Revenue and Taxation

Proposition 26’s Immediate Impact on Local Governments Will Be Limited

Voters approved Proposition 26 at the November 2, 2010 election, and, upon certification of the results, the measure will be effective as of November 3. The main thrust of Proposition 26 was to require a two-thirds vote of both houses of the Legislature to approve “regulatory fees” that the measure indicates are unrelated to a regulatory program. But it will also directly limit local governments’ authority to levy new fees. Nonetheless, our initial judgment is that the impacts on most local governments will not be particularly significant, although the impact may increase as ambiguities regarding the text of the measure are resolved in the future.

Proposition 26’s stated purpose is to require voter approval for regulatory fees that “exceed the reasonable costs of actual regulation or are simply imposed to raise revenue for a new program and are not part of any licensing or permitting program. . . .” Thus, the proposition was aimed at a narrow class of regulatory fees. The text however is less surgical. It simply defines “tax” to include “any levy, charge, or exaction of any kind imposed by” local government except for those listed among seven exceptions. The significance of this new definition is that any levy not covered by one of the seven listed exceptions is subject to voter approval.

Importantly, though, Proposition 26 does not apply to any fees that were in effect on November 2, 2010. Thus, even if a fee enacted prior to November 3, 2010 does not fit within any of Proposition 218’s exceptions, it will nonetheless remain valid if it is not increased.

Additionally, most of the fees presently imposed by local governments fit clearly within one or more of the seven listed exceptions. For example, sewer and water service charges are exempted because they are subject to Proposition 218’s fees and charges provisions. Similarly, assessments that comply with Proposition 218 are exempt. And, Proposition 26 has no impact on development impact fees and other exactions imposed as a condition of property development.

Thus, Proposition 26’s key impact on local government is that it will prevent the enactment or increase of regulatory fees that do more than recover the costs of regulation. Proposition 26 restricts regulatory fees by limiting recoverable costs to those associated with issuing licenses and permits, performing investigations, inspections and audits, and administration and enforcement. For instance, the Legislative Analyst indicated in the ballot pamphlet that fees imposed on alcohol retailers to generate funds to reduce public nuisance problems associated with alcohol would likely be considered taxes.

Nonetheless, because of the manner in which it was drafted, Proposition 26 may result in legal disputes in the future over the local government’s authority to adopt and increase fees of all types. We along with other local government lawyers are presently analyzing the potential arguments that may arise. Time will tell, but our initial view is that, outside of the regulatory fee context, Proposition 26 is unlikely to be interpreted a manner that is substantially more restrictive than previous law.

Federal Government Announces it Will Enforce Federal Marijuana Laws if Proposition 19 the “Regulate, Control and Tax Cannabis Act of 2010” Passes

If California voters adopt Proposition 19 on November 2, 2010, California will be the first state in the nation to legalize marijuana for recreational use. Marijuana, whether for recreational use or medical use, remains an illegal substance under the Federal Controlled Substances Act (“CSA”). In an October 13th letter to former chiefs of the U.S. Drug Administration Agency, Attorney General Eric Holder stated the Federal Government will continue to enforce its marijuana laws in California, even if Proposition 19 passes.

According to Holder’s letter, “We will vigorously enforce the CSA against those individuals and organizations that possess, manufacture or distribute marijuana for recreational use, even if such activities are permitted under state law.” The Attorney General also said, “If passed, this legislation will greatly complicate federal drug enforcement efforts to the detriment of our citizens.”

This letter may suggest a potential departure from the Administration’s position of not prosecuting medical marijuana users in compliance with state law, as set forth in an October 19, 2009 letter from the Department of Justice (“DOJ”). While the DOJ expressed its commitment to the enforcement of the CSA in all states, it explicitly told Federal prosecutors that the Department’s priorities should not focus on “individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.” 

With the Federal government’s stated opposition to Proposition 19, and the intent to enforce the CSA, local governments face an even bigger challenge of trying to comply simultaneously with State law and Federal law.

California Supreme Court Holds Secret Ballots Unnecessary for Approving Property-Related Fees and Assessments

Proposition 218 limits local governments’ ability to raise or to impose new assessments or property-related fees and charges, requiring them to submit new or increased assessments or fees to approval by affected property owners, or by the whole electorate. The California Supreme Court unanimously ruled yesterday that, in such proceedings, secret ballots are not required. (Greene v. Marin County Flood Control & Water Conservation Dist.)

“Voting shall be secret,” the California Constitution has long proclaimed. Since voters adopted Prop 218 in 1996, Article XIII D has required public entities to submit new or increased property-related fees (with certain exceptions) to approval at an “election,” among affected property owners or all registered voters. Another part of Article XIII D requires balloting for new or increased assessments, and spells out procedures (without using the word “election”). The assessment procedures don't include secret ballots. Moreover, a statute implementing the assess­ments section of Article XIII D requires that assessment ballots be signed, and be public documents once tabulated. The part of Article XIII D requiring elections for fees, meanwhile, does not spell out any procedures to be used. Instead, it says that local governments can use procedures “similar to” those for assessment balloting.

In Greene, the Court first concluded that secrecy is not required in assessment balloting. It treated as valid the statute that makes assessment ballots public documents once they are tabulated. The Court then held that complete secrecy is not required in fee-related elections, either--local entities may require property owners to sign the ballot with their vote. However, local entities may provide ballot secrecy if they choose. The Court left open a question whether some lesser degree of ballot secrecy in fee elections may be required; that will be up to a future case to decide.

Read more here, and for more information about Greene or assessment and fee balloting in general, contact Meyers Nave’s Writs and Appeals Group or Public Finance Group.

San Francisco and California Grapple with Unfunded Health Care Benefits

The City and County of San Francisco is working to address a $4.9 billion unfunded liability for the 30-year costs projected for retiree health care benefits. This is second to the State of California's unfunded liability of $48 billion. Click here for the S.F. Chronicle article on this story.

California Supreme Court Issues Long-Awaited Bighorn Decision

Today, the California Supreme Court issued its long-awaited decision in Bighorn-Desert View Water Agency v. Verjil (July 24, 2006, S127535) __ Cal.4th __. The case concerned whether the water agency’s rates were subject to repeal by initiative pursuant to section 3 of article XIII C of the California Constitution. In the course of answering this question, the Court determined that water service charges (and by implication sewer and refuse collection fees) are “property related fees” under Article XIIII D. This decision ends a long period of uncertainty.

For agencies that impose water, sewer, and refuse collection fees, Bighorn has three basic implications. First, the adoption and increase of “property related fees” are subject to Proposition 218’s procedural requirements. (Art. XIII D, sect. 6(a).) These procedural provisions require detailed noticing of each property owner 45 days prior to the hearing on the fee and prohibit the adoption of the fee or increase if a majority of the property owners protest the imposition or increase in writing. Second, property related fees are subject to Proposition 218’s substantive requirements. (Art. XIII D, sect. 6(b).) Among other things, the substantive requirements provide that the amount of the fee “shall not exceed the proportional cost of the service attributable to the parcel,” and that revenues from the fee “shall not exceed the funds required to provide the service” and “shall not be used for any purpose other than that for which the fee was imposed.” Third, “property related fees” are subject to the power of the electorate to reduce them by initiative. (Art. XIII C, sect. 3).

The decision can be found here. A link to a more detailed discussion of the case is forthcoming shortly.

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