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1 MCNEILL LAW OFFICES
Walter P. McNeill, STATE BAR NO. 95865
2 P.O. Box 2274 Nevada City, CA 95959
Telephone: (530) 222-8992
3
Email: WMcNeill@McNLaw.com
4
TYLER LAW, LLP
5 NATHAN R. KLEIN, STATE BAR NO. 306268
25026 Las Brisas Road
6 Murrieta, California 92562
7 Email: nklein@tylerlawllp.com
Telephone: (951) 600-2733
8 Facsimile: (951) 600-4996
9 Attorneys for Plaintiffs
10 Carl Pongs and Richard Moslenko
11
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SUPERIOR COURT OF THE STATE OF CALIFORNIA
P 0 . BOX 2274 . NEVADA CITY, CA 95959
12 COUNTY OF RIVERSIDE
MCNE ILL LAW O F F ICES
13
Case No. ____________________
14 CARL PONGS; and
RICHARD MOSLENKO 1. COMPLAINT FOR REVERSE
15 VALIDATION – RESOLUTION 24042
16 PLAINTIFFS (CCP §860 et seq.; Gov. Code §53759),
-- Enacted In Violation Of Article 13D of
17 -vs.- The California Constitution, On Multiple
Separate And Independent Grounds
18 CITY OF RIVERSIDE; and
ALL PERSONS INTERESTED IN THE 2. UNCONSTITUTIONAL “TAKING” -
19 MATTER OF THE VALIDITY OF CITY OF Confiscation of Money/Property By
RIVERSIDE RESOLUTION NO. 24042 (1) Imposition Of False/Invalid Excessive
20
APPROVING AND ESTABLISHING THE FY Rates, Taken For Public Use Without Just
21 2023/24-2027/28 WATER RATES BY Compensation In Violation Of The 5th & 14th
AMENDING WATER RATE SCHEDULES WA- Amendments To The U.S. Constitution And
22 1A, WA-1B, WA-2, WA-4, WA-7, WA-10, WA- Art. I §19 of the Ca. Constitution.
11, AND WA-12; TO BE EFFECTIVE
23 OCTOBER 1, 2023 AND UPON COUNCIL 3. DECLARATORY AND INJUNCTIVE
24 APPROVAL; (2) MAKING RELATED RELIEF (CCP §1060, §526)
FINDINGS OF FACT, ADOPTED SEPTEMBER
25 19, 2023,
26 DEFENDANTS
27
28
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COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF
1 PRELIMINARY ALLEGATIONS
2 1. Plaintiffs CARL PONGS (hereafter "PONGS" or included as "Plaintiffs") and
3 RICHARD MOSLENKO (hereafter "MOSLENKO" or included as "Plaintiffs") are now, and at
4 all times relevant were, citizens and residents of the defendant CITY OF RIVERSIDE, and are
5 owners of parcels of property in the CITY OF RIVERSIDE that receive and pay for CITY
6 water service to their properties, and are taxpayers in the CITY OF RIVERSIDE who
7 contribute fees, taxes, and their civic efforts for improvement of the CITY OF RIVERSIDE.
8 2. Defendant CITY OF RIVERSIDE (hereafter "CITY" or "Defendant City") is a charter
9 city duly established, organized and operating under the laws of the State of California, with
10 full authority under the law to provide water service to its resident property owners, to create
11 and collect water rates to fund the costs of providing water service, and to operate a water
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12 utility and water service system for the benefit of its citizens.
MCNE ILL LAW O F F ICES
13 3. Defendants named herein as " ALL PERSONS INTERESTED IN THE MATTER OF
14 THE VALIDITY OF CITY OF RIVERSIDE RESOLUTION NO. 24042 (1) APPROVING
15 AND ESTABLISHING THE FY 2023/24-2027/28 WATER RATES BY AMENDING
16 WATER RATE SCHEDULES WA-1A, WA-1B, WA-2, WA-4, WA-7, WA-10, WA-11, AND
17 WA-12; TO BE EFFECTIVE OCTOBER 1, 2023 AND UPON COUNCIL APPROVAL; (2)
18 MAKING RELATED FINDINGS OF FACT, ADOPTED SEPTEMBER 19, 2023, are joined
19 herein and will be served by publication pursuant to Code of Civil Procedure §860, §861,
20 §861.1, and §862, so as to effect service by publication of the summons, and to permit any
21 party interested to appear and contest the legality or validity of the matter sought to be
22 determined in the “validation actions” (CCP §860 et seq.; Gov. Code §50753) brought herein
23 by Plaintiffs.
24 NATURE OF THE ACTION
25 4. None are so vulnerable as the average customer of a water utility, with no choice but
26 to pay the monthly rates imposed by a municipal monopoly to receive a service and the water
27 that is necessary for the sustenance of life. Defendant City of Riverside has exploited this
28 position of advantage to bypass the procedural and substantive rights guaranteed to customers
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COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF
1 under the California Constitution (Proposition 218 - CA Const. Art. 13D §6) and the U.S.
2 Constitution (U.S. Const.- 5th and 14th Amendments) to seek profits for the City General Fund
3 and create a financing tool for City obligations that have nothing to do with water service.
