Local Government
Revenue Basics
Paying for Public Services Under
Propositions 26 and 218
Presented by Senior Deputy County Counsel
Mark Servino, County of Orange
2/3/2016
1
Local Government Revenues Sources
• Taxes
• Services Charges, Assessments and Fees
• Intergovernmental Transfers
• Rents for Use of Public Property
• Fines, Forfeitures and Penalties
2
County Revenue Sources
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Source: SCO Annual
Report on Counties
City Revenue Sources
Source: SCO4 Annual
Report on Cities
Taxes Fall Into Two General Categories
General Taxes
• “General tax” – Tax imposed for general governmental purposes.
• General purpose agencies like cities and counties must get
majority voter approval for new and increased general taxes.
• Special purpose districts, including school districts, cannot levy
general taxes.
Special Taxes
• “Special tax” – Tax imposed for specific purpose. Cannot be
imposed on an ad valorem (property value) basis.
• New or increased special taxes must be approved by a two-thirds
vote of the electorate.
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Taxes
• Property Tax – Tax based on the value of real and tangible personal
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•
•
•
property. Strictly limited by Proposition 13.
Sales and Use Tax – Sales tax is imposed on retailers for the privilege of
selling items in California. Use tax is imposed on purchases where sales
tax does not apply such as when good is purchased out of state for use in
California.
Business License Tax – Imposed on persons or entities doing business
within the city or county with rates determined by local government.
Utility User’s Tax (UUT) – Counties may levy a UUT on the consumption
of electricity, gas, water, sewer, telephone, telegraph and cable television
services in the unincorporated area.
Transient Occupancy Tax (TOT) – Imposed on persons staying 30 days or
less in a hotel, inn, or other lodging facility.
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Intergovernmental Transfers
• Gas Taxes – State imposed tax that is apportioned in part to cities
and counties. Much of the revenues are earmarked for
transportation and road purposes.
• Motor Vehicle License Fees – Tax on ownership of vehicles. Used
to fund realignment, including health and social service programs
and public safety.
• Subventions – Financial support provided by one level of
government to another. For example, the State’s reimbursement
of city and county costs to implement a State mandate.
• Federal and State Grants – Costs of programs must be calculated
consistent with OMB A-87.
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Services Charges, Assessments and Fees
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•
•
•
•
Utility Rates – Fees for utility services charged to users for public agency provided
water, sewer, electric or other utility services.
May be subject to Proposition 218
Benefit Assessments – Charges on real property to pay for public facilities or
services that provide a special benefit to each property.
Subject to Proposition 218
User Fees – Charges for services or privileges provided to the fee payer.
Proposition 26
Regulatory Fees – Fees to pay for the costs of issuing licenses and permits,
performing inspections, and enforcing agency laws and regulations.
Proposition 26
Development Impact Fees – Fees to pay for improvements to serve new
development or to mitigate the impacts of such development.
May have to demonstrate a nexus and rough proportionality between the fee and 8
the proposed land use.
Rents for Use of Public Property
• Rents, royalties and concessions – Includes lease payments
for the use of publicly owned property, charges for
advertising on public transportation and charges to operate
a concession at a publicly owned airport.
• Franchise Fees – A form of rent for the use of public streets
and roadways. Examples include trash hauling and
pipelines, transmission and distribution lines for electricity,
gas, petroleum, oil byproducts and cable TV lines, along
with the utility’s associated equipment. Franchise fees
might be subject to federal and state law limits.
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Fines, Forfeitures and Penalties
• Not subject to Propositions 26 or 218.
• Includes fines for the violation of laws and
forfeiture of bail amounts.
• State law might govern the distribution of
certain fine revenue, such as fines for parking
violations.
10
Propositions 26 and 218 in a Nutshell:
Assessments & Fees Cannot Exceed Costs
• “No assessment shall be imposed on any parcel which exceeds the
reasonable cost of the proportional special benefit conferred on that
parcel.” (Art. 13 D, § 4(a).)
• “Revenues derived from the fee or charge shall not exceed the funds
required to provide the property related service.” (Art. 13 D, §6 (b)(1).)
