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Court of Appeal:
Transfer of DWP’s Surplus to City’s General Fund Is Lawful
Justice Hoffstadt Says $5.22 of Rate-Payers’ Bills That Are Destined to Be Shifted From Department Does Not Constitute a Local ‘Tax’ Which Is Impermissibly Imposed Because Voter Approval Was Not Secured
By a MetNews Staff Writer
The $5.22 that customers of the Los Angeles City Department of Water and Power pay each month which winds up being transferred to the city’s general fund as surplus does not constitute a “tax” which is illegally imposed in light of the absence of voter approval, Div. Two of the Court of Appeal for this district held yesterday.
Its opinion, by Justice Brian M. Hoffstadt, affirms a May 20, 2019 judgment of dismissal by Los Angeles Superior Court Judge Mitchell L. Beckloff which followed his April 22, 2019 order sustaining a demurrer to the second amended complaint without leave to amend.
That pleading says of the $5.22 assessment:
“This exaction of money from LADWP ratepayers is an unconstitutional tax because voter consent was not obtained. This exaction of money does not fall within an exception to the constitutional mandates because LADWP customers are provided no specific benefit, privilege, service or product from the City in exchange for the tax.”
Allegations of Complaint
Plaintiff Jack Humphreville, a retired businessman, relied on Proposition 218, enacted by voters in 1996, which adds Article XIII C to the state Constitution barring local governments from enacting new taxes without voter approval, and Proposition 26, approved by the electorate in 2010, which adds Art. XIII C, §1(e), defining a tax as “any levy, charge, or extraction of any kind imposed by the local government.”
With its more than four million customers, the complaint alleges that DWP has unlawfully garnered $2,904,785,800 during the period from fiscal year 2006/07 through fiscal year 2017/18.
The operative complaint seeks a declaration that the city’s “tax scheme” is unconstitutional; an injunction against collecting fees from DWP ratepayers that will be shifted to city coffers, unless voter approval is obtained; a writ of mandate compelling compliance with the state constitutional requirement of voter-approval of local taxes; and an award of attorney fees under the private attorney general statute.
Beckloff held that if Humphreville is challenging the rates that were set by ordinance, the complaint is untimely under Public Utilities Code §10004.5 which requires that an action be filed “within 120 days of the effective date of that ordinance,” and if he’s not attacking the rates, no cause of action is stated “because there is no challenge to electric rates and therefore no allegations supporting the existence of a unconstitutional tax….”
The judge cited the California Supreme Court’s 2018 opinion in Citizens for Fair REU Rates v. City of Redding for the proposition that a “budgetary transfer…is not a tax.”
In a footnote, he said:
“As in City of Redding, if LADWP’s charges do not exceed the reasonable cost of service then my transfer to the City’s General Fund would be a budgetary transfer of money that did not exceed the costs of providing the service such that voter approval is not required.”
Hoffstadt’s Opinion
Hoffstadt agreed with Beckloff that the assessment to rate-payers is not a tax. He noted that “we have no occasion to consider the arguments offered by plaintiff and its amicus as to why the 120-day statute of limitations is inapplicable or unfair to apply in this case.”
He pointed out that Art. XIII C, §1(e)(2) provides that a “tax” does not include:
“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.”
The jurist wrote:
“…In order to avoid the statute of limitations attaching to any challenge that the City’s surplus transfer makes the DWP’s rates higher than its costs, plaintiff has pled that he is ‘not challeng[ing] the rate schedule from which electric bills are calculated’ (italics added), and has further elaborated that he is ‘not alleging that the rate [charged by the DWP] exceeds the cost of providing electrical service.’ This may place plaintiff’s lawsuit outside the statute of limitations bar set by Public Utilities Code, section 10004.5, but it simultaneously puts the DWP’s monthly charge outside the definition of a ‘tax.’ ”
He declared that under the “plain language” of the constitutional provision, “the DWP’s monthly charge for electric service—even though a portion of that charge eventually ends up in the City’s General Fund—is not a ‘tax.’ ”
Legislative Purpose
Hoffstadt added that the purpose of Proposition 26 was to block cities from gouging money from residents, remarking:
“But is this purpose of protecting taxpayers from hidden taxes implicated where, as plaintiff concedes here, the interfund transfer does not affect the amount the utility charges and does not otherwise cause the utility’s rates to exceed its costs? We conclude the answer is ‘no’ because, in this situation, the ‘California taxpayer’ is entirely unaffected by the subsequent interfund transfer.”
In a footnote, he related:
“Plaintiff colorfully likens the City to a ‘local strongman’ whose annual transfer of surplus funds is akin to the coerced payment of ‘protection money’ by a local ‘shopkeeper.’ ”
Commenting on the city’s approach, he said:
“What the City is doing may be unwise management of the municipal utility, but alleged mismanagement that does not affect the taxpayers does not constitute a ‘tax.’ ”
City of Redding
While Humphreville stressed differences in the fact situation in City of Redding and the present case, Hoffstadt agreed with Beckloff that it has pertinence, pointing out:
“At its core, City of Redding held the transfers of funds from a city-owned utility to a city’s general fund are not a ‘tax’ when ‘the charge imposed on ratepayers’ does not ‘exceed[] the reasonable costs of providing the relevant service.’…That holding applies with full force to this case.”
The case is Humphreville v. City of Los Angeles, B299132.
Representing Humphreville were Timothy G. Blood, Leslie E. Hurst, and Jennifer L. Macpherson of the San Diego firm of Blood Hurst & O’Reardon; Jerry Flanagan, Pamela Pressley, Benjamin Powell of Consumer Watchdog, based in West Los Angeles; and Richard J. Ayoob and Gregory R. Broege of the Glendale firm of Ajalat, Polley, Ayoob & Matarese. Deputy Los Angeles City Attorney Sara Ugaz acted for the city.
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