KERN COUNTY BUILDERS INC v. NORTH OF THE RIVER MUNICIPAL WATER DISTRICT

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Court of Appeal, Fifth District, California.

KERN COUNTY BUILDERS, INC., et al., Plaintiffs and Respondents, v. NORTH OF THE RIVER MUNICIPAL WATER DISTRICT et al., Defendants and Appellants.

No. F010621.*

Decided: October 11, 1989

James R. Parker, Jr., Kuhs & Parker, Bakersfield, for defendants and appellants. Eric Bradshaw, Bakersfield, for plaintiffs and respondents.

OPINION

STATEMENT OF THE CASE

North of the River Municipal Water District and members of the board of directors (District) appeal from a judgment and the issuance of a peremptory writ of mandate prohibiting them from collecting a “water development charge” and directing them to release the lien recorded as a result of Kern County Builders, Inc., and its principal shareholders' (respondents') refusal to pay the charge.

The primary issue on appeal is the legality of the water charge as to respondents who do not receive water directly from District.   The judgment will be affirmed.

FACTS AND PROCEDURAL HISTORY

In 1977, respondents purchased a 12.06–acre parcel of undeveloped property in Oildale.   In 1983, they began developing a 48–unit apartment complex on 2.67 acres of the parcel.   Respondents contacted Oildale Mutual Water Company (Oildale) and District concerning water service to the development.   District informed respondents they were in an assessment district and would have to pay a $2,500 per acre water development charge in order to obtain service.   Initially, District offered to assess respondents on only the acreage being developed if respondents elected to have District supply water to the property.   However, if respondents used Oildale water, District's water development charge would be levied on the full 12.06 acres.   Respondents opted to obtain water service from Oildale because it was less expensive than buying water retail from District.

Oildale is a mutual water company formed in 1919 to provide water to its shareholders.   All of Oildale's service area lies within District, and Oildale's principal water supply is treated state water project water from the Kern County Water Agency Improvement District No. 4 sold to it by District pursuant to a water services agreement dated December 16, 1975.   Oildale also has 12 wells, but these are used primarily as backup sources of water.   Oildale is solely responsible for the construction, operation and maintenance of its water delivery system.   Operating costs as well as capital improvements are financed by Oildale's customers/shareholders through stock charges and water rates.

District was formed in 1969 through efforts of a citizens group organized by the directors of Oildale and Highland Park Utility District (HPUD), the other local water purveyor.   At the time, both water companies relied on groundwater and were unable to serve new customers because of water shortages in the area.   Respondents' land was in this moratorium area.   When District was formed, it intended only to sell water wholesale.   However, in 1979 or 1980, HPUD merged with District, and District now supplies water as a wholesaler and retailer.

In 1975, the voters of District authorized the issuance of $2.3 million in general obligation bonds to finance the construction of various structures necessary for District to deliver water.   The project included construction of a 4.5 million gallon storage tank at the 600–foot elevation storage site, two 1.9 million gallon tanks at the 750–foot elevation storage site, a pump station at the 600 elevation site, a connecting line between the 600 and 750 sites, miscellaneous lines and turnouts to deliver water to Oildale, and larger pipelines to transport water from the improvement district No. 4 treatment plant to the 600 site.   All property owners in the District, including respondents, pay for the construction of these facilities through property taxes.

Oildale began receiving water from District in 1977, and the facilities initially constructed through the 1975 bond issue have been sufficient to meet the needs of Oildale's customers to date.

After District commenced water deliveries, its board of directors began planning for future growth with a consulting engineer.   There were a number of large developments in the planning stages which if completed would cause District to exceed its annual water entitlement from the improvement district.   The board considered the additional water supply and distribution facilities that would be required to supply water to all developments in District through the year 2000.   The board discussed the engineer's recommendations over the next year and on August 9, 1978, implemented a “connection charge” for newly developed or redeveloped land as follows:

“Connection Charge

“(b) A Connection Charge shall be fixed by the Board of Directors and shall apply to all lands or premises developed, or redeveloped to a different use, within the North of the River Municipal Water District after August 9, 1978.   Appendix ‘C’, Page 12, attached hereto sets forth the means of calculating the Connection Charge.

“․

“All funds collected hereunder shall be used explicitly for capital improvements, as set forth in the Engineering Study and Master Plan for the North of the River Municipal Water District, and no funds received therefor shall be used for operation and maintenance expenses of the District.”

In May 1982, the connection charge was relabeled a “water development charge,” and the rate applicable to property zoned commercial or industrial was increased from $2,000 to $2,500 per acre.

The water development charge rates were established by dividing the total projected cost of anticipated future capital improvements required by District because of new development by the number of acres District projected would be developed.   The rates were based on the assumption all newly developed property would place an equal burden on District's system.   The charge was imposed regardless of whether the developed land received water service directly from District or from another water company within the District.

