Another Assessment Invalidated by the Provisions of Proposition 218
In a case that represents a significant victory for property taxpayers in the City of San Diego, the Court of Appeal recently held that the vote establishing the Greater Golden Hill Maintenance Assessment District (the “District”) was invalid, and that the City’s failure to separate and quantify the general and special benefits provided by the proposed assessment rendered both the assessment and the formation of the District invalid. Golden Hill Neighborhood Assoc, Inc. v. City of San Diego, 199 Cal. App. 4th 416 (2011).
In 1996, California’s voters passed Proposition 218, which, among other things, limits a local government’s ability to exact revenue under the rubric of special assessments in several important ways. For example, Proposition 218 tightened the definition of the two key findings that the local government must make in order to support an assessment—special benefit and proportionality. A special assessment can be imposed only for a “special benefit” conferred on a particular property. Cal. Const. art. XIII D §§ 2(b), 4(a). In addition, Proposition 218 defined special benefit as “a particular and distinct benefit over and above general benefits conferred on real property located in the district or to the public at large.” Cal. Const. art. XIII D § 2(i).
With regard to proportionality, Proposition 218 provides that an assessment on any given parcel must be in proportion to the special benefit conferred on that parcel. Cal. Const. art. XIII D § 4(a). Thus, the “proportionate special benefit derived by each identified parcel shall be determined in relationship to the entirety of the capital cost of a public improvement, the maintenance and operation expenses of a public improvement, or the cost of the property-related service being provided.” Id. And, because only special benefits are assessable, and public improvements often provide both general benefits to the community at large and special benefits to a particular property, the assessing agency is required to “separate the general benefits from the special benefits conferred on a parcel” and impose the assessment only for the special benefits. Id.
Proposition 218 also established strict procedural requirements for the imposition of a lawful assessment. For example, “local agencies must give the record owners of all assessed parcels written notice of the proposed assessment, a voting ballot, and a statement disclosing that a majority protest will prevent the assessment’s passage.” Cal. Const. art. XIII D § 4(c), (d). The proposed assessment must be “supported by a detailed engineer’s report.” Cal. Const. art. XIII D § 4(b). The agency must consider all protests at a noticed public hearing, and “shall not impose an assessment if there is a majority protest.” Cal. Const. art. XIII D § 4(e). And, “[i]n tabulating the ballots, the ballots shall be weighted according to the proportional financial obligation of the affected property.” Id.
In 2007, San Diego’s City Council passed a resolution stating its intention to form the District and collect assessments to pay for a prescribed portion of the costs for various future improvements, as well as maintenance and/or services such as landscaping, litter removal, and area beautification. A public hearing was held, and ballots were cast by the various affected property owners—including the City, which owned 95 parcels in the affected area. The measure was approved by 53.95 percent of the weighted vote, however, an issue arose as to the weighting attributed to the City’s property. In determining the appropriate weighting for each parcel, the engineer’s report did not specify how the assessments would be levied on 90 parcels comprising publically owned parks and open space areas. Rather, the report simply applied an unexplained assessment to those properties.
Proposition 218’s weighted voting requirement enhances taxpayer consent by giving property owners whose properties are proposed to be assessed in amounts greater than other owners’ properties a proportionately greater say as to whether the assessment will be instituted. Thus, property owners who will receive higher assessments have a greater influence on the outcome of the vote. This system, however, could lead to abuse if the local government overassesses its own property. Although it may sound counterintuitive, a local government could have an incentive to overassess its property for the purpose of increasing the weight of its vote. As the Court pointed out, a local government “could view $35,000 in special assessment charges as a small price to pay to shift over $400,000 in costs for improvements and services that would otherwise have to be paid from its general revenues to property owners in a special assessment district.” Golden Hill, at 433. Here, because the measure creating the Department passed by a slim majority, the Court found that the City’s weighted vote made a material difference. And, because the engineer’s report did not reveal the basis for calculating the assessment amounts levied against the City’s parks and open space property, in determining the validity of the election on the formation of the District, the Court concluded it was appropriate to eliminate the City’s weighted vote.
In addition, the Court found that the actual assessments issued by the District were invalid because the engineer’s report failed to adequately separate general benefits from special benefits. Proposition 218 requires local governments to use a professional engineer’s report to estimate the amount of special benefit landowners would receive from the project or service, as well as the amount of general benefit, because local governments may only recoup from special assessments the proportionate share of cost to provide the special benefit. In other words, if the special benefits represent 50 percent of total benefits, then the local government may use special assessments to recoup just half the project’s or service’s overall costs. Other revenues must be used to pay for any remaining costs.
Here, the engineer’s report did not even attempt to separate and quantify the general and special benefits that the proposed services and improvements would confer. So, the report was facially invalid. Yet, the Court also found that the City’s park property in the District was unquestionably used by members of the general public outside the District. “[E]ven minimal general benefits must be separated from special benefits and quantified so that the percentage of the cost of services and improvements representing general benefits, however slight, can be deducted from the amount of the cost assessed against specially benefitting properties.” Golden Hill, at 439. Because no such effort was made here, the Court found that the District’s assessments also were in violation of Proposition 218. Consequently, in light of the above, the trial court was directed to issue of a writ vacating the City’s resolution forming the District and invalidating the assessments imposed thereby.
Obviously, the Court’s decision had a significant impact on the City of San Diego and the affected taxpayers within the District. Nevertheless, the case highlights the significant hurdles local governments need to overcome in order to enact special assessments, as well as the tactics some governments may employ to take advantage of the weighted voting system under Proposition 218. Taxpayers faced with questionable special assessments are, therefore, advised to seek counsel well versed in the nuances of Proposition 218 as soon as they learn of the proposed levy.
If you have any questions regarding the contents of this newsletter, please contact the following attorneys in the firm’s State and Local Tax Practice Group.
| Chicago (312) 558-5600 | San Francisco (415) 591-1000 |
| Robert F. Denvir | Charles J. Moll III |
| Alan Lindquist | Troy M. Van Dongen |
| Bradley R. Marsh | |
| Jocelyn M. Wang | |
| Dina M. Bronshtein | |
| Jasmine I. Tollette |