Capistrano Tax Payers Association v. City of San Juan Capistrano California

Court of Appeal 4th Appellate District, Division 3 Case No. G048969

Today, the California Court of Appeal, 4th District, Division 3, issued its long-awaited opinion in the Capistrano Taxpayers Association v. City of San Juan Capistrano water rates case. The ruling sheds much needed light on the State Constitutional requirements for determining how municipalities and water districts can set water rates. Proposition 218, enacted by the voters in 1996, set certain constitutional limitations on the ability of government agencies to generate revenues without taxpayer approval. 

First, and most importantly, the Court’s ruling does not invalidate all tiered water rates. Instead, in line with many state, regional and locally-instituted conservation efforts, as well as Governor Brown’s recent mandate to cut water usage by more than 25% in California, the Court’s ruling only invalidates arbitrary rate structures, whether tiered, blocked or flat, that do not meet the mandatory requirements found in Proposition 218.

Commentators should not read the Court’s ruling as a death knell for water conservation. It is not. Harmonizing Proposition 218 with water conservation efforts are not mutually exclusive endeavors.  Water conservation as mandated by the California Constitution, Article X, section 2 is not at odds with Proposition 218 so long as conservation is attained in a manner that does not exceed the proportional cost of service attributable to the owner’s property. As such, legal conservation efforts to reduce water usage is not in jeopardy by the Court’s ruling.  The Court’s ruling only covers those government agencies who, for expediency’s sake or to arbitrarily generate revenue and create slush funds, circumvent strict constitutional standards and protections for California’s citizens without first providing proper notice, rate making documentation and calculations, and an opportunity to be heard. This is what the City of San Juan Capistrano failed to do. Instead, the City created a rate model that jumped exponentially between tiers creating inherent inequalities, without any explanation, justification, or backup data to support its model – a rate model that was never disclosed to the City’s rate payers and never warranted as Proposition 218 compliant. 

Compliance with the mandates of Proposition 218 is not an exceptionally difficult endeavor. Reliable and credible rate models and calculations that take into account Proposition 218 standards will more than likely be given credence by the courts. Arbitrary and untrustworthy rate models will not, purely revenue-generating rate models will not, and rate models that are not proportional to the cost of service will not.  If the costs of service increase due to constrictions in water supplies as envisioned by the Governor and the State’s water suppliers, then these increased costs can be passed through to the rate payers through Proposition 218’s constitutional safeguards, not in spite of them.  This is the rub for most government agencies – to take the steps needed to draft, vet and create credible rate models and to expend sufficient effort to ensure accountability under Proposition 218. 

The Court’s ruling today only emphasizes the need for government agencies to follow the State’s Constitution in creating and implementing water rates so that all Californians have a say in how they utilize, pay for and conserve one of the State’s most precious commodities. 

Below are details of the legal issues and the rulings of the Court of Appeal, 4th District, Division 3.

LEGAL ISSUES  RULING  

1.  Are Tiered Water Rates Constitutional?  Yes.  Tiered water rates are constitutional as long as they (1) satisfy the proportionality and revenue-neutrality provisions of Proposition 218, (2) relate to a service that is immediately available, and (3) have been disclosed to the public prior to implementation.  Allocation-based conservation pricing consistent with California Constitution, article X, section 2, and Water Code section 372, is not at odds with Proposition 218 so long as conservation is attained in a manner that shall not exceed the proportional cost of the service attributable to the parcel and there is adequate support for the inequality between tiers, depending on the category of user. 

2.  Are the City’s tiered water rates compliant with Proposition 218?  No.  The City failed to present credible evidence that the arbitrary and incremental increases between its tiered rates were compliant with Proposition 218.  First, the City failed to provide any specific financial data to support its tiered rates.  Second, the City’s significant rate jumps between tiers are not cost-related.  Finally, the tiered rates are not proportional to the cost of service to each parcel. 

3.  Are the City’s tiered rates a penalty?  No. The City’s tiered water rates cannot be considered a penalty because such a theory would be inconsistent with the Constitution.  Penalty rates that bear no relationship to the actual cost of providing water service would make a “mockery of the Constitution.”  

4.  Does the City bear the burden of proof in demonstrating compliance with the mandates of Proposition 218?  Yes.  Proposition 218 expressly provides that the challenged agency (the City) bears the burden of proving compliance with Proposition 218.  It is clear that the voters intended to reverse the usual deference accorded governmental action and to reverse the presumption of validity by placing the burden on the governmental agency. 

5.  Can the City charge rate payers for non traditional, non-potable water services (recycled water)?  Yes.  The Court found that providing recycled water is not a fundamentally different kind of service from providing traditional potable water. When each kind of water is provided by a single local agency that provides water to different kinds of users, some of whom can make use of recycled water while other can only make use of traditional potable water, providing each kind of water is providing the same service.  Non-potable water for some customers frees up potable water for others.  Since water service is already immediately available to all customers of the City, there is no violation of Proposition 218 (Constitution, Article XIII(D), section 6(b)(4) requiring that a service is actually used by, or immediately available to, the owner of the property.) 

6.  Is there sufficient evidence to determine whether residential rate payers who are lower than average water users are being required to pay for recycling facilities that would not be necessary but for above-average consumption?  Insufficient evidence.  The Court remanded this issue back to the trial court for further findings on whether charges to develop the City’s nascent recycling operation have been improperly allocated to users whose levels of consumption are so low that they cannot be said to be responsible for the need for that recycling. 

Read the ruling here.

For more information, contact Louis Klein at 213.283.2112 or lklein@foleymansfield.com.