Memorandum: Permissible Expenditures by Community Parking Districts

Memorandum: Permissible Expenditures by Community Parking Districts

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MEMORANDUM

DATE: March 29, 2021
FROM: Jesse O’Sullivan and Colin Parent, Circulate San Diego
SUBJECT: The City of San Diego Has the Authority to Expand Permissible Expenditures by Community Parking Districts

I. Introduction

The City of San Diego’s Community Parking Districts have more than $9 million in unspent revenues collected from parking meters. ^[1] Since 2009, the City Attorney has considered parking meter revenues to be “fees”, which places limits on how Parking Districts may spend those revenues. However, in 2010, voters adopted Proposition 26, which amended the California Constitution and clarified that revenues generated from charging for the use of government property, including revenues from parking meters, are not fees or taxes. These parking revenues can therefore legally be spent for any government purpose.

Proposition 26 allows the City of San Diego to revisit its policies and to expand how parking meter revenue can be spent by Community Parking Districts. The City of San Diego can and should update its policy and join many of its peer jurisdictions in California that allow parking revenues to be spent on a wide variety neighborhood amenities for residents, visitors, and businesses.

II. Background

Since at least 1942, the City of San Diego has used parking meters to manage congestion along the curbside of public streets. ^[2] For almost 70 years, the City considered parking meter revenue to be available for any use. It was only in 2009, in a response to a Grand Jury Report faulting the City with a waste of the meter revenue, that the City Attorney first opined that the parking meter revenue was a “regulatory fee” that must be spent exclusively on parking-related expenses.

Despite the voters’ approval of Proposition 26, and recent court cases clarifying the law, the City Attorney has not reconsidered its 2009 legal conclusion that departed from long-standing practice. Consideration of Proposition 26 and recent case law reveals that parking meter revenues are charges that do not constitute fees or taxes within the meaning of the relevant law. ^[3] The City is therefore legally allowed to spend these funds as it chooses.

III. Parking Meter Law in San Diego

For most of San Diego’s history, parking meter chargers were considered to be revenue that could be placed in the general fund. In 1997, the City Attorney confirmed the City’s understanding that parking meter charges were neither taxes nor fees, and therefore not subject to the restrictions associated with those designations. ^[4] Moreover, as early as 1946, the City did not consider parking meters to be solely for the purpose of recouping the costs of parking, as would be required if they were a regulatory fee. As a local court explained in 1946, “regulation of parking and control of traffic may well justify a fee system intended and calculated to hasten the departure of parked vehicles in congested areas, as well as to defray the cost of installation and supervision.”. ^[5] In other words, the meters were not charging for parking simply to pay for the cost of parking meters; they were intended to discourage people from parking their cars indefinitely in crowded areas.

Over time, a series of citizens’ initiatives in California redefined and restricted cities’ ability to impose taxes, fees, and other charges. Proposition 13, which was enacted by voters in 1978, limited the collection of property taxes and, to prevent the government from replacing the lost property tax revenue with other sources, required some other tax increases to be approved by the voters. ^[6] After Proposition 62 was approved by voters in 1986, all local taxes required voter approval. ^[7] However, courts and the legislature recognized that various fees were not taxes for the purposes of Proposition 13. ^[8] Broadly speaking, a fee was not categorized as a tax if it “had a reasonable relationship to the benefit or cost on which it was based.”. ^[9] If a fee failed to meet this requirement, it was instead categorized as a tax which required voter approval. ^[10]

To make up for lost revenue, cities across California began to increasingly rely on regulatory fees to cover the costs of providing services. The imposition of new fees led to increased scrutiny from those that viewed fees as a “loophole” to the constitutional limits on taxation. ^[11]

In 1996, voters approved Proposition 218, which restricted cities’ ability to raise revenue without voter approval. ^[12] Proposition 218 defined a “fee” as “any levee other than an ad valorem tax, a special tax, or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for a property related service.” ^[13] In addition, it required that revenues from a fee be used only for the property related service that the fee was charged for. ^[14]

In the wake of Proposition 218, the City asked the City Attorney to consider whether Proposition 218 affected existing fees and charges, including parking meter charges. When asked in 1997 whether there were any problems with the way the City collected parking meter revenue after changes in the state constitution arising from the recently-passed Proposition 218, City Attorney Casey Gwinn assured the City that “[b]ecause [parking meter revenue] is in no way ‘property-related,’ it is not a fee, charge or assessment within the reach of Proposition 218. Further, because it is a fee imposed only on persons who voluntarily use the parking space that is metered, and only for the specified time chosen by the person using it, the charge is not a ‘tax’ within Proposition 218.” ^[15]

Despite the legal ability to spend parking meter revenue in any manner, the City passed an ordinance creating parking districts and directed that parking meter revenue should be spent on a narrow scope of projects related to parking. ^[16]

