CITIZENS FOR FAIR REU RATES v. CITY OF REDDING

Amicus Curiae Brief of Howard Jarvis Taxpayers Association

Cal.August 27, 2015

oper SUPREME COURT COPY IN THE SUPREME COURT OF THE STATE OF CALIFORNIA SUPREME COunt Citizens for Fair REU Rates,et al E i | - i Plaintiffs and Appellants, AUG 27 2015 Vv. City of Redding,etal Frank A. Mctauire Cierk Defendants and Respondents, Deputy HOWARD JARVIS TAXPAYERS ASSOCIATION’S APPLICATION FOR LEAVETO FILE BRIEF OF AMICUS CURIAE AND BRIEF OF AMICUS CURIAEIN SUPPORT OF APPELLANTS Review of a Published Decision of the Third Appellate District, Case No. C071906 Reversing a Judgment of 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 Trevor A. Grimm, SBN 34258 Jonathan M. Coupal, SBN 107815 Timothy A. Bittle, SBN 112300 J. Ryan Cogdill, SBN 278270 Howard Jarvis Taxpayers Foundation 921 Eleventh Street, Suite 1201 Sacramento, CA 95814 Telephone: (916) 444-9950 Facsimile: (916) 444-9823 Counsel for Amicus S224779 IN THE SUPREME COURT OF THE STATE OF CALIFORNIA Citizens for Fair REU Rates,et al Plaintiffs and Appellants, V. City of Redding,et al Defendants and Respondents, HOWARD JARVIS TAXPAYERS ASSOCIATION’S APPLICATION FOR LEAVE TO FILE BRIEF OF AMICUS CURIAE AND BRIEF OF AMICUS CURIAEIN SUPPORT OF APPELLANTS Review of a Published Decision of the Third Appellate District, Case No. C071906 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 Trevor A. Grimm, SBN 34258 Jonathan M. Coupal, SBN 107815 Timothy A.Bittle, SBN 112300 J. Ryan Cogdill, SBN 278270 Howard Jarvis Taxpayers Foundation 921 Eleventh Street, Suite 1201 Sacramento, CA 95814 Telephone: (916) 444-9950 Facsimile: (916) 444-9823 Counsel for Amicus “ S H N E W E R L O O l t oe TABLE OF CONTENTS TABLE OF CONTENTS..... 20.00 ceceetenent tenets 1 TABLE OF AUTHORITIES ...... 0... ccctenet ene’ il APPLICATION FOR LEAVETO FILE .. 1...eeeeee eee iil I. INTRODUCTION .... 1... eeenneee teens ] II. LEGISLATIVE BACKGROUNDOF PROPOSITIONS13, 218, & 26........ 2 Ill. THE PILOT IS A “TAX” FOR THE PURPOSES OF PROPOSITION 26 a) IV. THE EXCEPTION DOES NOT APPLY BECAUSETHE PILOT DOES NOT VI. REASONABLY OR FAIRLY REFLECT THE ACTUAL GENERAL FUND COSTS INCURREDBY THE CITY ON BEHALF OF ITS MUNICIPAL UTILITY 2...eeeee e eens 10 THE PILOT IS INVALID FOLLOWING THE BUDGETARYPERIOD IN EFFECT WHEN PROPOSITION 26 BECAME LAW ................005: 1] CONCLUSION ..... 00.cceeenee teen eens 15 WORD COUNT CERTIFICATION ...... 00.0ccceneeeeee 16 TABLE OF AUTHORITIES CASES: PAGE(S) Citizensfor Fair REU Rates v. City ofRedding (2015) 233 Cal.App.4th 402 2...ences 6, 10, 12, 13 City ofSan Diego v. Shapiro (2014) 228 Cal.App.4th 756 2...eeneee eee 2 Howard Jarvis Taxpayers Assn. v. City ofRoseville (2002) 97 Cal.App.4th 637 2...ceeeee eee 3,6, 7,9 Howard Jarvis Taxpayers Assn. v. City ofFresno (2005) 127 Cal.App.4th 914 2. eeene 8,9 Howard Jarvis Taxpayers Assn. v. City ofRiverside (1999) 73 Cal.App.4th 679 2.0. eeeee ee 14 Schmeer v. County ofLos Angeles (2013) 213 Cal. App. 4° 1310 20...eeeeeete 4 Sinclair Paint Co. v. State Board ofEqualization (1997) 15 Cal. App. 4" 866 2.0...enents 4 Town ofTiburon v. Bonander (2009) 180 Cal. App. 4° 1057 00...cnetnn eee e es 2 STATUTES: California Constitution Article XIII A, Section 1(a) 2... 0...ecence e eens 2 Article XIII C, Section 1(€) 0.6...ceceene e eens 5, 10 Article XIII C, Section 1(e)(2) .. 0...ceceence eee ene 5 Article XIII D, Section 6(b) 2.0.0... ccece ee 4,6 il APPLICATION FOR LEAVE TO FILE Howard Jarvis Taxpayers Association (“HJTA”) is a California nonprofit public benefit corporation with over 200,000 members. Thelate Howard Jarvis, founder of HJTA, and Paul Gann, founder of Paul Gann’s Citizens Committee (which merged with HJTA in 1999), utilized the People’s reserved powerofinitiative to sponsor Proposition 13, which was overwhelmingly approved by California voters in 1978, addingarticle XIII A to the California Constitution. Proposition 13 has kept thousands of fixed-income Californians in their homesbylimiting the rate and annual escalation of property taxes, which becomeliensif the property owner cannotafford to pay them. In 1996, California voters enacted Proposition 218, which wasalso authored and sponsored by HJTA. Proposition 218 was knownas the Right to