Regents of University v. East Bay Mud

• Decision Date: 06 July 2005
• Docket Number: No. A105674.,A105674.
• Citation: 130 Cal.App.4th 1361,31 Cal.Rptr.3d 278
• Parties: The REGENTS OF the UNIVERSITY OF CALIFORNIA, Plaintiff, Appellant, and Cross-Respondent, v. EAST BAY MUNICIPAL UTILITY DISTRICT, Defendant, Respondent, and Cross-Appellant.
• Court: California Court of Appeals Court of Appeals

31 Cal.Rptr.3d 278

130 Cal.App.4th 1361

The REGENTS OF the UNIVERSITY OF CALIFORNIA, Plaintiff, Appellant, and Cross-Respondent, v. EAST BAY MUNICIPAL UTILITY DISTRICT, Defendant, Respondent, and Cross-Appellant.

No. A105674.

Court of Appeal, First District, Division 5.

July 6, 2005.

James E. Holst, Oakland, Stephen P. Morrell, Thelen Reid & Priest LLP, Anthony J. Barron, Counsel for plaintiff, appellant and cross-respondent.

Lagerlof, Senecal, Bradley, Gosney & Kruse, LLP, Thomas S. Bunn III, Woodruff, Spradlin & Smart, P.C., Thomas L. Woodruff, Orange, Amicus Curiae on behalf of respondent and cross-appellant.

Robert C. Helwick, Craig S. Spencer, Oakland, Joel Fried, Fox & Sohagi, Margaret Moore Sohagi, Philip A. Seymour, Los Angeles, Counsel for defendant, respondent, and cross-appellant.

GEMELLO, J.

In San Marcos Water Dist. v. San Marcos Unified School Dist. (1986) 42 Cal.3d 154, 228 Cal.Rptr. 47, 720 P.2d 935 (San Marcos), the Supreme Court held that the constitutional public entity exemption from special assessments prohibited a local water district from imposing a capacity fee used to fund capital improvements to the water system, absent legislative authorization. The Legislature responded to the San Marcos decision by enacting Government Code section 54999 et seq.¹, often referred to as the San Marcos Legislation, authorizing public utilities to impose "capital facilities fees" on public entities, subject to certain limitations. This case involves the application of the San Marcos Legislation to the capital component of a public utility's periodic water service charges imposed on a public university.

The Regents of the University of California and the East Bay Municipal Utility District each appeal from a judgment on the Regents' refund action, challenging the fiscal year 2002 water rates. The Regents contend that the District's rates contain capital facilities fees exceeding the limitations imposed by the San Marcos Legislation. The District contends that the charges are not capital facilities fees within the scope of the statute and that, in any event, the statute does not authorize refunds. We hold that the trial court properly concluded that the District's water rates contain capital facilities fees and that the statute authorizes refunds, but that the trial court incorrectly applied the "Implicit Price Deflator" fee limitation in the San Marcos Legislation. We affirm in part and reverse in part.

FACTUAL AND PROCEDURAL BACKGROUND

The material facts are undisputed. The dispute lies in the application of the law to those facts. This case relates to defendant East Bay Municipal Utility District's ("East Bay MUD" or "District") fiscal year 2002 ("FY 2002") periodic charges for water and wastewater service, as imposed on the Regents of the University of California ("Regents"). The Regents paid a total of $2,966,972.16 in periodic water and wastewater charges in FY 2002.

The Regents filed a complaint in January 2002, alleging that the rates established by the District for its various water and wastewater charges exceeded the rates which may be charged under section 54999.3, part of the San Marcos Legislation.² In particular, the Regents alleged that the District's FY 2002 rates include capital facilities fees which exceed the section 54999.3 limitations because they charge the Regents for facilities which do not actually serve them (the "Actually Serving Limitation") and because the fees exceed the percentage increase in the Implicit Price Deflator for State and Local Government Purchases (the "Price Deflator Limitation"). (See § 54999.3.)³

In its answer and subsequent filings, East Bay MUD acknowledged that its rates provide revenue for payment of capital expenses, but disputed that any portion of its rates is a capital facilities fee. The District's rates are calculated to balance total revenues with the actual cost of providing water service to the District's users. This actual cost includes the costs of capital facilities, although the revenue generated from the portion of the rates calculated to cover the capital costs is not segregated from the revenue generated from the portion of the rates calculated to cover operating and maintenance expenses. In FY 2002, the costs of capital facilities represented approximately 40 percent of the total costs recovered through water rates.