4 5. On September 19, 2023 the City Council of Riverside adopted Resolution No. 24042
5 setting up a five year plan of exploitative increased water rates, once again bypassing the
6 constitutional rights of their customers such as the Plaintiffs herein. CA Gov. Code §53759
7 and Code of Civ. Proc. §860 et seq. provide a statutory framework allowing customers to
8 challenge the validity of the resolution through a "reverse validation" action in rem for the
9 benefit of themselves and "all those interested in the matter." Through a published summons
10 (Code Civ. Proc. §861, §861.1) other Riverside water utility customers will have the
11 opportunity to join the action, and the ultimate determination of the issues will be binding as to
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12 all (Code Civ. Proc. §870).
MCNE ILL LAW O F F ICES
13 6. Plaintiffs allege 7 violations of Proposition 218 in this validation action, each of which
14 individually supports revocation of Resolution No. 2492. (1) Defective and inadequate notice
15 of the proceeding [CA Const. Art. 13D §6 (a); KCSFV I_ LLC v. Florin County Water Dist.
16 (2021) 64 Cal.App. 5th 1015, 1037-1040]. (2) Inclusion of an illegal sequestered (last minute)
17 General Fund Transfer ("GFT") in the water rates. (3) Unlawful use of water rates to pay the
18 general fund obligation for unfunded pension liabilities of retirees. (4) Unlawful use of water
19 rates as a "cash cow" to support General Fund expenses through internal transfers and charges.
20 (5) Unlawful imposition of "tiered rates" to collect higher revenues without cost justification.
21 (6) Preemptive override of the Prop 218 hearing process by putting the City in debt default
22 absent an increase in rates. (7) Unlawful breach of municipal bond securitization requirements
23 to allow improper use of rate revenues.
24 7. Plaintiffs further allege an unconstitutional "taking" that occurs through the imposition
25 of illegally inflated water rates --which customers cannot avoid by going without water as a
26 necessity of life-- that the City imposes for the improper though "public purpose" of diversion
27 to the General Fund.
28
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COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF
1 8. The exploitation of water rate payers through these practices undercuts the validity of
2 Resolution No. 24042, but also have become endemic to the City's rate-setting process and
3 threaten to be repeated in the future. Accordingly Plaintiffs request declaratory and injunctive
4 relief both to invalidate/prevent enforcement of Resolution No. 24042 and to prevent the City
5 from continuing with these practices in future water rate setting. Plaintiffs have incurred and
6 will incur during the pendency of this action, attorney’s fees and costs herein. Such attorneys
7 fees and costs are necessary for the prosecution of this action and will result in a substantial
8 public benefit, as well as the vindication of important rights affecting the public interest, for
9 which Plaintiffs will be entitled and shall seek an award of attorney’s fees subject to approval
10 of the court – whether based on the theory of benefit conferred, common fund, private attorney
11 general (CCP §1021.5), or as the court deems just and proper.
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I. REVERSE VALIDATION – RESOLUTION No. 24042
MCNE ILL LAW O F F ICES
13 (CCP §860 et seq.; Gov. Code §53759)
14 Multiple Violations Of Article 13D §6 of The California Constitution
15 9. Plaintiffs refer to and incorporate by reference paragraphs 1 through 8 as though set
16 forth at length herein.
17 10. Plaintiffs allege and request complete adjudication of 7 violations of Article 13D §6
18 of the California Constitution. Each violation is sufficient of itself to invalidate the adoption of
19 Resolution No. 24042. Cumulatively these violations evince the City's abject disregard for the
20 constitutional rights much less the economic welfare of the City's water rate payers.
21 (1) Defective and Inadequate Notice of the Rate Increase Proceedings
22 11. Proposition 218 Art. 13D §6 (a) sets out the procedures required for notice to the rate
23 payers of a proposed rate increase. The required timing of the Notice is that it must be sent by
24 mail to all parcel owners receiving water service not less than 45 days before the prescribed
25 public hearing for consideration of protests [(§6(a)(2)] and potential adoption of new rates (if
26 there is not a majority protest by the rate payers). The substance of the Notice is explicitly
27 prescribed by §6 (a)(1) as follows:
28 (1) The parcels upon which a fee or charge is proposed for imposition shall be
identified. The amount of the fee or charge proposed to be imposed upon each parcel
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COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF
1 shall be calculated. The agency shall provide written notice by mail of the proposed
fee or charge to the record owner of each identified parcel upon which the fee or
2 charge is proposed for imposition, the amount of the fee or charge proposed to be
imposed upon each, the basis upon which the amount of the proposed fee or charge
3
was calculated, the reason for the fee or charge, together with the date, time, and
4 location of a public hearing on the proposed fee or charge.
5
12. A true copy of the Notice actually sent out by the City of Riverside is attached hereto
6
as Ex. “A.” It is nothing more than a flier or generic handbill describing the proposed rate
7
increases in summary terms of general application. The overall impact of the rate increases for
8
the entire water system are shown to be about 6.5% per year for 5 years. The Notice provides
9
examples of likely percentage increases, but not the actual rates, for an “average residential
10
customer” and a “typical commercial customer” notwithstanding that there are increases in 9
11
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different ratepayer classifications. There is no information about the costs driving up the rates
P 0 . BOX 2274 . NEVADA CITY, CA 95959
12
or where the extra rate revenues will be spent. This one-size-fits-all Notice was sent to the rate
MCNE ILL LAW O F F ICES
13
payers and they were left to their own devices to figure out how the proposed increases might
14
directly impact them on an individual basis.