Vote on Taxes Act, and addedarticles XIII C and XIII D to the California Constitution. Among other things, Proposition 218 placesstrict limitations on local governmental!entities’ authority to levy fees and charges for property-related services. Specifically, Proposition 218 subjects fees for property-related services to a “cost of service” requirement, and places the burdenof establishing the validity of such fees on the government. Prior to its passage in 2010, HJTA participated in the drafting iii process of Proposition 26. On the general merits of this case, HJTA strongly supports Appellants and urges this Court to affirm the majority opinion of the Third District Court of Appeal in every respect. The vast majority of issues herein are thoroughly and excellently briefed by Appellants. HJTA respectfully requests leave from this Court to file the accompanying Brief of Amicus Curiae in orderto lend its expertise as author and sponsor of both Propositions 13 and 218, specifically regarding historical context and legislative intent. Furthermore, HJTA successfully litigated twocases that guidethe analysis in the present matter: Howard Jarvis Taxpayers Assn. v. City ofRoseville (2002) 97 Cal.App.4th 637 and Howard Jarvis Taxpayers Assn. v. City ofFresno (2005) 127 Cal.App.4th 914. Amicus HJTA’s staff attorneys authored the entirety of the proposed brief, and Amicus HJTA neither made nor received any monetary contributions intended to fund the preparation or submission ofthe brief. /// iv For these reasons, HJTA respectfully requests this Court’s permissionto file the accompanying Brief of Amicus Curiae. Dated: August |Q, 2105 Respectfully submitted, TREVOR A. GRIMM JONATHAN M. COUPAL TIMOTHYA. BITTLE J. RYAN COGDILL WZ J. RYAN COGDILL Counsel for Amicus BRIEF OF AMICUS CURIAE I INTRODUCTION Amicus Howard Jarvis Taxpayers Association (“HJTA”) strongly supports Appellants Citizens for Fair REU Rates,et al (hereafter, “Citizens”) and urges this Court to affirm the decision of the Third District Court of Appeal. While Appellant has more than sufficiently briefed the relevant issues presented, Amicus writes separately to share its expertise as the drafter and sponsor of Propositions 13 and 218, and as a contributor to the drafting of Proposition 26. Proposition 26 was a response by the People of California to unfair and underhandedtactics by state and local governmentalentities seeking to circumventthe constitutional limitations imposed on revenue generation methods such as property taxes, assessments, and fees for property-related services. Specifically, the voters sought to rein in the wanton abuse of taxes masquerading as fees. But local governments remain undeterred, and continue to chip awayat the constitutional protections the People have seen fit to establish for themselves. Nothing in Proposition 26 prevents the Respondents City of Redding (hereafter, the “City”) from collecting from its electricalutility ratepayers costs that its general fund incurs to administer the municipal electrical utility. However, our Constitution requires that any cost allocation methodology purporting to capture such costs must reasonablyreflect actual costs incurred by the City. Because the paymentin lieu of taxes (“PILOT”) at issue here bears no reasonable relationship to the costs it purports to capture,it is plainly unreasonable. Accordingly, the City cannot meetits burden and the PILOTis an unlawfultax. Il LEGISLATIVE BACKGROUND OF PROPOSITIONS13 , 218, & 26 In 1978, California voters overwhelmingly passed Proposition 13, which was authored and sponsored by HJTA founder HowardJarvis and his partner Paul Gann. In passing Proposition 13, the People of California intendedto strictly limit the taxing authority of local governmental entities. (City ofSan Diego v. Shapiro (2014) 228 Cal.App.4th 756, 761-62.) One mechanism by which Proposition 13 accomplished this was to cap ad valorem property tax rates. (Cal. Const., art. XIII A, sec. 1, subdiv.