McINTYRE, J. —
In this case, a sanitation fee ratepayer, Jack Moore, appealed a judgment denying his petition for writ of mandate and equitable relief as against the City of Lemon Grove (the City) and the Lemon Grove Sanitation District (the District, together with the City, Respondents). Moore sought to stop Respondents from transferring funds collected as sewer service fees and charges to the City's general fund, claiming the transfers violated Proposition 218, the Right to Vote on Taxes Act. (Historical Notes, 2B West's Ann. Codes, Cal. Const. (2013 ed.) foll. art. 13C, § 1, p. 363.) The trial court concluded that the charges at issue were subject to Proposition 218, but that the transfers did not violate Proposition 218 as the District had used reasonable methods to determine the amounts to transfer. We agree and affirm the judgment.
The District manages and maintains about 67 miles of collection pipes that transport sewage to the City of San Diego treatment plants. The District possesses very little capital equipment and the City has three employees who exclusively perform District-related work. All District maintenance, facilities, administrative equipment, personnel, service, billing, regulatory and other overhead are provided by the City. The other functions required for the District to operate (accountants/finance, receptionists, analysts, engineers, inspectors, plan checkers, etc.) are provided by City employees who divide their time among various activities.
Moore sought a petition for writ of mandate directing that Respondents stop all transfers to the general fund and restore all previously transferred funds received by the general fund. He also sought a declaration of rights declaring that Respondents violated article XIII D (article XIII D) of the California Constitution and an injunction enjoining Respondents from transferring funds to the general fund and requiring them to repay all previously transferred funds received by the general fund.
After considering the parties' evidence, the trial court issued a tentative ruling concluding that the sanitation fees and charges at issue were subject to Proposition 218, but finding Respondents did not violate Proposition 218. The trial court later confirmed its tentative ruling. Thereafter, the court issued a judgment denying Moore's petition for writ of mandate. Moore timely appealed. We granted the application of the Howard Jarvis Taxpayers Association to file an amicus curiae brief on behalf of Moore.
"In 1978, California voters enacted Proposition 13, which amended the California Constitution by adding article XIII A (article XIII A). The amendment `plac[ed] significant limits on the taxing power of local and state governments.' [Citation.] As pertinent here, article XIII A, section 4 provides, `Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district ....'" (City of San Diego v. Shapiro (2014) 228 Cal.App.4th 756, 760-761 [175 Cal.Rptr.3d 670] (Shapiro), italics omitted.)
"In 1996, California voters enacted Proposition 218, which added article XIII C (article XIII C) and article XIII D (article XIII D) to the California
The agency charging the fee or charge has the burden of demonstrating compliance with these requirements. (§ 6(b)(5).) The question whether a fee or charge violates article XIII D is subject to de novo review. (Silicon Valley Taxpayers' Assn., Inc. v. Santa Clara County Open Space Authority (2008) 44 Cal.4th 431, 450 [79 Cal.Rptr.3d 312, 187 P.3d 37].) We presume that the appealed judgment is correct. (Denham v. Superior Court (1970) 2 Cal.3d 557,
The trial court concluded that the sanitation fees and charges at issue were fees as defined in article XIII D, section 2, subdivision (e) and thus, were "property-related fees subject to [Proposition] 218." This finding is not at issue. Rather, Moore contends the money transferred by Respondents from the sanitation fund to the general fund is illegal because the transfers were not properly tied to actual costs incurred for the District's benefit and Respondents never properly identified and quantified the costs. Moore alleges a violation of three specific subdivisions of article XIII D, section 6. Accordingly, we address each subdivision in turn, examining whether the District met its burden of demonstrating compliance with the requirements of section 6.
The District presented evidence showing most functions required for it to operate are provided by City employees that divide their time among various activities. In return, the District reimburses the City for these services and expenses related to these services. Cathleen Till, the City's finance director, explained that basic operational tools that the District requires to operate include support staff, accounting software, accounts payable staff, computer and "GIS" systems, human resource services, executive management and support, inspection services, engineering staff, design programs and tools, and receptionist staff. Because the District does not possess any of these software programs, computer systems, personnel, expertise, buildings for office space, etc., it relies on the City to provide these services.
Graham Mitchell is the city manager and serves as executive director for the District. As the District's executive director, Mitchell oversees the overall
Mitchell explained that the shared staffing approach utilized by the District and the City creates effective economies of scale and saves the taxpayers and ratepayers of the City and the District. Mitchell also stated it is common practice in California for a city manager to provide executive management for several city-related enterprises and for city staff to provide support for the other city-related enterprises such as a sanitation district.
Mitchell attempts to ensure an equitable and reasonable exchange of personnel and services between the City and the District. To manage the exchange of personnel and services between the City and the District, he utilizes an accounting practice in which the District transferred reimbursements to the City under two categories — "`Interfund Transfers for Operations'" and "`Interfund Transfers for Administrative Services.'" Interfund Transfers for Operations relates to the direct personnel costs that the City incurs to manage and operate the District (direct costs) and the Interfund Transfers for Administrative Services represents the overhead costs associated with operating the District (indirect costs).
