1

Filed 8/27/18

IN THE SUPREME COURT OF CALIFORNIA

CITIZENS FOR FAIR REU RATES et al., )

)

Plaintiffs and Appellants, )

) S224779

v. )

) Ct.App. 3 C071906

CITY OF REDDING et al., )

) Shasta County

Defendants and Respondents. ) Super. Ct. Nos. 171377, 172960

____________________________________)

Article XIII C of the California Constitution1 prohibits local governments

from imposing, increasing, or extending any tax without voter approval. Excepted 

from the definition of tax is any charge imposed for a service or product that does 

not exceed the reasonable costs of providing it. 

The City of Redding operates an electric utility as a department of its city 

government. Each year, the city’s budget includes a transfer from the utility’s 

enterprise fund to the city’s general fund. The transfer is designed to compensate 

the general fund for the costs of services that other city departments provide to the 

utility. The question here is whether article XIII C applies to this interfund 

transfer and, if so, how. We conclude that the budgetary transfer itself is not a tax. 

That is, it is not the type of exaction that is subject to article XIII C. The rate the 

city charges its utility customers is not a tax because it falls under the exception 

 

1 Unspecified references to “article” are to the California Constitution. 
2

mentioned above. The undisputed evidence here shows that the challenged rates

did not exceed the reasonable costs of providing electric service. Because the 

challenged rates were not taxes, voter approval was not required. 

I. BACKGROUND

A. The Rate Increase

Operating as a city department, Redding Electric Utility (REU) provides 

electricity to local residents and charges rates established by the city council. In 

December 2010, the council increased REU’s rates. Plaintiffs2 filed a writ petition 

and complaint alleging the city’s action violated article XIII C because it imposed 

or increased a tax without voter approval. 

Subject to certain exceptions, the term “ ‘tax’ ” is now defined as “any levy, 

charge, or exaction of any kind imposed by a local government.” (Art. XIII C, 

§ 1, subd. (e).) The definition excludes a charge imposed for a specific 

government service or product if: (1) the service or product is provided directly 

and exclusively to those who pay the charge; and (2) the charge does not exceed 

the reasonable costs to the local government of providing the service or product. 

(Art. XIII C, § 1, subd. (e)(2).) As discussed below, this definition was added to 

the constitutional scheme in November 2010. 

The gravamen of plaintiffs’ claim was that the city had embedded in REU’s 

rates an excessive charge designed to compensate the city for services its other 

departments provided to REU. As a result, REU’s rates exceeded the reasonable 

 

2 Plaintiffs are Citizens for Fair REU Rates, Michael Schmitz, Shirlyn 

Pappas, and Fee Fighter LLC. 
3

costs of providing electricity and could not be increased without voter approval.

3 

Some background is needed to understand this claim. 

B. The PILOT

Other city departments provide a variety of services to REU. These include 

general services, like police and fire protection, along with services provided to 

REU as a city department, including billing, finance, and fleet maintenance. To 

cover the costs, the city council adopted a practice common among municipalities

that operate utilities: an annual budgetary transfer from the utility’s enterprise 

fund to the city’s general fund. An enterprise fund is a budgetary device “used to 

track monies received and expended for municipal services where fees or charges 

to the users of those services pay wholly or in part for such services.” (Multari et 

al., Guide to Local Government Finance in California (2d ed. 2017) p. 27.) All 

customer rate payments are deposited in the enterprise fund. REU also realizes 

substantial revenue by selling excess electricity to other utilities, and from other 

sources as well. That revenue is also placed in the enterprise fund.4 

From 1971 to 1988, the budgetary transfer amount was $330,000. A 1987

study concluded the city was underpaying its general fund for the services 

provided to its departments, including REU. The city manager informed the 

council that the costs of any service “not met through [a] service charge

[transfer] . . . must necessarily be subsidized by the general taxpayer.” 

 

3 Plaintiffs also claimed the city council’s action violated Government Code 

sections requiring electoral approval of tax impositions or increases. (Gov. Code, 

§§ 53722, 53723.) These statutory claims are not before us. 

4 REU’s enterprise fund is called the “electric utility fund.” The city also 

operates waste collection, water, and wastewater utilities. Each has its own 

“utility fund.” The term “enterprise fund” is a generic one. 
4

In 1988, the city council adopted a new method for calculating the 

compensatory transfer, called the “payment in lieu of taxes” (PILOT). The PILOT

is based on the amount REU would pay in property taxes under Proposition 13 if it 

were a private enterprise, rather than a city department. (See post, p. 9 [discussing 

Proposition 13].) While REU’s property is not subject to taxation (art. XIII, § 3, 

subd. (b)), the city is entitled to recover the value of its provided services. Rather 

than calculate the actual cost of those services, the city used the amount a private 

utility would pay in property taxes as a proxy for the actual cost. The calculation 

was last amended in 2005, five years before the definition of “tax” was added to 

article XIII C. 

Throughout this discussion, it will be important to distinguish between the 

PILOT transfer in the city’s budget and the rates charged to REU’s customers. 

When the city council increased customer rates in December 2010, it recognized 

the PILOT as a cost of operation. The city council resolution explained the rate 

increase was necessary: “(1) to meet operating expenses and to fund statemandated programs; (2) to meet financial reserve needs and requirements; (3) to 

obtain funds for capital projects necessary to maintain service reliability; (4) to 

meet the costs of purchased power; (5) to meet required state and federal 

mandates; and (6) to obtain funds necessary to maintain such intra-City transfers 

as authorized by law.” REU’s financial plan for fiscal years 2009 to 2010 through 

2013 to 2014 also characterized the PILOT as an operational expense of the 

utility.

