ONETO v. CITY OF FRESNO

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Court of Appeal, Fifth District, California.

Frank ONETO, Plaintiff and Appellant, v. CITY OF FRESNO et al., Defendants and Respondents.

Civ. 5185.

Decided: June 01, 1982

Jeffrey Reich, Fresno, for plaintiff and appellant. Dawson & Ninnis and Wayne N. Witchez, Fresno, for defendants and respondents.

OPINION

The plaintiff commenced this taxpayer's suit pursuant to Code of Civil Procedure section 526a, seeking to require the City of Fresno (hereinafter “City”) to repay to the Water Division of the City of Fresno (hereinafter “Water Division”) $847,828 which was allegedly received by way of unlawful in lieu tax payments made by the Water Division over a period of two years—1975/1976 and 1976/1977.   He also seeks a permanent injunction enjoining the City from collection of illegal taxes in the future.   The central issue pertains to the proper interpretation of section 1218 of the Fresno City Charter (hereinafter “section 1218”).

Section 1218, enacted in 1957, provides:

“SECTION 1218.  MUNICIPALLY OWNED UTILITIES.   The Council through the Chief Administrative Officer shall endeavor to make each municipally owned utility financially self-sustaining.   After providing for depreciation reserves and amortization of general obligation and revenue bonds issued for such utility and for reasonable accumulation of reserves for improvement and expansion, and for deposits into special funds created to secure revenue bonds issued for such utility, each utility shall apply all annual profits thereafter remaining to rate reductions, subject to any limitations on the application of such profits or on rate reductions contained in any resolution of the Council relating to the issuance of revenue bonds for such utility.   No municipally owned utility shall be operated for the benefit of other municipal functions nor be used directly or indirectly as a general revenue-producing agency for the City, but may pay to the City such amounts of money, in lieu of property and other taxes normally placed upon private business enterprises, as the Council may provide by ordinance and may also pay to the City for any lawful purpose such amounts of surplus annual profits as may be permitted by the provisions of any resolution of the Council relating to the issuance of revenue bonds.”

Pursuant to section 1218, in 1967 the City passed ordinance No. 67–40 adding sections 4–801, 4–802 and 4–803 to article 8, chapter 4 of the Fresno Municipal Code, which insofar as germane here adopted an in lieu tax.   The tax rate adopted is the annual weighted average of the total property tax rate levied in all tax areas as established by the county assessor, hereinafter referred to as the county tax rate.   Under the ordinances, this tax rate has been and is applied to the value of the fixed assets of the Water Division.

The plaintiff contends that these ordinances are rendered unlawful by section 1218 of the charter in that the taxes authorized by that section may not exceed those that would be collected by the City from a private water company in the City.   Those city taxes are city property taxes, the utility users' tax, business license tax and sales tax, hereinafter referred to as city taxes.

 Plaintiff presented evidence in the trial court of four fiscal years, by year, showing the amount of taxes paid by the Water Division based upon the county tax rate and the amount that would have been paid if only city taxes had been paid.   Based upon these calculations, the application of the county rate resulted in an alleged excess amount of taxes collected per year as follows:

The trial court held that the in lieu county tax rate was authorized by section 1218 and that there is no limitation on the amount of tax that may be assessed by the City under that section.   Plaintiff appealed.

 We start with some fundamental principles.   An ordinance to the extent it conflicts with the charter is void.  (Currieri v. City of Roseville (1970) 4 Cal.App.3d 997, 1001, 84 Cal.Rptr. 615.)   A city “has all powers over municipal affairs, otherwise lawfully exercised, subject only to the clear and explicit limitations and restrictions contained in the charter.”  (City of Grass Valley v. Walkinshaw (1949) 34 Cal.2d 595, 598, 212 P.2d 894.)   A charter is to be broadly construed to permit the exercise of municipal power, and limitations on that power must be expressly stated in the charter, and may not be implied.  (Taylor v. Crane (1979) 24 Cal.3d 442, 450–451, 155 Cal.Rptr. 695, 595 P.2d 129;  City of Grass Valley v. Walkinshaw, supra, 34 Cal.2d 595, 599, 212 P.2d 894.)   Full exercise of municipal power is permitted except where it is “clearly and explicitly curtailed.”  (City of Grass Valley v. Walkinshaw, supra, 34 Cal.2d at p. 599, 212 P.2d 894.)

