A confusing 2017 California Supreme Court ruling about the threshold of approval for local ballot measures that are qualified for the ballot through citizen-led signature-gathering efforts – as opposed to being placed before voters by local officeholders – is causing major uncertainty in the Bay Area.

In the case of California Cannabis Coalition v. the City of Upland, the state high court appeared to suggest that citizen-qualified tax or fee measures needed only a simple majority for approval, while others required two-thirds support. But the court did not offer a definitive statement. Many legal experts questioned how justices came up with a new interpretation of 1978’s Proposition 13 and 1996’s Proposition 218, which generally imposed a two-thirds requirement for voter approval of local taxes.

This has created uncertainty around three measures in San Francisco and one in Oakland that were approved by strong majorities of voters – but not by two-thirds.

One city attorney says majority OK; other says two-thirds needed

Last week, the Harvard Jarvis Taxpayers Association, the California Business Roundtable and the California Business Properties Association launched a legal challenge to San Francisco’s Proposition C. It is a complicated measure that imposes a new tax on businesses with more than $50 million in gross receipts. Some industries are charged 0.175 percent, while others pay 0.69 percent – nearly four times as much. This is on top of San Francisco’s existing gross receipts tax on companies with $1 million or more in gross receipts.

Relying on City Attorney Dennis Herrera’s interpretation of the 2017 California high court ruling, the city has treated the new tax as valid despite its November passage with less than a two-thirds majority. Proposition C is expected to generate at least $300 million a year for homeless programs.

Herrera holds the same position on two measures approved by San Francisco voters last June. One imposed an annual parcel tax of $298 to help increase teacher salaries. The other raised taxes on some commercial rents to fund child care and education programs.

In interviews, Herrera has offered explanations for his position that seem more populist than rooted in any broader legal theory about how California direct democracy should function. He’s said voters should be able to impose tax hikes with simple majorities.

In Oakland, a divided City Council last week decided not to levy an annual $198-per-house, $135-per-apartment annual parcel tax in 2019. The parcel tax was passed by voters as Measure AA in November. It was expected to generate as much as $900 million for education programs over 30 years. While two council members wanted to begin collecting and spending the funds immediately, a council majority ended up heeding City Attorney Barbara Parker, who wrote in the official voters guide that two-thirds support was necessary for passage.

S.F. unruffled by loss of city’s highest-grossing firm

By far the most controversial of the four measures in legal limbo is Proposition C. It was opposed by Mayor London Breed and Twitter co-founder Jack Dorsey not just because it could be seen as creating a hostile business climate but because the measure would fund homeless programs without setting up metrics to determine what worked and what didn’t.

One huge multinational corporation made plain its unhappiness with the new levy. On Nov. 30, 11 days after a CalWatchdog report anticipating the decision, pharmaceutical giant McKesson Corp. announced it was relocating its headquarters from San Francisco to a Dallas suburb. The loss of McKesson – by far the highest-grossing San Francisco company, the second-largest in California after Apple and the sixth-largest in the U.S. – appeared to vindicate Breed’s and Dorsey’s warnings.

But despite McKesson’s exit and huge problems with housing and homelessness, San Francisco officials are much more upbeat than those in elsewhere in Silicon Valley about the sustainability of the tech boom. From 2010 to 2017, while tech job growth began to slow in the region, the number of tech jobs in San Francisco went from about 21,000 to 84,000.

A San Francisco Chronicle analysis noted that no large tech firm had left the city in recent years. Such companies, development analyst Colin Yasukochi told the Chronicle, are “in the innovation business. Being able to attract the best and brightest minds is going to give them a competitive advantage when it comes to innovating new products and services.”

Last week, the court issued its long-awaited decision in a court case involving a Sacramento local firefighters union that alleged a provision of the 2012 pension reform measure approved by the Legislature and signed by then-Gov. Jerry Brown was illegal under the “California Rule.” That’s the legal concept stemming from a 1955 state Supreme Court ruling that holds the terms of a public employee’s pension benefit cannot be reduced for years not yet worked, only kept the same or increased.

