CITIZENS FOR FAIR REU RATES v. CITY OF REDDING

Amicus Curiae Brief of California Taxpayers Association

Cal.August 27, 2015

IN THE SUPREME COURT OF THE STATE OF CALIFORNIA SUPREME COURT CITIZENS FOR FAIR REU RATES,etal., F j L E D Plaintiffs and Appellants, vs. AUG 27 2015 CITY OF REDDING,et al., Frank A. McGuire Clerk Defendants and Respondents. Deputy —.. APPLICATION TO FILE AMICUS CURIAE BRIEF ~ and BRIEF OF AMICUS CALIFORNIA TAXPAYERS ASSOCIATION IN SUPPORT OF APPELLANTS Review of a Published Decision of the Third Appellate District, Case No. Co71906 Reversing a Judgmentof the Superior Court of the State of California for the County of Shasta, Case No. 171377 (Consolidated with Case No. 172960) Honorable William D. Gallagher, Judge Presiding NIELSEN MERKSAMER PARRINELLO GROSS & LEONI, LLP Steven A. Merksamer (SBN 66838) Eric J. Miethke (SBN 133224) *Kurt R. Oneto (SBN 248301) 1415 L Street, Suite 1200 Sacramento, California 95814 Telephone: (916) 446-6752 Fax: (916) 446-6106 koneto@nmgovlaw.com Attorneysfor Amicus Curiae California Taxpayers Assn. No. $224779 IN THE SUPREME COURT OF THE STATE OF CALIFORNIA CITIZENS FOR FAIR REU RATES,et al., Plaintiffs andAppellants, vs. CITY OF REDDING,et al., Defendants and Respondents. APPLICATION TO FILE AMICUS CURIAE BRIEF and BRIEF OF AMICUS CALIFORNIATAXPAYERS ASSOCIATION IN SUPPORT OF APPELLANTS Review of a Published Decision of the Third Appellate District, Case No. Co71906 Reversing a Judgmentof the Superior Court of the State of California for the County of Shasta, Case No. 171377 (Consolidated with Case No. 172960) Honorable William D. Gallagher, Judge Presiding NIELSEN MERKSAMER PARRINELLO GROSS & LEONI, LLP Steven A. Merksamer (SBN 66838) Eric J. Miethke (SBN 133224) *Kurt R. Oneto (SBN 248301) 1415 L Street, Suite 1200 Sacramento,California 95814 Telephone: (916) 446-6752 Fax: (916) 446-6106 koneto@nmgovlaw.com Attorneysfor Amicus Curiae California Taxpayers Assn. TABLE OF CONTENTS Page APPLICATION FOR LEAVE TO FILE AMICUS CURIAE BRIEP000...eeesessssssesceeeessesceeececeesesesesssesseersesssneusesagseaeusesseesesesseaeeses 1 BRIEF OF AMICUS CURIAE CALIFORNIA TAXPAYERS ASSOCIATION IN SUPPORT OF APPELLANTS.......eeeeessseeeeeeeees 5 I. INTRODUCTION0...ee eeececsessseeceeeesnsnscnceeseeceecenensecesssnneeseeees 5 TT, ARGUMENT..00icceeceesssnsneceecsesesseeseesenssseseseeeesesseceeees 6 1. The Court Should Apply Proposition 26 According to Its Plain Language as wasIntended byVoters, Not by Microscopically Dissecting It to Defeat the Voters’ Intent ........ cece eccesceessseesseneeeeneeeeseessseesensseesneesees 6 2. In Passing Proposition 26, the Voters Specifically Intended to Ban Hidden Taxesin Electricity Charges Absent Voter Approval..............:cccsscceseesseeeeeenees 9 3. The PILOTis Presumedto be a Tax Under Proposition 26; and City Bears the Burden of Proving It 1S NOt..........ceesccecsssccsesereceseesseeaecececesesnseseesseees 11 4. Proposition 26’s Exception for Reasonable Costs to a Local Governmentin Providing a Service or Product Does Not Apply to the PILOT.............eee13 a. City Fails to Meet the Exception from Local “Tax” UnderProposition 26 Becauseit Offers the Same Services to Those Who Pay the PILOT and Those Whodo Not.............s0008 13 b. Because REUis City’s Alter Ego, City Controls Both Endsof the Transaction and Can Impose the PILOTfor the Benefit of Its General Fund in Violation of Proposition 26......15 c. The PILOT is Fundamentally Different from Costs Imposed by Third-Party Government EMNtiti@S ..........::ccccesscccsseeeeecescecesseeseeeeoeseneseneeeeseeees 16 d. The Way PILOTs are Measured MakesIt Impossible for Them to Be Used as a Proxy for the Reasonable Costs of Providing Utility SOLVICE......cescccsseecesneeseesseesseeesseescesesesseesseeesaeeesaee 19 e. PILOTs can Never be a Reasonable Cost of Providing Service Because They Violate Cal. Const., Art. XIII, § 3(b)........cccceec ccs ssscesssseeeseeeeeeee 21 f. The PILOTis an Ilegal Tax on Local Government OwnedProperty that Local Voters Cannot APpTove............ssesesesseeceeesssrsceeeees 25 5. The PILOT does Not Predate Proposition 26............... 25 TIT. CONCLUSION...eccsccccssseeeesecesecesssenecesseeceuseecsssseessnaeesees 29 CERTIFICATION OF BRIEF LENGTH...eeeeesscceeeeeenneeeesteeeeees 30 ii TABLE OF AUTHORITIES Page(s) Cases Amwest Surety Insurance Co. v. Wilson (1995) 11 Cal.4th 1243 ....... ccc cccccssssseesseeesessssssssssnseeeessseesseeseeessaees 8 Arias v. Superior Court (2009) 46 Cal.4th 960..........cccccscssccssseesssessseecceseesessscessnseessseeeeessaes 8 Calif. State Teachers Retirement System v. County of Los Angeles (2013) 216 Cal.App.4th 41..........ccecscssscsrcesrsesssereeeeessrecseseseneees 23, 28 Calif. Trout, Inc. v. State Water Resources Control Bd. (1989) 207 CalApp.3d 585........:cscccssssssecsesscccceeeesssteeseseeseseeeeeeses 24 Capistrano Taxpayers Assn.v. City ofSan Juan Capistrano (2015) 235 Cal.App.4th 1493 ..........ccssssscsssceeeesesesseeeessseeesesseeees 7,18 City ofEmeryville v. Cohen (2015) 233 Cal.App.4th 293 .........ccscccscstssstecssscteessesssessesssereeennesees 23 Committee to Defend Reproductive Rights et al. v. Myers (1981) 29 Cal.3d 252.........ccccccccccccssssssceesssecssssseescssssessesseeeeeeseenenees 26 Davis v. City ofBerkeley (1990) 51 Cal.3d 227........cccccssssccccssseesstecsscecesssssnseecessneeesseaeesesnseeess 8 Flynnv. San Francisco (1941) 18 Cal.2d 210...cecccessseesssescessennccneneescesesseeeeceessaees 22 Inglewood v. County ofLos Angeles (1925) 207 Call. 697........ccccccccssssscccesssesseecsteesesssnnneeeessseesssnseeessnsees 25 Lungren v. Deukmejian (1988) 45 Cal.9d 727 ......ccccccccssssscccesssesssccsseeseessneeeeeessseessseesessesneeeses 8 People v. Petrilli (2014) 226 Cal.App.4th 814 ........ccccccsccssecssecesssssecesseeseesssseeeeenees 27 Sacramento Mun.Util. Dist. v. County ofSonoma (1991) 235 Cal.App.3d 726 .........ccsccesssssecssesseceecsssscetsseesseeessettesnners 22 iil Silicon Valley Taxpayers Assn. v. Santa Clara Open Space Authority (2008) 44 Cal.4th 431 0... ccc ccccccsccssccecsesssneeseseeeeseseeeseseeaeeeneaseees 6,8 Strauss v. Horton (2009) 46 Cal.4th 364..........cccccccssceccesesseceesseeeseceseaeeessesssesesessenees 28 Yes on 25, Citizensfor an On-Time Budget v. Superior Court (2010) 189 Cal.App.4th 1445 ......eeceeeeccsscecessneeesssseessssssesssseassneues 26 Constitutional Authorities Cal. Const., art. XIII