5 

 

5 A table summarizing REU’s five-year financial plan, which was included in 

the city’s budget for fiscal years 2009 to 2010 and 2010 to 2011, is attached at 

Appendix A. 
5

C. Plaintiffs’ Claims

In challenging the rate increase, plaintiffs alleged that the PILOT: (1) was 

“embedded” in REU’s increased rates; (2) did not reflect the city’s actual costs to 

provide services, but was impermissibly based, like a property tax, on a percentage 

of the value of REU’s assets; and (3) was simply a device to collect extra money 

from REU’s customers for transfer to the city’s general fund. If the PILOT did not 

reflect any actual cost of providing electric service and was not approved by the 

electorate, it was a tax under article XIII C. Plaintiffs asked the court to invalidate 

the rate-increase resolution to the extent it incorporated the PILOT and to enjoin 

enforcement of the rate increase to that same extent. 

The city demurred, arguing that, if plaintiffs were alleging the PILOT itself 

was a tax, their claim must fail because article XIII C’s operative provisions were 

not in effect when the PILOT was first implemented or last increased.6 Plaintiffs 

then made a slight but significant adjustment to their argument. They claimed that 

when the PILOT was implemented or increased was irrelevant because they were 

challenging the city’s enactment of “inflated electric rates . . . in excess of the 

reasonable cost of electric service to REU customers.” The challenged tax, 

therefore, was the “ ‘rate which produces the surplus revenues’ ” that are then 

transferred to the general fund to pay the PILOT. Consequently, retroactivity was 

not an issue presented because the “offending action . . . [was] the creation . . . of 

inflated electric utility rates,” which occurred after the effective date of 

Proposition 26. 

 

6 Plaintiffs conceded their claims were based on amendments to article XIII 

C that became effective after the November 2010 adoption of Proposition 26. 

Because the PILOT was not implemented or increased after the adoption of 

Proposition 26, the city argued those amendments would not apply to the PILOT. 
6

The city responded that its increased rate, including the PILOT, reflected 

the reasonable cost of providing service. Under this theory, REU is treated like a 

private utility, which would pay property taxes and pass the cost to its customers

through its rates. Because city-operated REU does not pay property taxes, the city 

loses revenue. The PILOT takes into account this “cost” of providing utility 

services through its own operation rather than having them provided by a 

taxpaying private business. The city also advanced an alternative argument. Even 

if the PILOT was not a reasonable cost of providing service, the rate increase did 

not violate article XIII C because REU’s rate revenues did not exceed its other 

costs and its enterprise fund had sufficient non-rate revenues to pay the PILOT. 

The city’s alternative argument resolves the case. Consequently, we need 

not discuss the method used to calculate the PILOT. 

D. The Budget Action

In June 2011, the city council approved the city’s budget for fiscal years 

2011 to 2012 and 2012 to 2013. Plaintiffs sued again, challenging the budget 

resolution. They urged that the new budget suffered from the same defect as the 

previous rate increase because it incorporated the PILOT, a tax unapproved by the 

electorate. Plaintiffs asked the court to permanently enjoin the city from enforcing 

the budget resolution insofar as it affirmed or validated “the PILOT charges.” 

E. The Trial Court’s Rulings

The trial court consolidated the actions and entered judgment for the city. 

It held that, to the extent plaintiffs were alleging the PILOT itself was an invalid 

tax, the claim failed on retroactivity grounds. Plaintiffs’ claims were based on 

Proposition 26’s amendments to article XIII C, which became effective on 

November 3, 2010. The PILOT was an “already existing component of the REU’s 

budget that had been in place for over 20 years,” and the way it was calculated had 

not changed since 2005. Because the PILOT was not imposed, increased, or 
7

extended on or after November 3, 2010, it “was not a new or increased tax.” Nor 

was REU’s rate an invalid tax, because: (1) REU had sufficient non-rate revenues 

in the enterprise fund to pay the PILOT, so “there [was] no evidence that the 

PILOT is paid out of customer’s [sic] rates”; and (2) even if “the PILOT were part 

of the utility rates . . . , it could reasonably be argued that the PILOT is part of the 

cost of providing the service.” 

F. The Court of Appeal’s Decision

The Court of Appeal reversed in a split decision. The majority began by 

rejecting the trial court’s retroactivity analysis. It reasoned that the PILOT was a 

line item in REU’s budget “subject to annual discretionary reauthorization by [the] 

city council.” Thus, as the majority put it, the PILOT could not be considered as 

“grandfathered in” simply because its calculation was last amended before 

Proposition 26’s adoption. Instead, the PILOT was imposed each time a new

budget was adopted.

