Ocala’s fire fee strategies were flawed from inception to $80 million judgment

File photo: City Attorney, Patrick Gilligan, speaks during an Ocala City Council meeting at Ocala City Hall in Ocala, Fla. on Tuesday, Sept. 20, 2022. [Bruce Ackerman/Ocala Gazette] 2022.

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Posted December 10, 2022 | By Jennifer Hunt Murty
jennifer@ocalagazette.com

Newly released transcripts of closed-door meetings between the Ocala City Council and its legal representatives pull back the curtain on how city leaders for years devised various strategies for handling the city’s controversial fire service user fee litigation.

It’s not a pretty read.

From indications that the legal experts urged the council to blaze a trail on shaky legal grounds to initiate a first-of-its-kind user fee, to extensive damage control efforts when the ground began to crumble, to disparaging personal attacks on opposing counsel, the records show a legal team more intent on litigating until the bitter end than admitting they were wrong.

The 2006 city council decision to impose a monthly fire service fee on roughly 89,000 Ocala Electric Utility customers prompted a 2014 class-action suit that challenged the legality of the fee. An appellate court ultimately found the fees constituted an illegal tax, and in 2021, a judge ordered the city to devise a way to refund $80 million to affected utility customers.

The city struggled to find the money for the refunds, at one point even exploring bankruptcy. Ultimately, council pulled $20 million from reserves and took out a loan for $60 million. Millions of dollars in refund checks have already been issued and cashed- and some people owed money cannot be located.

The shade meeting transcripts, which the Gazette has spent months fighting for, provide fresh insight into the tortuous eight-year legal path the case has taken. What did the city council members and their attorney’s dialogue look like during this time? Here is a link to the transcripts for you to read them for yourself: https://bit.ly/3VL2Nha

The following are several key takeaways:

On the advice of counsel

Under well-established Florida law, fire services can only be funded through impact fees, special assessments, and property taxes. In 2006, Ocala was looking for a way to cover an estimated $5 million to $8 million budget shortfall they felt was brought on largely by those who were receiving fire services but not paying for them; mainly renters, nonprofits and other entities that do not pay property taxes.

The city council decided to add a monthly fire service user fee to every Ocala utility customer’s bill. For residential customers, it was around $15, but commercial users paid much higher rates based on their business and its square footage.

The city council relied on two legal opinions for originally enacting the fire user fee in 2006. One opinion was issued by Terry E. Lewis of the firm of Lewis, Longman, & Walker, and another one by the city attorney, Patrick Gilligan, who served as the city’s lead attorney for decades.

Both attorneys agreed the city legally could charge user fees for traditional utilities, such as electricity, natural gas, water, trash disposal and sewer services. But they indicated there was no case law supporting whether fire services could be funded by a user fee, so there could be problems if the city were to be challenged.

Florida’s attorney general, however, had issued opinions on whether municipalities could charge user fees for fire-related costs, in 1974, 1982, and 1991. In short, the answer was “no.”

The attorney general’s opinion was basically that a city cannot charge “user fees” for public safety services available to the general public because government owes citizens those services, regardless of who the user is and what they paid for it.

Nevertheless, Ocala’s attorneys vigorously, and erroneously, argued for years that case law allowing municipalities to charge user fees for utilities allowed Ocala to impose a user fee for a public safety service.

Equally concerning was that the city’s lawyers told city council for years that other Florida communities were charging fire user fees and that the courts had issued conflicting judgments on these user fees. Nowhere in the transcripts could the Gazette find any moment when the attorneys spelled out to the council they were about to become a statewide trailblazer litigating for their right to charge fire user fees.

Gilligan told the council during their first shade meeting in March 2014: “There have been, to our knowledge, two other fire user fees enacted by other municipalities and county governments in the State of Florida. The first was the City of Tallahassee, and they did it in conjunction with Leon County. So, both Leon County and the City of Tallahassee enacted a user fee together way back when, before even the City of Ocala did.”