In 2009, facing a budget shortfall, the City faced increased scrutiny of the revenue sitting unused in the parking districts’ coffers and over the parking districts’ spending practices. A San Diego County Grand Jury report found that one group, the Uptown Parking District, spent three times as much on salaries and other overhead as it spent on actual projects. ^[17] The report reasoned that the money could be better used by the City for other purposes and recommended scrapping the parking districts and redirecting the parking meter revenue into the City’s General Fund. ^[18]

In response to the Grand Jury report, the City Attorney reached an entirely new conclusion. In a memo, the City Attorney for the first time opined that the California Constitution limited the ways in which the funds could be spent. ^[19] Whereas the 1997 memo concluded the charges were neither taxes nor fees, the new 2009 memo concluded that parking meter revenue was a “regulatory fee” that could be spent only on “the control of traffic which may affect or be affected by the parking of vehicles in designated parking meter zones.” ^[20] If the revenue was used for other purposes, the memo warned the meter fees would morph into a special tax requiring voter approval. ^[21]

Based on this City Attorney memo, the Mayor and the Office of the Independent Budget Analyst responded to the Grand Jury report by explaining that it was legally impossible to redirect the parking meter revenue to the General Fund without converting the revenue into a special tax that had to be approved by the voters. ^[22] Since that 2009 memo, the City Attorney has repeatedly applied the same analysis to find additional restrictions on how the revenue could be spent to ensure the meter charges remain a “regulatory fee” rather than a “special tax.” ^[23]

These more recent memos, however, ignore an important change in the California Constitution approved by voters shortly after the City Attorney’s 2009 memorandum. In 2010, the voters approved Proposition 26, which provided much-needed clarity on the definitions of taxes, fees, and assessments. ^[24]

IV. Current California Law Allows Parking Meter Funds to be Used for Any General Government Purposes

For the first time, Proposition 26 specifically defined “tax” to include “any levy, charge, or exaction of any kind imposed by a local government”, unless it fell into one of seven exceptions. ^[25] A charge that satisfies an exception is, by definition, not a tax. ^[26] Among these are three exceptions that closely resemble the traditional category of fees and assessments that must be related the costs of providing a government service.” ^[27] More important to this analysis is another exception. Charges “imposed for entrance to or use of local government property, or for the purchase rental, or lease of local government property” are not taxes. ^[28]

Parking meter revenues are just such a charge. The city owns the street, and a parking meter charge is a charge for temporary use of that property. It therefore is not a tax. Nor is a parking meter charge a “fee” that must not exceed the reasonable cost of providing a service. The category of “regulatory fee” was developed as an exception to Proposition 13’s requirement that taxes must be approved by the voters. ^[29] As articulated in the 2009 City Attorney memo, Government Code Section 50076 and relevant case law explain that if a regulatory fee exceeds the reasonable cost of the service provided, it becomes a special tax that must be approved by two-thirds of the City electorate. ^[30]

However, Proposition 26 amends the Constitution to clarify that a charge for use of government property is not a tax regardless of whether it is related to the cost to the government of the use of the property. ^[31] Even if parking meter revenue exceeded the cost of providing parking, it could not meet the constitutional definition of a tax. This renders the requirements of a regulatory fee irrelevant.

A recent California Supreme Court case discussed a similar situation in which the use of government property exception applied. That case, Jacks v. City of Santa Barbara, involved a utility franchise fee, which the City of Santa Barbara charged the local electric utility in exchange for use of the public right of way to deliver electricity to residents. ^[32] The city charged the utility a flat fee that was added to customers’ bills. ^[33]

A group of homeowners challenged this fee in court, arguing it was either a tax that could only be imposed if approved by voters or, to be a permissible fee, had to be limited to the City’s costs to provide the property for use. ^[34] The Supreme Court rejected this distinction. ^[35] Instead, the Court explained that according to Prop 218, fees to use government property are not like fees for government services. ^[36] Unlike a fee to compensate the government for the cost of providing a service, a fee to use government property does not have to bear any relationship to the cost to the government to provide that property for use. ^[37] Instead, the Court stated that

“[A] fee paid for an interest in government property is compensation for the use or purchase of a government asset rather than compensation for a cost. Consequently, the revenue generated by the fee is available for whatever purposes the government chooses rather than tied to a public cost. The aspect of the transaction that distinguishes the charge from a tax is the receipt of value in exchange for the payment.” ^[38]

To avoid converting the fee into a tax, the Court cautioned that “fees imposed in exchange for a property interest must bear a reasonable relationship to the value received from the government.” ^[39]

This distinction between fees for public services and fees for use of public property makes obvious sense in a slightly different context: if a city sells a piece of land to a developer, the City can charge the buyer for the market price of the land. Indeed, this process was followed in the recent sale of the Qualcomm Stadium site to SDSU. No one suggested that the City could only charge SDSU a price that is related to the cost of listing the property for sale. And this rule does not have to be limited to a complete transfer of property. Generally speaking, the City may charge market rate rents for city-owned property.

