Citizens for Fair REU Rates v. City of Redding, 237 Cal. Rptr. 3d 179

Background

City of Redding operates Redding Electric Utility (REU) as a city department and each year makes a budgetary transfer (PILOT) from REU’s enterprise fund to the city general fund to compensate for services other departments provide.
In December 2010 the city increased REU customer rates; plaintiffs challenged the increase under Article XIII C (Proposition 26/218), arguing rates embedded an excessive PILOT that exceeded reasonable costs and thus was a tax requiring voter approval.
The PILOT was calculated as an in-lieu amount approximating property taxes a private utility would pay (method adopted in 1988; last amended 2005).
Trial court ruled for the city: PILOT was not a new tax (retroactivity) and REU’s rates were not taxes because non-rate revenues covered the PILOT.
Court of Appeal (majority) reversed, treating the PILOT as a subject-to-vote tax unless the city proved it equaled reasonable costs and ordering remand for cost justification.
California Supreme Court reversed the Court of Appeal: the budgetary transfer itself is not a tax, and undisputed evidence showed rate revenues were less than concededly reasonable costs (even excluding the PILOT), so rates were not taxes requiring voter approval.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the budgetary PILOT transfer is a "tax" under Art. XIII C	PILOT is effectively a tax because it is embedded in rates and transfers revenue to general fund	PILOT is a budgetary interfund transfer, not an exaction imposed on ratepayers; only rates are the levy	PILOT itself is not a tax; the transfer is a budgetary act, not an Article XIII C levy
Whether REU’s December 2010 rate increase was a tax because it incorporated the PILOT	Rates were inflated to generate PILOT revenue and thus exceed reasonable cost exception	Rates did not exceed reasonable costs; the PILOT was paid from non-rate revenues, so rates were not increased to generate surplus	Rates were not taxes: undisputed evidence showed rate revenues were insufficient to cover even the uncontested reasonable costs (PILOT not needed to be covered by rates)
Whether Proposition 26 applies retroactively to PILOT that predated its adoption	Retroactivity is irrelevant because the challenged action is the post‑2010 rate increase that produced surplus	PILOT was implemented/last changed before Prop 26; if PILOT itself were a tax it would be grandfathered	Court did not decide retroactivity for PILOT because PILOT is not a tax and rate increase occurred after Prop 26; no retroactivity issue remains
Standard/ burden to show a charge is not a tax under Art. XIII C	Plaintiffs argue city must justify PILOT as reflecting actual costs to pass exception	City must prove by preponderance that rates do not exceed reasonable costs and allocation is fair; city met burden on rates because other revenues covered PILOT	City bore burden and courts must focus on whether the charge imposed on payors (rates) exceeds reasonable costs; here city met burden regarding rates

Key Cases Cited

Jacks v. City of Santa Barbara, 3 Cal.5th 248 (discusses the local-tax-limiting initiative framework)
City of San Buenaventura v. United Water Conservation Dist., 3 Cal.5th 1191 (scope and interaction of Propositions 13/218/26)
Hansen v. City of San Buenaventura, 42 Cal.3d 1172 (reasonable-cost concept for municipal utility rates)
Roseville v. Howard Jarvis Taxpayers Assn., 97 Cal.App.4th 637 (interfund transfers treated as property-related fees under Art. XIII D)
Fresno v. Howard Jarvis Taxpayers Assn., 127 Cal.App.4th 914 (in‑lieu fees invalid where city failed to reasonably determine costs)
Northern California Water Assn. v. State Water Resources Control Bd., 20 Cal.App.5th 1204 (existence of other funding can show fee payors are not covering non-payor costs)
Webb v. City of Riverside, 23 Cal.App.5th 244 (focus on whether amount levied on ratepayers increased)
Sinclair Paint Co. v. State Bd. of Equalization, 15 Cal.4th 866 (standard of review on whether governmental acts impose levies/charges)
Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization, 22 Cal.3d 208 (background on Proposition 13 and limits on local taxation)