1.4.9 Property-Related Fees and Charges – California Debt Financing Guide

A property related fee or charge is a fee or charge “imposed upon a parcel or person as an incident of property ownership.” Article XIIID of the California Constitution specifically excludes fees for the provision of electrical or gas service or imposed “as a condition of property development,” from the scope of its limitations on property related fees and charges. This has been interpreted by the courts to include connection and other charges imposed as a condition to connecting a property to a municipal water system. Case law interpreting the phrase “as an incident of property ownership” continues to evolve. Fees or charges payable whether or not the property is used are imposed “as an incident of property ownership.” Furthermore, fees and charges that cannot be avoided because they are based on actions essential to the reasonable use of property (e.g., the consumption of water) are also imposed “as an incident of property ownership.” In contrast, fees or charges that could be avoided by use of the property for another reasonable use (e.g., using the property for something other than residential rental property) are not imposed as an incident of property ownership.55

SUBSTANTIVE CONSTITUTIONAL LIMITATIONS – Property related fees and charges may not be extended, imposed or increased unless the following are true:

Revenues derived from the fee or charge do not exceed the funds required to provide the property related service and are used for no purpose other than that for which the fee or charge was imposed.
The amount of the fee or charge imposed upon any parcel or person does not exceed the proportional cost of the service attributable to the parcel.
The service is actually used by or immediately available to the property owner (no fees or charges for potential or future use).
The fee or charge is not imposed for general governmental service where the service is available to the public at large in substantially the same manner as it is to property owners.

The local government agency bears the burden of demonstrating compliance and determinations of revenue needs and estimations of revenue to be derived from a fee or charge include large elements of uncertainty. Judgments with respect to “proportional costs” across properties can be particularly difficult. At what point, for example, does increased water usage in a water utility’s service area necessitate seeking additional costly supply, and how should that cost be allocated between homeowners who are using more water than their neighbors and homeowners whose properties are newly connected to the system? Demonstrating the appropriateness of the allocation of general costs of a general purpose entity like a city to its utilities (to be borne by ratepayers) can be particularly difficult and open to criticism. Courts have not required mathematical certainty or fine distinctions, but it is important that assumptions and categorizations be well considered. It is therefore common for public agencies to base their conclusions on studies done by independent experts projecting revenue needs and costs of providing service to various customer classes.

CONSTITUTIONAL PROCEDURAL REQUIREMENTS – Unless an exception applies, property related fees and charges must be approved by a majority vote of the owners of the property subject to the fee or charge or by a two-thirds vote of the electorate in the covered area. The exceptions to this voter requirement, including fees and charges for sewer, water and refuse collection services, cover most but not all property related fees and charges. Storm water drainage fees, for example, which were determined to be neither “water” nor “sewer” related, are not excepted.56 For the imposition or increase of a fee or charge in the excepted categories, the local government agency must mail notice to the owners of the property to be charged, hold a public hearing, and consider protests. The fee or charge may not be imposed if the local government agency receives written protests from a majority of owners of the affected parcels.57

DEBT FINANCING IMPACT – Property related fee and charge limitations are most relevant in wastewater and solid waste enterprise revenue financings. The constraints on the ability to impose service charges can make compliance with rate covenants associated with a debt financing more challenging. A greater concern is that in an area where interpretation is still developing, an imposed fee or charge or the process of its imposition may subsequently be found to be invalid, resulting in reduced revenues and vulnerability to refund claims.

In Apartment Association of Los Angeles County, Inc. v. City of Los Angeles, 24 Cal. 4th 830 (2001), the California Supreme Court determined that an inspection fee imposed on owners of residential rental property is not a “levy … as an incident of property ownership” subject to Article XIIID because it would not be payable if the owner used the property for another purpose. In Richmond v. Shasta Community Services District, 32 Cal. 4th 409 (2004), the California Supreme Court determined that a capacity charge and fire suppression fee imposed as a condition for making a new connection to a water system are neither “assessments” nor “property related fees and charges” for purposes of Article XIIID. In Bighorn–Desert View Water Agency v. Verjil, 39 Cal. 4th 205 (2006), the California Supreme Court determined that because the use of water was essential to the use of property, consumption-based water charges are “fees and charges” for purposes of Articles XIIIC and XIIID.