San Jose: Attorney claims City Hall ‘stole’ nearly $40 million from water customers

SAN JOSE — A longstanding dispute over whether San Jose could use money collected from its municipal water customers to pay for other city expenses may be heading to trial with the city refusing to pay nearly $47 million to settle a class-action lawsuit.

At issue is money the city transferred from a water fund — made up of fees paid by residents for their water — to the city’s general fund, which pays for police, fire protection, parks and other basic services.

The lawsuit, filed in Santa Clara County Superior Court in 2014, says those transfers violate provisions of Proposition 218 in the California Constitution. Approved by voters in 1996, it prohibits using revenue from service fees and charges for anything other than the purpose for which they were collected.

“They have been collecting more money than they needed, and they have been making a profit off the backs of folks on the East Side of town,” said Ray Plata, the lead plaintiff in the lawsuit. “We played by the rules, paid the bills, and trusted our elected officials to watch out for us. And they didn’t.”

San Jose acquired the municipal water system in 1961 and paid it off a decade later, the lawsuit said. The utility serves about a tenth of the city’s population or 100,000 people in northern and eastern San Jose, including Alviso, North San Jose, Evergreen, Edenvale and Coyote Valley.

The plaintiffs offered to settle for a total of $46.8 million, including $37.2 million in allegedly “misappropriated” water funds, $7.6 million in interest and about $2 million in attorney’s fees.

City Attorney Rick Doyle called that “outrageous.”

“We don’t think the transfers were improper,” Doyle said.

The lawsuit notes that the city’s municipal code allowed that if “adequate monies remain” in the water fund, the city could transfer up to 8 percent of the revenue to its general fund annually to reimburse the city for “indirect overhead costs and to provide a reasonable rate of return.”

The lawsuit claims that puts the city code in conflict with state law.

Nevertheless, Doyle said, San Jose has not transferred any money from the water utility fund since 2008. And the lawsuit filed six years later came too late to legally bring a case, he said.

“This is a very old situation,” Doyle said. “We’re not going to be held hostage.”

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Jim McManis, the lawyer representing the plaintiffs, called that “shameful.”

“What ought to be embarrassing to the city is to say, ‘Yes, we stole your money, we have it, but you can’t get it back because of the statute of limitations,’” McManis said. “They’re basically thumbing their nose at 10 percent of the population of San Jose.”

Plata, a salesman who’s been a municipal water customer for a decade, said he and his wife, a teacher, sometimes struggled to pay the water bill while putting two kids through college.

San Jose’s municipal water rates include a service charge of $26.70 a month for a 5/8-inch meter, plus a use rate ranging from $1.88 to $4.79 per hundred cubic feet of water, depending on location.

By comparison, San Jose Water Company, which serves most city residents, charges $25.45 a month for a 5/8-inch meter, plus a tiered rate ranging from $4.29 to $5.24 per hundred cubic feet that increases with the amount used.

Since San Jose didn’t accept the recent settlement offer, the city and McManis will head to a final settlement conference on Sept. 20. If negotiations fail, the case goes to court five days later.

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