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Memphians need look no further than a “No Taxes NBA” yard sign to see that the debate on getting an NBA team here is centered on who will pay for the arena. To aid in the financing of the proposed arena, Memphis Light, Gas and Water has pledged to contribute approximately $50 million to the arena from its Water Division. However, some Memphis business owners and residents have speculated that if MLGW has the money to contribute to the arena financing plan, then that money should instead be applied to a rate decrease. MLGW president Herman Morris, when he was head of the utility’s legal department, had a similarly conservative view on what money belonged to the utility and what belonged to its customers. The Flyer recently obtained a legal memorandum written by Morris on March 30, 1995, and addressed to MLGW’s then-president Bill Crawford, detailing the utility’s obligations to its rate-payers {the complete memo appears at the end of this story}. Though the document Morris prepared for Crawford was written to address the legality of the commingling of funds within the utility, Morris also discusses the utility’s responsibility to rate-payers with regard to any surplus funds. In the nine-page memorandum, Morris states that, under the utility’s charter, surplus funds in any MLGW division are the property of rate-payers and must be applied to a rate decrease. “It is my opinion that . . . a Tennessee court could find that the customers of MLGW who are entitled to have the surplus funds used to reduce their rates have a property interest in such funds, and further, that MLGW holds those funds in trust for those customers,” Morris’ memo reads. Under the proposed financing plan, MLGW has pledged to contribute approximately $2.5 million a year in “payment in lieu of taxes” (PILOT) money, for a total of about $50 million over a 23-year period. Morris’ 1995 legal interpretation may give opponents of the NBA financial plan added ammunition in their battle to keep tax-paid dollars out of the deal. Whether or not MLGW can contribute to the financing of the arena seems to hinge on the definition of “surplus.” And while some rate-payers think MLGW should apply surplus money to a rate decrease, the city of Memphis and MLGW don’t see the money as surplus. Tom Jones, senior advisor to Shelby County mayor Jim Rout, offers this explanation of MLGW’s PILOT funds: “MLGW, as a public utility, does not pay property taxes. It pays payment in lieu of taxes [PILOT], rather than taxes, of an amount determined by the city and county government. MLGW has never paid a PILOT for the water department because there was a 30-year-old bond issued, and before now they have been paying off that bond. Those bonds are about to be paid off and for the first time the city has the opportunity to collect PILOT money from the water department and has chosen to earmark that money for the arena,” says Jones. According to Marlin Mosby, bond consultant for the city of Memphis, without the proposed arena financing plan, MLGW would not have begun paying PILOT money to the city until 2012. Mosby says that under the current arena proposal, the city would “defease” the debt owed by the water department in order to free up money in the utility so that it can begin paying the city PILOT funds in July of this year. This PILOT money would go directly to the city, which has allocated it for the NBA arena. Nashville attorney Patrick Flynn believes that such a plan would be contrary to the City of Memphis’ charter. “By definition, surplus funds are funds that are not needed at the present time,” says Flynn. “If the PILOT payments were not scheduled to be paid until 2012, then the money for those payments is not due at this time and is therefore surplus. As I understand the Memphis charter, surplus funds must go into a rate decrease for the MLGW rate-payers.” Under the MLGW charter (which is included as an amendment to the charter of the city of Memphis), “Any surplus thereafter remaining over and above safe operating margins, shall be devoted solely to rate reduction.” The charter says that all revenues the utility collects for the Water Division must be applied, in order, to six categories of expenditures. The charter also says that any “surplus” funds after the six categories have been satisfied must go to a rate decrease for MLGW customers. Moreover, under the trustee relationship that Morris’ memo says is created between the utility and rate-payers, the utility is bound by law to act to the greatest benefit of the rate-payers. “Obligations imposed by the MLGW charter ... can be interpreted to impose a trustee relationship on MLGW as it relates to those rate-payers. If so, those rate-payers would have a property interest in the surplus funds and could bring suit to enjoin MLGW from transferring funds to other divisions ... ,” the memo reads. He adds in the memo that depriving rate-payers of this property interest without “due process of law” would open the city up to lawsuits as rate-payers could seek to enjoin the city from transferring the money. “Under the Tennessee Constitution, property interests are secured by the Constitution and cannot be taken away except by ‘due process of law’ or ‘the law of the land.’ If ... the MLGW charter, by its terms, creates a legitimate property interest in its customers’ entitlement to a specific use of the surplus funds, procedural due process requires notice and an opportunity to be heard by a fair and impartial tribunal before the property right is taken away. A referendum on the Charter Amendment should satisfy this requirement,” reads Morris’ memo. Morris also states that for the utility to legally act contrary to its charter, the charter must first be amended. However, his memorandum states that attempting to procure such an amendment “might also threaten the financial rating [AA] of MLGW, to the extent that it created a perception of confusion, instability, or financial problems.” According to the memo, the liability is not limited to the city of Memphis and MLGW. He notes that not only could the city be held liable for depriving rate-payers of property rights, but that the “municipal officers” could be held personally liable as well. In this case, this personal liability would extend to Mayor Herenton, all members of the Memphis City Council, and to Morris himself. The full text of Herman Morris' 1995 memorandum to Bill Crawford

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