• “The local government hears the burden of proving by a
preponderance of the evidence that a levy, charge, or other exaction is
not a tax, that the amount is no more than necessary to cover the
reasonable costs of the governmental activity…” (Art. 13 C, § 1.)
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What Are The Costs of the
Governmental Activity?
There are two basic types of costs that are incurred by any department in
conducting its operations: direct costs and indirect costs.
• Direct costs are costs that can be identified specifically with a particular final
cost objective.
• Indirect costs are those costs that are (1) incurred for a common or joint
purpose and (2) not readily assignable to the cost objectives specifically
benefited without effort disproportionate to the results achieved.
Determining the costs of an activity or program, including indirect costs, is a
critical component of SB 90 Claims, fee calculation, claiming reimbursement
from Federal and State grants, and resource allocation decisions.
12
County of Orange v. Barratt American, Inc.
150 Cal. App. 4th 420, 438 (2007)
• County appeared to have accumulated an $18 million
surplus of fee revenues. After it reduced the fees, a
developer argued that the fees ought to be even lower.
• Trial court found that the County had not shown that
expenditures were reasonable and necessary as to $ 4.5
million, and ordered the County to lower fees further until
that amount was dissipated.
• The Court of Appeal affirmed and held that the burden of
proof should be on the County because it is in a better
position to know whether the expenditures were allowable
as indirect costs under OMB A–87.
13
Proposition 26
• Adopted on November 2, 2010.
• Expands definition of “tax” to ensure that state
and local governments cannot circumvent
constitutional restrictions on tax increases “by
simply defining new or expanded taxes as ‘fees.’”
• Directed at fees “couched as ‘regulatory’ but
which exceed the reasonable costs of actual
regulation …”
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Proposition 26 Checklist
• Was the fee in existence prior to November 3,
2010?
• Is the fee imposed and collected by local
government?
• Do any exceptions to Proposition 26’s
definition of “tax” apply?
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Does Prop 26 Immediately Apply To Fees
Existing Prior To Its Passage?
Probably not. The Legislative Analyst stated
that “most other fees or charges in existence at
the time of the November 2, 2010 election
would not be affected unless … [the] local
government later increases or extends the fees
or charges.”
16
Prop 26 – “Tax” Refers to Charges Payable
to a Local Government
Schmeer v. County of Los Angeles (2013) 213 Cal.App.4th 1310
• LA County enacted an ordinance requiring retail stores to
charge 10 cents for each carryout bag provided, which is
retained by the store to be used for specified purposes.
• Held: The charge is not a tax under Proposition 26, because
the charge is payable to and retained by the retail store and
not remitted to the county. Proposition 26’s definition of
“tax” is limited to charges payable to, or for the benefit of, a
local government.
17
Proposition 26 Broadly Defines “Tax”
A “tax” means any levy, charge, or exaction of any
kind imposed by a local government,” unless it falls
within one of seven listed exceptions.
• Bottom Line: If a local government imposed fee
does not fall within an exception to Prop 26’s tax
definition, then it will be deemed a tax that must
be approved by either a majority (general tax) or a
2/3 (special tax) vote.
18
Section 1(e)(1) – Specific Benefits or
Privileges Exception
A charge imposed for a specific benefit
conferred or privilege granted 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 conferring the
benefit or granting the privilege.
19
Section 1(e)(2) – Government Service or
Product Exception
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.
20
Section 1(e)(3) – Reasonable Regulatory
Costs Exception
A charge imposed for the reasonable regulatory
costs to a local government for issuing licenses
and permits, performing investigations,
inspections, and audits, enforcing agricultural
marketing orders, and the administrative
enforcement and adjudication thereof.
21
Section 1(e)(4) – Access to or Use of
Government Property Exception
A charge imposed for entrance to or use of local
government property, or the purchase, rental,
or lease of local government property.
• Examples: Franchise fees for the right to use
government property, like cable, gas, electric,
and pipeline franchises. Park and recreation
entrance fees and equipment rental fees. Leases
of government property.
22
Jacks v. City of Santa Barbara (2015) 234
Cal.App.4th 925 (2015), review granted
• City imposed a franchise fee on Southern California Edison (SCE).
• SCE passed this fee on directly to utility consumers through a 1 percent
surcharge on their electricity bills and remitted the revenues to the city .