C, § 1.0... cceecccscssssessseeeceeeeceeeseeseaeeesoeeesseeeeeeeeees 11 Cal. Const., art. XIII C, § 1(€)........ce ccssccsssssseeeeeecereessseeeeres 6, 7, 11, 12 Cal. Const., art. XIII C, § 1(€)(1)-(7).......ccescccsseecceseceseeseetsceeeeesneeeeeaes 12 Cal. Const., art. XIII C, § 1€€)(2) .........cccscesssseseeeceeesseessneeeenes 13, 19, 29 Cal. Const., art. XTIT D....... ccc ccccssscccssseeessseeeeeceeeeseessneesesasseeeeeesaneoea 7 Cal. Const., art. XIII D, § 6........cccccsssccscssseeceseeeesseesseeessaeereeesenensaaes 18 Cal. Const., art. XIII, § 1.0.0... cccsssessssseceeeseesesseneeeerseneeessssaeeeees 25 Cal. Const., art. XIII, § 3(€) .........ccccccccsssccessscccceeceeseessceeeeeesseeeeeeees 23, 28 Cal. Const., art. XIII, § 3(D)............csccccssseseceesssneeeeeeeeeeee 21, 23, 25, 27 Statutes GOV. Code, § 7510......csscccsscccessseesessssceseseessecceessnneeecssnseeesseeessetsessnseeees 28 Other Authorities 74 Ops.Cal.Atty.Gen. 6 (1991)... ceeessesessesesssseessseesensenesseeensentens 23 http://vig.cdn.sos.ca.gov/2010/general/pdf/english/tex t-proposed-laws.pdf#prop26. (Last visited Aug.18, QOS.) .sssssccessscccsccesseessscccesssecesseesoeeesseesseeesesscessescesseescsssecsessceseseeeees 9 http://vigarchive.sos.ca.gov/2010/general/propositions /26/arguments-rebuttals.htm.(Last visited August 18, 2015.) ...cccscccssesssecsscesseccessceseneeesenseseesoeesesceesesseeeeseasesesssseseeaceeeess 10 Historical Notes, 2A West's Ann. Cal. Const., (2013 supp.), foll. art. XTIT A, § 3, pp. 141-142...eceeseeseseseeeeseenee 9,10 1V TO THE HONORABLETANI CANTIL-SAKAUYE, CHIEF JUSTICE, AND ASSOCIATE JUSTICES OF THE SUPREME COURT OF THE STATE OF CALIFORNIA: Pursuantto California Rules of Court rule 8.520(f), the California Taxpayers Association respectfully submits this application for permission to file an AMICUS CURIAE BRIEF IN SUPPORT OF PLAINTIFFS AND APPELLANTSCITIZENS FOR FAIR REU RATES,ET AL. Undersignedcounselcertifies that there are noparties, counsel, entities or other individuals to identify under California Rules of Court rule 8.520(f)(4). CALIFORNIA TAXPAYERS ASSOCIATION’S STATEMENT OF INTEREST The California Taxpayers Association (CalTax) is a nonprofit, nonpartisan research and advocacyassociation founded in 1926 with a dual mission: to guard against unnecessary taxes and promote governmentefficiency. CalTax represents the interests ofits members, and thestate’s taxpayersat large, in the areas of income andfranchise, property, sales and use, and otherstate andlocal taxes, assessments, fees and penalties. CalTax’s membership includes individuals and manybusinessesacrossall industries, ranging from small firms to Fortune 500 companies. CalTaxis dedicated to the uniform and equitable administration of taxes and minimizing the cost of tax administration and compliance. In 2010, CalTax co-sponsored Proposition 26 and wrote ballot arguments stating that theinitiative will stop state and local policymakers from enacting hidden taxes on goods andservices, suchaselectricity. Amicushasa great interest in the Court’s resolution of this matter, which will have a direct impact on Amicus, its members, and 1 many other taxpayersacross the state. Because of Amicus’ broad- based membership andits expertise and experience, in addition to that of its members, concerningthe legal and policy issues raised by this case, Amicus believes that its perspective on the relevant issues will be of assistance to this Court. Thecentral issue in this case concernsthe properconstruction of Cal. Const., art. XIII C, § 1, subd. (e), which was addedto the Constitution by the voters in Proposition 26 (2010). Amicus believes Defendant and RespondentCity of Redding has beenillegally imposing a charge on its own municipalelectricity department, Redding Electric Utility (REV), andin turn onelectricity customers within the City, in the form of a “paymentin lieu of taxes” (PILOT), in contravention of the letter and intent of Proposition 26 which requires voter approval for such exactions. While the particular chargesin this caseare limited to the City of Redding, unless stoppedheresimilar chargesarelikely to proliferate statewide as local jurisdictions continually search for new revenuesources. Amicustherefore has a strong interest in defending the proper interpretation of Proposition 26. Otherwise,the intent of the voters in adopting Proposition 26 will be thwarted and people’s right of self-determination regarding new and higherlocal taxes will be undermined. THE PROPOSED BRIEF WILL ASSIST THE COURT IN DECIDING THIS MATTER BYADDRESSING THE FOLLOWINGISSUES: Amicus Curiae’s brief will address the following issues:(1) that in adopting Proposition 26, the voters were specifically focused on eliminating overchargesonelectricity, and that is exactly whatis happeningin this case; (2) the test for determining whethera local 2 charge is a tax under Proposition 26 is very simple and the PILOT easily meets that test; (3) the PILOTis not the reasonable cost of providing a service under Proposition 26 because the PILOTisillegal underCal. Const., art. XIII, § 3(b), the City provides the same services allegedly provided to REU in return for the PILOTto other membersof the public who do not pay the PILOT,and the PILOTis not calculated in a way that even attempts to capture the costs of providing services to REU; and (4) the PILOT doesnot predate Proposition 26, and evenif it did, it is still invalid. THE ISSUES INVOLVEDIN THIS CASE ARE OF SUCH PARAMOUNT IMPORTANCE AS TO CONSTITUTE GOOD CAUSE FOR GRANTING THE APPLICATION Theissues involved in this case touch upon matters including the people’s rightof initiative; the proper interpretation and application of Proposition 26 with respectto local levies, charges, and exactions; and the underlying validity of payments in lieu of taxes imposed uponlocal government ownedproperty. These issues are of such far-reaching and statewide importancethat the issues themselves herein involved constitute good cause for this Court to grant CalTax’s requestto file an AMICUS CURIAE BRIEF IN SUPPORT OF PLAINTIFFS AND APPELLANTSCITIZENS FOR FAIR REU RATES,ET AL. CONCLUSION For the foregoing reasons, the California Taxpayers Association respectfully requests that the Court grant it permission to file an AMICUS CURIAE BRIEF IN SUPPORT OF PLAINTIFFS AND APPELLANTSCITIZENS FOR FAIR REU RATES,ET AL. DATED: August IY 2015 Respectfully submitted, Nielsen