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Ocean City

City more likely to drop service than add fees, given legal issues

(April 26, 2013) With the city government still scraping to boost revenues and cut expenses before fiscal year 2014 begins in July, a number of issues regarding the city’s expenses and services –and possible fixes for them – have run up against a legal wall.

Namely, the city is prohibited from turning a profit on any of its various enterprises, lest it be considered an unauthorized tax by the Maryland General Assembly.

“One thing you can count on in the state of Maryland is that the General Assembly jealously protects its taxing power,” said City Solicitor Guy Ayres.

Under Article 11 of the Maryland State Constitution, municipalities are banned from enacting new taxes without the express authority of the state’s legislature. Further laws, passed by the General Assembly, have restricted any new forms of public income to make the state’s exclusive tax power even more bulletproof.

This seems to have stymied the city’s hope of being able to commercialize – and then itself bid for the rights to run – its own trash removal operation, a move that was touted earlier this year as a potential silver bullet to the resort’s budget deficit.

The city’s solid waste operation costs between $5.6 and $5.7 million dollars of general revenue to support, equivalent to around 7 cents’ worth of the municipal property tax rate. However, if the city were to run its waste operation as a separate enterprise, it would essentially eliminate this expense.

“The idea was that one would write an ironclad RFP [request for proposals] to be put out on the market,” said Public Works Director Hal Adkins, “in a manner in which Steve [Brown, Solid Waste superintendent] and I could go about bidding on this ourselves.”

“A private firm may end up bidding $10 to $12 million, while we are currently operating at $5.7, so there would be some wiggle room there,” Adkins said.

“But then, through conversations with our city solicitor, it was his stance that generating that level of revenue relative to the cost [of running the service] would be considered a garbage tax and that would not be legally permissible.”

“It’s not that the city can’t operate in a proprietary sense,” Ayres clarified. “It’s just that, depending on what they do and what is done with the funds, the court could conclude it’s a tax. You have a problem on any type of fees that a municipality charges if they’re going to be considered a tax, as opposed to a legitimate fee to offset costs.”

If the city began to charge a service fee for garbage, and then had to lower its tax rate to compensate for the loss of service, “the question becomes what you’re really trying to accomplish,” Ayres said.

In fact, he said, the legal precedent for a Maryland municipality being banned from turning a profit on exclusive services comes from the resort itself, nearly 30 years ago.

“There was a case Ocean City was involved in back in the early ’80s, involving fees or building and zoning permits,” Ayres said. “In actuality, the town collected much more money in fees from those departments than were necessary to run the departments. The town got sued for a refund. It was a pretty well established case in Maryland, and it went up to the appellate court. Ultimately, it was declared an unlawful tax, and the city had to make a refund.”

This precedent also calls into question the city’s financial stake in special events, which often pay handsomely for the city’s services and facilities and, in some cases, have had profit-sharing schemes with the city.

“They may pay us a percentage, but it’s there to offset expenses,” Ayres said. As long as the city is not gaining a cash profit, it is not taxing event promoters in the eyes to the state.

The most legally palatable way for the city to reduce its garbage expense would be not to add fees, but to drop service. As Adkins said, most municipalities provide residential – but not commercial – trash service. He estimated that 78 percent of the service value that commercial properties receive from the city is contained in solid waste pickup.

If local government were to eliminate commercial pickup, and credit 7 cents of tax back to commercial properties, the city would likely end up with a much more equitable garbage service – a concept similar to the tax differentials seen at the county level elsewhere in the state.

“It’s similar to the theory that the state has in some counties that, if you live in a municipality, you get a tax break for what you don’t get,” Ayres said.

But the risk of this, Adkins said, would be that the city would be relinquishing its regulation of the garbage schedule and putting the service at the mercy of private haulers.

“Does it mean you’re going to lose ‘clean?’ No,” Adkins said. “But unless you did it in a restrictive and stringent manner, one could question whether the business owners … might suddenly realize they don’t want to pay for five-day-a-week collection.”

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