"Builders sue city over housing fund surchargeThe fee to support affordable housing is illegal, the suit contends."
June 9, 2008 · Updated 3:52 PM
"Saying they should not be taxed to support general public obligations, three Bainbridge Island builders have filed suit to strike down a building-permit surcharge the city uses to support affordable housing. We're not against affordable housing, said Andy Mueller, one of the named plaintiffs. But that should be funded by the public at large, not by a small group of people. We want our money back. But city Finance Director Ralph Eells not only defended the fee at issue, but said the suit may cost the builders more than they could possibly gain.If the city council determines that applicants should bear the whole cost of the regulatory process, the builders could end up paying an additional $1.5 million a year, he said, which is at least 10 times the amount at issue in the suit.At issue is Resolution No. 99-31, passed by a split council at the end of 1999, which codified the third in a series of recommendations made earlier that year by a blue-ribbon panel on affordable housing.The resolution imposed a 10 percent surcharge on building permits and increased some related fees. According to the measure's title, the surcharges were enacted for the purpose of partially funding an affordable housing trust fund. The first major appropriation from that fund, made earlier this month, was a $75,000 grant to Habitat for Humanity to help that organization buy three lots on Bainbridge Island for three volunteer-built homes. Small grants have helped add such features as handi-cap-access ramps to the homes of income-qualifying islanders.Although the Housing Trust Fund is funded from two other sources - voluntary contributions by some local realtors and mortgage lenders, from the proceeds of island real estate transactions - almost two-thirds of the money, some $78,000 in the year 2000, has come from the surcharge now under dispute.The complaintThe plaintiffs - Dick Allen's Hillandale Homes, Ray Stevenson's Jefferson Properties, and Andy Mueller Construction, along with the Homebuilders Association of Kitsap County - claim the surcharge is an illegal tax. According to the lawsuit, filed earlier this week in Kitsap County Superior Court, Washington law forbids cities from levying taxes on construction or development. Cities can impose fees, the suit says, but only to cover the actual cost of processing the application, inspecting the properties or reviewing plans.Because the surcharges imposed by resolution 99-31 are intended for other purposes, they are illegal, the suit contends.The suit, filed by Bellevue attorney Richard Stephens, seeks class-action status for everyone who paid a fee subject to the surcharge from Jan. 1, 2000, the effective date of the act, to the date of judgment. The suit also asks the court to prevent the city from spending any money generated by the surcharge.But Eells said that the city is acting legally, because the money is not actually going to the Housing Trust Fund.According to Eells, all money paid for building permits and plan checks, including the challenged surcharges, goes into what is called the building development services fund, which is used exclusively for permit- and inspection-related matters.Because the surcharges reduce the amount of general-fund revenue needed to support building services, general-fund revenue equal to the amount of the surcharge is placed in the Housing Trust Fund, Eells said.The total amount of money at issue in the lawsuit could be about $100,000, city officials said. That's in addition to the roughly $40,000 the city has agreed to refund because the formula for computing the surcharge wasn't properly applied.City records show that since the beginning of 2000, Mueller Construction has paid the city $20,741 for building activities affected by the surcharge. In the same time frame, Hillandale paid $14,065, and Jefferson Properties $9,634. Mueller said Thursday that if the builders prevail in court, he will return surcharge funds to clients.While the records available Thursday would not permit a precise calculation of the refunds each would receive if the suit were successful, Eells estimated it would be not much more than 10 percent of the amounts paid.Eells said that even with the surcharge, permit fees don't cover the entire cost to the city of regulating construction. A lot of costs are not included, he said. For example, two-thirds of the cost of city hall could be included, because the biggest space is taken up by building and planning, and another big bloc of space is taken by engineering, which spends a significant proportion of its time on building-related matters.This suit may prompt that reassessment, he said, and if the council decides that the builders should bear a bigger share of the costs, they could pay much more than they do now even with the surcharge. "