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Water Right Fees, Proposition 26, and the Delta . . .

November 12, 2010 by Daniel Kelly, dkelly@somachlaw.com

Supreme Court to Hear Water Right Fees Case in December

In 2003, several organizations and hundreds of individual water right holders challenged new charges on water rights enacted by the Legislature under the guise of “regulatory fees.” These organizations and water right holders argued, in part, that the charges violated Proposition 13’s prohibition on new and increased taxes absent a two-thirds vote and that the charges, also imposed on water rights held by the United States, violated federal law. While the Third District Court of Appeal held that the underlying statutes did not violate Proposition 13, the Court invalidated the State Water Resources Control Board’s regulations implementing the statutes, finding the regulations resulted in an unlawful tax. The case is currently pending at the California Supreme Court, and oral argument is scheduled to be heard in Los Angeles on December 7, 2010.

The Appellate Court held that the statutes in question created valid “regulatory fees.” Regulatory fees are a relatively new type of charge, finding favor with the California Legislature following the passage of Proposition 13. Courts have held that “regulatory fees” fall outside of Proposition 13’s supermajority voting requirements. This loophole has gained in popularity as the Legislature continues to search for funding sources for many statewide programs. Courts have continued to validate the imposition of these fees – and a good portion of the funding of State agencies has shifted from General Fund revenue to “regulatory fees.” The lure of regulatory fees is that they require a simple majority vote to adopt. These fees, of course, bear all the marks of taxes – but go by a different name. Thus, and with the proliferation of these “fees,” the California Supreme Court will now revisit the legitimacy of this new source of revenue and determine whether they comport with the voters’ intent in passing Proposition 13.

Proposition 26 Passed by Voters

Proposition 26 was passed by the voters on November 2, 2010. It expands the definition of “taxes” for the purpose of Proposition 13 and Proposition 218 to include some of what are now known as “regulatory fees.” According to ballot materials, the purpose of Proposition 26 was to put an end to “hidden taxes” being imposed through “fees.”

Proposition 26 is one in a line of four Propositions whereby the voters continue to attempt to constrain the state’s ability to impose new and increased taxes. Proposition 13, passed in 1978, was called the “People's Initiative to Limit Property Taxation.” Among other things, Proposition 13 established a two-thirds voting requirement for all state tax rate increases and put local tax rate increases to a vote of the people. After the passage of Proposition 13, revenue was still being raised at the local level through the imposition and increase of locally-authorized general taxes. In 1982, the California Supreme Court issued its decision in San Francisco v. Farrell, 32 Cal. 3d 47, where the Court held that only “special taxes,” and not general taxes, levied by local agencies were subject to the two-thirds voting requirement in Proposition 13.

Proposition 62, passed in 1986, was a statutory attempt to close loopholes put in Proposition 13 by the California Supreme Court in San Francisco v. Farrell. While Proposition 62 was ultimately held to be constitutional, many local agencies argued that they were not required to comply with its mandate. Moreover, many local agencies increased the use of property-related assessments, which also fell outside of the restrictions of the prior initiatives. In 1996, the voters again responded by passing Proposition 218, which attempted to further constrain local governments’ ability to impose fees, assessments, and taxes, effectively closing loopholes carved into Proposition 13 by the Legislature and Courts.

While Propositions 62 and 218 were being implemented, the Legislature created another loophole in Proposition 13 – a loophole that gained notoriety in the California Supreme Court’s decision in Sinclair Paint Company v. State Board of Equalization (1997) 15 Cal.4th 866. In Sinclair, the California Supreme Court gave rather broad approval to the use of a revenue raising mechanism called “regulatory fees.” Since that time, the “regulatory fee” has been the revenue-raising mechanism of choice – as it required only a simply majority vote. Regulatory fees have been imposed on all facets of everyday life – providing an alternate source of funding for many state programs as the Legislature looked to divert General Fund money for different purposes.

The result of this regulatory-fee bonanza was Proposition 26. Proposition 26 effectively closes the “regulatory fee” loophole created by the Legislature and sanctioned by the Courts. It subjects most of these new “fees” to the two-thirds voting requirements contained in Proposition 13. Indeed, and according to the Legislative Analyst’s analysis, many charges that are now considered “fees” would require a two-thirds vote to impose or increase. This includes charges that provide a broad public benefit like charges imposed to address health, environmental, or other societal or economic concerns. Proposition 26 will likely have a very significant effect on the ability of local and state government to raise revenue for many programs.

Indeed, Proposition 26 appears to make clear that charges like the water right fees are, and should have been, subject to the two-thirds vote requirement originally contemplated by Proposition 13. Thus – and even if the Supreme Court extends Sinclair to sanction the water right fees as regulatory fees – Proposition 26 would subject those charges, if enacted today, to the two-thirds vote requirement mandated by Article XIIIA of the California Constitution.

Proposition 26 applies retroactively to any state charges created or increased between January 1 and November 2, 2010. Any state charge created or increased during that time that conflicts with Proposition 26 is automatically repealed 12 months after the effective date of Proposition 26, unless that charge is reenacted by the Legislature by a two-thirds majority.

Proposition 26 and the Delta

During the last legislative session, there were several proposals to consider new fees to pay costs associated with governance and other activities related to the Delta. Most notable was Assembly Member Huffman’s AB 2092, which failed passage. AB 2092 sought to develop a funding scheme to pay for implementation of the Delta Stewardship Council’s Delta Plan. The funding plan, which was to be developed by the Delta Stewardship Council, would have identified public and private “benefits” and would have recognized the “broad public benefit to the state and nation of restoring and enhancing the Delta ecosystem.” AB 2092 contemplated that the finance proposal to pay for the private-benefit portion of the plan would have been new and existing fees, among other things. With the passage of Proposition 26, fee proposals like those contemplated by AB 2092 would likely be subject to a two-thirds voting requirement. The ultimate consequence of Proposition 26 on efforts to restore the Delta is that any broad-based fee proposal for Delta restoration is now likely subject to the two-thirds vote requirement – making raising needed revenue much more difficult.

For additional information on this or any related topic contact Dan Kelly at dkelly@somachlaw.com.

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