Till explained how the City and the District apportion indirect costs. For example, the telephone in the one-room office used by the District is charged as a direct cost to the sanitation program. However, a percentage of the telephones used by the supervising public works director, city manager and other employees who spend part of their working hours performing sanitation duties is apportioned as an indirect cost to the District. The apportionment is done in accordance with the City's best estimate of the actual time spent on sanitation matters. Till stated that general department overhead is apportioned to the general fund if services are provided to the District by that department.
Mitchell stated that Moore's inquiries over the past few years have prompted the City to create a better system to document transfers between the District and the City. After consulting with the San Diego County Grand Jury auditor, the City developed a method to determine overhead costs. The City first determines its total overhead-related costs for building expenditures, accounting software, copiers, utilities, etc. It then determines each fund or activity's share of the overhead costs by examining the budgeted expenditures for each fund or activity. Mitchell explained that the challenge with using an expenditure model is that in any given year, expenditures can fluctuate greatly. For example, the District could have $2 million in capital improvements, which would increase its share wildly that year. Because this anomaly
Till similarly stated that revenue estimates are a good indicator of general time spent by the support departments of each special fund when dividing overhead costs and provided the following as an example. Assuming she gets 30 phone calls a day about various business items. Each phone call may discuss a different budget fund. A call from the public works director may raise five or six special fund issues. Cost allocation by timesheet could not capture the allocation of each of these costs. However, a general allocation method based on how much money flowed through into the programs would be a more accurate measure of the actual time spent and the loaded costs of each employee's time in each program.
Till noted that counting tasks assigned to each manager would be a misleading way to determine overhead costs, using the handling of tort claims by the risk manager/public works director as an example. She stated that most street-related claims involve tire or wheel damage due to potholes. These claims have a very standardized process and seldom are a significant cost item. In contrast, sewer damage claims happen once or twice a year and take up significant time and resources. Till explained that for sewer backups, the District must respond as if it is the District's fault unless proven otherwise. This entails significant environmental cleanup costs and costs for damage to the household and often hotel bills. It is a time-intensive process even if it is later determined that the District was not at fault. The risk manager, city manager, city attorney, public works crews and outside contractors are involved for sewer backup claims. Accordingly, one claim for tire damage and one sewer backup claim are not equal from a cost allocation perspective.
Significantly, Moore conceded at oral argument below that when a cost is incurred for the joint benefit of different divisions within a city or local government, those costs may be allocated. Moore explained that the principle used by Respondents was "okay," but that the methods used were "too ad hoc" and "not subject to any kind of objective criteria." Moore agreed with the trial court's restatement of his argument that he believed the method used by Respondents to estimate and allocate their costs was unreasonable, while Respondents believed the method to be reasonable. Below and on appeal, Moore relied on the Roseville case to support his argument that Respondents did not use a reasonable methodology.
At issue in Roseville was an "`in-lieu franchise fee'" (in-lieu fee). (Roseville, supra, 97 Cal.App.4th at p. 638.) The Roseville court explained that "[p]rivate utilities pay public authorities `franchise fees' to use government land such as streets, or for rights-of-way to provide utility service. [The
The trial court rejected Moore's argument that the instant case was akin to the in-lieu fees at issue in Roseville. The court found that, unlike the Roseville case, "Respondents provided ample evidence that the amount of money transferred to the [g]eneral [f]und [was] based on [r]eliable estimates of time spent by City workers on sanitation issues." We agree.
In Roseville and Fresno, each city made no attempt to show that the flat fees represented the actual cost of providing the service as required by section 6(b)(2). (Roseville, supra, 97 Cal.App.4th at p. 648; Fresno, supra, 127 Cal.App.4th at p. 928.) Here, in contrast, Respondents presented evidence on this issue. Unlike Roseville and Fresno, Moore's challenge is to Respondents' method of showing they used the fees collected for only the purpose for which the fees were charged. Moore separately addressed personnel costs and overhead costs. We do the same.
As to personnel costs, Moore acknowledged that some city workers spent time on sanitation activities and, to the extent city workers do so, a portion of
Thus, at issue is the method used by Respondents to determine the amount of time city workers spend on District activities and thus, the amounts transferred to the general fund. On this issue, Till stated that after sanitation rates are established, she and her staff monitor expenditures to make sure that they stay within budget. Her department tracks direct costs to the sewer program to ensure they stay within budgetary parameters, she interviews department directors and makes adjustments to personnel allocations between various funds, and directors are required to review and analyze for which funds the work of their respective staff applies.
Although Till was not employed by the City during the preparation of the budgets for fiscal years 2009-2010 and 2010-2011, she created spreadsheets for these fiscal years by reviewing previous budgets and identifying the staff allocated to the District. She also reviewed handwritten notes identifying the various individuals with a percentage. Although these spreadsheets were created after the fact, Mitchell stated that Respondents employed the same analysis, albeit informally with written notes justifying the transfers.
