California Wastewater Rates — Life after Bighorn v. Verjil

William F. Stanger*
J.D. Candidate (2014), UC Davis School of Law (King Hall)
July 9, 2013

Introduction

In California, voters passed Proposition 218 in 1996, which added articles XIII C and XIII D to the state Constitution. These articles set limits on property-based revenues (taxes, assessments, fees, and charges), and require voter approval for most increases. Particularly pertinent to wastewater rates is the inherent friction between Article XIII C Section 3, which affirms the right of voters to reduce their local property-related bills, including their wastewater rates, and Article XIII D Section 6, which allows local governing bodies to raise wastewater rates without voter approval.¹ This paper discusses that friction as set forth in Bighorn-Desert View Water Agency v. Verjil, 39 Cal.4th 205 (2006), and explores relevant jurisprudence supporting a compromise between rate reductions and statutorily mandated rates.

Background

Wastewater is water contaminated by wastes and pollutants during its use in residential, commercial, or industrial processes that requires treatment prior to discharge.² The State Water Resources Control Board issues and regulates permits for wastewater dischargers to ensure compliance with the two major sources of water quality control standards: the federal Clean Water Act, and the Californian Porter-Cologne Act.³ For most aggregated residential and agricultural users, water is provided by a local governing body — their local water district, their county, or even their municipality. That local governing body is generally responsible for arranging treatment of the wastewater. The local landowners that benefit from having water delivered are responsible for paying for both water service and associated wastewater treatment, although they can and do contractually pass these use costs on to customers and lessees whenever possible.

Treating wastewater requires expensive plants and equipment. These facilities are costly to maintain, and even with diligent maintenance will eventually wear out or break down. When that happens, the wastewater treatment provider must invest in expensive capital improvements. A utility provider generally finances improvements by raising its customers’ rates.⁴ Increased rates may be set aside and accumulated in a capital improvement account well in advance of starting a project, or future rate collections may be used as security for a bond or loan to immediately finance a project. Under either such financing plan, improvement costs are passed through to the benefitted ratepayers.

Ratepayers may not understand or appreciate why their bills went up. This can generate confusion and animosity within the community. Wastewater treatment systems are doubly misunderstood, because the service tends to be invisible to benefitted property owners, and apportioning actual treatment costs and benefits to specific landowners is difficult. Domestic water consumers may understand why water delivery costs increase, but may not intuitively understand why wastewater treatment costs go up. The result can be opposition to necessary rate increases.

Bighorn v. Verjil — Interpreting the Landmark Case

The landmark California case that first addressed the tension between the California constitutional provisions governing the raising and lowering rates was Bighorn-Desert View Water Agency v. Verjil (2006), 39 Cal.4th 205, 221 (Bighorn). In Bighorn, a local water district sought to invalidate a proposed initiative reducing water rates and requiring voter approval for any future increase. The district argued that because Section 6 of Article XIII D authorizes them to impose new water or sewer charges without voter approval, then voters cannot reduce those charges under Section 3 of Article XIII C.⁵

While ultimately invalidating the initiative on other grounds, the California Supreme Court did not accept the district’s interpretation of Article XIII D and instead, reconciled the two constitutional provisions. In so doing, the Court created, perhaps unintentionally, a legal ambiguity as to the permissible scope of the local initiative power to reduce water rates. The Court held that Section 3 of Article XIII C does allow voters to reduce their water service charges, but that it does not authorize voter approval requirements for future rate increases.⁶ The Court went on to say that ratepayers may reduce their rates, and then the district may impose a new charge if necessary.⁷

The Court declined to rule on whether the repeal initiative would have withstood the statutory requirement that water rates be high enough to operate and maintain the equipment, build a capital reserve, and pay down any debt:

“In holding that [S]ection 3 of Article XIII C of the state Constitution authorizes initiative measures that reduce public agency water service charges, we are not holding that the authorized initiative power is free of all limitations. In particular, we are not determining whether the electorate’s initiative power is subject to the statutory provision requiring that water service charges be set at a level that ‘will pay the operating expenses of the agency, … provide for repairs and depreciation of works, provide a reasonable surplus for improvements, extensions, and enlargements, pay the interest on any bonded debt, and provide a sinking or other fund for the payment of the principal of such debt as it may become due.’ (Stats.1969, ch. 1175, § 25, p. 2286, 72B West’s Ann. Wat.-Appen., supra, ch. 112, p. 203.) That issue is not currently before us.”⁸

Thus, the Court in Bighorn left open the question of whether the initiative, had it been upheld, would have been required to comply with mandatory statutory obligations governing minimum rates.⁹

If the Court had addressed that issue, initiative jurisprudence suggests that the Court would likely have examined the Legislature’s involvement, the language of the statute, and the level of statewide concern involved. Applicable case law strongly suggests that although initiatives may be reconciled with a statute or preempted by a statute, initiatives are not likely to withstand direct conflict with a statute. It is likely the Court would only uphold a rollback initiative that left water rates high enough to maintain operations, build a capital reserve, and pay its debt.

Two Illustrative Cases of Rate Reduction Woes

The tension between rate increases and reductions in Bighorn has led to substantial legal expense and uncertainty with no clear benefit to either ratepayers or service providers. For two recent examples of ultimately fruitless rate challenges, consider recent rollback initiatives in Petaluma and Foresthill.

In 2006, Petaluma built a wastewater plant with a subsidized loan from the state. In 2007, Petaluma imposed a five-year schedule of rate increases to start paying back the loan. In 2008, Petalumans for Fair Utility Rates sponsored an initiative to rollback their wastewater rates to 2006 levels. It was defeated. In 2010, the same group tried to reduce rates again, and again they were defeated.¹⁰ Both of these defeated initiatives cost time, money, and emotional concern that could have been better spent elsewhere. Without clear guidance from the courts about how and why rates may be reduced, initiatives can threaten bond or loan repayment schedules at any election. Successful rate roll-backs could even result in service disruptions, or imperil local government finances.

In the Foresthill Public Utility District, ratepayers rolled back their water rates in June 2011. In December 2011, the District declared the initiative invalid and reinstituted the increased rates, on the grounds that the reduced rates were insufficient to maintain service.¹¹ In June 2012, the ratepayers formally repealed their original roll-back.¹² Again, clear guidance could have prevented the time, expense, and concern that was spent on these initiatives.

Inherent Limitations on Local Initiatives

Although Bighorn created a troubling ambiguity for rate reduction initiatives, case law reflects certain inherent limitations on the scope of local initiatives that help address this ambiguity. Local initiatives become mere ordinances after Election Day.¹³ As such, they may be preempted by state legislation. That preemption can be established several ways, most commonly by applying a three factor test.

The California Supreme Court’s decision in DeVita v. County of Napa (1995), 9 Cal.4th 763 (DeVita), describes the test for determining when a local ordinance is preempted by the state. In DeVita, voters approved an initiative requiring voter approval for county general plan changes that would reduce agricultural or open spaces. Objectors sued to prevent the County from adopting the initiative, but the Superior Court upheld the initiative, and the Supreme Court affirmed. In so doing, the Court described the three factors it considers when deciding if an ordinance has been pre-empted by the Legislature. The court considers: (1) the language and intent of the conflicting statute; (2 )the Legislature’s involvement in the local affair; and (3) whether the issue is a statewide concern.¹⁴ If the court decides that any of these factors weigh in favor of an overriding state interest, the ordinance with not stand, even if originally passed by initiative. The three factors are rarely considered explicitly, or even individually. Consequently, as will be discussed below, courts frequently examine the three factors together, as a delegation question. The question becomes whether the Legislature delegated its authority to act to the local governing body, or if the local governing body is merely performing an administrative function at the Legislature’s behest.¹⁵

