Rulings trash excessive local waste management fees

Waste collection and recycling in California are essential public services. Generally, local authorities like cities and counties must implement safe, cost-efficient, and environmentally sustainable waste management programs within their jurisdictions. Some operate their own programs, but most contract with private waste haulers and recyclers. Yet, as California's environmental regulations increase and global recycling markets contract, costs for our state's ratepayers, jurisdictions and the waste and recycling industry are growing. The question arises how we are going to pay to manage our state's more than 75 million tons of annual garbage and recyclables. Recent caselaw helps answer this question.

A Challenging Time for Waste Management

Waste management in California faces immense challenges. New laws from Sacramento are pushing the envelope on recycling and waste diversion. Assembly Bill 341 enacted in 2011 requires jurisdictions to implement mandatory commercial recycling and obtain a statewide recycling rate of 75% by 2020. Senate Bill 1383 passed in 2016 imposes a 75% organic waste (food scraps and yard waste) disposal reduction goal by 2025. State regulators at CalRecycle estimate 200 new green and food waste recycling facilities may need to be built at the potential cost of up to $40 billion. Somebody has to pay for all these programs.

However, at the same time as recycling mandates are increasing, international recycling markets are shrinking. California used to send 13 million tons a year of recyclables to China. No longer. China -- concerned about its environment and domestic markets -- started tightening restrictions in 2013, culminating in its National Sword policy and 2020 plan to stop accepting any imported recyclables. As a result, mixed paper (like newsprint or packaging wrappers) once worth $75 per ton now has a negative value. The most recent data from CalRecycle shows that in 2016 California recycled only 44% of its waste, down from 50% in 2014 -- far below the state's targets. The recycling rate today likely is 40% or lower. Costly new domestic recycling infrastructure is needed that will take years to come online. The COVID pandemic makes the situation more acute, as recycling facilities close to protect workers and many businesses cannot pay their trash bills.

As a result, what was once a source of revenue for local governments and their waste haulers is now a black hole draining local revenues and forcing significant increases in local garbage rates and regulatory fees to consumers. After all, it is our garbage and consumption -- and we all have to pay for it. However, this is a complex area of municipal taxation law. A pair of recent cases -- where local fees for waste and recycling programs were struck down -- provide guidance and best practices for municipalities moving forward.

Zolly and Waste Franchise Fees

In Zolly v. City of Oakland, 47 Cal. App. 5th 73 (2020), the 1st District Court of Appeal held that excessive waste franchise fees are taxes subject to voter approval under Article XIII C of the California Constitution. The case stands for the rule that franchise fees that private waste haulers pay a city as part of a waste contract must be value and cost justified.

Article XIII C is the product of a series of initiatives passed by California's voters that limit the government's taxing power (e.g., Propositions 13, 26 and 218). Proposition 218 requires voter approval for all special taxes (two-thirds) and general taxes (simple majority) imposed by local governments. Proposition 26 defines the term "tax" broadly to include any charge imposed by local government unless it falls within one of seven exemptions with the burden on the government to show the fee is reasonable. Zolly makes clear that waste franchise fees must follow these rules.

In Zolly, the city of Oakland approved two franchise contracts for collection of garbage, organics and residential recycling services, subject to the companies paying the city $25 and $3 million initial franchise fees, respectively. Such franchises for waste collection and recycling are very common. For example, we estimate more than 85% of the cities in Los Angeles County contract with a private waste hauler to run commercial or residential programs. In general terms, a franchise granted by a local government gives a private company (typically selected through a bidding process) authority to collect waste and recycling, and franchise fees are paid to the jurisdiction as compensation for the use of the public streets and right of ways.

Plaintiffs sued the city in Zolly, arguing the franchise fees were excessive and would be passed on to ratepayers as disguised taxes that required voter approval under Article XIII C. The city filed a demurrer, arguing the fees were exempt from voter approval because they fell within Proposition 26's fourth exemption (i.e., fees imposed for the entrance on or use of local government property). The trial court granted the demurrer.

On appeal, the 1st District reversed, rejecting the city's argument and invalidating the fees at issue, relying heavily on the California Supreme Court's recent decision in Jacks v. City of Santa Barbara, 3 Cal. 5th 248, 269 (2017), which held that franchise fees are only exempt from Article XIII C to the extent they bear a reasonable relationship to the value received from the government, and that any portion exceeding the reasonable value amounts to a tax. Excessive franchise fees can too easily become a vehicle to generate local revenue when passed onto ratepayers (like an unapproved tax). The complaint, therefore, stated a valid cause of action, as it alleged "financial analyses were not performed," and the fees "do not bear a reasonable relationship to the value received from the government."

