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Proposition 26’s Immediate Impact on Local Governments Will Be Limited

Voters approved Proposition 26 at the November 2, 2010 election, and, upon certification of the results, the measure will be effective as of November 3.

The main thrust of Proposition 26 was to require a two-thirds vote of both houses of the Legislature to approve “regulatory fees” that the measure indicates are unrelated to a regulatory program.

But it will also directly limit local governments’ authority to levy new fees. Nonetheless, our initial judgment is that the impacts on most local governments will not be particularly significant, although the impact may increase as ambiguities regarding the text of the measure are resolved in the future.

Proposition 26’s stated purpose is to require voter approval for regulatory fees that “exceed the reasonable costs of actual regulation or are simply imposed to raise revenue for a new program and are not part of any licensing or permitting program. . . .” Thus, the proposition was aimed at a narrow class of regulatory fees. The text however is less surgical. It simply defines “tax” to include “any levy, charge, or exaction of any kind imposed by” local government except for those listed among seven exceptions. The significance of this new definition is that any levy not covered by one of the seven listed exceptions is subject to voter approval.

Importantly, though, Proposition 26 does not apply to any fees that were in effect on November 2, 2010. Thus, even if a fee enacted prior to November 3, 2010 does not fit within any of Proposition 218’s exceptions, it will nonetheless remain valid if it is not increased.

Additionally, most of the fees presently imposed by local governments fit clearly within one or more of the seven listed exceptions. For example, sewer and water service charges are exempted because they are subject to Proposition 218’s fees and charges provisions. Similarly, assessments that comply with Proposition 218 are exempt. And, Proposition 26 has no impact on development impact fees and other exactions imposed as a condition of property development.

Thus, Proposition 26’s key impact on local government is that it will prevent the enactment or increase of regulatory fees that do more than recover the costs of regulation. Proposition 26 restricts regulatory fees by limiting recoverable costs to those associated with issuing licenses and permits, performing investigations, inspections and audits, and administration and enforcement. For instance, the Legislative Analyst indicated in the ballot pamphlet that fees imposed on alcohol retailers to generate funds to reduce public nuisance problems associated with alcohol would likely be considered taxes.

Nonetheless, because of the manner in which it was drafted, Proposition 26 may result in legal disputes in the future over the local government’s authority to adopt and increase fees of all types. We along with other local government lawyers are presently analyzing the potential arguments that may arise. Time will tell, but our initial view is that, outside of the regulatory fee context, Proposition 26 is unlikely to be interpreted a manner that is substantially more restrictive than previous law.

For more information about Proposition 26 contact Sky Woodruff or John Bakker at 800.464.3559.