MerksamerParrinello Gross & Leoni, LLP wm KecPl Kurt R\ Oneto, Attorheys|for Amicus Curiae, Californi Taxpayers Association BRIEF OF AMICUS CURIAE CALIFORNIA TAXPAYERS ASSOCIATION IN SUPPORT OF APPELLANTS I. INTRODUCTION Of the many battles fought by CalTax andits taxpayer advocateallies, none has been more important and hard-fought than the struggle against the creative attempts by governmentsto raise new revenueby mislabeling local “taxes” as somethingelse in order to avoid having to win voter approvalfor their imposition. Proposition 13 (1978), Proposition 62 (1986), and Proposition 218 (1996)all sought to advance and protect that basic principle: that taxpayers should havetheright to vote on neworhigherlocal taxes. Thelatest in this decades-long struggle was Proposition 26 (2010). Proposition 26 goesto the heart of the fundamentalissue in this case: can the City of Redding (City) enact a tax simply by “rebranding”it (in this case, by calling it a “paymentin lieu oftaxes” (PILOT)) and buryingit in a price for electrical service that exceeds the actual cost of providing that service? The PILOTinthis caseis a poster child for why the voters adopted Proposition 26. The entity imposing the PILOT(the Redding City Council) and the entity nominally paying the PILOT but passing the cost on to the public through chargesforelectricity service (Redding Electric Utility (REU)) are different arms attached to the same body. And because the nominalfee payer, REU, can 5 pass on the PILOTtaxto its customers without them even knowing that they are paying it, none of the checks and balancesfor the imposition of local taxes exist. In enacting Proposition 26, the state’s voters madeit clear they intended to put an end to such hidden taxes, even going so far as to specifically say they were trying to end the practice of burying hiddentaxesin electricity charges. It is this practice that the Court of Appeal correctly invalidated. Amicus also demonstrates below that the PILOT cannotbe sustained becauseit is calculated and applied in a mannerthat makesit impossible to be legally imposed under Proposition 26 absentvoter approval. Lastly, apart from the invalidity under Proposition 26, the PILOTis an unconstitutional imposition of a property tax on local government-owned property. Il. ARGUMENT 1. The Court Should Apply Proposition 26 According to Its Plain Languageas wasIntendedbyVoters, Not by Microscopically Dissecting It to Defeat the Voters’ Intent. The principles of constitutional interpretation are similar to those governing statutory construction. When the languageis clear and unambiguous, the plain meaning governs. (Silicon Valley Taxpayers Assn. v. Santa Clara Open Space Authority (2008) 44 Cal.4th 431, 444 (SVTA).) The language of Proposition 26, set forth in Cal. Const., art. XIII C, § 1(e), is abundantly clear, and it is just as 6 clear that the PILOTis a tax underthat constitutional provision.’ No doubtseeking to overcomethe plain languageof Proposition 26, City’s Opening Brief instead attempts to dissect Proposition 26 in the most hyper-technical sense possible, parsing words,splitting hairs, and jumping onto the most minorof asserted language differences to support its mistaken claim that Proposition 26 really allows the imposition of local levies, charges, and other exactions without voter approval to continue unabated. (See City OpeningBr., at pp. 30-33.) As discussed infra, however, City’s position “makes a mockery of the Constitution” and cannotstand. (Capistrano TaxpayersAssn.v. City ofSan Juan Capistrano (2015) 235 Cal.App.4th 1493, 1515.) As this Court madeclear in enforcing ' Proposition 26 states that “any levy, charge, or exaction of any kind” imposedbya local governmentis a tax except for seven specific exceptions. The exceptionsare (1) a charge imposedfor specific benefits or privileges provided directly to the payorthat are not providedto those not charged and which does not exceed the reasonable cost to the governmentin providing the benefit/privilege; (2) a charge imposedfor specific services or products provided directly to the payorthat are not providedto those not charged and which does not exceed the reasonable cost to the government in providing the service/product; (3) a charge imposed for a reasonable regulatory cost to a local governmentin issuing licenses, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcementthereof; (4) a charge imposed for entranceto or use of local governmentproperty or the purchase,rental, or lease of local government ownedproperty; (5) fines and penalties imposedas a result of a violation of law; (6) a charge imposedas a condition of property development; and (7) assessments andproperty-related fees imposed in accordance with Cal. Const., art. XIII D. (Cal. Const., art. XIII C, § 1(e).) 7 Proposition 218, “We must enforce the provisions of our Constitution and ‘maynotlightly disregard or blinkat...a clear constitutional mandate.’ (Citation.)” SVTA, supra, 44 Cal.4th 431 at 448.) Despite City’s best efforts, the text of Proposition 26is unwavering. Furthermore, even assuming arguendothat an ambiguity did exist, the rules of initiative interpretation unequivocally reinforce the conclusion that the PILOTis a tax under Proposition 26. “Whenconstruing a constitutional provision enacted by initiative, the intentofthe voters is the paramount consideration.” (Davis v. City ofBerkeley (1990) 51 Cal.3d 227, 234; emphasis added.) “The intent prevails over the letter, and the letter will, if possible, be so read as to conform to thespirit of the act.” (Lungren v. Deukmejian (1988) 45 Cal.3d 727, 735.) In determining the voters’ intent in adopting an initiative measure, this Court has declared it will consider the historical context of the amendment as well as the ballot arguments favoring the measure. (Amwest Surety Insurance Co. v. Wilson (1995) 11 Cal.4th 1243, 1256; Ariasv. Superior Court (2009) 46 Cal.4th 969, 979.) Thehistorical context surrounding Proposition 26is set forth in its findings and declarations. As declared in those passages, Proposition 26 wasthe culmination of more than three decades’ worthof efforts by the voters, starting with Proposition 13 and continuing through Proposition 218, to gain control overlocal imposition of new or higher taxes andfinally put an endto the clever devices that local governments had employedto extract ever greater revenue from Californians without their consent. Proposition 26 was intendedto “ensurethe effectiveness” of these priorinitiative constitutional amendments by eliminating the ability of local governmentsto enact “hidden taxes”. (Voter Information Guide, Gen.Elec. (Nov. 2, 2010) text of Prop. 26, § 1, p. 114’; see Historical Notes, 2A West's Ann. Cal. Const., (2013 supp.), foll. art. XIII A, § 3, pp. 141-142.).) 