Proposition 218: Background and Impact Analysis
 
Local Governmental Relations Committee, Tax Committee, Legislative Committee, IMPAC Trustees, December 16, 1996

The following is for study only and has NOT been approved by the Local Governmental Relations Committee, the Tax Committee, the Legislative Committee, the IMPAC Trustees, the Executive Committee or the Board of Directors.

Issue:	What is the status and likely impacts of Proposition 218, commonly known as the Right to Vote on Taxes Act?
Action:	Not Required
Options:	Not applicable

Status/Summary: Proposition 218 specifically requires voter approval requirements for local taxes, assessments, and fees. The measure?s major provisions:

• Require majority voter approval for all future local general taxes.
• Require two-thirds voter approval for all local special taxes.
• Require voter approval of existing local taxes enacted after January 1, 1995.
• Require majority property owner approval of benefit assessments by mail-in ballot.
• Prohibit property-relatedfees from exceeding costs of service provided.
• Generally require either majority voter approval of fee payers or two-thirds approval of voters for imposition of fees.
• Provide that the initiative power is not restricted with respect to reducing orrepealing local taxes, assessments, or fees.

Proposition 218 will have a significant impact on California local governments, taxpayers, and businesses. REALTORS should be adequately informed regarding the measure and how local governments? responses will impact them and their businesses.

I. BACKGROUND

In 1978, California voters passed Proposition 13, a landmark tax measure which capped property taxes, limited reassessments, andimposed a 2/3 voter approval requirement for special taxes. Since Prop. 13 imposed new limitations on their ability to raise money, local governments turned to alternative property-related financing mechanisms in an effort to recoup some of their lost property tax revenues. Specifically, many local jurisdictions increased their use of benefit assessments and fees because they did not require voter approval. Benefit assessments are levied on a per-parcel basis and the amount of the assessment must be tiedto the amount of benefit a parcel receives from the resulting project or service. However, a state Supreme Court decision in 1991 loosened the nexus between assessments and their purported benefit to individual properties when it ruled that "indirect" benefits are assessable. Consequently, local governments may have increased some assessments on properties that were marginally benefited by the levies. In 1986, California voters passed Proposition 62 which required majority voter approval of local generaltaxes and reiterated Prop. 13?s 2/3 voter approval threshold for special taxes. Although a 1992 court decision ruled the general tax provision of Proposition 62 invalid, that ruling was eventually overturned by the California Supreme Court (Santa Clara County Transportation Authority v. Guardino; 1995). However, because Proposition 62 only enacted a statute and not a constitutional amendment, its provisions, it was argued, probably do not apply to charter cities. Proposition 218?s sponsors argue that local governments have subjected taxpayers to excessive tax, assessments, and fee increases that frustrate the purposes of voter approval for tax increases that began with Prop. 13 and continued with Prop. 62. Therefore, Proposition 218 grants property ownersthe right to vote on most local tax, assessment, and fee increases, applies to charter cities, and codifies a Supreme Court ruling that voters could pass local initiatives to repeal existing taxes and prohibit future tax levies (Rossi v. Brown). II. PROVISIONS OF PROPOSITION 218

A. Definitions

Local government. For the purposes of this Act, "local government" is definedas "any county, city and county, including a charter city or county, any special district, or any other local government or regional governmental entity." Under current law, charter cities and counties are afforded special constitutional powers to exertcontrol over local revenue raising. However, Prop. 218?s inclusion of charter cities and counties in its definition of "local government" effectively precludes these entities from using their "municipal affairs" doctrine to avoid compliance with the measure. Special District. Prop. 218 defines a special district as "an agency of the state, formed pursuant to general law or special act, for the performance of governmental or proprietary functions with limited geographic boundaries including, but not limited to, school districts and redevelopment agencies." Taxes, Fees, and Assessments. Local governments pay for the assorted services they provide to their citizens and businesses by imposing fees, assessments and taxes. A fee (or charge) is a voluntary charge imposed on an individual or property owner to pay for a local public service that directly benefits the payer. A benefit assessment is an involuntary charge imposed on a property owner to pay for a local public improvement or service that directly benefits the assessed property. Finally, a tax is an involuntary charge against an individual or landowner which pays for public services and facilities regardless of the taxpayer?s benefit. Special taxes are levied for a specific purpose, and general taxes have no restrictions on their use.