The trial court filed a stipulated case management order establishing a two-phase trial. The Phase I trial was to decide whether East Bay MUD's periodic charges are subject to section 54999; if so, whether the District complied with the limitations in section 54999.3; and whether the District's affirmative defenses bar the Regents' claims. The parties submitted a joint statement of stipulated facts. The trial court rejected the District's affirmative defenses and concluded that each of the challenged periodic rates at issue contain capital facilities fees; that the Regents paid for facilities that did not "actually serve" them; and that, for the purpose of the Price Deflator Limitation, the FY 2002 capital facilities fees should be determined by reference to the fees charged in FY 1999.

Phase II was to decide all remaining issues. The parties submitted a Phase II joint statement of stipulated facts, specifying the amount of overcharges under different interpretations of the limitations in the San Marcos Legislation. The trial court's Phase I and II decisions were incorporated into a final judgment awarding the Regents a $47,000 refund based on the Price Deflator Limitation as calculated using FY 1999 as the baseline and declaring that there was no overcharge under the Actually Serving Limitation. The judgment invalidated the District's resolution enacting the challenged rates "to the extent it resulted in overcharges to The Regents in the amount of $47,000.00 based upon [the District's] violation of the Implicit Price Deflator limitation as to The Regents."

The Regents appealed, contending that the trial court erred in its construction of the Price Deflator and Actually Serving Limitations. East Bay MUD cross-appealed, contending that the trial court erred in concluding that the District's rates contain capital facilities fees within the meaning of the San Marcos Legislation and in concluding that the statute authorizes refunds of overcharges.

DISCUSSION

I. The Supreme Court Decision in San Marcos and the San Marcos Legislation

A. The San Marcos Decision

In San Marcos, supra, 42 Cal.3d 154, 228 Cal.Rptr. 47, 720 P.2d 935 (San Marcos), the Supreme Court considered whether a school district was exempt from a local water district's capacity fee, used to fund capital improvements to the water system. At issue was Article XIII, section 3, subdivision (b) of the California Constitution, exempting property owned by public entities from property taxation. From that constitutional exemption, California courts have implied a further exemption of such property from special assessments, absent legislative authorization. (San Marcos, at pp. 160-161, 228 Cal.Rptr. 47, 720 P.2d 935, citing Inglewood v. County of Los Angeles (1929) 207 Cal. 697, 703-704, 280 P. 360.) "The rationale behind a public entity's exemption from property taxes and special assessments is to prevent one tax-supported entity from siphoning tax money from another such entity; the end result of such a process could be unnecessary administrative costs and no actual gain in tax revenues. [Citation.]" (San Marcos, at p. 161, 228 Cal.Rptr. 47, 720 P.2d 935; see also Smith v. City of Santa Monica (1912) 162 Cal. 221, 222, 121 P. 920 ["to countenance taxation of [public] property would be to countenance the folly of the sovereign taxing its own property `and taking money out of one pocket to put in another'"].)

The Supreme Court considered whether the capacity fee at issue, a one-time fee for capital improvements paid at the time of connection and based on anticipated sewage discharge, was more properly characterized as a special assessment or as a user fee for purposes of the property tax exemption. (San Marcos, supra, 42 Cal.3d at p. 159, 228 Cal.Rptr. 47, 720 P.2d 935.) A special assessment is "`a compulsory charge placed by the state upon real property within a pre-determined district, made under express legislative authority for defraying in whole or in part the expense of a permanent public improvement therein.'" (Id., at p. 161, 228 Cal.Rptr. 47, 720 P.2d 935.) "In contrast to a special assessment, a usage fee typically is charged only to those who use the goods or services. The amount of the charge is related to the actual goods or services provided to the payer. The usage fee for an ongoing service would normally be a monthly charge rather than a one-time charge." (Id. at p. 162, 228 Cal.Rptr. 47, 720 P.2d 935.) The Court characterized the capacity charge at issue as a "hybrid" because it had "`some characteristics which resemble a special assessment (one time charge; not based on actual use) and some which look more like a user charge (charge only applies to users; based on anticipated use).'" (Id. at p. 163, 228 Cal.Rptr. 47, 720 P.2d 935, quoting Court of Appeal decision.)

The San Marcos Court held, "Under the rule we adopt, no matter how the form of the fee is varied (i.e., whether based on actual or anticipated use, or unrelated to use; whether a one-time fee or monthly fee; and whether charged to all property owners or only to users of the sewer system), the purpose of the fee will determine whether or not public entities are exempt from paying the fee. In sum, a fee aimed at assisting a utility district to defray costs of capital improvements will be deemed a special assessment from which other public entities are exempt." (San Marcos, supra, 42 Cal.3d at pp. 164-165, 228 Cal.Rptr. 47, 720 P.2d 935.)

The Supreme Court recently reaffirmed the San Marcos decision, which it characterized as holding "that the fee should be considered an...