The North Carolina Supreme Court’s recent decision to consider the legal battle over who should control the city of Asheville’s water system may finally answer one of the fundamental legal questions facing municipalities across the state: What are the limits of the state’s authority to take control of local assets?
The case before the Supreme Court stems from a 2013 law passed by the General Assembly that withdrew the city’s authority to own and operate the Asheville Water System and transferred it to the Buncombe County Metropolitan Sewerage District, without compensating the city.
Asheville challenged the law on constitutional grounds, arguing the state had overstepped its authority to intervene in matters of local government. Despite winning a summary judgment at the trial level, Asheville suffered a thorough defeat at the Court of Appeals, which held the state’s authority was much broader than what the city had maintained.
But in its Jan. 28 order granting review, the Supreme Court noted that the lawsuit raised a substantial constitutional question, making it more likely the justices will consider the merits of the case.
Municipalities across the state are following the case closely because it has the potential to set new guidelines for when the General Assembly can transfer control of local assets.
“There’s a real need to strengthen the case law in this area,” said Drew Erteschik, an appellate partner in Poyner Spruill’s Raleigh office. “For years now, we have seen litigation over the balance between state and local governance. The Supreme Court should be commended for its decision to reinforce—and perhaps add to—its teachings in this area.”
The stakes in the case before the Supreme Court couldn’t be much higher for the parties involved.
For Asheville, a loss would mean giving up control of a water system worth hundreds of millions of dollars that affects more than 100,000 residents. The city has also argued that the 2013 Water/Sewer Act “eviscerates key constitutional doctrines that protect municipalities and their taxpayers.”
For the state, the lawsuit represents a threat to lawmakers’ ability to decide the best way to administer public utilities in order to ensure they are operating in a way that benefits state residents.
The case before the Supreme Court hinges on several key legal questions. The first has to do with whether the 2013 Water/Sewer Act should be considered a so-called local law.
Under the state Constitution, the General Assembly is barred from enacting city-specific laws that affect a set list of categories, which include laws affecting health and sanitation and non-navigable streams.
While the text of the law did not single out Asheville, the city’s public water system was the only one in the state that met all of the criteria for a forced transfer under the law’s transfer provision.
The Court of Appeals’ Oct. 6 decision determined it was not necessary to decide whether the transfer provision was a local law because it was “not plain and clear and beyond reasonable doubt that the transfer provision falls within the ambit of either prohibited subject identified by the trial court.”
The Court of Appeals said the law makes no mention of health and sanitation and only tangentially affects non-navigable streams.
However, in the city’s petition for Supreme Court review, Asheville City Attorney Robin Currin said the appellate court got it wrong because the high court has “recognized repeatedly that water and sewer services inherently affect health and sanitation.”
Poyner Spruill’s Erteschik said the issue of whether oversight authority of water and sewer systems relates to health and sanitation is among the most important questions raised by the Asheville case. Erteschik said the ongoing crisis in Flint, Michigan, should serve as an example of how control of a water system can affect public health. In Flint, a cost-cutting decision by the state of Michigan to take control of the city’s water system may have exposed up to 8,000 children under the age of 6 to unsafe levels of lead in their drinking water.
“So we don’t have to look far to see how the governance of a water system—in the words of our state Constitution—‘relates to health or sanitation.’” Erteschik said.
‘Taking’ or leaving
Asheville also argues the state Constitution prohibits takings without just compensation.
On that issue, the Court of Appeals held that the General Assembly has the authority to divest a city of its authority to operate a public water system and transfer it to another political entity. The appellate court noted the U.S. Supreme Court has held there is no constitutional prohibition against a state withdrawing a city’s ability to own and operate a water system without compensation.
But Currin argues in the petition that “this carte blanche reasoning would apparently avoid all the usual requirements of takings doctrine.”
Currin adds that the standard set by the Court of Appeals would not require that the taking meet the legal tests for a public purpose, nor would it require compensation for the property that is taken.
The N.C. Supreme Court has not set a date for oral argument in the case. But briefs are due in early March. The justices put the transfer on hold while they considered whether to take the case. That hold will remain in place for the time being.
“This is a very important case for the city of Asheville,” Currin said in an interview. “We are putting together the best brief possible so we can support our argument that we should keep our water district. We are cautiously optimistic at this stage.”
Asheville is also represented by former N.C. Supreme Court Justice Robert Orr, who is currently of counsel to Campbell Shatley in Asheville; Matthew Sawchak, a partner at Ellis & Winters in Raleigh; and Robert Long and Ronald Payne, name partners of Long, Parker, Warren, Anderson & Payne in Asheville.
Efforts to reach a spokesman for the N.C. Justice Department, which is representing the state and the Buncombe County Metropolitan Sewerage District, were not immediately successful.
Asheville’s lawsuit is being watched closely by other municipalities in the state because of the precedent it could set.
Erteschik said case law in North Carolina is relatively vague when it comes to instances of the state taking control of a municipal asset away from a local government. Erteschik said the recent battle over control over Charlotte Douglas International Airport raised many of the same legal questions as the Asheville case, but because the state opted not to appeal that case, it didn’t provide any guiding precedent.
The city of Charlotte, which Erteschik represented, won its lawsuit against the Charlotte Airport Commission, which had been given control of the airport by the General Assembly in 2013. A superior court judge said Charlotte should retain control but left open the possibility that the Federal Aviation Administration could transfer control to the commission.
Another lawsuit before the Supreme Court could also provide greater clarity on the limits of state legislative power, Erteschik said. In that case, Boone is challenging a 2014 law adopted by the General Assembly that took away the town’s extraterritorial jurisdiction powers.
Meanwhile, the Asheville case has also raised concerns about what it might mean for local bond issuances.
Kim Hibbard, general counsel for the N.C. League of Municipalities, which is acting as amicus curiae in the Asheville case, said allowing the state to take control of local assets without compensation could hurt local governments’ ability to raise capital for infrastructure projects.
“This case could have a chilling effect on infrastructure investment,” Hibbard said. “Municipal citizens would be reluctant to invest in infrastructure if they think the state is going to transfer control of those assets, and elected officials are likely to be reluctant to take the financial risks that come with infrastructure investment.”
But Ed Lucas, a partner in Robinson Bradshaw’s public finance practice, said some of those concerns may be overblown. He said simply transferring control of a water system from a city to another government entity does not necessarily mean the system’s credit rating would be affected.
“In fact, if it’s better managed, it could actually benefit bondholders,” Lucas said.