B. Impact of Prop. 218 on Taxes

General Taxes. General taxes include money that goes into a governmental agency?s general fund for discretionary spending,such as sales, utility, and hotel taxes. In 1986, Prop. 62 specified that all new local general taxes must be approved by majority vote. However, litigation is currently pending as to whether Prop. 62?s election provisions apply to charter cities. On thecontrary, Prop. 218 prohibits a local agency from imposing, extending or increasing future general taxes, including those in charter cities, without majority voter approval. The measure additionally requires existing local general taxes established afterDecember 31, 1994 without a vote of the people to obtain majority voter approval within two years. Special Taxes. As noted above, special taxes are imposed for a specific purpose, such as funding transportation and police programs. Proposition 13 allowedcertain local agencies to impose special taxes with 2/3 voter approval. Prop. 218 restates the 2/3 voter approval requirement for special taxes and prohibits any special purpose agency from imposing general taxes. In addition, Prop. 218 constitutionalizes the Rossi decision which authorizes voters to use the initiative process to repeal or reduce a tax, assessment, or fee. Consequently, even if the revenues from a previously enacted tax or assessment are being utilized for an ongoing government activity,voters can repeal the taxing authorizing and force the local agency to cease providing the associated service. It is unclear how Prop. 218 will impact other financing tools, such as lease-purchase agreements, certificates of participation, and long-termpayment agreements like labor contracts.

C. Impact of Prop. 218 on Assessments

Currently, there are over 30 benefit assessment laws that authorize specified agencies to impose assessmentsfor "special" purposes such as sidewalks, streets, lighting, or recreation programs. Prior to imposing a benefit assessment, pre-Prop. 218 law required local governments to determine which properties would benefit from the proposed project, notify the owners, and set assessment levels approximately commensurate with the benefit the owner would receive. Benefit assessments could not exceed the cost of the improvement or service nor be imposed against a property that did not benefit. Typical general assessment projects include fire, park, ambulance, and mosquito control assessments. Prior to enactment of Prop. 218, voter approval was not necessary before assessments could be imposed, but local agencies were required to provide property owners with writtennotice of a public hearing and protest procedures. Typically, benefit assessment proposals had to be abandoned if a majority of the affected property owners protested, and some assessments required local elections if the assessment proposal generated a minimum level of protest. Further, "standby charges," which are typically used to finance water and sewer service expansions to new developments have been levied by local governments in a manner similar to assessments. For the purposes of Prop. 218, standbycharges are treated as assessments. Prop. 218 enacts new, highly specific, requirements on local governments (including charter cities) before they may institute or increase assessments. By July 1, 1997, all new, existing, or increased assessments must comply with Prop. 218 requirements. It should be noted that because pre-Prop. 218 law did not generally require voter approval for assessments, most current assessments that did not obtain voter approval must be placed before qualified voters for approvalor be eliminated. Specifically, Prop. 218:

• Requires local governments to identify those parcels that would receive a special benefit from the proposed project or service. A parcel?s proportionate special benefit must be determined in relation to the total cost of the project. Only "special" benefits are assessable, so if a project also provides a general benefit to the public, the agency must separate these costs and only assess landowners for the special benefit portion. Consequently, the remaining portion of the project?s costs must be funded through general revenues, such as taxes.
• Requires local governments to have a detailed report prepared by a registered professional engineer. Under pre-Prop. 218 law, local agencies were typically required to prepare an engineer?s report detailing the proposed project?s boundaries, improvements, or services, plus the per-parcel assessment. Prop. 218 requires a more detailed engineer?s report and an explicit description of what benefits are specially afforded individual property owners, rather than simply community-wide. As such, local governments may have to examine relative benefits on a parcel-by-parcel or block-by-block basis.
• Requires local governments to send a detailed notice to each parcel owner regarding a proposed assessment. Under law prior to enactment of Prop. 218, local agencies were required to mail notice to property owners subject to an assessment, unless the levy is agency-wide or for operation and maintenance purposes and affects 50,000 parcels or more. Under Prop. 218, an assessment mailer must be sent to all parcel owners and must include: the total assessment on all property owners; the reason for the assessment; the assessment?s duration; the property owner?s assessment; the basis for calculating the assessment; the date, time and location of a public hearing on the proposal; and a complete summary of the balloting procedures. It should be noted that public property parcels, such as schools, cannot be exempted from the measure?s requirements, as they often are currently.
• Requires the public agency imposing the assessment to conduct a public hearing not less than 45 days after mailing a detailed notice to affected parcel owners. Prop. 218 requires all assessment proposals toinclude a noticed public hearing where the local government agency is required to consider all protests and tabulate ballots. Only property owners and any renters responsible for paying assessments are eligible to vote. Prior to Prop. 218, local agenciescalculated "majority protest" in a variety of ways, including by parcel size and total assessment amount. On the contrary, Prop. 218 requires all ballots cast in assessment elections be weighted based on the property owner?s proportional assessment obligation. For example, under Prop. 218, if property owner A would be required to pay twice as much assessment as property owner B, property owner A?s vote would be worth twice as much as property owner B. The agency is precluded from imposing an assessment if a majority of the ballots SUBMITTED oppose the assessment.
• Includes several exemptions. Prop. 218 includes several exemptions to the above assessment requirements, including:
  • Any assessment imposed to finance the capital or maintenance costsof sidewalks, streets, sewers, water, flood control, drainage systems, or vector control. However, subsequent increases in these assessments must comply with the measure.
  • Any assessment which previously received majority voter approval or was imposedpursuant to a petition signed by all the affected property owners at the time of its imposition. However, subsequent increases must comply with the measure.
  • Any assessment where the proceeds are used to pay bonded debt for which failure to pay wouldviolate the state or federal constitution.

