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CCCA - Proposition 218: Rules, Regulations And Requirements
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CCCA - Proposition 218: Rules, Regulations And Requirements



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  • 1. THE RULES, REGULATIONS AND REQUIREMENTS OF PROPOSITION 218 COMPLIANCE Patricia Quilizapa – Aleshire & Wynder, LLP Chris Fisher – Wildan James Ciampa - Lagerlof, Senecal, Gosney & Kruse, LLP California Contract Cities Association Fall Seminar October 15, 2011
  • 2. Prop. 218 – Intro & Background
    • Background – evolution from Prop. 13
    • What is Prop. 218?
    • To whom does Prop. 218 apply?
    • Why should I care about Prop. 218?
    • Assessments – Article 13, Section 4
      • * Procedural Requirements
    • 1. Notice
    • 2. Hearing
    • 3. Ballot Procedure
    • * Substantive Requirements:
    • 1. Engineer’s Report
    • 2. Segregation of Special Benefits and General Benefits
    • Fees & Charges – Article 13, Section 6
      • Procedural Requirements
        • 1. Notice
        • 2. Hearing
        • 3. No Majority Protest (no ballot)
      • Substantive Requirements
        • 1. Proportionality
        • 2. Not Exceed Cost of Service
        • 3. Not for General Governmental Services
    • Initiative Power under Art. 13C, Sec. 3
    • Burden of Proof Shifted
    • Statutory Clarifications
      • Mailing to customer base
      • Flow-through rate increases and inflation
  • 6. Introduction
    • Chris Fisher – Willdan Financial Services:
    • Utility Rate Studies
      • Water, Wastewater
    • Special District Formations
      • Assessments, CFDs, BIDs
    • User Fee Studies, Cost Allocation Plans
    • Economic and Fiscal Analysis
    • Impact Fees
  • 7. Proposition 218 – Practitioner's Perspective
    • Substantive Requirements
      • Spell out the need to identify special benefit
      • Outline requirements for utility rates and property related fees
    • Procedural Requirements
      • Describes steps that must be followed in order to impose assessments, rates, fees, etc.
  • 8. Assessment Principles
    • Must identify and quantify special benefits vs. general benefits
      • Heightened scrutiny of assessments with recent court cases
    • Develop methodology to apportion specific costs to properties that receive benefit
    • Methodology based on special benefits that properties receive from services and improvements
      • Assessments must be proportional to benefits received
      • Assessments must not exceed any parcel’s proportional benefit
    • Supported by Engineer’s report, simple majority
    • General benefit must be identified, quantified and excluded
  • 9. Assessments (more from Article XIIID)
    • Identify parcels which have a special benefit
      • Particular and distinct benefit over and above general benefits conferred on real property located in the district or to the public at large
      • General enhancement of property value is not a special benefit
    • Determine parcels’ proportionate special benefit relative to cost of improvements or maintaining and operating improvements
    • Assessment may not exceed cost of proportional special benefit
      • Be reasonable & justified by engineer's report
    • Only special benefits are assessable. Costs associated with general benefit must be paid from other resources of the local agency
      • Recent case law strengthens this requirement – Santa Clara, Beutz, West Point, Golden Hill
  • 10. Assessment Notice Requirements
    • 45 day mailed notice to record owner of each parcel
    • Hearing notice must also follow statutory provisions under which assessment is being levied
    • Typically mailed at same time as ballot
    • Notice must contain:
      • total assessment for entire assessment district;
      • assessment chargeable on owner’s parcel;
      • duration of proposed assessment;
      • reason for assessment;
      • basis on which amount of proposed assessment was calculated;
      • date, time and place of public hearing;
      • summary of voting procedures and effect of majority protest
  • 11. Assessment Ballot Provisions
    • Property owners may express support or opposition to a proposed assessment by ballot
    • Ballots must be returned before conclusion of public hearing
    • Ballots may be tabulated at public hearing; or after at designated time and place
    • No assessment imposed if a “majority protest” exists
    • Majority protest exists if ballots submitted in opposition exceed ballots submitted in favor of assessment
      • Weighted according to proportional financial obligation
    • Provisions do not apply to annual renewals (with previously approved inflator)
    • Provisions do apply when increasing assessment
  • 12. Things to consider before balloting
    • Determine needs
      • Analyze extent, nature and location of improvements
      • Develop thorough budget
      • Identify long-term service requirements, development potential
      • Analyze longer term financial needs
    • Have a clear understanding of benefit
      • Clear nexus between properties and improvements/services
      • Account for general benefit, develop methodology accordingly
    • Clear, concise, easy to understand materials
    • Political factors, public perception, values, support
  • 13. More considerations…
    • Evaluate potential alternatives
      • Level of General Fund subsidy
      • Increase assessments (Including an inflationary formula?)
