APPEAL from a judgment of the Superior Court of Sacramento County, Lloyd G. Connelly, Judge. Reversed in part with directions and affirmed in part. (Super. Ct. Nos. 06CS00748 & 07CS00263).
The opinion of the court was delivered by: Butz, J.
CERTIFIED FOR PUBLICATION
This declaratory relief and writ of mandate action concerns the validity of two auditing rules used by defendant State Controller's Office (Controller). The Controller used these rules in reducing state-mandated reimbursement claims for employee salary and benefit costs submitted from plaintiff school districts and community college districts (hereafter plaintiffs).
Contemporaneous Source Document Rule (CSDR)
The first auditing rule is referred to by plaintiffs as the Contemporaneous Source Document Rule (CSDR). The Controller used this rule to reduce reimbursement claims for the following four state-mandated school district programs during the challenged period straddling fiscal years 1998 to 2003: (1) the School District of Choice Program (SDC); (2) the Emergency Procedures, Earthquake Procedures and Disasters Program (EPEPD); (3) the Intradistrict Attendance Program; and (4) the Collective Bargaining Program. We conclude this rule was an invalid underground regulation under the state Administrative Procedure Act (APA) during this period. (Gov. Code, § 11340 et seq.)*fn1 Consequently, we overturn the Controller's audits for these four programs during this period to the extent they were based on this rule.
Health Fee Elimination Program: Health Fee Rule
The second auditing rule is the Health Fee Rule, which the Controller used to reduce reimbursement claims for state-mandated health services provided by the plaintiff community college districts pursuant to the Health Fee Elimination Program. We uphold the validity of this rule.
The trial court: (1) invalidated the CSDR as applied to the Intradistrict Attendance and Collective Bargaining Programs (from which the Controller appeals); (2) hinted at the CSDR's invalidity as applied to the SDC and EPEPD Programs but did not grant relief thereon, apparently deeming the administrative remedy sufficient (from which the school districts appeal); and (3) upheld the validity of the Health Fee Rule (from which the community college districts appeal). We shall affirm the judgment regarding the Intradistrict Attendance Program, the Collective Bargaining Program, and the Health Fee Rule, but reverse the judgment, with directions, regarding the SDC and EPEPD Programs.
Because the issues raised in this appeal are almost entirely legal ones subject to our independent review (see Grier v. Kizer (1990) 219 Cal.App.3d 422, 434, disapproved on a different ground in Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, 577(Tidewater) [whether an auditing rule is an APA regulation is a question of law]), it is unnecessary to set forth a factual background at this stage. Instead, we will proceed straight to our discussion. First, we will briefly summarize the process of state-mandated reimbursement and the concept of underground regulation. Then we will turn our attention to the programs and remedies at issue, weaving in the pertinent facts as we go.
I. State-mandated Reimbursement Process
In 1979, California's voters adopted article XIII B, section 6, of the state Constitution, which specifies that if the state imposes any "new program or higher level of service" on any local government (including a school district), the state must reimburse the locality for the costs of the program or increased level of service.
In 1984, the Legislature enacted statutes to govern the state mandate process. (§ 17500 et seq.) Under these statutes, the Commission on State Mandates (the Commission) determines, pursuant to a "test claim" process, whether a state program constitutes a reimbursable state mandate. (§§ 17551, subd. (c), 17553.)
Once the Commission determines that a state mandate exists, it adopts regulatory "[P]arameters and [G]uidelines" (P&G's) to govern the state-mandated reimbursement. (§ 17557.) The Controller, in turn, then issues nonregulatory "[C]laiming [I]nstructions" for each Commission-determined mandate; these instructions must derive from the Commission's test claim decision and its adopted P&G's. (§ 17558.) Claiming Instructions may be specific to a particular mandated program, or general to all such programs.
The Controller may audit a reimbursement claim filed by a local agency or school district within three years of the claim's filing or last amendment. (§ 17558.5, subd. (a).)
If the Controller reduces a specific reimbursement claim via an audit, the claimant may file an "[I]ncorrect [R]eduction [C]laim" with the Commission. (§ 17558.7, subd. (a).)
II. The Concept of Invalid Underground Regulation
In their petitions for writ of mandate and complaints for declaratory relief, the school districts (comprising Clovis, Fremont, Newport-Mesa, Norwalk-La Mirada, Riverside, Sweetwater, and San Juan; hereafter collectively, School Districts) allege that the CSDR constitutes an invalid, unenforceable underground regulation under the APA as applied by the Controller in auditing salary and benefit costs in reimbursement claims for the SDC, EPEPD, Intradistrict Attendance, and Collective Bargaining Programs during the applicable periods roughly encompassing the fiscal years 1998 to 2003.*fn2
In their petition for writ of mandate and complaint for declaratory relief (actually appended to the School Districts' petition and complaint), the community college districts (comprising San Mateo, Santa Monica, State Center, and El Camino; hereafter collectively, College Districts) allege that the Health Fee Rule constitutes an invalid, unenforceable underground regulation under the APA as applied by the Controller in auditing reimbursement claims for the Health Fee Elimination Program or, alternatively, that the Controller's auditing actions in this respect were beyond its lawful authority.
The basic legal principles that apply to these allegations are as follows:
"'If a rule constitutes a "regulation" within the meaning of the APA (other than an "emergency regulation"... ) it may not be adopted, amended, or repealed except in conformity with "basic minimum procedural requirements"'" that include public notice, opportunity for comment, agency response to comment, and review by the state Office of Administrative Law. (Morning Star Co. v. State Bd. of Equalization (2006) 38 Cal.4th 324, 333 (Morning Star).) "These requirements promote the APA's goals of bureaucratic responsiveness and public engagement in agency rulemaking." (Ibid.)
Any regulation "'that substantially fails to comply with these requirements may be judicially declared invalid'" and is deemed unenforceable. (Morning Star, supra, 38 Cal.4th at p. 333; § 11350, subd. (a).)
A "regulation" under the APA "means every rule, regulation, order, or standard of general application or the amendment, supplement, or revision of any rule, regulation, order, or standard adopted by any state agency to implement, interpret, or make specific the law enforced or administered by it, or to govern its procedure." (§ 11342.600.) As we will later explain more fully, an APA regulation has two principal characteristics: It must apply generally; and it must implement, interpret, or make specific the law enforced or administered ...