In 1984, District completed the “900 Project,” which is the only capital improvement that has received a contribution from the water development charge fund.   The 900 Project was constructed primarily to provide service to lands above the 750 pressure zone.   Respondents' property is in the 750 pressure zone.   The only customers currently served by the 900 Project are retail customers of District.   While the 900 Project could service respondents' land, it does not currently do so.

When respondents began developing their land, District billed them $30,150 for the water development charge.   Respondents did not pay the charge, and District recorded a lien on respondents' real property in Kern County.

Respondents filed a complaint against District challenging the constitutionality of the water development charge as applied to them.   District cross-complained for the amount of the water development charge.

The court granted, in part, respondents' motion for summary adjudication of issues finding District's water development charge constitutes a “special assessment.”   The remaining issues were tried to the court which found for respondents.   The court concluded respondents were denied due process of law as a result of not being afforded notice and an opportunity to be heard regarding the validity and extent of District's assessment;  the assessment and recording of a lien resulted in a taking of respondents' property without just compensation because the property received no “special benefit,” and the charge was a “special tax” within the meaning of article XIIIA, section 4, of the California Constitution and thus invalid because it was not approved by two-thirds of the voters.

DISCUSSION

1. The nature of the “water development charge.”

Respondents contend the water development charge is a “special assessment” because it was implemented to finance capital improvements.   Consequently, they were entitled to a due process notice and opportunity to object to the proposed assessment of their property before the assessment was levied.   Since they were not afforded such notice and opportunity, the special assessment and lien recording were nullities.   In the alternative, respondents contend the assessment is an improper “special tax” under the California Constitution, article XIIIA, section 4.   District submits the charge is a development fee imposed pursuant to its “inherent powers.”   The trial court concluded the charge is a special assessment.

Whether the charge is a special assessment, a special tax or a development fee, is a question of law.  (Cf. Russ Bldg. Partnership v. City and County of San Francisco (1987) 199 Cal.App.3d 1496, 1504, 246 Cal.Rptr. 21, opn. ordered pub. by Supreme Ct. except for given portions not pertinent here [44 Cal.3d 839, 855, fn. 15, 244 Cal.Rptr. 682, 750 P.2d 324].)   Thus, this court must determine the nature of the water development charge anew.

A. The charge is not a development fee.

 Generally, a development fee is an exaction imposed for the privilege of developing land.   Such fees are commonly imposed on developers by local governments in order to lessen the adverse impact of increased population generated by the development.  (Russ Bldg. Partnership v. City and County of San Francisco, supra, 199 Cal.App.3d at p. 1504, 246 Cal.Rptr. 21.)   But development fees are an exercise of the local police power granted to cities and counties by article XI, section 7 of the California Constitution.  (See, e.g., J. W. Jones Companies v. City of San Diego (1984) 157 Cal.App.3d 745, 753, 758, 203 Cal.Rptr. 580;  Trent Meredith, Inc. v. City of Oxnard (1981) 114 Cal.App.3d 317, 328, 170 Cal.Rptr. 685.)   Other public entities have no constitutional authority to impose fees pursuant to police powers.   Their authority to levy assessments to pay for improvements is derived from the power to tax as delegated to them by the Legislature.  (California Bldg. Industry Assn. v. Governing Bd. (1988) 206 Cal.App.3d 212, 234, 253 Cal.Rptr. 497;  Clute v. Turner (1909) 157 Cal. 73, 79–80, 106 P. 240;  County of Fresno v. Malmstrom (1979) 94 Cal.App.3d 974, 983, 156 Cal.Rptr. 777;  and see 51 Cal.Jur.3d, Public Improvements, § 5, pp. 569–570.)

Municipal water districts, such as District, are empowered by the Legislature to construct, operate and improve a waterworks system (Wat.Code, § 71691),1 to exercise all powers expressly granted by, or necessarily implied from, the Municipal Water District Law (§ 71590) and to use the Improvement Act of 1911 (Sts. & Hy.Code, § 5000 et seq.), the Municipal Improvement Act of 1913 (Sts. & Hy.Code, § 10000 et seq.) and the Improvement Bond Act of 1915 (Sts. & Hy.Code, § 8500 et seq.) for the construction of facilities.  (§ 71820.)   Such authority permits District to levy assessments to pay for the construction and operation of a water system.   In addition, District is authorized to fix water rates which will generate revenues sufficient to pay for operating expenses, repairs, improvements and enlargements (§ 71616).   Districts may also issue bonds and levy taxes to pay the bonds for improvements for the district (§ 71860), for improvements for less than all the district (improvement districts) (§ 71870) and for improvements for uninhabited portions of the district (uninhabited improvement districts) (§ 71922).   These powers to generate revenue, however, are taxing powers, not police powers.   District's reliance on case law sanctioning development fees under city and county police powers is misplaced.   Moreover, District has cited no authority for the proposition that a municipal water district can levy developer fees pursuant to unnamed inherent powers.   Thus, the water development charge cannot be characterized as a development fee.

