Stormwater Alert: Maryland Fee Program No Longer Mandatory

HIGHLIGHTS:

• In April 2015, the Maryland General Assembly enacted SB 863 that substantially amended legislation enacted in 2012 requiring each of the 10 most populous jurisdictions in Maryland to establish an annual stormwater remediation fee and local watershed protection restoration fund.
• Gov. Larry Hogan made repeal of the stormwater fee a major priority during his successful election bid as a prime example of the high taxes in Maryland that were driving away businesses. Stormwater fees became a major issue in the 2015 session of the Maryland General Assembly. Ultimately the General Assembly enacted SB 863 – a compromise that was overwhelmingly passed and was also supported by the environmental community.
• SB 863 is a complex bill and questions remain about its requirements, exclusions and interaction with federal law. The bill is a step forward in providing flexibility to the Phase I jurisdictions while still requiring accountability and oversight, however, the flexibility will not remove the underlying obligation that these jurisdictions will have in financing the huge costs of stormwater remediation needed to meet the Chesapeake Bay TMDL.

In April 2015, the Maryland General Assembly enacted a law – known as SB 863 – that substantially amended legislation enacted in 2012 requiring each of the 10 most populous jurisdictions in Maryland to establish an annual stormwater remediation fee and local watershed protection restoration fund. Some jurisdictions had been actively implementing this program while others refused or strongly objected to the so-called "rain tax" mandate. This issue became highly politically charged during Maryland's 2014 gubernatorial election. Newly elected Gov. Larry Hogan had vowed during his campaign to repeal the mandatory fee program and succeeded in working a compromise making the fee program discretionary, but still requiring local jurisdictions to provide financial assurance plans that they had sufficient revenues to meet their stormwater remediation obligations to restore the Chesapeake Bay.

SB 863 is a complex bill and questions remain about the bill’s requirements, exclusions and interaction with federal law.

Background of the Maryland So-Called "Rain Tax"

The 2012 Maryland stormwater fee program was an outgrowth of the aggressive federal program to help restore the water quality of the Chesapeake Bay, which has been in decline for many years. With the Environmental Protection Agency's (EPA) December 2010 promulgation of the Chesapeake Bay Maximum Daily Load (TMDL) rule, the six Bay states and the District of Columbia were mandated to meet specific pollution reduction targets for the first time. The TMDL sets the maximum amount of pollution the Bay can receive and still meet water quality standards. It also identifies specific pollution reduction requirements for nitrogen, phosphorus and sediment that must be met by 2025 – with at least 60 percent of the actions completed by 2017.

The cost of treating stormwater in Maryland to meet the TMDL is estimated to be $7.7 billion with much of the costs falling on the shoulders of local jurisdictions. This prospective burden led to the Maryland General Assembly's enactment of HB 987 in 2012, which requires Anne Arundel, Baltimore, Charles, Carroll, Frederick, Harford, Howard, Montgomery and Prince George’s Counties, as well as Baltimore City, (Phase I Storm Water permitted jurisdictions) to establish an annual stormwater remediation fee and local watershed protection and restoration fund.

Municipal Separate Storm Sewer (MS4) Permits

As enacted, HB 987 was intended to generate fees to reduce stormwater impacts in Maryland’s most populous jurisdictions, thereby helping Maryland comply with EPA's Chesapeake TMDL. The bill directed that local laws and ordinances be enacted by July 1, 2013. The 10 major jurisdictions have been operating under Municipal Separate Storm Sewer (MS4) permits requiring the development of stormwater plans to restore 20 percent of impervious surfaces to help capture and attenuate the damage from uncontrolled stormwater runoff into streams and creeks. Fees collected under the 2012 law were to be used to implement projects with green technologies, such as rain gardens, bioswales, permeable pavements, stream restoration and landscape infiltration.

The mandate became known as the "rain tax" although state courts in Kentucky, Washington state and Georgia have held that such charges are a fee for providing stormwater services and not a tax. In fact, there are roughly 1,500 stormwater utility fees collected by counties and municipalities or regional authorities in 40 states and the District of Columbia. However, a huge public backlash emerged as the Maryland Phase I jurisdictions began to implement fee programs. The Baltimore Sun reported on several industrial and commercial businesses that faced enormous stormwater fees on impervious surfaces that in some instances even surpassed their property tax bills. Jurisdictions reacted very differently in developing these programs, for example:

• Carroll County instituted a $0 fee but agreed to dedicate a portion of the County's tax revenue to stormwater fee projects.
• Frederick County adopted a one-cent-a-year tax for each property, but budgeted general funds for stormwater compliance.
• Other counties developed fee programs with different fee structures for residential, commercial and nonprofit properties. Those fee programs generated substantial revenues to pay for stormwater remediation projects as noted in a recent report by the Hughes Center at the University of Maryland.

