The Court of Appeal, Second District, recently issued a decision in the long battle over the constitutionality of a water district charging lower fees for agricultural groundwater use than for municipal use. The court held that the higher municipal fees complied with the water district’s enabling act but violated voter-approved constitutional amendments that prevent local governments from levying taxes under the guise of regulatory “fees.” City of San Buenaventura v. United Water Conservation District, ___ Cal.Rptr.3d ___ (2022).
Proposition 218, approved by voters in 1996, limits the ways local governments may collect revenue from taxpayers and requires local governments to place proposed taxes on the ballot for voter consideration. Cal. Const. Art. XIII C. Proposition 26 targets regulatory fees, which proponents asserted were taxes that had merely been named “fees” to avoid Proposition 218’s requirements. By defining “tax,” Proposition 26 brought certain types of fees imposed by local governments under the voter approval requirement set forth by Proposition 218. Voters approved Proposition 26 in 2010, and the new language was added to the California Constitution at Article XIII C, § 1(e).
After Proposition 26 passed, the City of Buenaventura (“City”) challenged the rates set by the United Water Conservation District (“District”). Under Water Code § 75594, the District was required to set a groundwater pumping fee for municipal and industrial (M&I) uses at 3-5 times the rate for agricultural groundwater pumping. The District was charging the City for M&I groundwater at the minimum rate allowed by its enabling act: three times the rate the District charged for agricultural groundwater users.
Following many years of litigation, the California Supreme Court remanded the case in 2017, directing the appellate court to determine if the challenged rates “bore a reasonable relationship to the burdens on or the benefits of” the District’s conservation activities. City of San Buenaventura v. United Water Conservation District (2017) 3 Cal.5th 1191, 1214.
The appellate court’s recent decision held the minimum 3:1 ratio required by section 75594 is facially unconstitutional. A 3:1 ratio may be justified under some circumstances, according to the court, but only if the District can show the rates “bear a fair or reasonable relationship” to the burdens on the District of providing the service or the benefits the District provides through the service. Cal. Const. Art XIII C, § 1; City of San Buenaventura v. United Water Conservation District (2017) 3 Cal.5th 1191, 1215 (conc. opn. of Liu, J.).
The court began by confirming that claims asserted against local governments under Proposition 218 or 26 are not subject to a deferential rational basis review. Instead, noting the purpose of the constitutional amendments is “to limit government’s power to exact revenue and to curtail the deference,” the court confirmed that the judicial standard of review is independent judgment. City of San Buenaventura v. United Water Conservation District, ___ Cal.Rptr.3d ___ (2022) (citing Silicon Valley Taxpayers’ Assn., Inc. v. Santa Clara County Open Space Authority (2008) 44 Cal.4th 431, 448; see also Brooktrails Township Community Services Dist. v. Board of Supervisors of Mendocino County (2013) 218 Cal.App.4th 195.)
Then the court independently reviewed the facts and declared that the District failed to meet its burden in showing why M&I groundwater use costs three times what agricultural groundwater costs. Because the District could not show that the City enjoyed a greater benefit from the M&I water — or that the higher rate was reasonably related to a higher burden on the District to manage or provide M&I water — the higher rate violated Article XIII C.
Missing Context: Water Law Principles
Water law principles grant priority to senior users. Generally, the most senior users are agricultural groundwater users, who hold “overlying” groundwater rights that have priority to native groundwater over junior M&I users that hold “appropriative” rights. Under the “physical solution” doctrine, the junior rights holders may be required to pay for programs and projects that make new water available for their use, while protecting senior rights.
The appellate opinion does not mention or analyze whether the 3:1 fee ratio for M&I use compared to agricultural use is justified by the physical solution doctrine.
Absent any analysis of whether or how the water rights context might justify the District’s 3:1 fee ratio, it remains unclear whether the appellate opinion’s impact will ripple beyond the District fees challenged in this case.
Takeaway Points
The proper test for regulatory fees, charges, and rates set by local governments, like cities, counties, and special districts, is whether the party setting the fee has shown that the fee is reasonably related to the burdens or benefits of the governmental service or product. Cal. Const. Art XIII C, § 1(e)(2). Parties charged a higher fee should be receiving a greater benefit, or the government needs to demonstrate why the higher rate is justified by higher burdens to provide services or products to the impacted party. Without this showing, the regulatory fee, charge, or rate is likely a “tax” requiring voter approval under Article XIII C.
Cases brought under Proposition 218 and Proposition 26 will receive an independent court review. That means courts will not concern themselves with conflicting evidence and will only decide whether substantial evidence supports the defendant agency’s determination that its regulatory fee bears a fair or reasonable relationship to the burdens on the agency of providing the service or the benefits the agency provides through the service.
Questions
If you have any questions regarding this Legal Alert, please contact the following attorney or any of Kronick’s Municipalities and Special Districts or Water Law attorneys.
Eric Robinson
erobinson@kmtg.com | 916.321.4576
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