The September 1997 issue of Debt Line reported on an Attorney General opinion which concluded that water service was not “property
related” for purposes of Article XIIID of the California Constitution (Proposition 218). Such an interpretation, if adopted by the courts, would permit local governments to impose water rates in a manner that deviates from the important “costs of service” requirements mandated by the new law, as well as depriving California taxpayers of significant procedural protections.
In light of the importance of this issue, the drafters and sponsors of Proposition 218 desire to set the record straight as to what they believe the proper (and only) interpretation of Proposition 218 is with respect to Proposition 218’s applicability to water rates.
The opinion of the Attorney General was in response to an inquiry from Senator Richard Rainey regarding “tiered” water rates. Such rates typically assess higher charges per unit of water as the level of consumption increases. Although tiered water rates conceivably could reflect the actual “cost of service” for water users, such a rate structure is usually imposed for the purpose of encouraging conservation, and thus deviates from “cost of service” requirements under Article XIIID.
The opinion contained little actual analysis of tiered rates and, what little analysis was presented, was flawed. For example, the opinion set forth a substantial discussion of various “rules of construction” applicable to the interpretation of initiatives. Yet, the opinion failed to mention or follow Proposition 218’s very specific liberal construction provision which constitutionally mandates that the provisions of the act “shall be liberally construed to effectuate its purposes of limiting local government revenue and enhancing taxpayer consent.” (Section 5 of the Right to Vote on Taxes Act.)
Contrary to the opinion of the Attorney General, the express language of Proposition 218 subjects water rates to the procedural and substantive requirements of the new law. Under Article XIIID, the terms “fee” and “charge” are defined broadly as “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.” (Cal. Const., art. XIIID, sec. 2, subd. (e).)
A. Meaning of “Incident of Property Ownership”
Any fee or charge imposed by a local agency upon a person as an “incident of property ownership” is subject to Article XIIID unless expressly exempt therefrom under Proposition 218. The opinion of the Attorney General construes the phrase “incident of property ownership” as something that is dependent upon property ownership. However, this interpretation is inconsistent with the way the term “incident of property ownership” has been used and understood under California law.
For example, excise taxes are imposed on the exercise of one of the incidents of property ownership, such as the ability to transfer or devise property or the ability to use, store, or consume it. City of Oakland v. Digre (1988) 205 Cal.App.3d 99, 106.) An excise tax is a tax whose imposition is triggered not by ownership but instead by some particular use of the property or privilege associated with ownership. (Thomas v. City of East Palo Alto (1997) 53 Cal.App.4th 1084, 1089.) An excise tax generally is levied against an activity which can be foregone without loss of ownership. (Digre, supra, 205 Cal.App.3d at p. 109.) The target of an excise tax can always avoid taxation by not engaging in the privilege taxed. (Id.) An excise tax is imposed upon the person engaging in the privilege being tax, which can be the property’s occupant rather than the property owner. (Cf. City of Glendale v. Trondsen (1957) 48 Cal.2d 93.)
Corpus Juris Secundum notes the following concerning what constitutes an “incident of ownership” for purposes of property generally:
“Ownership of property comprises numerous different attributes. The chief incidents of the ownership of property are the right to its possession, the right to its use, and the right to its enjoyment, according to the owner’s taste and wishes, free from unreasonable interference, usually to the exclusion of others…In addition, an incident of ownership is the right to exercise dominion over property, to change or improve the property, or to sell or otherwise dispose of it according to the will of the owner, and without any diminution or control except only by the laws of the land.” (73 C.J.S., Property, Sec. 27, pp. 209-212.)
“Incidents of property ownership” include the sale, transfer, or rental of property, as well as the use of services. (Thomas, supra, 53 Cal.App.4th at p. 1088.) The development of property is also an “incident of property ownership” as an excise tax may be imposed on the privilege of developing property. (Centex Real Estate Corp. v. City of Vallejo (1993) 19 Cal.App.4th 1358, 1364.)
Consistent with the above analysis and Section 5 of Proposition 218 which constitutionally mandates that its provisions be liberally construed, a fee or charge imposed upon a person as an “incident of property ownership” is a fee or charge associated with the exercise of one or more of the incidents of property ownership including, but not limited to, the use of property, rental of property, or the use of services related to the property.
Property-related fees or charges under Article XIIID are not based merely on the ownership of property, as that would be an unduly restrictive interpretation inviting easy circumvention, as well as being inconsistent with the way the term “incident of property ownership” has been used and understood under California law.