“That user fee is currently being challenged in a class action, but not for the reason ours is being challenged. Ours is being challenged as it’s not a valid user fee. That user fee is being challenged as a class action by the class representative saying that you’re only charging people that rent their property, or people that rent the property are having to pay the user fee not the actual landlords. I suspect they did that because it’s a college town, and between FSU, and A & M, and the junior college there, they’ve got a lot of people that rent apartments, and so they pay the user fee and not the actual landlord that owns the property,” Gilligan told city council.

“I don’t have any comment other than to let you know that it’s out there, but they’re not even challenging the validity of the user fee. They’re just assuming it’s valid. They’re just challenging it for the way it’s being billed.”

But that comparison does not hold up to scrutiny.

Tallahassee was funding its fire services through a special assessment the city collected through utility bills, not a user fee. The problem with billing a special assessment that way was that the people paying the utility bills weren’t the same people responsible for paying special assessments because sometimes they were renters, not property owners. The faulty ordinance was entered in 2009, legally challenged in 2013, and settled – with Tallahassee paying the plaintiffs.

The other community referred to by Gilligan was Fruitland Park. That community started collecting a user fee for police and fire in 2009 but issued refunds in a court-approved settlement in 2014- the same year the city was challenged.

In January 2021, city attorney Robert Batsel, Jr. told the council that, “Back when we did this … there were different governments around the state doing it.”

When the Gazette asked Batsel to identify other governments that had instituted a fire user fee, he said he wasn’t referring to fire user fees but rather “a proliferation of user fees adopted by local governments throughout the state to fund government functions previously funded by ad valorem taxes.”

On May 21, 2021, another attorney who entered the case, Jason Zimmerman with Gray Robinson, told the council that the 5th District Court of Appeal had decided the city’s user fee was “no longer valid.” The Gazette later asked Zimmerman if he believed the fire user fee had been valid and the DCA had veered from an established legal precedent. He did not answer the question, despite his firm’s indication that he would.

Zimmerman also told city council that “most counties and cities do something similar.”  But he would not identify any other county or city in Florida that had enacted a fire service user fee.

Other than Fruitland Park’s attempt, the Gazette has not been able to identify any.

How to get out of it

In 2014, attorney Derek Schroth sued Ocala challenging the basis for the city’s authority to collect the mandatory fire fees and asking for a common fund to be established for paying refunds and attorney’s fees. By the time refunds were ordered by the court, the average residential utility customer was owed approximately $1,600; some businesses were due hundreds of thousands of dollars.

Most of the legal discussion evident in the transcripts was about ways the city could get out of paying the refunds. The city clung to two defenses hoping they would limit damages, statute of limitations and set-off.

On the statute of limitations defense, the appellate court addressed it multiple times. In its third order, the tone of 5^th DCA order was such that transcripts reflect council understanding that it was a rebuke for continuing to raise the issue despite the court’s prior ruling.

The city attorneys also told city council that damages would be severely reduced based on an affirmative defense of set-off.  The lawyers reasoned that since Ocala hadn’t pocketed the money, the award to the plaintiffs should be offset by the amount the city had spent to provide the fire services.

However, illegal taxation doesn’t have many defenses applicable to offsetting damages- even though the attorneys continued to assure council otherwise.

Since the city knew there was no prejudgment interest accruing on damages, the consensus was to kick the can down the road as a long as they could. After all, the city’s insurance company was paying the bulk of the city’s attorney’s fees.

Following the third appellate order telling the city to issue refunds, the city’s attorneys spent at least $100,000 unsuccessfully appealing to the Florida Supreme Court to intervene. They then explored another strategy they believed would give the state Supreme Court no choice but to hear their appeal: through a bond validation procedure. Those plans seemed to be abandoned at some point just before the court entered its judgment.

The attorneys also told the council they believed they were entitled to a second trial on damages and spent at least another hundred thousand dollars hiring economists and gearing up for trial. They bragged during the shade meetings they were going to teach Schroth a thing or two about winning the battle but losing the war.

Things didn’t go that way.

