Citizens for Fair Reu Rates v. City of Redding
| Citation | 6 Cal.5th 1,424 P.3d 268,237 Cal.Rptr.3d 179 |
| Decision Date | 27 August 2018 |
| Docket Number | S224779 |
| Parties | CITIZENS FOR FAIR REU RATES et al., Plaintiffs and Appellants, v. CITY OF REDDING et al., Defendants and Respondents. |
| Court | United States State Supreme Court (California) |
McNeill Law Offices and Walter P. McNeill, Redding, for Plaintiffs and Appellants.
Arthur Jarvis Cohen and Harry Zavos for Glendale Coalition for Better Government as Amicus Curiae on behalf of Plaintiffs and Appellants.
Trevor A. Grimm, Los Angeles, Jonathan M. Coupal, Timothy A. Bittle, Sacramento, and J. Ryan Cogdill for Howard Jarvis Taxpayers Association as Amicus Curiae on behalf of Plaintiffs and Appellants.
Meriem L. Hubbard, Sacramento, and Ralph W. Kasarda for Pacific Legal Foundation as Amicus Curiae on behalf of Plaintiffs and Appellants.
Nielsen Merksamer Parrinello Gross & Leoni, Steven A. Merksamer, Eric J. Miethke and Kurt R. Oneto, Sacramento, for California Taxpayers Association as Amicus Curiae on behalf of Plaintiffs and Appellants.
Colantuono & Levin, Colantuono, Highsmith & Whatley, Michael G. Colantuono, Amy C. Sparrow, Pasadena, Michael R. Cobden, Grass Valley, Jon R. di Cristina and Megan S. Knize, Pasadena, for Defendants and Respondents.
Braun Blaising McLaughlin & Smith, C. Anthony Braun, Justin C. Wynne and Daniel E. Griffiths, Sacramento, for California Municipal Utilities Association as Amicus Curiae on behalf of Defendants and Respondents.
Jarvis, Fay, Doporto & Gibson, Benjamin P. Fay and Rick W. Jarvis, Oakland, for League of California Cities and California State Association of Counties as Amici Curiae on behalf of Defendants and Respondents.
Article XIII C of the California Constitution1 prohibits local governments from imposing, increasing, or extending any tax without voter approval. Excepted from the definition of tax is any charge imposed for a service or product that does not exceed the reasonable costs of providing it.
The City of Redding operates an electric utility as a department of its city government. Each year, the city's budget includes a transfer from the utility's enterprise fund to the city's general fund. The transfer is designed to compensate the general fund for the costs of services that other city departments provide to the utility. The question here is whether article XIII C applies to this interfund transfer and, if so, how. We conclude that the budgetary transfer itself is not a tax. That is, it is not the type of exaction that is subject to article XIII C. The rate the city charges its utility customers is not a tax because it falls under the exception mentioned above. The undisputed evidence here shows that the challenged rates did not exceed the reasonable costs of providing electric service. Because the challenged rates were not taxes, voter approval was not required.
Operating as a city department, Redding Electric Utility (REU) provides electricity to local residents and charges rates established by the city council. In December 2010, the council increased REU's rates. Plaintiffs2 filed a writ petition and complaint alleging the city's action violated article XIII C because it imposed or increased a tax without voter approval.
Subject to certain exceptions, the term " ‘tax’ " is now defined as "any levy, charge, or exaction of any kind imposed by a local government." (Art. XIII C, § 1, subd. (e).) The definition excludes a charge imposed for a specific government service or product if: (1) the service or product is provided directly and exclusively to those who pay the charge; and (2) the charge does not exceed the reasonable costs to the local government of providing the service or product. (Art. XIII C, § 1, subd. (e)(2).) As discussed below, this definition was added to the constitutional scheme in November 2010.
The gravamen of plaintiffs' claim was that the city had embedded in REU's rates an excessive charge designed to compensate the city for services its other departments provided to REU. As a result, REU's rates exceeded the reasonable costs of providing electricity and could not be increased without voter approval.3 Some background is needed to understand this claim.