B. “User Fee or Charge for a Property-Related Service”
The above discussion of the phrase “incident of property ownership” is only half the analysis. The conclusion that water rates are governed by Article XIIID is further supported by the inclusion of “a user fee or charge for a property related service” within the scope of the “fee” or “charge” definition under Section 2 of Article XIIID.
A usage fee is typically charged “only to those who use goods or services. The amount of the charge is related to the actual goods or services provided to the payer. The usage fee for an ongoing service would normally be a monthly charge rather than a one-time charge.” (San Marcos Water Dist. v. San Marcos Unified School Dist. (1986) 42 Cal.3d 154, 162.) Thus, a usage fee is triggered by the use of goods or services and not by the mere ownership of property. Such a fee is “voluntary” in the sense that it is the payer’s solicitation and utilization of a service which triggers the charge. (Id. at p. 161.) This clearly indicates that the scope of the “fee” or “charge” definition in Section 2(e) applies to levies beyond those based merely on the ownership of property. This situation is analogous to and consistent with an excise tax whose imposition is triggered not by ownership but instead by some particular “incident of property ownership” such as the use of services. (See Thomas, supra, 53 Cal.App.4th at p. 1089.)
Under Section 2(e), in order for a user fee or charge to be subject to Article XIIID, it must be for a “property related service.” In determining what constitutes a “property related service,” the focus is on the nature of the service being provided and whether that service is sufficiently related to property. The focus is not on the nature or characteristics of the fee or charge, as the “user fee or charge” component of the definition addresses that issue.
A “property related service” is defined as “a public service having a direct relationship to property ownership.” (Cal. Const., art. XIIID, sec. 2, subd. (h).) The definition specifically states that the public service for which the fee or charge is imposed must have a direct relationship to property ownership rather than being based on the mere ownership of property or imposed on a parcel basis.
Mindful of the constitutionally mandated Section 5 liberal interpretation provision which requires a liberal interpretation that effectuates the purposes of limiting local government revenue and enhancing taxpayer consent, a “property related service” must be broadly construed. The “ownership” of property is defined as the “right of one or more persons to possess and use it to the exclusion of others.” (Civ. Code, sec. 654.) It is a “collection of rights to use and enjoy property.” (Black’s Law Dict. (6th ed. 1990) p. 1106, col. 2.) As further evidence that “property ownership” under Proposition 218 is broad in its scope, the term includes “tenancies of real property where tenants are directly liable to pay the assessment, fee, or charge in question.” (Cal. Const., art. XIIID, sec. 2, subd. (g).)
Consistent with the Section 5 liberal interpretation provision and the foregoing definitions of “ownership,” a user fee or charge for a “property related service” is a fee or charge for a public service that has a direct relationship to the use, possession, or enjoyment of property. Under the foregoing, water service is the quintessential property related service. Virtually all water service has meaning only in the context of the use and enjoyment of property. The opinion of the Attorney General abjectly fails to provide any analysis supporting a contrary conclusion.
C. Purpose of Levy, Not Form, Controls Analysis
In contrast to the opinion of the Attorney General, it is unlikely that any court would construe the provisions of Proposition 218 in a manner so clearly contrary to its stated intent. Indeed, with respect to revenue issues in particular, courts have repeatedly rejected efforts to circumvent provisions of law by simply manipulating the form of the levy. An excellent example was encountered by the Supreme Court in the San Marcos case (San Marcos, supra, 42 Cal.3d 154).
At issue in San Marcos was whether a utility fee for capital improvements was a special assessment from which public entities are exempt, or a user fee which public entities must pay. In resolving the issue, the Supreme Court established a “purpose” test which looks to the purpose of the fee rather than how the form of the fee is varied, a matter which can be easily manipulated. The Supreme Court noted:
“By placing the emphasis on the purpose of the charge, the courts in those cases created a rule which conforms to the policy behind the implied exemption for public entities, and avoids easy manipulation…Under the rule we adopt, no matter how the form of the fee is varied (i.e., whether it is based on actual or anticipated use; whether a one-time fee or monthly fee; and whether charged to all property owners or only to users of the sewer system), the purpose of the fee will determine whether or not public entities are exempt from paying the fee.” (Id. at p. 164.)
