Ed. Note: The following is an abridged version, with permission of No Standing News editor Robert W. Nash of Rolla, of an NSN editorial that appeared in November explaining how the class-action lawsuit, Arbor Investment v. City of Hermann came about and what impact a decision against the City or Hermann may have on all the unregulated municipalities in the state who have for decades indulged in inflating their utility rates so they can skim off the ‘profits’ to use for non utility purposes ranging from budget deficits to plain old political pork. This is NSN’s story….
How long are you going to let chicken-killing dogs stink up your place?
Arbor Investment v. City of Hermann, the first of three class-action cases filed on this issue, will be argued before the Missouri Supreme Court in December and a decision is expected in spring of 2011. How the cases came about and how they will affect the three towns being sued is a fascinating story. The decision, if it goes against the City of Hermann, could end decades of the corrupt “pump and skim” practice in hundreds of Missouri towns where utility rates are not controlled by the PSC. It would allow citizens to finally vote on utility rate increases as the Hancock Amendment intended. It could also touch off a tidal wave of municipal lawsuits. Which way it will go and whether all the rate payers who have been paying these “hidden taxes” all these years will benefit from a decision favorable to rate payers in this lawsuit, depends on several things. Read on…
What does the Hermann Hancock lawsuit mean?
The Attorney General and the State Auditor have filed amicus briefs to support the plaintiffs in a class action lawsuit Arbor Investment vs. City of Hermann which is now case # 91109 on the docket of the Missouri Supreme Court. Attorney General Koster said in his Oct. 28, 2010 press release that he was filing an amicus brief in the case for the plaintiffs because: “The law says Missouri taxpayers have the right to say when they want their taxes increased and increasing user fees for that purpose clearly is in breach of the law.” State Auditor Montee said essentially the same thing but made a particular example of the recent Marceline audit and listed other cities where similar findings have been made.
If the City of Hermann loses, and I say the odds are they will, it means there will be a new “landmark” case from the Missouri Supreme Court telling all the unregulated towns that they must quit taking money from their utility funds to fill holes in the city budgets that they were too incompetent to balance. Some few will do it willingly but most we expect will have to have a gun held to their heads. Why do we say the odds are that the City of Hermann will lose? It’s unusual for the AG to take sides in one of these cases and unheard of for the State Auditor to join him. When two ambitious politicians, the Attorney General and the State Auditor both take sides on an issue it means they’re pretty sure who the winners and losers are going to be.
Must reading-the primary sources: This link will take you to the SC’s docket page link with links to each of the most current briefs being presented to the Supreme Court. The brief by the Armstrong Teasdale firm on behalf of Arbor Investment et. al. is, in the editor’s opinion, very lucid and describes the issues well. The defense brief by the City of Hermann sounds sweaty and desperate. For laughs read the feeble amicus brief filed by MPUA - the mother ship of MJMEUC-MoPEP. Their argument is that the “utility customers consent to the city providing them utilities and are free to discontinue their use of the city’s services.” Oh sure they can, but only if they want to live without heat and light, and without bathing, cooking, flushing and all the other MONOPOLY city services. A typical MJMEUC opinion.
Deep down in their tiny lizard hearts these municipal lobby organizations MML and MPUA-MJMEUC) and their lawyers know that the jig’s up and sooner or later their clients are going to have to quit using their utility fees as “hidden taxes” and start submitting rate increases to the voters they just want it to be as ‘later’ as possible. In MJMEUC case, if their unregulated MoPEP members have to get the public’s consent to utility rate increases it would damage their credit rating. They’ve promised the holders of their over $2 Billion in revenue bonds that their credit strength is the (MoPEP) "participants' willingness and ability to increase rates and maintain financial metrics to support MJMEUC's debt." They’ve got $2 Billion riding on this decision.
The City Audits that exposed the racket: No one knows how many towns are playing this skim game but it has been going on since WWII. My money says it’s not the dozen or so the auditor has uncovered but more likely there are well over a hundred or even two hundred corrupt unregulated towns in this state. In the last few years, petition audits by the State Auditor of the towns of Springfield, in 2007, Salem in 2010, Rolla in 1989 (their second state audit was 2009), Marceline in 2010 (also their second state audit), and Hermann in 2004, and, as the auditor points out in the above press releases, state petition audits of several other Missouri towns such as, Farmington, Lebanon, La Plata and others going back many years, have produced repeated condemnation from state auditors of both political parties for what they called “hidden taxation” or the practice of skimming inflated utility rates. But, like an addict loves his needle, city officials loved their secret pork machine so they flat refused to give it up even after the state auditor pulled their pants down in public. For the ethically feeble, continuing the crooked practice was easier and more rewarding than exercising the tough fiscal discipline often promised in their election campaigns.
