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.

California Cities Can Require Developers to Build and Sell Affordable Housing in Their Projects

Local governments may enact laws that require all new residential development projects of 20 or more units to sell at least 15 percent of the for-sale units at a price that is affordable to low or moderate income households, the California Supeme Court has held.

The case marks a defeat for the California Building Industry Association (“CBIA”), who sought to invalidate San Jose’s inclusionary housing ordinance on the basis that the law was an unconstitutional condition in the form of a development exaction under the takings clauses of the United States and California constitutions. An “inclusionary housing ordinance” is a law that requires a developer to construct and offer affordable housing as a part of its proposed development project. The case is California Building Industry Ass’n v. City of San Jose, decided June 15, 2015.

The decision is significant for cities and counties as they grapple with the limited amount of affordable housing in the state. Many cities and counties are now expected to follow San Jose’s example and adopt laws imposing affordable housing requirements on for-sale development in their jurisdictions. The imposition of affordable housing requirements on new for-rent housing is limited by the Costa-Hawkins Rental Housing Act, a 1995 state law.

For developers, the decision is another example of the tough legislative requirements imposed on new developments in California.  Developers of large scale projects have often had to deal with cities and counties demanding that in return for long term vested rights to build their projects, the developer is required to provide a percentage of affordable housing in the overal project. Now, not only can cities and counties bargain for a required percentage of affordable housing in development agreements, they can mandate it as law on projects as small as 20 units (and perhaps fewer!). Developers in cities and counties that adopt such laws will now need to include in their pro formas the cost of building, offering and selling affordable units to low income and moderate income families. Those financial impacts not only include lower returns on construction and development costs, but the added expense of implementing an affordable housing program as part of the project (unless the local government provides those services).  The inclusionary requirements will certainly reduce developer profit, but may also affect the financial viability of the project as a whole.

Chief Justice Cantil-Sakauye wrote for the Court that the conditions that the San Jose ordinance imposed upon future developments did not impose “exactions” upon the developer’s property so as to bring into play the unconstitutional conditions doctrine under the takings clauses of the federal or state constitutions. The conditions do not require the developer to pay money but place a limit on the way a developer may use its property, the court said. The ordinance serves legitimate government purposes of increasing the number of affordable housing units in the city and assuring that new affordable units are distributed throughout the city as part of a mixed-income development. Therefore, the court reasoned, the affordable housing ordinance is a zoning restriction, not a taking. The higher standard of court review applied to takings cases did not apply. Instead, the court could apply the much lower judicial review standard for zoning laws: such laws will be upheld so long as they have a reasonable relationship to a legitimate governmental interest.

CBIA’s lawsuit was a “facial” challenge to the City of San Jose’s ordinance, which argues that the ordinance was unlawful for essentially all reasonably conceivable projects. Another path to challenge the City of San Jose’s ordinance is still available. It is still possible for a developer to make the argument that the law, “as applied” to its particular project, is a taking. Under compelling facts, the California Supreme Court could find that “as applied” the law was confiscatory or an “unconstitutional condition” to the development of the project. However, such a lawsuit would be a risky endeavor given the Court’s prior holding.

In addition, CBIA could appeal the decision to the United States Supreme Court to review the California Supreme Court’s interpretation of federal takings law.  Strategically, it would probably be best for the CBIA to wait for a project with compelling facts in an “as-applied” challenge rather than using the facial attack. It could well be the case that the chances of prevailing would be higher in an “as-applied” challenge.  The risks of losing the case in another “facial” challenge and establishing national legal precedent similar the California Supreme Court’s holding would definitely not be welcomed by the development community.

Chick-Fil-A, Land Use Permitting and the Constitution

This week, elected officials in San Francisco, Boston, Chicago and New York made statements that Chick-Fil-A restaurants would not be welcome in their jurisdictions because of the personal opinions expressed by the company’s CEO Dan Cathy.  What was surprising in all of this was not the conflict of political opinions over same-sex marriage.  The bigger issue — from the perspective of land use law — was the willingness of those same public officials to suggest a course of action that would violate state and federal Constitutional law if taken to its logical conclusion.

For example, according to press reports, a Chicago alderman said that he would personally “deny a land use permit [to Chick-Fil-A] to open a restaurant in my ward.” His refusal to grant a land use permit on the basis of the personal views of the property owner would almost certainly be a violation of the federal Constitution — specifically the Fourteenth Amendment’s equal protection clause.   (By the way, the California Constitution also guarantees equal protection of the laws.  Cal. Const. art. I, section 7(a).) 