A preliminary analysis by the Legislative Analyst anticipates that more than half of all existing assessments would qualify for an exemption. All other existing assessments are required to meetthe measure?s voter approval requirements by July 1, 1997. Prop. 218 requires local agencies to prove that a property receives a special benefit and that the assessment amount is appropriate. This provision is a shift from current practice. In lawsuits challenging special assessments prior to enactment of Prop. 218, the taxpayer typically had the burden of proof to demonstrate that the charges are not legal. Shifting the burden of proof to the government should make it easier for taxpayers to win lawsuits alleging over taxation. Further, Prop. 218 specifies that since only special benefits are assessable, non-property owners cannot vote for assessments. However, if a subsequent legal ruling specifies that non-property owners should be authorized to vote,the measure states that the assessment cannot be imposed without an additional 2/3 vote of the electorate.

D. Impact of Prop. 218 on Fees

Local governments can charge fees on property owners to pay for a variety of property-related services. Prior to enactment of Prop. 218, fees were limited to the reasonable cost of the service provided to each property. Local officials were required to hold a noticed public hearing before they could levy a fee, and most simply posted a resolution about the proposal in a local newspaper. No elections were required prior to imposing or increasing fees. Prop. 218 restricts local governments? ability to charge most new and existing property related fees.Specifically, the local governments are required to identify the affected parcels, then notify the parcel owners by mail of the proposed fee, the basis of the fee, the reasons for the fee, and the date, time, and place of a public hearing on the proposal.The agency is required to conduct the public hearing on the proposed fee not less than 45 days after mailing the notice. At the public hearing, the agency would be required to reject the fee if a majority of the affected owners file written protests. Ifthe proposal is not rejected at the hearing, the agency must hold an election on the fee within 45 days of the hearing. An agency cannot impose or increase a property-related fee until it is approved by a majority of the affected property owners or 2/3 ofthe voters residing in the specified area. Sewer, water, and refuse collection fees are exempted from the measure?s voter approval requirements. Gas and electric fees and developer fees are specifically exempted from all the measure?s provisions. The Proposition also specifies that a local government cannot extend, impose, or increase a fee or charge unless it meets the following requirements:

• Fee or charge revenue cannot exceed the total amount necessary to fund the specified project or service.
• Individual fees or charges cannot exceed the cost required to provide service to the specified property.
• Revenues from the fee or charge cannot be used for any purpose other than that for which the fee or charge was imposed.
• Fee or charge revenue cannot be used for fire, police, ambulance, library service, or any other service generally available to the public.
• No fee or charge can be imposed for a service unless that service is actually used by, or immediately available to, the propertyowner. Fees based on potential or future services are prohibited. Standby charges must be classified as assessments and imposed pursuant to the measure?s assessment provisions.

Proposition 218 also shifts the burden from the fee payee to the local government to prove compliance with the initiative?s requirements.

III. LOCAL GOVERNMENTS? PROBABLE RESPONSES

Local governments will respond to the requirements of Proposition 218 in many ways. All of these responses will impact local governments? financial resources and the provision of essential services. Since this has a significant impact on REALTORS®? ability to market homes in their community, REALTORS® will need to be knowledgeable about how their local governments are likely to respond to Proposition 218. What follows is a synopsis of the most significant steps local governments are likely to take. These are grouped according to the type of requirements Proposition 218 imposes.