The Lawsuits: This case started in 2006, when citizens in Hermann, Missouri represented by the firm of Armstrong Teasdale LLP, 7700 Forsyth Blvd., St. Louis, Missouri, filed a class action lawsuit against the city. In 2010, Armstrong Teasdale, finding the same conditions existed in other towns filed similar class action lawsuits on behalf of more clients in the towns of Marceline and Salem. Each lawsuit alleges basically the same violation of Sec. 22 of the Missouri Hancock Amendment to the Missouri Constitution. The three complaints charge that each of the three cities have over-charged their local utility citizen-customers by millions of dollars annually then skimmed off the ill-gotten utility ‘profits’ and used the cash to subsidize city deficits and/or fund other non-utility projects. James E. Mello of the Armstrong Teasdale firm is the lead attorney for all three suits.
The Briefs: The oldest of the three lawsuits is the one against the City of Hermann, which was first filed in the Gasconade County Circuit Court in 2006. On Tuesday, September 21, 2010, this class action suit was accepted by the Missouri Supreme Court for transfer, which means it has been placed directly on the Supreme Court docket without the case going back to the Gasconade County circuit court on remand as the Missouri Court of Appeals ordered in their June 2010 decision. The link to the Hermann Application for Transfer is a summary of the case and contains the questions the Supreme Court is being asked to decide. The class action suits against the cities of Salem and Marceline by citizens of those towns which raise the same questions were filed early in 2010 but have not yet been heard in their respective circuit courts. Marceline’s is the most entertaining read. The redundancy of the filings in three cities so far can be read as resolve on the part of the Armstrong Teasdale law firm to end this decades-long municipal corruption which is practiced in dozens if not hundreds of unregulated towns in this state - not just to stop the practice in the three towns being sued.
In addition to the allegation that the cities were inflating various utility fees and skimming off the excess ‘profit’ for non-utility purposes it is also alleged that they raised these utility rates without a vote of the citizens as required by the 1980 Hancock Amendment. Pumping up utility rates and skimming off the surplus for non utility uses is a popular and common practice among cities with home-owned and unregulated electric utility departments that are unprotected by the Missouri PSC. In the three lawsuits the “utilities” at issue are not just electric power but also water, sewer, natural gas, trash and communications. Although the most egregious violations are usually in electric utility rates - the greatest revenues naturally produce the greatest abuses - all utilities offered by a city for what is now called a “fee” have been abused and will be affected by this ruling.
Among the more bald-faced practitioners of this “pump ‘n skim,” scam, the utility rake-off is dumped into the general fund and spent as part of the general city budget. Among the more nervous it’s politely called “interdepartmental loans” which moves money from the lucrative utility fund to other funds (permitted by law temporarily) but the ‘loans’ are never repaid (not permitted by law). The excess utility ‘profits’ are never rebated to the utility customers and rate increases are never voted on by the public and there lies the heart of the legal question.
The Appellate “Toast” order. In their June 2010 ruling on the Hermann case the Eastern District Appellate Court gave the City of Hermann and the lower court this parting shot:
“In conclusion, we find the trial court erred in entering summary judgment in favor of the City because there is a genuine dispute of material fact as to whether and for what purpose the City increased utility fees in violation of the Hancock Amendment by setting charges at a level to increase the City’s general revenue and to subsidize general government expenditures rather than to compensate for the provision of services. Therefore, the judgment of the trial court is reversed and remanded.
If it is shown on remand that the object of the fees is to fund the City’s general revenue, then this constitutes a violation of the Hancock Amendment and deserves an appropriate remedy under the Hancock Amendment.” – 6-10 Mo. E. Dist. Court of Appeals, Arbor Investment Co…..
Translation: “You have one chance to prove that for decades you haven’t deliberately pumped up city utility fees and skimmed off the resulting ‘profits’ to benefit the city budget thereby using your monopoly captives as “hidden tax cash cows” and that said cow did, in fact, jump over the moon. If you can’t prove this, you’re toast.”
Of course the City of Hermann denies that they ever intentionally inflated utility rates so they could skim off the excess revenues for non-utility uses. They say it was just an accident which happened with uncanny regularity month after month, year after year, decade after decade. All the corrupt cities like Rolla who steal their utility funds this way tell the same lie. Any lingering question about the City of Hermann’s intent was blasted sky high at the 9/29/10 Hermann city council meeting when Hermann’s Alderman Penning blurted out, “We had an election in the 50s in this town to go into the electrical business to make money to run the city….It was done specifically to make money to run the city.” It’s fair to say that Alderman Penning doesn’t have a firm grip on the defense strategy in their case.
