Key Points

• Before a party may sue to seek a refund of allegedly excessive property-related fees, like municipal water rates, their pre-suit Government Claims Act presentation must “fairly describe” each way in which the fees violated Proposition 218, or risk dismissal.
• Proposition 218 does not apply to penalties that water agencies impose on customers who fail to timely pay water bills.

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Do not overlook the Government Claims Act. On February 2, 2022, the Fourth District Court of Appeal found that a plaintiff cannot pursue a Proposition 218 lawsuit without an adequate claims presentation. If their pre-suit claim fails to “fairly describe” the Proposition 218 violations they later assert in court, then the Government Claims Act requires dismissal.

Proposition 218 added to the California Constitution substantive and procedural restrictions on local governments’ ability to impose assessments and property-related fees and charges, including municipal water rates. In Plata v. City of San Jose, two customers challenged the City of San Jose’s water rates. In their pre-suit claims presentation, they argued that the City used revenues from late penalties for general purposes rather than to cover operational costs associated with water service, which they claimed violated Proposition 218’s requirements that fee revenue be used exclusively for the service for which it is charged. Just before trial, however, the customers added a new challenge to the City’s water rates. They claimed that the City’s tiered water rates violated Proposition 218’s requirement that fees not exceed the proportional costs of service.

The trial court found that the late charges were not governed by Proposition 218, and so the City was free to use the revenue for purposes unrelated to water service. It also allowed the customers to proceed with their new challenge to the City’s tiered rates, despite the City’s objection that the customers’ claims presentation failed to preserve that challenge. The parties cross appealed, and the case was transferred from the Sixth District Court of Appeal to the Fourth, which affirmed in part and reversed in part.

On the customers’ tiered-rate challenge, the court agreed with the City—and with a related amicus curiae brief Hanson Bridgett filed on behalf of the League of California Cities—that the customers’ pre-suit notice failed to “fairly describe” the claims. Before any litigant can sue a public agency for money or damages, the Government Claims Act requires that they first present to the agency a pre-suit notice explaining their claim. The pre-suit notice must give the agency sufficient information to investigate and, if appropriate, settle without litigation. But if the pre-suit notice does not “fairly describe” the threatened claim, then the public agency lacks the information to adequately evaluate the claim. The customers’ pre-suit notice focused only on misuses of late fee revenues, saying nothing about tiered rates or rate amounts. As a result, the City had no notice that the customers were also attacking the tiered rate structure.

“Rates are quite a broad subject,” the court explained. And justifying the amount of a rate “requires wholly different evidence” than justifying transfers of funds into and out of a fund. The pre-suit notice needed to explain both theories of liability under Proposition 218 in order to preserve those claims for trial. “Clarity on such issues is especially critical in Proposition 218 cases because the Constitution places the burden on the government to show compliance with its requirements.” As a result, the customers’ tiered rate claims should have been dismissed.

On the other hand, the court affirmed the trial court’s decision to reject the customers’ preserved claim challenging the City’s use of fee revenues. Proposition 218 applies to fees or charges that are imposed “as an incident of property ownership.” Late penalty charges, however, “are not charges for water delivery, they are charges for money non-delivery, for failure to pay the bill.” Late penalty charges thus are not imposed “as an incident of property ownership,” and resulting revenues are not subject to Proposition 218’s limits as a result.

For more information about Proposition 218, and water and wastewater fee setting, contact Adam W. Hofmann and Sean G. Herman.