Colantuono Highsmith & Whatley, PC
Two recent developments involving water rates are of interest to California’s public water providers and may influence similar applications for other utilities. Both are good news, and both benefited from the support of CSDA. The first, a Supreme Court decision, holds that water rates are not subject to referendum. The second, a statute, clarifies that water rates may recover the cost to provide fire flows.
Wilde v. City of Dunsmuir: Rates Not Subject to Referendum
First, is the California Supreme Court’s recent decision in Wilde v. City of Dunsmuir (2020) 9 Cal.5th 1105, which holds that water rates are not subject to referendum and, on the logic of the cases, neither are other utility fees — like those for sewer, waste hauling, electricity, etc. I filed an amicus curiae (“friend of the court”) brief in the case for CSDA and other local government associations.
The decision is narrow but significant. It holds that the referendum power created by article II, section 9 of California’s Constitution does not extend to “statutes providing for tax levies,” defining the latter term broadly to include most government revenues and not limiting it to “tax levies … for usual current expenses of the State.” That latter phrase limits “appropriations” but not “taxes.” It does not matter whether a government revenue funds a service (like water) that private parties also provide. It matters only that the service is a non-trivial part of government’s operations. Water rates and other utility charges must still comply with the voter- and property-owner-approval processes of Proposition 218, and they remain subject to the initiative power, but not to referendum.
This will help stabilize public finance, allow revenue bonds to issue without incident or risk and, once they have, allow the contracts clauses of the State and federal Constitutions to protect rates from initiative repeal to the extent necessary to honor the debt.
This quote is the heart of the case: “Article II, section 9’s exemptions from referendum reflect a recognition that in certain areas, legislators must be permitted to act expediently, without the delays and uncertainty that accompany the referendum process.”
Along the way, the Court established a number of other points worth noting:
Rossi v. Brown (1995) 9 Cal.4th 688 upheld a San Francisco charter provision (that became a rule of Prop. 62 and Prop. 218 for all local governments) requiring voter approval of taxes, concluding it did not require a prohibited referendum. It was arguably inconsistent with Geiger v. Board of Supervisors (1957) 48 Cal.2d 832 protecting local government revenues from referenda. The Court read Rossi narrowly, as merely about the initiative power. This can be read as part of a larger trend of the current Supreme Court resuscitating precedents from the era before the 1986 recall of three justices and reading narrowly precedents from the intervening conservative era.
The rationale of the exception from the referendum power for taxes is to avoid “interference with the administration of [government’s] fiscal powers and policies” and this explains the conclusion to include all government revenue which fund essential services within the “taxes” protected from referendum and not just those within the narrower, modern definition of that term provided by Props. 218 and 26.
The Court noted that the rule protecting revenues that fund essential services from referendum “is related to, but distinct from, the rule we articulated and applied in Simpson v. Hite (1950) 36 Cal.2d 125.” Simpson holds that one cannot use the initiative to challenge government actions which constitute essential government functions (there, siting a courthouse). Simpson has not often been cited in recent years, because it reflects less judicial deference to the initiative power than is the current standard. This opinion recasts Simpson as holding that the initiative power cannot affect acts that State legislation delegates to local government officials — not to their voters. This conflates Simpson with Committee of Seven Thousand v. Superior Court (City of Irvine) (1988) 45 Cal.3d 491. That can be viewed as pro-direct democracy or as restating Simpson on a stronger, more modern footing. It might also reflect the current Court’s slightly greater willingness to review initiatives and referenda than were earlier courts. On that, time will tell.
In what is plainly dicta (i.e., not a precedential holding) the Court comments on how Dunsmuir might have responded to an adverse referendum result: “Perhaps the City could simply default to its prior rates while it restates the process of ‘study[ing], plan[ning], and implement[ing] a new water rate master plan.” This may be helpful when an agency loses its rates to an initiative repeal or reduction and needs to do something to get money in the door while it makes new rates.
Water service is an essential government function, some other things are not, and the Court does not tell us much about how to draw the line. This rejects reasoning of the Court of Appeal’s decision in this case, which held that water service was not “essential.”
The Court expressly rejects a 1980 case which rejected an initiative change to Lompoc’s power rates. This is further support for the rule that ratemaking is legislation which exposes it to the initiative, but also provides for protective litigation rules, like the litigation-on-the-record rule of Western States Petroleum Association v. Superior Court (1995) 9 Cal.4th 559.
Wilde is a helpful case for public utilities, their bondholders and all who depend on their services.
SB 1386 (Moorlach): Water Rate Recovery of Fire Flows
Also of interest is SB 1386 (Moorlach, R-Costa Mesa) which Governor Newsom signed into law on September 28, 2020. CSDA supported the bill, and it had no opposition in the Legislature. The bill clarifies that water rates may recover the cost to provide fire flows — water service in the volumes and at the pressures needed to serve fire hydrants and sprinklers. Specifically, it amends the Proposition 218 Omnibus Implementation Act of 1997 to provide:
“The fees or charges for property-related water service imposed or increased pursuant to [Prop. 218] may include the costs to construct, maintain, repair, or replace [fire] hydrants as needed or consistent with applicable fire codes and industry standards, and may include the cost of water distributed through hydrants.”
The statute is stated to be a declaration of existing law — i.e., it clarifies what Prop. 218 has meant since it was adopted in 1996.
A plaintiffs’ firm in Albany, California has filed a lawsuit against more than 80 California water providers, arguing the inclusion in water rates of costs to fund fire flows violates Prop. 218 because fire flows are not water service, but a general government service to be funded by taxes. My firm successfully litigated that issue for the City of Glendale, but the Court of Appeal did not publish Glendale’s victory, meaning further litigation will be required to resolve it. This new statute will be helpful in doing so.
Water, sewer and trash ratemaking under Prop. 218, and power and gas ratemaking under Prop. 26, are now fraught with risk of suit. Agencies should hire competent ratemaking consultants, make good records to support their rates, and engage counsel experienced in this subject to review those records before rates are adopted.
This article was written by Michael G. Colantuono, Esq. Colantuono Highsmith & Whatley, PC, as part of CSDA’s New Laws Series, where experts explain recently enacted laws and how they will impact special districts moving forward. This article is provided for general information only and is not offered or intended as legal advice. Readers should seek the advice of an attorney when confronted with legal issues, and attorneys should perform an independent evaluation of the issues raised in these materials.
Stay tuned to the New Laws Series in CSDA eNews for more in-depth analyses on new laws affecting special districts.
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#Advocacy News #Prop 218 #Court Cases #Water #Fees #Revenue
By Michael G. Colantuono, Esq.