7 

The majority then considered whether the PILOT was an invalid tax. The 

answer, it reasoned, “turn[ed] on whether the exception in article XIII C, section 1, 

subdivision (e)(2), applies.” That exception excludes from the definition of “tax” 

any service charge that is (1) paid only by those directly served and (2) does not 

exceed the reasonable costs of providing the service. The majority found the 

PILOT did not satisfy the exception because it was not “designed to approximate 

the reasonable costs of providing electric service in Redding.” Instead, it was a 

proxy amount, calculated like a property tax would be. The fact that the PILOT 

was paid to the general fund also supported “the conclusion that the payment 

 

7 The majority also found that the PILOT was increased on December 7, 

2010, and concluded that the city must “cost justify” that increase. The majority is 

incorrect. REU’s rate was increased on December 7, 2010. The PILOT was not. 
8

constitutes a revenue-generating tax.” (See Weisblat v. City of San Diego (2009) 

176 Cal.App.4th 1022, 1043.) 

The majority downplayed the trial court’s finding that the PILOT was not 

paid out of rate revenues. It reasoned that, “regardless of what else [the city] 

might collect from [other sources], it has imposed a PILOT — which it may do 

only with voter approval or if able to show it reflects [the city’s] reasonable costs 

of providing electric service.” Though it recognized the city incurred “costs to 

provide infrastructure and support to [REU],” the majority found the city had 

failed to adequately substantiate those costs by proving “the dollar amounts 

expended to provide electricity generation or distribution.” It remanded the matter 

for the trial court to determine “whether the PILOT reflects the reasonable costs 

borne by [the city] to provide electric service.” 

The dissent noted that, technically, the PILOT was not “imposed on 

ratepayers.” The dissent also concluded the PILOT was not a tax because it 

satisfied the reasonable cost exception. The dissent acknowledged that there was 

no “evidence of the exact benefits conferred by [the city] to [REU].” But if the 

PILOT conformed to the tax computation for private utilities permitted under 

Proposition 13, then the PILOT was a reasonable cost of providing electric 

service. The critical question for the dissent was whether the PILOT could 

properly be based on the amount a private utility would pay in property taxes. The 

dissent concluded it could because the Public Utilities Commission considers a 

private utility’s tax liabilities when assessing the fairness of the utility’s rates. 

We take a different analytical approach. While the parties assert various 

complex arguments, resolution here is more straightforward. 

II. DISCUSSION

We granted review to resolve three questions: (1) Would the PILOT 

generally qualify as a tax under article XIII C, section 1, subdivision (e)?; (2) If so, 
9

does the exception, for a charge to cover the reasonable costs of providing a 

service or product, apply?; and (3) If not, is the PILOT nonetheless exempt from 

Proposition 26 because it was in place when the ballot initiative was adopted? 

A. Article XIII C

The scope and application of article XIII C were recently addressed in 

Jacks v. City of Santa Barbara (2017) 3 Cal.5th 248 (Jacks) and City of San 

Buenaventura v. United Water Conservation Dist. (2017) 3 Cal.5th 1191 (San 

Buenaventura). California voters have, over the past four decades, adopted a 

series of initiatives designed to limit the authority of state and local governments 

to impose taxes without voter approval. (Jacks, at p. 257.) 

The first of these initiatives was Proposition 13, adopted in 1978. It added 

article XIII A to the state Constitution “to assure effective real property tax relief 

by means of an ‘interlocking “package” ’ ” of four provisions. (Sinclair Paint Co. 

v. State Bd. of Equalization (1997) 15 Cal.4th 866, 872 (Sinclair Paint).) The first 

provision capped the ad valorem8 real property tax rate at one percent (art. XIII A, 

§ 1); the second limited annual increases in real property assessments to two 

percent (art. XIII A, § 2); the third required that any increase in statewide taxes be 

approved by two-thirds of both houses of the Legislature (art. XIII A, § 3); and the 

fourth required that any special tax imposed by a local government entity be 

approved by two-thirds of the qualified electors (art. XIII A, § 4). Thus, with its 

first two provisions, Proposition 13 limited local government authority to increase 

property taxes. Further, “since any tax savings resulting from the operation of [the 

first two provisions] could be withdrawn or depleted by additional or increased 

 

8 An “ad valorem tax” is a “tax imposed proportionally on the value of 

something (esp. real property), rather than on its quantity or some other measure.” 

(Black’s Law Dict. (10th ed. 2014) p. 1685, col. 1.) 
10

state or local levies of other than property taxes, sections 3 and 4 combine to place 

restrictions upon the imposition of such taxes.” (Amador Valley Joint Union High 

Sch. Dist. v. State Bd. of Equalization (1978) 22 Cal.3d 208, 231.) 

In 1996, the voters adopted Proposition 218, known as the “ ‘Right to Vote 

on Taxes Act.’ ” (Jacks, supra, 3 Cal.5th at p. 259.) It added articles XIII C and 

XIII D to the state Constitution. Article XIII D, like the first two provisions of 

article XIII A, limits the authority of local governments to assess taxes and other 

charges on real property. (See San Buenaventura, supra, 3 Cal.5th at pp. 1203-

1204.) Article XIII C buttresses article XIII D by limiting the other methods by 

which local governments can exact revenue using fees and taxes not based on real 

property value or ownership. As enacted, article XIII C provided that “[a]ll taxes 

imposed by any local government shall be deemed to be either general taxes or 

special taxes.” (Art. XIII C, § 2, subd. (a).) Local governments may not impose, 

increase, or extend: (1) any general tax, unless approved by a majority vote at a 

general election; or (2) any special tax, unless approved by a two-thirds vote. 

(Art. XIII C, § 2, subds. (b), (d).) 

Significantly, Proposition 218 did not define the term “tax.” That 

definition was provided 14 years later, with the passage of Proposition 26 in 

November 2010. Proposition 26’s findings stated that, despite the adoption of 

Propositions 13 and 218, “California taxes have continued to escalate.” (Voter 

Information Guide, Gen. Elec. (Nov. 2, 2010) text of Proposition 26, § 1, subd. 

