A September 2015 South Carolina Supreme Court ruling established clear rules for transferring revenue generated by user fees from one fund to another. This ruling may have significant implications for South Carolina cities and towns who make these types of transfers.
In the case of Azar v. City of Columbia, the Court’s ruling favored the plaintiffs who challenged the validity of the City of Columbia’s practice of transferring approximately $4.5 million annually from the utility fund to the general fund.
The Court asserted that the City of Columbia "admitted" the revenues in question constitute user fees as defined in S.C. Code of Laws § 6-1-300, commonly referred to as the Local Government Fiscal Authority Act. Based on this admission, the Court found that the city must spend the revenue in question solely on water and sewer services, unless the revenue is surplus as defined in the Revenue Bond Act, S.C. Code of Laws § 6-21-440.
The Revenue Bond Act requires utility revenue be used to pay for system operating, maintenance, bond principle and interest, depreciation and contingency set-asides before any money is considered surplus. If these requirements are met, the Court indicated the remaining revenue is surplus and could be used for unrelated purposes at the local government’s discretion.
In examining the case, the justices identified two unresolved questions and sent the case back to the trial court to get the questions resolved. The questions centered on whether the revenue at issue was actually spent on costs related to water and sewer services and whether the money at issue is "surplus revenues."
"While Azar v. City of Columbia pertained to only the practice of transferring revenues generated from user fees, it gives us the opportunity to highlight best practices for transferring revenue, regardless of its source, into the general fund," explained Eric Budds, the Municipal Association’s deputy executive director.
"If a municipality transfers revenue to the general fund as reimbursement for support services provided for utility or other enterprise operations, local officials should prepare a detailed expense allocation each year to document these support services," said Budds.
"If a municipality transfers revenues to the general fund to pay for expenses related to and of benefit to the core services or functions of the fund from which the revenue is transferred, council should adopt a policy statement describing the benefit," concluded Budds.
Municipal officials should consult their city attorney or bond counsel for advice on how the Supreme Court’s ruling impacts their current transfer policies.