(a).) In order to circumventthe restrictions imposed ontheir taxing authority by Proposition 13, many local governmententities began charging new or higher fees, charges, and assessments. (See Town of Tiburonv. Bonander(2009) 180 Cal.App.4th 1057, 1072-74.) One commonpractice 2 wasfor local governmententities to pad utility bills with charges far in excess of the cost to provide the property-related service. To remedy these and other abuses, HJTA authored and sponsored Proposition 218: “In adopting this measure, the people found and declared that Proposition 13 was intended to provide effective tax relief and to require voter approval of tax increases. However,local governments have subjected taxpayers to excessive tax, assessment, fee and charge increases that not only frustrate the purposes of voter approval for tax increases, but also threaten the economicsecurity ofall Californians and the California economyitself. This measure protects taxpayers by limiting the methods by which local governments exact revenue from taxpayers without their consent.” (Howard Jarvis Taxpayers Assn. v. City ofRoseville (2002) 97 Cal.App.4th 637, 640 (internal quotation marks omitted) (hereafter Roseville); citing Historical Notes, 2A West's Annotated California Constitution (2002 supp.) following article XIII C, section 1, page 38.) Proposition 218 limits the authority of local governmentalentities to levy property-related fees and charges. It specifically provides: “A fee or charge shall not be extended, imposed,or increased by any agency unlessit meets all of the following requirements: (1) Revenues derived from the fee or charge shall not exceed the funds required to provide the property related service. & (2) Revenues derived from the fee or charge shall not be used for any purpose other than that for which the fee or charge was imposed. [...] “(5) No fee or charge may be imposed for general governmentalservices including, but not limited to, police, fire, ambulance or library services, where the service is available to the public at large in substantially the same manner as it is to property owners.[...] In any legal action contesting the validity of a fee or charge, the burden shall be on the agency to demonstrate compliance with thisarticle.” (Article XIII D, sec. 6, subdiv. (b) [emphasis added].) In light of Proposition 218's new restrictions on fees, charges, and assessments, local governments again sought to circumventconstitutional restrictions on revenue generation and began broadening the scopeoffees. The consequenceofthis trend, as well as this Court's landmark decision in Sinclair Paint Co. v. State Board ofEqualization (1997) 15 Cal.4th 866, wasthat the voters elected to enact Proposition 26 in 2010. (Schmeerv. County ofLos Angeles (2013) 213 Cal.App.4th 1310, 1322.) “Proposition 26 expandedthe definition of taxes so as to include fees and charges, with specified exceptions; required a two-thirds vote of the Legislature to approve lawsincreasing taxes on any taxpayers; and shifted to the state or local governmentthe burden of demonstrating that any charge, levy or assessmentis not a tax.” (/d.) S e e e ll THE PILOTIS A “TAX” FOR THE PURPOSES OF PROPOSITION 26 Thefirst question certified by this Court asks whether the “payment in lieu of taxes (PILOT)transferred from the city utility to the city general fund [is] a ‘tax’ under Proposition 26 (Cal. Const., art. XIII C, sec. 1, subd. (1)(e))”. Proposition 26 redefines a “tax” imposed by a local governmental entity as “any levy, charge, or exaction of any kind imposedbya local government” subject to seven enumerated exceptions. (/d.) The exception at issue in the instant case excludes from the definition of a tax “charge[s] imposedfor a specific government service or product provided directly to the payor that is not provided to those not charged, and which doesnot exceed the reasonable costs to the local government of providing the service or product.” (Cal. Const., art. XIII C, sec. 1, subd. (e)(2).) “The local governmentbears the burden of proving by a preponderanceofthe evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmentalactivity, and that the mannerin which those costs are allocated to a payor bear fair or reasonable relationship to the payor’s burdenson, or benefits received from, the governmentalactivity.” (Cal. Const., art. XIII C, sec. 1, subd. (e).) Thus, as the appellate court correctly noted, the PILOTatissue here is a tax unlessthe City affirmatively demonstrates that it does not