(c), p. 114.) The findings also took note of a “recent phenomenon whereby the 

Legislature and local governments have disguised new taxes as ‘fees’ in order to 

extract even more revenue from California taxpayers without having to abide by 

[the] constitutional voting requirements.” (Id., subd. (e) unenumerated par.) 

To ensure the effectiveness of Propositions 13 and 218, Proposition 26 

made two changes to article XIII C. First, it specifically defined “ ‘tax,’ ” and did 
11

so broadly, to include “any levy, charge, or exaction of any kind imposed by a 

local government.” (Art. XIII C, § 1, subd. (e).) However, the new definition has 

seven exceptions. A charge that satisfies an exception is, by definition, not a tax. 

The relevant exception here involves charges “imposed for a specific government 

service or product provided directly to the payor that is not provided to those not 

charged, and which does not exceed the reasonable costs to the local government 

of providing the service or product.” (Art. XIII C, § 1, subd. (e)(2).)9 

Second, Proposition 26 requires the local government to prove “by a 

preponderance of the evidence that . . . [an] exaction is not a tax, that the amount 

is no more than necessary to cover the reasonable costs of the governmental 

activity, and that the manner in which those costs are allocated to a payor bear a 

fair or reasonable relationship to the payor’s burdens on, or benefits received from, 

the governmental activity.” (Art. XIII C, § 1, subd. (e).)

B. Is Either the PILOT, or REU’s Rate, a Tax Under Article XIII C?

Based on article XIII C’s structure, it is apparent that a challenge to an 

alleged tax involves three questions: (1) Is the alleged tax a levy, charge, or 

 

9 The other six exceptions are for (1) charges “imposed for a specific benefit 

conferred or privilege granted directly to the payor that is not provided to those not 

charged, and which does not exceed the reasonable costs to the local government 

of conferring the benefit or granting the privilege” (art. XIII C, § 1, subd. (e)(1)); 

(2) charges “imposed for the reasonable regulatory costs to a local government for 

issuing licenses and permits, performing investigations, inspections, and audits, 

enforcing agricultural marketing orders, and the administrative enforcement and 

adjudication thereof” (art. XIII C, § 1, subd. (e)(3)); (3) charges “imposed for 

entrance to or use of local government property, or the purchase, rental, or lease of 

local government property” (art. XIII C, § 1, subd. (e)(4)); (4) fines, penalties, or 

other monetary charges “imposed by the judicial branch of government or a local 

government, as a result of a violation of law” (art. XIII C, § 1, subd. (e)(5)); (5) 

charges “imposed as a condition of property development” (art. XIII C, § 1, subd. 

(e)(6)); and (6) “[a]ssessments and property-related fees imposed in accordance 

with the provisions of Article XIII D” (art. XIII C, § 1, subd. (e)(7)). 
12

exaction imposed by a local government?; (2) Does it satisfy an exception to the 

definition of tax?; and (3) If it does not, was it properly approved by the voters? If 

a levy, charge, or exaction is imposed by a local government and does not fit 

within an exception, it is a tax which must be approved by the voters in order to be 

valid. 

1. The PILOT Is Not a Tax 

Whether the PILOT is a levy, charge, or exaction subject to article XIII C is 

a question of law to be decided by independent review. (Sinclair Paint, supra, 15 

Cal.4th at pp. 873-874.) The majority below did not explicitly address this 

question. But its reasoning shows that it considered the PILOT a potential tax 

under article XIII C. It explained that the city had “imposed [the] PILOT —

which it may do only with voter approval or if able to show it reflects [the city’s] 

reasonable costs of providing electric service.” Thus, in the majority’s view, the 

PILOT was a tax, requiring voter approval, unless it satisfied an exception. 

The city and various amici curiae argue the majority was wrong. As one 

amicus puts it, “[t]he budgetary act of transferring sums from one fund to the 

other does not constitute” the imposition of a levy, charge, or exaction by a local 

government on those who pay the charge. Accordingly, the PILOT per se cannot 

be a tax. It is only the rate, not the PILOT, that is imposed on customers for 

electric service. The critical question is whether REU’s rates themselves exceeded

its reasonable costs of providing electricity. 

Plaintiffs do not directly contest this premise. Consistent with their 

response to the city’s demurrer (see ante, p. 5), they acknowledge that the PILOT 

itself is not a tax. They admit the “only fees, charges or exactions . . . that would 

come within the purview of [article XIII C] would be [REU’s] electric rate.” 

Plaintiffs recognize that the PILOT is better characterized “as a ‘cost’ item [that] 

the electric utility . . . may recover through the rates as with all other costs of the 
13

enterprise.” Nevertheless, plaintiffs creatively argue we should affirm the Court 

of Appeal’s judgment because the PILOT transfer is “in the nature” of an unlawful 

tax. Plaintiffs argue, by reverse reasoning, that, “[i]f the imposition of the inflated 

rates has been found to be a ‘tax’ then the funds collected and transmitted for the 

PILOT naturally would also be ‘taxes.’ ” Reaching into the unrelated realm of 

search and seizure jurisprudence, they characterize the PILOT as the “ ‘fruit of the 

poisonous tree’ — with the ‘poisonous tree’ being the collection of electric rates in 

excess of the ‘reasonable costs to the local government of providing the service or 

product[,]’ . . . and the PILOT the ‘poisonous fruit.’ ” 

As we shall see, the argument fails because its presupposed premise, that 

rate revenues exceed reasonable costs, is not borne out by the record. Before 

turning to those facts, however, we address two cases relied on by both plaintiffs 

and the majority below: Howard Jarvis Taxpayers Assn. v. City of Roseville

(2002) 97 Cal.App.4th 637 (Roseville); and Howard Jarvis Taxpayers Assn. v. 

