Wednesday, January 21, 2015
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City’s Transfer of Utility Revenues Held ‘Tax’ by Court of Appeal
By KENNETH OFGANG, Staff Writer
A city’s transfer of revenues from its municipal utility to its general fund requires two-thirds voter approval unless the city can show that the amount of money involved does not exceed the costs of providing electrical service, the Third District Court of Appeal ruled yesterday.
In a 2-1 decision, the court overturned a Shasta Superior Court judge’s ruling that Redding’s use of a “payment in lieu of taxes,” or PILOT, does not constitute 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.
Budgeting Process
Redding has used a PILOT since 1988. The PILOT, which is enacted as part of the budgeting process, is a 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.
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.
‘Reasonable Costs’
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.
Justice’s Dissent
Justice Elena Duarte dissented, saying the decision would require “every municipal utility that is charged a payment in lieu of taxes (PILOT), with the insignificant exception of those utilities, if any, that pay PILOTS pursuant to a pre-Proposition 26 ordinance, to prove at a trial the exact cost of providing fire, police, sanitation, streets, and other municipal services, no doubt with competing accounting, municipal finance, and other experts,” a result she called “disruptive, uncertain, and chaotic…and…not compelled by Proposition 26.”
Citing The Law of Municipal Corporations, by Eugene McQuillin, she elaborated:
“By requiring the utility to pay the same amount that a private utility would pay in taxes, Redding recoups the reasonable or—as stated by Proposition 13—‘fair’ costs incurred in providing electric service. This insures Redding operates ‘on sound business principles, and, as far as practicable, on the same basis that a successful private business is conducted.’”
The case is Citizens for Fair REU Rates v. City of Redding, 15 S.O.S. 373.
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