Other city departments provide a variety of services to REU. These include general services, like police and fire protection, along with services provided to REU as a city department, including billing, finance, and fleet maintenance. To cover the costs, the city council adopted a practice common among municipalities that operate utilities: an annual budgetary transfer from the utility's enterprise fund to the city's general fund. An enterprise fund is a budgetary device "used to track monies received and expended for municipal services where fees or charges to the users of those services pay wholly or in part for such services." (Multari et al., Guide to Local Government Finance in California (2d ed. 2017) p. 27.) All customer rate payments are deposited in the enterprise fund. REU also realizes substantial revenue by selling excess electricity to other utilities, and from other sources as well. That revenue is also placed in the enterprise fund.4
From 1971 to 1988, the budgetary transfer amount was $330,000. A 1987 study concluded the city was underpaying its general fund for the services provided to its departments, including REU. The city manager informed the council that the costs of any service "not met through [a] service charge [transfer] ... must necessarily be subsidized by the general taxpayer."
In 1988, the city council adopted a new method for calculating the compensatory transfer, called the "payment in lieu of taxes" (PILOT). The PILOT is based on the amount REU would pay in property taxes under Proposition 13 if it were a private enterprise, rather than a city department. (See post , 237 Cal.Rptr.3d at pp. 184–85, 424 P.3d at pp. 272–73 [discussing Prop. 13].) While REU's property is not subject to taxation (art. XIII, § 3, subd. (b) ), the city is entitled to recover the value of its provided services. Rather than calculate the actual cost of those services, the city used the amount a private utility would pay in property taxes as a proxy for the actual cost. The calculation was last amended in 2005, five years before the definition of "tax" was added to article XIII C.
Throughout this discussion, it will be important to distinguish between the PILOT transfer in the city's budget and the rates charged to REU's customers. When the city council increased customer rates in December 2010, it recognized the PILOT as a cost of operation. The city council resolution explained the rate increase was necessary: "(1) to meet operating expenses and to fund state-mandated programs; (2) to meet financial reserve needs and requirements; (3) to obtain funds for capital projects necessary to maintain service reliability; (4) to meet the costs of purchased power; (5) to meet required state and federal mandates; and (6) to obtain funds necessary to maintain such intra-City transfers as authorized by law." REU's financial plan for fiscal years 2009 to 2010 through 2013 to 2014 also characterized the PILOT as an operational expense of the utility.5
In challenging the rate increase, plaintiffs alleged that the PILOT: (1) was "embedded" in REU's increased rates; (2) did not reflect the city's actual costs to provide services, but was impermissibly based, like a property tax, on a percentage of the value of REU's assets; and (3) was simply a device to collect extra money from REU's customers for transfer to the city's general fund. If the PILOT did not reflect any actual cost of providing electric service and was not approved by the electorate, it was a tax under article XIII C. Plaintiffs asked the court to invalidate the rate-increase resolution to the extent it incorporated the PILOT and to enjoin enforcement of the rate increase to that same extent.
The city demurred, arguing that, if plaintiffs were alleging the PILOT itself was a tax, their claim must fail because article XIII C's operative provisions were not in effect when the PILOT was first implemented or last increased.6 Plaintiffs then made a slight but significant adjustment to their argument. They claimed that when the PILOT was implemented or increased was irrelevant because they were challenging the city's enactment of "inflated electric rates ... in excess of the reasonable cost of electric service to REU customers." The challenged tax, therefore, was the " ‘rate which produces the surplus revenues’ " that are then transferred to the general fund to pay the PILOT. Consequently, retroactivity was not an issue presented because the "offending action ... [was] the creation ... of inflated electric utility rates," which occurred after the effective date of Proposition 26.
The city responded that its increased rate, including the PILOT, reflected the reasonable cost of providing service. Under this theory, REU is treated like a private utility, which would pay property taxes and pass the cost to its customers through its rates. Because city-operated REU does not pay property taxes, the city loses revenue. The PILOT takes into account this "cost" of providing utility services through its own operation rather than having them provided by a taxpaying private business. The city also advanced an alternative argument. Even if the PILOT was not a reasonable cost of providing service, the rate increase did not violate article XIII C because REU's rate revenues did not exceed its other costs and its enterprise fund had sufficient nonrate revenues to pay the PILOT.
The city's alternative argument resolves the case. Consequently, we need not discuss the method used to calculate the PILOT.
In June 2011, the city council approved the city's budget for fiscal years 2011 to 2012 and 2012 to 2013. Plaintiffs sued again, challenging the budget resolution. They urged that the new budget suffered from the same defect as the previous...
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