California Supreme Court lets stand challenge to tiered pricing model for water service

California water utilities cannot impose tiered pricing to discourage excessive water use without showing the price increases are related to the increased cost of providing water service to the customer.

On July 23, the California Supreme Court let stand a lower court ruling that invalidated San Juan Capistrano’s price tier structure for water rates.  In Capistrano Taxpayers Association, Inc. v. City of San Juan Capistrano, the California Court of Appeal held that Proposition 218 requires public water agencies to calculate the actual costs of providing water at various levels of usage.  Water rates must reflect the “cost of service attributable” to a particular parcel.  If a water agency does not calculate the cost of actually providing water at its various tier levels, the tier allocation is suspect and may violate the California Constitution.

Capistrano Taxpayers Association was decided and published in April.  The immediate outcry in response to the decision was powerful — with even California Governor Jerry Brown deriding the decision.  In response, various public interest groups and California’s Attorney General Kamala Harris requested that the California Supreme Court “depublish” the opinion.  “Depublication” would have eliminated the precedential effect of the lower court ruling, so that other water districts could ignore the decision.  However, without further comment, the California Supreme Court refused to depublish the opinion today.  As a result, Capistrano Taxpayers Association is binding on water districts throughout the state.

The state’s Water Resources Board has told the Sacramento Bee that it can live with the ruling.  “The decision does not foreclose conservation pricing,” board spokesman Tim Moran said in a written statement.  It appears that the Water Resources Board may need to re-read Capistrano Taxpayers Association and Proposition 218.

Proposition 218, enacted by voters in 1996, says that it “shall be liberally construed to effectuate its purposes of limiting local government revenue and enhancing taxpayer consent.”  The voters adopted Proposition 218 in order to prevent local governments from using their considerable powers to raise revenue without an economic nexus or a vote of the people.  Proposition 218 provides in relevant part:  “A fee or charge shall not be extended, imposed, or increased by any agency unless it meets all of the following requirements: Revenues derived from the fee or charge shall not exceed the funds required to provide the property related service [and] the amount of the fee or charge imposed upon any parcel or person as an incident of property ownership shall not exceed the proportional cost of the service attributable to the parcel.”  If the fee or charge does not meet the economic nexus requirements of the California Constitution, then a water district should call the policy what it is – a tax – and seek voter approval.

Put another way, if a water district seeks to adopt, as a matter of policy alone, a pricing structure to discourage “wasteful water use” such an action by a water district would not survive a challenge under Proposition 218 without a vote of the people.  Taxpayer consent is required for a water district to adopt a “conservation pricing” policy.

Of course, most water districts politically want to avoid a public vote.  It is much easier politically to claim that a tiered pricing structure fits within the economic nexus requirements of Proposition 218. To do that, some heavy lifting by the water district and its consultants will be required.  A water district needs to do more than merely balance its total costs of service with its total revenues.  The water district must correlate its tiered prices with the actual cost of providing water at those tier levels.  Of course, Capistrano Taxpayers Association says that it is not necessary for the water district to calculate a rate for each particular parcel or street address.  However, pricing tiers must be based on water usage, not water budgets.  Water agencies must determine how to pass on the true, marginal cost of water to those customers whose extra use of water forces water agencies to incur higher costs to supply extra water.  In order to make that determination, water agencies will need to compile a robust evidentiary record and supporting professional analysis in support of their decision.

Much of California is still in the midst of a severe drought.  Policy makers are using whatever tools they can to encourage residents and businesses to conserve water — and rightly so.  However, those tools should be used within Constitutional limits. The California Supreme Court’s decision not to depublish Capistrano Taxpayers Association ensures that water districts will have to follow Proposition 218’s mandate.

US Supreme Court holds sign regulations can’t impose different restrictions based on informational content

If a city or county’s laws impose different restrictions on signs based on their informational content, the laws are presumptively unconstitutional and may be justified only if the government proves they are narrowly tailored to serve compelling state interests, the US Supreme Court has held.

In Reed v. Town of Gilbert, decided in the last blockbuster month at the US Supreme Court, the justices established a powerful tool for real estate owners, developers and brokers to challenge local sign ordinances. Cities and counties throughout the US should carefully review their signage laws and regulations in light of the court’s decision, as many local governments likely have non-compliant laws on the books.

The Town of Gilbert is a municipality in Arizona that had, like many U.S. cities, a sign code that limits the use and display of outdoor signs without a permit.  The Town’s sign code applied different time, size, and other restrictions on the signs, depending on whether they were ideological, political or for religious assembly, among other categories.  The petitioners, a church and its pastor, held temporary worship services in and near the Town.  The church posted signs early each Saturday bearing the church’s name and the time and location of the next service.  The church did not remove the signs until around midday Sunday.  The Church was cited by the Town for exceeding the time limits for displaying temporary directional signs and for failing to include an event date.

The U.S. Supreme Court held that the sign code’s provisions were content-based regulations of speech, violating the First Amendment to the U.S. Constitution.    The Town’s sign code defines categories of temporary, political and ideological signs on the basis of their messages and then subjects each category to different restrictions.  Because the nature of the restrictions depend entirely on the signs communicative content, the signs are subject to the strictest level of Constitutional review. The Town’s claims that the disparate treatment was justified on the basis of keeping the Town beautiful and safe were inadequate and rejected by the high court.

Justice Thomas, writing for the court, rejected the Ninth Circuit’s prior decision upholding the Town’s sign code.  A court must first ask whether a law is content based on its face. If so, the inquiry ends and strict scrutiny applies. It doesn’t matter if a local government has a benign motive, content-neutral justification, or lack of animus toward the ideas contained in the regulated speech. However, if a sign law is content neutral on its face, the inquiry is not over.  A court must still inquire into the purpose and justification for the law and determine whether it is content based.

The Court rejected the Ninth Circuit’s conclusion that the Sign Code did not single out any idea or viewpoint for discrimination.  While the Town may not have been guilty of blatant content discrimination, the sign code did single out specific subject matter for differential treatment.

In light of the Court’s decision, local governments enacting sign ordinances must resolve their public policy concerns with regulations that focus on size, building materials, lighting, moving parts, portability, and location.  Those requirements cannot differ based on the content or message of the sign.  For example, it is no longer acceptable to have different sign requirements for political signs and commercial real estate listing signs.

Only in extraordinary circumstances would a content-based sign survive strict scrutiny — such as, for example, where absolutely necessary to protect the safety of pedestrians, drivers and passengers. Local governments are well advised to closely review Justice Alito’s concurring opinion, which describes additional helpful examples of sign restrictions that would likely survive First Amendment testing.

Real estate owners, developers and brokers often confront cities and counties that seek to impose strict limits on the types of signage that can be placed on public and private property.  In light of the holding of Reed v. Town of Gilbert, commercial signage will be harder for local governments to prohibit and limit.  All signage in the community must be treated equally, regardless of its content, with very limited exceptions.