Cal Fire Local 2881 said that the pension reform’s ban on “air time” – the purchase of service credits to enhance pensions – violated the California Rule. But a unanimous state Supreme Court said “air time” was not a comprehensively bargained or legislatively approved vested right.

Yet in the lead opinion, Chief Justice Tani Cantil-Sakauye (pictured) explicitly said she was not taking a position on the California Rule question of whether pension terms could be changed going forward for years not worked.

This mixed message produced media confusion. Some news bulletins declared the justices had approved allowing a rollback of local benefits. Others suggested the California Rule had dodged a bullet.

Was ‘California Rule’ weakened or untouched?

Interest groups were similarly split.

Officials with the League of California Cities saw the court’s willingness to change the terms of pensions on a relatively minor issue as a sign it was open to a significant weakening of the California Rule. The league and many like groups hope for a state Supreme Court ruling that echoes a lower court’s ruling that pensions are not “immutable.” They were heartened by Cantil-Sakauye specifically noting the state had raised the retirement age from 67 to 70 for current as well as prospective employees.

But the Californians for Retirement Security, which represents 1.6 million public employees and former public employees, declared victory after noting that Cantil-Sakauye had specifically said “air time” was changeable because it was not a vested right – unlike basic pension formulas basing retirement checks on years worked times a percent of late-career salary.

The group and others also cited a concurring opinion written by Justice Leondra Kruger and joined by Justice Goodwin Liu that held that government employers could not “withdraw” from the pension terms established upon initial employment by “an implied unilateral contract.”

The state Supreme Court is expected to eventually take up at least two more cases involving union objections to the 2012 pension reform, so the sanctity and extent of the California Rule is likely to remain in the news. In his final year in office, Gov. Jerry Brown repeatedly urged the court to give governments the option to change future pension terms as pension costs have crowded out local, county and school programs and services. Brown’s office defended the 2012 reform law before the high court because of concern that state Attorney General Xavier Becerra was not eager to defend it.

Like 2017 case, ruling seen as murky, not clarifying

But in the meantime, last week’s ruling seems as murky as the court’s decision in the 2017 California Cannabis Coalition v. City of Upland case. Previously, Proposition 218, approved by voters in 1996, had been understood to require that any tax whose revenue would go to a special purpose – building a sports arena, adding libraries, etc. – had to be approved by a two-thirds vote.

Upending decades of precedent, the state Supreme Court held in a 5-2 decision that the two-thirds threshold applied only to ballot measures initiated by local governments. Because they were not local government measures, those qualified by citizen initiatives only needed simple majority support to be enacted.

In dissent, Justice Kruger took square aim at the idea that this interpretation was what voters expected in 1996 when they made it harder for local governments to raise taxes.

Kruger wrote, “A tax passed by voter initiative, no less than a tax passed by vote of the city council, is a tax of the local government, to be collected by the local government, to raise revenue for the local government. None of this could have been lost on the electorate that, also by initiative, amended the California Constitution to set ground rules for voter approval of local taxes.”

As CalWatchdog.com reported last month, “the 4^th District Court of Appeal struck down San Juan Capistrano’s tiered water fee plan because it violated Prop. 218’s restriction that any fee must be for the cost of service and no more. The court found that by creating a 4-tier fee plan that charged $2.47 per unit for first tier water usage up to $9.05 a unit for greater usage the plan was not based on the cost of the water service.”

That has Golden State water agencies struggling to figure out their next steps. “The vast majority of urban water agencies in California use some form of tiered rates, which are seen as a key conservation tool as communities work to comply with Gov. Jerry Brown’s order to slash water use by 25 percent over the next year,” the Los Angeles Times observed.

“Long-time rate consultant Sanjay Gaur said aggressively increasing rates — especially those that charge more than $10 per unit — could raise red flags. He estimated that at least a third of the state’s water suppliers would need to ‘do a better job explaining their tiered rates and the rationality behind them.'”

Early this month, regulators had moved to adopt dramatic new tiered rates meant to reflect Gov. Jerry Brown’s order to slash municipal consumption. The State Water Resources Control Board decided to require “up to 36 percent reductions from the biggest water users,” as BuzzFeed reported. “The cities in the highest tier were singled out after failing to make significant cuts over the previous year.”