 The rules of statutory interpretation are to be applied to the construction of charters.  (Castaneda v. Holcomb (1981) 114 Cal.App.3d 939, 942, 170 Cal.Rptr. 875.)   Since there was no extrinsic evidence introduced as to the meaning of the language used, the proper interpretation of that language is a question of law for the court, and we are not constricted in this regard by the conclusions of the trial court.  (Neal v. State of California (1960) 55 Cal.2d 11, 17, 9 Cal.Rptr. 607, 357 P.2d 839, cert. den. 365 U.S. 823, 81 S.Ct. 708, 5 L.Ed.2d 700.)

 The primal principle of statutory construction requires the ascertainment of the intent of the Legislature.  (Select Base Materials v. Board of Equal. (1959) 51 Cal.2d 640, 645, 335 P.2d 672.)   Where, as here, there is no direct evidence of legislative intent, the court must turn to the words of the statute for the answer.  (People v. Knowles (1950) 35 Cal.2d 175, 182–183, 217 P.2d 1, cert. den. 340 U.S. 879, 71 S.Ct. 117, 95 L.Ed. 639.)   Of particular significance is the cardinal rule set forth in City of San Jose v. Lynch (1935) 4 Cal.2d 760, 766, 52 P.2d 919:

“It is axiomatic that every provision of the charter should be construed in the light of the whole instrument and of each and every other provision thereof, keeping in view at all times the intent underlying the same․  ‘․ General and special provisions in a statute should stand together, if possible, but where general terms or expressions in one part of a statute are inconsistent with more specific or particular provisions in another part the particular provisions must govern, unless the statute as a whole clearly shows the contrary intention․’ ”  (Emphasis added.)

 It is plain beyond cavil that the language “․ each utility shall apply all annual profits thereafter remaining to rate reductions, ․” was intended to assure cheap water rates to users.   This express purpose cannot be gainsaid.

The last full sentence of section 1218 of the Fresno City Charter is a long one.   As part of that sentence it is stated:  “No municipally owned utility shall be operated for the benefit of other municipal functions nor be used directly or indirectly as a general revenue-producing agency for the City, but may pay to the City such amounts of money, in lieu of property and other taxes normally placed upon private business enterprises, as the Council may provide by ordinance ․”  The expressed intent is clear, explicit and unambiguous.   Its manifest purpose is to prevent the City from riding on the backs of water users to pay the general expenses of the City by raising revenue from the Water Division in excess of what City services to that agency cost, thus reducing or eliminating the profits which the agency might otherwise make and apply to the reduction of water rates.

It is evident that construing section 1218 as a whole, the dominant purpose and intent is to apply profits to the reduction of rates, and to that end section 1218 prohibits the City from assessing the Water Division for the benefit of other municipal functions or directly or indirectly using the Water Division as a general revenue producing agency.   It is obvious that if the Water Division is assessed at a rate which pays for the services it receives from the City, represented by City taxes, ipso facto any amount of money collected by the City over that amount is an amount collected for use to support City services and operations for other purposes, thus using the Water Division as a revenue producing agency in violation of the specific provisions of section 1218.

 Once the legislative intent is ascertained, it is fundamental that the court's task is to effectuate the purpose of the law as expressed in that intent.  (Select Base Materials v. Board of Equal., supra, 51 Cal.2d 640, 645, 335 P.2d 672.)   Our endeavor must be to produce a “reasonable result consistent with [the] legislative purpose ․”  (E.g., Kusior v. Silver (1960) 54 Cal.2d 603, 620, 7 Cal.Rptr. 129, 354 P.2d 657.)   As the court stated in Friends of Mammoth v. Board of Supervisors (1972) 8 Cal.3d 247, 259, 104 Cal.Rptr. 761, 502 P.2d 1049:

“Once a particular legislative intent has been ascertained, it must be given effect ‘ “even though it may not be consistent with the strict letter of the statute.” ’  (Dickey v. Raisin Proration Zone No. 1 (1944) 24 Cal.2d 796, 802 [151 P.2d 505, 157 A.L.R. 324].)   As we stated nearly a half century ago in In re Haines (1925) 195 Cal. 605, 613 [234 P. 883]:  ‘ “The mere literal construction of a section in a statute ought not to prevail if it is opposed to the intention of the legislature apparent by the statute;  and if the words are sufficiently flexible to admit of some other construction it is to be adopted to effectuate that intention.   The intent prevails over the letter, and the letter will, if possible, be so read as to conform to the spirit of the act.” ’ ”

 The interpretation urged by the City that the section authorizes the City to use the county tax rate negates and renders meaningless the above referred to express limitations in section 1218.   Section 1218 should be construed to give effect to every provision, if possible.  (See 58 Cal.Jur.3d, Statutes, § 99, pp. 465–468, § 100, pp. 468–469, § 133, pp. 529–530.)