Circuit Judge Robert W. Hodges told the city the appellate court was clear and that his role going forward was only to rule on how the refunds would be doled out.

The appellate decision and trial record were clear that the city was not entitled to a second trial. Yet, the transcript shows the attorneys reassured the council otherwise.

The council and attorneys explored the option of the city filing bankruptcy as a bargaining chip in negotiations with Schroth. At one point, city staff was directed to contact the governor’s office to see if Gov. Ron DeSantis would approve such a measure. However, the city’s chief financial officer at the time, William Kaufman, told council the city’s finances were solid and it was unlikely the city would qualify for such an extreme debt relief measure.

Unrealistic expectations about the claims process

Over and over, the attorneys assured council that even if they did not prevail, damages would be significantly reduced by the number of claimants who applied for their refunds.

Batsel thought limiting the customers to a 30- to 60-day window to apply would mean fewer people would apply in time. Zimmerman told council the notices to be sent to citizens about their refunds would be confusing. That, combined with a very short claims period, would save the city money.

“We want people to ignore the mailings,” Zimmerman told the council in an Oct. 15, 2021 meeting. “We want the mailings to be confusing and, you know, not exactly explain what’s going on.”

In a meeting transcript dated Dec. 14, 2021, Zimmerman told the council, “If the court decides to say no, just refund the checks, we’re immediately going to appeal that and we’re going to drag this out as long as we can.”

That strategy didn’t work out either.

Hodges ruled that utility customers did not have to apply for refunds and those refunds must be sent out within 60 days. The city did not appeal Hodges’ decision.

Lobbying for relief

The city had erroneously tried to use their “home rule” power to enact a tax renamed a “user fee” without authority to do so, and they hoped legislators would give them a “fix.” In the early years of the litigation, the city attorneys spent money and effort on Tallahassee lobbyists, to no avail.

They then tried a novel approach: Try to convince the public it’s in their, and the city’s, best interest for them not to seek refunds because of the financial harm it would cost Ocala. Utility customers were given the option to opt-out as class action members, and some did, saving the city money.

Throughout the final years of litigation, city council members spoke of getting a message to the community that the lawsuit was bad for the community, but a definitive public relations effort never materialized.

Time and again during the shade meetings, city council members voiced shock that the court wasn’t giving them the ruling they thought was fair. After all, didn’t the courts understand the class action suit was just a money grab based on a technicality brought by plaintiffs who were often characterized as pitiful, down-and-out citizens represented by a greedy lawyer, Derek Schroth?

The council members repeatedly said they had the best intentions toward their citizens, and the fire user fee was only a way to spread the cost of fire services over a larger group of people. They felt if the courts and the public understood their intentions, justice would prevail.

In reviewing the transcripts, the Gazette could not find one reference made by a council member or lawyer recognizing that the user fee forced utility customers who under state law were not responsible for funding public safety services to pay an illegal tax, and that these customers had little recourse if they decided not to pay it.

Litigation became personal

At times, the litigation became personal for the city’s attorneys and some council members. The tone of their comments and their refusal to try mediation to resolve the case reflect that. The dialogue instead seemed focused on guessing at Schroth’s motivation for bringing the case since he was working hard for eight years with his legal fees contingent on a successful outcome.

Gilligan acknowledged that Schroth was persistent, but he over and over again expressed the sentiment echoed by council members that Schroth had picked an unwise fight with no winners.

Zimmerman played into some council members’ disdain for Schroth. Many times, he framed his legal strategy with aggressive comments about legal actions the attorneys would take to “kick him in the mouth,” “educate him.” He even bantered with council members Justin Grabelle and Jay Musleh about using a “red hot poker” on Schroth’s genitals.

Some city council cooed with the reassurances that they’d eventually teach Schroth a lesson. Others remained quiet.

Who is to blame?

Multiple times, Musleh asked about whether the city could offset the costs of litigation with a claim against the Gilligan firm and Lewis. On Jan. 8, 2021, he asked Batsel, “Any errors and omissions policies by either the attorney groups that gave us the feel-good letter back when we enacted the user fee or — I hate to admit it — on your firm?”