Uneven impact

Not all water agencies with tiered pricing found themselves in a crisis situation, however. The court’s ruling only applied to punitive tiered pricing. Tiers based around the relative cost and availability of providing water, by contrast, were allowed to continue.

Regional reputations

In a Field Poll conducted this February, the Sacramento Bee noted, “pluralities of voters in every region in California said the state should be allowed to bypass environmental regulations protecting fish in the San Francisco Bay and Sacramento-San Joaquin River Delta — except one. In the San Francisco Bay Area, nearly two-thirds of voters disagreed.”

Visions have persisted in Northern Californians of luxury, vanity and water waste in the Southland. But despite the frequent stories of outsized consumption by celebrities and golf courses, recent data has painted a different picture. “Southern California has made huge strides in conservation,” according to the Bee. “Regional water agencies have invested in storage and water recycling. Total water consumption in the region has remained flat over the past 15 years, despite population growth.”

Celeste Cantú, former director of the State Water Resources Control Board, said that “Southern California really did get the message. We’ve added millions of people, and our potable water is the same.”

The 4^th District Court of Appeal struck down San Juan Capistrano’s tiered water fee plan because it violated Prop. 218’s restriction that any fee must be for the cost of service and no more. The court found that by creating a 4-tier fee plan that charged $2.47 per unit for first tier water usage up to $9.05 a unit for greater usage the plan was not based on the cost of the water service.

Paying for the service provided

The goal of Prop. 218 was explained in a Legislative Analyst’s Office paper written to help clarify the measure after it had become law:

In general, the intent of Proposition 218 is to ensure that all taxes and most charges on property owners are subject to voter approval. In addition, Proposition 218 seeks to curb some perceived abuses in the use of assessments and property-related fees, specifically the use of these revenue-raising tools to pay for general governmental services rather than property-related services.

The Analyst’s paper also noted under Prop. 218, “The amount of the fee may not exceed the cost of government to provide the service.”

In other words, some governments went beyond paying for the service provided. The local governments or agencies tacked on increased amounts beyond what was necessary to provide some services such as water and sewer charges. If the local governments wanted additional revenue they should have presented a tax measure to voters for approval. To avoid tax votes, many governments turned to revenue raising devices such as assessments and fees.

The unusual, extensive and improper use of assessment districts and fees employed by local governments prior Prop. 218 passing in November 1996 explains the measure’s solid support from voters on Election Day, 56.5 percent Yes to 43.5 percent No.

Examples of misuse

To get a sense of how the assessments were abused, some well-reported examples of misused assessments were included in the pro-218 argument in the official state ballot booklet:

(O)ne lawyer working with politicians wrote, assessments ”are now limited only by the limits of human imagination.”

How imaginative can the politicians be with assessments? Here are a few examples among thousands:

• A view tax in Southern California – the better the view of the ocean you have the more you pay.
• In Los Angeles, a proposal for assessments for a $2 million scoreboard and a $6 million equestrian center to be paid for by property owners.
• In Northern California, taxpayers 27 miles away from a park are assessed because their property supposedly benefits from that park.
• In the Central Valley, homeowners are assessed to refurbish a college football field.

It was the misuse exemplified in these property assessment examples that prompted the ballot measure passed by the voters. Prop. 218 did not make provisions for penalties, which in essence, the tiered tax water rates are.

The court, in its ruling, did not reject the use of tiered water rates and this case will not prevent conservation if the rate system is rewritten to satisfy the law. As Jon Coupal of the Howard Jarvis Taxpayers Association, the group that sponsored Prop. 218, wrote, “Water districts can restrict use through fines and penalties which they already do. Moreover, virtually all water – particularly in Southern California – is metered. Allotments can be fixed with hard caps on use with stiff penalties for use above allotments. A water district even has the power to terminate service. … The reality is that water districts have many tools in their arsenal of legal options to enforce conservation.”

By not adhering to the principle of fees-for-service the court said the water tiered plan violated Proposition 218.

Follow Joel Fox on Twitter @1JoelFox1