      • Reduce the current level of service
      • Out-source services (contract services)
      • When re-engineering – possible enhancements
      • Consider alternative revenue mechanisms
        • Special Tax, CFD
        • Consolidation, expansion or re-engineering
  • 14. Things to keep in mind
    • Engineer’s reports should account for latest case law – reports older than Silicon Valley should be rewritten
    • Special/general benefit requirements are more exacting
      • Thank you Santa Clara, Beutz, Golden Hill, West Point
    • Assessing agencies should allow time for legal review of engineer’s reports
    • Important for agencies to track legal developments, there have been numerous in assessments over past five years
    • All of above even more critical in assessments for services
  • 15. Proposition 218 and Utilities
    • Prop. 218 requires mailed notice to property owners of new or increased property-related fees and means for property owner rejection of fees via majority protest at public hearing
    • Except for sewer, water and refuse collection services, fees subject to requirements of article XIIID require majority vote of property owners
    • Revenues may not be used for any purpose other than that for which the fee was imposed
    • Revenues may not exceed the funds required to provide service
    • The amount of the fee may not exceed the proportional cost of service attributable to the parcel
  • 16. Procedural Requirements for Utility Fees
    • Identify parcels upon which a fee or charge is proposed
    • Calculate amount of the fee to be imposed on each parcel
    • Provide written notice by mail to the record owner of each identified parcel
    • Conduct public hearing on the proposed fee not less than 45 days after the mailing
    • Consider all protests against the proposed fee or charge
    • If written protests against the fee are presented by a majority of owners of the identified parcels, the fee cannot be imposed
  • 17. Overview of Rate Setting
  • 18. Overview of Revenue Requirements
    • Goal is a comprehensive financial plan and model
    • Review or develop budgets and financial projections
    • Project demand for and cost of water
      • Analyze custumer demand
      • Review sources and associated costs for water
    • Incorporate O&M, treatment
    • Identify capital needs, cost and timing
    • Incorporate provision for debt service and bond covenants
    • Incorporate reserve policies and funding levels in model
  • 19. Cost of Service Analysis
    • Distribute revenue requirements based on function:
      • Fixed vs. Variable – most basic allocation
      • Customer Cost – cost associated with individual customers and typically fixed
      • Special Categories – special classes derived from service, such as fire protection costs, recycling
    • Allocate functional costs to customer classes - (i.e. residential, commercial, etc) based upon demand characteristics
      • Volume/Flow Cost – normal delivery of water (includes treatment)
      • Peaking Cost – delivery of water during peak conditions
  • 20. Cost Causation and Conservation Rates
    • To justify tiers, costs must be further allocated to demonstrate cost basis for progressively higher rates
      • Groundwater vs purchased water vs purchased recycled water vs purchased water at penalty rates
      • Increasing commodity charge based upon water allocation
    • Goal is to marry intent of AB 2882 (sec 372) with intent of Prop 218
    • Palmdale case specifically addressed this issue
  • 21. More on AB 2882 (Water Code 372)
    • Water use must be metered
    • Basic allocation of water must be established based on basic needs and property characteristics
    • Water used must be based upon volumetric rate (as opposed to fixed rate)
    • A conservation charge can be imposed on excess use
      • Also volumetric
      • Designed to encourage conservation and recover costs of conservation measure and overuse
  • 22. Conservation Rates
    • Conservation rates are legal under Prop. 218
    • AB 2882 (2009) amended Water Code (sections 370 – 375) to allow conservation based pricing
    • Must have a clear rationale for the ratios of rate tiers
    • Must also have rationale for rates for residential and other customers
    • Rationale must be related to the cost of service
  • 23.
    • Rate Design should address the following criteria:
      • Financial sustainability – minimize volatility of revenue
      • Equitable to all customer classes, and customers within classes
      • Environmental soundness –reflect resource scarcity
      • Administrative ease - easy to administer and simple to explain
    • Fixed Charge:
      • With no demand - still inherent operating costs
      • CUWCC BMP targets 30% for fixed charge
    • Consumption charge (three basic types for water):
      • Decreasing block
      • Uniform block
      • Increasing block, tiers, budget-based rates
    Rate design
    • Initially, cases supported the conclusion that Prop. 218 was not applicable to water rates
      • Water charges based on the amount consumed
      • Not levied as an incident of property ownership
    • 2000 – HJTA v. City of L.A. (Court of Appeal decision)
      • Challenge to water rates charged by L.A.
