Local Assessments: 1 Survives, Another Fails Legal Challenges
Local government won one round and lost one round in separate, recent decisions over taxes levied without voter approval. The City of La Habra defended its utility users' tax from a lawsuit that claimed the tax violated a Proposition 62 requirement of voter approval. However, the City of Los Angeles lost a case in which an annual assessment on apartment owners was ruled a violation of Proposition 218, which also mandates voter-approval.
Both cases — which appear to set important precedents regarding local government finance mechanisms — could wind up at the California Supreme Court.
In the La Habra case, the Fourth District Court of Appeals, Division Three, ruled that the statute of limitations had elapsed for challenging the utility users' tax. The decision conflicts with a 1997 decision in a utility tax case by a different division of the same appellate district. The court in McBrearty v. City of Brawley, 59 Cal.App.4th 1441, interpreted the statute of limitations differently.
Because of these conflicting opinions, the Howard Jarvis Taxpayers Association (HJTA), which sued La Habra, plans an appeal to the state Supreme Court. Even La Habra's attorney expects the high court will grant a hearing.
In December of 1992, the City of La Habra adopted an ordinance establishing a utility users' tax to raise revenue for the general fund. The measure became operational May 1, 1993, when tax collection commenced. At the time, two appellate decisions held that Proposition 62 was unconstitutional. (See City of Woodland v. Logan (1991) 230 Cal.App.3d 1058, and City of Westminster v. County of Orange (1988) 204 Cal.App.3d 623.) Proposition 62, approved in November 1986, prohibited local governments from imposing a general tax without a majority vote in an election.
Relying on these opinions, the City of La Habra did not submit its utility users' tax to voters. However, in September 1995, the California Supreme Court upheld the constitutionality of Proposition 62 in Santa Clara County Local Transportation Authority v. Guardino, (1995) 11 Cal.4th 220. In that case, the Supreme Court invalidated a tax imposed without voter consent.
In March of 1996, the Jarvis group filed a lawsuit against La Habra and Orange County. The city demurred, in part because of the three-year statute of limitations. Orange County Superior Court Judge Ronald Kline ruled for the city.
On appeal, Jarvis appeared to have McBrearty on its side. The McBrearty court concluded that an exception to the three-year statute of limitations was warranted to prevent an injustice. Application of the three-year statute "would have required [the plaintiff] to bring a lawsuit challenging the validity of the tax at a time when the legal landscape suggested her only chance of success would be upon review of the issue by the California Supreme Court. Short of such a Herculean effort, the City could at no time have been compelled to conduct an election for the tax in question," the McBrearty court wrote. "This would essentially thwart the intent of the electorate in passing Proposition 62, despite the confirmation of the validity of the initiative provisions in Guardino."
But the court in the La Habra case called the McBrearty opinion "flawed, as it gave little recognition to the long-standing Supreme Court authority which we are bound to follow."
The State Supreme Court in Monroe v. Trustees of the California State Colleges (1971) 6 Cal.3d 399, concluded that "the mere existence of a contrary precedent" does not alter the statute of limitations. To rule otherwise would allow litigation every time a precedent changed. Thus, the three-year statute must be upheld.
"It is absurd for HJTA to suggest it was forestalled or intimidated by the prevailing case law from filing its suit at the time the City passed its utility tax ordinance," wrote Orange County Superior Court Judge Tully Seymour, sitting on assignment to the appellate bench. "HJTA was in fact the real party in interest in Guardino, a case it pursued in the face of the contrary appellate court cases for the express purpose of having them overruled."
The court also dismissed Jarvis's claim that the statute of limitations was renewed every time the city collected the tax.
Timothy Bittle, the lawyer for Jarvis, and Richard D. Jones, the city's attorney, agreed the case is significant because so many other cities and counties have imposed similar taxes without voter approval. Bittle said his group has sued Sacramento County over a similar levy.
"There are probably in excess of 50 or 60 cities that would be impacted, and there are six or seven cities and counties involved in active litigation," Jones said.
Bittle vowed to seek a state Supreme Court hearing to resolve the conflicting opinions from the same appellate district. Added Jones, "I would anticipate, given that we have two totally different decisions, that they may accept it."
The Los Angeles apartment fee opinion was more straightforward. The Second District Court of Appeals, Division One, ruled that an annual assessment on residential rental properties with at least two dwelling units was subject to Proposition 218, the 1996 Right to Vote on Taxes Act.
In July of 1998, the City Council approved an apartment inspection program intended to combat slum housing. To fund the program, the council levied a $12 annual fee on each of the city's approximately 750,000 apartments.
Apartment owners sued but lost at the trial court level. Los Angeles County Superior Court Judge Charles McCoy Jr. ruled that although the assessment of a service fee appeared to fall within the parameters of Proposition 218, it was not "imposed by virtue of ownership per se" because it was levied only against owners of rental units.
But a unanimous three-judge appellate court panel overturned McCoy's decision. "There is nothing is Proposition 218 that exempts regulatory fees imposed on residential rental properties," Justice Miriam Vogel wrote.
The city argued that "it's a regulatory fee based on engaging in a business that happens to occur on real property," explained Miguel Dager, deputy city attorney. The tax was not based on property ownership, and, therefore, was exempt from Proposition 218, the city contended.
But Vogel quoted from the City Council's own findings in approving the fee, which stated the inspection program was in the public interest of the people of Los Angeles, not simply owners of rental units.
"Quite plainly, Proposition 218 applies to any ‘fee' or ‘charge,' both of which are defined to mean ‘any levy other than an ad valorem tax, a special tax, or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for property related service,'" Vogel wrote. "However well intentioned the City's program to abolish slum housing may be, we find it impossible to say that a fee imposed upon the owners of rental units so the City can locate and eradicate substandard housing is anything other than a user fee or charge for property related service."
Trevor Grimm, attorney for the apartment owners, said Proposition 218 was designed to get at the items on a property tax bill under the assessed value line. The decision "could effect any other sort of fees charged to property owners by cities," he said. "It opens up a whole raft of challenges."
In this case, the fee was based on property ownership and was not related to the number of inspections a property owner received, he said.
Dager, the city's lawyer, could not think of another fee within Los Angeles that would be affected by the ruling. But, he said, the decision could impact future fee proposals.
The city will seek review at the state Supreme Court, which has not yet decided a Proposition 218 case.
The Cases:
Howard Jarvis Taxpayers Association v. City of La Habra, No. G020573, 99 C.D.O.S. 7133, 1999 Daily Journal D.A.R. 9003, filed August 27, 1999.
Apartment Association of Los Angeles County, Inc., v. City of Los Angeles, No. B130243, 99 C.D.O.S. 7038, Daily Journal D.A.R. 8951, filed August 26, 1999.
The Lawyers:
For Jarvis: Timothy Bittle, (916) 444-9950.
For La Habra: Richard D. Jones, (714) 529-9402.
For Apartment Association of L.A. County: Trevor Grimm, Grimm & Kaplanis, (213) 380-0303.
For City of L.A.: Miguel A. Dager, deputy city attorney, (213) 847-0165.