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Local Agencies Have Authority to Levy Fees on Businesses to Cover Inspection Costs for New Environmental Programs Imposed by the State

Client Alert

           On January 4, 2021, the California Court of Appeal issued a published decision in Department of Finance v. Commission on State Mandates, 21 Cal. Daily Op. Serv. 234, finding that local governments have the authority to levy a fee on businesses to cover the local governments’ environmental regulation compliance inspection costs imposed by a state agency.  

            This case arises from the issuance of permits to certain Cities[1] by The Regional Water Quality Control Board, Los Angeles Region (“Regional Board”) to operate stormwater drainage systems in 2001.  The permit program No. 01-182 (“Program”) requires the Cities to: (1) install and maintain trash receptacles at each transit stop (“Transit Stop Requirement”), and (2) periodically inspect commercial facilities, industrial facilities, and construction sites to ensure compliance with various environmental regulatory requirements (“Inspection Requirements”). 

            The Cities filed claims with the Commission on State Mandates (“Commission”) asserting that the state must reimburse the costs related to the Transit Stop Requirement and Inspection Requirements pursuant to article XIII B, section 6 of the California Constitution (“Section 6”).  Section 6 requires subvention of funds to reimburse a local government’s costs to comply with new programs or higher level of service on existing programs imposed by a state agency.  In July 2009, the Commission determined that the trash receptacle requirements are a reimbursable state mandate pursuant to Government Code § 17556, but the costs for inspections are not reimbursable. 

            In February 2011, the State Agencies[2] and the Cities filed cross-petitions for writs of administrative mandamus challenging the Commission’s findings.  The matter was appealed and later remanded back to the trial court for further proceedings.  In February 2018, the trial court granted the State Agencies’ petition, denying the Cities’ petition as moot.  The Cities appealed. 

            Ultimately, the Court of Appeal reversed the trial court’s findings and denied both sides’ petitions—reinstating the Commission’s determinations in whole.  As a result, case precedent is now established authorizing a city’s levy of fees against businesses to cover costs related to compliance with environmental inspection regulations imposed by state agencies.  Simultaneously, this case also signals that any local agency, including special districts, may recoup compliance costs for new programs imposed by the state or for a higher level of service on existing programs.

Court of Appeal Decision

            In 1979, the California electorate added article XIII B to the state constitution restricting the amounts state and local governments may appropriate and spend each year.  To protect local agencies from cost-shifting attempts by state agencies, Section 6 was included which provides: “Whenever the Legislature or any state agency mandates a new program or higher level of service on any local government, the State shall provide a subvention of funds to reimburse that local government for the costs of the program or increased level of service.”  (Cal. Const., art. XIII B, § 6, subd. (a).)  As a result, the state, with certain exceptions, must “pay for any new governmental programs, or for higher levels of service under existing programs, that it imposes upon local governmental agencies.” (County of San Diego v. Commission on State Mandates (2018) 6 Cal.5th 196, 207.)  The Cities’ petition argued that in addition to reimbursement for the Transit Stop Requirement, the state should also be responsible for subvention of funds for complying with the Inspection Requirements.[3]

            The Court of Appeal reversed the trial court’s findings in favor of the State Agencies, agreeing with the Commission that the Transit Stop Requirement and Inspection Requirements (collectively, “Program Requirements”) constituted both (i) “new programs” and (ii) required a higher level of service for purposes of Section 6.  The Court found that “trash collection is itself a government function that provides a service to the public by producing cleaner transit stops, sidewalks, streets, and, ultimately, stormwater drainage systems and receiving waters” and therefore “the mandate to install and maintain trash receptacles at transit stops is a ‘new program’ within the meaning of section 6 because it was not required prior to the Regional Board’s issuance of the permit.”  The Court of Appeal also ruled that the Program Requirements imposed a higher level of service, as the requirements promote and enforce third party compliance with environmental regulations limiting the amount of pollutants that enter storm drains and receiving waters.  Additionally, the Court found that Section 6 applied because the Program Requirements “impose[s] unique requirements on local governments” “to implement a state policy.”  (County of Los Angeles v. State of California (1987) 43 Cal.3d 46, 56.)

            i.          No Authority To Levy Fees For Transit Stop Requirement        

            The Court of Appeal determined that because local governments do not have the authority to levy charges, fees, or assessments to cover costs created by the Transit Stop Requirement, such costs are reimbursable state mandates.  The Court agreed with the Commission’s reasoning that, “[b]ecause the trash receptacles are required to be placed at transit stops that would typically be on the city property (sidewalks) or transit district property (for bus, metro, or subway stations), there are no entities on which the [local governments] would have authority to impose the fees.”  The Transit Stop Requirement, therefore, requires subvention under Section 6.

            The Court of Appeal struck down the State Agencies’ arguments under Government Code § 54999.7(a) concerning fees imposed between public agencies.  The Court explained that section 54999.7 is not applicable because the statute’s reference to the power of one public agency to impose a fee for a public utility service “provided to [another] public agency” contemplates that the receiving public agency is a public utility customer that solicited and uses the services for which it is charged.  As stated by the Court, “[t]he statute does not permit one public entity to simply install equipment—such as trash receptacles—on another public entity’s premises and then charge the other entity for their installation and ongoing maintenance.”  Accordingly, the appellate court rejected the State Agencies’ attempt to shift “service charges, fees, or assessments to pay the costs of complying with the trash receptacle requirement” to the Cities.

