What You Need to Know About Municipal Finance
Recent Major Developments in the Law
Michael G. Colantuono is a shareholder in the law firm of Colantuono, Highsmith & Whatley PC and can be reached at email@example.com.
California’s appellate courts have delivered three very significant decisions involving municipal revenues in the past few months. Most significant is the San Francisco Court of Appeal’s landmark decision in City and County of San Francisco v. All Persons Interested in the Matter of Proposition C. The case concludes that special taxes do not require two-thirds voter approval if proposed by initiative under Proposition 13 (1978), Prop. 218 (1996), or San Francisco’s charter.
The decision follows on a 2017 decision of the California Supreme Court under Prop. 218 in California Cannabis Coalition v. City of Upland. That case challenged Upland’s refusal to call a special election on an initiative proposal to allow marijuana dispensaries. The city argued the measure imposed a general tax, because it required each dispensary to pay a regulatory fee that the city concluded would exceed its cost to regulate. A provision of Prop. 218, a 1996 initiative amendment to California’s Constitution, requires local general taxes (those that can be used at the discretion of the legislative body) to appear on general election ballots when city council or board of supervisors seats are contested. In Upland, the Supreme Court concluded that Prop. 218 did not apply to initiative tax proposals because “local government” did not include the electorate exercising its initiative power. The decision was written broadly, however, and raised immediate questions about its implications for other provisions of Prop. 218, specifically the two-thirds voter approval requirement for special taxes.
The late Burk “Buck” Delventhal, a respected deputy city attorney of San Francisco who had litigated some of the earliest cases involving Prop. 13, prepared a public opinion for his office concluding that initiative special tax proposals could be approved by a simple majority. San Francisco promptly set out to test Delventhal’s opinion.
San Francisco voters approved Prop. C in 2018 to raise a business license tax to fund homeless services. It passed with 61 percent, and the city filed a validation action to test whether it could be enforced despite the lack of two-thirds voter approval. The California Business Properties Association, the Howard Jarvis Taxpayers Association, and the California Business Roundtable answered the published summons to argue for the two-thirds requirement. The trial court ruled for the city, citing Upland.
The three business associations argued that two-thirds voter approval was required by Prop. 13, Prop. 218, and the city charter, which extends the initiative power to measures “within the powers conferred upon the Board of Supervisors to enact.” The appellate court disagreed.
First, the court concluded that Prop. 13 was ambiguous as to whether its two-thirds voter approval requirement for special taxes applies to initiatives, because it makes no express reference to initiatives. Under the laws governing how legal texts are interpreted, this ambiguity allowed the court to resort to extrinsic evidence to determine the voters’ intent — the ultimate issue to be decided. The two-thirds voter approval requirement is in conflict with the initiative provisions of the state Constitution, which require only simple-majority approval of initiatives. Several doctrines favor construing Prop. 13 not to require two-thirds voter approval for initiative special taxes. Among these was language from the California Supreme Court’s 1982 decision in City and County of San Francisco v. Farrell (one of Delventhal’s cases) narrowly construing the supermajority requirements of Prop. 13 because they are anti-majoritarian. This theory was not often cited in the years following the 1986 recall of Chief Justice Rose Bird and two other justices and the creation of a very conservative judiciary under the Deukmejian and Wilson administrations. California has since changed greatly and its courts along with it, especially after former Gov. Jerry Brown’s second, eight-year stint in office. In addition, contemporaneous construction of Prop. 13 by the Legislature did not show Prop. 13 was intended to limit the initiative power. This reflects a rule of construction that requires a court to consider the Legislature’s views on a measure’s meaning if the Legislature expresses such a view at about the same time as voters approved the measure.
The appellate court also concluded Prop. 218 does not require two-thirds voter approval of initiative special taxes, noting it was intended to be construed similarly to Prop. 13. It cited Upland’s conclusion that “local governments” as used in Prop. 218 means legislative bodies, not voters, and noted that Prop. 218’s ballot materials did not indicate intent to limit the initiative power.
As to San Francisco’s charter, the court applied the rule that procedural restrictions on legislation by legislators are not applied to voters legislating by initiative.
