WHAT IS PROPOSITION 218?
Proposition 218 is “The Right to Vote on Taxes Act.” It was written and sponsored by the Howard Jarvis Taxpayers Association (HJTA) and approved by California voters in 1996 to expand on HJTA’s landmark Proposition 13. The next year, the state legislature passed a law to help implement Proposition 218, using language approved by the HJTA. Many court rulings have interpreted Proposition 218.
WHAT DOES 218 COVER?
Proposition 218 applies to three kinds of government actions: taxes on the value of real property; property assessments for public improvements that only benefit specific properties; and fees and charges for property-related purposes. Most people hear about Proposition 218 in the last context – typically, when a local government wants to increase water or sewer rates. That will be the focus here.
For the first decade after Proposition 218 became law, the conventional wisdom was that water and sewer rates were not subject to Proposition 218. In two 2001 cases, the California Supreme Court ruled that: i) Proposition 218 does not apply if the charge results from an owner’s voluntary decision to use their property in a particular way, and ii) Proposition 218 does not apply to the one-time “hook-up” fees that a new water or sewer customer pays.
However, in 2006 the California Supreme Court ruled that ordinary metered water charges paid by existing customers are “property-related fees and charges” covered under Proposition 218. Since then, local agencies have been required to comply with Proposition 218 before raising water or sewer rates.
WHAT DOES 218 REQUIRE FOR WATER AND SEWER RATE INCREASES?
Proposition 218 imposes requirements on how water and sewer rates are raised. It also imposes requirements on what the rates can be.
PROCEDURES
First, the how. Before a local agency can raise rates, it must do three things: 1) Provide written notice of the increase; 2) Hold a public hearing on the proposal; and 3) Consider all protests against it.
The written notice must be mailed to the owner of every parcel affected by the proposal. Why property owners? Because Proposition 218 applies to charges that arise from the ownership of property. Some agencies send their notices to both the owner and any tenants who actually receive the utility’s bill.
The notice must show the per-parcel cost of the increase. This requirement is infeasible for consumption-based rates, since every customer is different and no one can predict their future usage. Court rulings have allowed the notice simply to identify the changes in consumption-based rates, so that a customer can calculate the impact on them.
The notice must also explain the basis and rationale for the increase. Finally, it must state the time, date, and location of the required public hearing – at least 45 days after the notice is mailed.
Proposition 218 does not require the notice to describe the right to protest, or to include a protest form. Notices almost always explain how to protest, and some notices include protest forms.
At the public hearing, the agency considers all protests submitted. If written protests are submitted by a majority of the affected property owners (or bill-paying tenants), the rate increase cannot be enacted. One protest per parcel is allowed – again, because Proposition 218 is all about property-related fees.
The protest procedure is not an election. Although Proposition 218 requires most property-related fees and charges to also be approved in an election, the HJTA specifically exempted water, sewer, and garbage rates from this requirement.
SUBSTANCE
Now, the what. Proposition 218 imposes three limitations on how high water and sewer rates can be. First, total revenues cannot exceed the costs of providing service. This calculation need not be exact, so long as it is reasonable.
Second, revenues must be used to provide service, not for any other purpose.
Third, the cost to any person or property cannot exceed the proportional costs attributable to providing service to them. Because it is infeasible to calculate and charge a “tailored” rate for each customer, court rulings allow agencies to group similar customers together and charge everyone in that group the same rate. Different rate classes can be charged very differently, if each rate is cost-justified.
The California Environmental Quality Act exempts rate-making from its environmental review requirements.
In a court challenge, the local agency has the burden of proving that it has complied with these three limitations. However, these rules apply only to rate revenues – not other income, like property taxes, power sales, and investment earnings.