TO: MAYOR AND CITY COUNCIL
CITIZENS’ FINANCIAL ADVISORY COMMITTEE

FROM: JAMES B. HENDRICKSON, CITY MANAGER

SUBJECT: PROPERTY-RELATED FEES AND CHARGES -- SEWER CAPITAL IMPROVEMENT PROGRAM

DATE: JUNE 28, 2002

The "White Paper" re: Proposition 218 and the Re-Enactment of the Fire Suppression Benefit Assessment District discussed 2 options that are relevant and applicable to the Re-Enactment of the Utility User’s Tax. These are: 1) The adoption of a special tax, or 2) the adoption of a general tax.

Proposition 218 also permits the enactment of property-related fees and charges for specified services. At its meeting on June 25, 2002, the City Council adopted a Sewer Master Plan with a specified funding level of $1.5 million for each of the first 10 years. A property-related fee or charge is a viable mechanism, and an additional alternative beyond the utility user’s tax, to fund the Sewer Capital Improvement Program.

Property-Related Fees and Charges

Proposition 218 creates a special subset of fees and charges. It defines the term fee or charge to mean a, "levy…imposed on a parcel or upon a person as an incident of property ownership…for a property-related service". It means a public service having a direct relationship to property ownership.

In order to be levied, Prop. 218 prescribes exhaustive notice and hearing requirements, and voter-approval provisions. It prohibits local agencies from using fees imposed as in incident of property ownership to fund general governmental services (such as police, fire, ambulance service, library service). Other restrictions are imposed as well. Revenues derived from the fee must not exceed the funds required to provide the property-related service. Revenue must not be used for any purpose other than that for which the fee or charge is imposed.

In utilizing this methodology, we would be required to make parcel-specific determinations in the form of a finding regarding the relationship between the fee imposed on the parcel and the proportional cost of the service provided to that parcel. If we were to establish a sewer capital fee, an engineer’s report would be prepared to determine an equitable spread of the costs to each property owner. Most likely, this would be based on the number of bathrooms in the home, or on the overall water consumption. The larger homes (with either more bathrooms or great water consumption) would pay proportionally more than the smaller homes (with either fewer bathrooms or lesser water consumption).

Process for Enactment

There are 3 procedural requirements for the enactment of fees or charges under Proposition 21...

1. Notice requirements. The City must provide written notice, by mail, of the proposed fee or charge to the record owner of each identified parcel. The notice must contain the following:

• The amount of the fee or charge proposed to be imposed on each parcel
• The basis upon which the fee was calculated
• The reason for the fee or charge
• The date, time and location of a public hearing on the proposed fee or charge.

2. Hearing requirements. The City must conduct a public hearing on the proposed fee or charge at least 45 days after mailing the notice. At the hearing, the City must consider all protests against the fee or charge. If written protests are presented by a majority of owners of the identified parcels, the City may not impose the fee or charge.

3. Voter-Approval Requirements. New or increased fees subject to Prop. 218 must receive a majority vote of property owners, or a two-thirds vote of the general electorate (at the City’s option) at an election held no sooner than 45 days after the protest hearing. Significantly, there is a major caveat to this requirement: sewer, water, and refuse collection fees are exempted. Hence, if a sewer capital fee proposed by the City did not receive a majority protest at the public hearing, the Council could proceed directly to enact the fee. It would not be subjected to the additional voter-approval requirement.

This process is much the same as the one by which the City originally enacted the Fire Suppression Benefit Assessment District. At the Hearing on Protests in May 1991, the City received written protests amounting to only 3.5% of the revenue to be raised. It unanimously adopted the resolution putting the FSBAD in place. Five years later, when the FSBAD was up for renewal, the City received less than ½ of 1% formal protests. Again, the Council proceeded to enact the District.

The written protest process is a much less stringent requirement to meet than the voter-approval requirement. The psychology is much different. Under the voter-approval requirement, it is necessary to motivate voters to go to the polls and vote affirmatively either by a majority (or 2/3) to levy a new fee, tax or charge. The protest process is a passive one; and it would require a concerted effort by a group in opposition to achieve a majority protest.

Issues

There are aspects of the property-related fee or charge to fund the Sewer Capital Improvement Program that are attractive. However, there are some important issues the Committee should carefully consider if it is inclined to pursue this option.

• Tax Deductibility. It should not be construed that though a sewer capital fee would appear on an individual’s property tax bill, that it would be tax deductible. In a separate opinion, the City Attorney addresses this issue. Probably, the main complaint we hear about the utility user’s tax is that it is not tax deductible. We hear this concern expressed more than the size or amount of the tax. Unfortunately, the establishment of a property-related fee or charge will not address this complaint, in that it would not be deductible either.
  
  
• Major Capital Improvement Needs. While a sewer capital fee addresses the issue of funding the improvements laid out in the Sewer Master Plan adopted by the Council, it does not address the other major capital improvement needs identified over the next 10 to 20 years. These include street improvement and storm drain needs (Paseo Lunado Channel, corrugated metal pipe drain replacements and NPDES requirements). If the City were to propose a slimmed-down utility user’s tax for these needs, and a property-related fee for sewer capital, it could be quite confusing to the electorate. We would be utilizing a noticing and public hearing process for the sewer capital fee; and an entirely different process to place a special tax or general tax (utility users tax) on the March 2003 municipal election ballot. It would be difficult to explain the rationale to the voters for pursuing 2 different tracks (especially since the presumed impetus for the sewer capital fee, tax deductibility, does not apply).