B. The charge resembles a “special assessment.”

 Generally, the purpose of the improvement financed by the levied charge determines the nature of the charge.  (San Marcos Water Dist. v. San Marcos Unified School Dist. (1986) 42 Cal.3d 154, 164, 228 Cal.Rptr. 47, 720 P.2d 935.)   For example, ad valorem property taxes are levied at a given rate on all taxable property within a particular taxing district and pay for general expenditures, such as police and fire protection, and general improvements, such as public buildings and streets, which are deemed to benefit all property owners within a taxing district whether or not they enjoy any direct benefit from the expenditures and improvements.  (Solvang Mun. Improvement Dist. v. Board of Supervisors (1980) 112 Cal.App.3d 545, 552, 169 Cal.Rptr. 391.)   General ad valorem taxes also include levies to satisfy assessments of such taxing entities as municipalities, school districts, water districts and the like, whose activities and facilities may or may not benefit a particular property owner.  (Ibid.)

 A “special tax” is a tax collected and earmarked for a special purpose, rather than being deposited in the general fund.  (County of Fresno v. Malmstrom, supra, 94 Cal.App.3d 974, 983, 156 Cal.Rptr. 777.)   A special tax on real property need not specifically benefit the taxed property.  (Id. at p. 984, 156 Cal.Rptr. 777.)

 In contrast, a special assessment usually is a compulsory charge imposed on real property in a predetermined district, made under express legislative authority for defraying the expense of a permanent public improvement in the district.  (Spring Street Co. v. City of Los Angeles (1915) 170 Cal. 24, 29, 148 P. 217.)   A special assessment must directly benefit the property assessed, as for example a street improvement, lighting improvement, irrigation improvement, sewer connection or flood control improvement.   The rationale of special assessment is that the assessed property has received a special benefit over and above that received by the general public which directly benefits and increases its value.   A special assessment may be in a fixed sum, or it may be in an amount which fluctuates with the use to which the assessed property is put.  (Cedars of Lebanon Hosp. v. County of L. A. (1950) 35 Cal.2d 729, 747–748, 221 P.2d 31.)

“Although a special assessment is imposed through the same mechanism used to finance the cost of local government, in reality it is a compulsory charge to recoup the cost of a public improvement made for the special benefit of particular property.   It has been said that, strictly speaking, a special assessment is not a tax at all, but a benefit to specific real property financed through use of public credit.”  (Solvang Mun. Improvement Dist. v. Board of Supervisors, supra, 112 Cal.App.3d at p. 553, 169 Cal.Rptr. 391.)

 In practical application, the two types of taxation, general ad valorem taxes and special assessments, overlap to some extent.   A tax to pay the cost of a particular improvement may be crafted as a special assessment levied against particular real property within a district on the theory this property is the primary beneficiary of the improvement, or it may be structured as a general ad valorem tax levied on property in a larger area on the theory all property within the larger area benefits to some extent from the improvement.   Such treatment may be seen in the projects of water districts, irrigation districts and sewer districts where the benefit of the improvement to a particular property is sometimes thought to outweigh its benefit to property in the larger area, and sometimes not.  (112 Cal.App.3d at pp. 553–554, 169 Cal.Rptr. 391.)

In this case, the water development charge has some characteristics of a special assessment:  it is a one-time charge levied against undeveloped or redeveloped property in District to pay for capital improvements to the water delivery system required by new development.   The amount charged is based roughly on the property's use, i.e., residential or commercial/industrial.   The charge is levied on property which will benefit, at least generally, from the expanded water system.   If more water is available, the undeveloped land in the District, which would otherwise remain undeveloped for lack of water, can be developed.   And, with water available, the property increases in value.

The charge also has certain characteristics of a special tax:  it is not a compulsory fee;  property owners are obligated to pay the charge only if they develop their land.   And, the charge is deemed to benefit all owners of undeveloped property within the District whether or not they enjoy any direct benefit from the improvement, i.e., whether they receive water directly from District or from another water company within the District.

Despite its hybrid character, the water development charge is more like a special assessment than a special tax:  it is a fee levied against property, which will benefit particularly from the expanded District water system, whether it receives water wholesale or retail from District, to pay the cost of expanding the system.   Thus, the trial court did not err in concluding the charge is a special assessment.

2. Respondents were denied due process because they were not given notice and an opportunity to be heard regarding the validity of the District's assessment.

