California Appellate Court Holds that Transfer Did Not Violate Proposition 218

In a challenge to the transfer of revenues from a city’s wastewater utility to its general fund, a California Appellate Court held Tuesday that the transfer did not violate California Constitution article XIII D, section 6(b) (commonly known as Proposition 218). The court found the city’s method of determining how much revenue should be transferred was reasonable and justified by its cost of service study. The court further found that, based on the evidence at trial, the city’s use of the revenues was proper under Proposition 218.

In Moore v. City of Lemon Grove, a wastewater customer challenged Lemon Grove’s annual transfer of revenues from its wastewater utility to its general fund. The City’s utility has three employees who exclusively perform work for the utility. All other functions to operate the utility (accounting and finance, receptionists, analysts, engineers, inspectors, plan checkers, etc.) are performed by city employees. The plaintiff alleged that the utility transfers were not tied to actual costs incurred for the utility’s benefit, and that the City failed to properly identify, earmark or quantify these costs. The plaintiff asserted that the transferred funds were used for general governmental purposes of the City in violation of Proposition 218. The court disagreed.

The City presented evidence at trial showing that most of the functions required to operate the utility are provided by City employees who divide their time among various activities. In return, the utility reimburses the City for these services and expenses related to these services. The apportionment of time related to services provided to the utility were done in accordance with the City’s best estimate of the actual time spent on sanitation matters by City employees. Overhead-related expenses were determined by examining the budgeted expenditures for each fund or activity. The City also provided evidence showing that, after the wastewater rates are established, the City monitors expenditures to make certain that City employees stay within budgetary parameters; resultant adjustments to personnel allocations are made where necessary.

The City explained that the utility’s revenues are specifically tied to expenditures through its five-year wastewater rate study. The rate study averages out costs over a five-year period and then determines the revenue required to cover these charges from year to year. The Court of Appeal agreed with the trial court that the evidence showed that apportioning costs based on revenues was reasonable under the circumstances and met the City’s burden of demonstrating compliance with the requirements of Proposition 218.

If you have any questions about this case or how it may impact your agency, please contact the attorney authors of this legal alert listed to the right in the firm’s Public Finance and Municipal Law practice groups, or your BB&K attorney.

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Originally posted at BBK.

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