Marceline refuses rescue offer. Some of these towns are so thick they still don’t get it and Marceline leads this pack of Stupids. Not only are they soaking their citizens with the highest utility rate in the state (15¢ per kWh, but Rolla is closing in on the rail with 10.3¢ per kWh) but they’re also running their town almost entirely out of their utility fund which is municipal hari-kari if the Hermann decision and/or their own later class action lawsuit goes against them. How will they cut back their city budget by 62% in one year?
The Marceline Malefactors have refused a settlement offer made by James Mello of Armstrong Teasdale, LLC on behalf of the three Marceline plaintiffs who are suing the city. As part of the settlement the plaintiffs would drop the lawsuit and Mello and the firm would arrange bridge financing and other financial assistance while the Marceline Malefactors figure out how to run a town without sucking the utilities dry and exploiting its citizens with the highest utility rates in the Midwest. The law firm would charge a substantial fee for this remedial class in city government but the reprobates in City Hall really can’t expect the law firm to provide the means of a massive bail-out and teach them how to govern for nothing. The firm’s fees for this service would be high but probably less than the cost of the inevitable court-ordered bankruptcy and the long-term economic damage such headlines would cause which is their almost certain fate right now. In exchange, the city would have to quit ripping-off its citizens but that, it seems, was too high a price to pay. (In the infamous Jefferson County Alabama Ch. 9 bankruptcy a federal judge appointed a lawyer to be the court-appointed receiver at $500 per hour but the judge cautioned him not to bill the county for more than 10 hours per day!)
The stiff-necked Marceline city government flat refused the offer because to accept it and stop milking their citizens would be to publicly admit their guilt and they absolutely refuse to do that even though they’ve twice been caught by the state auditor with both hands and feet in the cookie jar. Instead, they asked citizens to volunteer to serve on a finance committee. Marcelanians may not be the brightest but they weren’t that stupid. There were no volunteers.
At the November 2nd Marceline city council meeting, Mayor Stuart, city manager Liz Cupp and the Council came up with their second most wonderfulist idea ever (the first being the idea to fund 62% of the whole city budget out of their 15-cent per kilowatt utility rate). They made plans to put a referendum on the April 2011 ballot asking the citizens of Marceline to vote on whether they would like to have the Council to continue to transfer money from the electrical fund and continue “business as usual!” The sheer idiocy of it takes your breath away doesn’t it? These people are afflicted with the same brain disease as Herman’s Alderman Penning. They actually think a local referendum will absolve them of compliance with what they fear will be the outcome of the Hermann case before the Missouri Supreme Court and subsequently their own case.
These people are beyond saving. They’re like having a chicken-killing hound. He may be your favorite hunting dog but when he begins killing your chickens there are only two choices, cure him or shoot him. The only way to cure him is to take a chicken he’s killed and a stout piece of rope and tie that chicken on his back and leave it there until it rots and falls off and he stinks so bad the other dogs can’t stand him and he even looks ashamed and can’t stand himself. If that doesn’t cure him you just have to shoot him. The problem is you have to live with the stinking dog while you’re trying to cure him of killing your chickens. Marceline’s city government never was a good hunting dog to begin with. The dead rotting chicken has been stinking a long time and they’re still killing chickens. It’s time to just shoot them with a mass recall election.
What will it CO$T if Hermann, Marceline and Salem lose?
In each of the three lawsuits the plaintiffs are asking for “damages, declaratory judgment and injunctive relief.” If the Supreme Court finds the skimming practice to be an illegal “hidden tax,” that automatically makes it a violation of the Hancock law, so the plaintiffs ask that they be immediately stopped from doing it and they ask that the excessive utility charges which were transferred from one or more utility funds to other funds for up to six preceding years be refunded to their utility customers. Presumably, if the current utility rate is illegal it could be ordered rolled back to the last voted legal rate which may have been years ago or to 1980. That would require immediate action by the city to hold a public referendum to try to restore the kilowatt or water or trash rate to its current illegal level. All these “ifs” are up to the court.
The plaintiffs in each city are asking the utility rebate to the rate payers from the alleged illegal transfers for the years 2005 to 2009 in Marceline which transfers would total $3,335,220. In Salem the total is $4,700,000, in Hermann the rebates would be a total of $5,255,052 because they were skimming from six different utility accounts. In addition to refunding some of their ill-gotten gains the cities may have to pay some or all of the legal fees and costs of the plaintiffs.
