1.4.8 Fees and Charges

Fees and charges, for purposes of the California Constitution, are local government charges or exactions that are not “taxes” or “assessments.” The first key question is whether a particular fee or charge fits into one of the exceptions to the definition of a tax. See Section 1.4.2, What Is a Tax? for the list of exceptions. To do so, the local government must undertake a two part analysis. First, it must prove that the charge does not exceed its reasonable costs to provide the benefit, privilege, or service and that the costs allocated to a particular payor bear a fair and reasonable relationship to the burden on the local government entity or the benefit that the payor receives from the government entity (i.e., that charges in the aggregate do not exceed reasonable costs and are fair and reasonably allocated). To meet this burden, public agencies often rely on independent cost of service and benefit studies. Second, the local government must determine whether a fee or charge is a “property related fee or charge” subject to Article XIIID of the California Constitution. Property related fees and charges must satisfy the additional requirements described in Section 1.4.9, Property-Related Fees and Charges.

DEBT FINANCING IMPACT – The requirement that imposed fees and charges not exceed the cost of service does allow some flexibility in recovering general overhead or other indirect costs (e.g., the cost of city attorney time allocable to service provided to a municipal utility), but effectively precludes the use of fees and charges to support general local government operations. Further, the requirement that the fees and charges be fairly and reasonably allocated may affect the ability to offer “lifeline” rates or provide conservation incentives to particular categories of payors. The validity of a local government’s rates and charges schedule is essential to making budgetary decisions, particularly when these charges are a source of debt repayment.