HIGHLIGHTS:

  • In Northern California Water Association et al. v. State Water Resources Control Board et al., the California Third District Court of Appeal rejected challenges to a new annual fee on water right permit and license holders imposed on them during Fiscal Year 2003-2004 by the State Water Resources Control Board.
  • The appellate decision reversed the trial court and determined that the fee constituted a valid regulatory fee and not an unlawful tax.
  • The ruling is another example of the uphill legal battle faced by challengers to regulatory fees imposed by public agencies in California, and it underscores the need of property owners and other stakeholders to provide early input in any available administrative review or public vetting process prior to such fees being officially adopted.

In the recently decided case of Northern California Water Association et al. v. State Water Resources Control Board et al. C075866, 2018 WL 1127892, 3rd Appellate District, March 2, 2018 (NCWA), the California Court of Appeal rejected challenges to a new annual fee on water right permit and license holders imposed on them during Fiscal Year 2003-2004 by the State Water Resources Control Board (the Board). The fee was imposed in order to cover a portion of the costs of regulatory activities of the Board's Division of Water Rights (the Division). In so doing, the court reversed the trial court and determined that the fee constituted a valid regulatory fee and not an unlawful tax.

Court of Appeal Decision

Challengers Northern California Water Association, California Farm Bureau Federation and individual fee payors prevailed at the trial court level on their claims that the California statutory and regulatory framework authorizing the annual fee (Water Code §§1525, 1540, 1550-1552, and 1560; Cal. Code Regs, Title 23, §§1066, 1073) imposed an unlawful tax that failed to meet the requirement of a two-thirds vote by the legislature under Proposition 13 (Article XIII A, Section 3 of the California Constitution), as opposed to a valid regulatory fee, requiring only a simple majority. The annual fee allocated the entire cost of the Division's regulatory activities to permit and license holders, while non-paying water-right holders who also benefited from and placed burdens on the Division's activities paid nothing.

The trial court also found that the fees, as allocated to water supply contractors under the Central Valley Project (CVP) water supply project administered by the U.S. Bureau of Reclamation (USBR), violated the supremacy clause of the U.S. Constitution because they exceeded the contractors' beneficial interest in the USBR's water rights. In addition, the trial court found that the fee regulations were invalid because they operated in an arbitrary manner as to a single payor, the Imperial Irrigation District.

Upon appeal by the Board, the court in NCWA reversed the trial court's judgment and upheld the validity of the fee regulations. The court first noted that the plaintiff challenging payment of any regulatory fee bears the burden of proof to establish a prima facie case showing that the fee is invalid. Only then does the burden shift to the agency to show the estimated cost of the regulatory activity and that the charges allocated to the challenger bear a fair or reasonable relationship to the challenger's burdens on or benefits from the regulatory activity. Applying this standard, the court first concluded that the fees assessed on permit and license holders were proportionate to the benefits derived by them or the burdens they placed on the Division because, contrary to the challengers' assertion, the revenues from the fees accounted for only roughly half of the costs of the Division's regulatory activities (the balance deriving from the state's general fund and other funds), while roughly 90 percent of the Division's costs were attributable to permit and license holders.

The court further concluded that the allocation, pursuant to the challenged regulations, of all of the USBR's annual fee for projects within the CVP to the water supply contractors (because the USBR was exempt from the fee pursuant to the supremacy clause) also was reasonable because the contractors in fact received everything the USBR had to give under the CVP permits and licenses. Finally, the court rejected any invalidation of the fee based upon any potential disproportionate impact on the Imperial Irrigation District because the question of proportionality is measured on a collective basis as to all payors and not on an individual basis as to a single payor.

Takeaways and Considerations

  • The decision in NCWA is another example of the uphill legal battle faced by challengers to regulatory fees imposed by public agencies in California, and it underscores the need of property owners and other stakeholders to become involved and provide input early on in any available administrative review or public vetting process regarding such fees prior to their official adoption.
  • Similar hurdles are faced by challengers seeking to invalidate the wide array of development impact or "in lieu" fees imposed by local agencies throughout the state, whether under the auspices of the Mitigation Fee Act (Gov't Code §§66000 et seq.) or the general police power, including but not limited to affordable housing impact fees and school impact fees. (See Holland & Knight's alert, "California "In Lieu" Affordable Housing Fees Withstand Constitutional Challenge," Oct. 31, 2017.)
  • This legal reality, as well as the practical financial and timing realities faced by property owners and developers in California, places a premium not only on involvement prior to the final adoption of such fees but on the potential use of statutory development agreements (Gov't Code §§65864-65869.5), vesting tentative maps (Gov't Code §§66498.1-66498.9) and school mitigation fee agreements to reach either contractual or "vested" rights assurance as to the precise types and amounts of such fees that will be applicable to a project.
  • Both owners/developers and local agencies should pay special attention to compliance with the periodic accounting and findings requirements for development fees imposed by the Mitigation Fee Act. (SeeWalker v. City of San Clemente (2015) 239 Cal.App. 4th 1350, where failure of the city to comply with such requirements resulted in a judgment ordering the city to refund $10.5 million in unexpended beach parking impact fees.)