2. In Passing Proposition 26, the Voters Specifically Intended to Ban Hidden Taxesin Electricity Charges Absent Voter Approval. Whenadopting Proposition 26 voters were contemplating the precise type of hiddentax that is presented by this case. The /// /// /// /// //]/ 2 http://vig.cdn.sos.ca.gov/2010/general/pdf/english/text- proposed-laws.pdf#prop26. (Last visited Aug. 18, 2015.) 9 argumentin favor of Proposition 26 includesthe following statements: YES ON PROPOSITION 26: STOP POLITICIANS FROM ENACTING HIDDEN TAXES Local politicians have been calling taxes “fees” so they can bypassvoters andraise taxes withouttheir permission—taking awayyourright to stop these Hidden Taxesat the ballot...DON’T LET THE POLITICIANS CIRCUMVENT OUR CONSTITUTION TO TAKE EVEN MORE MONEYFROMUS...When governmentincreases Hidden Taxes, consumers and taxpayers pay increased costs on everydayitems. (Voter Information Guide, Gen. Elec. (Nov. 2, 2010) Argument in Favorof Prop. 26, p. 60; capitalization in original.*) Furthermore, the argumentin supportof Proposition 26 expressly stated that the measure wouldstop politicians from imposing Hidden Taxes on, amongotherthings,electricity: Hereare a few of the examplesofthings they [politicians] could apply Hidden Taxesto unless westop them: Food, Cell Phones, Gas, Electricity... (Id., emphasis added.) The expressionsofvoter intent in adopting Proposition 26 are unmistakable. First, voters wanted to approve ALL local revenue measuresat the ballot box (save for seven distinctly specified exceptions discussed infra). They did not wantlocal officials 3 http: //vigarchive.sos.ca.gov/2010/general/propositions/26/arguments- rebuttals.htm. (Last visited August 18, 2015.) 10 imposing such charges without voter approval. This does not mean that local officials cannot place tax measures on theballot or advocate for their passage. It simply meansthat taxpayers wanted to vote to approve or disapprove suchlocal charges. (See Cal. Const., art. XIII C, § 1, final { [placing burden on the local governmentto prove by a preponderancethat a chargeis not a tax].) Second, voters expressly intendedthat hidden taxes would notbe built into charges for everyday itemslike electricity, and they madethat intent absolutely clear in the argument supporting Proposition 26. Amicus CalTax urges the Court to analyze thefacts of this case with this long and consistentintent of the voters in mind,andreject City’s attemptat revisionist history. With this as background, Amicus now turnsto the specific questions posed by the Court. 3. The PILOT is Presumedto be a Tax Under Proposition 26; and City Bears the Burden of Proving It is Not. The test for determining whethera local charge is a tax under Proposition 26 is quite simple: “any levy, charge, or exaction ofany kind” is presumptively a tax; and the local governmenthas the burden to prove otherwise. (Cal. Const., art. XIII C, § 1(e); emphasis added.) Here,it is undisputed that City imposes the PILOT on REU, REUincludes an amountto cover the cost of the PILOT in charges to customersfor electric service, and the PILOTis transferred to City’s 11 general fund. It is also undisputed that in January, 2011, City increased REU rates by 7.84 percent and acknowledged that oneof the purposes for doing so was “to obtain funds necessary to maintain such intra-City transfers as authorized by law.” (Citizens for Fair REU Rates AnswerBr., at p. 12.) Under Proposition 26, this makes the PILOT presumptively a tax unless City proves the PILOT falls into oneof the exemptionsspecified in paragraphs(1) to (7) of subdivision (e) of Section 1 of Article XIII C of the Constitution. City argues that the PILOTis not a tax under Proposition 26 because REU’s non-rate revenue exceeds the amountof the PILOT, and REU’sratesare lower than other investor-ownedutility rates. (City OpeningBr., at pp. 35-38, 46.) Neither of these rationales satisfies any of the seven exceptionsto the definition of a local “tax” found in Proposition 26. (Cal. Const., art. XTII C, § 1(e)(1)-(7).) REU might generate more non-rate revenue thanis paid out in PILOT, but that is not one of the exceptionsto the definition of “tax” specified in Cal. Const., art. XIII C, § 1(e). REU’s rates might be lower than those of one or moreotherelectricity providers, but that is not one of the exceptionsto the definition of “tax” specified in Cal. Const., art. XIII C, § 1(e) either. Therefore, even assuming arguendo the City’s arguments weretrue,theystill fail to demonstrate that the 12 PILOTis not a tax because neither are includedin the exceptionsto Proposition 26’s definition of a local “tax.” 4. Proposition 26’s Exception for Reasonable Costs to a Local Governmentin Providing a Service or Product Does Not Apply to the PILOT. a. City Fails to Meet the Exception from Local “Tax” UnderProposition 26 Becauseit Offers the Same Services to Those WhoPay the PILOT and Those WhodoNot. City’s PILOTis unconstitutional becauseit does not represent the reasonable cost of providing a service underProposition 26. City argues that the PILOT qualifies as a reasonable cost of providing electricity because the PILOT compensatesCity for vital benefits and services provided to REUlike police andfire protection, street maintenance, rights-of-way, and “administration.” (City Opening Br., at pp. 3, 39-40.) Thus, from City’s perspective, the PILOT takes the form of a contractualobligation to “repay” City for services provided to REU. City’s argument overcomplicates Proposition 26 by conveniently overlooking the key element of Proposition 26’s exception for charges imposedforspecific local governmentservices. In order not to be a tax, Cal. Const., art. XIII C, § 1(e)(2) states that a charge must be imposedfora specific service or product provideddirectly to the payor “thatis not providedto those not charged.” (Emphasis added.) City asserts that the PILOT 13 compensatesCity for police protection, fire protection, and street maintenance; however,City fails to recognize that these services are provided to others who do notpay