Metropolitan News-Enterprise


Thursday, April 30, 2015


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S.C. to Decide Whether City’s Transfer of Utility Revenues Is ‘Tax’




The California Supreme Court yesterday agreed to decide whether a city’s transfer of revenues from its municipal utility to its general fund requires two-thirds voter approval if the amount of money involved exceeds the costs of providing electrical service.

The justices, at their weekly conference in San Francisco, granted the City of Redding’s request for review of a ruling in favor of a local citizen’s group. The Third District Court of Appeal, in a 2-1 decision, said Redding’s use of a “payment in lieu of taxes,” or PILOT, constituted a “tax” within the meaning of Proposition 26.

The 2010 voter-approved measure expanded the definition of a tax, for purposes of the supermajority requirements of previous initiatives, to include “any levy, charge, or exaction of any kind imposed by a local government” unless an exception applies.

One exception provides that a “charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product” is not a tax.

Use of PILOT

Redding had used a PILOT since 1988. The PILOT, which is enacted as part of the budgeting process, involved transfer from the tax-exempt Redding Electrical Utility to the city general fund of an amount designed to be equivalent to the ad valorem tax the utility would have to pay if privately owned. 

A number of other cities have enacted PILOTs, and the League of California Cities, California State Association of Counties, and California Municipal Utilities Association filed amicus briefs supporting Redding. Justice Andrea Hoch, writing for the Court of Appeal, said in a footnote that the court was not expressing a view on the validity of any PILOT other than Redding’s.

Two Lawsuits

At issue in the consolidated appeal were two suits filed in 2011. The first was triggered by a 2010 increase in utility rates, which the plaintiffs alleged was imposed solely to fund a $6 million PILOT and not to cover costs of providing service. Superior Court Judge William D. Gallagher sustained the city’s demurrer on the ground that the city had been making a PILOT since before Proposition 26 was passed, so the transfer was grandfathered-in, even if it was a tax.

The second action was brought later in 2011, after the city enacted its biennial budget, which provided for an increase in the PILOT to account for the addition of a new generator. Gallagher again ruled that the PILOT was grandfathered-in, and also that it could reasonably be argued that it reflected a reasonable cost of providing electrical service.

Hoch, however, reasoned that the PILOT was a tax unless the “reasonable costs” exception applied. Because the trial judge did not definitively rule on the issue, the justice said, the case must go back to the lower court.

“Throughout its history, the PILOT has been measured against the ad valorem tax,” she wrote. “The PILOT has been adjusted to keep it equivalent to the ad valorem tax. It has not been designed to approximate the reasonable costs of providing electric service in Redding.”

Hoch rejected several arguments advanced by the city, including that utility rates are not “imposed” by the city since no one is required to connect to electric service. “A tax does not lose its revenue-generating character because there is a theoretical but unrealistic way to escape from the tax’s purview,” she wrote.

The justice went on to say that the trial judge was wrong about the PILOT being grandfathered-in, because the transfer has never been imposed by ordinance and must be reauthorized every time the city enacts a new budget.

Justice Tony Mauro concurred in the opinion, while Justice Elena Duarte dissented.

The high court, in an order signed by all seven justices, said it would consider three issues—whether the PILOT is a tax under Proposition 26, whether the “reasonable costs” exception applies, and whether the PILOT is exempt as predating Proposition 26.  

The case is Citizens for Fair REU Rates v. City of Redding.

Other Action

In other conference action, the justices:

•Denied the plaintiff’s request for publication in Chavez v. Southern California Edison Co., B253514.

Div. Two of this district’s Court of Appeal held in that case that an action for same-sex harassment at the workplace can be established without showing any particular motive. The panel reversed a judgment in favor of the defendant, which is accused of failure to take reasonable steps to prevent sexual harassment, and the two coworkers who allegedly committed the harassment.

Plaintiff Alejandro Madera Chavez will have another chance to attempt to prove at trial her claims under the Fair Employment and Housing Act. In other respects, the judgment was affirmed, but the Court of Appeal found error in an instruction telling jurors that plaintiff had to show, among other things, that “[e]ach defendant was motivated by sexual desire [or] by a general hostility toward men in the workplace.”

•Left standing a Fifth District Court of Appeal ruling that police who allegedly delayed obtaining medical help for a physician who suffered a stroke while driving home from work, and whom they mistakenly thought was intoxicated, cannot claim that the plaintiff’s failure to manage his high blood pressure was a legal cause of his damages.

While there is a paucity of California case law on the issue of pre-occurrence comparative negligence, Justice Donald Franson explained, California does follow the traditional rule that the “tortfeasor takes the plaintiff as he finds him.” 

A number of jurisdictions have held, particularly in medical malpractice cases, that conduct by the plaintiff prior to the occurrence of medical negligence cannot be used to prove comparative fault, Franson noted. That position, he pointed out, is consistent with the Restatement Third of Torts: Apportionment of Liability, which states:  “[I]n a case involving negligent rendition of a service, including medical services, a factfinder does not consider any plaintiff’s conduct that created the condition the service was employed to remedy.”

Franson went on to conclude that the comparative-fault argument was too large a part of the defense case for the error to have been harmless.

In addition to denying review, the court denied requests by the city, as well as by the California medical, dental, and hospital associations, to depublish the opinion.

The case is Harb v. City of Bakersfield, F066839.


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