 Construing section 1218 as a whole in order to effectuate its clear intent and purpose, we hold that the express limitations set forth in section 1218 qualify the authority of the City to assess in lieu taxes.   The City is limited in the amounts of money it can raise from the Water Division to that amount which will not produce revenue for the benefit of other municipal functions or revenue in excess of the amounts needed to pay for the services supplied by the City to the Water Division, plus amounts required for reserves for depreciation and amortization of bonds.   To the extent that sections 4–801, 4–802 and 4–803 of article 8, chapter 4 of the Fresno Municipal Code are in conflict with this standard, they are invalid.

Respondent City relies upon the principle that a city charter may not be interpreted to contain implied limitations on the exercise of power.  (City of Grass Valley v. Walkinshaw, supra, 34 Cal.2d 595, 599, 212 P.2d 894.)   Referring to the language in section 1218, the City contends that there is no express limitation on the City's power to assess in lieu taxes.   The City misses the mark as section 1218 does contain the express limitations we have discussed.2  As mentioned, those limitations are the express limitation pertaining to the application of profits to rate reductions, and the limitation contained in the phrase prohibiting the operation of the division for the benefit of other municipal functions and prohibiting the division's use as a general revenue producing agency for the City.   Significantly, these limitations are found in the same sentence as the authority to assess in lieu taxes.   Since the limitations are express and not implied, the authorities cited by the City are inapplicable.

 We have given due deference to the City's interpretation of the charter, but that interpretation cannot be permitted to change the true meaning and intent of the charter.  (2 McQuillin, Municipal Corporations (3d ed. 1979), p. 686.)

Turning to the question of remedy, plaintiff prays, in part, for an order requiring the City to restore the sum of $847,828 to the Water Division.   Most of the statistics presented were by stipulation, with certain expressed reservations and limitations.   Accordingly, this court cannot fix an exact figure.   The determination of the precise amount within the prayer of the complaint will have to be made by the trial court upon remand.

Whatever the amount, we hold that Code of Civil Procedure section 526a does not mandate the court to order repayment under all circumstances.

 City Financial Director Walter Berg testified that as of June 1979 the City had no general reserve funds for the contingency of repayment of unlawfully collected taxes, and that the taxes collected from the Water Division had been spent.   If repayment were ordered, the funds would have to come from future appropriations from the general fund of the City.   Thus, there is a real possibility that a decrease in City services would result if repayment were ordered.   While water rates may decrease, it may be that there would be no net benefit to the City residents.   In this regard, the court takes judicial notice of the extreme financial strictures under which cities generally and the City of Fresno in particular are currently operating in these troubled economic times.

Cota v. County of Los Angeles (1980) 105 Cal.App.3d 282, 164 Cal.Rptr. 323 (cert. den. 449 U.S. 1014, 101 S.Ct. 573, 66 L.Ed.2d 473) was a suit commenced pursuant to Code of Civil Procedure section 526a by a taxpayer to enjoin the illegal and wasteful expenditure of public funds.   The court held that the plaintiff's claims for relief were not meritorious, but stated that even if they had been meritorious, “such relief can be denied where it would cause severe harm to the public.  [Citation.]”  (105 Cal.App.3d at p. 292, 164 Cal.Rptr. 323.)   This principle readily applies here.   Even assuming the validity of appellant's contentions, this court may deny his request for repayment, if it is determined that repayment will cause harm to city finances, and in the long run to city residents.

The same principle was applied in Kahn v. East Bay Mun. Util. Dist. (1974) 41 Cal.App.3d 397, 116 Cal.Rptr. 333.   There, property owners within a municipal utility district sought a writ of mandate to compel the district to set higher water rates, which would in turn lower property taxes.   The issue arose as to whether taxes already collected could be repaid.   The court held that relief could not be granted.  “In this case, however, it is too late to unscramble the eggs.   There is no true surplus from the total amount collected by taxes and water charges for the overall long run operations of the district.”  (41 Cal.App.3d at p. 408, 116 Cal.Rptr. 333.)

 We have concluded that the trial court, after hearing the evidence, will have discretion to determine whether the sum should be ordered restored to the Water Division.   This determination should be made after considering various factors, including the length of time the tax has been in existence, the amount involved, the disbursement or nondisbursement of the illegally collected funds, the financial condition of the City, the source of the funds for repayment and the effect of repayment on other City services, and any other facts bearing upon the issue.

