On August 3, 2020, the California Supreme Court ruled that municipal water rates are not subject to the referendum process (as opposed to the initiative process) as set forth in the California Constitution
The California Constitution specifically provides the referendum power to the voters “to approve or reject statutes or parts of statutes except urgency statutes, statutes calling elections, and statutes providing for tax levies or appropriations for usual current expenses of the State.” (Cal. Const., Article II, § 9, subd. (a).) (Emphasis added.) The Court held that a municipal water rate could be considered a “tax” for purposes of an exemption from the referendum process.
After conducting an assessment of its water systems, the City of Dunsmir (“City”) concluded that its aging facilities required significant upgrades and repairs, and that new water rates would supplement the required infrastructure projects. Plaintiff Leslie Wilde (“Wilde”), a resident, opposed the new water rates as proposed by the City. During the public hearing for the proposed water rates, as required by Proposition 218 (set forth in Article XIII C and Article XIII D of the California Constitution) (“Prop 218”), Wilde failed to produce enough ballots to stop the approval of the new water rates and the City eventually approved a resolution adopting the new water rates (“Resolution”).
Following approval of the Resolution, Wilde made two attempts to stop the implementation of the new water rates – by way of initiative and by way of referendum. Wilde’s initiative was rejected by the voters, and the City refused to place Wilde’s referendum on the ballot and informed Wilde that “[t]he setting of Proposition 218 rates is an administrative act not subject to the referendum process. Also, Prop 218 provides for initiatives (Art. XIIIC, sec. 3), but not referenda.” Subsequently, Wilde filed a petition for writ of mandate, seeking to compel the City to place the referendum on the ballot.
Wilde argued that the new water rates adopted by the City could not be excluded from the referendum power provided by Article II, section 9. Specifically, Wilde pointed to the language in Prop 218, which identifies water rates as “fees” (specifically, “property-related fees”) rather than “taxes.” Wilde contended that a similar definition of “fees” found in Prop 218 should be applied to Article II, section 9 of the Constitution. The Court found no reason to relate “fees” found in Prop 218 with “taxes” in Article II, section 9. The Court looked to various precedent to determine that “tax” has no fixed meaning and that the definitions of “tax” and “fee” frequently blurred. Ultimately, the Court held that “the constitutional provisions added by Prop 218 do not control whether the water rates at issue are subject to challenge by referendum.”
Citing its previous opinion in Geiger v. Board of Sup’rs of Butte County (1957) 48 Cal.2d 832, 839-840, the Court explained that the principle reason why the California Constitution excepts tax levies from the referendum power is “to prevent disruption of its operations by interference with the administration of its fiscal powers and policies.” Any legislative enactments subject to a referendum must be suspended for a period of time before taking effect. By contrast, the initiative power granted to the voters does not delay or suspend operation of statutes, and must undergo a prolonged process before the electorate approves or rejects the initiative. In its ruling, the Court specifically held:
“[E]xemptions from referendum reflect a recognition that in certain areas, legislators must be permitted to act expediently, without the delays and uncertainty that accompany the referendum process. All of the exemptions – for urgency statutes, statutes calling elections, and statutes providing for tax levies or appropriations for usual current expenses of the state – are for ‘measures having special urgency, a delay in the implementation of which could disrupt essential governmental operations.’”
In the Geiger opinion, the Court reasoned that if taxes were subject to referendum, a public agency’s ability to adopt a balanced budget and raise funds for operating expenses through taxation would be delayed and ineffective.
The Court found that even a temporary halt to the City’s ability to levy its water rates would run the risk of undermining the City’s ability to finance its water utility and manage its fiscal affairs, including providing water service to its residents.
Throughout its opinion, the Court repeatedly affirmed a resident’s right to challenge water rates through the Prop 218 process and by initiative, but ultimately held that referendum was not the appropriate avenue to challenge the City’s water rates. The Wilde case ensures consistency among local government and their abilities to fund essential governmental services through taxes.