15
13. The Notice has 3 glaring omissions. (a) The City does not calculate the amount of the
16
proposed increased rates for the individual parcel owner/ rate payer, despite that specific
17
requirement in §6(a)(1). (b) There is no information whatsoever concerning “the basis upon
18
which the amount of the proposed fee or charge was calculated” or exactly how the City came
19
up with these increases. (c) The Notice addresses the requirement for a description of “the
20
reason for the fee or charge” with the following patronizing and uninformative statement:
21
Why are water rates changing? The City of Riverside is facing challenges, like most
22 utilities across the state, related to aging infrastructure, government regulations and
investment into capital-improvement projects designed to make Riverside's water safe,
23 reliable and affordable. This rate increase is meant to address those issues.
24 Instead of an ordinary rate increase “like most utilities across the state,” if rate payers had gone
25 to the public hearing on September 19, 2023 they would have heard a very different story-- the
26 City Manager and Staff describing the water utility as facing an existential fiscal crisis that
27 could only be averted by raising rates, though that crisis had been caused by the City’s runaway
28 borrowing and its insatiable appetite for transfers of revenues to the General Fund.
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COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF
1 14. “Compliance with section 6’s procedural requirements is fundamental to ensure
2 ratepayers have the information necessary to determine whether to, among other things, submit
3 a written protest to the rate increase in advance of the hearing.” (KCSFV I_ LLC v. Florin
4 County Water Dist. (2021) 64 Cal.App. 5th 1015, 1037-1040.) The City’s failure to comply
5 with these basic requirements of §6(a)(1) invalidates Resolution No. 24042.
6 (2) Inclusion Of An Illegal Sequestered (last minute) General Fund Transfer
7 15. The City Charter of Riverside (see §1204.1) authorizes a levy embedded in the City
8 water rates commonly referred to as a General Fund Transfer (“GFT”) in an amount up to
9 11.5% of the gross operating revenues of the water utility from the previous year. This
10 provision was approved by a majority of voters in an election held in 2013. It has been the
11 historical practice of the City to collect the full 11.5% of the GFT up through the most recent
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12 increase in water rates approved by Resolution 24042. The GFT is transferred to the General
MCNE ILL LAW O F F ICES
13 Fund where it is available to pay for general governmental services such as police patrols, fire
14 protection, senior/disabled services, etc.
15 16. The GFT is not mentioned at all in the Prop 218 Notice (Ex. “A”) that was sent to
16 rate payers advising them of the Prop 218 public hearing set for September 19, 2023. However
17 the new proposed rates attached to Resolution 24042 refer to the GFT as a “Special Condition”
18 and a component of the rates, without breaking out or quantifying the amount:
19 The Water General Fund Transfer is a component of every customer’s water bill, and is a
transfer of up to 11.5% from the Water Fund to the City General Fund. On June 4, 2013,
20 the voters of the City approved the Water General Fund Transfer as a general tax,
pursuant to Article 13C of the California Constitution.
21
22
17. The legality of the GFT had been challenged in a pending lawsuit filed in 2019 –
23
Simpson v. City of Riverside, RIC1906168, Superior Court of the County of Riverside. In
24
particular that case called into question the validity of the City’s assertion that the GFT is a
25
valid general tax. The liability phase of the case went to trial, resulting in a ruling filed August
26
17, 2023, finding unequivocally that: the GFT is not a valid general tax, that it is not an
27
exception to the prohibitions of Art. XIII D §3, that the GFT violates Art XIII D §6 (b) (1) &
28
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COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF
1 (2) because it causes rates to be set higher than the cost of providing services and the GFT
2 revenues are used for purposes other than the purpose for which water rates are collected.
3 That ruling is in place while the parties now address the damages phase of the case.
4 18. When the September 19, 2023 Prop 218 hearing arrived the City had been aware for a
5 month that a court ruling had found the GFT to be invalid (even though the ruling is not
6 immediately enforceable). The City had the option to reduce the water rates by eliminating the
7 GFT; Prop 218 permits a pure fee reduction without the formalities required for fee increases.
8 The City Council also had the option to collect $0 under the GFT, because the City Charter
9 provision allows the Council to set the transfer amount anywhere between $0 and “up to”
10 11.5% of the previous year gross revenues. They did neither. Instead City staff made a last
11 minute recommendation to impose and collect the GFT in the new rates as planned; and then
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12 set aside the collected GFT revenues in a reserve account “until further City Council direction.”
MCNE ILL LAW O F F ICES
13 The City Council approved that recommendation in conjunction with approval of the new rates
14 in the same form as put out for public notice.
15 19. Attached as Ex. “B” are true and correct images of 2 power point slides added at the
16 last minute to the City’s September 19, 2023 presentation to the Council on the new rates. The
17 slides note that the “lawsuit continues” while the GFT is collected from rate payers, with a
18 projected amount of $8,565,800 to be taken from rate payers in FY 2023/24. The consequence
19 of sequestering the GFT funds in a reserve account is that the funds cannot be spent on General
20 Fund projects or expenses, so the General Fund budget has to be reduced accordingly The
21 minutes of the meeting show that the motion to approve the rates included a directive to: ”place
22 all future Water General Fund Transfer collections into a reserve account, amend General Fund
23 budget accordingly until conclusion of litigation and further direction by City Council.”
24 20. Plaintiffs agree with the liability ruling in Simpson v. City of Riverside, and hereby
25 allege the findings and reasoning of that ruling in support of this validation action. In essence,
26 Proposition 218 makes no allowance or exception for a general tax levied on a property related
27 service. The GFT is void on its face.