The case that most extensively discussed the judicial tradition of examining these three factors together was Committee of Seven Thousand v. Superior Court (1988), 45 Cal.3d 491, 501 (“COST”). COST cited numerous examples where courts found legislative intent sufficient to disable local government discretion. For example, the court cited an example from Riedman v. Brison (1933), 217 Cal. 383, 387 (Reidman), which barred an initiative to withdraw from a water district because legislation only authorized the local governing body, not voters, to initiate withdrawal proceedings. Similarly, the court cited Simpson v. Hite (1950), 36 Cal.2d 125 (Simpson), which held that legislation imposing a duty on the board of supervisors to find suitable accommodations for a court barred opposing action by initiative.¹⁶ Likewise, Geiger v. Board of Supervisors (1957), 48 Cal.2d 832 (Geiger), held that legislation specifically authorizing a county board of supervisors to enact a sales tax precluded opposition by initiative. Because the legislation specifically authorized the board, it implicitly excluded everyone else. There, if the legislation had been silent on who had the authority to enact such taxes, it would have naturally fallen to the county board of supervisors, and then would be subject to initiative.¹⁷ Reidman, Simpson, and Geiger share a common theme: when the Legislature has imposed a duty on a specifically named local governing body, that body is bound to obey, and initiatives are foreclosed from interfering.

Formally, the concept COST was describing is the “general dichotomy between a governing body’s legislative acts, which are subject to initiative and referendum, and its administrative or executive acts, which are not.”¹⁸ Local action is administrative where the local governing body is merely acting on the delegated authority of the Legislature to perform a statutorily mandated task.¹⁹ In that case, a successful local initiative would create a local ordinance in conflict with a state statute (albeit a statute being implemented locally) — an unacceptable state of affairs.²⁰ However, if the repeal initiative addresses matters the Legislature intended to leave to the autonomous discretion of the local governing body, the initiative will likely be upheld as a “legislative act.” By examining the statutory language, looking for either an imposed administrative duty or authorization to act on its own legislative authority, the court combines the first two parts of the test.

Finally, local initiatives may only affect local affairs, not matters of statewide concern. One foundation for this principal lies within the California Constitution, Article XI, Section 7, which authorizes counties and cities to make and enforce ordinances and regulations “not in conflict with general laws.” With respect to the initiative process specifically, the scope of local initiatives is co-extensive with the authority of the local governing body.²¹ This limits the scope of local initiatives to the political boundaries of the electors voting for the initiative. The Court also recognizes that the Legislature may explicitly preempt local laws in matters of statewide concern.²² These principles prevent the state from having to abide by one political subdivision’s local ordinance that has impacts extending beyond its boundaries. With this final consideration, the court can evaluate whether the state has a compelling interest in precluding local initiatives.

The Case for Limiting Local Initiatives

In the case of local ratepayers pursuing a rate reduction initiative, the Court will likely consider the initiative in light of statutory obligations for a local governing body to ensure rates sufficient to maintain service and operations. For example, the Court might consider Water Code Section 31007, which states that county water districts shall set rates sufficient to pay operating expenses, provide for repairs and depreciation, and pay down debt. In addition, water districts have their own similarly worded statutory mandates.²³ In these cases, the Legislature established a floor for the water agency’s rates, and so its discretion is bound by statute. Where a wastewater service provider has been ordered not to set rates below the floor by statute, it would be inappropriate for a local initiative to reduce rates below that level.

The local governing body is generally authorized to set its own water rates anywhere above that statutorily mandated floor. So, local initiatives that leave rates high enough to maintain operations and repay debt (and meet any other minimum statutory obligations) are more likely to withstand judicial scrutiny. If courts allow rate changes that do not reduce rates below the statutory floor, Article XIII C may result in rates set exactly at the statutory floor.