Gov. Hogan made repeal of the stormwater fee a major priority during his successful election bid as a prime example of the high taxes in Maryland that were driving away businesses. Stormwater fees became a major issue in the 2015 session of the Maryland General Assembly. Ultimately the General Assembly enacted SB 863 – a compromise offered by Senate President Miller that overwhelmingly passed the General Assembly and was also supported by the environmental community.

Key Provisions of SB 863

The bill has several important provisions.

• The bill allows a Phase I jurisdiction to repeal or reduce a stormwater existing fee program before July 1, 2016. The jurisdiction must identify dedicated revenues deposited in its local watershed protection fund to meet the requirements of the jurisdiction's MS4 permit and must file a financial assurance plan that demonstrates to MDE its good faith efforts in achieving the funding requirements of SB 863. The bill also does not prohibit a jurisdiction from repealing or reducing the fee on or after July 1, 2016.
• If the jurisdiction chooses to maintain or establish a fee program, these jurisdictions must include a statement on the bill that the fees are "established in response to the federal stormwater requirements."
• The bill retains certain protections for businesses and property owners assessed a fee by requiring that any fee program must: be based on a proportional share of stormwater management services related to the property; establish procedures and a system of credits to account for on-site and off-site services and activities that reduce the quantity and/or improve the quality of stormwater discharged from the property; and establish procedures for appealing any stormwater fee imposed.
• SB 863 addresses the stormwater funding relationships between Phase I counties and municipalities located within the county. If the county funds stormwater remediation by using general revenues, the county must assume responsibility for the municipality's stormwater remediation and must adjust the county property tax rate within the municipality to offset any stormwater remediation fee charged by the municipality that has established its own stormwater fee program.
• Each of the covered jurisdictions must file a financial assurance plan with MDE beginning July 1, 2016 – regardless of whether the jurisdiction decides to repeal or maintain their fee program.
• A jurisdiction must submit an annual report to MDE describing its funding structure, the source and amount of money deposited, and the stormwater management projects implemented the previous fiscal year.
• Beginning on July 1, 2016, and every two years thereafter, the jurisdiction must submit financial assurance plans to MDE identifying actions required to meet the jurisdiction's 20 percent impervious surface restoration requirements in its Phase I MS4 permit and the projected annual and five-year costs and revenues. The plan must demonstrate that the jurisdiction has sufficient funding in the current fiscal year budget and in subsequent fiscal year budgets to meet the impervious surface restoration requirement of its Phase I MS4 permit.
• The jurisdiction must first hold a public hearing and approve the financial assurance plan prior to submission and MDE must decide within 90 days after the plans are submitted whether the plan demonstrates sufficient funding. SB 863 establishes a phased funding demonstration approach. A plan submitted prior to July 1, 2016, must demonstrate that the jurisdiction has dedicated sources of funding to meet 75 percent of the projected costs of compliance with the 20 percent impervious surface restoration requirements of its MS4 permit over the succeeding two years. Plans filed for the second and subsequent two-year periods must demonstrate that the jurisdiction has sufficient dedicated funds for 100 percent of the projected annual costs to meet the impervious surface restoration requirement.
• If MDE determines that the funding in the financial assurance plan filed on or before July 1, 2016, is insufficient to meet the 75 percent funding requirements for the two-year period immediately following the filing date, MDE must issue a warning letter and engage in discussions with the jurisdiction on developing a plan for meeting the projected costs of compliance. If MDE determines that the funding in the second or subsequent financial assurance plans is insufficient to meet 100 percent of the projected costs of compliance with the impervious surface restoration plan requirements of the MS4 permit, MDE will impose an administrative penalty. For the first offense, the penalty can be up to $5,000 for each day until the financial assurance plan is determined to be adequate. For the second and subsequent offenses, the penalty can be up to $10,000 for each day until the financial assurance plan is determined to be adequate. Collected penalties will be put in escrow to be used by the jurisdiction for stormwater projects pending a determination by MDE that the financial assurance plan is sufficient. These penalties are in addition to any other remedy available to MDE by law or equity.
• The bill authorizes jurisdictions to charge a fee on property owned by the State or a unit of state government if the state and county agree to collection of a fee based on the state's share of stormwater management services provided by local jurisdictions for the state property, the jurisdiction also appropriates money into its own local watershed fund based on the share of stormwater services related to county property on an annual basis and the county demonstrates that fees collected were deposited into the county's local watershed protection and restoration fund. However, a jurisdiction may not charge a stormwater remediation fee to property specifically covered by an MS4 permit or industrial stormwater permit held by the state or unit of state government.
• Beginning Sept. 1, 2016, MDE must submit a report to the governor and to the General Assembly evaluating the compliance of the jurisdictions with the requirements of SB 863.
• With limited exceptions, jurisdiction may not charge a fee on tax-exempt property owned by a veterans organization or volunteer fire department, or on roads owned by a tax-exempt homeowners' association if the roads qualify for state or county roadway reimbursement funding. However, property owned by a tax-exempt veterans organization or volunteer fire department may be charged a fee if the jurisdiction determines that the creation of a nondiscriminatory program for applying the fee to federal properties under the Clean Water Act is necessary for the jurisdiction to receive federal funding for stormwater remediation and if the veterans organization or volunteer fire department is allowed to apply for an alternative compliance program under the bill.
• The bill allows a jurisdiction to authorize a tax-exempt charitable nonprofit group or organization demonstrating financial hardship to implement an alternative compliance plan in lieu of paying a stormwater remediation fee and directs MDE to adopt regulations to establish alternative compliance plans to implement and enforce the provisions of SB 863.
• The bill exempts Montgomery County, Md., since the county had adopted and implemented a stormwater fee program under a state law that predated the 2012 law. However, the bill makes a number of the key provisions of SB 863 applicable to the county, including the requirement to submit a financial assurance plan, exclusions applicable to tax-exempt fire departments, veterans organizations and homeowner association-owned roads, and the exceptions to those exclusions.
• SB 863 also authorizes Chesapeake and Atlantic Coastal Bays 2010 Trust Fund moneys to be granted to local government and other political subdivisions for urban and suburban stormwater nonpoint source pollution control projects, including up to 25 percent in matching funds to these jurisdictions that have enacted stormwater remediation fee programs. Further, SB 863 authorizes the Bay Restoration fund to be used for costs associated with implementation of alternative compliance plans.