exceed its costs to the general fund to provide electrical utility service. (Citizensfor Fair REURates v. City ofRedding (2015) 233 Cal.App.4th 402, 410-12.) Giventhat Proposition 26 is a relatively recently enacted law,it is unsurprising there is no relevant case law construing the reasonablecost requirement. However, as both the Third District and Citizens have demonstrated, there are cases construing analogousprovisions of Proposition 218 applicable to non-electricity utility rates that are instructive to the case at bar. In Roseville, the Third District considered an “in-lieu franchise fee” charged by the City of Roseville to three municipalutilities. The fee, which was incorporated into charges onutility bills, was intended to reimburse the city for general fund costsrelated to theutility’s use ofcity streets, alleys, and rights of way. (Roseville, 97 Cal.App.4th at 639-40.) The fee was calculated as a flat 4% of the annual budget of each utility and wasdeposited in the city’s general fund. (/d. at 638.) The court determined that the in-lieu fee was a fee for property-related service subject to the limitations of article XIII D, section 6(b) and that such costs theoretically may be recovered from ratepayers. However, the court held that Roseville’s fee was invalid becausethecity failed to establish it “reasonably represent[ed] the cost of providing service”: “Roseville sets the in-lieu fee at a flat 4 percent of each ofthe three utilities’ annual budgets. Onits face, this fee does not represent costs. It is a flat fee. It is imposed on the utilities’ budgets, presumably after their total costs have been accounted for in the budget process. If the budget of a utility increases because of a cost increase unrelated to the in-lieu fee, the in-lieu revenues, as a flat percentage ofthat increased budget, increase as well. The in-lieu fee is the same percentage applied to each budget, regardless of varying usesofstreets, alleys and rights-of-way by the individualutilities. It cannot be said that this flat fee on budgets coincides with these costs. “Roseville concedesthat the in-lieu fee was set at 4 percent‘ofutility expenses by a process that considered (1) what [Roseville] collects as franchise fees from private enterprises, (2) what other communities collect as franchise fees, and (3) what would be a reasonablerate of return for use of [Roseville's] rights[-]of[-]way.’ As plaintiffs point out, however, not one of these factors aligns with an identified cost of providing utility service, as required by Proposition 218; instead, they all ask, ““‘ What will the market bear?’’” While Roseville may be free to impose franchise fees on private utilities on the basis of contractual negotiation rather than costs,it is not free, under section 6(b) of Proposition 218, to impose franchise-like fees on a noncostbasis regarding its municipalutilities.” (Roseville, 97 Cal.App.4th at 648 [emphasis added].) Three yearslater, the Fifth District considered a similar challenge to an “in lieu fee” imposed by the City of Fresno on eachofits municipal utilities. (Howard Jarvis Taxpayers Assn. v. City ofFresno (2005) 127 Cal.App.4th 914) (hereafter, Fresno.) In circumstances mirroring the case at bar, this in lieu fee was designed to capture the “property and other taxes normally placed onprivate business” and wascalculated as one percent of “the assessed value offixed assets of the utility”. (U/d. at 917.) In considering the constitutionality of the in lieu fee in light of Proposition 218's passage, the court reasoned: “Before Proposition 218, a city did not need to be too precise in accountingfor all of the costs of a utility enterprise, since the city was permitted (unless otherwise restricted by its charter) to makea profit onits utility operations in any event and rates were permitted to reflect the ‘value’ of the service, not just the cost of providing the service. “Proposition 218 changedall that with its constitutional requirement that revenues derived from the fee or charge shall not exceed the funds required to provide the property related service. “Cities are still entitled to recoverall of their costs for utility services through user fees. The mannerin which they may do so, however,is restricted