In a recent article, I talked about Proposition 4, passed in 1979, as the godfather of voter initiatives that defined service fees and how they should be calculated. While Proposition 4 is widely remembered as establishing the Gann Appropriation Limit, it also defined service fees as being limited to the full costs of providing the service. But the detail of what that meant was limited to the author’s intent documents and court decisions in those early days.
Then, Proposition 218, passed in 1996 and becoming Articles XIIIC & D, further limited local governments’ revenue source options. Those two propositions have had, and will continue to have, a profound effect on California governments.
But it was left to the passage of Proposition 26, passed in 2010, to codify many of the fee setting practices of the previous 30 years. Article XIII C of the State Constitution was amended to formally declare that fees are not considered taxes if they do not exceed the reasonable costs of the service. Government Code Section 66014 further defined that statement for development fees.
Some of the types of services for which reasonable fees are allowable are:
A charge 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.
A charge 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.
A charge 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.
Article XIII C also provides that a local government agency must demonstrate that the amount of revenue to be generated by a fee is no more than necessary to cover the reasonable costs of the governmental activity supported by the fee, 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. Therefore, a fee on liquor store owners to fund an alcohol education program would not be allowed.
While Proposition 26 was built on the foundations of Propositions 4 and 218, it provided a sharper definition of the reach and limits of service fees, and the courts have looked to it when reviewing fee challenges.