City of Fresno (2005) 127 Cal.App.4th 914 (Fresno). Neither case provides the 

support suggested because of factual distinctions. 

In Roseville and Fresno, the Courts of Appeal held that transfers like the 

PILOT were invalid property-related fees under article XIII D.10 In Roseville, the 

city operated municipal water, sewer, and refuse collection utilities. (Roseville, 

 

10 Under article XIII D, section 6, an agency may not extend, impose, or 

increase a property-related fee unless it meets all of the following requirements: 

(1) the revenues derived from the fee may not exceed the amount required to 

provide the property-related service; (2) the revenues derived from the fee may not 

be used for any purpose other than that for which the fee was charged; (3) the 

amount imposed on any parcel or person may not exceed the proportional costs of 

the service attributable to the parcel; (4) the service must be immediately available 

to the owner of the property upon which the fee is imposed; and (5) the fee may 

not be imposed for general governmental services. (Art. XIII D, § 6, subd. (b).) 
14

supra, 97 Cal.App.4th at p. 638.) Each year, the city transferred to its general 

fund from each utility’s enterprise fund four percent of the utility’s total budgeted 

costs. (Id. at pp. 639, 648.) The purpose was to replace the revenue the city 

would have received as franchise fees from private utilities. (Id. at p. 639.) The 

full transfer amount was recovered from customers through rate payments. (Id. at 

p. 638.) The Court of Appeal held that the charge to recover the transfer amount 

was an invalid property-related fee because it exceeded the amounts required to 

provide the utility services, and because revenues derived from the charge were 

used for unrelated purposes. (Id. at pp. 647-650.) 

In Fresno, the city operated several utilities. (Fresno, supra, 127 

Cal.App.4th at p. 918.) The city charter required all utility profits to be applied to 

rate reductions, but permitted each utility to pay to the city’s general fund an 

amount “ ‘in lieu of property and other taxes normally placed upon private 

business enterprises.’ ” (Id. at p. 917.) Under that authority, the city collected an 

in-lieu fee equal to one percent of the assessed value of each utility’s fixed assets. 

(Ibid.) These fees were blended into each utility’s service charges. (Id. at p. 918.) 

The Fresno court held the in-lieu fee invalid under article XIII D. The court 

acknowledged that the city “undoubtedly has . . . costs generated by the utility 

departments” (id. at p. 922), but it held the in-lieu fee invalid as calculated because 

the city had failed to “reasonably determine” those costs (id. at p. 923). 

Although Roseville and Fresno involved several of the concepts at issue 

here, those cases are distinguishable in two key respects. First, Roseville and 

Fresno were decided under article XIII D, which restricts both (1) the amount of a 

property-related fee and (2) the manner in which fee proceeds are spent. Like an 

exaction subject to article XIII C, a property-related fee violates article XIII D if 

the revenues derived from the fee exceed the amount required to provide the 

property-related service. (See art. XIII D, § 6, subd. (b)(1).) But a property-
15

related fee can also violate article XIII D if revenues derived from the fee are used 

for any purpose other than that for which it was imposed (see art. XIII D, § 6, 

subd. (b)(2)) or if the fee is imposed for general government services (see art. XIII 

D, § 6, subd. (b)(5)). Thus, in Roseville and Fresno, the fact that the utilities were 

transferring rate proceeds to the cities’ general funds, where those proceeds could 

be used for general government services, created an independent violation of 

article XIII D. (See Roseville, supra, 97 Cal.App.4th at p. 650.) Article XIII C 

contains no such restriction. So long as the amount charged by a local government 

for a service does not exceed the reasonable costs of providing it, the charge is not 

a tax. (See art. XIII C, § 1, subd. (e)(2).)11 

Webb v. City of Riverside (2018) 23 Cal.App.5th 244 supports the 

conclusion that an interfund transfer is not a tax. There, the City of Riverside 

operated a municipal electric utility and, as here, made an annual transfer from the 

utility’s enterprise fund to the city’s general fund. (Id. at p. 248.) The city 

changed the methodology for calculating the interfund transfer. The change 

increased the transfer amount but not customer rates. (Id. at p. 249.) The plaintiff 

filed an action alleging that the “fund transfers constitute[d] a tax increase because 

they alter[ed] the methodology used to calculate the amount of money Riverside 

transfers from the electric utility reserve to the general fund.” (Id. at p. 248.) The 

Court of Appeal rejected that argument, holding the relevant inquiry for purposes 

of article XIII C was whether the amount charged to ratepayers had increased. (Id. 

 

11 Indeed, the Fresno court rejected an argument similar to the one plaintiffs 

make here. There, the city argued its in-lieu fee was not an invalid propertyrelated fee under article XIII D because it was actually a tax regulated by article 

XIII C. (Fresno, supra, 127 Cal.App.4th at p. 926.) Though the case was decided 

before Proposition 26 specifically defined the term “tax,” it is relevant because the 

court found that the city had failed to show that the in-lieu fee “constitute[d] a tax 

on utilities consumers in any meaningful sense of the word ‘tax.’ ” (Id. at p. 927.) 
16

at p. 259.) The court reasoned that, even if the change in methodology resulted in 

an increased transfer amount, there was no tax increase “if it does not increase the 

amount levied on Riverside ratepayers.” (Id. at p. 260.) Webb correctly identifies 

the electric rate charged by the utility as the “ ‘levy, charge, or exaction’ ” subject 

to article XIII C’s restrictions. (Id. at p. 258.) 

