Local agencies that provide water service may impose fees to recover the costs of providing water services. Unlike taxes, which require voter approval prior to adoption, water fees are approved by a local agency’s legislative body. However, under Article XIII D, section 6 of the California Constitution (commonly referred to as Proposition 218), such fees must first overcome majority protest proceedings, where a majority of property owners or customers of record may defeat such fees by filing written protests. In Paradise Irrigation District et al. v. Commission on State Mandates et al., the Third District Court of Appeal determined the authority to levy service fees prohibits local agencies from receiving state reimbursement for new state-mandated requirements, despite the opportunity for ratepayers to undermine that authority by a majority protest.
After the adoption of Proposition 13 and its restrictions on property taxes, voters approved Proposition 4 in 1979 to add Article XIII B to the California Constitution. Article XIII B requires California to reimburse local costs whenever the State mandates a new program or higher level of service on any local government. To seek state reimbursement, local agencies must file a test claim with the State Commission on State Mandates, which determines whether local agencies may receive state reimbursement. Local agencies, however, cannot receive state reimbursement if they can levy fees to cover the new costs.
The claimants, which include a number of water districts, filed a test claim in 2011 alleging that the Water Conservation Act of 2009 imposes a state mandate to conserve water and achieve water conservation goals. The Commission rejected the test claim on the grounds that the claimants possess service fee authority under their enabling statutes sufficient to recover the costs of any new, required activities under the Conservation Act. The claimants appealed, arguing that Proposition 218 undermines their statutory authority to impose fees because any new fees may be defeated by a majority of their water customers filing written protests.
The appellate court determined that the claimants have statutory authority and a statutory procedure for levying fees sufficient to recover costs incurred under the Conservation Act. Proposition 218’s majority protest procedure does not divest the claimants of this authority. The appellate court held that this fee authority is a matter governed by statute, and should not consider the “factual considerations of practicality” – namely, that a majority protest may in practice defeat the claimants’ authority to recover costs through the levy of service fees. The court concluded that, because the claimants have the statutory authority to levy fees, they are not eligible for state reimbursement under the Conservation Act. The implications of this decision are that any new program or higher level of service for which a water district could conceivably levy fees to recover costs will not be deemed a reimbursable state mandate, even if the water district does not or cannot, due to a majority protest, levy such fees.
An additional issue on appeal was whether two local agencies – Richvale and Biggs water districts – could ever claim state reimbursement because neither entity receives tax revenues. Because the two water agencies have the authority to impose service fees, the appellate court declined to consider whether the Commission erred in dismissing these two agencies as ineligible claimants. This issue will continue to impact all local agencies that do not receive tax revenues, as the Commission has consistently held these agencies cannot receive state funding for mandated services.
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