Legal Alerts Aug 06, 2020

Local Utility Charges Cannot Be Challenged by Referendum

Calif. Supreme Court Decision in Wilde v. City of Dunsmuir

Local Utility Charges Cannot Be Challenged by Referendum

Local utility charges are not subject to referendum, according to a California Supreme Court decision issued Monday that held that water rates fall within the referendum exemption for “tax levies.”  

In Wilde v. City of Dunsmuir, the Dunsmuir City Council approved a resolution establishing a five-year plan for a $15 million upgrade to the City’s water storage and delivery infrastructure, and adopted the new water rates necessary to pay for this project. The resolution was adopted in accordance with Proposition 218 after holding a noticed public hearing.

The plaintiff was a Dunsmuir water rate payer who opposed the water rates, and attempted to block the rate increase by many different means. First, the plaintiff organized an unsuccessful protest effort, which yielded far fewer protests than necessary to block adoption of the rates. After the new rates were adopted, the plaintiff next tried to undo the resolution in two ways: first, through submitting a petition for a referendum seeking to overturn the resolution. Second, the plaintiff gathered  a sufficient number of signatures to place on the ballot an initiative to implement a different water rate schedule. The initiative was placed on the November 2016 ballot and rejected by the voters. The City refused to place the plaintiff’s referendum on the ballot, on the grounds that setting water rates is an administrative act not subject to referendum, and that article XIII C, section 3 of the California Constitution allows for initiatives, but not referenda, for water rate increases.

The plaintiff filed a writ petition to compel the City to place the referendum on the ballot. The trial court denied the petition on the grounds that Proposition 218 allows voters to challenge property-related fees by initiative but not referendum. The Court of Appeal reversed, finding that, while article II, section 9 exempts tax measures from referendum, the “tax exemption” did not apply because the water charges are a “property-related fee” and not a “tax” under Proposition 218. The Supreme Court reversed, holding that the resolution imposing new water rates is exempt from referendum as a tax measure under article II, section 9. In doing so, the Court also resolved conflicting lower court decisions and expressly affirmed the Court of Appeal’s decision in Howard Jarvis Taxpayers’ Association v. Amador Water Agency that water service fee rates are not subject to a referendum.

Under article II, section 9(a), the referendum allows voters to approve or reject statutes in whole or part, with certain exceptions including “urgency statutes, statutes calling elections, and statutes providing for tax levies or appropriations for usual current expenses of the State.” The distinction between taxes and fees is often blurred and varies depending on the context, and the Supreme Court applied a broad interpretation of “tax” to determine that water rates could be both a property-related “fee” under articles XIII C and XIII D and a “tax” within the referendum provisions in article II.

The purpose of a “tax exemption” from referendum is to avoid disruptions of essential government operations and fiscal management. While enactments subject to referendum must wait a period before they take effect, measures exempt from referendum may take effect immediately. Unlike referenda, initiatives do not delay or suspend the operation of legislative enactments and do not affect a local government’s current budget.

The Supreme Court’s decision in Wilde makes clear, once and for all, that water rates and other utility rates are not subject to challenge by referendum. While rates can be challenged by other means, including pre-adoption protests or post-adoption initiatives, a challenge by referendum is not permitted.

Disclaimer: BB&K Legal Alerts are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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