California Supreme Court to scrutinize city’s money grab

Are you paying hidden taxes through your electric utility bill?  The residents of Redding are, and a lawsuit to stop it has reached the California Supreme Court.  PLF attorneys filed a brief last week challenging those taxes in Citizens for Fair REU Rates v. Redding.

When the Redding City Council approved the city’s budgets for fiscal years 2009 and 2010, it also approved the yearly transfer of money from its municipally owned electric utility to the city’s general fund in an amount equal to 1% of the utility’s assets.  That’s about $6 million dollars in FY 2009-10 and another $6 million dollars in FY 2010-2011.  After being warned about the utility’s low cash reserves, the City Council chose to continue transferring funds away from the utility by making the rate payors bear the loss.  It passed a resolution approving steep utility rate increases of 7.84%, effective January 2011, and another 7.84%, effective December 2011 – a total increase of 15.68%.

As we explained in a previous post, Californians passed Proposition 13 in 1978, and Proposition 218 in 1996, to stop local governments from taxing property owners out of house and home.  Those measures limit the ability of government to increase property taxes (Proposition 13), and certain assessments, fees, and charges (Proposition 218).  But local government officials across the state continued to adopt secret taxes in order to extract more revenue from taxpayers.  In 2010, Californians approved Proposition 26 to close the loopholes in the earlier tax initiatives that allowed the proliferation of hidden state and local taxes.  Proposition 26 amended the constitution to state, plainly and simply, that subject to specific exceptions, before “any levy, charge, or exaction of any kind” can be imposed by a local government, it must be approved by the voters.

Proposition 26 enacted another key reform that applies to this case.  Proposition 26 placed the burden on the city to prove “by a preponderance of the evidence” that any new levy, charge, or exaction is not a tax, and that the amount is no more than necessary to cover the reasonable costs of the governmental activity.  Were the $6 million transfers and 7.84% rate increases necessary to cover the cost of electricity generation?  The city couldn’t prove it, so the court of appeal held that the city’s money grab was unconstitutional under Proposition 26.  But the city asked the California Supreme Court to review that decision, and the court agreed.

Proposition 26 does not prevent the city from recovering the reasonable costs of electricity generation and distribution.  But Proposition 26 does prohibit the city from raising electricity rates to pay for the utility-to-general fund transfers without voter approval, or without showing that the higher rates are necessary to cover those reasonable costs.  Until either of those have been accomplished, the court should find that the city’s revenue-generating scheme is exactly the type of mischief Proposition 26 was enacted to prevent.