Court of Appeal Strikes Down Minimum 3:1 Ratio Statute for Failure to Comply with Proposition 26 and Provides Guidance on Standard of Review

The California Court of Appeal has ruled that a statute requiring local agencies to charge non-agricultural users three to five times more than agricultural users for groundwater pumping violates Proposition 26. Among other significant implications, this decision should serve to remind local agencies that they bear the burden of proof to demonstrate that a fee is exempt from the definition of a “tax.”

Background: San Buenaventura v. United Water Conservation District
In City of San Buenaventura v. United Water Conservation District, the City challenged the District’s groundwater pumping charges. The District manages water acquisition and distribution from groundwater resources in central Ventura County, California. The District imposes groundwater pumping charges to fund operations and conservation activities such as replenishing groundwater stores and preventing degradation of the water supply. These charges are based on the volume of water that is pumped within its service area. As authorized by statute, pumping charge rates were to be “fixed and uniform” for two classes of use: agricultural purposes and all other purposes. The Water Code further required that the charges for non-agricultural use be set at a rate that is between three and five times the fixed and uniform rate established for agricultural water use. The District set its rates at the minimum 3:1 ratio accordingly.

Unanswered Questions
In 2017, the California Supreme Court determined that the District’s groundwater pumping charges did not violate Proposition 218 because the charges were not imposed on property or on any person in their capacity as a property owner. However, the Supreme Court left open the question of whether the statute requiring a 3:1 ratio in the rates violated Proposition 26. On remand, the appellate court determined the administrative records were insufficient and instructed the trial court to allow the parties to supplement the records.

Instead of supplementing the records, the parties litigated the rates for the more recent 2019-2020 water year. The City alleged that the 2019-2020 rates charged by the District violated Proposition 26 because they were not allocated to the City and other non-agricultural users in a manner that bore a reasonable relationship to the City’s burdens on or benefits from the District’s activities. The City further argued that the 3:1 minimum ratio under Water Code section 75594 was unconstitutional under Proposition 26.

Tax Classifications, Exceptions and Stipulations
Under Proposition 26, local agency fees and charges are classified as taxes unless they qualify under one of seven exceptions, two of which are:

• Charges imposed for a specific benefit conferred or privilege granted, or
• A government service or product provided directly to the payor that is not provided to those not charged.

These fees and charges must not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege, or providing the service or product. In addition, the manner in which those costs are allocated must bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity. The burden of demonstrating a fee or charge is not a tax is on the local agency imposing the fee or charge.

Statute Requiring a 3:1 Ratio Unconstitutional
Based on an independent review of the record, the trial court determined the District had not met its burden to show that the groundwater pumping charges were consistent with Proposition 26. The trial court also concluded that Water Code section 75594 is unconstitutional because its 3:1 minimum ratio is inconsistent with Proposition 26’s cost-of-service requirement.

In reviewing the record, the trial court found the following:

1. Non-agricultural users do not enjoy a more reliable groundwater supply than agricultural users.

2. Agricultural users do not have a preferential right to pump the safe yields of the basins that the District augments.

3. A report stated that credits regarding recharge on agricultural lands do not reflect an accurate cost-based valuation for replenishment.

The trial court rejected the District’s argument that the appropriate standard of review is the rational or reasonable basis test.

Substantial Evidence Test
On appeal, the District did not challenge the trial court’s findings as unsupported, but argued that the record also supported contrary findings. The appellate court affirmed the trial court’s ruling, and found that even if the District’s contention was true, the court would still be bound by the trial court’s findings to the extent they are supported by substantial evidence.

In construing the evidence in the light most favorable to the trial court’s judgment, the court concluded that, “based on the evidence that the District’s rates for the 2019-2020 water year did not bear a ‘reasonable relationship to the [City’s] burdens on or benefits of [the District’s] conservation activities, as article XIII C requires,’” the District’s groundwater pumping charges violated Proposition 26.

Additionally, with respect to the unconstitutionality of Water Code section 75594, the court acknowledged that there may be instances in which a 3:1 ratio is justified. That would not result from compliance with the statute, but rather the satisfaction of constitutional requirements under Proposition 26. The court also rejected the District’s contention that Proposition 26 conflicts with the California Constitution, article X, section 2’s water conservation mandate, finding there is no conflict so long as conservation is attained in a manner that does not exceed the proportional cost of service attributable to the parcel.

Takeaways
This decision is an important reminder that local agencies have the burden of proof in demonstrating that a fee is exempt from the definition of a “tax.” For groundwater extraction charges, agencies must show that charges do not exceed the reasonable costs of the government activity, and the manner in which costs are allocated bear a fair or reasonable relationship to the payor’s burdens on, or benefits received from, the governmental activity.

[View source.]