IMPACTS OF PROPOSITON 26 ON LOCAL AGENCIES Kelly J. Salt BEST BEST & KRIEGER LLP
Proposition 26• Adopted November 2, 2010.• Restricts the ability of the state and local agencies to raise revenues to fund government services, facilities, and programs.• Amends California Constitution article XIIIC by reclassifying certain fees and charges as taxes.
Background• Proposition 13 added Article XIII A.• Legislature adopted Government Code sections 50075 and 50076.• Proposition 4 added Article XIII B.• Proposition 218 added Articles XIII C & D.
Regulatory Fees• Sinclair Paint Co. v. State Board of Equalization – Fee assessed upon manufacturers of materials that contributed to environmental lead contamination could reasonably be characterized as a “regulatory fee” and not a special tax. – Regulatory fees imposed to mitigate the past, present, or future adverse impact of the fee payer’s operations are valid.
Regulatory Fees TargetedProposition 26 targets fees which are“couched as ‘regulatory’ but which exceedthe reasonable costs of actual regulation”or which “are imposed to raise revenue fora new program and are not part of anylicensing or permitting program.”
Article XIII C Section 1(e)• As used in this article, “tax” means any levy, charge, or exaction of any kind imposed by a local government, except the following: – (1) A charge imposed for a specific benefit conferred or privilege granted 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 conferring the benefit or granting the privilege.
Article XIII C, section 1(e)– (2) 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.– (3) A charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof.
Article XIII C, section 1(e) – (4) A charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property. – (5) A fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law.
Article XIII C, section 1(e)– (6) A charge imposed as a condition of property development.– (7) Assessments and property- related fees imposed in accordance with the provisions of Article XIII D.
Consequences of Proposition 26If a fee is deemed to be tax pursuant to Section1(e), then it will be classified either as a generaltax requiring a majority vote or a special taxrequiring a 2/3 voter approval pursuant to Article XIII C, §2 (c) & (d).
Section 1(e)(1) & (2) – Benefits, Privileges, Services, and Products• (1) the fee or charge is imposed for a specific benefit conferred or privilege granted, or specific government service or product provided to the payer of the fee; and• (2) the same benefit is conferred, privilege is granted, or service or product is also provided to others who are not charged for such benefit, privilege, service or product; and• (3) the fee or charge exceeds the reasonable costs of providing the benefit, privilege, service or product.
Examples• A city provides discounts to seniors and students who participate in a parks and recreation ceramics class.• A school district charges students for a lunch program and after school care services, but provides such products and services for free to qualifying low income students.
Examples• A park district charges different rates for swim classes provided to adults, children, and seniors.• A city provides gas and electrical service within its jurisdiction and provides discounts to low income customers.
Examples• A municipal water district provides discounted water capacity and connection charges for affordable housing projects
Section 1(e)(3) – Regulatory FeesA charge imposed for the reasonableregulatory costs to a local government forissuing licenses and permits, performinginvestigations, inspections, and audits,enforcing agricultural marketing orders,and the administrative enforcement andadjudication thereof.
Examples• A city imposes a business license fee on businesses that sell alcoholic beverages. A portion of the revenues from the fee funds a program to address public nuisances associated with those sales.• A city authorizes ministerial grading permits for construction projects. The revenues from the permit fees fund inspection of the construction site, administration, and enforcement.
Examples• A city establishes regulations requiring businesses that operate surface parking lots to comply with best management practices to prevent storm water run off. The city imposes an inspection fee on such businesses. A portion of the fee is used to fund a storm water prevention education program in local schools.
Examples• A community services district adopts a fee to be imposed on all persons who use grocery store carryout plastic and paper bags. The fee is imposed to mitigate the adverse impact that the fee payer’s use of such materials has on the district’s landfill.
Section 1(e)(3)• A municipal water district adopts a water conservation ordinance and imposes an inspection fee on property owners who violate the ordinance. A portion of the fee is used to fund a rebate program for the installation of low volume water fixtures.
