Local Initiative Measures May Not Set Water Rates Lower than Amount Needed to Cover Required Costs under the Water Code

After a county water district raised its water and sewer rates, opponents of the rate hikes qualified two initiatives for the ballot to reverse the increase.  The district filed a court action for declaratory relief, arguing that the initiatives set rates so low that the district would be driven into insolvency.  The initiative proponents filed a strategic litigation against public participation (“SLAPP”) motion, asserting that the suit suppressed their First Amendment rights of free speech and petition.  The trial court rejected the motion.  On appeal, the court of appeal upheld the trial court’s denial of the motion, holding that the Water Code did not permit the district or local voters from setting rates so low that the district could not pay operating expenses and other required costs.  (Mission Springs Water District v. Verjil (--- Cal.Rptr.3d ----, Cal.App. 4 Dist., August 7, 2013).

Facts

After several years of budget shortfalls, Mission Springs Water District (“the District”) raised water and sewer rates in an effort to remain solvent and operational.  Opponents of the rate increases collected signatures for two initiatives to reverse the rate hikes and gathered the number required to qualify the initiative for a vote.  However, instead of putting the initiative on a ballot, the District filed suit in state superior court, seeking a declaration from the court that the initiative was invalid.  In response, the proponents of the initiatives (“the Proponents”) filed a SLAPP motion asserting that the District’s litigation was brought to suppress the Proponent’s Constitutional First Amendment rights of free speech or petition.  In order to win their SLAPP motion, the Proponents had to show that the District’s lawsuit arose from protected First amendment activities.  However, the District could overcome this showing if it demonstrated a probability of prevailing in its lawsuit.

The trial court denied the Proponents’ SLAPP motion, finding that the declaratory relief sought by the District did not arise out of protected First Amendment activities of the Proponents.  The trial court based its decision on the Fourth District Court of Appeal’s decision in the case City of Riverside v. Stansbury (2007) 155 Cal.App.4th 1582.  The Proponents appealed to the Fourth District, asking it to reconsider its opinion in Stansbury.

Decision

The Fourth District Court of Appeal upheld the trial court decision but agreed with the Proponents that Stansbury was no longer good law due to the later California Supreme Court decision in Perry v. Brown (2011) 52 Cal.4th 1116.  Perry held the reverse of Stansbury, stating that a court challenge to an initiative before the initiative makes it onto a ballot does arise from the personal constitutional rights of the initiative‘s proponents.  At the same time, the Court of Appeal ruled that that the trial court correctly denied the SLAPP motion because the District demonstrated a probability of prevailing on its claim that the initiative would violate a section of the Water Code that requires water districts to set rates high enough to cover their costs.  The Court of Appeal ruled that voters in a local district do not have the power to “override this statewide requirement.”

Examining the SLAPP Act’s requirements, the Court of Appeal observed that in determining whether litigation arose from protected First Amendment activity, the focus of analysis was on the defendant’s activity that formed the basis for the plaintiff’s court action.  If the activity constituted protected speech or petitioning, the SLAPP Act would apply.  The court noted that its 2007 decision in Stansbury held that a court challenge to the placement of an initiative on the ballot did not involve the proponents’ First Amendment petition rights because once an initiative had qualified for the ballot, the right to petition was complete.  However, the California Supreme Court decision in Perry analyzed the question somewhat differently.  Perry stated that before an initiative has been placed on the ballot, proponents were asserting their “personal rights and interests” under the section of the California Constitution that allowed for the power of initiative.  In pre-election cases, proponents “are acting to vindicate their own rights to have their proposed measure . . . put to a vote of the people.”

Perry also articulated an important policy reason for allowing proponents to defend initiatives in the pre-election context:  the initiative process exists to provide an alternate avenue for the people to enact laws that “government officials have declined to adopt (and often have publicly opposed).”  Thus there is “an inherent conflict of interest” between proponents and governmental officials before an initiative reaches the ballot.

The Court of Appeal noted that although the Perry decision means that proponents may bring a SLAPP motion to assert their petition rights, Perry does not mean that initiatives cannot be successfully challenged before being placed on the ballot.  This is because even though First Amendment rights may be involved, a party challenging the initiative can defeat a SLAPP motion by showing the party has a probability of winning the lawsuit.  Therefore, the Court stated that the Perry decision meant that “no one could bring a meritless petition challenge.”

The Court of Appeal then examined the second prong of the SLAPP motion analysis:  the District’s probability of prevailing in the court action.  The Court first examined and disagreed with the Proponents’ argument that the District’s suit was barred pursuant to section 9380 of the Elections Code.  That statute requires that initiative challenges be brought through a petition for writ of mandate by a voter or an elections official, not an action for declaratory relief.  The Court stated that the Code of Civil Procedure provided a procedure for nonvoters to challenge an initiative by seeking declaratory relief, and so the District’s suit was procedurally proper.

The Court also rejected the District’s first argument that although Proposition 218 allowed local district rates to be lowered by initiative, the Proponents’ initiatives exceeded Proposition 218 by limiting future rate increases.  The Court stated that the case cited by the District, Bighorn-Desert View Water Agency v. Verjil (2006) 39 Cal.4th 205 involved a special district that operated under an uncodified act of the Water Code.  That act specified that the board of directors of the special district would set the district’s water rates, and so the initiative limiting future increases in that district ran counter to expressed legislative intent that the board maintained power to set rates.  In that situation, the rates could be lowered by initiative, but they could also be raised later by the board.  In contrast, the District is a county water district organized under the County Water District statutes in the Water Code, not a special district with its own specialized act as in Bighorn.  As a county water district, the District cited Water Code section 31007 as the source of its rate-setting authority.  The Court of Appeal concluded that unlike the act in Bighorn, Water Code section 31007 does not specifically state who shall fix water rates, and so there was no reason to infer that the Legislature intended to exclude the setting of the District’s future rates from the initiative process.

The Court also rebuffed the District’s contention that the Proponents’ initiatives were impermissibly vague because they tied future rate increases to the Consumer Price Index (“CPI”) but did not specify which CPI applied.  The Court explained that in evaluating a vagueness claim, a court should attempt to interpret the statutory language to make it more precise by judicial construction.  The Court then went through a rather creative process to determine the applicable CPI.  The Court stated that although the District correctly noted that there are many types of CPIs, the lack of specificity in the initiative was not an obstacle because it was relatively simple to determine which CPI would likely apply.  The Court then proceeded to describe several types of CPIs and creatively opined that the applicable CPI would likely be the CPI-U (for urban consumers) “for all items for the Los Angeles-Orange County-Riverside geographical area.”

However, the Court returned to interpret Water Code section 31007 and agreed with the District argument that the initiatives were invalid because section 31007 required water rates be set high enough to pay operating expenses, repair and depreciation costs, interest on bonded debt, and payments on principal of bonded debt.   The Court explained that where the Legislature restricts local government’s legislative power, the restriction also applies to the exercise of the local initiative power.  The court concluded that because the District brought undisputed evidence that the initiatives would set rates so low that they would not pay the costs required by the Water Code, the District had shown a probability that it would prevail on its claim that the initiative was invalid.  Based on this showing, the Court dismissed the Proponents’ SLAPP motion.