(February 24, 2011) The California Supreme Court has decided that more evidence is needed in a long-awaited case dealing with state water “fees.”

In the case of the California Farm Bureau Federation v. California State Water Resources Control Board (CSWRCB), the issues before the State Supreme Court were:

• Whether the charge on water rights permit applicants and license holders is
  indeed a fee;
• If it is a valid fee, can the fee be charged to contractors who receive water deliveries from the federal government; and
• How fees should be calculated in the future if the current system is deemed to be inaccurate.

While the court ruled that the charge was not a tax, the court could not determine, based on the evidence presented, whether the fees were constitutional as applied in the case.

As a result, the Supreme Court sent the case back down to the lower court to determine whether “the fees were reasonably apportioned in terms of the regulatory activity’s cost and the fees assessed.”

Background

In 2003, the Legislature approved changes to the Water Code aimed at making the state’s Water Rights Division entirely supported by fees rather than an allocation from the state General Fund. The legislation making this change passed with just a majority vote, rather than the two-thirds required for increasing taxes.

The CSWRCB imposes fees on water rights permit applicants and license holders; however, the permits and licenses issued by the department account for only a small portion of the water rights protected by the CSWRCB’s regulatory oversight.

A large percent of water rights in California predate requirements for permits and licensure and therefore the holders of those rights don’t pay the fees.

The federal government also accounts for a large percent of the water diversion in the state, with those rights being used for hydroelectric projects and the Central Valley Project. Because the federal government is sovereign, the state cannot force federal agencies to pay any fees.

The fees imposed by the CSWRCB were set up under the assumption that 40 percent of the regulated community would not pay the charge, either from simple refusal or based on sovereign immunity. As a result, the remainder of the fee payers were assessed an amount in excess of their proportionate share of the regulatory burden in order to make up this deficit.

Individuals and agencies that contracted with the federal government for water deliveries were assessed a fee of more than 10 times higher than the fees charged for those engaged in the direct diversion of water. In the first year of collecting fees, the CSWRCB took in nearly twice the actual cost of running the CSWRCB permits and license program.

The 3rd District Court of Appeal ruled that the fees charged under the regulation were not “proportional” and ordered the CSWRCB to come up with a new basis
for calculating the fees.

Current law recognizes that there are limits on regulatory fees and restricts the amount of revenue generated by the fee to the amount “necessary to recover the costs incurred in connection with the issuance, administration, review, monitoring and enforcement of permits.”

There is no simple way for the regulated community to enforce those limits, however.

Supreme Court Ruling

The Supreme Court rejected the argument that the 2003 law authorizing an annual charge on water permit applicants and license holders is unconstitutional because it imposes a tax, rather than a valid regulatory fee.

The court also pointed out, however, that “What a fee cannot do is exceed the reasonable cost of regulation…An excessive fee that is used to generate general revenue becomes a tax.”

In the Farm Bureau case, the Supreme Court said, “The trial court’s order lacks sufficient factual findings for us to determine whether the fees, as imposed, were reasonably proportional to the costs of the regulatory program.”

Instructions for Trial Court

In returning the case to the trial court, the Supreme Court directed the lower court to determine “whether the fees are reasonably related to the total budgeted cost” of the Water Rights Division “keeping in mind that a government agency should be accorded some flexibility in calculating the amount and distribution of a regulatory fee.”

The trial court must determine whether the law and the regulations implementing it “provide a fair, reasonable and substantially proportionate assessment of all costs related to the regulation” of the fee payers, the Supreme Court said.

Refund Remedy

The California Chamber of Commerce, along with five other groups, filed a “friend of the court” brief in support of the California Farm Bureau Federation in its case against the CSWRCB in 2007.

In the brief, the CalChamber urged the court to create and require a refund remedy for individuals and businesses that overpaid.

The CalChamber commented that the case would set a precedent for allocating surplus fees, as the remedy would require an agency that collects too much money to refund the excess to the user, thereby eliminating the fee surplus and the temptation to divert a surplus to other programs in lean budget years.

Such a remedy would afford individual fee payers a forum to challenge the application of the fee without calling into question the funding for an entire statewide program, the CalChamber said.

Read the  full opinion on the Supreme Court website.

Staff Contact: Erika Frank