e-Bulletin: Court Rules Prop. 218 Applies to Water Rate Increases

On March 23, 2005, a California appellate court ruled that Prop. 218 applies to regular water rates, thereby threatening the ability of cities and other local public agencies to effectively update water rates.

The City of Fresno Case-- The Fresno case involved the City of Fresno’s “in-lieu fee.”  That fee was a payment from the City’s water utility department to the City’s general fund in-lieu of business, franchise or property taxes, as are often paid by private entities.  The fee was not separated out on the water customer’s water bill.  The Howard Jarvis Taxpayers Association (HJTA) claimed that this “in-lieu fee” violated Prop. 218 in three ways. First, HJTA claimed that the fee was not “required” to provide the property related service and therefore exceeded the cost to provide such service. Second, HJTA claimed that revenues derived from the fee were used “for a purpose other than that for which the fee or charge was imposed.” Third, HJTA claimed that because the fee is deposited in the general fund, it therefore violates Prop. 218’s requirement that no fee “may be imposed for general governmental services.”   The Fresno Court agreed with HJTA, concluding that the ongoing water rates paid by water customers are “property-related” fees and thus subject to Prop. 218’s substantive and procedural requirements.

The Conflict-- California appellate courts have been split on whether such rates are subject to Prop. 218.  Last year, another court of appeal concluded that ongoing water rates paid by water customers are not “property-related” fees. (Bighorn-Desert View Water Agency v. Beringson [July 20, 2004] 120 Cal.App.4th 890.) (Review granted, depublished.)  That Court’s conclusion has been accepted by the California Supreme Court for review. (Bighorn-Desert View Water Agency v. Beringson 2004 Cal.LEXIS 11283 [Nov. 10, 2004].)   The California Supreme Court has itself suggested that it thinks ongoing water rates may be subject to Prop. 218. (Richmond v. Shasta Community Services Dist. [2004] 32 Cal.4th 409.)  However, it did not squarely address those rates because they were not the subject of that challenge.  However, the Fresno Court chose to follow this Supreme Court “dicta,” disregarded the Bighorn case, and concluded that ongoing water rates are subject to Prop. 218.

Implications-- If the Supreme Court applies Prop. 218 to ongoing water rates, any time a city or local agency needs to increase water rates to pay for the increased costs of pipe maintenance and repair, or to provide pay raises to its employees, that agency will be faced with the daunting task of having to provide notice to the record owner of each parcel.  It will also be faced with the practically impossible task of identifying, in advance, the amount of the water charge proposed to be imposed on each parcel.  The agency then would have to hold a public hearing at which the water customers could reject, through a simple majority, the proposed rate increase.  Moreover, the public agency would have to demonstrate that the revenues derived from the rate do not exceed the funds required to provide the water service and that the amount of the rate paid by a customer at a particular parcel does not exceed the “proportional” cost of the service attributable to that parcel.  Precisely how this would be done has not been explained by either the Supreme Court or the Fresno Court.

Resolution-- The City of Fresno has decided to seek review of the recent decision in the California Supreme Court.  For the sake of water facilities throughout California and the customers served by them, hopefully the Supreme Court will accept review and reverse the Fresno decision.   In the meantime, if you have any questions, please don’t hesitate to contact the BB&K attorney of your choice.