By William W. Abbott

Citizens for Fair REU Rates v. City of Redding (2015) 233 Cal.App.4th 402.

In Citizens for Fair REU Rates v. City of Redding, the Third District Appellate Court found that the City of Redding’s PILOT charge was subject to Proposition 26’s voter approval requirement unless the charge reasonably related to the cost of service.

The Third Appellate District called into question the City of Redding’s PILOT transfer from the city-owned electrical utility to the City’s General Fund. PILOTs are Payments In Lieu Of Taxes, imposed by an agency on an agency-owned utility. In the situation of Redding, the payment was nearly equivalent to the ad valorem tax that a private utility was to pay were it providing services within the City.

With each municipal budget, the City of Redding sets the PILOT transfer for the City-owned and operated electrical utility. As a city owned utility, the City is not subject to an ad valorem tax which would otherwise be collected from the end user. The City’s long standing practice had included the PILOT charge as part its standard budget approvals.  In 2011, ratepayers sued to challenge the PILOT increase adopted in December, 2010. Late in August 2011, the ratepayers filed a new action challenging the PILOT adopted as part of the 2011 biennial budget on the grounds that the imposition required voter approval under Proposition 26 unless the charges were reasonably related to the cost of service. Eventually, the trial court consolidated the two actions. The trial court ruled for the City, finding that the PILOT transfer was not a new tax and therefore was grandfathered in. The court also concluded that the transfer did not exceed the reasonable cost of providing the service. On appeal, the appellate court reversed.

On appeal, the City’s primary defenses to the challenge to the PILOT transfer were: (1) it was not a tax; (2) it was grandfathered in; and (3) the PILOT transfer represented a reasonable cost of providing the service. Addressing the first issue, the appellate court concluded that the amount was calculated largely on what the ad valorem tax would have been on a utility. The fee proceeds went into the City’s general fund. As a flat percentage charge, it was not linked to any service levels or particular expenses incurred in providing the service, and shared similarities to the fee charged by the City of Roseville invalidated in Howard Jarvis Taxpayers Assn. v. City of Roseville (2002) 97 Cal.App.4th 637. As to the grandfathering argument, the court recognized that the PILOT had been an element of the City budget process for many years preceding the enactment of Proposition 26 in 2010. However, each approval of the budget reflected a new approval, and on a forward looking basis, the PILOT transfer was subject to Proposition 26. Finally, the appellate court reviewed the trial court’s decision regarding reasonableness, and concluded that the trial court’s ruling was not dispositive. The record was insufficient to establish the reasonableness of the transfer charge, and the matter was remanded for further review. In defending the reasonableness, the City argued that as its rates were lower than compared to other utilities, that this satisfied the reasonable cost of service requirement. The appellate court rejected this argument, determining that the PILOT transfer had to stand on its own, and could not be saved by bundling with an otherwise substantiated charge.

William W. Abbott is a partner at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.