 Lastly, plaintiff seeks a permanent injunction enjoining the City from employing a tax rate from any jurisdiction other than the City.  Daar v. Alvord (1980) 101 Cal.App.3d 480, 161 Cal.Rptr. 658 sounds the death knell for such relief.   There, plaintiffs pursuant to section 526a sought a preliminary injunction against the expenditure of taxes allegedly unlawfully collected by the City and County of Los Angeles.   The court denied this relief and reasoned by implication from article 13, section 32 of the California Constitution and Revenue and Taxation Code section 4807 that section 526a does not authorize the granting of an injunction against “activity characterized as illegal solely by reason of purportedly illegal tax collection.”  (101 Cal.App.3d at p. 486, 161 Cal.Rptr. 658.)   Thus, the court held that the strong public policy against enjoining tax collection was controlling over section 526a's purpose of restraining the waste of taxpayers' funds.   It follows that an injunction restraining tax collection will not lie under section 526a.

 However, section 526a authorizes declaratory relief.  (See Van Atta v. Scott (1980) 27 Cal.3d 424, 449–450, 166 Cal.Rptr. 149, 613 P.2d 210;  Squire v. City and County of San Francisco (1970) 12 Cal.App.3d 974, 979, 91 Cal.Rptr. 347.)   While the plaintiff has not specifically prayed for declaratory relief, his complaint is susceptible to granting such relief.   In the interest of judicial economy, we construe the prayer of the third cause of action of plaintiff's complaint as one for declaratory relief.  (Rev. & Tax. Code, § 4808;  Code Civ.Proc., § 1060;  3 Witkin, Cal. Procedure (2d ed. 1971) § 709, p. 2331.)   We presume the City will follow the court's interpretation if and when this decision becomes final.  (Pacific Motor Transport Co. v. State Bd. of Equalization (1972) 28 Cal.App.3d 230, 236, 104 Cal.Rptr. 558.)

The court declares that section 1218 of the City Charter limits the City in the amounts of money it is authorized to raise from the Water Division of the City to that amount which will not produce revenue for the benefit of other municipal functions or in excess of the amounts needed to pay for the services supplied by the City to the Water Division, plus amounts required for reserves for depreciation and amortization of bonds.   To the extent sections 4–801, 4–802 and 4–803 of article 8, chapter 4 of the Fresno Municipal Code are in conflict with this standard, they are invalid.

The judgment is reversed and the cause is remanded to the trial court to fix, within the prayer of the complaint, the amount of illegally collected taxes in accordance with the principles set forth in this opinion, and to determine if the amount so fixed should be ordered refunded to the Water Division of the City in accordance with the standards set forth herein.

That part of the judgment denying an injunction against future collection of taxes from the Water Division based upon the county tax rate as heretofore assessed is affirmed.

Plaintiff shall have his costs.

I respectfully dissent.

The majority observes that charter provisions limiting municipal powers may not be implied, but then implies a limitation.

The issue may be delineated by rewriting section 1218 of the charter as construed by the majority.   The last sentence, as so amended, would read:

“No municipally owned utility shall be operated for the benefit of other municipal functions nor be used directly or indirectly as a general revenue-producing agency for the City, but may pay to the City such amounts of money, in lieu of property and other taxes normally placed upon private business enterprises limited however to taxation to provide those services supplied by the City to the utility as the Council may provide by ordinance ․”  (The underlined portion constitutes the amendment.) 1

The charter provision should be read as meaning that a municipal utility, such as the Water Division, shall operate without a profit, but must pay an in lieu amount measured by those property taxes normally assessed against private business enterprises, including taxes collected by the county and the City irrespective of benefits to the utility.   The intent of section 1218—to assure cheap water rates—is met because the Water Division is precluded from making a profit, as would a private business, and is precluded from raising funds for municipal purposes beyond payment to the City of an amount equal to taxes assessed against private enterprise.   As observed by the trial court below, the reference to an in lieu amount measured by taxes “normally placed on private business enterprises” is a reference to the tax burden that is avoided rather than the tax loss to the City by reason of public ownership.   This manifests an intent to give water users the benefit of the profits that would have been distributed to the owners if the utility were private, but not more.

