Voters in California may cast ballots this November on a proposal to make substantial changes to the California Constitution involving taxation and related government powers. 

Initiative 1935, the so-called “Taxpayer Protection and Government Accountability Act,” seeks to limit the State’s and local agencies’ ability to generate revenues by, among other things, broadening the definition of what constitutes a tax, increasing voter and government approval thresholds in some cases, and adding procedural election requirements.  It seeks to overturn recent judicial decisions holding that local initiative tax measures require approval of only a majority vote. 

The measure also purports to apply retroactively.  If retroactivity is effective, applicable taxes, fees and charges created, increased or extended after January 1, 2022, not adopted in a manner consistent with the requirements of Initiative 1935 would become void unless reenacted within 12 months.

The Governor and State Legislature are challenging Initiative 1935 in the California Supreme Court.  They say it should not appear on the ballot, arguing that the initiative would amount to an unlawful revision of the California Constitution and an impermissible interference with essential government functions.  The Governor and Legislature have requested a ruling by June, before election workers prepare ballots for the November election.  It is unclear how the California Supreme Court will rule.

How Initiative 1935 Would Affect Local Governments

Propositions in 2010, 1996 and 1978 limited the ability of the State and local governments to raise taxes and fees.  Here’s a look at how local governments would be affected by Initiative 1935.

Exactions, Charges and Fees

Proposed Initiative 1935 provides that all levies, charges or exactions imposed by a local law would be “taxes” unless the charge is an “exempt charge.” (A “local law” is broadly defined to include regulations, rulings and opinion letters.) Local governments imposing fees would need to prove by clear and convincing evidence that the charge qualifies as an exempt charge, which Initiative 1935 defines as limited to categories of fees and charges that generally include: 

• Reasonable charges imposed for a specific local government service or product in an amount that does not exceed the actual cost to the local government. 
  • Initiative 1935 limits actual cost to the “minimum amount necessary to reimburse the government for the cost of providing the service or product.”
  • Local governments would be required to account for other sources of funds to pay for the product or service provided.
• Charges relating to the reasonable cost of regulatory activities.
• Reasonable charges for entering public property, such as a park.
• Judicial fines, penalties and other charges imposed pursuant to adjudicatory due process.
• Charges as a condition to property development except those relating to vehicle miles traveled.
• Assessments, fees or charges subject to Article XIIID of the Constitution (such as charges for water or wastewater services) or assessments imposed by a tourism marketing district, a parking and business improvement area or a property and business improvement district.
• Charges for certain health care services that do not exceed the reasonable cost of providing the service.  

Under the provisions of Initiative 1935, fees and charges imposed by a local government (including any extension, but excluding certain health care service fees) would have to be imposed by ordinance (which may be subject to referendum).  Accordingly, Initiative 1935 may, in certain circumstances, limit the ability of local governments to delegate fee and rate setting to other agencies or departments.

In addition, Initiative 1935 would prohibit new municipal charter amendments to impose, increase or extend exempt charges (as well as taxes). 

Initiative 1935 could affect fees and charges related to emergency response, document processing and duplication, transit, tolls, parking, facility use, and garbage disposal. 
If the fee or charge does not qualify as an “exempt charge” under Initiative 1935, or the local government cannot prove the necessary facts by clear and convincing evidence, the charge would be considered a tax, requiring certain procedures and an election.  Under Initiative 1935, any special tax, whether proposed by the governing body or by initiative, would require a two-thirds vote.

Should Initiative 1935 become law, local governments may need to consider whether to reimpose or readopt fees or charges implemented since January 1, 2022.  For exemptions that require it, local governments should consider the evidence retained to support its determination that any fee or charge is an exempt charge.

Enterprise Funds

Initiative 1935 would affect local agencies with enterprise funds, including cities, counties and special districts that operate water, wastewater, electrical or similar systems, as well as agencies that operate public transportation systems.  

Initiative 1935 would affect enterprise funds by altering a local government’s ability to impose fees and charges in a variety of ways:

• It would limit the types of fees and charges that qualify as exempt charges.  It also would require local governments to prove qualification as an exempt charge by clear and convincing evidence.
• Local government charges for services or products provided directly to a payor (apart from property related fees and charges subject to Article XIIID of the California Constitution, which would continue to be subject to limitations in Article XIIID) would qualify as exempt charges only if reasonable and not in excess of the “actual cost” of providing the service or product unless such charges fell into another category of exempt charge. 
• Actual cost calculations would be limited to the “minimum amount necessary” and would have to take into account other sources of funds to pay for the product or service provided.  
• Fees and charges for services would only qualify as an “exempt charge”  if imposed by local government ordinance.    

As with other fees and charges, should Initiative 1935 become law, local agencies that operate enterprises may want to consider whether to reimpose or readopt any fees or charges for services or products implemented since January 1, 2022.  Further, for exemptions that require it, local governments should ensure that the evidence retained—to support its determination that charges constitute exempt charges—includes evidence of the computation of actual cost.

