TACOMA – Attorneys for the Bainbridge Ratepayers Alliance argued in front of a state Appeals Court Thursday in Tacoma that the city illegally allowed potential increases of water and storm-water rates to repay bonds authorized by ordinance for the $15 million Waste Water Treatment Plant upgrades, a capital sewer project.

The oral arguments, given to judges Joel Penoyar, Lisa Worswick and Susan Keers Serko at Washington’s Division II Court of Appeals, were the first step in an appeal process that could last as long as another six months.

The ratepayers alliance is appealing a decision made in September in Kitsap Superior Court to validate the city’s quest for a bond of up to $6 million for several utility projects.

“Our primary argument is that these ordinances authorize bonds to raise $6 million, and they’re going to pledge them to water, sewer and storm water rates,” said Ratepayers Alliance attorney Richard Stephens.

Should the alliance’s appeal be successful, the summary judgment the city earned in September on the bond issue would be thrown out, and the claim could be regrouped with the rest of the lawsuit.

Steve DiJulio, representing the city, argued that the city is not pledging water rates to a sewer project, that those rates go into a separate fund. However, the city is allowed to loan money between utility funds under the consolidated waterworks utility program to bolster a specific fund, like the sewer. As long as there is a return on that loan, there is no legal issue, he said.

“They are loans exclusively, not pledges of revenue exclusively from those utilities or those utility’s ratepayers,” DiJulio said. “They are simply loans from those systems on a temporary basis.”

As has been the crux of the alliance’s argument since it sued the city in April 2009 for misusing utility funds, Stephens argued that ratepayers who wouldn’t benefit from the upgraded sewer plant were forced to foot the bill.

“People unconnected with the sewer are going to have to pay higher rates for the financing of a sewer project,” he said.

The appeal over the bond issue is part of the larger lawsuit brought against the city. The bond issue was severed from the rest of the alliance’s claims, which have yet to be heard in court.

In January, the alliance and the city reached a partial settlement, which allowed the city to complete a $1 million loan agreement with Cashmere Valley Bank to fund the final upgrades to the treatment plant.

But talks for a full settlement broke down and the suit was refiled with additional claims in March.

The three new causes of action accuse the city of illegally using sewer funds to pay for clean up of petroleum contamination, allocating general government costs to utility ratepayers, and improper allocation of litigation costs.

The refiling seeks a judgment declaring a number of payments and costs charged to utility funds an illegal tax.

Several claims in the lawsuit have already been addressed. In the lawsuit, the alliance alleged that the $6 million bond was far in excess of what the city actually needed. As a result of the lawsuit, the city obtained a smaller bond.

The alliance also demanded that the city form a Utility Advisory Committee to oversee and advise city officials and councilors on utility issues. After years of delaying the formation, the city filled out its UAC in August and the group has worked with the council on rate changes and the sewer surcharge, among other issues.

The lawsuit has wielded great influence over city finances since its filing. The city took out two interfund loans from the water fund to support the sewer fund, which was bleeding cash without the bond funds to support it. One of the two loans, a $600,000 payment in January, was repaid earlier this year, but a larger interfund transfer of $3 million made last spring has yet to be repaid.

The lawsuit came close to causing a massive surcharge for the island’s sewer customers. The city had no other options but to either implement a 111 percent surcharge last December or stop construction on the upgrades all together, a move that would have run approximately $100,000 a month.

The City Council adopted the surcharge, but days before the month’s sewer bills were to go out, former interim City Manager Lee Walton and members of the alliance were able to broker the partial settlement to allow the city to obtain short-term financing to pay for the remainder of the treatment plant upgrades.