For an equal protection violation to occur, a property owner does not need to be a member of an identifiable class.  The equal protection guarantee protects not only groups, but individuals who would constitute a “class of one.”  “A plaintiff can establish a ‘class of one’ equal protection claim by demonstrating that it has been intentionally treated differently from others similarly situated and that there is no basis for the difference in treatment.”  Squaw Valley Dev. Co. v. Goldberg (9th Cir. 2004) 375 F.3d 936. 

“Class of one” equal protection cases often involve claims that a government action was “arbitrary and irrational,” usually on the basis of vindictive action, illegitimate animus or ill will.  The textbook case is the U.S. Supreme Court’s decision in Village of Willowbrook v. Olech (2000) 528 U.S. 562.  In that case, the court held that a village unfairly required one property owner to grant a larger water connection easement than that required by neighboring property owners.  Why? Because the local government held animosity toward the property owner from a previous, successful lawsuit the property owner had filed against the village. 

In the Ninth Circuit, federal courts have also found a cause of action when government action in the land use context is based on “arbitrary or malicious conduct.”  See Lockary v. Kayfetz (9th Cir. 1990) 917 F.2d 1150; Valley Outdoor, Inc. v. City of Riverside (9th Cir. 2006) 446 F.3d 948.  Ninth Circuit courts have also established a test whereby an equal protection plaintiff may show pretext by creating a triable issue of fact that either: “(1) the proffered rational basis was objectively false; or (2) the defendant actually acted based on an improper motive.”  Squaw Valley Dev. Co. v. Goldberg (9th Cir. 2004) 375 F.3d 936. So, in the present case, even if the proposed Chick-Fil-A restaurant might cause increased traffic, noise, or air pollution from cooking all that chicken, a project applicant could argue that the real reason that the city rejected the permit was the CEO’s personal views. 

Regardless of your beliefs on the political question (and this blog is not taking a position one way or the other, as this blog only deals with real estate and land use law), you can see why the legal issues have caused several public officials to backtrack on their comments against the land use permitting of Chick-Fil-A in their jurisdictions. 

Again, even those backtracking statements may not be enough if Chick-Fil-A wants to take legal advantage.  On his Land Use Prof Blog, Ken Stahl, an associate professor of law at Chapman University, astutely observed “because of what the various officials in Chicago, San Francisco, Boston, etc. have said, it will only be harder to exclude Chick-Fil-A even if the city has a legitimate concerns about traffic, noise, etc. because the inference of discriminatory animus will be so hard to shake.” 

Only time will tell if the owners/franchisees of Chick-Fil-A in the aforementioned cities pursue their expansion plans and, if they do, whether land use litigation will ensue.

Charter Cities Not Required To Pay Prevailing Wages to Private Construction Workers on Locally Funded Public Works

In July, the California Supreme Court issued an opinion with far-reaching impact on the payment of prevailing wages in public works projects. In State Building Construction Trades Council of California, AFL-CIO v. City of Vista, 54 Cal.4th 547 (July 2, 2012), the court exempted charter cities and their contractors from the obligation to pay workers state-mandated prevailing wages when a public improvement project is a “locally funded public work.”

In City of Vista,  the court held that the wage levels of contract workers building locally funded public works are a “municipal affair” and not a matter of “statewide concern.” As a result, the California Constitution protected Vista’s adoption of an ordinance prohibiting the payment of prevailing wages, because the ordinances of charter cities supersede state law with respect to “municipal affairs.”

Facts

In 2006, while Vista was a general law city rather than a charter city, city voters approved a sales tax to fund renovation of several public buildings. In February 2007, following a special election, Vista changed from a general law city to a charter city. One of the purposes of the change was to give the council the power to decide whether to impose prevailing wages on the construction of its planned public works projects.

Shortly after that, the Vista City Council enacted a city ordinance to prohibit city contracts from requiring payment of prevailing wages, except in three limited circumstances: “(a) such payment is compelled by the terms of a state or a federal grant, (b) the contract does not involve a municipal affair, or (c) payment of the prevailing wage is separately authorized by the city council.”  The city council then enacted a resolution approving contracts for the public buildings to be financed by the sales tax, but did not require compliance with the state’s prevailing wage laws. The State Building and Construction Trades Council of California (“the union”) then filed suit.

The Court’s Decision

The court started its analysis with what is commonly known as California’s “home rule doctrine.”  This doctrine is set forth in Article XI, section 5, subdivision (a) of the California Constitution, which provides, “It shall be competent in any city charter to provide that the city governed thereunder may make and enforce all ordinances and regulations in respect to municipal affairs, subject only to restrictions and limitations provided in their several charters and in respect to other matters they shall be subject to general laws. City charters adopted pursuant to this Constitution shall supersede any existing charter, and with respect to municipal affairs shall supersede all laws inconsistent therewith.”