28
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COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF
1 21. The water rate payers literally receive nothing in return for the GFT collections from
2 them. In fact they are marginally worse off than before due to the City’s last minute decision to
3 sequester the GFT funds in a contingency reserve account. Not only are they imposed upon to
4 pay an illegal charge that isn’t a function of water service, but with the funds sequestered in
5 reserves there isn’t even an indirect benefit from expenditure of those funds that might benefit
6 the community at large. Further, given that litigation through a full appeals process could take
7 another 2 to 5 years, and that many rate payers open and close accounts or leave town within
8 that span of time, there is a significant though unknown number of rate payers who will miss
9 out on any refund program set up when the Simpson v. City of Riverside case is later
10 concluded.
11 22. Insofar as the GFT is a component of the water rates, the last minute change in the
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12 disposition of GFT revenues was, all by itself, prejudicial to the rate payers. There may be rate
MCNE ILL LAW O F F ICES
13 payers who don’t mind paying the GFT if they believe the expenditures of those funds benefit
14 the general community. But then again they might have protested the rates had they known in
15 advance that GFT funds are indefinitely sequestered. This is a modification of the rates that
16 deserved public review and Notice per Art. XIII D §6 (a).
17 23. Resolution No. 24042 should be invalidated now, through this action, based on the
18 unlawful collection and disposition of the GFT in violation of Art. XIII D §6 (a), (b)(1) and
19 (b)(2).
20 (3) Unlawful Use Of Water Rates To Pay The General Fund Obligation
For Unfunded Pension Liabilities Of Retirees
21
22 24. The question presented here is “Who should pay for the historic unfunded pension
23 liabilities of water utility employees who have left the service of the City and are not part of the
24 current active work force?” It is a given that the currently active work force in the water utility
25 that provide their services in this fiscal year should have the City’s pension contributions paid
26 for by the water rates collected in this fiscal year. The pension cost through the CalPERS
27 system1 requires a contribution of 13.56% of payroll by the employer with a contribution of
28
1
There are some retirement plans other than CalPERS in the City, but their size is negligible.
_________________________________________________________________________________ 8
COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF
1 8.09% by the employee, for a total of 21.65% of payroll in FY 2023/24. This is denominated
2 the “Normal Cost” contribution, and in theory – as calculated by the actuarial projections of
3 CalPERS—it should be a fully sufficient amount to fund the future pensions of the employees
4 covered by the contributions. These contributions should be treated no differently than payroll
5 or salary paid for by the utility from the rate revenues as a “cost of services” for that fiscal year.
6 25. But what happens when the CalPERS actuarial projections are flawed, or the
7 retirement investment fund managed by CalPERS suffers losses due to volatility in the
8 securities and investment markets, leaving a shortage in the retirement investment fund –
9 referred to as Unfunded Accrued Liability or “UAL”—to cover the projected payments to
10 retirees? Unfortunately that has happened on a widespread and massive scale to cities across
11 the State in the CalPERS system over the last 15 years. The City of Riverside found itself in
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12 this position about 5 years ago, facing a huge UAL debt of approximately $642,133,567 that
MCNE ILL LAW O F F ICES
13 threatened the solvency of the City. That debt was the total for two CalPERS plans in
14 Riverside, a Safety Employees plan (fire and police employees) at $328,783,663 and a
15 Miscellaneous Plan in the amount of $313,349,904 (for all other non-safety employees) that
16 includes the water utility employees.
17 26. The City embarked on a plan to work out this debt, primarily with the issuance in FY
18 2019/20 of $432,165,2020 in Pension Obligation Bonds (“POBs”) with amortized repayments
19 through June of 2045. From this borrowing the City paid CalPERS $239,231.058 for the Safety
20 Employees fund and $200,330,920 for the Misc. Employees fund. The outstanding UAL debt
21 for the fund servicing the water utility was greatly reduced by this payment, along with smaller
22 payments toward UAL made in earlier years through bond issuances in 2006 and 2017. The
