A Tax by Another Name: Beware of Excessive Fees Included in Exclusive Waste Hauling Franchise Contracts

• Publication year: 2016
• Author: by Gideon Kracov* and Jordan R. Sisson**

A Tax by Another Name: Beware of Excessive Fees Included in Exclusive Waste Hauling Franchise Contracts

by Gideon Kracov* and Jordan R. Sisson**

MCLE SELF-STUDY ARTICLE

(Check end of this article for information on how to access 1.0 self-study credit.)

"There's no Democrat or Republican way to pick up the trash."

- New York Major LaGuardia

INTRODUCTION

While presidential hopefuls debate issues like foreign policy and international trade agreements, local elections concern basic matters like filling potholes and picking up garbage. In Los Angeles County, 59 of 88 cities grant exclusive franchises to private party waste haulers to pick up trash and recyclables from the city's residents or businesses.¹

In December 2015, a California Court of Appeal held in Crawley v. Alameda County Waste Management Authority (Crawley) that household hazardous waste fees are "property-related" and subject to Article XIII D of Proposition 218.² Enacted into law through the voter initiative process, Proposition 218 puts procedural and substantive limits on local government's ability to raise revenue through "property-related fees."³ Proposition 218 protects property owners from arbitrary fees by requiring local governments to cost-justify their fees.

Crawley is the latest in a line of cases confirming that exclusive waste-hauling franchises fees may be property-related. Therefore, fees imposed under such exclusive franchise agreements should be cost-justified - including service, franchise, regulatory, and signing fees. Municipal lawyers in cities awarding exclusive waste-hauling franchises should scrutinize these fees carefully. Moreover, a municipal franchise case - Jacks v. Santa Barbara (Jacks)⁴ - is among several cases pending before the California Supreme Court that will likely provide important further guidance in this area.

I. BRIEF CONSTITUTIONAL AND CASE LAW BACKGROUND ON MUNICIPAL FEES AND TAXES

Prior to Proposition 13, each California city, county, and special district could impose a property tax rate without limitation. The average property tax rate throughout the state was just shy of three percent.⁵

A. Propositions 13 and 62

In 1978, voters passed Proposition 13 to "provide effective tax relief and to require voter approval of tax increases."⁶ The measure added Article XIII A to the California Constitution to limit property tax rates and to prevent cities, counties, and special districts from raising "special taxes" (i.e. property taxes) without two-thirds voter approval.⁷ However, Proposition 13 did not define "special tax," which courts subsequently interpreted as a tax imposed for a "special purpose."⁸ This allowed local governments to raise property taxes without voter consent if used for general government.⁹

In 1986, voters passed Proposition 62, declaring all taxes as "special" or "general," thus requiring voter consent.¹⁰ Proposition 62 prevented local governments from raising "general taxes" without majority approval.¹¹ Although held constitutional,¹² the constitutional amendment was later held inapplicable to charter cities which were free to raise revenues without triggering the voter approval requirement.¹³

B. Proposition 218

Voters changed that rule in 1996 with Proposition 218. Under Article XIII C, local governments must secure voter consent before imposing special taxes (two-thirds) or general taxes (simple majority).¹⁴ Under Article XIII D, substantive and procedural requirements prevent local government from raising general funds through assessments, fees, or other charges for property-related services (exempting only gas and electrical services).¹⁵ Substantively, a local government may not extend, impose, or increase fees that exceed the funds required to provide the service.¹⁶ Procedurally, all new or increased fees must include a 45-day majority protest period requiring notice to all affected property owners.¹⁷ Except for certain services (i.e., sewer, water, and refuse collection), the public agency must also get approval from either a majority of property owners or two-thirds of the electorate.¹⁸ "[I]n any legal action contesting the validity of a fee or charge," the agency must demonstrate compliance with these substantive and procedural requirements.¹⁹

C. Sinclair Paint

In 1997, the California Supreme Court decided Sinclair Paint Co. v. State Board of Equalization (Sinclair Paint), holding a regulatory fee (a special fee used for the benefit of non-fee payers) is not a tax when used "to mitigate the actual or anticipated adverse effects of the fee payers' operations" and the amount "bear[s] a reasonable relationship to those adverse effects."²⁰ The Court upheld a state-imposed fee on manufacturers of lead products to fund lead poisoning prevention efforts. The Court held the fee was not a tax because its "primary purpose" was not to raise revenue, but rather a "reasonable police power decision" to shift the costs imposed onto the public back to those persons deemed responsible (i.e., lead industry).²¹ On remand, the fee was still subject to challenge on grounds it "exceeded the reasonable cost of providing the protective services . . . or that the fees were levied for unrelated revenue purposes."²²