• Consumers filed a class action claiming that the surcharge constituted an
illegal tax that was imposed without voter approval in violation of
Proposition 218.
• The Court of Appeal found that the surcharge was a tax that required voter
approval rather than a franchise fee.
• The California Supreme Court granted review. Case is pending.
23
Section 1(e)(5) – Fines and Penalties
Exception
A fine, penalty, or other monetary charge imposed
by the judicial branch of government or a local
government, as a result of a violation of law.
Section 1(e)(6) – Development Impact
Fees Exception
A charge imposed as a condition of property
development.
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Section 1(e)(7) – Proposition 218 Exception
Assessments and property-related fees
imposed in accordance with the provisions of
Article XIII D.
25
Prop 26 - Burden of Proof
A local government must prove by a preponderance of
the evidence that:
1. The levy, charge, or other exaction is not a tax;
2. That the amount is no more than necessary to cover
the reasonable costs of the governmental activity;
and
3. That the manner in which those costs are allocated
to a payor bear a fair or reasonable relationship to
the payor’s burdens on, or benefits received from,
the governmental activity.
26
City of San Buenaventura v. UWCD, 235
Cal.App.4th 228 (2015), review granted
• City sought to over turn a water conservation district’s decision to increase
city’s rate to pump water from the district’s territory to sell to residential
customers resulting a in 3 to 1 cost ratio between agricultural and nonagricultural rates.
• Court held that the rates the district charged the city were not “property
related” within the meaning of Proposition 218.
• Key: Court held charge did not violate Proposition 26 because a regulatory
fee does not become a tax simply because the fee may be disproportionate
to the service rendered to individual payors. Proportionality is not measured
on an individual basis, but rather, it is measured collectively.
• California Supreme Court granted review.
27
California Building Industry Assn. v. SWRCB, 235
Cal.App.4th 1430 (2015), review granted
• Plaintiff challenged Board’s storm water program fees.
• Court held that Plaintiff bears the burden of proof to establish a
prima facie case showing that the fee is invalid.
• The reasonableness of the Board’s imposition of annual permit
fees relates to the costs of regulating the entire program and is
measured collectively, considering all rate payors, not by the
impact on an individual payor.
• California Supreme Court granted review on whether Proposition
26 applies to the fees and whether the Board bears the initial
burden of demonstrating that its fees are valid.
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Suggestions For Implementing Prop 26
• Require departments sponsoring a fee to identify
the Prop 26 exception that applies to the fee.
• Provide analysis and facts that supports the Prop
26 exception that is being invoked by the
department.
• Request that the governing board make findings
that the fee meets the requirements of the
exception that is being invoked.
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Suggestions For Implementing Prop 26
Analysis of proposed fee should address how it meets the
following three criteria or why the criteria is not applicable:
• That the fee or charge is not a tax, i.e., it falls within one of
Prop 26’s exceptions;
• That the amount is no more than necessary to cover the
reasonable costs of the governmental activity; and
• That the manner in which those costs are allocated to
payors bear a fair or reasonable relationship to the payors’
burdens on, or benefits received from, the governmental
activity.
30
Proposition 218
• “Right to Vote on Taxes Act” (1996) – ensures that all taxes
and most charges on property owners are subject to voter
approval
• Establishes procedural and substantive requirements for
local government adoption of taxes and fees
• Proposition 218 states that, “[n]o tax, assessment, fee, or
charge shall be assessed by any agency upon any parcel of
property or upon any person as an incident of property
ownership except”: (1) an ad valorem property tax; (2) a
special tax; (3) an assessment adopted as provided therein;
and (4) a property related fee as provided therein.
31
Proposition 218
Assessments (Art. XIII D, § 4)
• Assessment is a charge that confers a special benefit
• “Assessment” is a charge on property to pay for a public improvement or
•
service that benefits the property. It is placed on the tax bill but are based
on the costs of the improvement or service, not on the value of the
property.
• ”Special benefit” means a particular benefit to the land or building.
Cannot be a general benefit to the public or a general increase in property
values.
An assessment imposed on each parcel cannot exceed the reasonable
cost of the proportional special benefit conferred on the parcel.
• Must estimate the amount of special benefit and the amount of the
general benefit using a professional engineer’s report.