Examples• A fire protection district imposes an inspection fee on properties located adjacent to canyons, hillsides, and other open space for brush management. A portion of the inspection fee funds an emergency preparedness education program.
Examples• A county licenses all restaurants and food establishments within its jurisdiction. The county also establishes regulations prohibiting the use of styrofoam in the distribution and sale of food products. The purpose of the regulation is to mitigate the adverse impacts that styrofoam has on the county’s landfill. The revenues from the county’s license fee are used to fund the reasonable costs of issuing licenses, performing investigations and inspections and enforcement of the styrofoam regulations.
Section 1(e)(4)-(7) – Fees Not Impacted• Charges imposed for entrance to or use of local agency property, or the purchase, rental, or lease of local agency property;• Fines, penalties, or other monetary charges imposed by a court or local agency as a result of a violation of law;• A charge imposed as a condition of development; and• Assessments and property-related fees imposed in accordance with Article XIII D.
Examples• A city provides a discount to local residents for green fees at its municipal golf course and entrance fees to its aquatic centers.• A county discounts the special events fees paid by non-profit organizations for use of county parks.
Examples• A city imposes a franchise fee on public utilities (e.g., gas and electric utilities) for the use of the public right-of-way and other city property. The amount of the franchise fee is five percent of the franchisees’ annual income arising from the use, operation, or possession of the franchise.
Examples• An irrigation district provides discounted rates to low income water customers.• A municipal water district prosecutes violations of its water conservation ordinance and seeks to impose a fine of $1,500 for a first violation.• As a condition of approval of a development project, a city imposes a fee of $2.5 million for construction of a water pump station necessary to serve the proposed project. The estimated cost of the pump station is $1.5 million.
Examples• A transit district provides discounted transit fares to students and the disabled.• A county water district provides discounted rates to local residents for use of boats at its local reservoir.
Examples• A city levies an assessment for the maintenance of landscape improvements within an assessment district, but exempts city property from the levy of the assessment.• A community services district enters into a franchise agreement with a solid waste hauler to provide solid waste services to residential property within the district. Pursuant to the franchise agreement, the city collects a franchise fee from the solid waste hauler.
Fees Grandfathered• State fees reclassified as taxes, void within twelve months of the effective date of the constitutional amendments• There are no similar repeal provisions for local agency fees.
Burden of Proof• Establishes preponderance of the evidence standard.• Will this standard of proof be extended to property-related fees and charges and assessments?
Unfunded State Mandates• Article XIII B, section 6 – “Whenever the Legislature or any state agency mandates a new program or higher level of service on any local government, the state shall provide a subvention of funds to reimburse that local government for the costs of the program or increased level of service” except in certain specific circumstances.
Unfunded State Mandates• Exception to state mandate provision: A state mandate will not be considered “unfunded” if the local agency “has the authority to levy service charges, fees, or assessments sufficient to pay for the mandated program or increased level of service.”
Unfunded State Mandates• Administrative appeal process• File test claim
Issues that Remain to be Resolved• Section 1(e)(5) – What constitutes the “law” for purposes of this exception?• Section 1(e)(4) – Does the term “property” include tangible property or was it intended to solely mean real property?
Issues that Remain to be Resolved• Will the same burden of proof standard be applicable to property-related fees and assessments?• How do public agencies approach fees which may be classified under more than one exception?
Conclusion• Proposition 26 will restrict the ability of public agencies to impose certain fees but may bolster the argument that certain state requirements are unfunded mandates.• Proposition 26 will be the subject of litigation and clarifying legislation.
Conclusion• Public agencies should closely review the basis upon which their fees are calculated, the purposes for which they are imposed, and how the revenues are expended.• Public agencies should continue to review any other constitutional or statutory limitations relative to a fee.• Public agencies should include in their administrative record the basis for any exemption from Section 1(e)
QUESTIONS? Kelly J. SaltBEST BEST & KRIEGER LLP655 W. Broadway, 15th Floor San Diego, CA 92101 (619) 525-1375 email@example.com