Local Agencies that Can Recover Fees Through Prop 218 Process are Ineligible for State Reimbursements

by Best Best & Krieger LLP
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Decision from the Commission on State Mandates

Several agricultural water suppliers seeking reimbursement for state-mandated activities under the Water Conservation Act of 2009 are ineligible to receive state funding, the Commission on State Mandates has decided. The decision, released in early December, states that the suppliers are ineligible because they have the option to recover costs through the Proposition 218 process. The Commission also held that any local government entity that is funded exclusively through user fees, charges or assessments are per se ineligible for state mandate reimbursement.

This decision marks an unprecedented position by exempting from reimbursement a majority of local agencies who have the ability to impose fees and recover costs — regardless of the potential obstacles in raising fees through the Proposition 218 process. Further, the Commission affirmed that only local agencies that receive property taxes are eligible to receive reimbursement for state-mandated programs. The Commission’s ruling regarding an agency’s ability to collect property taxes as a prerequisite to receiving state reimbursement is similarly broad sweeping, and affects a large number of special districts as well as other local agencies that do not receive property taxes.

The Commission’s reasoning relied on two main arguments. First, the Commission adhered to the California Supreme Court case County of Fresno v. State of California, which predates Proposition 218 and provides that state reimbursement is limited to only those local agencies subject to the tax and spend limits of Articles XIII A and XIII B of the California Constitution. Second, the Commission departed from its prior decision in Discharge of Stormwater Runoff, finding instead that Proposition 218 was not a legal impediment to an agency’s ability to raise fees to cover costs associated with complying with the state mandate. The Commission created a distinction between inquiring into whether an agency possessed fee authority, and inquiring into the sufficiency of an agency’s fee authority. The Commission ruled it was only concerned with the former — the latter was a factual inquiry. Rather, the Commission held that claimants would need to first try, and fail, to impose the necessary fees under Proposition 218 before they could demonstrate state mandated costs.

Based on this decision, local agencies mandated by new legislation to perform a new program or higher level of service may be ineligible for state reimbursement. The Commission’s decision could result in a denial of state reimbursement to local agencies in two different ways. First, it may be denied state reimbursement for new legislation whose costs could be covered through Proposition 218 fees, regardless of whether those fees are in place. Second, the Commission continued to extend its ruling that local agencies that are not funded through property taxes are not eligible for state reimbursement.

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