Court rejects water rights fees after 4-year fight

Issue Date: January 31, 2007

By Kate Campbell
Assistant Editor

Family farmers who were wrongfully required to pay a state water rights fee could get some of their money back. After a four-year legal battle, the 3rd District Court of Appeal in Sacramento decided in favor of farmers and ranchers who protested imposition of a new and unconstitutional state fee that resulted in a total collection of more than $20 million.

Water rights fees were levied on about 7,000 water rights holders beginning in 2004. The court agreed with the California Farm Bureau Federation that those fees were invalid and unconstitutional.

Refund checks, however, aren't in the mail to those wrongfully charged, said Carl Borden, CFBF associate counsel. It's likely the state will appeal the opinion to the California Supreme Court. Legal experts are advising patience as this issue is played out in court.

At the heart of this dispute, Borden said, is the state's new "beneficiary pays" philosophy for funding state agencies and services, which has the potential for wrongful fees and thinly disguised taxes in other areas of state government.

The California Farm Bureau Federation, along with the Northern California Water Association and Central Valley Project Water Association, led the legal challenge to the yearly fee charged to water rights holders. The court determined the fees were unfairly and disproportionately charged to only one group of water rights holders and were used to fund activities of the State Water Resources Control Board's Water Rights Division unrelated to the fee payers.

"Farm Bureau had serious concerns, not just about the constitutionality of the fee, but also about the hasty adoption of the fee provision, lack of budget analysis and the collection of far more money than is needed to administer existing small water rights," Borden said.

Farm Bureau took legal action after the Legislature passed Senate Bill 1049 in 2003, which directed the water board to set and collect fees to cover the full costs of its Water Rights Division from Jan. 1 to June 30, 2004, and each year thereafter. SB 1049 passed with a simple majority vote of the Legislature.

Rather than establish fees for actual services provided by its Water Rights Division, the SWRCB instead imposed a 3-cents-per-acre-foot fee, with a $100 minimum, on all water rights permits and licenses, regardless of the benefits received or burdens imposed by the holders of these water rights. The fees have been billed annually on the amount of water authorized to be diverted under a permit or license, whether the water is actually used or not.

In reviewing the matter, the appeal court cited previous cases that had found regulatory fees are valid only if they "do not exceed the reasonable cost of providing services necessary to the activity for which the fee is charged and they are not levied for unrelated revenue purposes."

Recognizing a fee scheme may be unfair and unreasonable to payers, and "where it is impossible to apply 'a flexible assessment of proportionality,'" the court concluded "[w]e believe the fee structure in this case crosses the line."

The opinion allows the water board 180 days to write and issue a new regulation that meets the state constitutional test and permits the board to keep amounts that have been collected until it does. Excessive amounts would be refunded only then, Borden said.

"The Court of Appeal opinion said that to avoid a financial hardship to the state and its Division of Water Rights, it can keep the money it has collected until a valid regulation is promulgated. A valid regulation would likely allow the state to retain some portion of the money it's already gotten from water rights holders."

Borden stressed that the court's opinion ordered the board to pay refunds "if any." He added that it allows refunds only to those who filed fee protests--technically, petitions for reconsideration filed with the water board.

"There are some things in this decision that are still murky from a legal standpoint," Borden said.

One thing that's not murky is the vindication some Farm Bureau members feel from the court's decision.

San Luis Obispo County cattle rancher Hy Blythe, one of a half-dozen individuals who joined Farm Bureau as petitioners in the case, said, "Ranchers around here feel the state tried to sneak a tax onto us. That's illegal. With Proposition 13, there's a whole series of things the state is required to do before they can tax us.

"We're very happy that Farm Bureau represented us on this and has kept going for the past four years," Blythe said. "We know it's not done, and it doesn't help that we're paying for the other side's legal fees, because we're paying state taxes too."

Blythe said that wrongful fees, like those charged to water rights holders, are an added burden, "and if the state continues to burden us with these added costs, it makes our ability to compete with the rest of the states fall apart."

The ironic part of paying these unconstitutional fees, Blythe said, is that "since we haven't gotten any rain, all the ponds they're collecting this money on are empty. Most of these stock ponds are small and have water in them only a few months of the year anyway, but I understand these realities have nothing to do with these wrongful fees.

"What's good, though, is that the appeals court judges recognized the situation," Blythe said. "But we don't know what will happen next. It's a lot of money, all the profit on a good many calves. Thank goodness Farm Bureau stood by us."

Borden pointed out that resolving the situation with wrongfully charged fees may take several more years to resolve through the courts. For perspective, he noted that the California state budget tops $100 billion.

"We're talking about the funding of one particular division of one particular board of about $9 million a year," Borden said. "For the state, it's a tiny fraction of one percent. For many of our members, though, what they have to pay is a lot of money, especially for those who have several permits or licenses.

"While the litigation isn't over yet, we will use this favorable opinion in our effort to persuade the Legislature that it should retroactively repeal the fee, order refunds with interest to all who paid it and fund the division with general revenue monies as it had done before SB 1049's enactment."

(Kate Campbell is a reporter for Ag Alert. She may be contacted at kcampbell@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item. Top