23 Riverside Public Utilities (“RPU”) department financial statements allocate 10.2% of the Misc.
24 Employees plan combined UAL bond debt to the water utility, resulting in a proportional share
25 of that total debt at a principal amount of $22,363,000 as of June 30, 2022 (the most recent
26 statements). That amount is amortized through 2045 with payment in FY 2024 estimated at
27 $2,282,000 and increasing slightly in the next few years, with a total of payments and interest
28 in the span from FY 2023/24 to FY 2027/28 (the duration of the water rate increases made by
Preview
1 MCNEILL LAW OFFICES Walter P. McNeill, STATE BAR NO. 95865 2 P.O. Box 2274 Nevada City, CA 95959 Telephone: (530) 222-8992 3 Email: WMcNeill@McNLaw.com 4 TYLER LAW, LLP 5 NATHAN R. KLEIN, STATE BAR NO. 306268 25026 Las Brisas Road 6 Murrieta, California 92562 7 Email: nklein@tylerlawllp.com Telephone: (951) 600-2733 8 Facsimile: (951) 600-4996 9 Attorneys for Plaintiffs 10 Carl Pongs and Richard Moslenko 11 EL. (630 ► 222·8992 • WMCI\ E ILL8MCNLAW .COM SUPERIOR COURT OF THE STATE OF CALIFORNIA P 0 . BOX 2274 . NEVADA CITY, CA 95959 12 COUNTY OF RIVERSIDE MCNE ILL LAW O F F ICES 13 Case No. ____________________ 14 CARL PONGS; and RICHARD MOSLENKO 1. COMPLAINT FOR REVERSE 15 VALIDATION – RESOLUTION 24042 16 PLAINTIFFS (CCP §860 et seq.; Gov. Code §53759), -- Enacted In Violation Of Article 13D of 17 -vs.- The California Constitution, On Multiple Separate And Independent Grounds 18 CITY OF RIVERSIDE; and ALL PERSONS INTERESTED IN THE 2. UNCONSTITUTIONAL “TAKING” - 19 MATTER OF THE VALIDITY OF CITY OF Confiscation of Money/Property By RIVERSIDE RESOLUTION NO. 24042 (1) Imposition Of False/Invalid Excessive 20 APPROVING AND ESTABLISHING THE FY Rates, Taken For Public Use Without Just 21 2023/24-2027/28 WATER RATES BY Compensation In Violation Of The 5th & 14th AMENDING WATER RATE SCHEDULES WA- Amendments To The U.S. Constitution And 22 1A, WA-1B, WA-2, WA-4, WA-7, WA-10, WA- Art. I §19 of the Ca. Constitution. 11, AND WA-12; TO BE EFFECTIVE 23 OCTOBER 1, 2023 AND UPON COUNCIL 3. DECLARATORY AND INJUNCTIVE 24 APPROVAL; (2) MAKING RELATED RELIEF (CCP §1060, §526) FINDINGS OF FACT, ADOPTED SEPTEMBER 25 19, 2023, 26 DEFENDANTS 27 28 _________________________________________________________________________________ 1 COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF 1 PRELIMINARY ALLEGATIONS 2 1. Plaintiffs CARL PONGS (hereafter "PONGS" or included as "Plaintiffs") and 3 RICHARD MOSLENKO (hereafter "MOSLENKO" or included as "Plaintiffs") are now, and at 4 all times relevant were, citizens and residents of the defendant CITY OF RIVERSIDE, and are 5 owners of parcels of property in the CITY OF RIVERSIDE that receive and pay for CITY 6 water service to their properties, and are taxpayers in the CITY OF RIVERSIDE who 7 contribute fees, taxes, and their civic efforts for improvement of the CITY OF RIVERSIDE. 8 2. Defendant CITY OF RIVERSIDE (hereafter "CITY" or "Defendant City") is a charter 9 city duly established, organized and operating under the laws of the State of California, with 10 full authority under the law to provide water service to its resident property owners, to create 11 and collect water rates to fund the costs of providing water service, and to operate a water EL. (630 ► 222·8992 • WMCI\ E ILL8MCNLAW .COM P 0 . BOX 2274 . NEVADA CITY, CA 95959 12 utility and water service system for the benefit of its citizens. MCNE ILL LAW O F F ICES 13 3. Defendants named herein as " ALL PERSONS INTERESTED IN THE MATTER OF 14 THE VALIDITY OF CITY OF RIVERSIDE RESOLUTION NO. 24042 (1) APPROVING 15 AND ESTABLISHING THE FY 2023/24-2027/28 WATER RATES BY AMENDING 16 WATER RATE SCHEDULES WA-1A, WA-1B, WA-2, WA-4, WA-7, WA-10, WA-11, AND 17 WA-12; TO BE EFFECTIVE OCTOBER 1, 2023 AND UPON COUNCIL APPROVAL; (2) 18 MAKING RELATED FINDINGS OF FACT, ADOPTED SEPTEMBER 19, 2023, are joined 19 herein and will be served by publication pursuant to Code of Civil Procedure §860, §861, 20 §861.1, and §862, so as to effect service by publication of the summons, and to permit any 21 party interested to appear and contest the legality or validity of the matter sought to be 22 determined in the “validation actions” (CCP §860 et seq.; Gov. Code §50753) brought herein 23 by Plaintiffs. 24 NATURE OF THE ACTION 25 4. None are so vulnerable as the average customer of a water utility, with no choice but 26 to pay the monthly rates imposed by a municipal monopoly to receive a service and the water 27 that is necessary for the sustenance of life. Defendant City of Riverside has exploited this 28 position of advantage to bypass the procedural and substantive rights guaranteed to customers _________________________________________________________________________________ 2 COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF 1 under the California Constitution (Proposition 218 - CA Const. Art. 13D §6) and the U.S. 2 Constitution (U.S. Const.- 5th and 14th Amendments) to seek profits for the City General Fund 3 and create a financing tool for City obligations that have nothing to do with water service. 4 5. On September 19, 2023 the City Council of Riverside adopted Resolution No. 24042 5 setting up a five year plan of exploitative increased water rates, once again bypassing the 6 constitutional rights of their customers such as the Plaintiffs herein. CA Gov. Code §53759 7 and Code of Civ. Proc. §860 et seq. provide a statutory framework allowing customers to 8 challenge the validity of the resolution through a "reverse validation" action in rem for the 9 benefit of themselves and "all those interested in the matter." Through a published summons 10 (Code Civ. Proc. §861, §861.1) other Riverside water utility customers will have the 11 opportunity to join the action, and the ultimate determination of the issues will be binding as to EL. (630 ► 222·8992 • WMCI\ E ILL8MCNLAW .COM P 0 . BOX 2274 . NEVADA CITY, CA 95959 12 all (Code Civ. Proc. §870). MCNE ILL LAW O F F ICES 13 6. Plaintiffs allege 7 violations of Proposition 218 in this validation action, each of which 14 individually supports revocation of Resolution No. 2492. (1) Defective and inadequate notice 15 of the proceeding [CA Const. Art. 13D §6 (a); KCSFV I_ LLC v. Florin County Water Dist. 16 (2021) 64 Cal.App. 5th 1015, 1037-1040]. (2) Inclusion of an illegal sequestered (last minute) 17 General Fund Transfer ("GFT") in the water rates. (3) Unlawful use of water rates to pay the 18 general fund obligation for unfunded pension liabilities of retirees. (4) Unlawful use of water 19 rates as a "cash cow" to support General Fund expenses through internal transfers and charges. 