Roseville and Fresno are distinguishable in another respect. In those cases, 

it was clear the interfund transfers directly increased customer rates. In Roseville, 

the Court of Appeal noted that the transfer amount was “paid by the utility 

ratepayers.” (Roseville, supra, 97 Cal.App.4th at p. 638.) In Fresno, the city’s 

charter required its utilities to apply all uncommitted profits to rate reductions and 

the court explained that “[t]he [transfer] amount paid by each utility is passed 

through to its customers.” (Fresno, supra, 127 Cal.App.4th at p. 918.) Based on 

the records before them, those courts did not have to differentiate between the 

challenged interfund transfers and the rates charged by the utilities. Indeed, in 

Fresno, the plaintiffs’ summary judgment motion “did not distinguish between the 

in lieu fee itself, imposed by Fresno on its utility departments, and the effect of the 

fee on ratepayers as the fee is recovered (along with all the rest of a department’s

budgeted costs) as part of monthly utility bills.” (Fresno, at p. 919.) 

Here, on the other hand, there is no evidence that REU customers paid the 

PILOT through rate payments. Instead, as described below, REU had more than 

enough non-rate revenue to cover the PILOT. Unlike the in-lieu fees in Roseville

and Fresno, the PILOT was not necessarily passed through to and imposed on 

ratepayers. We reject plaintiffs’ invitation to treat the PILOT as a tax despite their 

admission it is not one. It is necessary to distinguish between REU’s rate and the 

PILOT. The majority below failed to make this distinction. 
17

2. Retroactive Application of Proposition 26

As mentioned, the trial court ruled that plaintiffs’ claim failed in part 

because Proposition 26 does not operate retroactively, and the PILOT had not 

been imposed, increased, or extended since November 3, 2010. Because the 

PILOT itself is not a tax subject to article XIII C’s limitations, we need not decide 

whether Proposition 26 operates retroactively. REU’s rate was increased after the 

effective date of Proposition 26. No issue of retroactive application is presented. 

3. Is REU’s Rate a Tax?

The question remains whether REU’s rate was a tax. The city concedes the 

rate is a levy, charge, or exaction imposed by a local government and that the 

December 2010 rate increase was not approved by the voters. The question, then, 

is whether the rates paid by REU’s customers exceeded the reasonable costs of 

providing electrical service. The reasonable costs include expenditures to generate 

and acquire electricity and other costs typical of utility operations. (Hansen v. 

City of San Buenaventura (1986) 42 Cal.3d 1172, 1181 (Hansen); see also, 

Roseville, supra, 97 Cal.App.4th at pp. 647-648 [“what it costs to provide such 

services includes all the required costs . . . , short-term and long-term, including 

operation, maintenance, financial, and capital expenditures.”) The city bears the 

burden of proof on this question. (Art. XIII C, § 1, subd. (e), unenumerated par.) 

Plaintiffs argue that REU’s rates did not satisfy the exception because they 

incorporated the PILOT. The city, they urge, failed to show the PILOT reflected 

any actual costs of providing electric service. If the PILOT is included in REU’s 

budget as an expense and it exceeds the costs of services it is designed to cover, 

then REU’s rates must necessarily be invalid taxes. The city counters that REU’s 

rates were not taxes because REU had sufficient non-rate revenues to pay the 

PILOT. Put another way, the city argues the amount of the PILOT is irrelevant to 
18

the determination whether the rate is a tax because rate revenues were not used to 

cover the PILOT amount. The majority below rejected this argument. 

The majority’s reasoning was flawed. A similar set of circumstances was 

addressed in Northern California Water Assn. v. State Water Resources Control 

Bd. (2018) 20 Cal.App.5th 1204 (Northern California Water). There, the 

plaintiffs challenged a water rights permit fee imposed by the State Water 

Resources Control Board. The evidence showed that the total costs of the permit 

program were approximately $9.06 million, and that “[r]oughly 51 percent of that 

amount was paid for by [permit] fees ($4.608 million), 43 percent from the state’s 

general fund ($3.865 million), and the remaining 6 percent from the tobacco tax 

fund ($355,000), federal trust fund ($150,000), and reimbursements ($88,000).” 

(Id. at p. 1224.) The plaintiffs argued the permit fee was a tax because others, who 

did not pay the fee, benefitted from the program. (Id. at p. 1221.) Because overall 

program costs were higher than they would have been had the program not 

benefitted non-payors, the fee that contributed to covering those costs must be a 

tax. The Court of Appeal disagreed. It reasoned that, even though non-payors 

benefitted from program activities, that fact was “relevant only if the regulatory 

costs attributable to [them] necessarily were allocated to the affected fee payors. If 

other sources of funding, such as the state’s general fund, were sufficient to cover 

the regulatory costs attributable to [those who benefitted but did not pay], it does 

not matter that [they] were not charged a fee.” (Id. at p. 1221, italics added.) The 

court then concluded the fee was not a tax because “general fund support for the 

Division’s regulatory activities . . . was more than enough . . . to cover the costs 

attributable to [those who benefitted but did not pay].” (Id at p. 1224. ) In other 

words, fee payors were not being forced to cover those costs because there was 

sufficient general fund support to cover them. 
19

Northern California Water demonstrates that the mere existence of an 

unsupported cost in a government agency’s budget does not always mean that a 

fee or charge imposed by that agency is a tax. The question is not whether each 

cost in the agency’s budget is reasonable. Instead, the question is whether the 

charge imposed on ratepayers exceeds the reasonable costs of providing the 

relevant service. If the agency has sources of revenue other than the rates it 

imposes, then the total rates charged may actually be lower than the reasonable 

costs of providing the service. 

