Howard Jarvis Taxpayers v. Los Angeles

• Decision Date: 01 November 2000
• Docket Number: No. B137639.,B137639.
• Citation: 101 Cal.Rptr.2d 905,85 Cal.App.4th 79
• Parties: HOWARD JARVIS TAXPAYERS ASSOCIATION et al., Plaintiffs and Appellants, v. CITY OF LOS ANGELES et al., Defendants and Respondents.
• Court: California Court of Appeals Court of Appeals

101 Cal.Rptr.2d 905

85 Cal.App.4th 79

HOWARD JARVIS TAXPAYERS ASSOCIATION et al., Plaintiffs and Appellants, v. CITY OF LOS ANGELES et al., Defendants and Respondents.

No. B137639.

Court of Appeal, Second District, Division 4.

November 1, 2000.

Rehearing Denied December 1, 2000.

Review Denied Feb. 14, 2001.^*

Timothy Bittle; Klapanis & Grimm, Trevor Grimm, Los Angeles; Richard I. Fine, Los Angeles, for Plaintiffs and Appellants.

James K. Hahn, City Attorney, Philip Shiner, Senior Assistant, Edward A. Schlotman and S. David Hotchkiss, Assistant City Attorneys, and Fay A. Chu, Deputy City Attorney, for Defendants and Respondents.

HASTINGS, J.

Plaintiffs and appellants in this action are two non-profit corporations, the Howard Jarvis Taxpayers Association and the Apartment Association of Los Angeles County, Inc., and three individuals, Ivan Shinkle, Harold Greenberg and Mark Dolan (collectively referred to as appellants). In June 1999, they brought a class action lawsuit on behalf of all individuals and entities who paid for water services in the City of Los Angeles from 1995 to the present, for declaratory relief, taxpayers' injunctive relief (Code Civ.Proc, § 526a), writ of mandate, and damages, against the City of Los Angeles and the Los Angeles Department of Water and Power (collectively referred to as respondents). In October 1999, respondents' demurrer was sustained without leave to amend and the matter was dismissed. This appeal followed. We affirm the judgment (order of dismissal).

FACTUAL AND PROCEDURAL BACKGROUND

In their complaint, appellants allege that they were overcharged for water services and that the overcharges resulted in a surplus in the City's Water Revenue Fund. Appellants allege that during 1995-1999, respondents illegally transferred the surplus of approximately $87 million from the Water Revenue Fund to the City's Reserve Fund and then to the city's General Fund. Appellants contend that this transfer of funds violates Proposition 218 (Cal. Const., arts. XIII C and XIII D) and the provisions of the Los Angeles City Charter. The gist of appellants' argument is that payments for water services are essentially property-related user fees or special taxes, and thus come under the purview of Proposition 218, which prohibits the imposition of certain tax levies and real property assessments without voter approval.

Respondents do not deny that the transfers of funds were made, but argue that the Department of Water and Power (DWP) has the power to set water rates, enjoy a reasonable rate of return, that the charging of such rates for water services does not constitute a property-related user fee or special tax within the meaning of Proposition 218, rather, it is the sale of a commodity, and that the City is authorized to make intra-fund transfers. Respondents also contend that appellants' complaint is procedurally defective for their failure to exhaust administrative remedies and to comply with class action requirements.

DISCUSSION

1. The Authority of the DWP to Set Rates and to Enjoy a Reasonable Rate of Return

Article XXII, section 220 of the City Charter provides that the DWP has the power "to fix the rates to be charged for water ... for use within or without the City, and to prescribe the time and the manner of payment of the same. [¶] (a) Such rates for water and reclaimed water shall be so fixed at least every two years; provided that, except as hereinafter otherwise prescribed, such rates shall be of uniform operation, as near as may be, and shall be fair and reasonable, taking into consideration, among other things, the nature of the use, the quantity supplied and the value of the service; provided, further, that the rates inside the City may be less, but not greater, than the rates outside the City for the same or similar uses." (Italics added.)

Water rates established by the lawful rate fixing body are presumed reasonable, fair and lawful. (Hansen v. City of San Buenaventura (1986) 42 Cal.3d 1172, 1180, 233 Cal.Rptr. 22, 729 P.2d 186.) A plaintiff contesting the rates bears the burden of proof of unreasonableness. (Id. at p. 1180, 233 Cal.Rptr. 22, 729 P.2d 186; Elliott v. City of Pacific Grove (1975) 54 Cal.App.3d 53, 60,126 Cal.Rptr. 371.)

