Ben Franklin famously said: “When the well is dry, we know the worth of water.” Today’s Supreme Court decision in Wilde v. Dunsmuir is an important win for public utilities and local governments promising stability in local finance. [Disclosure: I argued the case for five local government associations.]

Specifically, it holds that water rates are not subject to referendum and, on the logic of the case, neither are other utility fees.

The decision is narrow, but significant. It holds that the referendum power created by article II, section 9 of California’s Constitution does not extend to “statutes providing for tax levies,” defining the latter term broadly to include most government revenues and not limiting it to “tax levies … for usual current expenses of the State.” That latter phrase limits “appropriations” but not “taxes.” It does not matter whether a government revenue measure funds a service (like water) that private parties also provide. It matters only that the service is an essential part of government’s operations. Water rates and other utility charges must still comply with the voter- and property-owner-approval processes of Proposition 218, and they remain subject to the initiative power, but not to referendum. This will help stabilize public finance, allow revenue bonds to issue without the risk of referendum repeal and, once bonds have issued, allow the contracts clauses of the State and federal Constitutions to protect rates from initiative repeal to the extent necessary to honor the debt.

This quote is the heart of the case: “Article II, section 9’s exemptions from referendum reflect a recognition that in certain areas, legislators must be permitted to act expediently, without the delays and uncertainty that accompany the referendum process.”

Along the way, Justice Kreuger, writing for a unanimous Court, made a number of other points worth noting:

  • The Howard Jarvis Taxpayers Association, among the proponents of Proposition 218, circulated an annotation of the initiative during the 1996 campaign. Public lawyers and taxpayer advocates have often cited it in arguments as to the meaning of the measure. But Wilde holds (in footnote 3) that this annotation is not authority to construe Proposition 218. It rejected Dunsmuir’s request for notice of the annotation as irrelevant but, significantly, cites with approval (i) a case holding the motive of initiative drafters is irrelevant to construing initiatives — it is the motives of voters that matter and (ii) Mission Springs Water District v. Verjil, which also held the HJTA annotation irrelevant because it was not in the ballot books voters received. The annotation will be a much less useful tool than previously.
  • The definition of “tax” — and by implications, the other definitions of Propositions 218 and 26 — do not apply to other constitutional provisions and specifically do not apply to the referendum provision of article II, section 9.
  • 1978’s Proposition 13 does not revise the entire field of tax law, and by implication, neither do 1996’s Proposition 218 and 2010’s Proposition 26. Therefore, they will be construed to avoid implied repeal of other constitutional provisions and earlier statutes.
  • Rossi v. San Francisco (a 1995 SCOCA decision) had uphold a San Francisco charter provision (that became a rule of Proposition 62 and Proposition 218) requiring voter approval of taxes concluding it did not require prohibited referenda on taxes. It was arguably inconsistent with Geiger v. Board of Supervisors (a 1957 SCOCA case) protecting local government revenues from referenda. The Court read Rossi narrowly, as about the initiative power only. This can be read as part of a larger trend of the current SCOCA resuscitating precedents from the era before the 1986 recall of 3 justices (which swung our courts to the right) and reading narrowly precedents from the intervening, conservative era.
  • The rationale of the exception from the referendum power for taxes is to avoid “interference with the administration of [government’s] fiscal powers and policies” and this explains the conclusion to include all government revenue measures which fund essential services within the “taxes” protected from referendum and not just those within the narrower, modern definition of that term provided by Propositions 218 and 26.
  • The Court noted that the rule protecting revenues that fund essential services from referendum “is related to, but distinct from, the rule we articulated and applied in Simpson v. Hite.” Simpson holds that one cannot use the initiative to challenge government actions which constitute essential government functions (there, siting a courthouse). Simpson has not often been cited in recent years because it reflects less judicial deference to the initiative power than is the current standard. This opinion recasts Simpson as holding that the initiative power cannot affect legislative acts that State legislation delegates to local government officials — not to their voters. This has the effect of conflating Simpson with Committee of Seven Thousand, a 1988 SCOCA case. That can be viewed as pro-direct democracy or as restating Simpson on a stronger, more modern footing. It might also reflect the current Court’s slightly greater willingness to review initiatives and referenda than were earlier courts. On that, time will tell.
  • In what is plainly dicta (i.e., not a precedential holding) the Court comments on how Dunsmuir might have responded to an adverse referendum result: “Perhaps the City could simply default to its prior rates while it restarts the process of ‘study[ing], plan[ning], and implement[ing] a new water rate master plan.” This may be helpful when an agency loses its rates to an initiative repeal or reduction and needs to do something to get money in the door while it makes new rates.
  • Water service is an essential government function, some other things are not, and the Court does not tell us much about how to draw the line. This rejects reasoning of the Court of Appeal’s decision in this case, which held that water service was not “essential.”
  • The Court expressly rejects a 1980 case which rejected an initiative change to Lompoc’s power rates. This is further support for the rule that ratemaking is legislation which exposes it to the initiative, but also provides for protective litigation rules, like the litigation-on-the-record rule of Western States Petroleum Association v. Superior Court.
  • The Court cites the California Municipal Law Handbook as authority. That is written and annually updated by a committee of the City Attorneys Department of the League of California Cities and published by Continuing Education of the Bar. [Disclosure: I edit the public finance chapter of the Handbook].

All in all, a helpful case for local governments, holders of their bonds, and those who depend on their services.