General Fund and General Obligation Credits

Cities, counties and school districts often issue debt payable from the public entity’s general fund.  General fund revenues typically include property tax, sales tax, licensing and permit fees and charges for services not otherwise allocated to an enterprise.  Initiative 1935 would impose new restrictions that could make it significantly more difficult for local governments to raise revenues, impacting their ability to support general fund-paid debt.

• Each ballot measure for a new, increased or extended tax would have to include language concerning the type, amount or rate, duration and use of the tax.
• Any special tax, including those imposed by initiative, would require a two-thirds vote. 
• Advisory measures accompanying a general tax would be prohibited.
• For local government general funds supported by fees and charges, the information described above under the heading “Exactions, Charges and Fees” would be relevant.

The imposition of new or increased ad valorem taxes for general obligation bonds should not be impacted by Initiative 1935.  However, local governments may need to review measures adopted after January 1, 2022, to confirm.

Mello-Roos Community Facilities Districts

Cities, counties, school districts and other local agencies often use the Mello-Roos Community Facilities Act of 1982 to finance infrastructure and services that become necessary as a result of new development.  Mello Roos special taxes might be subject to the requirement in Initiative 1935 that each ballot measure for a new, increased or extended special tax include language concerning the type, amount or rate, duration and use of the tax.  

Typically, the rate and method of apportionment of special tax that sets the tax rate has a high level of detail that is difficult to accurately describe within the word limits applicable to a ballot.  Though nearly all community facilities districts for new infrastructure are developer-initiated and subject to landowner vote with customarily broad waivers of procedural election requirements, agencies should consider engaging counsel to review proceedings conducted after January 1, 2022, and to assist with ongoing proceedings to ensure compliance with Initiative 1935 requirements.  

How Initiative 1935 Would Affect State Entities

Initiative 1935 would similarly affect taxes and other charges implemented under State law.  The provisions of Initiative 1935 would apply to a broad range of State-initiated actions, including statutes, regulations, executive orders, resolutions and opinion letters—but not actions taken by The Regents of the University of California, Trustees of the California State University or the Board of Governors of the California Community Colleges. 

• All levies, charges or exactions imposed by California law would be “taxes” subject to voter approval unless the State can prove by clear and convincing evidence that the charge is an “exempt charge.”
• The definition of “exempt charge” is limited to certain categories, which generally include:
  • Reasonable charges for a government service or product in an amount that does not exceed the actual cost to the State.
  • Charges relating to the reasonable cost of regulatory activities.
  • Certain levies, charges or exactions on local government, health care providers or health care service plans to support Medi-Cal.
  • Reasonable charges for entrance to or use of State property.
  • Judicial fines, penalties and other charges imposed pursuant to adjudicatory due process.
  • Certain charges for promotion of tourism.  Any required actual cost calculations would be limited to the “minimum amount necessary” to reimburse the cost of providing a service or product to the payor and must take into account other sources of funds to pay for the product or service provided. 
• Only the legislature (pursuant to a vote of both houses) could impose exempt charges, and Initiative 1935 might, in certain cases, limit the State’s ability to delegate the imposition of fees and charges to State agencies.  Each act imposing a new exempt charge would be required to specify the type of exempt charge, and the amount or rate of the exempt charge.
• New or higher taxes would require a two-thirds vote of both houses of the legislature and a majority vote of the electorate.  
• Each act imposing a new or increased tax would need to specify the duration, the annual amount expected to be derived and “[a] specific and legally binding and enforceable limitation on how the revenue from the tax can be spent.”
• Each ballot measure for a new, increased or extended tax, including initiatives, would also have to include language concerning the type, amount or rate, duration and use of the tax.

Competing Measures

Two competing measures will appear on the November 2024 ballot:

• ACA 13 (Voting Thresholds) 
  • ACA 13 would amend the California Constitution to require that any initiative increasing voter approval thresholds obtain the same proportion of votes cast in favor of the initiative as increased voter approval threshold to be enacted (e.g., an initiative requiring a two-thirds vote to approve a tax or fee increase would itself require a two-thirds vote to be adopted). 
  • ACA 13 specifies that this voter approval requirement applies to statewide initiative measures on the ballot on or after January 1, 2024.  If adopted on November 5, 2024, ACA 13 may require Initiative 1935 to obtain a two-thirds supermajority approval to be enacted.
  • In addition, ACA 13 authorizes advisory votes to accompany local general tax measures, in contradiction of Initiative 1935.
• ACA 1 (Local Government Financing; Affordable Housing and Public Infrastructure; Voter Approval)
  • ACA 1 would lower the voting threshold to 55% from two-thirds for GO bonds, sales taxes and parcel taxes for public infrastructure and affordable housing projects.
  • “Public infrastructure” is broadly defined to include a variety of projects providing water, water quality protection, sewer, wastewater treatment, sea level rise protection, parks and recreation, open space, transit and streets and highways, flood control, broadband expansion, local hospitals, public safety and public libraries.

Please contact a member of Orrick's Public Finance team if you have questions about Initiative 1935, ACA 13 or ACA 1.