The city attorneys always avoided a direct answer to that question, according to the transcripts.

Gilligan told city council in 2014 that they needed to consider hiring outside counsel to defend the fire fee lawsuit because Gilligan could become a witness in the case. The issue was not addressed again in the shade minutes. The Gazette asked Gilligan how and when city council decided to forgo independent counsel, but Gilligan did not respond to the inquiry.

On the flip side, one council member, Brent Malever, expressed over and over complete confidence in Gilligan and Batsel – even after the third appellate order. When Batsel suggested that the council bring in another firm with more experience defending class action suits for the final leg of the litigation, Malever had to be convinced it was even necessary.

In 2021, seven years into the litigation, the city brought in Jason Zimmerman of Gray & Robinson.

Where things stand

The lawsuit established case law that will likely serve to protect other communities from the pitfall Ocala fell into trying to find creative ways to raise money from a larger group of people than their tax base.

When it comes to the cost of attorney’s fees incurred by the city during this suit, the city has had help offsetting those expenses.

It was previously reported that the city was self-insured and maintained excess coverage with Chubb North American Financial Lines Claims when an applicable insured event triggered more than $75,000 in attorney’s fees and costs. In 2017, the city surpassed the $75,000 threshold, and the firm started submitting its invoices to Chubb instead of the city for reimbursement.

In April 2021, Batsel, Jr. told the Gazette the city’s attorney’s fees were around $500,000.

The majority of utility customers have received refunds, and it is anticipated that some will not be located and their share will be used to fund a second round of refund checks so that the majority of the utility customers receive 100% of what they paid in the illegal tax.

The city now must pay down a $60 million note.

When the city stopped collecting the fire user fee on utility bills in early 2021, it funded the remainder of the year’s fire services through a special assessment and currently funds its fire services through a non-ad valorem property tax.

The Gilligan firm continues to handle some of the city’s litigation; however, the city has hired a new city attorney, William Sexton, who is in the process of building an in-house legal department to provide oversight of all legal work for the city.

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(Sidebar) How we did this story:

Shortly after Marion County Circuit Judge Robert Hodges entered a final judgment in 2021 requiring the City of Ocala to refund $80 million to local utility customers who for years had been assessed an illegal fire service user fee, the Gazette began digging for details about how this municipal debacle came about.

The newspaper asked for minutes of the so-called “shade meetings’’ held over the years between the Ocala City Council and its legal team. Shade meetings are exemptions to Florida’s Sunshine Law, under which governments must operate in the public’s view. Shade meetings are publicly noticed, but in Ocala’s case, only the attorneys, council members and the city manager attended to discuss the pending litigation. The mayor did not attend these meetings, but a court reporter did, recording every word spoken.

The transcribed records became available to the public at the conclusion of litigation.
For five months, the city rebuffed the Gazette’s requests for the transcripts, including a demand that the newspaper pay attorney’s fees for reviewing the public records for possible redaction before the city would release them.

The city recently released transcripts from 28 shade meetings, at no cost to the Gazette and without redaction.

The city confirmed that there were no shade meetings held on this case from March 18, 2014 to Sept. 6, 2016 and confirmed that there was only one shade meeting a year on this suit in 2016, 2017, and 2019.

All of the transcripts were maintained by the law firm of Gilligan, Anderson & Phelan, P.A., the city’s legal representatives during the majority of the litigation.

For this report, we sought comment from former council member Charlie Ruse, the only one who expressed concerns the fee was an illegal tax, but he did not return our call. We attempted to speak with current council members Jay Musleh and Ire Bethea to ask what they understood from their attorneys’ advice during the course of the litigation, but they both declined to comment. We reached out to attorneys involved with the litigation–Patrick Gilligan, Robert Batsel, Jr. and Jason Zimmerman for the city—but only Batsel responded. His comments are included in the report.

Derek Schroth, attorney for the class, declined to comment on the transcripts.

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