by another portion of Proposition 218: The amountof a fee or charge imposed shall not exceed the proportional cost of the service attributable to the parcel. “Together, subdivision (b)(1) and(3)ofarticle XIII [D], section 6, makes it necessary-if Fresno wishes to recoverall of its utilities costs from user fees-that it reasonably determine the unbudgetedcosts of utilities enterprises and that those costs be recovered through rates proportional to the cost of providing service to each parcel. Undoubtedly this is a more complex process than the assessmentof the in lieu fee and the blending of that fee into the rate structure. Nevertheless, such a process is now required by the California Constitution. Thetrial court correctly prohibited Fresno from collecting the outdated in lieu fee.” (Fresno, 127 Cal.App.4th at 922-23.) (Emphasis added; internal quotations andcitations omitted.) The samereasoning ought to apply to the case at bar. While Proposition 26 does not contain precisely the same cost-of-service language that Proposition 218 does, they are conceptually identical. Like the in lieu fees in Roseville and Fresno, the PILOT imposed by the City bears no correlation to costs. There is simply no relationship, reasonable or otherwise, between Proposition 13's arbitrary one percent cap on ad valorem real property taxes and the actual costs incurred by the City in connection with its administration of the electrical utility. The valuation oftheutility’s assets, which are subject to the ebbs and flowsof the market, in no way reflects actual costs incurred by the City on behalf ofthe utility. That this figure represents the property taxes the utility would have paid if it were a private entity is a non sequitur. It may betrue that the City incurs costs legitimately incurred on behalf of the electrical utility, but the PILOT does not reasonably identify and capture those costs. To the extent the PILOT approximatesactual costs, it is merely coincidence. And relying on coincidenceis notfair or reasonable. Because the PILOTistotally arbitrary with respect to actual costs incurred by the City, the City has not and cannot meet the burden imposed uponit byarticle XIII C, section 1(e), and the PILOT must be considered an illegal tax. The majority opinion of the Third District was entirely correct when it remandedthis case to the trial court for further factual determinations regarding actual costs. (Redding, 233 Cal.App.4th at 421-22.) IV THE EXCEPTION DOES NOT APPLY BECAUSE THE PILOT DOES NOT REASONABLYOR FAIRLY REFLECT THE ACTUAL GENERAL FUND COSTS INCURREDBY THE CITY ON BEHALF OF ITS MUNICIPAL UTILITY The second question certified by this Court asks whether“the exception for ‘reasonable costs to the local governmentofproviding the service or product’ apply to the PILOT (Cal. Const., art. XIII C, sec. 1, 10 subd. (1)(e)(2)”. For the reasons discussed in Section III, supra, the answerto this question must be no. The PILOT merelyreflects the valuation of the utility’s assets, and in no way correlates with actual costs incurred by the City on behalf of the Utility. Thus, the City has not and cannot meetits obligations under Proposition 26 to establish that one of the enumerated exceptions apply. Therefore, the PILOT is an unlawfultax that has not been approvedbythe voters. Vv THE PILOT IS INVALID FOLLOWING THE BUDGETARYPERIODIN EFFECT WHENPROPOSITION 26 BECAME LAW The third and final question certified by this Court asks whether “the PILOTpredate[s] Proposition 26.” The correct answerto this question is yes, though onlyasto the budgetary cycle in effect on the date Proposition 26 becameeffective. Because the PILOT wasnot codified and was merely a recurring item in the City’s biennially approved budget, it has no continuing vitality following the end of the budgetary period that ended in 2011. For the same reasons, the City violated Proposition 26 whenit increased the PILOTafter the date Proposition 26 becameeffective but before the expiration of the budgetary 1] cycle ending in 2011. On this point, the majority opinion ofthe Third District is entirely correct in every respect: “The PILOT’s regular appearance in Redding’s budgetary process does not meanit was a permanentor continuing transfer