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Citizens for Fair Reu Rates v. City of Redding

California Court of Appeals, Third District, Shasta

January 20, 2015

CITIZENS FOR FAIR REU RATES et al., Plaintiffs and Appellants,
CITY OF REDDING et al., Defendants and Respondents.


[As Modification on February 19, 2015]

APPEAL from a judgment of the Superior Court of Shasta County Nos. 171377, 172960, William D. Gallagher, Judge. Reversed with directions.

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[Copyrighted Material Omitted]

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McNeill Law Offices and Walter P. McNeill for Plaintiffs and Appellants.

Colantuono & Levin, Colantuono, Highsmith & Whatley, Michael G. Colantuono, Amy C. Sparrow and Michael R. Cobden for Defendants and Respondents

Braun Blaising McLaughlin Smith, C. Anthony Braun and Justin C. Wynne 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 for League of California Cities and the California State Association of Counties as Amicus Curiae on behalf of Defendant and Respondent, City of Redding.

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California voters adopted Proposition 13 in 1978 (Cal. Const., art XIII A, added by Prop. 13, as approved by voters, Primary Elec., June 6, 1978)[1] to require—among other constitutionally implemented tax relief measures—that any “special taxes” for cities, counties, and special districts be approved by two-thirds of voters. (Art. XIII A, § 4.) In 1996, voters adopted Proposition 218 (art. XIII D, added by Prop. 218, as approved by voters, Gen. Elec., Nov. 5, 1996 (Proposition 218)), with one of its aims being “to tighten the two-thirds voter approval requirement for ‘special taxes’ and assessments imposed by Proposition 13.” (Brooktrails Township Community Services Dist. v. Board of Supervisors of Mendocino County (2013) 218 Cal.App.4th 195, 197 [159 Cal.Rptr.3d 424] (Brooktrails).) To this end, Proposition 218 added article XIII C to require that new taxes imposed by a local government be subject to vote by the electorate. (Art. XIII A, § 4; art. XIII C, § 1, as approved by voters, Gen. Elec., Nov. 5, 1996; see 2B West’s Ann. Cal. Const. (2013 ed.) foil. art. XIII C, § 1, pp. 362-363.) General taxes may be approved by a simple majority of voters, but special taxes require two-thirds voter approval. (Art. XIII C, § 2, subds. (c) & (d).) Article XIII C was amended by the voters in 2010 when they passed Proposition 26. (Art. XIII C, § 1, amended by Prop. 26, as approved by voters, Gen. Elec., Nov. 2, 2010 (Proposition 26).)

Proposition 26 added subdivision (e) to section 1 of article XIII C, broadly defining “tax” to include “any levy, charge, or exaction of any kind imposed by a local government.” (Art. XIII C, § 1, subd. (e).) Subdivision (e) incorporated seven exceptions to this definition of tax. (Ibid.) The second exception is the subject of this appeal and provides that “tax” does not include “[a] charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.” (Art. XIII C, § 1, subd. (e)(2), italics added.) Section 1 of article XIII C further provides that “[t]he local government bears the burden of proving by a preponderance of the 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 governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.” (Art. XIII C, § 1 [last para.].)

This case calls us to consider whether Proposition 26 applies to a practice by the City of Redding (Redding) of making an annual budget transfer from the Redding Electrical Utility (Utility) to Redding’s general fund. Because the Utility is municipally owned, it is not subject to a one percent ad valorem tax imposed on privately owned utilities in California. (Art. XIII, § 3,

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subd. (b), adopted by voters, Gen. Elec., (Nov. 5, 1974).) However, the amount transferred between the Utility’s funds and the Redding general fund is designed to be equivalent to the ad valorem tax the Utility would have to pay if privately owned. Redding describes the annual transfer as a payment in lieu of taxes (PILOT). The PILOT is not set by ordinance, but is part of the Redding biennial budget.

Plaintiffs in this case (Citizens for Fair REU Rates, Michael Schmitz, Shirlyn Pappas, and Fee Fighter LLC) challenge the PILOT on grounds it constitutes a tax for which article XIII C requires voter approval. Redding responds the PILOT is not a tax, and if it is a tax, it is grandfathered-in because it precedes the adoption of Proposition 26.

We conclude the PILOT constitutes a tax under Proposition 26 for which Redding must secure voter approval unless it proves the amount collected is necessary to cover the reasonable costs to the city to provide electric service. We reject Redding’s assertion the PILOT is grandfathered-in by preceding Proposition 26’s adoption. As a budget line item, the PILOT is subject to annual discretionary reauthorization by Redding’s city council. The PILOT does not escape the purview of Proposition 26 because it is a long-standing practice.[2] Because the trial court concluded the PILOT was reasonable as a matter of law, we reverse and remand for an evidentiary hearing in which Redding has the opportunity to prove the PILOT does not exceed reasonable costs under article XIII C, section 1, subdivision (e)(2).


Redding’s PILOT

The facts of this case are undisputed.[3] Redding owns a municipal utility to provide electric service for residents and commercial businesses within the city. The Utility owns property to generate and transmit electricity. This municipally owned property is not subject to taxation. (See generally, art. XIII, § 3, subd. (b).)