      • Court: “The charges for water service are based primarily on the amount consumed, and are not incident to or directly related to property ownership.”
      • Court rejected HJTA’s challenge
    • 2001 – Apartment Association of Los Angeles County, Inc. v. City of L.A. (Cal. Supreme Court decision)
      • Challenge to inspection fee imposed by City of L.A. on landlords
      • In depth review of origins of Prop. 218 and its relationship to Prop. 13
      • Court’s conclusion: Prop. 218 only applies to a fee or charge “levied solely by virtue of property ownership.”
      • The inspection fee was not subject to Prop. 218 because it was levied on landlords by reason of their renting of their property; not just their ownership.
    • 2002 - HJTA v. City of Roseville
      • Challenge to City of Roseville’s flat percentage in-lieu franchise fee charged to City utilities
      • The Court of Appeal invalidated that fee – no data for City’s costs incurred as a result of the utilities; the fee was just an arbitrary percentage the City selected
    • 2004 – HJTA v. City of San Diego
      • San Diego initiative that sought to impose heightened voter approval requirement on general taxes
      • Prop. 218 (Art. 13C, Sec. 2(b)) requires only a majority vote to enact a general tax
      • Court rules that Prop. 218 preempts (i.e., controls over) any local initiative that would attempt to enact a higher vote requirement
    • 2004 – Richmond v. Shasta Community Services District (Cal. Supreme Court)
        • Signals shift in Supreme Court’s view of and application of Prop. 218
        • Challenge to a CSD water connection charge
        • Mixed bag:
            • Good: connection charges NOT subject
            • Bad: in dicta, the Court stated that a fee for ongoing water service through an existing connection is subject to Prop. 218
    • 2006 – Bighorn Desert-View Water Agency v. Verjil (Cal. Supreme Court)
      • Everything changed with Bighorn!!!
      • Background: local voter initiative to reduce rates and to subject future increases to voter approval requirement
      • Victory for the Agency at trial court and Court of Appeal
      • California Supreme Court – actually affirmed the Court of Appeal, but . . . .
    • Reduction of water rates - water service determined to be a property-related charge that is provided as an incident of property ownership; thus, water rates are subject to the notice, hearing and majority protest requirements.
    • Open issue with respect to a voter initiative to reduce rates to a level below ability to operate system
    • 2008 – Silicon Valley Taxpayers Assn. v. Santa Clara County Open Space Authority (Cal. Supreme Court)
      • Challenge to flat rate assessment imposed on all parcels, regardless of location
      • Assessment held to violate Prop. 218 because inadequate segregation of special benefits provided to specific parcels
      • Supreme Court used independent judgment test; no deference given to local agency revenue decisions
    • 2009 – Dahms v. Downtown Pomona Property & Business Improvement District
      • Challenge to assessments imposed in a business improvement district
      • Assessments to non-profit entities were discounted
      • Court held that discounts are permissible so long as other properties do not fund them through payment of higher assessments
    • 2009 – Town of Tiburon v. Bonander
      • Court clarified that all properties that receive any special benefit from the project being funded by the assessments must be included in the assessment district
      • Prop. 218 proportionality = value of the special benefit; not cost of the improvement.
    • 2010 – Greene v. Marin County Flood Control District (Cal. Supreme Court)
      • Challenge to a new storm drainage fee
      • Storm drainage fee not exempt from voter approval requirement under Prop. 218
      • Challenge to non-secret ballot used in the voter approval election
      • Prop. 218 election is not an “election” to which secret ballot requirement applies
    • 2011 – California Farm Bureau v. State Water Resources Control Board (Cal. Supreme Court)
      • Challenge to SWRCB water rights fees
      • Important issue as to Prop. 218 is Court’s statement that proportionality is to be measured by the costs to all ratepayers collectively
      • Uncertainty as to future application
    • 2011 – City of Palmdale v. Palmdale Water District
      • District adopted water budget rate structure
      • Different tier widths among its three customer classes; irrigation class had narrowest tiers
      • City challenged the District’s compliance with Prop. 218, both procedurally and on proportionality
      • Court ruled District did not meet its burden in having increased cost justification in the record for the difference in tier widths
      • Pajaro Valley Water Management Agency v. Amrhein
        • Involved groundwater augmentation fee imposed primarily on persons who used the water produced on their own land
        • Initial decision, issued while Bighorn decision was pending, was Prop. 218 was NOT applicable to the groundwater charge
        • After Bighorn, court granted rehearing and changed its mind, holding Prop. 218 was applicable
  • 39. Pajaro (continued)
    • The court based its decision largely on the fact that the overlying well owners possessed special rights to the reasonable use of groundwater under their land and those rights were appurtenant to the land
    • The court found such use was more intimately connected with property ownership than just receiving water service, as in Bighorn
  • 40. Pajaro – What’s Next?