The operation of the water department is a municipal affair.  (Mefford v. City of Tulare (1951) 102 Cal.App.2d 919, 924, 228 P.2d 847.)   Established law governing municipal affairs of chartered cities is that the city has all powers over its municipal affairs subject only to the clear and explicit limitations and restrictions contained in the charter.  (City of Grass Valley v. Walkinshaw (1949) 34 Cal.2d 595, 599, 212 P.2d 894.)  “All rules of statutory construction as applied to charter provisions [citations] are subordinate to this controlling principle.”  (Ibid.) 2

The majority construes the charter to mean that the City may not raise amounts in excess of those needed to pay for those services supplied by it to the Water Division (plus amounts required for reserves for depreciation, amortization of bonds and accumulation of reserves for capital improvements).   Which police and fire protection services and City street maintenance services would find inclusion?   And what of recreational facilities, such as parks and playgrounds?   Or the cost of providing land for a convention center hotel?   Or the cost of City beautification through the planting of trees?   If the in lieu payments made to the City are to be measured by benefits to the Water Division, should not benefits conferred upon it by the county also be taken into consideration?   If so, should emergency medical facilities at the general hospital be included because a Water Division employee injured on the job might make use of said facility?   Or provision of law enforcement services pursuant to the Mutual Aid provision of the Emergency Services Act?  (See Gov. Code, § 8615 et seq.)   Or provision of court facilities for litigation involving the Water Division?

The majority casts upon the trial court the difficult job of determining which City services do and which do not benefit the Water Division, then determining an in lieu payment which pays for those services and none other.   The electorate in enacting the charter could not have expected such a result.3  The plain language of section 1218 provides that the in lieu payments may be measured by taxes normally placed upon private business enterprises.   It does not restrict the taxes to those which benefit the Water Division or make it function.   We should not read such a limitation into the charter.

The drafters of the City Charter easily could have expressly limited in lieu payments to an amount equal to the imposition of the taxes levied against private business enterprises by the City.   After the words in section 1218 granting the City power to collect payments “in lieu of property and other taxes normally placed upon private enterprise” the mere insertion of the words “by the City” would have limited the City's power as the majority interprets.   The drafters' failure to use this clear and simple limitation of the City's power is evidence of an intent not to so restrict that power.

Since 1967, the City has been applying the in lieu payments complained of.   Admittedly, this was only 10 years before the plaintiff filed his complaint.   However, this contemporaneous construction is entitled to some weight (City of Grass Valley v. Walkinshaw, supra, 34 Cal.2d at pp. 601–602, 212 P.2d 894.)

I think a common sense reading of the charter leads us to the conclusion that the words “property and other taxes normally placed upon private business enterprises” includes all property taxes normally imposed on such businesses, which include the county tax rate and those City taxes which do not support services to the Water Division.

I would affirm the judgment.

FOOTNOTES

FN1. The complaint covers the fiscal years 1975/1976 and 1976/1977 only and asks for the specific sum of $847,828.   As shown by the above figures, the proof was different.   Since no motion was made to amend the complaint to conform to proof, the plaintiff is limited to his prayer..  FN1. The complaint covers the fiscal years 1975/1976 and 1976/1977 only and asks for the specific sum of $847,828.   As shown by the above figures, the proof was different.   Since no motion was made to amend the complaint to conform to proof, the plaintiff is limited to his prayer.

2.   Our colleague's dissent makes the same error.

1.   A portion of the majority opinion is subject to the construction that the in lieu payments may equal an amount equal to City taxes.   If this is the majority's holding, the underlined words would read:  “by the City.”

2.   Section 200 of the charter provides:“Section 200.  General Powers.   The City shall have the power to make and enforce all laws and regulations in respect to municipal affairs, subject only to such restrictions and limitations as may be provided in this Charter and in the Constitution of the State of California.   It shall also have the power to exercise any and all rights, powers and privileges heretofore or hereafter established, granted or prescribed by any law of the State, by this Charter, or by other lawful authority, or which a municipal corporation might or could exercise under the Constitution and laws of the State of California.“The enumeration in this Charter of any particular power shall not be held to be exclusive of, or any limitation upon, the generality of the foregoing provisions.”The effect of this provision is that as to municipal functions, the City's powers over its affairs became all embracing, restricted and limited by the charter only.  (Civil Center Assn. v. Railroad Comm. (1917) 175 Cal. 441, 448, 166 P. 351.)

3.   We assume that in a city the size of Fresno, there are many users.   The impact of county taxes on the water rate must be minimal.

GEO. A. BROWN, Presiding Justice.

GOMES,* J., concurs.