Implications of SB 863

The repeal of the state mandate on the 2012 law should alleviate many objections raised by local governments, property owners and businesses by providing the Phase I jurisdictions with the flexibility to develop alternative programs to meet their Chesapeake Bay restoration responsibilities. These jurisdictions are now free to use alternative funding sources and not have to resort to a fee program that had been severely criticized as a "rain tax." Carroll County for example has already received MDE approval to "forgo the stormwater fee and dedicate a portion of property tax revenue to funding stormwater projects." However, the fact remains that the costs of stormwater remediation will be extremely high – the projected capital spending of the Phase I jurisdictions from 2015 to 2020 is over $2 billion dollars and MDE has estimated total local annual stormwater costs of $380 million as described in the fiscal note on SB 863. Further, MDE estimates that annual stormwater fee revenues range from 0.5 percent to 10 percent of total local property tax revenues. Thus, jurisdictions opting out of the stormwater fee program will especially have a major burden in developing financial assurance plans that meet the bill's stringent criteria. The environmental community will likely be watching these plans very closely and will surely object to any plan that does not demonstrate sufficient resources to meet the exacting restoration standards under MS4 plans such as the 20 percent impervious restoration requirement.

The Cardin Amendment

Further complicating effective implementation of SB 863 is the question of whether or not the federal government, as a substantial property owner in Maryland, must also pay local stormwater fees. On Jan. 4, 2011, Congress enacted Public Law 111-378, commonly known as the Cardin Amendment, to the Clean Water Act (named for Sen Ben Cardin, the bill's sponsor). The amendment clarifies the duty of federal agencies to pay "reasonable service charges" for treating stormwater runoff from federal property, provided that the fee is "nondiscriminatory," based on "some fair approximation of the proportionate contribution of the property or facility to stormwater pollution," and the fee is "used to pay or reimburse the cost associated with any stormwater management program." The Cardin Amendment was especially significant in that the federal government has historically refused to pay service charges unless Congress expressly waived the sovereign immunity of the United States.

The Cardin Amendment would presumably enable local jurisdictions to collect substantial fees from federal facilities in Maryland since the federal government owns or controls a huge amount of land in the state with considerable impervious surface stormwater discharges into various municipal systems. However, federal agencies have shown resistance to fees assessed under these proposed programs. In a March 1, 2013 letter, the Department of the Navy wrote to the Anne Arundel County Council asserting that the county’s proposed ordinance implementing HB 987 was "discriminatory," and concluding that the Department of Defense was not required to pay the fee under the Cardin Amendment. Senate Bill 863, by eliminating the exemption for state properties and volunteer fire departments in the 2012 law and referencing the Cardin Amendment to the CWA, could remove legal objections of the federal government that the 2012 law was discriminatory. Yet, it remains to be seen whether federal agencies may still object to stormwater fee assessments based on differing criteria among the Phase I jurisdictions.

An Uncertain Future for SB 863

SB 863 is a step forward in providing flexibility to the Phase I jurisdictions while still requiring accountability and oversight. The flexibility provided by SB 863 will not remove the underlying obligation that these jurisdictions will have in financing the huge costs of stormwater remediation needed to meet the Chesapeake Bay TMDL. Those obligations will likely require these Phase I jurisdictions to look at a range of funding sources even if they decide to continue with the stormwater fee program. In the end, the ultimate costs of meeting Maryland's stormwater reduction targets of the Bay TMDL will largely fall on the shoulders of these jurisdictions.  

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.