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Fourth Appellate District Holds Transfers of Funds Collected As Sewer Service Fees to the City’s General Fund Did Not Violate Prop 218

Client Alert

On June 2, 2015, the California Court of Appeal for the Fourth Appellate District issued its decision in Jack Moore v. City of Lemon Grove et al., (“Lemon Grove”). The Lemon Grove Court evaluated whether transfers of funds collected by the Lemon Grove Sanitation District as sewer service fees to the City’s general fund violated Proposition 218. The Court found the subject transfers did not violate Proposition 218 because the fees were not spent for unrelated revenue purposes, did not exceed the cost of providing service, and were not imposed for general governmental services. This case provides a useful analysis for public agencies to determine what transfers of property-related fees to general funds pass muster under Proposition 218, and the evidence necessary to support those transfers if challenged.

Summary of the Lemon Grove Decision

Lemon Grove involves an appeal to a judgment denying a petition for writ of mandate and equitable relief against the City of Lemon Grove (the City) and the Lemon Grove Sanitation District (the District, together with the City, Respondents). Sanitation fee ratepayer Jack Moore sought to stop Respondents from transferring funds collected as sewer service fees and charges to the City's general fund, claiming the transfers violated Proposition 218.

Moore alleged Respondents failed to earmark funds collected as sewer service fees and charges transferred to the City's general fund for a specific purpose, and instead used the funds for general governmental purposes. Moore contended the money transferred by Respondents from the sanitation fund to the general fund was illegal because the transfers were not properly tied to actual costs incurred for the District's benefit and Respondents never properly identified and quantified the costs.

 The Fourth Appellate District affirmed the trial court’s ruling that the transfers of the sanitation fees and charges did not violate Proposition 218 because the District had used reasonable methods to determine the amounts to transfer because the fees were not spent for unrelated revenue purposes, did not exceed the cost of providing service, and were not imposed for general governmental services.

A.        The Fees Were Not Spent for Unrelated Revenue Purposes.

Moore challenged Respondents' method of showing they used the fees collected for only the purpose for which the fees were charged. A fee may only be used for the purpose it was charged. (Cal. Const., art. XIII D, § 6, subd. (b)(2).)  Applying this rule to the fees in Lemon Grove, the Fourth Appellate District found that because the fees at issue were collected from property owners and described as sewer service charges, Respondents may appropriately spend those fees on anything related to the maintenance and management of the sewer system.

The District presented evidence that most functions required for it to operate are provided by City employees that divide their time among various activities. To determine the amount transferred to the general fund, the City finance director monitors expenditures to make sure they stay within budget, tracks direct costs to the sewer program, interviews department directors, and makes adjustments to personnel allocations between various funds. Moore conceded that when a cost is incurred for the joint benefit of different divisions within a city or local government, those costs may be allocated.

The Court found that although Respondents’ methods were informal, they were not unconstitutional. The Court rejected Moore’s argument that Respondents provided no authority to support their “revenue-centric methodology” and affirmed the trial court’s opinion that the evidence showed "apportioning the funds based on revenue [was] reasonable under the circumstances."

B.        The Fees Were in Amounts Necessary to Accomplish Their Purpose.

Under Proposition 218, a fee cannot be charged in excess of the service provided; a fee can only be used for the purpose it was charged; and the fee may not be imposed for general governmental services. (Cal. Const., art. XIII D, § 6, subd. (b)(1), (2) & (5).) The Section 6(b) fee or charge must reasonably represent the cost of providing service. (Howard Jarvis Taxpayers Assn. v. City of Roseville (2002) 97 Cal.App.4th 637, 647-648.)

Applying these principles to the fees in Lemon Grove, the Court found that the fees imposed by the District did not exceed the cost of providing the service. The District’s revenue is tied to expenditures through a five-year rate study which identifies the maximum fee increases that the District can apply annually. The District has increased or decreased the sanitation rate based on the amounts set forth in the study. After sanitation rates are established, the City finance department monitors expenditures, interviews department directors, and makes adjustments to personnel allocations between various funds. Therefore, the Court found that Respondents appropriately spent the fees collected from ratepayers on the maintenance and management of the sewer system.

C.        The Fees Were Not Imposed for General Governmental Services.

Section 6(b)(5) provides in part: "No fee or charge may be imposed for general governmental services including, but not limited to, police, fire, ambulance or library services, where the service is available to the public at large in substantially the same manner as it is to property owners."  Applying this rule to the fees in Lemon Grove, the Court rejected Moore’s argument that Respondents violated Section 6(b)(5) because they failed to earmark or pledge the transferred funds for any specific purpose. Once Respondents determined the proper amount needed to cover the District's share of personnel and overhead expenses, the funds were placed in the City's general fund. If fees are properly linked to costs, Section 6(b) does not prevent those properly imposed fees from then being placed in a general fund. Therefore, the Court concluded that Respondents' action of reimbursing the general fund for its costs did not violate Section 6(b)(5).

The decision was certified for publication.  The full text is available here:
http://www.metnews.com/sos.cgi?0615//D066670

For further information, please contact any of the attorneys from Aleshire & Wynder, LLP’s Public Finance and Water Practice Groups at (949) 223-1170.

Disclaimer:  Aleshire & Wynder, LLP legal alerts are not intended as legal advice.  Additional facts or future developments may affect subjects contained herein.  Please seek legal advice before acting or relying upon any information in this communication.