Although a franchise fee appears unlike parking meter charges, both share important similarities: both are charges by the government for use of a public street right of way. Thus, as the Supreme Court explained, that a parking charge does not have to be tied to the cost of providing the public street to avoid becoming a tax, so long as the charge is based on the actual value of the use of the property. The city can then use parking revenue for “whatever purposes the government chooses.” ^[40]

This interpretation of Jacks is shared two UC Davis School of Law professors, who recently analyzed the permissible uses of parking fees under California law. ^[41] Professors Chris Elmendorf and Darien Shanske reached the same conclusion as this memorandum, writing that parking meter fees were either categorically not taxes, or were not taxes as long as they had a “reasonable relationship to the value of the property interest.” ^[42]

Furthermore, a California Court of Appeal recently ruled that under Proposition 26, an increase in the charge for use of a toll road fell within an analogous exception to the constitutional definition of a tax. Howard Jarvis Taxpayers Ass’n v. Bay Area Toll Authority found that an increase for a toll road was not a tax under Proposition 26 because it was a charge for entrance to or use of government property. ^[43]

The case interpreted California Constitution Article XIII A, section 3, which defines “tax” for the purposes of taxes imposed by the state, rather than local governments. ^[44] Article XIII A, section 3 exempts from the definition of “tax” “[a] charge imposed for entrance to or use of state property, or the purchase, rental, or lease of state property, except charges governed by Section 15 of Article XI.” ^[45] The Court in Bay Area Toll Authority ruled that where the state had caused an increase in the toll for seven bay area bridges, the toll was not a tax and was not subject to any reasonableness requirement because it was a “charge for entrance to or use of state property.” ^[46]

The facts in Bay Area Toll Authority are closely analogous to San Diego’s parking meter charges. A parking meter charge, like a toll, is a charge for the use of public roads. While Bay Area Toll Authority analyzed under Article XIII A, section 3, which applies to state charges, there is no relevant distinction between that provision and Article XIII C, which applies to local governments like the City of San Diego. Both of these provisions use almost identical language, and were adopted as a part of Proposition 26. Given this precedent, a court would likely conclude that local governments’ parking meter charges fall within the analogous exception under Article XIII C for use of government property. As explained above, if a charge falls within this exception, the requirements of regulatory fees are irrelevant because the charge does not fall within the constitutional definition of “tax.”

It is also worth noting that an important and well-respected organization, the League of California Cities, offered advice to cities regarding the word “imposed” in the definition of tax found in Prop 26. ^[47] As the League explained, it is important to first consider whether the charge is even “imposed” by a city. If not, the whole conversation is largely irrelevant because the charge would not be a tax or a fee.

To determine whether a charge is imposed, the League advises cities to focus on whether the charge is in connection with a service the city is statutorily obligated to provide and for which the city is the exclusive provider, or instead whether the service is provided by the city in competition with private enterprises and the charge amount is established by a voluntary negotiation between unrelated parties. If the charge falls into the latter category, the League suggests the charge is not a tax or fee at all. The City has no obligation to provide street parking, does so in competition with private parking lots, and does not force anyone to use metered parking. In that sense, it does not seem meter charges are “imposed”, and do not need to be analyzed as taxes. This conclusion mirrors the City Attorney’s analysis back in 1997 that meter charges are neither fees nor taxes because they are not “imposed” on the voluntary users of metered parking spaces. ^[48]

The City Attorney has not reevaluated its opinion about parking meter revenue in light of Jacks and Bay Area Toll Authority, or since the adoption of Proposition 26. If the City Attorney reconsiders its legal analysis, they will discover, as have other cities, that San Diego has broad discretion for how to spend its parking meter revenue. Existing unspent parking revenues can be freed up as an important resource immediately available to fund projects that can immediately benefit neighborhoods.

V. Cities Throughout California Use Parking Meter Revenues in a Variety of Ways

The conclusion that parking meter revenues can be spent as general funds is reflected in the actions of several California cities. These cities have used parking meter revenue to finance projects that likely would not be allowed by the City of San Diego based on the outdated advice of the City Attorney. Some examples are:

• In the City of Ventura, all parking meter revenues generated in the downtown parking district are allocated to be used exclusively for the benefit of the downtown parking district. ^[49] City Code Section 4.400.030 describes the ways in which the revenue is allowed to be spent, including for security, education programs, landscaping, street furniture, and pedestrian and bicycle enhancements within the district. ^[50] The parking meter revenue has been used to fund a variety of non-parking expenses including a police officer dedicated to the downtown area,^[51] free wifi,^[52] and other improvements.
• La Mesa City Code allows parking meter revenue to be spent on “events, programs, and advertising as determined appropriate by the City Council.” ^[53] In addition, parking revenues may be spent “[f]or other public improvements related to the maintenance and enhancement of facilities within parking districts as determined appropriate by the city council.” ^[54] La Mesa also allocates “fifty percent of budgeted surplus parking district revenues into a Village Enhancement Fund”, which is “allowed to finance events, programs, advertising, and physical improvements to benefit the Downtown Commercial Zone.” ^[55]
• In Pasadena, parking meter revenue is used to widen sidewalks, plant trees, fix up old storefronts, and provide for security and cleaning services. ^[56] The Pasadena Municipal Code authorizes the City to pledge parking meter revenues for any authorized purpose of an Urban Improvement District. ^[57] These purposes include administration of the District, district planning, dissemination of district information,^[58] parking related expenses, and the construction of beautification facilities. ^[59] Pasadena requires all funding generated in the Old Pasadena district to go exclusively to improvements within the district. ^[60] The City of Pasadena is often held out by planning professor Donald Shoup a model for using parking revenues to contribute to the neighborhoods where the revenues are generated. ^[61]
• In Los Angeles, surplus parking meter revenues may be spent for any governmental purpose. ^[62] Although the Los Angeles Municipal Code requires that funds from parking meters must first be spent on parking improvements, any surplus funds “at the direction of the Council may be transferred immediately to the Reserve Fund for any general governmental purposes.” ^[63]
• In Oceanside, the city uses the revenue to fix up its pier and to build and maintain public restrooms. ^[64]
• Redwood City uses parking revenue to clean up sidewalks and add improvements. ^[65]

San Diego should follow the example of these cities by using parking districts’ large unspent balances for similar projects.

VI. San Diego’s Parking Districts Have Surplus Funds that can be Put to Use

Under San Diego’s Council Policy 100-18, Community Parking Districts (“CPDs”) are allocated 45% of the parking meter revenue from parking meters within that district. ^[66] The parking meter revenues allocated to each district are substantial. Estimated revenue allocated to CPDs for fiscal year 2020 was $1,974,000 for the Downtown CPD, $720,119 for the Uptown CPD, and $73,570 for the Mid-City CPD. ^[67] The CPDs have apparently had significant difficulty finding projects to spend their revenue on. For fiscal year 2020, revenue carryovers were $5,643,335 for the Downtown CPD, $3,047,896 for the Uptown CPD, and $723,307 for the Mid-City CPD. ^[68]

The difficulty arises because CPD parking meter revenue spending is required by Council Policy 100-18 to be “focused on improvements and activities that increase the availability, supply, and effective use of parking for residents, visitors, and employees.” ^[69] Parking meter revenue is additionally controlled by Municipal Code § 82.08, which limits spending to projects closely related to providing parking. ^[70]

The revenues sitting in CPD accounts cannot benefit the public without being spent. The City can and should change Council Policy 100-18 and Municipal Code § 82.08 to allow a broader use of parking meter funds so that San Diego can use its parking revenue stream for the maximum public benefit. There is no state law that stands in the way.

VII. Policy Considerations for Updating Council Policy 100-18 and Municipal Code § 82.08

Proposition 26 and California case law make clear that the City of San Diego can use its parking revenues for any government purpose.

Updates to Council Policy 100-18 and Municipal Code § 82.08 can expand the types of activities that Community Parking Districts may fund, but the Council may wish to adopt policies that limit the use of funds to activities that are related to parking, transportation, and to the success of the relevant neighborhood. These sorts of reasonable limits can help those who pay parking fees, and the businesses and residents in the areas subject to the fees, feel confident that the funds are being used to their benefit.

Below are some recommendations for policies that the City Council might consider:

• Provide a maximum percentage of revenue each year that can be spent on staff^[71]
• Expand the use of funds to activities that provide transportation access to the neighborhood in a manner that would not burden limited parking resources, including:
  • Sidewalks
  • Crosswalks
  • Intersection murals
  • Bicycle lanes
  • Storage for bicycles, scooters, etc.
  • Improvements to transit stops
  • Transportation planning and outreach activities
  • Education and encouragement programs for active transportation and public transit ridership
  • Transit pass subsidy programs

• Expand the use of funds to activities that attract more customers and visitors, including:
  • Events
  • Parklets
  • Placemaking
  • Marketing and promotions
  • Maintenance and “clean-and-safe” activities

VIII. Conclusion

The adoption of Prop 26 and recent case law invite the City Attorney to revisit it is prior analysis about how the City can allow for spending of parking revenue.

By recognizing new law and modifying its policies and Municipal Code, the City stands to gain access to substantial new resources for projects that benefit the City and the neighborhoods that each Community Parking District serves. The current unspent balances in community parking districts accounts should not be allowed to go to waste any longer.