Court of Appeals Found that Glendale Violates its Own Charter When Transferring Money to the General Fund.

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Court of Appeals Found that Glendale Violates its Own Charter When Transferring Money to the General Fund. Case was Remanded Back to Lower Court for Re-calculating $60 Million Award to Rate Payers — By Frank Gallo

In February 2014, the Glendale Coalition for Better Government ( a nonprofit organization advocating for a transparent City Government) sued the City of Glendale asking it to return all monies that were transferred in violation of its own Charter as well as in violation of State propositions 218 & 26 (Article XIIIC of the State Constitution) from the Electric and Water revenue funds to the City’s General Fund (GFT); and restraining the City from increasing the electric rates without a vote from the electorate.

Even though the Electric and Water Utilities in Glendale (GWP) are City owned, the City and the Utilities are run as two separate entities and their finances, are by law not to be commingled.

Three years after the suit was filed, the Court decided in favor of the Coalition, but the City appealed that decision, which caused the Coalition to counter-appeal. On December 27, 2018 the Appeals court entered a decision on the appeals and counter-appeals.

The Court of Appeals found that the City had waived their portion of the appeal on the  statute of limitations in the Public Utilities Code.  Consequently that was not a valid defense for the City’s actions.

The Court of Appeals found that The City of Glendale had failed to follow the accounting provision of its city Charter. The City’s charter requires that every year an amount of depreciation be set aside from the revenue received by the Electric side of the Utility and placed into a separate Electric Depreciation Fund. The charter further defines depreciation as normal tear and wear on the plant as well as capital improvements, limiting the use of depreciation funds to those purposes only. At the end of the year any revenue left after paying for operational costs, interest and money placed aside for liabilities and depreciation is to be transferred to the Utility’s Surplus Fund and then it may be transferred to the General Fund (General Fund Transfer).

The City failed to maintain separate fund accounts as required by the Charter and did not account for the depreciation expenses of existing plants and equipment. Also, what the City considered surplus included not only cash and liquid assets but it also reflected fixed assets and liabilities. In other words, the electric surplus fund did not simply hold surplus cash, but was a balance sheet for accounting purposes that held profits, loses, assets, liabilities and equities of the utility.

The Court recognized that the City in 2013 and 2014 did not reduce sufficiently the amount of the transfer to insure the Utility’s sound financial position.

The Court of Appeals found the City had discretion to make the transfer because “the utility’s net position was positive.” The Coalition failed to show a nexus between the City’s accounting failures and the exercise of discretion to make the General Fund Transfer.   “The court may not substitute its judgement for that of that agency (City Council), and if reasonable minds may disagree as to the wisdom of the agency’s action, its determination must be upheld.” The Court’s interference in the legislative activity is limited by the separations of powers doctrine.

In short, the Courts would not second guest Council Members decisions. If a Council Member approved the Transfer knowing that the law was been violated or if that Council Member wrongly believed that the transfer was properly done was not for consideration of the Courts.

Now that two courts have concurred on finding the General Fund Transfer illegal, a decision by Council members to continue the transfer cannot longer be excused as a miss-informed decision. That might leave room for the Coalition to seek legal action against individual Council Members in the near future.

In regards to the violation of Article XIII C of the California Constitution; the prohibition on local governments from imposing, increasing or extending a tax without obtaining approval from a majority of the voters (66.67%), the Court of Appeals decided the following:

Prior to 2010 it was legal for the City to generate revenue through the electric rates that could be transferred to the City’s General Fund to pay for cost unrelated to providing electric service. After the passage of Prop 26 in 2010, any fee imposed for a specific government service is a tax unless it meets three conditions: 1) It is provided to the one who pays for it, 2) it is not provided to those not charged and 3) it does not exceed the reasonable cost of providing the service.

The electric rate increase approved in August 2013 included a charge to fund the annual transfer to the general fund. This charge was not a reasonable cost of providing the electric service which makes this portion of the charge a tax. Again “No local government may impose, extend, or increase any general tax unless and until that ta is submitted to the electorate and approved by a majority vote.”

The City said that the annual transfer was a cost of providing electric service required by the charter, but the Court of Appeals concluded otherwise.  “The City cannot accomplish indirectly what is prohibited from doing directly [by article XIII C of the State Constitution].”

Additionally, the City alleged that the annual transfer provision was intended to generate surplus revenue for general services. The Court of Appeals disagreed, indicating that according to the City Charter the Utility was required to provide funds to General Fund if surplus funds were available. The “voters approved the annual transfer to the General fund; they did not approve a charge on ratepayers to generate revenue for the transfer.”

The [Superior Court] judgement was affirmed but the portion of the judgement concerning the tax violation was reversed. The Court of Appeals remanded the case to the Superior Court to determine whether the amount of tax increased with the amendment of the rates in 2013, triggered the need for voter approval.

Also considering the California Supreme Court decision on a different case (Redding), the Court of Appeals remanded the case to the Superior Court to determine if non-rate revenue subsidized retail rates. Thought the City conceded that the amount of wholesale revenue was less than the amount of the annual transfer to the General Fund.

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Post Author: Glendale City