Recently, the California Supreme Court ruled in favor of the City of Redding in upholding the city’s annual transfer of funds from its electric utility enterprise fund to its general fund to compensate the city for its costs in providing services to the utility.1 This transfer, called a “payment in lieu of taxes” (“PILOT”), was challenged by ratepayers as an improper tax because the ratepayers claimed that embedded within their utility rates were excessive charges designed to compensate the city beyond the cost of providing electricity. The Court held that because the enterprise fund received sufficient revenue from non-rate sources to cover the cost of the PILOT, and because the rates did not exceed the reasonable cost of providing electricity, the PILOT transfer was not an improper tax.
The Redding Electric Utility (“Utility”) operates as a separate department in the City of Redding. The city council sets the rates, which when paid by customers, are placed into a separate enterprise fund along with other sources of revenue to the city. Other city departments provide a variety of services to the Utility, including police, fire, finance and fleet maintenance. To cover these costs, the city council annually transfers funds from the enterprise fund into the general fund, a practice common among municipalities that operate their own utilities.
As a rule, city-imposed “taxes” generally require voter approval, but city-imposed “charges” for a specific government service do not require voter approval so long as the charge only applies to the user and does not exceed the reasonable cost of providing the service. The plaintiff ratepayers in this case argued that because the city annually made the PILOT transfer to cover city costs associated with the utility, their utility rates exceeded the actual cost of providing the service and were therefore a tax requiring voter approval. The trial court ruled in favor of the city, but the court of appeal reversed, finding that the PILOT was not designed to approximate the reasonable cost of providing electrical service but was instead a revenue generating tax.
The California Supreme Court reversed. In ruling for the city, the Court held that the simple act of transferring sums of money from one fund to another does not constitute the imposition of a levy, charge or exaction by local government. Rather, because only utility rates are imposed on customers, the proper analysis is whether these rates exceed the reasonable cost of providing the utility. The Court noted that there was no evidence that utility customers paid the PILOT through rate payments. Rather, the enterprise fund contained significantly more revenue from other sources such that the PILOT could be paid for using those non-rate funds. The Court agreed with the city that the utility rates did not exceed the cost of providing the service because the enterprise fund had sufficient non-rate revenues to pay the PILOT.
This case affirms legality of transferring funds from an enterprise fund without voter approval so long as the rates charged to the public do not exceed the reasonable costs of providing the service.
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1 Citizens for Fair REU Rates v. City of Redding, 6 Cal. 5th 1 (2018).