the PILOT; and thoseservicesare not denied to those who do not pay the PILOT. City provides police andfire protection to anyonein the City. 911 emergency operators, for example, do notaskcallers if they pay the PILOT before dispatchingfirst responders. City street maintenance crewsdo not question homeownersif they pay the PILOT before repairing the roadsin front of their houses. Unless City decided to ONLYprovide police andfire protection and street maintenance to REU and no one else, the PILOT cannot as a matterof law qualify as a reasonable cost of providing a service underProposition 26. Becauseof this, City cannot satisfy the burden Proposition 26 places on City to prove that the PILOTis not a tax and that the way in which costs are allocated bear a fair or reasonable relationship to payors’ burdenson,or benefits received from, City. To the contrary, City’s allocation of the PILOT (only paid by REU)in comparisonto its allocation of public safety and street maintenanceservices (provided to everyonein City) guaranteesthat there is no relationship between how benefits are distributed on the one hand and howcosts are allocated on the other. 14 b. Because REUis City’s Alter Ego, City Controls Both Endsofthe Transaction and Can Impose the PILOTfor the Benefit of Its General Fund in Violation of Proposition 26. Beyondthefact that the “services” REU pays for via the PILOT are providedto those not charged the PILOT,the arrangement between City and REUis not an arm’s length transaction. A fiction running throughoutCity’s briefs is the implication that City and REU are separate anddistinct legal entities, with the former providing services to the latter and the latter providing compensation in return. The truth of the matter is that REU is simply a department of City, no different from the police department, the fire department, or the public works department. The governing bodyof City is the same as the governing body of REU (the City Council); thus the “value” of any “service” set by City will automatically be accepted by REUsince they are one in the same. Dueto its ownership and control of REU, there would be no limit on whatprice City could arbitrarily charge to REU for any services provided. The members of the City Council can simply put on their “council member” hats and declare that services provided by City to REU are worth $XX. The membersof the City Council then can put on their “REU governing board”hats and agree to pay that amountto City’s general fund. Proposition 26 does not permit such devices. 15 Thereis no limit on the dollar value the City Council can attribute to services allegedly provided to REU because they know that they themselveswill be the ones agreeing to pay that price on the other end. Thus, City can set the valueofthe servicesallegedly provided based on general fund needsrather than on anyobjective estimate of providing “services” to REU. City could contractto provide police, fire, and public worksservices to outside entities, but there would be arms-length bargaining to assure the agreed-upon- price wasfair and reasonable. But REUhasnoability to resist the price City affixes to any services provided because REUis theCity. WhateverCity says mustbe paid will be paid. UnderCity’s theory, the “contractual obligation”is no different than a general tax imposed on REU ratepayers because City can use it as a pure revenuedevice given the City Council’s control of both endsof the transaction. This is especially the case when city departmental budgets are already compensatedfor costs they incurfor the benefit of other departments,as is current City practice. (Citizens for Fair REU Rates AnswerBr., at p. 30.) c. The PILOT is Fundamentally Different from Costs Imposedby Third-Party GovernmentEntities. City further argues that the PILOTis a reasonable cost of providing service becauseit is “compelled by legislation” adopted by City. (City Opening Br., at pp. 39-40.) Hence, City attempts to frame 16 the PILOTasa legal obligation imposed upon REU which REU has no discretion to escape. The problem,of course, is that REU is City’s alter ego. To avoid gutting Proposition 26, the PILOT imposed on REU by City must be vieweddifferently from statutory obligations imposed by other lawmaking bodies. City alleges that the PILOT is a cost of service no different than complying with federal Occupational Safety and Health Administration Rules or greenhouse gas mandates imposedby the state Legislature, and that “complying with applicable law”is necessarily a reasonable cost of providing the service. (City Opening Br., at p. 40.) However, with respectto local laws that City imposes uponitselfwithout voter approvalto raise revenues, Proposition 26 governs. Unlike federal workplace regulations or state greenhousegas rules (which do not impose taxes or in-lieu-of-tax payments), City has a direct financial interest in imposing statutory obligations upon REU which require REU to pay moneyinto City’s general fund. UnderCity’s argument, by passing an ordinance requiring REU to pay revenueto City, City could circumvent Proposition 26 on the groundthat REUis simply satisfying a legal mandate. This proves too much. It would allow, for example, the Redding City Council to pass an ordinance requiring REUto payall of its revenues overto the City general fund, and the 17 arrangementwouldstill qualify as a reasonable cost of providing service because it would simply be “complying with applicable law.” This would be an obviously improperevasionofthe voter approval requirements of Proposition 26. Justifying rates on the basis of self-imposed quasi-contractual or legislative obligations, with the same governing body controlling both endsof the transaction to the ultimate benefit of its general fund,is precisely the type of end-run on the constitutionalright of voter approvalof local taxes that Proposition 26 soughtto eliminate. Similar end-runs have been rejected by the courts in recent weeks. In Capistrano Taxpayers Assn., supra, 235 Cal.App.4th 1493, San Juan Capistrano arguedthatit could justify its tiered water rates underCal. Const., art. XTII D, § 6 by simply labeling the rates in the uppertiers as penalty rates for excessive water use. (/d., at 1515.) The Court of Appeal responded that San Juan Capistrano’s theory would open up a loopholein article XIII D, section 6, subdivision (b)(3) so large it would virtually repealit. ] an agency supplyin