Utility transfers to general fund challenged in a California city

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Three Riverside, California, residents have filed a lawsuit seeking to end the city’s longtime practice of transferring up to 11.5% of water utility revenue to its general fund to pay for city services.

The city of 326,000 is among many California municipalities that have faced litigation for the fund transfers, which some cities have defended as in lieu of taxing the utilities if they were private entities. Los Angeles, Glendale and Redding are three others that have faced lawsuits with mixed outcomes.

The class-action lawsuit filed Dec. 19 in Riverside County Superior Court alleges that Riverside is violating the state's Proposition 218 by overcharging ratepayers to generate excess water profits for purposes unrelated to providing water.

Riverside Public Utilities’ payments of electric and water revenues to the general fund are a long-standing practice provided for in the city charter. The charter allows up to 11.5% of water and electric profits to be transferred each year.

California voters approved Proposition 218 in 1996 to prevent cities from levying utility fees and charges to generate revenues that exceed what is needed to provide water or electricity, according to the complaint. The proposition also prohibits imposing a fee or charge on ratepayers to pay for basic city services, including, but not limited to police, fire, ambulance or library services, according to the complaint. It also requires a vote on taxes.

City spokesman Phil Pitchford could not be reached for comment.

Though the lawsuit contends the utility has unlawfully collected more than $100 million since 1997, the litigants are seeking damages of $6 million, the amount transferred to the city in fiscal 2018-19, in keeping with legal time constraints, said Ryan Kroll, a partner with Solomon, Saltsman & Jamieson, a Los Angeles-based law firm.

“We are going back as far as the law will allow though the practice has been going on since 1997,” Kroll said.

Kroll brought the lawsuit on behalf of Scott Simpson, Dvonne Pitruezzello and Kevin Dawson, three longtime critics of the fund transfers. Pitruezzello unsuccessfully ran for mayor in 2012, finishing fifth with less than 3.5% of the vote.

Simpson, Pitruezzello and Joel Udayke filed ethics complaints in 2013 against all seven Riverside City Council members after they approved placing Measure A on the June 4, 2013 ballot asking voters to allow the water fund transfers, according to the Press-Enterprise, a local newspaper.

Simpson, Pitruezzello and Udayke had alleged that the language of Measure A was illegal and that by approving it, the council had chosen to mislead the public.

The ethics panel dismissed the complaint. Voters approved the measure with more than two-thirds of the vote.

The city council introduced Measure A after it settled a lawsuit brought by Vivian and Javier Moreno in 2013 that alleged the water fund transfer violated Proposition 218. As part of the settlement, city leaders agreed to repay $10 million to the water fund over a three-year period.

The passage of Measure A doesn't change the fact that the fund transfers are unconstitutional, Kroll said.

“The California Supreme Court has been clear in similar cases in ruling that the constitution is the supreme law of the land,” Kroll said. “Voters can’t make something unconstitutional, constitutional.”

For instance, he said, the federal constitution grants women the right to vote — and the city of Riverside could not pass a measure that took away that right, he said.

Though the practice continues more than 20 years after 218 was passed, Kroll believes the tide can be turned.

The state constitution requires that the practice end, Kroll said.

“Proposition 218, [which added Article XIII to the California Constitution], was very specific in saying that water fees and charges can’t be used for general fund purposes, and they can’t be used for matters other than paying for water services,” he said. “Cities are continuing the practice despite the restrictions placed in Proposition 218, specifically Riverside, which is what the lawsuit is about.”

In May 2018, a California appellate court dismissed a challenge to Riverside’s transfer of electric utility revenue to its general fund, because the lawsuit was determined to be past a 120-day time limit for filing it.

In Los Angeles, the city-owned Department of Water and Power received a favorable ruling in a lawsuit brought in Los Angeles County Superior Court by Jack Humphreville, a longtime critic of the utility. Humphreville had sued to challenge LADWP’s practice of transferring 8% of the revenue from electricity sales to the city.

An earlier lawsuit over the LADWP transfer, Patrick Eck v. City of Los Angeles was settled in 2018. The city agreed it would no longer transfer 8% of the most recent five-year increase in electricity rates, but the transfer of 8% of the rest of the revenue would continue.

City officials had long argued that the city charter allowed the transfer of surplus revenue from LADWP to the city treasury. Critics argued there is no surplus revenue — and the utility was raising rates and borrowing billions in the bond market to pay for neglected infrastructure including water pipes on a 300-year replacement schedule on the water side and environmental mandates.

Humphreville claimed in the lawsuit that DWP was overcharging customers for electricity and increasing its debt burden in order to create a surplus to transfer to the city’s general fund.

The lawsuit alleged that LAWDP was including within its budget an amount it had agreed upon with the city to transfer at of the year.

Los Angeles Superior Court Judge Mitchell Beckloff issued a ruling in the Humphreville suit similar to the Riverside electric case, deeming the lawsuit as “time barred,” because it challenges the underlying electric rates, and the lawsuit was not filed with 120 days of the rate increase. The rate increase went into effect on April 15, 2016 and the lawsuit wasn’t filed until July 25, 2018.

The judge also ruled that the fund transfer was not a tax subject to Article XIII C based on Citizens for Fair ERU Rates v. City of Redding, a 2018 ruling. In that case, the court found the transfer is not a “tax” that would have to be approved by voters under the California constitution.

In the Riverside case, the goal in filing the lawsuit is to “right all the wrongs, and get the city to stop the fund transfer and stop overcharging citizens for water," Kroll said.

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