In this case, appellants do not allege that water rates are unreasonable per se, for example, by comparison to other areas, past rates, or actual costs. Appellants seem to allege that the existence of a surplus in the Water Revenue Fund proves that the DWP is overcharging for water. Appellants argue that water charges must reflect the cost of delivering the water and maintaining the system and that there should not have been a surplus if the City had regulated charges in a manner related to the costs. However, according to Hansen, a municipal utility is entitled to a reasonable rate of return and utility rates need not be based purely on costs. (Hansen v. City of San Buenaventura, supra, 42 Cal.3d at pp. 1176, 1183, 233 Cal.Rptr. 22, 729 P.2d 186.)

Appellants argue that Hansen, decided before the adoption of Proposition 218, is no longer good law. As discussed infra, we find that Proposition 218 does not apply to the rates at issue here.

2. Are Water Rates Taxes or Fees? Does Proposition 218 Apply?

"Proposition 218, the `Right to Vote on Taxes Act,' was adopted by the voters in November 1996. The stated purpose of Proposition 218 was to `protect[ ] taxpayers by limiting the methods by which local governments exact revenue from taxpayers without their consent.' (Prop.218, Gen.Elec.(Nov.5, 1996) § 2, p. 108.) The proposition generally provides for taxpayer approval for the adoption, extension or increase of taxes or assessments. Proposition 218 added [to the Cal. Const.] article XIII C involving general and special taxes and article XIII D involving assessments." (Howard Jarvis Taxpayers Assn. v. City of San Diego (1999) 72 Cal.App.4th 230, 235, 84 Cal.Rptr.2d 804.)

Proposition 218 defines a "special tax" as "any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund." (Cal. Const, art. XIII C, § 1, subd. (d).) Pursuant to Proposition 218, a local government may not impose, extend or increase any special tax unless "that tax is submitted to the electorate and approved by a two-thirds vote." (Cal. Const., art. XIII C, § 2, subd. (d).)

Proposition 218 also provides: "Except for fees or charges for sewer, water, and refuse collection services, no property-related fee or charge shall be imposed or increased unless and until that fee or charge is submitted and approved by a majority vote of the property owners of the property subject to the fee or charge or ... by a two-thirds vote of the electorate residing in the affected area." (Cal. Const., art. XIII D, § 6, subd. (c), italics added.) "Fee" and "Charge" are defined as "any levy other than an ad valorem tax, a special tax, or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property-related service." (Cal. Const., art. XIII D, § 2, subd. (e), italics added.)

Appellants contend that the charges imposed for water services in Los Angeles are in reality special taxes, imposed as an incident of property ownership, and therefore, require voter approval. We disagree.¹

These usage rates are basically commodity charges which do not fall within the scope of Proposition 218. They do not constitute "fees" as defined in article XIII D, section 2, because they are not levies or assessments "incident of property ownership." (Subd. (e).) Nor are they fees for a "property-related service," defined in subdivision (h) as "a public service having a direct relationship to property ownership." As indicated by the ordinances setting water rates, the supply and delivery of water does not require that a person own or rent the property where the water is delivered. The charges for water service are based primarily on the amount consumed, and are not incident to or directly related to property ownership.²

3. Can the City Transfer Monies Between the Various Funds?

Article XXVIII, section 380 of the City Charter³ established various funds in the City Treasury, including the Reserve Fund, the Water Revenue Fund, and the General Fund. The General Fund "is established as a medium of control of and accounting for municipal activities other than activities authorized or contemplated by special funds. All revenues and receipts which are not by law or Charter pledged or encumbered for special purposes shall be credited to the general fund."

Appellants argue that nothing allows monies from the Water Revenue Fund to be transferred to the General Fund. However, our review of the provisions of the City Charter reveals that the City Council is authorized to transfer surplus funds from the Water Revenue Fund to the Reserve Fund, and is also authorized to transfer funds from the Reserve Fund to the General Fund.

City Charter article XXII, section 221 provides: "None of the money in or belonging to the water revenue fund ......