The “Utility Modernization Act” (Measure K1) up for a vote this November seeks approval of two unrelated utility issues in a single ballot measure, presenting voters with a dilemma if they favor one but not the other.

As arguments emerge, supporters and opponents alike tend to focus on only one-half of the ballot measure. One part is about collecting a tax, the other about transferring funds.

The “modernization” aspect of the measure pertains to updating the city’s definition of telephone service to include phone service arriving via the Internet and cell phone transmitters, technologies not contemplated when the current ordinance was drafted.

The city estimates it is losing about $1.5 million annually in utility tax revenue because not all cell and Internet phone providers are collecting the tax, which would go to the city. For instance, city officials say Verizon Wireless is not collecting the full tax. Thus, some users’ phone bills are artificially lower than others’ because of tax avoidance, providing a de facto corporate subsidy to certain phone service providers.

The modernization also raises the age at which seniors can receive a partial exemption from the tax from 62 to 65 years of age, to account for a population who now works and lives longer.

Opponents question whether the existing utility tax should be expanded at all, claiming it affects vulnerable seniors who are trying to make ends meet. They also say the increased tax revenue could potentially trigger wage increases for all public safety employees, which remain even when the economy falters. Supporters, on the other hand, say it’s only fair that everyone pays the same tax for telephone service.

The second aspect of the ballot measure (the transfer of funds) was prompted by a legal challenge. The city is currently facing a lawsuit that alleges the longstanding practice of annually transferring funds from the city-owned electric power company to the city is actually a “tax” not approved by the voters and that the funds should remain at the utility company for energy-related uses. By having voters amend the city charter and approve the annual $3.7 million fund transfer both retroactively and into the future, the city hopes the lawsuit will become moot.

Of the total $3.7 million in annually transferred funds, $900,000 is used for street light maintenance. The remaining $2.8 million goes into the city’s general fund, with no special earmarks on how it will be used.

Some residents worry the fund transfer will be used to underwrite the growing pension and benefit obligations the city owes its highly paid staff and public safety employees. They would rather see the measure fail, and have the money be spent on maintaining our utility infrastructure and on the utility’s ongoing need to adapt to the changing energy world. Others believe that because the city owns the utility company, it should rightly be able to tap into those funds for running the city.

Contrary to popular belief, if Measure K1 fails, the transfer of funds from the utility company to the city will not automatically end. Changing or ending the transfer would still require action by the city council.

On the other hand, if voters provide a vote-of-confidence for the annual fund transfer, it could potentially frustrate future efforts at the city council level to alter the practice, such as changing the transfer amount and/or earmarking the transferred funds for specific items.

Voters will have to make one decision on two unrelated issues. Whether those issues will need to return to the ballot box is yet to be seen.

Originally published in Alameda Sun

Further reading:

Turn up the AMP! – Alameda Merry-Go-Round, by Robert Sullwold, June 5, 2016

Illegal tax? Outsized city fees on utility bills are challenged – The San Diego Union-Tribune, March 23, 2015.

Jacks v. City of Santa Barbara – Ruling by 2nd District Court of Appeal

Excerpts from the ruling:

We conclude that the 1% surcharge is an illegal tax masquerading as a franchise fee. The sole issue before us is whether the 1% surcharge is a tax subject to Proposition 218’s voter approval requirement or a franchise fee that may be imposed by the City without voter consent. In interpreting Proposition 218, we must liberally construe its provisions “`. . . to effectuate its purposes of limiting local government revenue and enhancing taxpayer consent.'” Proposition 218 prohibits local governments from imposing “taxes” without voter approval but does not tell us what “taxes” means. The term “has no fixed meaning, and . . . the distinction between taxes and fees is frequently `blurred,’ taking on different meanings in different contexts.” In general, taxes are imposed for revenue purposes, rather than in return for a specific benefit conferred or privilege granted. In contrast, the definition of “franchise fee” has been constant for nearly a century. A franchise fee is a “charge which the holder of the franchise undertakes to pay as part of the consideration for the privilege of using the avenues and highways occupied by the public utility.”