Legal Alerts Mar 31, 2015

Two California Appellate Court Rulings Demonstrate that Groundwater Pumping Fees are in the Eye of the Beholder

One Holds that the Fee is Subject to Prop. 26 and Another that it is a Property-Related Fee Subject to Prop. 218

Two California Appellate Court Rulings Demonstrate that Groundwater Pumping Fees are in the Eye of the Beholder

Two California Appellate Court decisions handed down this month address whether or not a local water agency’s groundwater pumping charges are property-related fees, and reach different conclusions. The distinction is important because of the restrictions imposed for property-related fees under Proposition 218 — as well as the exemptions for fees that are considered taxes under Proposition 26.

In City of San Buenaventura v. United Water Conservation District, issued March 17, the Second District Court of Appeal held that a water conservation district’s groundwater pumping fees, established at a rate for non-agricultural users that is three times higher than that for agricultural users, are not property-related fees subject to the restrictions imposed under Proposition 218 (California Constitution article XIII D, section 6). The court also rejected the argument that the challenged fees are taxes under Proposition 26 (California Constitution, article XIII C, section 1(e)). Rather, the court found that the fees are valid fees imposed under two exceptions to the definition of “tax” established under Proposition 26.

In Great Oaks Water Company v. Santa Clara Valley Water District, issued March 26,the Sixth District Court of Appeal came to a contrary conclusion regarding the classification of the district’s groundwater pumping fees. Here, the court found that the District’s groundwater pumping fees are a property-related fees subject to Proposition 218.

Based on these cases, whether a local water agency’s pumping charges are subject to the restrictions and exemptions of these laws may turn on the unique facts and circumstances of the agency’s groundwater basin and alternative water supplies available to the agency.

City of San Buenaventura v. United Water Conservation District
The United Water Conservation District manages water acquisition and distribution from groundwater resources in central Ventura County. To fund its operations, UCWD imposes groundwater pumping fees that are based on the volume of water that is pumped within its service area. As authorized by statute, the rates for the pumping fees must be “fixed and uniform” for two classes of use: agricultural purposes and all other purposes. The Water Code further requires that the fee for non-agricultural use be set at a rate that is no less than three times - and not more than five times - the fixed and uniform rate established for agricultural water use. UCWD always set it rates at the minimum 3:1 ratio.

The City of San Buenaventura pumps groundwater within the service area of UCWD and treats, delivers and sells the pumped water to properties within the City. The City was subject to the higher 3:1 pumping rates for non-agricultural groundwater extractors. The City challenged the fees, arguing that the statutorily-mandated ratio for non-agricultural and agricultural uses constituted an illegal subsidy for agricultural users at the expense of all other users in violation of the California Constitutional and statutory, and common law. In particular, the City asserted that the fees violated the provisions of Proposition 218 because they “exceed the proportional cost of the service attributable to the parcel[s]” of land from which the City pumped its water.

The Second Appellate District disagreed. The court explained that the groundwater pumping fees charged to the City were not property-related fees subject to Proposition 218. The Second Appellate District noted that the majority of residential customers received retail water from the City and did not pump water from wells on their property. Additionally, the court noted that other case authority properly characterized pumping fees as a charge on the activity of pumping, and not one imposed by reason of property ownership.

Finally, the Second Appellate District concluded that the pumping fees are not taxes pursuant to Proposition 26. Under Proposition 26, a fee is a tax requiring voter approval unless it qualifies as one of seven exceptions. The court concluded that the pumping charges fell within two of those exceptions. The first is a fee imposed for a specific benefit conferred that does not exceed the reasonable costs to the local government agency of conferring that benefit. The second exception is a fee imposed for various regulatory activities for which a local agency may recover its reasonable costs that don’t exceed the cost of regulation. Here, the court held the pumping fees are fees imposed for a payor-specific benefit—the benefit being that the pumpers may extract groundwater. Without UCWD’s resource management operations, the court reasoned, groundwater would be depleted far faster and overdraft in the district would be far more severe. In response to the City’s argument that the pumping fees were taxes because the 3:1 ratio was unreasonable and disproportionate, the court explained that fees designed to recover a local agency’s reasonable costs are not measured on an individual basis, but are measured collectively, considering all rate payors. Thus, permissible fees must be related to the overall cost of the governmental regulation. By imposing the pumping fees based on the volume of water extracted, the court concluded that the fees in aggregate did not exceed the reasonable costs of regulating the groundwater supplies.

Great Oaks Water Company v. Santa Clara Valley Water District
In Great Oaks Water Company, the Sixth Appellate District reached a different conclusion. The water district’s major responsibilities included preventing depletion of the aquifers from which the water company extracts the water it sells. The Water District funds those activities through the imposition of pumping fees. The rates for non-agricultural pumpers were much higher than for agricultural pumpers. The company asserted, among other things, that the pumping fees imposed by the District violate the procedural and substantive requirements of Proposition 218.

The court found that pumping groundwater involves the exercise of a right in real property. Since a charge on that activity burdens the exercise of that right, it must be deemed incidental to it, and thus to ownership of property. Because the fees imposed for pumping groundwater are incidental to property-ownership, the Sixth Appellate District concluded they are property-related fees. This conclusion is consistent with the Sixth Appellate District’s earlier decision in Pajaro Valley Water Management Agency v. Amrhein.

The court’s analysis of the petitioner’s challenges to the pumping fees also provides some clarification on the obligation of a local agency in complying with the procedural provisions of Proposition 218 for property-related fees. Prior to holding a public hearing to adopt a new, or increase an existing property-related fee, a local agency must hold a public hearing and provide written notice of the public hearing at least 45 days in advance. The court made the following conclusions regarding the notice and other procedural requirements of Proposition 218:

  1. The notice may identify a range of possible rates to be imposed. By doing so, the notice effectively establishes the maximum rate that may be approved, but a local agency may also adopt a rate that is lower than the maximum rate identified in the notice.
  2. Proposition 218 does not require that the notice state the specific amount each property owner will pay, only the method by which the fee will be calculated. When a fee depends in part on an unknowable variable, such as consumption, all a local agency can reasonably be expected to provide in the notice are the known variables, such as the rate and unit of measure.
  3. Local agencies are not required to include in such notices information regarding the majority protest procedures of Proposition 218—i.e., the right of property owners to submit a written protest or their power to nullify the proposed fee by a majority protest.
  4. The pumping fees are fees for water service and thus are not subject to the voting requirements applicable to property-related fees that are not for sewer, water or refuse collection services.

Ultimately, the court did not determine if the Water District violated the substantive provisions of Proposition 218. The court instead found that the trial court failed to apply a properly deferential standard of review to the question of whether the Water District’s setting of the fees and remanded the case for further proceedings.

If you have any questions about these cases or how they may impact your agency, please contact the attorney author of this legal alert listed to the right in the firm’s Public Finance practice group, or your BB&K attorney.

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