The city petitioned the California Supreme Court for review and depublication of Zolly (still pending as of the date of this article), but the case shows that local governments that rely on franchises for waste collection and recycling must beware of limits on municipal taxing power. They must show their work in order to justify the franchise fee assessed -- the amount cannot be pulled out of thin air (which too often is the case now).

Chiquita Canyon Invalidates Landfill Fees

The other new, significant waste management fee case is a Los Angeles County Superior Court trial decision earlier this month involving the Chiquita Canyon Landfill. The ruling and reasoning is similar to Zolly. In Chiquita Canyon, LLC v. County of Los Angeles (July 2, 2020), Judge Daniel Murphy ruled that fees imposed by Los Angeles County on a landfill land use permit renewal must have an essential nexus and be roughly proportional to the facility's impacts under the California Mitigation Fee Act.

Chiquita involves a 639-acre landfill in the Castaic community located in the unincorporated area of Los Angeles County near Six Flags Magic Mountain. The defendant county first approved the landfill's conditional use permit in 1965. In renewing the permit in 2017, the county imposed more than a dozen different fees on the landfill, many of which the plaintiff operator challenged under the Mitigation Fee Act in a writ petition for administrative mandamus.

For background, the Legislature enacted Mitigation Fee Act (Gov. Code Sections 66000-66025) in response to concerns about local agencies imposing excess development fees. In short, the act requires the local agency to determine that there is a reasonable relationship between the fee amount and the impacts of the development. To determine this, the act adopts the U.S. Supreme Court Nollan/Dolan taking jurisprudence requiring the fees (1) have an essential nexus to a legitimate government interest and (2) be roughly proportional to the impacts of the project.

At trial, the Chiquita court upheld some of the challenged fees, but found that more than 10 of the discrete fees imposed by the county went overboard under the act. Several fees lacked an essential nexus (e.g., development of a park costing up to $2 million, $0.50 per ton of waste disposed for natural habitat, $0.08 per ton to fund disaster debris cleanup, $50,000 every other year for a planning study). For example, the county argued the $0.08 per ton disaster cleanup fee was necessary because the landfill would benefit from increased debris tonnage while the neighbors would suffer increased traffic and other impacts. The court disagreed, noting that disaster cleanup would be necessary independent of the landfill, and that the use of the fee (i.e., funding disaster cleanup efforts countywide) was unrelated to the impacts to be mitigated (i.e., increased local community impacts). Other fees lacked proportionality (e.g., $0.25 per ton for waste reduction and diversion programs, $0.50 per ton for road improvement, $.2-$3.0 million for annual alternative technology research). For instance, while the county's road improvement fee had a nexus to impacts caused by the landfill (e.g., added traffic congestion from trash truck trips), the record did not show how the $0.50 per ton fee was proportional to potential road improvements to mitigate traffic. The county did not show its work. The court also invalidated certain fees on disposal of out of county trash at the landfill. Judge Murphy stuck down fees that could total $100 million or more over the life of the landfill conditional use permit. And in the end, all these fees would have trickled down to ratepayers. A post-trial status conference is scheduled for later this month.

Conclusion

Zolly and Chiquita -- one case from the north of our state and one from the south -- instruct local governments that they must tether their waste management fees to real evidence, determined during bona fide negotiations over franchise fees and rates (Zolly) or in cost justification fee studies of the impacts of waste and recycling operations (Chiquita). Unjustified fees or rates imposed upon residents or industry will be tossed out under California's constitutional and statutory limits on municipal taxing power.

In practice, the requirement that local governments show their work when imposing waste fees and rate increases should be manageable (pardon the pun) because it is undisputable that California's waste collection sector is under severe financial strain from the double whammy of strict domestic environmental mandates and shrinking international recycling markets. Recycling is getting significantly more expensive. At the same time, the COVID pandemic and recession pose serious challenges to raising rates. The authors of this article are not unsympathetic to the difficulties facing local governments. Nevertheless, if Californians are going to continue to consume and generate sizeable per capita volumes of trash, while also prioritizing stringent sustainability and recycling rules, we all have to pay for it. Zolly and Chiquita provide the roadmap to show how local jurisdictions can properly pass on waste management costs to their residents and ratepayers. 