New Bills Aim to Protect Water Rates, Charges from Prop. 218 Litigation
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New Bills Aim to Protect Water Rates, Charges from Prop. 218 Litigation

Brownstein Client Alert, May 16, 2024

Lawmakers introduce tools to ease pressure from SGMA and infrastructure demands on public agency revenue powers

Adopted in 1996, Proposition 218 (and later Proposition 26 in 2010) amended the California Constitution to create limits, including voter approval requirements, around local and regional government revenue powers (taxes, assessments and fees). While the intent of these laws is clear, ensuring proper compliance is far more convoluted. The California State Legislature introduced three bills this session in an apparent effort to reduce the vulnerability of public agencies’ revenue streams to legal attack.

Why now?

One major factor is the significant pending costs of infrastructure and service improvements that agencies are planning to implement to meet future water supply and reliability needs in the face of climate change and implementation of the Sustainable Groundwater Management Act (SGMA).

Along with the increased need to raise revenue, there are significant questions as to who should pay and how much. Using SGMA implementation as an example: how should costs for projects to mitigate subsidence, shrinking groundwater storage, seawater intrusion, declining groundwater levels, poor water quality and depleted interconnected surface water be allocated? Most would probably answer, “fairly.” But what fair means is not always clear, even assuming there is sufficient data to determine the cause of these undesirable results. For example, how should project costs be allocated between:

  • Agricultural and municipal uses?
  • Pumpers with access to surface water and those without?
  • Smaller pumpers and larger pumpers?
  • Pumpers overlying a portion of the basin experiencing greater impacts and those in unaffected areas?
  • Pumpers overlying hydrologically disconnected portions of the basin?

While these questions arise from general concepts of fairness, the answers are constrained by the constitutional limitations known as “proportionality.” Proportionality, however, still leaves significant ambiguity. Moreover, the most cost-effective or politically feasible allocation methods may not necessarily satisfy conditions of proportionality. Because Prop. 218 analysis is highly fact-dependent, a proportional charge imposed in one groundwater basin may be unconstitutional in another—thus vulnerable to legal challenge. Fee litigation may potentially result in large settlements or judgments against the agency or leave the agency without funding to implement projects.

Here, we summarize AB 2257, AB 1827, SB 1072 and what they could mean, both for local agencies and to entities subject to potential taxes, fees and assessments. 

1. AB 2257 – Optional exhaustion requirement.

If a public agency opts in, AB 2257 would require public agencies to provide written notice and explanation of the basis for a water/sewer rate or special benefit assessment, written responses to all public comments or protests and justification for why changes were or were not made in response to comments, in addition to existing Prop. 218 requirements. If the agency complies with the public process described by AB 2257, litigants would be required to participate in the agency’s public process prior to challenging an adopted fee or assessment. AB 2257 would also limit the scope of evidence that could be introduced in litigation.

The bill would not apply to any exempted Prop. 26 fees (e.g., regulatory SGMA fees adopted pursuant to Water Code 10730).

2. AB 1827 – Rate structures incentivizing conservation.

To encourage water conservation, some agencies have proposed charging higher rates to less efficient water users. However, courts have interpreted Prop. 218 to prohibit such rate structures for disproportionately allocating costs among customers. (See Capistrano Taxpayers Assn., Inc. v. City of San Juan Capistrano (2015) 235 Cal.App.4th 1493.) AB 1827 would clarify that a public agency may charge incrementally higher water rates due:

(1) higher water usage demands of parcels,

(2) maximum potential water use,

(3) projected peak water usage, or

(4) any combination of the above.

While AB 1827 signals the legislature’s belief that conservation-based rate structures are consistent with the constitutional proportionality requirements, it is the role of the courts—not the legislature—to interpret the state constitution. Given that the courts’ interpretation of Prop. 218 will prevail over the legislature’s, ultimately, AB 1827 may have limited legal effect.

It is unclear whether AB 1827 would apply to groundwater management fees as a form of property-related fees imposed for water service.

3. SB 1072 – Prohibiting refunds of fees charged exceeding proportional cost.

In several recent cases where rates were found to be invalid, agencies have been saddled with judgments in the tens of millions of dollars not necessarily related to the excess amounts paid by plaintiffs. For any overcharges due to constitutional violations (e.g., exceeding cost of service, disproportionate allocation, etc.), SB 1072 would require that a public agency use the overage to defray future costs of service rather than issuing refunds to ratepayers. SB 1072 would not apply to fees that have existing statutory refund provisions, such as SGMA. Landowners would remain eligible for refunds due to administrative billing errors, such as inaccurate calculation of water usage due to incorrect billing cycles or inaccurate land use designation.

Elements of these pending bills are notable. But regardless of their fate, the issues and ambiguity around governments’ revenue powers particularly at this moment in time, are worthy of special attention. As water supply volatility, SGMA matters and pending infrastructure and service improvement projects are pushed up the priority list, our team is closely watching developments and have witnessed a marked increase from our clients in interest in these matters. We continue to monitor developments in future Prop. 218 legislation and case law.

This document is intended to provide you with general information regarding three bills related to local government revenue powers in California. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

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