In 1987, Redding’s director of finance proposed a PILOT to transfer funds from the Utility to the city’s general fund. The director of finance noted 17

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other cities regularly made PILOT transfers and a PILOT in Redding “would generate $1,531,622.45 for the General Fund.” However, the proposal included a cautionary statement contained in a legal advisory letter to the Northern California Power Agency, a consortium of municipal electric utilities including Redding’s Utility. The legal advisory letter concluded that so long as the internal fund transfer had a rational basis or was equal to or less than market rates, there was little risk of invalidation. However, the letter also warned of “a real possibility that rates which produce revenues in excess of cost of service will require a two thirds vote of the affected electorate to be valid under Propositions 13 and 62, or that such excess revenues will be subjected to the expenditure limitations of Proposition 4.”

Redding adopted the PILOT in 1988.

As noted above, California voters adopted Proposition 26 in the general election November 2, 2010. The next month, in December 2010, Redding passed a resolution (No. 2010-179) increasing electric rates by 7.84 percent effective January 2011, and an additional 7.84 percent effective December 2011. There is no line item in the electric bills sent to the Utility’s customers that reflects the PILOT.

The First Action

On February 4, 2011, plaintiffs filed a petition for writ of mandate and complaint for declaratory and injunctive relief. Plaintiffs’ first petition and complaint focused on Resolution No. 2010-179, which the Redding City Council passed in December 2010 to increase the Utility’s rates. One of the stated purposes for the Resolution was “to obtain funds necessary to maintain such intra-City transfers as authorized by law.” Plaintiffs alleged the new rates incorporated the PILOT charge (about $6,000,000), which did not reflect “any particular costs or expenses incurred” to provide electric service, but was “purely extra revenue.” They alleged that because the PILOT was an invalid tax, the rate increase calculated based on the PILOT was also invalid. Plaintiffs asserted the PILOT is an unlawful tax that is “in excess of the reasonable cost of providing services, due to the unlawful incorporation of the PILOT charge and transfer to [Redding]’s general fund.”

Redding demurred, raising three general claims: First, Proposition 26 was not retrospective and therefore did not apply to any aspect of the PILOT charge; second, utility rates were not “imposed” because anybody was free to provide their own electricity rather than pay the Utility for a supply; third, a

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utility charge was not a “tax” within the meaning of Proposition 62.[4] The trial court denied the demurrer and the case proceeded to a bench trial.

The trial court denied the first petition based on its conclusion the PILOT charge predated and therefore was immune from a Proposition 26 challenge. “The PILOT was an established cost that was not increased or affected by the adoption of Resolution 2010-179 [raising rates]. As the rate increases did not increase the PILOT, the Court finds that the Resolution did not impose or increase any tax, and therefore did not require voter approval.”

The Second Action

On August 29, 2011, plaintiffs filed a second complaint, seeking a declaration that a new two-year budget adopted on June 22, 2011, violated Proposition 26. The Redding City Council passed Resolution No. 2011-111 to adopt the biennial budget for the fiscal years ending June 30, 2010, and June 30, 2011. The Resolution explains that “the City Council has approved continuation of the PILOT in every budget since 1988-89. Upon adoption of the [fiscal year] 1992-1993 budget, the City Council amended the PILOT to include the value of capital improvement projects undertaken during the budget year in the asset base to which the 1% [PILOT] is applied. Upon adoption of the [fiscal year] 2002-2003 budget, the City Council further revised the PILOT to adjust the value of assets for inflation in the calculation of the PILOT. Upon adoption of a two-year budget in June 2005, the City Council amended the PILOT into its current form by including the value of joint-venture assets in which [the Utility] has a share in the asset base to which the 1% [PILOT] is applied. The City’s practice is to estimate the value of the assets over the life of a two-year budget and to calculate the PILOT based on that estimate and to correct any variance between the PILOT calculated for the last two-year budget and the actual asset value experienced in that time. Estimates are necessary because the PILOT formula: (i) includes capital projects to be completed in the two future years covered by a [PILOT] and (ii) uses an estimate of inflation during that time.” Thus, Redding’s biennial budget incorporated “a marked increase” in the PILOT that was “due to the addition of the Unit Six generator. . . .”

Consolidation and Trial Court Decision

By stipulation, the trial court consolidated the two actions. The trial court then issued a memorandum of decision in favor of Redding. The trial court

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concluded the PILOT transfer was not a new, increased, or extended tax under Proposition 26, and therefore was grandfathered-in. After reaching this conclusion, the trial court went on to address additional issues. In this part of the decision, the trial court also found that “even if” the PILOT fell within Proposition 26’s ambit, it could reasonably be argued the PILOT reflected a reasonable cost of providing electric service.

Plaintiffs timely appealed from the ensuing judgment for Redding.



Proposition 26’s Application to Redding’s PILOT

We begin by considering whether the PILOT constitutes a tax under Proposition 26. If the PILOT is not a tax under Proposition 26, there is no need to consider whether it is grandfathered-in. Plaintiffs contend the PILOT is a tax because it is not based on any calculation of reasonable costs to Redding for providing electric service. In support, plaintiffs note the ...

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