The Supreme Court can do all of the above or none or something else entirely but the very least that will happen if they find this practice has been illegal is that the city of Hermann (Salem and Marceline in their turn) will be ordered to cease this practice and the people will be relieved of a gross injustice and henceforth be able to vote on utility rate increases as they should have been doing since 1980. If that happens, the deceitful anti-Hancock cities will have sudden large holes in their budgets and will have to learn how to run their cities without a subsidy from the utility fund. Is that a bad thing? They would also have to learn how to make a convincing case to the voting public when they honestly need a rate increase. That’s accountability.
The budget shortfall in Hermann would be about 35% just for the annual utility skim which is bad enough but in Marceline over 62% of their annual city budget is skimmed from the utility fund. And here is the mother of all ironies – if they’re ordered to pay back the millions they’ve taken from inflating and skimming the utility accounts they’d have to do it WITHOUT being able to use the money from inflating and skimming their utility accounts!
What will happen to all other guilty unregulated towns?
If the Supreme Court’s decision goes against the city, any unregulated Missouri city guilty of the same practice that does not likewise voluntarily roll back utility rates and take other prudent remedial measures will be wide-open to an easy-to-win lawsuit by any local ratepayer and his $300-per-hour-plus-expenses lawyer. Unlike the remedial offer made to Marceline, other lawyers can just use the precedent, file a lawsuit, collect an out-of-court cash settlement with little or no judicial fuss and walk away leaving the city to continue to milk their electric cow. This can happen over and over and with a confidentially agreement to keep it all secret you’ll never know who city hall is paying off or for how much but you will be paying the settlements out of your utility bills.
The “Hermann decision” will not be self-enforcing
but more like a Do-It-Yourself-Kit
If the Supreme Court decision in Arbor vs. City of Hermann is that cities may not fund non utility activities out of their utility account and must get voter approval of appropriate fee increases, it doesn’t mean every city council in the state that is guilty of doing the same thing Hermann has been doing will automatically stop their illegal practices. Human nature being what it is – intractable - and city council’s being what they are – dense – many or maybe most will go right ahead and continue to do the same thing they have been doing for decades, victimizing their fellow citizens while making up whining excuses why their reason for doing it is different and justified unless they see chain gangs of city councilmen in perp walks on TV - which they won’t.
So don’t sit back and wait for the hound dogs to stop killing your chickens because it won’t happen. There will be no thunderbolt to strike them dead for you - mores the pity. God only helps those who get off their fat asses and file class-action suits. What the Hermann case does mean is that local citizens may have a great new precedent or almost a do-it-yourself-kit with which to file their own class action suit and a fairly easy time winning it. “Attach lawyer A to the new Landmark Hermann Case B and insert nozzle into…”
If the past is a predictor of the future, and it usually is, citizens in all the little unregulated towns in Missouri who are paying gawd-awful utility prices had better be thinking about doing what the citizens in Hermann, Marceline and Salem have done which is calling up the lawyers at Armstrong Teasdale or some other law firm and offering to be one of the names on a class action lawsuit against their City of Really-High-Utility-Rates-With-No-Votes. Initiating a class-action lawsuit shouldn’t cost the plaintiffs (that would be you) much except maybe for some filing fees and it’s the only way people (that would be you too) are ever going to get their utility, sewer and water rates down to something reasonable and competitive and have the privilege of voting on all future utility increases that qualify for a Hancock Amendment vote (also you).
The Hancock Amendment, or the power to vote on some utility rate increases is, for those rural cities who have been left naked without PSC protection for the last 71 years, our rather crude substitute for the Public Service Commission protection we have been entitled to but haven’t had since 1939. We pay state taxes so city people can have PSC protection but we don’t get PSC protection because we live in unregulated municipalities. So Hancock law solution is not perfect but it’s all we’ve got and for three decades they’ve even robbed us of that.
Armstrong Teasdale is the law firm representing the plaintiffs in the Arbor Investment Co vs. City of Hermann. I say hire the cook with the most experience because beginners are going to have a long and expensive learning curve but shoot, pick any lawyer you like.
The point is that State Auditors have been telling citizens for decades that City Hall was robbing us with “hidden taxes” but nobody knew how to make them stop it without paying a fortune for a private public service lawsuit and none of the local lawyers had the guts to sue them anyway. Even after state petition audits of local governments pulled down their panties they’ve continued to do it every day since. Now there are these guys at this big law firm who obviously know what they’re doing and have laid out the whole road map and it sure looks like they’re going to pull it off. The people in Hermann, Marceline and Salem who had the guts to stand up and sue over something that was so obviously corrupt are going for it because they’ve had enough of being victimized by their own elected city officials.
It’s probably the last chance you’ll ever have so the question is this, how long are you going to put up with letting these chicken-killing dogs hang around your yard stinking up the place?
James E. Mello Jeff McPherson
Phone: 314-621-5070 Phone: 314-552-6610
Direct Phone: 314-342-4154