The record shows that to be the case here. The city prepared a five-year 

financial plan for REU in 2009. (See ante, p. 4; see also, Appendix A.) In fiscal 

year 2010 to 2011, when the city council adopted the rate increase, REU was 

projected to collect $102.1 million in rate revenues. REU’s expenses were 

projected as follows: power supply ($82.3 million); operations and maintenance 

($28.5 million); debt service ($13.9 million); revenue-funded capital projects ($5.2 

million); rolling stock and major plant maintenance ($0.8 million); and the PILOT 

($6.0 million). These projected expenses would result in a $34.6 million shortfall

between rate revenues and projected expenses. That gap was to be bridged with 

the surplus in the enterprise fund and revenues from a variety of non-rate sources. 

The only expense plaintiffs challenged was the PILOT. At oral argument, 

their counsel conceded that they do not challenge any of REU’s other projected 

expenses as unreasonable.12 We return to the critical question under article XIII 

C. It is clear that, even if we ignore the PILOT, the rate charged does not exceed 

the concededly reasonable costs of providing electric service. For 2010 to 2011, 

projected rate revenues were $102.1 million. Unchallenged expenses were 

 

12 There is no suggestion that a significant portion of these costs must be 

allocated to any activity other than providing electricity to ratepayers. 
20

$130.7 million, excluding the $6 million PILOT. Thus, projected, uncontested 

costs would exceed rate revenues by $28.6 million. Similar shortfalls were 

expected for subsequent years: $21 million in 2011 to 2012 and $12.6 million in 

2012 to 2013.

13 In other words, for all years potentially at issue, the undisputed 

evidence shows that REU’s rates were not taxes. Total rate revenue was less than 

the concededly reasonable costs of providing electric service.14

A fundamental premise underlying plaintiffs’ argument and the majority’s 

holding below is that the city was required to subsidize REU’s rates by using its 

non-rate revenues. If the city were required to cover REU’s expenses with nonrate revenue, the city could not claim that its use of non-rate revenue to cover the 

PILOT removed the rate charged from the definition of a “tax.” That is, if 

subsidization of rates with non-rate revenue was required, the PILOT would have 

to be shown to be a reasonable cost because the PILOT was part of the rate 

calculation. But such subsidization is not required by California law. Before the 

 

13 REU projected the following expenses for fiscal year 2011 to 2012: power 

supply ($80.4 million); operations and maintenance ($29.4 million); debt service 

($13.9 million); revenue-funded capital projects ($6.0 million); rolling stock and 

major plant maintenance ($1.4 million); and the PILOT ($6.1 million). Excluding 

the PILOT leaves $131.1 million in unchallenged costs for that year, against 

$110.1 million in rate revenues. (See Appendix A.) Projected expenses for fiscal 

year 2012 to 2013 were: power supply ($79.8 million); operations and 

maintenance ($30.3 million); debt service ($13.9 million); revenue-funded capital 

projects ($6.2 million); rolling stock and major plant maintenance ($4.0 million); 

and the PILOT ($6.3 million). Excluding the PILOT leaves $134.2 million in 

unchallenged costs, against $121.6 million in rate revenues. (See Appendix A.)

14 We have concluded that REU’s rates were not taxes because total rate 

revenue was insufficient to cover the operating costs that plaintiffs concede were 

reasonable. As a result, we need not consider the city’s arguments that the PILOT 

was also a reasonable cost of providing electric service. Any calculation that 

included the PILOT as a reasonable cost would only establish that the gap between 

rate revenues and reasonable costs was even larger. 
21

adoption of Propositions 218 and 26, the rule in California was that a municipal 

utility’s “rates need not be based purely on costs.” (Hansen, supra, 42 Cal.3d at p. 

1182.) Article XIII C changed that rule, but it does not operate to require 

subsidization. Instead, for any service charge to which the article applies, a local 

government must either charge a rate that does not exceed the reasonable costs of 

providing the service or obtain voter approval for rates that exceed costs. Article 

XIII C does not compel a local government utility to use other non-rate revenues 

to lower its customers’ rates. 

Plaintiffs cite no authority for their assertion that REU was “legally 

required” to subsidize its rates with non-rate revenues. Settled authority runs to 

the contrary. “[T]here is no . . . mandate that municipally owned public utilities 

pass along to the ratepayers any savings in its costs of providing service.” 

(American Microsystems, Inc. v. City of Santa Clara (1982) 137 Cal.App.3d 1037, 

1043.) In addition, when “a governmental entity is authorized to exercise a power 

purely proprietary, the law leans to the theory that it has full power to perform it in 

the same efficient manner as a private person would.” (City of Oakland v. Burns

(1956) 46 Cal.2d 401, 407.) The majority below was wrong to reject, as 

irrelevant, the city’s argument that REU’s rates were not taxes because the PILOT 

was not paid out of rate revenues.

This discussion demonstrates that there was no transfer of rate payments to 

the general fund, as there was in Roseville and Fresno. The total revenue realized 

from rate payments was insufficient to cover REU’s other operating expenses. As 

a result, all rate revenues went to covering REU’s uncontested operating costs. 