In view of the language of the California Constitution, the court said, “[T]he controlling inquiry is how the state Constitution allocates governmental authority between charter cities and the state.”

The court then applied the framework for determining whether an ordinance of a charter city concerns “municipal affairs” or whether the ordinance would be superseded by state law as dealing with matters of “statewide concern.” California Fed. Savings & Loan Assn. v. City of Los Angeles, 54 Cal. 3d 1, 17 (1991) (“California Fed. Savings”).

The court concluded “that the wage levels of contract workers constructing locally funded public works are a municipal affair (that is, exempt from state regulation), and that these wage levels are not a statewide concern (that is, subject to state legislative control),” reaffirming City of Pasadena v. Charleville, 215 Cal. 384, 389 (1932). 

In support of its holding, the court reasoned as follows: 

  • First, “the construction of a city-operated facility for the benefit of a city’s inhabitants is quintessentially a municipal affair, as is the control over the expenditure of a city’s own funds. Here, the two fire stations in the City of Vista, like the municipal water system in Charleville, … are facilities operated by the city for the benefit of the city’s inhabitants, and they are financed from the city’s own funds. We conclude therefore that the matter at issue here involves a ‘municipal affair.’” Second, noting that the prevailing wage laws expressly cover public works of a city, whether a charter city or not, the court found that “an actual conflict exists between state law and Vista’s ordinance.”
  • The court rejected the union’s arguments that what may have once been a “municipal affair” was now a state concern because (i) the prevailing wage is now set by the Director of the California Department of Industrial Relations, rather than the local contracting body, as when Charleville was decided, (ii) the state’s economy is interconnected at the state level and regional levels, and (iii) that prevailing wages support state-wide apprenticeship programs in skilled crafts. The court considered these arguments and instead stated: “[T]he question presented is whether the state can require a charter city to exercise its purchasing power in the construction market in a way that supports regional wages and subsidizes vocational training, while increasing the charter city’s costs. No one would doubt that the state could use its own resources to support wages and vocational training in the state’s construction industry, but can the state achieve these ends by interfering in the fiscal policies of charter cities?” The court answered “no.” The same principle that applies in the court’s prior decisions with respect to public employees held true for private employees as well.

Factors Cities and Developers Should Consider

City of Vista significantly changes the trend in California on the issue of the payment of prevailing wages. Over the past 10 years, the legislature has expanded the types of projects that qualified as “public works” and were subject to the payment of prevailing wages. This ruling allows charter cities to separate themselves from the legislature’s prevailing wage requirements. Today, charter cities can exert much greater control over their capital improvement expenditures. 

The court’s decision helps financially strapped charter cities and struggling real estate developers.   Construction spending can go farther with potentially greater public benefit. Public works that had been put on hold because construction was too expensive may be possible. A private development dependent on significant public improvements may not have been financially feasible if prevailing wages (and benefits) had to be paid, but now the project may be possible, simulating the local economy. On the other hand, union employees may find that the wages they will be paid on public works projects will drop in the aftermath of this decision, affecting their wallets.

What’s more, developers and charter cities may need to more closely evaluate Project Labor Agreements (“PLAs”) on multi-craft construction contracts, balancing their costs against the labor relations benefits they offer.

The important question is whether a charter city’s proposed improvement is a “locally funded public work” — something the court does not specifically define. However, the expenditure of “a City’s own funds” was identified as a municipal concern exempt from prevailing wages. But what constitutes “a City’s own funds”? A voter-approved sales tax measure for public construction purposes qualified in City of Vista. If a charter city received money under a development agreement from a developer for constructing a public park, would the use of those proceeds be an expenditure of “a City’s own funds”? If a charter city received mitigation fees or impact fees for a new public library, would the spending of those dollars be “an expenditure of a City’s own funds”? A good argument can be made for each of these, if properly structured.

An interesting strategy worth considering is whether a charter city can create a Mello-Roos communities facilities district, or another special taxing district, and cloak the funds expended by those entities with the constitutional “home rule” protection granted to charter cities. A particularly plausible alternative is using charter city-created public finance tools, such as facilities benefit assessments used by the City of San Diego and the City of Sacramento, to shield a charter city from the payment of prevailing wages.  

The case also raises the issue that unions may take actions to press their agenda on charter cities which refuse to opt into the state’s prevailing wage mandate.  Those strategies could include direct political pressure of city council, the ballot box or use of other legal tools (such as environmental laws and regulations) that prevent or delay the commencement of construction.

— Kenneth Kecskes