially the same whether the system serves only residents or both residents and nonresidents. She said the presence of nonresident customers, by itself, was not a reason to think the city was barred from using general funds for upgrades.

Second, the statutes quoted in the opinion generally contemplate that water and sewer systems will be funded by system revenues. Water rates must provide for a depreciation fund and the estimated cost of operation and maintenance; sewer rates must cover proper and reasonable expenses of operation, repair, replacement, and maintenance. The opinion also quotes a provision allowing service lines beyond city limits where demand is sufficient to produce revenue that will retire their cost.

Those provisions do not, in the AG's opinion, impliedly prohibit devoting city general revenues to the systems. Her assessment assumed that rates had been set in good faith based on the estimated water-system cost and reasonable sewer-system expense. On that assumption, she saw no reason to think a city was generally foreclosed from using general funds for improvements. She expressly declined to answer whether any particular proposed expenditure was lawful without the relevant facts.

Currency note

This opinion was issued in 2015. Later law may have changed the rules. It is a general analysis, not an approval of a particular budget or rate decision; check current law and the city's actual rates and proposed expenditure.

Common questions

Did the AG authorize every city water or sewer upgrade from general funds? No. She said the statutes did not generally foreclose the use of general funds, assuming rates were set in good faith. She could not answer definitively because the particular facts would control.

Does serving people outside city limits change the funding analysis? The AG said the basic principles were essentially the same for systems serving residents and nonresidents. Nonresident customers alone did not create a general bar on city funds for upgrades.

What role do user rates play?
The quoted water and sewer provisions contemplate rates sufficient for system costs. The AG's general conclusion about general funds expressly assumes rates were set in good faith based on estimated water-system costs and reasonable sewer-system expenses.

What facts must a city examine before relying on the opinion? The opinion does not list a complete set. It specifically points to the rate-setting premise and says the circumstances of the proposed funding will control. A city would need to review those facts before treating this general opinion as applicable.

Background and statutory framework

The stored opinion quotes, without reproducing statute numbers, provisions on municipal waterworks rates, municipal sewer rates, and extending service lines outside corporate limits. The water provision calls for an adequate depreciation fund and estimated operating and maintenance costs. The sewer provision calls for rates sufficient for operation, repair, replacements, and maintenance. The extension provision refers to demand sufficient to retire the cost of service lines.

The AG characterized these provisions as generally expecting funding through system revenues while declining to infer a prohibition on adding general revenues for improvements. Her answer remained conditional on good-faith rates and the particular facts.

Source

• Landing page: https://arkansasag.gov/divisions/opinions-foia/attorney-general-opinions-search/

Original opinion text

Opinion No. 2015-006
March 13, 2015
The Honorable John Baine
State Representative
Post Office Box 10056
STATE OF ARKANSAS
THE ATTORNEY GENERAL
LESLIE RUTLEDGE
El Dorado, Arkansas 71730-0022
Dear Representative Baine:

This is in response to your request for my opinion on the following question:

May a city use city general funds to pay for water and sewer upgrades to the city system that includes customers inside and outside the city limits?

RESPONSE

This question does not lend itself to a simple "yes" or "no" because the answer will depend upon an analysis of the particular surrounding facts. While I consequently cannot offer a definitive response to your inquiry, I will review some of the generally applicable law in an effort to assist in framing the relevant legal and factual issues.

As an initial matter, according to my review of the various statutes that may bear on this question, the analysis is essentially the same regardless of whether the city's water or sewer system includes both resident and nonresident customers. Accordingly, if the concern is that the city may be foreclosed from using general funds for "upgrades" based upon the fact that the system services nonresidents, I believe that concern is unfounded. The same basic principles come into play when addressing the matter of funding the cost of serving those inside and outside city limits.

The law generally contemplates that the rates for resident and nonresident consumers of a municipal waterworks or sewer system will be sufficient to pay for installing and maintaining the system. The statutes governing municipal waterworks systems provide in relevant part:

(a) Rates for resident and nonresident consumers of a municipal waterworks system shall be fixed by the legislative body of the municipality. (b) The rates to be charged by the municipality must be adequate to:

(3) Provide an adequate depreciation fund and to
provide the operating authority's estimated cost of operating and maintaining the waterworks system.

The statutes applicable to municipal sewage systems similarly provide:

(a)(1) The council of the municipality shall have the power, and it shall be its duty, by ordinance to establish and maintain just and equitable rates or charges for the use of and the service rendered by the works, to be paid by each user of the sewerage system of the municipality. . . . (b) The rates or charges shall be sufficient in each year for the payment of the proper and reasonable expense of operation, repair, replacements, and maintenance of the works. . . .

A statute addressed specifically to servicing areas outside corporate limits also similarly contemplates rates being sufficient to cover the cost of the extension:

Any municipality in the State of Arkansas owning and operating a municipal waterworks system or a municipal sewer system or both may extend its service lines beyond its corporate limits for the purpose of giving water service, sewer service, or both, to adjacent areas where the demand for services is sufficient to produce revenues that will retire the cost of such service lines. . . .

As a general rule, based on these statutes, a city is expected to fund its water and sewer systems through system revenues. However, these statutes do not, in my opinion, impliedly proscribe devoting general revenues to those systems. Assuming that rates have been set in good faith, based on the "estimated cost" of the water system and "reasonable expense" of the sewer system, I see no reason to think a city is generally foreclosed from using its general funds for improvements. As indicated above, I believe this conclusion pertains regardless of whether the improvements will benefit customers inside or outside city limits.

I cannot opine further because the specific facts will ultimately be controlling of any issues surrounding the funding of a city's water or sewer system. While I am unable to definitively answer your question, the foregoing will hopefully be of assistance in identifying what I believe are the most relevant general guiding principles in this area of the law.

Deputy Attorney General Elisabeth A. Walker prepared the foregoing opinion, which I hereby approve.

Sincerely,

Attorney General
LR/EAW:cyh