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November 11, 2020  |  Written by Alyson E. Ackerman

Court of Appeal for Second Appellate District Determines Plaintiff Not Required to Exhaust Administrative Remedies in Proposition 218 Challenge to Ratemaking Methodology

The Court of Appeal for the Second Appellate District recently ruled that a plaintiff challenging the method that a special district uses to calculate rates in a judicial action need not first present her evidence at the Proposition 218 public hearing regarding an increase in the rates.

In 1996, California voters approved Proposition 218 creating constitutional limitations on local governments (e.g., special districts) levying and collecting assessments and property-related fees and charges.  California Constitution Article XIII D, section 6 (Section 6) provides the procedures with which local governments must comply before imposing or increasing property-related fees and charges.  In part, Section 6 requires a noticed public hearing on the proposed fee or charge.  Section 6 also requires that the proposed property-related fee or charge shall not exceed the “proportional cost of the service attributable to the parcel.”

Summerland Sanitary District (District) sought to increase its wastewater services fees.  The District complied with Section 6, distributing written notices to property owners affected by the proposed rate increase and holding a public hearing.  Later, the District authorized the proposed rate increase.  Malott, an owner of a 30-unit apartment building within the District, neither attended the public hearing, nor filed a written protest to the proposed rate increase.

After the District authorized the rate increase, Malott challenged the rate increase in court, alleging that the District’s rate schedule, which it used to calculate wastewater service fees, was arbitrary.  Malott claimed the District’s rate schedule failed to account for both the actual quantity of wastewater discharged from a parcel (e.g., a multi-family residence) and the proportional cost of providing wastewater services to that parcel, thus violating Section 6’s proportionality requirement.  She filed a declaration of a utility and wastewater service rate expert to support her claims.  The District sought to exclude the expert’s declaration on the grounds that the information in the declaration was not filed during the District’s public hearing for the rate increase.  The trial court ruled that the testimony was “improper extra-record evidence” and granted the District’s request to exclude the declaration.

The appellate court determined that Malott’s failure to contest the rate schedule at the public hearing (i.e., exhaust her administrative remedies) did not bar her from bringing a court action challenging it.  In its analysis, the appellate court discussed a recent California Supreme Court case – Plantier v. Ramona Municipal Water District (2019) 7 Cal.5th 372 (Plantier) – wherein the court determined that a Proposition 218 public hearing that only addresses a rate increase does not provide an adequate administrative remedy to those challenging the underlying method used to allocate the rate.  Notably, Plaintiffs in Plantier filed a declaratory relief action, whereas Malott filed an administrative mandamus action.

Nevertheless, after analyzing the various legal actions available to challenge local government rates (e.g., traditional mandamus, administrative mandamus, injunctive relief, or declaratory relief) and recognizing that the goal of Proposition 218 was not to restrict challenges, the appellate court determined that Plantier applied to Malott’s case.  Relying on case law stating that the nature and character of a pleading is to be determined from the allegations, regardless of what it may be called, the court determined that Malott’s underlying claim was virtually the same as the Plantier plaintiffs’, despite their different titles.  Thus, the court determined Malott was excused from exhausting the administrative remedy of presenting evidence at the District’s Proposition 218 public hearing.

The appellate court also considered whether the trial court properly excluded the utility and wastewater service rate expert’s declaration.  The appellate court determined the evidence in the declaration, if accepted, could provide the trier of fact “highly relevant evidence” supporting Malott’s challenge to the rate schedule.  Accordingly, the appellate court ruled that the trial court erred in excluding it, and remanded the case to the trial court so Malott may present evidence to support her contentions.

For more information on local government rate setting and Proposition 218, please contact Alyson E. Ackerman at aackerman@somachlaw.com, or Aaron Ferguson at aferguson@somachlaw.com.

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