any service would need to do to circumventarticle XIII D, section 6, subdivision (b)(3), would beto establish a low legal base use for that service, pass an ordinanceto the effect that any usage above the base amountisillegal, and then decree that the penalty for such illegal usage equals the incrementally increased rate for that service. Such a methodology could easily yield rates that have no relation atall to the actual cost of providing the service at the penalty levels. And it would make a mockery of the Constitution. (Id.) 18 City’s argument here would “make a mockery of the Constitution.” When a charge is imposedon the public through a municipal departmentrather thandirectly by the municipality itself, all the municipality would needto dois pass an ordinance requiring the department to make paymentsto the municipality’s general fund (or arbitrarily set the value of services provided to the department) and then havethat charge passed onto the paying public underthe guiseof a legal obligation to comply with “applicable law”(or a contractual obligation). City’s argument would open a gaping loophole in Proposition 26. d. The Way PILOTsare Measured MakesIt Impossible for Them to Be Usedasa Proxy for the Reasonable Costs of Providing Utility Service. Cal. Const., art. XIII C, § 1(e)(2) exempts from thedefinition of local tax charges imposedfor specific governmentservices or products provided directly to the payor that (1) are not provided to those not charged; and (2) do not exceed the reasonablecost to the local governmentof providing theservices or products. City argues that the PILOT recoupscosts to City in providing services to REU. (City OpeningBr., at p. 40 [“the PILOTis intended to defray costs to theCity...”].) However, City concedesthat the formula used to calculate the PILOTis the amountof property tax REU would generateif it were privately rather than publicly owned. 19 (City Opening Br., at pp. 1, 6, 8; City Reply Br., at pp. 11 n. 4, 22.) Tellingly, City never claims (let alone attempts to prove) that the actual formula used to calculate the PILOTis the sum totalofall costs borne byCity for services provided to REU. Proposition 26 makes an exception for the reasonable costs to a local governmentin providing a service or product. It does not makean exception for charges to replace property tax revenuelost because the property is ownedbyCity itself. And because the PILOT only capturesthe latter and not the former,it is impossible for the PILOTto be legally imposed absentvoter approval. It is not hard to see whyit is impossible for the PILOT to representthe costs of providing electric service. Each is driven by completely separate factors. For example, because the PILOTis supposedto replace property tax lost by municipalization of the electric utility, the amount of the PILOTcanincrease if the utility acquires moreassets, expandsits operations, or builds more facilities. (See City Opening Br., at p. 8 [PILOT amendedin 1991-92 to include the value of construction in progress]; and City Reply Br., at p. 8 [PILOT amendedin 2005to include value ofjoint-venture assets].) The amountof the PILOT could also decreaseif maintenance on REU’selectric system is deferred or facilities becomeobsolete. Alternatively, the cost of providing electricity can 20 move up or down basedonfuel prices, technology changes,political unrest in energy-producing regions, labor rates and disputes, and precipitation levels affecting hydroelectric power generation. (See City OpeningBr., at p. 9 [retail electric rates were increased in 2008 dueto fluctuations in the natural gas marketanda dry yearfor hydroelectric power].) The cost of providing first responder, street maintenance, and similar services to REU will also move independently from thefactors that drive the PILOT. (Collective bargaining costs, materials costs, year-to-year frequency of emergencycalls, etc.) Anytime City’s cost of providing services to REUina given year equaled one percent of REU’s imputed property value, it would be nothing more than random coincidence. City has not metits burden of proving that the cost of providing services to REUwill always equal one percent of the value of REU’s property; andCity has not even attempted to make sucha claim. e. PILOTs can Neverbe a Reasonable Cost of Providing Service Because TheyViolate Cal. Const., art. XIII, § 3(b). Pursuantto Cal. Const., art. XIII, § 3(b), local government owned property is exempt from taxation. City readily concedes that the PILOTis designedto replicate the one percent property tax REU’s electric utility assets would bearif held by an investor-owned utility. (City OpeningBr., at pp. 1, 6; City Reply Br., at pp. 11 n. 4, 21 22.) City even acknowledgesthat the PILOTis calculated using the State Board of Equalization’s property tax assessment methodology. (City Opening Br., at p. 8; City Reply Br., at p. 11 n. 4.) Whenviewed accordingto the real object, purpose, and result of the PILOT,it is an unconstitutional property tax on local government ownedproperty. City attempts to evade that characterization throughthe useof the phrase“in lieu”, but that provides no help. When determiningthe characterof a charge, labels havelittle relevance: The characterof a tax must be determinedbyits incidents and from the natural andlegaleffect of the language employedin the act. The nomenclatureis of minor importance,for the court must look beyond the meretitle and barelegislative assertion of the tax’s designation and determinethereal object, purpose and result of the enactment. (Sacramento Mun.Util. Dist. v. County ofSonoma (1991) 235 Cal.App.3d 726, 733 [ignoring legislative assertion that a charge was an excise tax and determiningthatit actually operated as a property tax]; citing Flynn v. San Francisco (1941) 18 Cal.2d 210, 214-15.) Beyondthesingle phrase “in lieu”, City’s briefs acknowledge that the PILOT operatesas a property tax on local government owned property, including using the same methodologies the Board of Equalization uses in assessing privately-ownedutilities, including electric companies. Moreover, PILOT revenuesare also used in the 22 same manneras ad valorem property tax revenues. Property tax revenues fund general government purposes. (City ofEmeryville v. Cohen (2015) 233 Cal.App.4th 293, 298 [“property tax revenues...fund general local governmental services”].) City concedes that PILOTrevenuesare used in the same