Now that the California Supreme Court has denied review, the case is the most significant change in local governments’ revenue authority since Prop. 26 (2010). But the story continues to unfold. A trial court in Oakland reached the opposite conclusion, and the appeal in that case is now being briefed. That appellate court could disagree. A Fresno court also ruled that the two-thirds rule applies to local government initiatives, and an appeal is pending in the appellate court in that city. That case was fully briefed as of Aug. 18, 2020, and awaits argument, likely sometime in 2021. Moreover, other cases involving San Francisco, Oakland, and Alameda County are pending in trial and appellate courts and could produce conflicting appellate decisions, too. But for now, the new San Francisco opinion is the law.
Franchise Fees on Trash Hauling
A second major development involved franchise fees on trash hauling. A 2017 case, Jacks v. City of Santa Barbara, held that the city’s franchise fee on Southern California Edison (passed through to electricity customers in the city) was not a tax requiring voter approval. However, the California Supreme Court established in Jacks a new test for fees for use of government property — government must prove a fee bears at least some reasonable relationship to the value of the rights the franchise confers. In March 2020, in Zolly v. City of Oakland, the appellate court overturned that city’s trial court win in a challenge to its solid waste franchise fees. The trial court had concluded the plaintiff trash customers lacked standing to sue because they did not directly pay the fees — haulers did. Zolly concludes the plaintiffs there adequately alleged a lack of a relationship between the fees and the franchise rights and remanded the case for trial — without discussing the the customers’ standing. The case is one of a growing number of challenges to franchise fees generally and to solid waste franchise fees in particular. Oakland obtained Supreme Court review, and the court’s decision is not likely before late 2021. The League is providing amicus curiae (friend-of-the-court) support to Oakland in the case.
Bay Area Toll Authority Prevails in Significant Case
In the third case of interest to cities, the San Francisco Court of Appeal upheld a victory for the Bay Area Toll Authority (whose parent agency is the Metropolitan Transportation Commission) in Howard Jarvis Taxpayers Association v. Bay Area Toll Authority (HJTA v. BATA). The case challenged Regional Measure 3 (2018), which authorized a $3 hike in tolls on Bay Area bridges (other than the Golden Gate Bridge) to fund 35 alternative transportation programs. The plaintiffs argued the toll increase was a special tax requiring two-thirds voter approval (55 percent of voters approved the measure) or two-thirds legislative approval (the measure received two-thirds approval in the Senate, but not the Assembly). The trial court ruled for BATA. This is an important development under Prop. 26, a 2010 initiative amendment to the California Constitution that makes most government revenues “taxes” requiring voter approval unless one of seven exceptions applies for local government fees. Only five exceptions apply to state fees.
The appellate court found Regional Measure 3 was not a tax because it was a fee for the use of government property and these fees are not subject to any cost of service limit — they are one of the few revenue sources available to government that can provide discretionary revenue without voter approval. The court reasoned that the cost-of-service limits in the first three exceptions to Prop. 26 (for fees for benefits and privileges, services and products, and regulatory fees) do not apply to the fourth (for use of government property) and fifth (fines and penalties).
Interestingly, HJTA v. BATA devotes a lengthy footnote to disagreeing with Zolly. It concludes Zolly erred to apply the cost-of-service standard to a fee for use of property. The Howard Jarvis Taxpayers Association petitioned the California Supreme Court on Aug. 10, 2020, to review the decision, and the decision on that petition is due by Oct. 9 — unless the court extends its time by 30 days, as it commonly does.
HJTA v. BATA’s disagreement with Zolly may make review more likely in HJTA v. BATA, but Supreme Court review is still uncommon. The Supreme Court also has a vacancy due to Justice Chin’s Aug. 31 retirement, and the Governor’s Office indicates the governor may take a few months to fill the seat. This may make the court less willing to add to its workload while it is short-handed.
HJTA v. BATA provides very helpful law for cities and other local governments, nearly all of which charge for the use of their property. San Francisco’s Prop. C victory is a major development for local taxes. Zolly v. Oakland portends more litigation over franchise fees. Things are still in motion, though, so stay tuned.
Plan to Attend This Session at the Annual Conference
This topic will be the subject of a session titled “What You Need to Know About Municipal Finance” at the League of California Cities 2020 Annual Conference & Expo, Oct. 7–9. Michael Colantuono and Michael Coleman, the League’s fiscal consultant, will discuss the latest legal developments and laws affecting your city’s finances, trends and prospects for core city revenues, and financing tools. See page 10 for more conference details; for registration information, visit www.cacities.org/events.