compelled by ordinanceor other non-discretionary authority. Asa recurring discretionary part of the Redding biennial budget, the PILOT cannotbe said to precedeor be grandfathered-in under Proposition 26. And, the PILOT also cannot be said to be the productof legislation for which Proposition 218 provided a savings clause to allow ‘fees and charges’ to be broughtinto compliance by a certain date. Although Propositions 26 and 218 standin pari materia—namely they relate to the same subject (People v. Honig (1996) 48 Cal.App.4th 289, 327)—nothing in either statute grandfathers in the PILOTsimply becauseit has been a customary recurrence in the Redding municipal budget.” (Redding, 233 Cal.App.4th at 417-18.) The decision ofthetrial court improperly blurred the lines separating free market participation and government coercion whenit reasoned: “All businesses are required to pay taxes. Here, the City of Redding had the foresight to own and operate its own electric utility. As a result [i]t has utility rates that are comparatively lower than manyothers in the state. If there was a private company providingelectric service, that company would be requiredto pay taxes to [Redding] for the services and benefits [Redding] provides. That expense would be passed on to customersas a cost of providing 12 the service and product, and would not be subject to voter approval. Theprivate utility could charge whateverratesit desired. Requiring [Redding] to put its electric rates out to vote every time a rate increase is necessary (becausethe rates include items that arguably are not‘directly related’ to the cost of providing electricity) cannot reasonably be deemedto be an intended consequenceofProposition 26.” (Redding, 233 Cal.App.4th at 417-18.) Municipally ownedutilities are not like private businesses, nor does our constitution treat them as such. Private businesses rely on the persuasion of consumersin order to transact business, while the invisible hand of the marketcorrects price inefficiencies. On the other hand, government ownedutilities enjoy the full coercive powerof the state over its monopolizedterritory. Given the obvious distinctions between these two systems, the public policy argumentsfor treating municipally ownedutilities differently are clear. Whereas a business must provide a quality productorservice at a fair price in orderto satisfy its customers andsustain its existence, a governmental entity exists in perpetuity by legislative fiat, free from the corrective influences of competition and financed via extractions from the populace backedby the heavy hand ofthe state. In light ofthis, it is easy to see why the People saw fit to reserve for themselves peremptory approval for all revenue increases save a narrow and enumeratedselection offees. 13 The People of California made clear and unequivocal public policy judgments whenthey passed Propositions 218 and 26 that municipal utilities should be limited to providing utility service at no more than cost, and that they should not be permitted to operate at a profit. Indeed, the “fee” hike at issue in this case is precisely this sort that proponents had in mind whendesigning Proposition 26, which, like Propositions 218 before it, was designed to increase voter participation on matters of public finance and enhance taxpayer consent. (See Howard Jarvis Taxpayers Assn. v. City ofRiverside (1999) 73 Cal.App.4th 679, 683.) Therefore, this Court ought to affirm the majority opinion of the Third District in every respect. /Il 14 VI CONCLUSION For the foregoing reasons, Amicus respectfully requests that this Court affirm the majority opinion of the Third District in its entirety. Dated: August |4, 2015 Respectfully submitted, TREVOR A. GRIMM JONATHAN M. COUPAL TIMOTHYA. BITTLE J. RYAN COGDILL AM J. RYAN COGDILL CounselWc Amicus 15 WORD COUNT CERTIFICATION I certify, pursuant to Rule 8.204(c) of the California Rules of Court, that the attached brief, including footnotes, but excluding the caption pages, tables, and this certification, as measured by the word count of the computer program usedto preparethe brief, contains 3,128 words. Dated: August|Q, 2015 Respectfully submitted, TREVOR A. GRIMM JONATHAN M. COUPAL TIMOTHYA. BITTLE J. RYAN COGDILL | B—-