• State or local government owned parcels generally may not be exempt. 32
Proposition 218
Assessment Procedures (Art. XIII D, § 4)
• Assessments must be approved by a majority of
property owners in a mailed ballot election.
• Ballots are weighted based on the amount of the
proposed assessment on the property. “One dollarone vote” system, not “one person-one vote.”
• Burden is on the public agency to demonstrate: (1) the
properties in question receive a special benefit over
and above the benefits conferred to the public at
large; and (2) the amount of the assessment is
proportional to, and no greater than, the benefits
conferred on the properties in question.
33
Proposition 218
Property Related Fees (Art. XIII D, § 6)
Substantive Requirements:
• “Fee” or “charge” means any levy other than an ad valorem tax, a
special tax, or an assessment, imposed by an agency upon a parcel
or upon a person as an incident of property ownership, including a
user fee or charge for a property related service.
• “Property-related service” means a public service having a direct
relationship to property ownership.
• Examples include fees for garbage collection, sewer service, and
water service, but electrical or gas service fees are excluded from
the definition of property related fees.
34
Proposition 218
Property Related Fees (Art. XIII D, § 6)
Substantive Requirements:
• Revenues cannot exceed costs to provide the property related
service.
• Fee imposed on a parcel or person cannot exceed the proportional
cost of service to the parcel.
• Fees may only be used for the purpose for which the fee was
charged.
• Service must be actually used by or immediately available to the
fee payer, i.e., stand-by charges and “future facility fees” must be
adopted as assessments.
• Fee may not be imposed for general governmental services
including, police, fire, ambulance or library services, where the
service is available to the public at large.
35
Proposition 218
Property Related Fees (Art. XIII D, § 6)
Procedural Requirements:
• Provide written notice of a public hearing by mail to the
record owner of each parcel upon which fee or charge will
be imposed.
• Notice must be mailed no less than 45 days prior to the
public hearing.
• Notice must contain: (1) the amount of the proposed fee;
(2) the basis upon which it was calculated; (3) the reason for
the fee; and (4) the date, time and location of the public
hearing.
36
Proposition 218
Property Related Fees (Art. XIII D, § 6)
Procedural Requirements:
• At the public hearing, agency must consider all protests.
• One written protest per parcel.
• If written protests against the proposed fee are presented by a
majority of owners of the identified parcels, the agency shall not
impose the fee or charge.
• Election required for fees other than charges for sewer, water, and
refuse collection services.
Majority vote of the property owners of the property subject to
the fee or charge; or
A two-thirds vote of the electorate residing in the affected area.
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Overview of Public Involvement in the
Revenue Process
Type of Charge
Public Hearing
Protest Procedure
Voter Approval
General Tax
No
No
Yes, majority vote
Special Tax
No
No
Yes, two-thirds vote
Property Related
Fee
Yes
Yes
Yes, except for water,
sewer or refuse
Benefit Assessment
Yes
Yes
Yes, mailed ballots
Development
Impact Fees
Yes
No
No
Utility Rates
Sometimes
Sometimes
Sometimes
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Agreements for the Collection of Special Taxes,
Special Assessments and User Fees
• Counties can recover their costs for collecting the special taxes, special
assessments and user fees that are placed on the county tax roll by cities
and special districts. (Gov’t Code § § 29304, 50077, 51800.)
• The amount of compensation often must be fixed by an agreement
between the county and the agency. (Gov’t Code § § 29304, 50077, 51800.)
• California State Association of County Auditors Guidelines recommend:
•
•
•
•
A written agreement between the county and the agency, which should describe the
amount of compensation to be paid by the county.
An annual compliance certification statement from the agency that it has complied
with applicable law such as Proposition 218.
An agreement to indemnify the County Auditor and the County for any liability arising
from the tax, fee or assessment that is being collected by the county.
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Consult with your counsel.
More Information
• California Local Government Finance Almanac
http://www.californiacityfinance.com/
• California League of Cities Proposition 218
Implementation Guide (2007)
• California League of Cities Proposition 26
Implementation Guide (2011)
• State Controller’s Handbook of Cost Plan Procedures for
California Counties and 2 CFR Part 225 (OMB A-87).
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