20 (5) Unlawful imposition of "tiered rates" to collect higher revenues without cost justification. 21 (6) Preemptive override of the Prop 218 hearing process by putting the City in debt default 22 absent an increase in rates. (7) Unlawful breach of municipal bond securitization requirements 23 to allow improper use of rate revenues. 24 7. Plaintiffs further allege an unconstitutional "taking" that occurs through the imposition 25 of illegally inflated water rates --which customers cannot avoid by going without water as a 26 necessity of life-- that the City imposes for the improper though "public purpose" of diversion 27 to the General Fund. 28 _________________________________________________________________________________ 3 COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF 1 8. The exploitation of water rate payers through these practices undercuts the validity of 2 Resolution No. 24042, but also have become endemic to the City's rate-setting process and 3 threaten to be repeated in the future. Accordingly Plaintiffs request declaratory and injunctive 4 relief both to invalidate/prevent enforcement of Resolution No. 24042 and to prevent the City 5 from continuing with these practices in future water rate setting. Plaintiffs have incurred and 6 will incur during the pendency of this action, attorney’s fees and costs herein. Such attorneys 7 fees and costs are necessary for the prosecution of this action and will result in a substantial 8 public benefit, as well as the vindication of important rights affecting the public interest, for 9 which Plaintiffs will be entitled and shall seek an award of attorney’s fees subject to approval 10 of the court – whether based on the theory of benefit conferred, common fund, private attorney 11 general (CCP §1021.5), or as the court deems just and proper. EL. (630 ► 222·8992 • WMCI\ E ILL8MCNLAW .COM P 0 . BOX 2274 . NEVADA CITY, CA 95959 12 I. REVERSE VALIDATION – RESOLUTION No. 24042 MCNE ILL LAW O F F ICES 13 (CCP §860 et seq.; Gov. Code §53759) 14 Multiple Violations Of Article 13D §6 of The California Constitution 15 9. Plaintiffs refer to and incorporate by reference paragraphs 1 through 8 as though set 16 forth at length herein. 17 10. Plaintiffs allege and request complete adjudication of 7 violations of Article 13D §6 18 of the California Constitution. Each violation is sufficient of itself to invalidate the adoption of 19 Resolution No. 24042. Cumulatively these violations evince the City's abject disregard for the 20 constitutional rights much less the economic welfare of the City's water rate payers. 21 (1) Defective and Inadequate Notice of the Rate Increase Proceedings 22 11. Proposition 218 Art. 13D §6 (a) sets out the procedures required for notice to the rate 23 payers of a proposed rate increase. The required timing of the Notice is that it must be sent by 24 mail to all parcel owners receiving water service not less than 45 days before the prescribed 25 public hearing for consideration of protests [(§6(a)(2)] and potential adoption of new rates (if 26 there is not a majority protest by the rate payers). The substance of the Notice is explicitly 27 prescribed by §6 (a)(1) as follows: 28 (1) The parcels upon which a fee or charge is proposed for imposition shall be identified. The amount of the fee or charge proposed to be imposed upon each parcel _________________________________________________________________________________ 4 COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF 1 shall be calculated. The agency shall provide written notice by mail of the proposed fee or charge to the record owner of each identified parcel upon which the fee or 2 charge is proposed for imposition, the amount of the fee or charge proposed to be imposed upon each, the basis upon which the amount of the proposed fee or charge 3 was calculated, the reason for the fee or charge, together with the date, time, and 4 location of a public hearing on the proposed fee or charge. 5 12. A true copy of the Notice actually sent out by the City of Riverside is attached hereto 6 as Ex. “A.” It is nothing more than a flier or generic handbill describing the proposed rate 7 increases in summary terms of general application. The overall impact of the rate increases for 8 the entire water system are shown to be about 6.5% per year for 5 years. The Notice provides 9 examples of likely percentage increases, but not the actual rates, for an “average residential 10 customer” and a “typical commercial customer” notwithstanding that there are increases in 9 11 EL. (630 ► 222·8992 • WMCI\ E ILL8MCNLAW .COM different ratepayer classifications. There is no information about the costs driving up the rates P 0 . BOX 2274 . NEVADA CITY, CA 95959 12 or where the extra rate revenues will be spent. This one-size-fits-all Notice was sent to the rate MCNE ILL LAW O F F ICES 13 payers and they were left to their own devices to figure out how the proposed increases might 14 directly impact them on an individual basis. 