Court Decision Reaffirms Rate-Setting Powers of Water Districts

By Arden Wallum and John Pinkney

Mission Springs Water District (“MSWD” or “District”)— encompassing North Palm Springs, Desert Hot Springs and some unincorporated areas of Riverside County — experienced robust growth for a decade until 2007.

During the growth spurt, MSWD significantly expanded its facilities to keep up with the demand created by nearly $1 billion in new development and construction.  In less than five years, MSWD’s assets grew from $90 million to over $150 million as the District built new infrastructure to keep up with increased demand.

But the Great Recession stopped economic momentum in MSWD’s service area almost overnight. MSWD’s revenues declined by millions, but the District still had to maintain its new and expanded infrastructure. On top of that, regulations requiring a new solids removal and treatment process in one of the District’s production wells added nearly $1 million annually to operating costs.

Like other public agencies in California, MSWD quickly found itself facing a challenging position. The District aggressively cut costs — including staff layoffs, a salary freeze and other measures — to reduce operating expenses. But it was not enough and raising water and sewer rates became inevitable.

So MSWD initiated and completed a Prop 218 rate increase process and held eight public meetings to garner extensive community input. Most of the meeting participants supported the proposed rate increase, and less than 0.2% of those receiving rate increase notices objected to the proposed new rates.  Even the local daily newspaper publically endorsed the proposal.

MSWD maintained some of the lowest rates in the region, even after the rate increase went into effect at the start of 2011.

After the new rates were implemented, a small group began circulating petitions to place initiatives on an upcoming ballot that would reduce MSWD’s revenues by as much as 40%. One of the initiatives’ proponents made comments to the local press that the initiatives were intended to force MSWD into insolvency with the intent the District would then be taken over by neighboring agencies.

MSWD’s financial analysis concluded that the District would be rendered insolvent and unable to continue providing water and sewer services if voters approved the initiatives. The MSWD board and its general manager had serious concerns not only about the impact of the initiatives themselves, but also about whether a small group of voters could misuse the initiative process as a means to drive a public agency into insolvency.

Consequently, MSWD evaluated its legal options. One concern was that the initiatives violated the mandates of California Water Code section 31007, which requires that water rates be set at levels that are sufficient to cover the cost of providing services, service debt and set aside reasonable reserves. Amid an election year, the MSWD board made the politically difficult decision to file a lawsuit challenging the legality of the initiatives on several grounds.

The initiatives’ proponents, via representation from the the Howard Jarvis Taxpayers’ Association, responded to MSWD’s lawsuit by filing a demurrer and a SLAPP motion.  Jarvis argued that MSWD had acted without legal authority in failing to place the initiatives on the ballot and argued that the initiatives could not be challenged before the election.  MSWD countered that there is no constitutional right to place an unlawful measure on the ballot and the District further argued that post-election initiative challenges that result in successful measures being overturned by courts have the tendency to erode voter confidence.  Accordingly, MSWD argued that where a ballot initiative contains serious legal flaws, the better approach is to permit pre-election judicial review of the initiatives. The trial court ruled in favor of MSWD on both the demurrer and SLAPP motion, and thus, refused to dismiss MSWD’s lawsuit.

In response, Jarvis filed an appeal with the Fourth District Court of Appeal, which ruled that a measure may be kept off the ballot if it represents an effort to exercise a power which the electorate does not possess. The Court of Appeal agreed with MSWD’s position that the initiative proponents lacked the power to exempt themselves from the requirements of Water Code Section 31007.

Thereafter, Jarvis filed a petition for review with the California Supreme Court, which was denied.  As a result, the Fourth District Court of Appeal’s published opinion remains good law.  (See Mission Springs Water District v. Verjil  (2013) 218 Cal.App.4th 892.)

The case presented some fascinating constitutional issues, primarily whether a group of local voters may rely on the constitutional right of initiative to essentially override a state statute mandating that water rates be set at a minimum level.  The Jarvis organization argued to the Fourth District that initiatives could be used to involuntarily bankrupt a public agency.  Based on the court’s published decision, the answer is clearly that the initiative power has limitations and that when voters step into the shoes of a local agency’s legislative body to pass an initiative, the voters are subject to the same laws and limitations as the legislative body.

While the initiative process remains alive and well after Mission Springs Water District vs. Verjil, the case confirms that a public agency may seek pre-election review of an invalid initiative.  The case also makes clear that where a state statute mandates that an agency set rates at a level sufficient to cover the cost of services, the initiative process cannot be used to set rates below that level.

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