    • Pending Appeal – Great Oaks Water Company v. Santa Clara Valley Water District
      • 2010 – trial court upheld Great Oaks’ challenge to the District’s groundwater charge, which was imposed primarily on retail water producers
      • Pending appeal will, in part, likely determine how broadly Pajaro will apply
    • L. A. Superior Court – numerous cases now pending; initial case: Cities of Cerritos, Downey & Signal Hill v. Water Replenishment District of Southern California
        • Primarily based on Pajaro, the court decision in April ruled that Prop. 218 applied to WRD’s replenishment assessments
        • Court’s decision not yet final and in effect
        • Status – determination of what, if any, refunds are owed to the Cities is pending; Feb. 2012 trial date
    • Proposition 26 adopted in November 2010
      • “ Tax” now encompasses “any levy, charge or exaction of any kind proposed by a local government.” [Article 13C, Section 1(e)]
      • Seven possible exceptions
        • Benefit conferred or privilege granted - charge can’t exceed reasonable cost of providing
        • Service or product provided – charge can’t exceed reasonable cost of providing
        • Regulatory costs for issuing licenses, etc.
        • Entrance or lease of local gov’t property
        • Fines, penalties, etc. for violating the law
        • Property development charges
        • Prop. 218 assessments and property-related fees
  • 43. Recent Legislation
    • Govt. Code § 53755 – effective Jan. 1, 2008
      • Authorizes notice of a proposed rate increase to be given by including with regular billing statement
      • BUT, if the agency desires to preserve its ability to lien the parcel to which service is provided, it must also mail notice to the record owner at the address shown on assessment roll
      • Clarifies only one protest per parcel
      • Attempt for one year statute of limitations rejected
  • 44. Recent Legislation
    • Govt. Code § 53756 – effective Jan. 1, 2009
      • Allows non-voter-approved inflation adjustments and wholesale rate pass-throughs, but they must be approved by the Board at a public hearing and no majority protest
      • 5 year limit; then must hold new protest hearing
      • The formula for inflation must be clearly defined and cannot exceed the cost of providing the service
      • Must give at least 30 days’ notice prior to adjustment taking effect (can do this via bill insert)
  • 45. Recent Legislation
    • Water Code §§ 370 et seq. - effective Jan. 1, 2009
      • Specific legislative intent not to limit the design of rate structures to be used to promote water conservation
      • Authorizes “allocation-based conversation water pricing”
      • Legislature’s declaration that such pricing is an effective means to prevent unreasonable waste of water and increase efficient use of water
  • 46. Water Code Sections 370 et seq.
    • How it works:
      • Establish basic use allocation for each customer’s needs and property characteristics
      • Basic charge applies to water used within the basic use allocation
      • Conservation charge applies to use in excess of the basic use allocation
      • Conservation charge determined by the “incremental costs,” but “incremental costs” + “basic costs” cannot exceed the reasonable cost of water service
  • 47. Water Code Sections 370 et seq.
    • Incremental Costs can include:
      • Conservation devices & conservation BMPs
      • Water system retrofitting, dual plumbing facilities; recycled water uses
      • Securing dry-year water supplies
      • Runoff prevention programs
      • Procuring water supplies to satisfy demands in excess of the basic use allocations, including water rights or entitlements and related energy costs
  • 48. THE FUTURE . . .
    • Groundwater Fees
    • Initiatives – resulting in sufficient revenues
    • Refund Issues
    • Water Conservation Issues
  • 49. TRIAL COURTS APPLY PROP.218 TO GROUNDWATER EXTRACTION FEES City of Cerritos, et al. v. WRD Final Order on Writ of Mandate – Trial on Refund in February 2012 Great Oaks Water Co. v. Santa Clara Valley Water Dist. Final Judgment re: Refund of Groundwater Extraction Fees
    • Excerpt from April 25, 2011 Hearing – Judge Chalfant:
    • “ I can’t issue the writ until there’s a final judgment; that means no writ until your damages case is over. You understand that I will have made a ruling here, but there is no writ; they don’t have to do anything until there’s a judgment in the case.”