Water rights fees decision: Pity moment for the SWRCB?

Ronald Reagan State Building in Los Angeles, where the water rights fees case was argued before the California Supreme Court in December 2010. Photo courtesy of Curbed LA.

This week, after hemming and hawing for four years, the California Supreme Court issued its long anticipated, but ultimately rather anticlimactic, decision (PDF) on the water rights fees imposed by the State Water Resources Control Board.  These fees have been contested for the better part of the last decade.  In 2003, the Legislature enacted Senate Bill 1049, which directed the State Board to devise a formula and institute regulatory fees on water right holders.  These fees were then deposited into a Water Rights Fund.  The objective was to fund the State Board’s Division of Water Rights with fees so that General Fund dollars could be directed elsewhere.  But SB 1049 was enacted with only a 53 percent vote in the Legislature.  Under the California Constitution, that’s good enough for a regulatory fee, but not a tax.  So the water rights fees were a sitting duck.  Naturally, water users scattered throughout California challenged the fee as being a tax in disguise.

The Fees

Two broad categories of fees are involved: (1) charges to water users who divert water under a permit or license; and (2) charges to Central Valley Project contractors, who pay the fees for water rights held by the Bureau of Reclamation.

The fee formula raises a number of problems.  There is the overarching issue that riparians and pre-1914 appropriators are not charged any fees and yet still benefit from the orderly administration of water rights.  There is also the issue that the annual fees were designed to subsidize costs for processing one-time permit applications and change petitions, so that one-time fees would not be too high.  How accurately, then, does the fee formula reflect the Division’s regulatory activities?

And then there are the CVP contractors.  Reclamation holds permits and licenses for 116 million acre-feet of water, including rights for hydroelectric power generation, but CVP water supply contracts account for only 6.6 million acre-feet of those rights.  Yet even with a discount for the hydroelectric permits, the contractors paid fees in individual prorated shares that collectively account for 86 million acre-feet — much more than the small proportion of rights corresponding to their contracts.  Should the CVP contractor fees have been limited to the 6.6 million acre-feet?

The Decision

The Supreme Court found that SB 1049 itself was valid.  SB 1049 requires that fees be imposed so as to recover the exact costs of the Division’s regulatory and enforcement activities.  The fees should generate revenue equal to what the state budget allots to the Division, and the legislation allows the State Board to adjust the annual fees as necessary to get these numbers to line up.  The legislation was careful not to authorize new general revenue streams and thus presents no constitutional concern.  It also did not impose a real property tax because the water right is based on use, not ownership.

Although SB 1049 is constitutional, there is still no true resolution here because the Supreme Court decided that there was not enough detailed information available to say conclusively whether the fee formula devised by the State Board was valid.  It’s up to the lower court to learn the details and come to a conclusion.  But the Court was also quick to caution that government agencies need some flexibility when setting fees: A fee does not automatically become a tax just because some individual water users might have paid disproportionately high fees.  That’s one point in favor of the State Board.

As for the CVP contractors: Given that their interest extends past their contracted supply and embraces the entire CVP system that provides them with that water, the Court said it is fair to impose fees that cover more than just the 6.6 million acre-feet.  So how much more?  We don’t know; that was also left unresolved.  But even this unquantified statement is another point in favor of the State Board.

Pity Moment for the State Board?

Whatever the Supreme Court may have written in the decision to justify its conclusion, one cannot help but wonder about another, purely practical consideration that may be the unspoken rationale behind this result: In this post-Proposition 26 era, it’s no longer even possible for the State Board to institute a new charge that’s not a tax.

Proposition 26, approved by California voters in the November 2010 election, is a response to “Sinclair Paint” fees, in which the government would require regulated entities to pay a fee for the purpose of mitigating or “cleaning up” the pollution or other damage caused by those entities.  These regulatory fees needed only a majority vote to pass and were not considered taxes, even though the entity paying the fee did not directly benefit from the fee.  But Prop 26 now classifies these fees as “taxes,” which means that a supermajority vote is required to approve these types of charges as they are imposed for a specific purpose.  Prop 26 also requires agencies to keep close track of how benefits and burdens are distributed when enacting new charges.  If someone is charged for a benefit they did not receive, then the charge is a tax.  But also: Even when the paying entity does benefit, if another entity who isn’t charged incidentally receives a benefit (i.e. is subsidized by the paying entity), then the charge is still a tax.

These draconian requirements of Prop 26 explain what a difficult position the State Board is in.  The State Board has no direct regulatory authority over the significant quantity of water used by riparians and pre-1914 appropriators, and thus it cannot collect fees from these water users.  It can only charge the appropriators that divert water under permits and licenses.  But the regulatory and enforcement activity carried out by the Division of Water Rights administers California’s waterways for all users, whether or not they are paying the water rights fees.  In other words, a Division activity funded by a water rights fee will inevitably benefit both the paying entity and some other non-paying entity — and that means it’s a tax under Prop 26.  The peculiarities of the State Board, taken in combination with Prop 26’s restraints, essentially make it impossible for the State Board to assess a charge that’s anything other than a tax.

But Prop 26 does not extend to the original water rights fee legislation.  SB 1049 was enacted in 2003, well before even Prop 26’s retroactive reach.  Charges that are assessed under SB 1049 will remain regulatory fees, even though the exact same charge would be classified as a tax if similar legislation had been enacted this year.

And that may be the key to the Supreme Court’s decision.  Even if there are problems with the State Board’s fee formula, the underlying legislation authorizing the fees, SB 1049, remains valid: No new legislation is needed.  Had the Supreme Court completely dismantled SB 1049, a new bill would have to be enacted by a two-thirds vote in the Legislature, for the reasons stated above.

But SB 1049 only passed the Legislature with a 53 percent vote in 2003, and it is difficult to imagine the current Legislature assembling a supermajority endorsement, which Prop 26 now requires for any new taxes that smell like the regulatory fees of yesteryear.  Practically, then, invalidating SB 1049 would likely have defunded the Division of Water Rights, forcing the State to either reach back into the General Fund or severely impair an already underfunded division.

Although the State Board’s fee formula was sent back to the lower court for further analysis, the Supreme Court also gave an implicit nod of understanding to the delicate balance of interests the State Board faced as it crafted the formula.  There is room within this guidance for the lower court to approve the fee formula as is, or it could find that the formula is flawed and needs revision.  But either way, regulatory fees can be collected moving forward without resorting to a new tax.  That’s no doubt a relief for the State Board.