California Farm Bureau Federation et al. v. California State Water Resources Control Board, (January 17, 2007, C050289) __ Cal.App.4th__ http://www.courtinfo.ca.gov/opinions
The Court of Appeals for the Third Appellate District has declared that regulatory fee schedules adopted by the State Water Rights Control Board (“Board”) in 2003, imposing new annual fees on holders of water rights permits and licenses are unconstitutional and invalid. The decision was based largely on the court’s finding that the Board failed to demonstrate the requisite “proportionality” between the costs of the Board’s regulatory program and the fees imposed on the targeted fee payors, and addressed several important issues frequently raised in the implementation and litigation of regulatory fees.
The California Legislature adopted SB 1049 in 2003, which required the Board to fund its regulatory program by adopting a new schedule of annual fees (sufficient to “recover the costs incurred” by the Board in performing water rights regulatory activities) to be paid by the holders of permits or licenses to appropriate water regulated by the Board. As mandated by the Legislature, the Board adopted “emergency regulations” including fee schedules during 2003 to be paid by holders of water rights and by those contracting for Central Valley Project (“CVP”) water from the US Bureau of Reclamation to cover the cost of the water rights program for the remainder of that fiscal year. Although the budgeted “costs” of its program were $4.4 million, the Board set the fee schedule based on a target revenue of $7 million, in anticipation that 40% of the water rights holders would not pay the new fees. The legislation and the new fee regulations were timely challenged, but the trial court (Sacramento Superior Court) rejected the challenge in April 2005 and held that the legislation and the fees were lawful.
The Court of Appeals Decision
The Third Appellate District issued its decision January 17, 2007,and unanimously held that the new fee schedules and regulations as adopted by the Board were “unconstitutional and invalid.” The court also held, however, that the enabling legislation authorizing and requiring the Board to adopt regulatory fees to cover the costs of the Board’s water rights program was lawful. In addition to summarizing the nuances of California water law, the court’s lengthy opinion addressed several significant “fee” issues.
Burden of Proof
The court held that where, as here, a purported “fee” is challenged on the basis that it is in fact an unlawful “tax,” the burden of proof is on the State to show (1) the estimated costs of the regulatory activity, and (2) “the basis for determining the manner in which the costs are apportioned, so that charges allocated to a payor bear a fair or reasonable relationship to the payor’s burdens on or benefits from the regulatory activity.” The court concluded that the trial court had erroneously shifted the burden of proof to the fee challengers, contrary to the Supreme Court’s 1997 holding in Sinclair Paint v. State Board of Equalization (15 Cal.4th 866).
Failure to Demonstrate “Proportionality” of Fees
The court next held that although the Board had apparently demonstrated the costs of its regulatory program and services, it failed to demonstrate a sufficiently “fair or reasonable” basis for allocating those costs among the parties subjected to the new fees.
The court concluded, to the contrary, that the Board had unreasonably allocated the costs of its water rights regulatory program such that the burdens fell disproportionately on a relatively small class of fee payors. The evidence showed that holders of water rights to 60% of the State’s regulated water were effectively excluded from the burden of the new fee regime. “By quirk of historical development” 38% of the State’s water subject to water rights permits is held by parties over whom the Board has no regulatory authority. Another 22% of water subject to water rights permits is held by the federal Bureau of Reclamation, which can claim immunity from the Board’s fees. Consequently, the costs of the Board’s program fell – disproportionately – on the remaining holders of water rights to just 40% of the State’s regulated water.
The court distinguished this situation from earlier cases affirming regulatory fees, since the Board had failed to provide any evidence demonstrating a reasonable basis for imposing 100% of the costs of the Board’s regulatory program on the holders of permits to just 40% of the water rights. The court also observed that “the proportionality assessment” for the costs of the Board’s programs “is further complicated” by the State’s acknowledgement that roughly 1/3 of the water rights program “is for the benefit of the general public to protect the public trust and the environment” – with the implication that such costs of regulatory activity incurred for “general public benefit” may not be allocated to private fee payors.
Invalid Fees on Federal Contractors
The court also invalidated the Board’s parallel fee regulations imposing charges on parties contracting with the federal Bureau of Reclamation for water. The court held that it was not unlawful for the State enabling legislation to provide for a charge on federal water contractors, but that the Board’s authority to impose such charges was limited to the extent of the federal contractor’s contractual interest in the Bureau’s water rights permits, and the fee schedule used an improper formula to allocate these costs.
Invalidation and Refund Remedies
The court fashioned a remedy for the Board’s collection of unconstitutional fees by ordering the Board to adopt a new, valid, fee schedule within 180 days, and further ordering the Board to use the new fee schedule formula to determine the amount of fees improperly collected and to refund the excess fees unlawfully collected using the new fee schedule formula, with interest, to fee payors who paid unlawful fees and who had filed timely objections to the new fees.
For more information please contact Dave Lanferman and Ella Foley-Gannon. Dave Lanferman is a member of the Real Estate, Land Use, and Environmental Practice Group in the firm’s San Francisco Office. Ella Foley-Gannon is Partner in the Land Use and Natural Resource Practice Group in the firm’s San Francisco Office.