 For an improvement to be validly financed by special assessment, due process requires that the affected owners be given notice and an opportunity to object to the proposed assessment of their property.  (Hoffman v. City of Red Bluff (1965) 63 Cal.2d 584, 594, 47 Cal.Rptr. 553, 407 P.2d 857.)   As a general rule, the determination whether the public improvement should be constructed does not trigger due process, and the opportunity to protest the making of an improvement need not be given.   (Ibid.)  However, where an assessment is imposed to finance the improvement, the affected property owner must be notified of the proposed improvement and given an opportunity to object to the assessment of his property.  (Ibid.)  He has the right to a hearing on the amount of assessment he has to pay (In re Orosi Public Utility Dist. (1925) 196 Cal. 43, 51, 235 P. 1004) as well as on the validity of the assessment before it may be declared a lien on his land.  (Gwynn v. Dierssen (1894) 101 Cal. 563, 566, 36 P. 103.)

District contends it was not required to give notice and an opportunity to be heard before establishing the water development charge or imposing a lien based on unpaid charges.   District relies on two cases which are inapposite.   In Provident Institution v. Jersey City (1885) 113 U.S. 506, 5 S.Ct. 612, 28 L.Ed. 1102, mortgagees who brought an action to foreclose two mortgages challenged the city's claim to a prior lien on the property for unpaid water bills.   The court concluded the mortgagees could not complain.   Rents for water actually used were not taxes or special assessments and, when the complainants took their mortgages, they knew if the mortgaged lot used water the cost of that water would be a first lien on the property.  (Id. at p. 515, 5 S.Ct. at 615.)   Likewise, in North Wash., etc. v. Majestic Sav. & Loan Ass'n (1979) 42 Colo.App. 158, 594 P.2d 599, an action by the water district to foreclose a lien for sewer and water tap fees, the court concluded the mortgagee was not deprived of due process because he would be deprived of property (his lien priority) only after a hearing to determine the validity of the water and sewer tap fees lien.  (Id. at p. 601.)

 The cases are not dispositive because neither involves a special assessment.   The law in California is clear.   Notice, hearing and an opportunity to object must be afforded at some time before property is finally burdened by a special assessment.  (See 51 Cal.Jur.3d, Public Improvements, § 59, p. 637.)   District concedes respondents were not notified or given an opportunity to be heard before the charge was enacted.   Thus, since the water development charge is akin to a special assessment, respondents were denied due process.

Our holding makes it unnecessary to discuss the trial court's additional finding that the District's charge was a “special tax,” invalid under article XIIIA, section 4, of the California Constitution.   Special assessments are not ad valorem taxes within the meaning of article XIIIA, section 4, and are not subject to the two-thirds vote requirement.  (County of Fresno v. Malmstrom, supra, 94 Cal.App.3d 974, 985, 156 Cal.Rptr. 777;  City Council v. South (1983) 146 Cal.App.3d 320, 332, 194 Cal.Rptr. 110.)

3. The action was not time barred by Government Code section 54995.

 Government Code section 54995 provided at the time of the action:

“Any judicial action or proceeding to attack ․ an ordinance, resolution, or motion levying a new fee or service charge, or modifying or amending an existing fee or service charge, duly enacted by a local agency [which includes a district], ․ shall be commenced within 120 days of the effective date of the ordinance ․ or January 1, 1983, whichever date is later.”

District submits the water charge resolution was adopted on August 8, 1978, and revised on May 26, 1982, so respondents' action must have been filed on or before January 1, 1983.   Since it was not filed until May 18, 1984, it is barred by Government Code section 54995.

For the section to apply, the resolution must be “duly enacted.”   That language is not defined in the code nor has it been interpreted, as far as we can find, by courts applying the section.   However, “duly enacted” commonly means done according to law, both as to form and substance.  (See, e.g., Gurnsey v. Northern California, etc., Co. (1908) 7 Cal.App. 534, 544, 94 P. 858;  Commonwealth v. Sherman (1906) 191 Mass. 439 [78 N.E. 98, 99];  Harbater v. Congregation Beth Israel of Port Wash. Inc. (1953) 204 Misc. 83, 119 N.Y.S.2d 700, 703.)   Since the water development charge is a special assessment, District was obligated to provide respondents with notice and an opportunity to be heard before their property was burdened with the water charge.  (See also Gov.Code, §§ 54991, 54992.)   District did not do so, so the resolution was not “duly enacted,” and section 54995 is not applicable.

4. The award of attorney fees was proper.***

DISPOSITION

The judgment of the trial court is affirmed.   Respondents to recover their costs on appeal.

FOOTNOTES

1.   All statutory references are to the Water Code unless otherwise indicated.

FOOTNOTE.   See footnote **, ante.

FRANSON, Presiding Justice.

ARDAIZ and DIBIASO, JJ., concur.