Water Right Holders Still Must Pay SWRCB Water Fees Until Trial Court Determines if Fees are Reasonably Apportioned.
On January 31, 2011, the California Supreme Court decided California Farm Bureau Federation v. State Water Resources Control Board, 51 Cal. 4th 421 (2011), (PDF) in which a collective of California water right holders asserted constitutional challenges to a statutory and regulatory scheme that authorized the State Water Resources Control Board (“Water Board” or “Board”) to collect annual fees from water rights holders.
This lawsuit began in 2003, when the Legislature passed Senate Bill No. 1049 (PDF) (2003-2004 Leg., Reg. Sess.), by a simple majority vote, enacting Water Code sections 1525-1560, which provide that the activities of the Board’s Water Rights Division be funded by user fees rather than from its historical source—the state’s general fund. The specific question in this case was whether the new fee program violated Proposition 13, which amended article XIII A, Section 3, of the California Constitution. Proposition 13 prohibits any new “tax” without by a two-thirds supermajority vote of the Legislature. Thus, if the Supreme Court ruled that the water right fee scheme was a “tax,” its passage by a simple majority of the Legislature would violate the constitution—and the water rights holders who paid their fees under protest would be entitled to reimbursement of any such unconstitutional tax.
The Court Concluded the Fee is Not Unconstitutional On Its Face.
The Supreme Court rejected Plaintiffs’ argument that Water Code Section 1525’s annual fee requirement was unconstitutional on its face because it imposes an unlawful tax, not a valid regulatory fee. The Court reiterated that taxes are compulsory and ordinarily imposed to generate revenue and are not tethered to any specific benefit conferred. A valid fee, by definition, cannot generate unrelated revenue but must relate to the reasonable cost of providing services necessary to regulate the activity for which the fee is charged. At the same time, compulsory fees can be legitimate regulatory fees and not taxes, simply because the fee is disproportionate to the benefit received.
The Supreme Court had no difficulty finding that the express terms of Section 1525 do not run afoul of Proposition 13. The annual fees imposed are expressly limited to those that are necessary for the costs of the Water Rights Division’s activities. The Supreme Court noted that nothing in the statute authorizes the Water Board to collect more than is necessary for the Division’s operations. In fact, the statute contains a safeguard that authorizes the Water Board to adjust the annual fees if it collected more or less than was needed the prior year.
The Supreme Court’s Decision seemingly undercuts over 100 years of California Water Rights Law.
Plaintiffs asserted a second facial challenge to Section 1525 and the Court’s decision on this challenge has generated an on-going dialogue about the nature of water rights.
Of particular concern is the Court’s statement that Plaintiffs’ “argument assumes that water rights are real property rights, and that the fee imposed by Section 1525 is based upon the ownership of real property. Because this assumption is faulty, the argument fails.” The Court continued, “[t]he water rights at issue are ‘usufructuary’ only and do not confer a right of private ownership in a watercourse.” These statements call into question the “assumption” that water rights are real property rights, which is not an assumption at all, but in fact well-established California law, thus prompting Plaintiff’s to file a petition for rehearing.
In their petition for rehearing, Plaintiffs describe the potential ramifications of the manner in which the Court described water rights. Those ramifications include calling into question the ownership status of water rights throughout California, which are appurtenant to the land and transfer with property rights absent an express reservation. Plaintiffs also point out that financial transactions related to land are often secured by the water right as collateral, and any change in the law has the very real potential to negatively impact those existing and potential future transactions.
It is more likely the Supreme Court did not intend to wildly alter the legal status of water rights, but that its characterization of water rights was the inadvertent result of its primary focus being on the proportionality assessment of the fee program. If the Court’s grants rehearing and clarifies its holding, however, there should be no impact to the Court’s ultimate conclusion that the fee validity regulates water use.
Still Unknown is Whether 100 Percent of the Water Rights Divisions Costs Are Reasonably Imposed on 40 Percent of the Water Rights Holders.
Although not evident from the terms of the operative statutes or the regulations, the Water Board is authorized to collect 100 percent of the annual revenue from only 40 percent of water rights holders. Plaintiffs argued that the fees are so disproportionate to the benefits derived by the fee payors or the burden the fee payors place on the regulatory system that they constitute a tax. Thus, the Supreme Court was called upon to resolve whether the fee program provided a “fair, reasonable, and substantially proportionate assessment of all costs related to the regulation of affected payors.”
Ultimately, however, the Supreme Court was not able to resolve that issue because the trial court did not make express findings on the amount of time and cost associated with the Water Rights Division’s activities that are necessary to regulate the permit and license system. To the extent the Water Board provided adequate evidence to the trial court on this issue, and the trial court simply failed to make adequate findings, the trial court’s action on remand should be fairly straight-forward. Yet nothing in this case has been straight-forward, and this remand gives many the sense that the Water Board is being provided another opportunity to prove that the costs are reasonably apportioned