The Attorney General has previously followed the San Marcos “purpose” rule, and in doing so noted that it was not significant what the fees were called, upon whom they were imposed, or the basis upon which they were assessed. It was the use of the revenues that was the controlling factor. If the fees were to help pay for ongoing services provided, they were user charges. (See 71 Ops.Cal.Atty.Gen. 163, 165 (1988).)
Applying the San Marcos “purpose” rule in the context of a “user fee or charge for a property related service,” which determines whether or not a levy is subject to Article XIIID, the purpose of the charge must be the controlling factor rather than the form of the charge, a factor which can be easily manipulated by local governments in an attempt to avoid the requirements of Article XIIID.
Thus, if the purpose of a fee or charge is to fund a service, then it should not matter how the form of that fee or charge is varied (e.g., whether it is based on actual or anticipated use; whether a one-time fee or monthly fee; whether it is based on a per parcel basis or some other basis; or whether charged to all property owners or only to users of the service). Consistent with the “purpose” rule articulated in the San Marcos case, if a fee or charge is for a property related service, then it is subject to the requirements of Article XIIID without regard to the form of the fee or charge, a matter which can be easily manipulated by local governments in an attempt to avoid the requirements of Proposition 218.
D. Utility Services are “Property Related Services”
Mindful of the constitutionally mandated Section 5 liberal interpretation provision which requires a liberal interpretation that effectuates the purposes of limiting local government revenue and enhancing taxpayer consent, utility services are “property related services” under Article XIIID.
Section 6(c) of Article XIIID specifically exempts water, sewer, and refuse collection services only from the voter approval requirements of Article XIIID, but not from the other requirements of Article XIIID. (Cal. Const., art. XIIID, sec. 6, subd. (c).) It has long been a rule of interpretation that “the exception of a particular thing from general words, proves that, in the opinion of the lawgiver, the thing excepted would be within the general clause had the exception not been made.” (Brown v. State of Maryland (1827) 25 U.S. 419, 438.) This rule is applicable to the constitution as to other instruments. (Id.) Thus, water, sewer, refuse collection, and similar services are intended to be within the scope of Article XIIID as “property related services.”
Proposition 218 also expressly exempts fees for the provision of electrical or gas service from not being deemed imposed as an incident of property ownership for purposes of Article XIIID. (Cal. Const., art. XIIID, sec. 3, subd. (b).) However, the scope of the exemption does not include other types of utility services such as water, drainage, sewer, or refuse collection. It is a settled rule of statutory construction that “where a statute provides a specific exemption to a general rule, other exceptions are necessarily excluded.” (Adams v. County of Sacramento (1991) 235 Cal.App.3d 872, 880.) Had the drafters intended to expand the exemptions to include fees for water service, they would have done so expressly.
Furthermore, it has been stated by our courts that “land to which utility service cannot be extended…cannot be developed.” (L & M Professional Consultants, Inc. v. Ferreira (1983) 146 Cal.App.3d 1038, 1048.) At issue in the Ferreira case was the constitutionality of two statutes (Civ. Code, sec. 1001, Code Civ. Proc., sec. 1245.325) which provide private condemnation authority to a property owner to acquire an appurtenant easement to provide utility service to the owner’s property.
Section 1001 of the Civil Code specifically authorizes any owner of real property to “acquire by eminent domain an appurtenant easement to provide utility service to the owner’s property.” (Civ. Code, sec. 1001, subd. (b).) “Utility service” refers to “water, gas, electric, drainage, sewer, or telephone service.” (Civ. Code, sec. 1001, subd. (a).) Section 1001 is designed to serve “the function of opening what would otherwise be landlocked property to enable its most beneficial use.” (Ferreira, supra, 146 Cal.App.3d at p. 1048.) This clearly illustrates the “direct relationship” between utility service and property ownership (the use, possession, and enjoyment of property), thereby making utility service a “property related service” for purposes of Article XIIID of the Constitution.
It is the drafters’ position, supported by the clear language of Proposition 218, the liberal construction provision, and the intent of the voters that fees and charges for water service are governed by Proposition 218. To the extent tiered water rates are imposed in a manner that deviates from “cost of service” requirements, those rates are in violation of Proposition 218. Local governments or special districts which do not abide by the requirements of the new constitutional language do so at the risk of litigation.
Jon Coupal is president of the Howard Jarvis Taxpayers Association. Jack Cohen is a Southern California attorney specializing in property rights.