15 13. The Notice has 3 glaring omissions. (a) The City does not calculate the amount of the 16 proposed increased rates for the individual parcel owner/ rate payer, despite that specific 17 requirement in §6(a)(1). (b) There is no information whatsoever concerning “the basis upon 18 which the amount of the proposed fee or charge was calculated” or exactly how the City came 19 up with these increases. (c) The Notice addresses the requirement for a description of “the 20 reason for the fee or charge” with the following patronizing and uninformative statement: 21 Why are water rates changing? The City of Riverside is facing challenges, like most 22 utilities across the state, related to aging infrastructure, government regulations and investment into capital-improvement projects designed to make Riverside's water safe, 23 reliable and affordable. This rate increase is meant to address those issues. 24 Instead of an ordinary rate increase “like most utilities across the state,” if rate payers had gone 25 to the public hearing on September 19, 2023 they would have heard a very different story-- the 26 City Manager and Staff describing the water utility as facing an existential fiscal crisis that 27 could only be averted by raising rates, though that crisis had been caused by the City’s runaway 28 borrowing and its insatiable appetite for transfers of revenues to the General Fund. _________________________________________________________________________________ 5 COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF 1 14. “Compliance with section 6’s procedural requirements is fundamental to ensure 2 ratepayers have the information necessary to determine whether to, among other things, submit 3 a written protest to the rate increase in advance of the hearing.” (KCSFV I_ LLC v. Florin 4 County Water Dist. (2021) 64 Cal.App. 5th 1015, 1037-1040.) The City’s failure to comply 5 with these basic requirements of §6(a)(1) invalidates Resolution No. 24042. 6 (2) Inclusion Of An Illegal Sequestered (last minute) General Fund Transfer 7 15. The City Charter of Riverside (see §1204.1) authorizes a levy embedded in the City 8 water rates commonly referred to as a General Fund Transfer (“GFT”) in an amount up to 9 11.5% of the gross operating revenues of the water utility from the previous year. This 10 provision was approved by a majority of voters in an election held in 2013. It has been the 11 historical practice of the City to collect the full 11.5% of the GFT up through the most recent EL. (630 ► 222·8992 • WMCI\ E ILL8MCNLAW .COM P 0 . BOX 2274 . NEVADA CITY, CA 95959 12 increase in water rates approved by Resolution 24042. The GFT is transferred to the General MCNE ILL LAW O F F ICES 13 Fund where it is available to pay for general governmental services such as police patrols, fire 14 protection, senior/disabled services, etc. 15 16. The GFT is not mentioned at all in the Prop 218 Notice (Ex. “A”) that was sent to 16 rate payers advising them of the Prop 218 public hearing set for September 19, 2023. However 17 the new proposed rates attached to Resolution 24042 refer to the GFT as a “Special Condition” 18 and a component of the rates, without breaking out or quantifying the amount: 19 The Water General Fund Transfer is a component of every customer’s water bill, and is a transfer of up to 11.5% from the Water Fund to the City General Fund. On June 4, 2013, 20 the voters of the City approved the Water General Fund Transfer as a general tax, pursuant to Article 13C of the California Constitution. 21 22 17. The legality of the GFT had been challenged in a pending lawsuit filed in 2019 – 23 Simpson v. City of Riverside, RIC1906168, Superior Court of the County of Riverside. In 24 particular that case called into question the validity of the City’s assertion that the GFT is a 25 valid general tax. The liability phase of the case went to trial, resulting in a ruling filed August 26 17, 2023, finding unequivocally that: the GFT is not a valid general tax, that it is not an 27 exception to the prohibitions of Art. XIII D §3, that the GFT violates Art XIII D §6 (b) (1) & 28 _________________________________________________________________________________ 6 COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF 1 (2) because it causes rates to be set higher than the cost of providing services and the GFT 2 revenues are used for purposes other than the purpose for which water rates are collected. 3 That ruling is in place while the parties now address the damages phase of the case. 4 18. When the September 19, 2023 Prop 218 hearing arrived the City had been aware for a 5 month that a court ruling had found the GFT to be invalid (even though the ruling is not 6 immediately enforceable). The City had the option to reduce the water rates by eliminating the 7 GFT; Prop 218 permits a pure fee reduction without the formalities required for fee increases. 8 The City Council also had the option to collect $0 under the GFT, because the City Charter 9 provision allows the Council to set the transfer amount anywhere between $0 and “up to” 10 11.5% of the previous year gross revenues. They did neither. Instead City staff made a last 11 minute recommendation to impose and collect the GFT in the new rates as planned; and then EL. (630 ► 222·8992 • WMCI\ E ILL8MCNLAW .COM P 0 . BOX 2274 . NEVADA CITY, CA 95959 12 set aside the collected GFT revenues in a reserve account “until further City Council direction.” MCNE ILL LAW O F F ICES 13 The City Council approved that recommendation in conjunction with approval of the new rates 14 in the same form as put out for public notice. 15 19. Attached as Ex. “B” are true and correct images of 2 power point slides added at the 16 last minute to the City’s September 19, 2023 presentation to the Council on the new rates. The 17 slides note that the “lawsuit continues” while the GFT is collected from rate payers, with a 18 projected amount of $8,565,800 to be taken from rate payers in FY 2023/24. The consequence 19 of sequestering the GFT funds in a reserve account is that the funds cannot be spent on General 20 Fund projects or expenses, so the General Fund budget has to be reduced accordingly The 21 minutes of the meeting show that the motion to approve the rates included a directive to: ”place 22 all future Water General Fund Transfer collections into a reserve account, amend General Fund 23 budget accordingly until conclusion of litigation and further direction by City Council.” 