From a public policy perspective, reducing water rates below sustainable levels can have real statewide impacts. First, wastewater treatment operations may be reduced or impaired because of lack of funds. Wastewater treatment implicates the Porter-Cologne Act²⁴, the authority of the State Water Resources Control Board²⁵, the applicable Regional Water Quality Control Boards²⁶, and numerous other statewide regulations and laws. Furthermore, because many watersheds are hydrologically connected, the actual wastewater could leave the political boundaries where the initiative applies, causing a nuisance to neighboring treatment facilities. For these reasons, it is likely that courts would preempt initiatives that reduce rates below statutorily mandated floors.

Counter-Arguments Favoring Unlimited Local Initiatives

Proponents of a local initiative may leverage several types of arguments to show that preemption is not appropriate in wastewater reduction cases. First, setting up sewer and wastewater treatment systems are generally municipal affairs.²⁷ As such, decisions about wastewater systems are within the discretion of the local governing body and may properly be the subject of an initiative.²⁸ Statutory and regulatory rate floors could be interpreted as mere guidelines. Under this argument, these rate floors could be considered a broadly defined list of factors to consider (maintain operations, repay debt, etc.) and do not include specific processes or clear definitions that a local governing body is obligated to follow. This interpretation would grant wastewater service providers discretion to determine what actual definitions and processes apply when establishing rates, so long as all statutory factors were considered. Since the local governing body has discretion to act, initiatives would be allowed.²⁹

Second, still dealing with the imprecision of the statutorily mandated rate floors, initiative proponents could argue with a wastewater service provider’s method of calculating rates. Rate calculators make assumptions and set accounting practices regarding labor requirements, maintenance costs, overhead, and other budget items. Here, the argument would be that even though the wastewater service provider says the established rates are barely sufficient to meet the budget, the budget itself may require streamlining.

Third, initiative proponents may argue that rates unfairly burden property owners. This argument posits that the benefits of clean water are extensive and do not accrue solely to the burdened property. In this regard, one solution might be to consider subsidizing rates through different revenue sources, such as development fees, sales tax increases, or government grants. Raising rates may be the most convenient way for a wastewater service provider to pay its bills, but it is not the only way. If voters reduce rates, it may force wastewater service providers to find more creative financing solutions that are better aligned with the sensibilities of its constituency.

However, all of these arguments weaken as rates fall. Eventually, budgets for operating costs and debt repayment will be trimmed as far as possible. When that happens, statutory “guidelines” will have to be abandoned altogether to justify further decreases. A reviewing court would then have to choose between ignoring the statute and imposing a judicially created floor on rates. Moreover, as rates are reduced, it becomes difficult to argue that established rates are too high. Once rates have become as efficient as possible, further subsidies merely shift costs from benefitted taxes onto the local governing body at large.

Conclusion

Jurisprudence supplies courts, political subdivisions, and local agencies with a roadmap for reconciling the right of initiative and the discretion granted to local government. As the Bighorn court commented in dicta, “We presume local voters will give appropriate consideration and deference to a governing board’s judgments about the rate structure needed to ensure a public water agency’s fiscal solvency, and we assume the board, whose members are elected … will give appropriate consideration and deference to the voters’ expressed wishes for affordable water service.”³⁰ It seems likely that the Court will uphold rollback initiatives but only to a practicable point: rates should always be sufficient to maintain service, conduct repairs, and pay back project debt. This compromise would give effect to articles XIII C and XIII D, protect the people’s power to repeal their taxes by initiative, and allow them to keep pressure on local governing bodies to keep costs low.

* Bill Stanger is a J.D. candidate, class of 2014 at the University of California Davis School of Law (King Hall). He is the Editor-in-Chief of the Business Law Journal, and winner of the 2013 Doremus/Anthon Environmental Law Writing Prize. Bill graduated from the University of Pennsylvania in 2002 with Bachelors’ Degrees in Economics and Computer Science earned through the Jerome Fisher Program in Management and Technology.

¹Bighorn-Desert View Water Agency v. Verjil, 39 Cal.4th 205, 209 (2006) (Bighorn).