manner:to fund general governmentalservices of City. (City OpeningBr., at pp. 1-3.) This is why so-called “in lieu fees” imposed on public agencies to makeup for lost property taxes have already been declared unconstitutional under Cal. Const., art. XIII, § 3(a). (See Calif. State Teachers Retirement System v. County ofLos Angeles (2013) 216 Cal.App.4th 41, 58 [citing with approval a 1991 Attorney General opinion finding that an “in lieu” fee for general government purposes imposed on the California Public Employees’ Retirement System based on its ownership of real property was unconstitutional (74 Ops.Cal.Atty.Gen. 6 (1991)].) The PILOT imposed on REUis no different. City argues that the PILOTis necessary to keep City’s general fund “on the footing it would have”if the community had notelected to municipalize electric service. (City Opening Br., at pp. 6-7.) However,Cal. Const., art. XIII, § 3(b) does not make any such exception to the prohibition on taxing local government owned 23 property.* City’s other defense is to point at other municipalities that impose PILOTsandessentially argue that they mustbe legal because “others are doing it”. (City Opening Br., at pp. 1, 7-8.) But the fact that other local agencies might be engagingin anillegal practice does not legitimize it. (Calif. Trout, Inc. v. State Water Resources Control Bd. (1989) 207 Cal.App.3d 585, 607 [“The ultimate resolution of a question of statutory meaningis a judicial question” and an erroneousconstruction “does not becomedecisive no matter how long continued”].) To summarize, the PILOT walkslike a property tax, talks like a property tax, and acts like a property tax. City’s only defenseis that the insertion of the words“in lieu of” between the word “payment” and “tax” somehow converts the PILOT from an unconstitutional property tax into a permissible charge for service. But as previously determined by an Attorney Generalopinion andthe Court of Appeal, 4If REU was ownedbya private entity, the property tax generated by it would not belongsolely to City. To the contrary, the property tax revenues would be required to be shared with multiple governmentagencies. (See Citizens for Fair REU Rates AnswerBr., at pp. 39-40.) Thereis no evidencethat City is sharing PILOT revenue with these other jurisdictions; nor do those other jurisdictions have theability to extract hidden tax payments from consumersbecausethey do notsell them electricity. 24 calling the leopard by a different name does not changeits spots. If anything, the “paymentin lieu oftax” label only reinforces the conclusion that the chargeis a tax on local government owned property. An unconstitutional charge such as this can neverbe part of the reasonablecost of providing a service or product because the charge cannotbelegally imposedin thefirst instance. f. The PILOTis an egal Tax on Local Government OwnedProperty that Local Voters Cannot Approve. The exemption from taxation of local government owned property stretches far back into California’s constitutional history. (See, e.g., Inglewood v. County ofLos Angeles (1925) 207 Cal. 697, 703 [property of a municipality is exempt from general government taxes under fmr. Cal. Const., art. XIII, § 1].) Furthermore,Cal. Const., art. XIII, § 3(b) prohibits local government ownedproperty from being taxed evenif the tax is approved by the voters. Thus, the PILOTis illegal not only because it was not approvedby local voters as required by Proposition 26. It is also illegal because it constitutes a property tax on local government owned property that the voters have no powerto approvein thefirst instance. 5. The PILOT does Not Predate Proposition 26. City spills a substantial amountof ink attempting to incorrectly characterize the PILOTas a permanent, unbroken legal 25 requirement. It also spendsa great deal of time discussing how the PILOTis valid undercases which predate Proposition 26. (City OpeningBr. at p. 42 [citing 1982 case suggesting rates can be in excess of cost of service so long as they are subjectively “reasonable”, and a 1975 case regarding “commonlaw”rate reasonableness]; and pp. 43-45 [citing 1986 case suggesting local governmentscan earn profits from municipalutility operationsto the benefit of their general funds].) These arguments have no merit. First, the PILOT does not predate Proposition 26. The PILOT is inserted in and adoptedaspart of City’s annual budget. (City OpeningBr., at pp. 6-9, 11-12.) A budgetbill is simply list of appropriations itemizing recommendedexpendituresfor the ensuing fiscal year. (Yes on 25, Citizensfor an On-Time Budget v. Superior Court (2010) 189 Cal.App.4th 1445, 1455.) City argues that the PILOTpredates Proposition 26 because it appeared in budgets prior to November 3, 2010. (City Opening Br., at pp. 16-17.) The very fact that the PILOT hasbeen enactedvia the budget process undermines City’s argument. City’s fiscal year, like that of most government agencies in California, runs from July 1 to June 30. (City Opening Br., at p. 7n. 3.) Therefore, also like most other California governmentagency budgets, City’s budget only remainseffective duringthe fiscal year for which it was enacted. (See, e.g., Committee 26 to Defend Reproductive Rights et al. v. Myers (1981) 29 Cal.3d 252, 260 n. 3 [lawsuits seeking to restrain enforcementof the 1978 and 1979 state Budget Acts were “technically moot” because the budget acts in question had expired].) Once the relevantfiscal year expires, the budget act has no moreforceor effect. The simplefact that the PILOT wasrepeatedly enacted in successive budgets provesthatit did not outlast the prior budget in which it was adopted absent reenactment. Second, even assuming arguendo that the PILOT did predate Proposition 26—which as explained aboveit does not—the issue would be mooted bythefact that the PILOT does notpredate Cal. Const., art. XIII, § 3(b) andis invalid underthat section. Finally, judicial decisions decided prior to the enactmentof Proposition 26 do nottake into consideration the requirements of Proposition 26 itself. Moreover, those decisions must be deeply discounted,if not entirely disregarded,in light of the voters’ repudiation via Proposition 26 of the prior tax versus “fee” frameworkthatall too often allowed the voter approval requirements contained in Propositions 13 and 218 to be circumvented. (People v. Petrilli (2014) 226 Cal.App.4th 814, 823 n. 5 [decision of SupremeCourt regarding grand jury proceedings was later overturnedbythe electorate via adoption ofan initiative 27 constitutional amendment]; Strauss v. Horton (2009) 46 Cal.4th 364 [initiative constitutional amendment superseding prior Supreme Court decision dealing with marriage].) Charging voters more than the actualcost of a service and earning profits on municipalutilities are precisely the type of local “hidden taxes” that Proposition 26 intendedto invalidate absent voter approval. To the extent these andanyothercasescited by City stand in the wayofvoterself- determination regarding new andhigherlocal taxes, they are no longer viable authority in evaluating whethera local chargeis subject to voter approval.