A. Retroactive Provisions

Many local governments will incur significant expenses trying to meet the retroactive provisions of Proposition 218. They will be forced to place some existing general taxes, assessments and fees on the ballot in upcoming municipal elections. Thus, local governments will incur the expense of researching and identifying levies that must receive electoral approval and additional election expenses. Many local governments may lose existing revenues due to levies that are rejected by voters. If voters do not approve general taxes, assessments and fees placed on local ballots for retroactive approval, local governments will have to find replacement revenue. They also will face the difficult task of figuring out if and how they should return to taxpayers money already collected.

B. Public Vote and Disclosure Requirements

The provisions of Proposition 218 are stringent enough to make local governments much less likely to adopt new or raise existing general taxes, assessment, or fees in the future. This was the intent of the ballot measure. However, this may also lead local governments to search for revenue mechanisms that are exempt from the provisions or that are more likely to receive voter approval. These include developer fees; electrical, gas, sewer, water and garbage collection fees (utility taxes); business license taxes; transfer taxes; occupancytaxes.

C. Initiative Power

Proposition 218?s codifies court cases that give voters the right to use the initiative process to restrict local taxes (See Rossi v. Brown and Santa Clara County v. Guardino.) Consequently, voters may be inclined to use the initiative process to influence local taxing authority in the future.

D. Legal Burden

Passage of Prop. 218 could result in an increased amount of lawsuits involving local governments; thereby incurring tremendous costs for local governments. Provisions which place the burden of proof of compliance on local governments may encourage citizens to file lawsuits against their local governments. Further, issues surrounding the return of revenue collected from levies that do not receive retroactive voter approval may also incur lawsuits. Lastly, many local governments may sue over the implementation of the provisions of Proposition 218.

E. Loss of Revenue

Local governments will respond differently to the loss of revenue resulting from Proposition 218. Some localities will scramble for new sources of revenue, either those that are exempt from the provisions of Proposition 218 or those that will encounter less resistance; such as developer fees; electrical, gas, sewer, water and garbage collection fees (utility taxes); or business license taxes; transfer taxes; andoccupancy taxes. Some localities will look for new ways to reduce spending and cut costs, such as privatizing, downsizing and other efficiency measures.

IV. REALTOR® OPTIONS

None of the preceding prognosis is intended to diminish the importance of or the impetus behind the passage of Proposition 218. An objective analysis of its provisions points to the responses as they have been presented. REALTORS® have a vested interest in the finances of their local governments. Local governments that do not have adequate financial resources to keep up essential services may let those services lapse. On the other hand, they may attempt to find other sources of revenue to help them meet the demands oftheir constituents. These may be onerous to REALTORS® as business persons or as representatives of property owners. Whether REALTORS® support or oppose their local governments? handling of finances and/or their attempts to gain voter approval for local levies on local ballots, REALTORS® have a stake in these issues. REALTORS® have many options at their disposal to provide input into the many issues that will arise due to the passage of Proposition 218:

• First of all, REALTORS® should become knowledgeable about and involved in the local government budget decision-making process. This will ensure that local governments don?t turn to onerous revenue raising measures like business license taxes or transfer taxes to solve their revenue problems. This can be accomplished by taking a range of action, from simple steps like reading the local newspaper and following local finance issues as they evolve, to bigger steps like participating in citizen budget review committees and attending public hearing on taxation matters. (See C.A.R.?s Local Government Budgeting Manual, READING BETWEEN THE LINES, published by the LGR Committee and available through the Public Policy Division in C.A.R.?s Los Angeles headquarters office.)
• REALTORS® also can participate inthe many local ballot measure campaigns on taxation issues that will arise in the near and distant future. Whether REALTORS® choose to support or oppose such measures is a choice which must be made on a case-by-case basis by the local Association. Regardless of the position taken, REALTOR® participation is essential to influencing the ultimate decisions that are made. Once the local Association makes a decision regarding a local ballot measure, REALTORS® can do a number of things to mobilize and educateAssociation members, clients, property owners and the general electorate. (The LGR Committee also has informational materials pertaining to local initiative campaigns available through C.A.R.?s Public Policy Division.)
• Lastly, REALTORS® should be prepared to provide input and alternatives to their local officials struggling with difficult financial decisions and considering revenue raising measures that REALTORS® would oppose. The deterioration of essential local services and the imposition of onerousrevenue raising measures have an equally devastating impact on the real estate industry. It is imperative for REALTORS® to be prepared to provide constructive input to local officials to help them reconcile these two issues in an acceptable manner. C.A.R.?s LGR Committe Leadership and staff are prepared to help you and your local Association respond to any of the above issues that may arise in your community. Please do not hesitate to call for information.