²State Water Resources Control Board, Wastewater, available at http://www.waterboards.ca.gov/rwqcb2/water_issues/programs/wastewater.shtml. (Wastewater is informally defined by the State Water Resources Control Board as, “water containing wastes from residential, commercial, and industrial processes. Municipal wastewater contains sewage, gray water (e.g., water from sinks and showers), and sometimes industrial wastewater. Large industries, such as refineries, also generate wastewater. Wastewater requires treatment to remove pollutants prior to discharge.”)

³Id.

⁴See, e.g., CA WATER App. § 112-25 (The Bighorn Mountains Water Agency Law specifies that rates must be set high enough to pay for the water service infrastructure and operations).

⁵Bighorn, supra, note 1, 39 Cal.4th at 219, 220.

⁶Id. at 209.

⁷Id. at 220.

⁸Bighorn, supra, note 1, 39 Cal.4th at 221.

⁹CA WATER App. § 112-25 (“Bighorn Mountains Water Agency Law”)

¹⁰Argus-Courier Editorial Board, Sewer Ballot Measure Already Hurting City, Argus Courier (11 Feb. 2010), available at www.pressdemocrat.com. See also, Ballotpedia, Petaluma Water and Sewer Act (2008), and Petaluma Sewer Rate Rollback Initiative, Measure U (2010), available at www.ballotpedia.org.

¹¹It is interesting to note that it is not clear that the Foresthill PUD had the authority to invalidate the initiative without judicial intervention.

¹²Foresthill Public Utility District Board, Measure C: Proposal to Repeal Measure B for the Foresthill Public Utility District, Placer County election material (Jun. 5 2012), available at www.placerelections.com/ uploads/documents/06052012/06052012_Measure_C-District.pdf. See also, Ballotpedia, Foresthill Public Utility District Water Rate Increases, Measure C (June 2012), available at www.ballotpedia.org.

¹³They are not entirely mundane: initiative-created ordinances require extra steps to modify or repeal.

¹⁴DeVita v. County of Napa, 9 Cal.4th 763, 776 (1995).

¹⁵See 38 Cal. Jur. 3d Initiative and Referendum § 51 (“The initiative and referendum powers in city elections are restricted to municipal affairs, whether or not the city operates under a charter.”); Id. at § 52. (“A municipal governing body, when functioning as an agency of the state, is beyond the reach of a municipal initiative or referendum election.”)

¹⁶Contrast with Blotter v. Farrell, 42 Cal.2d 804 (1954), where the Court allowed an initiative to change municipal ward boundaries to proceed on the grounds that the legislation expressly and broadly authorized the local governing body, and thereby the voters, to make changes.

¹⁷Geiger v. Board of Supervisors, 48 Cal.2d 832, 840 (1957).

¹⁸DeVita, supra, note 14, 9 Cal.4th at 776 [with citations].

¹⁹Id.; see also Simpson v. Hite, 36 Cal.2d 125, 130 (1950) (initiative or referendum power cannot be used to interfere with board of supervisor’s duty to provide suitable accommodations for courts); 38 Cal. Jur. 3d Initiative and Referendum § 51.

²⁰See 38 Cal. Jur. 3d Initiative and Referendum § 52. (“A municipal governing body, when functioning as an agency of the state, is beyond the reach of a municipal initiative or referendum election.”)

²¹DeVita, supra, note 14, 9 Cal.4th at 775.

²²Id. at 776.

²³See CA WATER App. § 112-25, supra, note 9 (Bighorn Mountains Water Agency).

²⁴Water Code, § 13000, et seq. (Porter-Cologne Water Quality Act).

²⁵See Water Code, § 13140, Water Code, § 13160.

²⁶Water Code, § 13240.

²⁷45 Cal. Jur. 3d Municipalities § 199 [including citations].

²⁸DeVita, supra, note 14, 9 Cal.4th at 776 [with citations].

²⁹Id.

³⁰Bighorn, supra, note 1, 39 Cal.4th at 220.