Under Proposition 26, Cities are Limited When Transferring Utility Receipts Into General Fund
by William R. Galstan on February 4, 2015
Under a court ruling issued in January of this year, cities must be careful when transferring money from utility accounts into the general fund.
The City of Redding owns an electrical utility. Because it is publicly owned, it is exempt from the one percent ad valorem tax imposed on privately-owned California utilities. The City requires the utility department to pay the city’s general fund a one percent “Payment In Lieu Of Taxes,” or “PILOT” fee, for the city’s general use.
In Citizens for Fair REU Rates v. City of Redding, the state Court of Appeal held that the PILOT imposed by Redding was a tax that had never been approved by the voters as required by Proposition 26, partially because the amount of the fee exceeded the cost to the city of providing the service.
Although Proposition 26 states that a city-imposed fee is not a “tax” if it is a charge imposed for a specific government service or product provided directly to the payor, such a charge must not exceed the cost of providing the service or product, Cal. Constitution Art. XIII C Sec. 1, subd. (e). Here, the Court found that the PILOT fee was, in effect, a profit or windfall for the City’s general fund, having no connection to the cost of providing electrical service.
The “take away” lesson from this case may be that cities can perhaps transfer funds from utility accounts to general fund accounts if necessary to cover the cost of providing city services to the utility, such as recouping proportional administrative costs (i.e. city manager, finance, legal, etc.) as long as those transfers do not exceed the cost of providing those services. It does appear that cities may not use utilities as a source of “profit” or additional revenue to the general fund, at least not without voter approval.