The remaining unpaid shortfall and the PILOT had to be satisfied from REU’s 

other sources of income. Because the budgetary transfer was not paid out of rate 

revenues, it was not part of a charge imposed on ratepayers. Contrary to plaintiffs’ 
22

assertion, the PILOT did not operate to generate “extra money” to the general 

fund. The rate payments simply did not generate surplus revenue. 

III. DISPOSITION

Neither the budgetary transfer calculated by using the PILOT, nor the rate 

charged during the years at issue, constituted a tax under article XIII C. The 

judgment of the Court of Appeal is reversed. 

CORRIGAN, J.

WE CONCUR:

CANTIL-SAKAUYE, C. J.

CHIN, J. 

LIU, J. 

CUÉLLAR, J.

KRUGER, J. 

MIHARA, J.*

* Associate Justice of the Court of Appeal, Sixth Appellate District, assigned 

by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
23

APPENDIX A

Five-Year 

Financial Plan

Fiscal Years Ending June 30

2009 2010 2011 2012 2013 2014

Electric Utility [Enterprise] 

Fund Beginning Balance 40.7 32.2 25.7 18.9 15.0 14.7

Rate Adjustments 7.84% 7.84% 9.10% 9.10% 9.10% 9.10%

Operating Revenues

Retail Electric Sales

[rate revenues] 86.3 93.4 102.1 110.1 121.6 134.6

Wholesale Electric Sales 26.6 22.7 18.7 12.2 11.7 10.5

Miscellaneous Income 6.1 5.4 5.7 5.9 6.0 6.2

Total 119.0 121.5 126.5 128.2 139.3 151.3

Operating Expenses

Power Supply 85.0 81.4 82.3 80.4 79.8 81.1

Operation & Maintenance

(O & M) 26.0 27.5 28.5 29.4 30.3 31.2

Total 111.0 108.9 110.8 109.8 110.1 112.3

Net Operating Revenue 8.0 12.6 15.7 18.4 29.2 39.0

Total Net Debt Service 5.2 10.0 13.9 13.9 13.9 14.0

Revenue - Debt Service 2.8 2.6 1.8 4.5 15.3 25.0

Other Revenues and Expenses

Other Revenues 2.1 1.6 1.2 0.9 0.7 0.7

Bond Proceed 

Reimbursements 6.0 2.0 2.0 4.0 0.0 0.0

General Fund Payback for 

Land Purchase 0.2 0.2 0.2 0.2 0.2 0.2

Revenue-Funded Capital 

Projects (6.5) (5.8) (5.2) (6.0) (6.2) (6.3)

PILOT (5.2) (6.1) (6.0) (6.1) (6.3) (6.5)

Rolling Stock, Major Plant 

Maintenance (7.9) (1.0) (0.8) (1.4) (4.0) (5.5)

Total (11.3) (9.1) (8.6) (8.4) (15.6) (17.4)

Increase (Decrease) in Funds (8.5) (6.5) (6.8) (3.9) (0.3) 7.6

Electric Utility Fund Ending 

Balance 32.2 25.7 18.9 15.0 14.7 22.3

Reserves (as % of O & M) 29.0% 23.7% 17.1% 13.6% 13.4% 20.0%

Debt Service Coverage Ratio 1.93 1.42 1.22 1.39 2.14 2.85
See next page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion Citizens for Fair REU Rates v. City of Redding

__________________________________________________________________________________

Unpublished Opinion

Original Appeal

Original Proceeding

Review Granted XXX 233 Cal.App.4th 402

Rehearing Granted

__________________________________________________________________________________

Opinion No. S224779

Date Filed: August 27, 2018

__________________________________________________________________________________

Court: Superior

County: Shasta

Judge: William Gallagher

__________________________________________________________________________________

Counsel:

McNeill Law Offices and Walter P. McNeill for Plaintiffs and Appellants.

Arthur Jarvis Cohen and Harry Zavos for Glendale Coalition for Better Government as Amicus Curiae on 

behalf of Plaintiffs and Appellants.

Trevor A. Grimm, Jonathan M. Coupal, Timothy A. Bittle and J. Ryan Cogdill for Howard Jarvis 

Taxpayers Association as Amicus Curiae on behalf of Plaintiffs and Appellants.

Meriem L. Hubbard and Ralph W. Kasarda for Pacific Legal Foundation as Amicus Curiae on behalf of 

Plaintiffs and Appellants.

Nielsen Merksamer Parrinello Gross & Leoni, Steven A. Merksamer, Eric J. Miethke and Kurt R. Oneto for 

California Taxpayers Association as Amicus Curiae on behalf of Plaintiffs and Appellants.

Colantuono & Levin, Colantuono, Highsmith & Whatley, Michael G. Colantuono, Amy C. Sparrow,

Michael R. Cobden, Jon R. di Cristina and Megan S. Knize for Defendants and Respondents.

Braun Blaising McLaughlin & Smith, C. Anthony Braun, Justin C. Wynne and Daniel E. Griffiths for 

California Municipal Utilities Association as Amicus Curiae on behalf of Defendants and Respondents.

Jarvis, Fay, Doporto & Gibson, Benjamin P. Fay and Rick W. Jarvis for League of California Cities and 

California State Association of Counties as Amici Curiae on behalf of Defendants and Respondents.
Counsel who argued in Supreme Court (not intended for publication with opinion):

Walter P. McNeill

McNeill Law Offices

280 Hemsted Drive, Suite E

Redding, CA 96002

(530) 222-8992

Michael G. Colantuono

Colantuono, Highsmith & Whatley

790 E. Colorado Boulevard, Suite 850

Pasadena, CA 91101-2109

(213) 542-5700