Blogs

By @Lutfi Kharuf, Partner, Best Best & Krieger and Dean Atyia, Partner, Best Best & Krieger

California special districts provide vital public services, ranging from water provision and wastewater treatment to solid waste collection and disposal. Because many of these services are related to the ownership of property, they are subject to Article XIII D, Section 6 of the California Constitution, commonly known as Proposition 218.

Proposition 218 was passed by voter initiative in 1996 and created procedural and substantive limitations on the ability to adopt or increase property-related fees. For example, property-related fees cannot exceed the proportional cost of providing the service, and the revenues generated from such fees can neither exceed the total cost of service, nor be used for an unrelated purpose.  

Special districts must juggle increased demands, new regulations, growing populations, and inflation, among other things, when providing property-related services. At the same time, special districts operate under tightening budgets and the constant threat of legal challenges to their rates. By its own terms, Proposition 218 is intended to make it easier for ratepayers to successfully challenge property-related fees. And this intent has manifested in nearly thirty years of costly litigation. Each new, and often more restrictive, judicial interpretation of Proposition 218 leaves special districts scrambling to adjust and manage risk. 

Over the last several years, the State Legislature has attempted to provide some balance to the legal framework by passing laws that assist special districts when setting and defending rates for property‑related fees. This year alone, Governor Gavin Newsom signed into law three new bills to protect local revenues and ensure special districts have sufficient notice of potential challenges to their rates. These laws take effect January 1, 2025.  

AB 1827 – Recovering Incremental Costs for Water Use

Proposition 218 prohibits water providers from imposing fees for water service that exceed the proportional cost of service to a parcel. California courts have continually held that it is not only permissible, but encouraged, to establish rate structures for property-related services that allocate incremental costs to those that cause the agency to incur those costs, so long as such rates are supported with evidence. For example, the Court of Appeal held in Capistrano Taxpayers Association v. City of San Juan Capistrano that tiered water rates do not violate Proposition 218 so long as the water provider demonstrates, with evidence, that the rate within each tier reflects the proportional cost of service within such tier.

Since Capistrano, special districts continue to defend legal challenges to the means and methods of allocating incremental costs of service. AB 1827 codifies the authority outlined in Capistrano and other cases, providing specifically that agencies can consider the higher water usage demand of parcels, maximum potential water use, and projected peak water usage to allocate such costs. AB 1827 further authorizes special districts to allocate such costs in any manner that reasonably assesses the cost of service, including based on meter size or peaking factors. Special districts must continue to justify these incremental costs with evidence of higher usage and increased burden, and whether a special district’s allocation of incremental costs violates Proposition 218 will hinge on whether it has sufficient evidence supporting its rates.

AB 2257 – Administrative Exhaustion Procedure

California law requires that a litigant first exhaust administrative remedies prior to suing a public agency. However, what constitutes an “administrative remedy” in the context of Proposition 218 has not always been clear. Proposition 218 requires that a public agency hold a noticed public hearing and majority protest proceeding prior to adopting new or increasing existing property-related fees. The California Supreme Court held in Plantier v. Ramona Municipal Water District that, without an obligation to act on legal objections, Proposition 218 fails to provide an adequate administrative remedy that must be exhausted before a litigant can bring suit.

AB 2257 incorporates the lessons from Plantier and other related cases by establishing an independent administrative remedy that must be exhausted prior to any Proposition 218 litigation. AB 2257 is optional, but its protections only extend to special districts that choose to meet its specified requirements and procedures, which are summarized below: 

• The special district must make the proposed rates available at least 45 days prior to the deadline for a property owner to submit objections, and provide notice of the administrative remedy procedure in the public hearing notice.
• The special district must post evidence supporting the rates on the agency’s website, and mail it to a property owner upon request.
• The special district must provide property owners with a minimum of 45 days in which to submit a written objection alleging noncompliance with Proposition 218; 
• The special district must respond in writing to each written objection prior to the close of the public hearing during which the agency considers adopting the fee or assessment in question.

If a special district complies with the requirements of AB 2257, a ratepayer may only bring litigation after timely submission of a written objection. Further, AB 2257 limits any litigation to the administrative record of the proceedings, which avoids costly discovery and the addition of extra-record evidence.  

SB 1072 – Remedies

Proposition 218 does not explicitly authorize a refund in the event of a violation. However, California courts have previously found that a litigant can obtain a refund for amounts paid in violation of Proposition 218. For example, the California Court of Appeal recently upheld a refund in Coziahr v. Otay Water District, finding that refunds are available in Proposition 218 litigation pursuant to a mandate claim. Refunds can often be material, and special districts must generally pass these costs through to all ratepayers as part of the special district’s cost of service.

SB 1072 seeks to rectify the pass-through cost of any refunds by providing that an agency must instead credit the amount of the property-related fee attributable to the Proposition 218 violation to reduce the agency’s cost of service. This would likely have the effect of reducing the special district’s revenue requirement and the amount collected from future ratepayers. SB 1072 applies to water, sewer, and solid waste rates. 

The bills described above are significant developments that attempt to balance the importance and cost of public utility services with the public’s right to participate in the rate-setting process and challenge property-related fees. The manner in which they will be applied, considered, and interpreted by California courts may further limit or expand the authority these new laws provide.

Communication 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 communications.

Take a look back at previous parts of the 2025 New Laws Series in CSDA eNews for more in-depth overviews of new laws affecting special districts:

Missed Part 3? Read it now: The Brown Act: Clarification of the Standards for Remote Meetings and an Expanded Ground for Closed Session; New Attorney General Guidances

Missed Part 2? Read it now:  Assembly Bill 2561 (McKinnor): All Local Agencies Must Present Status of Job Vacancies at a Public Hearing

Missed Part 1? Read it now:  Public Officials May Not Block Commenters from Official Social Media Accounts and Posts