Our review of the totality of the evidence shows Respondents' methods were informal. For example, although Mitchell asked Till to interview each of the department directors to identify the amount of time spent on District activities and then interview individual staff members to verify the amount of time, Till never interviewed employees to determine if the percentages were accurate. Similarly, Till did not provide instructions on determining percentages. She assumed that based on their supervisory roles, directors knew what percentage of time employees were spending on certain directives. While the informality of Respondents' method for determining the percentage of time employees spend on District matters is not ideal, we concur with the trial court's implied conclusion that no unconstitutionality exists.
As to overhead costs, Till stated that "[g]eneral department overhead is apportioned to the General Fund if services are provided to the [District] by that [particular] department." (Italics added.) After the City determines its total overhead related costs, it then determines each fund or activity's share
The District's revenue is specifically tied to expenditures through the Lemon Grove Sanitation District Wastewater Enterprise Rate Study (the Five-Year Rate Study). An independent consultant develops the Five-Year Rate Study by reviewing past and projected expenditures, such as costs associated with capital improvement projects, sewer line maintenance, contracted services, and administration (including indirect operational costs). The Five-Year Rate Study averages out costs over a five-year period and then determines the revenue required to cover those charges from year to year to avoid ratepayers experiencing spikes in sewer bills the year of a large capital project. Mitchell explained that this process helps to ensure that ratepayers do not overpay for sewer services.
Moore argues that Respondents transferred a flat fee to the general fund that bore no relation to costs. He cited evidence that for the 2010-2011 fiscal year, Respondents transferred a flat 11 percent of sanitation revenues to the general fund as administration/indirect costs and the following fiscal year, this percentage increased to 13.5 percent. This argument is misleading as it ignores the methodology used by Respondents to calculate the percentages transferred. Namely, Respondents calculated the percentage to transfer to the general fund by dividing sanitation expenditures by sanitation revenue. As Mitchell explained, reviewing staff report time revealed that amounts budgeted for sanitation "pretty close[ly]" corresponded to time actually spent on sanitation matters.
Moore asserts Respondents provided no authority to support their "revenue-centric methodology," noting Respondents argued in conclusory fashion that their method of cost allocation was reasonable and legal. We disagree.
As explained above, we determined Respondents appropriately spend the fees collected from ratepayers on the maintenance and management of the sewer system. The District explained its revenue is tied to expenditures through the Five-Year Rate Study and we concluded that Respondents reasonably apportioned the funds based on revenue. (Ante, pt. A.)
As allowed by law, the Five-Year Rate Study identifies the maximum fee increases that the District can apply annually. This same approach was used in the previous rate study published in 2007. The District board annually determines whether the estimates identified in the Five-Year Rate Study are accurate based on new cost conditions. In 2007 and 2011, the District board increased the sanitation rates consistent with the amounts set forth in the current and prior Five-Year Rate Study. In later years, the District lowered the rate increases to an amount below that set forth in the current the Five-Year Rate Study. After sanitation rates are established, the City finance department monitors expenditures to make sure they stay within budget. Additionally, direct costs to the District are tracked to ensure they stay within budgetary
Section 6(b)(5) provides in part: "No fee or charge may be imposed for general governmental services including, but not limited to, police, fire, ambulance or library services, where the service is available to the public at large in substantially the same manner as it is to property owners." Viewed in conjunction with section 6(b)(1) and (2), the purpose of section 6(b)(5) is to require that a fee or charge collected from ratepayers be used to pay for the service for which the fee or charge was imposed and not general governmental services.
To show a violation of section 6(b)(5), Moore relies on the following discussion in Roseville: "[The city] concedes that `[r]evenue from the in[-]lieu franchise fee is ... placed in [the city's] general fund to pay for general governmental services. It has not been pledged, formally or informally[,] for any specific purpose.' This concession runs afoul of section 6(b)(2) that `[r]evenues derived from the fee or charge shall not be used for any purpose other than that for which the fee or charge was imposed.' It also contravenes section 6(b)(5) that `[n]o fee or charge may be imposed for general governmental services ....'" (Roseville, supra, 97 Cal.App.4th at p. 650, italics added.)
Namely, Moore cites to the above italicized language to assert Respondents violated section 6(b)(5) because they failed to earmark or pledge the transferred funds for any specific purpose. Rather, once Respondents determined the proper amount needed to cover the District's share of personnel and overhead expenses, the funds were placed in the City's general fund. Although not specifically argued by Moore, he appears to suggest that the funds placed in the general fund need to be specifically earmarked as payment for particular overhead or personnel costs of the District. We conclude Respondents' action did not violate section 6(b)(5).
Here, Respondents presented evidence linking the fees to its costs and showing its fees did not exceed the cost of providing the service. (Ante, pts. A. & B.) The District then reimburses the City for services and expenditures related to the services provided by the City. As Till stated, the general fund can subsidize any other fund, including sanitation. Respondents' action of reimbursing the general fund for its costs did not violate section 6(b)(5).
The judgment is affirmed. Respondents are entitled to their costs on appeal.
Nares, Acting P. J., and O'Rourke, J., concurred.