24 20. Plaintiffs agree with the liability ruling in Simpson v. City of Riverside, and hereby 25 allege the findings and reasoning of that ruling in support of this validation action. In essence, 26 Proposition 218 makes no allowance or exception for a general tax levied on a property related 27 service. The GFT is void on its face. 28 _________________________________________________________________________________ 7 COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF 1 21. The water rate payers literally receive nothing in return for the GFT collections from 2 them. In fact they are marginally worse off than before due to the City’s last minute decision to 3 sequester the GFT funds in a contingency reserve account. Not only are they imposed upon to 4 pay an illegal charge that isn’t a function of water service, but with the funds sequestered in 5 reserves there isn’t even an indirect benefit from expenditure of those funds that might benefit 6 the community at large. Further, given that litigation through a full appeals process could take 7 another 2 to 5 years, and that many rate payers open and close accounts or leave town within 8 that span of time, there is a significant though unknown number of rate payers who will miss 9 out on any refund program set up when the Simpson v. City of Riverside case is later 10 concluded. 11 22. Insofar as the GFT is a component of the water rates, the last minute change in the EL. (630 ► 222·8992 • WMCI\ E ILL8MCNLAW .COM P 0 . BOX 2274 . NEVADA CITY, CA 95959 12 disposition of GFT revenues was, all by itself, prejudicial to the rate payers. There may be rate MCNE ILL LAW O F F ICES 13 payers who don’t mind paying the GFT if they believe the expenditures of those funds benefit 14 the general community. But then again they might have protested the rates had they known in 15 advance that GFT funds are indefinitely sequestered. This is a modification of the rates that 16 deserved public review and Notice per Art. XIII D §6 (a). 17 23. Resolution No. 24042 should be invalidated now, through this action, based on the 18 unlawful collection and disposition of the GFT in violation of Art. XIII D §6 (a), (b)(1) and 19 (b)(2). 20 (3) Unlawful Use Of Water Rates To Pay The General Fund Obligation For Unfunded Pension Liabilities Of Retirees 21 22 24. The question presented here is “Who should pay for the historic unfunded pension 23 liabilities of water utility employees who have left the service of the City and are not part of the 24 current active work force?” It is a given that the currently active work force in the water utility 25 that provide their services in this fiscal year should have the City’s pension contributions paid 26 for by the water rates collected in this fiscal year. The pension cost through the CalPERS 27 system1 requires a contribution of 13.56% of payroll by the employer with a contribution of 28 1 There are some retirement plans other than CalPERS in the City, but their size is negligible. _________________________________________________________________________________ 8 COMPLAINT FOR REVERSE VALIDATION, “TAKINGS,” DECLARATORY & INJUNCTIVE RELIEF 1 8.09% by the employee, for a total of 21.65% of payroll in FY 2023/24. This is denominated 2 the “Normal Cost” contribution, and in theory – as calculated by the actuarial projections of 3 CalPERS—it should be a fully sufficient amount to fund the future pensions of the employees 4 covered by the contributions. These contributions should be treated no differently than payroll 5 or salary paid for by the utility from the rate revenues as a “cost of services” for that fiscal year. 6 25. But what happens when the CalPERS actuarial projections are flawed, or the 7 retirement investment fund managed by CalPERS suffers losses due to volatility in the 8 securities and investment markets, leaving a shortage in the retirement investment fund – 9 referred to as Unfunded Accrued Liability or “UAL”—to cover the projected payments to 10 retirees? Unfortunately that has happened on a widespread and massive scale to cities across 11 the State in the CalPERS system over the last 15 years. The City of Riverside found itself in EL. (630 ► 222·8992 • WMCI\ E ILL8MCNLAW .COM P 0 . BOX 2274 . NEVADA CITY, CA 95959 12 this position about 5 years ago, facing a huge UAL debt of approximately $642,133,567 that MCNE ILL LAW O F F ICES 13 threatened the solvency of the City. That debt was the total for two CalPERS plans in 14 Riverside, a Safety Employees plan (fire and police employees) at $328,783,663 and a 15 Miscellaneous Plan in the amount of $313,349,904 (for all other non-safety employees) that 16 includes the water utility employees. 17 26. The City embarked on a plan to work out this debt, primarily with the issuance in FY 18 2019/20 of $432,165,2020 in Pension Obligation Bonds (“POBs”) with amortized repayments 19 through June of 2045. From this borrowing the City paid CalPERS $239,231.058 for the Safety 20 Employees fund and $200,330,920 for the Misc. Employees fund. The outstanding UAL debt 21 for the fund servicing the water utility was greatly reduced by this payment, along with smaller 22 payments toward UAL made in earlier years through bond issuances in 2006 and 2017. The 23 Riverside Public Utilities (“RPU”) department financial statements allocate 10.2% of the Misc. 24 Employees plan combined UAL bond debt to the water utility, resulting in a proportional share 25 of that total debt at a principal amount of $22,363,000 as of June 30, 2022 (the most recent 26 statements). That amount is amortized through 2045 with payment in FY 2024 estimated at 27 $2,282,000 and increasing slightly in the next few years, with a total of payments and interest 28 in the span from FY 2023/24 to FY 2027/28 (the duration of the water rate increases made by