            The Court denied the State Agencies’ petition and reinstated the Commission’s findings mandating reimbursement in connection with the Transit Stop Requirement.

            ii.         Authority To Levy Fees For Inspection Requirements

            With respect to the inspection requirements—and denying the Cities’ petition—the Court of Appeal also affirmed the Commission’s finding that local governments have the authority to levy fees to pay for the increased level of service mandated by the Permit Program on commercial facilities such as restaurants, automotive service shops, industrial complexes, and construction business within its jurisdiction.  The Court affirmed the Commission’s holding that inspection costs are therefore not “costs mandated by the state” pursuant to Government Code § 17556(d) and are not reimbursable. 

            The Cities argued in their writ, among other grounds, that they were “constitutionally constrained” from imposing fees for inspection costs because some businesses or sites that the Cities must inspect already “pay fees to the state, a portion of which the Regional Board must spend ‘solely on stormwater inspection and regulatory compliance issues associated with industrial and construction stormwater programs’” pursuant to Water Code § 13260(d)(2)(B)(iii).  According to the Cities, any fee imposed by the local government based on the Inspection Requirements would duplicate fees already paid to the state and are therefore unconstitutional.

            The Court of Appeal disagreed, holding that “nothing in the [Water Code] requires a regional board to inspect a fee payer’s site.”  The judges stated they had no indication before them showing the Cities’ inspection would replace or supplant inspections the Regional Board is required to conduct.  “Thus, the permit’s inspection requirements and Water Code section 13260 can be applied without duplication or conflict; the local governments can impose and collect a fee to cover the reasonable costs of the particular inspections they are required to undertake and the Regional Board can fulfill its expenditure requirements by addressing ‘stormwater inspection and regulatory compliance issues’ in other ways.”

            Based on the foregoing, the Court of Appeal denied the Cities’ petition.  In so doing, however, the Court expressly ruled that the Cities are authorized to levy fees against business owners to comply with the Program’s inspection costs.

Takeaways

            This case specifically addresses and clarifies what is reimbursable as compliance costs in connection with the Program Requirements by the Cities of Artesia, Azusa, Bellflower, Beverly Hills, Carson, Commerce, Covina, Downey, Monterey Park, Norwalk, Rancho Palo Verdes, Signal Hill, Vernon, and Westlake Village.  Specifically, because no exception applies to the trash receptacle requirement, subvention is required to reimburse the Cities for their costs of compliance; however, subvention is not required for costs associated with inspection requirements because the Cities have the authority and ability to collect fees from another source, i.e., businesses, to pay for the mandated inspections.  (Gov. Code, § 17556, subd. (d).)  

            Applied more broadly, this Court of Appeal decision supports a city or county’s authority to levy service charges, fees, or assessments to pay the costs of compliance with environmental regulation inspection costs.  If such fees are to be considered by any local agency, the fee must not exceed the reasonable cost of the inspections nor levied for unrelated revenue purposes, and must be fairly allocated among the fee payers.  Cities and counties should continue to monitor new programs by the state or existing programs calling for higher services to assess if levying fees is permitted from another source, and if not, whether seeking reimbursement of costs is warranted. 

            Further, this case supports all local agencies’ right, including special districts, to seek reimbursement for compliance costs on state-imposed programs—at the minimum in the environmental context.  The relevant Government Code sections expressly acknowledge that “special districts within the[] county” may submit a test claim to the Commission on State Mandates to determine reimbursement rights on “STATE-MANDATED LOCAL COSTS”.  Gov. Code §§ 17556, 17564(a).  Accordingly, special districts should keep in mind where compliance costs for new programs or programs requiring a higher level of service are imposed by a state agency, the special district may be entitled to seek subvention of funds from the state agency if it is unable to cover costs of compliance from another source such as businesses or the public.

 

For further information, please contact D. Dennis La from Aleshire & Wynder, LLP’s Water Practice Group at (310) 527-6660.  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.



[1] Real parties in interest include the Cities of Artesia, Azusa, Bellflower, Beverly Hills, Carson, Commerce, Covina, Downey, Monterey Park, Norwalk, Rancho Palo Verdes, Signal Hill, Vernon, and Westlake Village (collectively, “Cities”). 

[2] The state agency petitioners include the Department of Finance, State Water Resources Control Board, and the Regional Board (collectively, “State Agencies”).

[3] In the States Agencies’ petition for writ of administrative mandamus, three grounds were advanced challenging the Commission’s decision:  (1) the challenged requirements are mandated by federal law; (2) the challenged requirements do not impose new programs or higher levels of service; and (3) subvention for the costs of complying with the trash receptacle requirement is not required because the local governments have authority to levy fees to cover such costs.  In the Cities’ cross-petition, the Cities challenged the Commission’s determination that the local governments could levy fees to cover the costs of the required inspections.