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D. Proposition 26

In 2010, to further limit fees that exceed the reasonable cost of actual regulation,²³ voters passed Proposition 26, "the Supermajority Vote to Pass New Taxes and Fees Act." Proposition 26 amended Article XIII C of the California Constitution to define a tax as "any levy, charge, or exaction of any kind imposed by a local government," unless it falls into one of seven exemptions.²⁴ Local governments bear the burden of proving the fee is not a tax, is limited to the "reasonable costs," and bearing a "reasonable relationship" to the benefit conferred or burden imposed.²⁵

II. EXAMINING WASTE HAULING EXCLUSIVE FRANCHISE AGREEMENTS AND COST JUSTIFICATION RULES

Under most exclusive waste franchises agreements, the rate charged to customers is a combination of service, franchise, and regulatory fees.²⁶ The service fee covers curbside collection; the franchise fee is a percentage charged on the total bill and usually transferred to the local government's general fund; and the regulatory fee supports recycling programs in the jurisdiction. Recently, winning bids for exclusive waste franchises in Southern California have also included a large, lump sum signing fee directed to the general fund.

A. Waste Hauling Fees Are Property-related under Proposition 218

Proposition 218's procedural and substantive protections apply to "lev[ies] ... imposed by an agency upon a parcel or ... person as an incident of property ownership ... including a user fee or charge for a property-related service."²⁷ Fees for trash and recycling pick-up, such as those imposed under exclusive waste hauling franchises, are subject to these protections. Article XIII D explicitly references waste hauling services (i.e., refuse collection) as fees exempt from the voter-approval requirements - implying all other protections apply. Additionally, in Proposition 218's ballot pamphlet, voters were told waste hauling fees "probably meet ... [the] definition of property-related fee."²⁸ Moreover, absent the willingness to tolerate mounds of accumulated waste, most people consider weekly garbage collection as a necessary and unavoidable service. As explained in the "Proposition 218 Implementation Guide" prepared by the League of California Cities (The League), waste hauling services are "indispensable - and sometimes mandatory - for most uses of property."²⁹ This is particularly true where services are compelled for health and environmental reasons and without a meaningful opt-out provision allowing for self-hauling. Due to fiscal impacts, complicated bookkeeping, mandatory recycling requirements under new state law,³⁰ and grave risks associated with improper disposal, workable opt-out provisions are rare and often limited to rural communities.

In Crawley, households in Alameda County were charged an additional hazardous waste fee, authorized by ordinance, which took effect after a Proposition 218 majority protest process was held. A homeowner challenged the fee, contending it was not a property-related fee imposed incident to property ownership, but rather an assessment subject to Proposition 218's more stringent voter approval requirements. The County successfully demurred and the First District Court of Appeal affirmed. The Crawley court held the fee was a property-related fee citing Howard Jarvis Taxpayers Assn. v. Roseville (Roseville), (2002) 97 Cal.App.4th 637, a case where in lieu franchise fees for refuse services were deemed property-related under Proposition 218.³¹ "[B]y the [o]rdinance's own terms, [the fee] [was] imposed on 'each [h]ousehold in Alameda County' ... requir[ing] nothing other than normal ownership and use of property."³² Additionally, the majority protest procedure was sufficient without the additional voter approval because the household hazardous waste was similar to refuse collection service, thereby falling within Article XIII D's voter approval exception.³³ Crawley's Proposition 218 reasoning applies with equal force to residential or commercial waste hauling and recycling under an exclusive franchise because the fees are incident to property ownership.

In Torres v. City of Montebello (Torres), the Los Angeles Superior Court used the same rationale to invalidate an exclusive waste franchise agreement between the City of Montebello and a private hauler Athens Services.³⁴ As is common in exclusive franchise agreements, the City included a direct assessment on the property tax bill of every property owner, collected it from the county, and then remitted it to the private hauler. For the court, it did not matter that fees were not retained by the City because it "use[d] its authority to impose a fee on persons for residential trash collection ... nothing in the [c]ity's handling of residential trash hauling fees...