° ’ Even assuming for the sake of argumentthat the pre- Proposition 26 cases cited by City remain valid legal authority after the passageof Proposition 26, they are not on point. None of them dealt with a situation wherea local government imposeda tax onits own property. To the contrary, the presentsituation is most analogousto the Calif. State Teachers Retirement System case, supra, 216 Cal.App.4th 41. In that case, the state teachers’ retirement system (STRS) purchased anoffice building in Los Angeles in 1984. As a publicentity, its interest in the building was exempt from taxation, so the property was removedfrom the county tax roll. The County of Los Angelesstill taxed the possessory interest in the building held by a private lessee pursuant to Gov. Code, § 7510. (Id., at 48-49.) However, STRS complained that Section 7510 resulted in taxation of not only the lessee’s possessory interest but also STRS’reversionary interest in the property, in violation ofCal. Const., art. XIII, § 3(a). (Id., at 49.) The Court of Appealheld that Section 7510 violated Cal. Const., art. XIII, § 3(a) becauseit taxed the constitutionally exemptreversionary interest in the property held by STRS. (Id., at 61.) The only difference in this case is that City holds both the reversionary and presentinterest in the taxed property. 28 II. CONCLUSION For the foregoing reasons,the decision of the Court of Appeal below should be affirmed. The PILOTis a general tax under Proposition 26, does not and cannot qualify as a reasonable cost of providing a service underCal. Const., art. XIII C, § 1(e)(2), is also an illegal property tax on local government owned property, and does not predate Proposition 26. DATED: August1 2015 __ Respectfully submitted, Nielsen MerksamerParrinello Gross & Leoni, LLP By: Kurt R.'‘Oneto, Attorneys|forAmicus Curiae, Californi Taxpayers Association 29 DECLARATION OF KURT R. ONETO IN CERTIFICATION OF BRIEF LENGTH Kurt R. Oneto, Esq., declares: 1. I am licensedto practice law in the state of California, and am the attorney of record for Amicus Curiae California Taxpayers Association (“CalTax”), in this action. I makethis declaration to certify the word length of Brief of Amicus Curiae CalTax. 2. I am familiar with the word count function within the Microsoft Word software program by which the Brief was prepared. Applying the word countfunction to the Brief of Amicus Curiae CalTax, I determined and herebycertify pursuant to California Rules of Court Rule 8.204(c) that the Brief contains 5,746 words,andis within the word count limit imposed by Rule 8.204(c). I declare under penalty of perjury underthe lawsofthe State of California that the foregoing is true and correct and of my own personal knowledge except for those matters stated on information andbelief and, as to those matters, I believe them to be true. If called as a witness, I could competently testify thereto. Executed on August |9, 2015, at Sacramento,California. Yul2.cLat Kurt R. ‘Oneto 30 Citizensfor Fair REURatesv. City ofRedding California Supreme Court Case No. S224779 PROOF OF SERVICE I, the undersigned, declare under penalty of perjury that: I am a citizen of the United States employed in the County of Marin. I am overthe age of 18 and nota party to the within cause of action. My business addressis 2350 KernerBlvd., Suite 250, San Rafael, California. I am readily familiar with my employer's practices for collection and processing of correspondencefor mailing with the United States Postal Service and for pickup by Federal Express. On August 20, 2015 I served a true copy of the foregoing APPLICATION TO FILE AMICUS CURIAE BRIEF AND BRIEF OF AMICUS CALIFORNIA TAXPAYERS ASSOCIATION IN SUPPORT OF APPELLANTSonthe following parties in said action, by serving: Walter P. McNeill Michael G. Colantuono McNeill Law Offices Michael R. Cobden 280 Hemsted Drive,Suite E MeganS.Knize Redding, CA 96002 Colantuono, Highsmith & Whatley, PC Attorneysfor PlaintiffandAppellant 11364 Pleasant Valley Road Citizensfor Fair REURates Penn Valley, CA 95946-9000 Attorneysfor Defendant and RespondentCity ofRedding Barry DeWalt, City Attorney Rick W.Jarvis City of Redding Jarvis Fay Doporto & Gibson 777 Cypress Avenue 492 9tStreet, Suite 310 P.O. Box 496071 Oakland, CA 94607 Redding, CA 96001 Attorneysfor League ofCalifornia Attorneysfor Defendantand Cities, Pub/Depublication Requestor RespondentCity ofRedding 1 PROOF OF SERVICE Daniel E. Griffiths . Braun Blaising McLaughlin & Smith 915 L Street, Suite 1270 Sacramento, CA 95814 Attorneysfor California Municipal Utilities Association, Pub/Depublication Requestor JamesR. Cogdill HowardJarvis Taxpayers Assn. 921 11% Street, Suite 1201 Sacramento, CA 95814 Attorneysfor Howard Jarvis Taxpayers Association, Pub/Depublication Requestor Arthur Jarvis Cohen Harry Zavos Law Offices of Arthur Jarvis Cohen 2 Venture, Suite 120 Irvine, CA 92618 Attorneysfor Amicus Curiae Glendale Coalitionfor Better Government Clerk of the Court Shasta County Superior Court 1500 Court Street Redding, CA 96001-1686 Court ofAppealThird Appellate District914 Capitol MallSacramento, CA 95814 _X__BY U.S. MAIL:Byfollowing ordinary business practices and placing for collection and mailing at 2350 Kerner Blvd., Suite 250, California 94901 a true copy of the above-referenced document(s), enclosed in a sealed envelope; in the ordinary course of business, the above documents would have been deposited for first-class delivery with the United States Postal Service the same day they wereplaced for deposit, with postage thereonfully prepaid. Executed in San Rafael, California, on August 20, 2015. I declare underpenalty of perjury, that the foregoingis true and correct. 2 tpl. Set Paula Scott PROOF OF SERVICE