Public Agencies Collecting Fees Under the Mitigation Fee Act May Be Required to Refund Unexpended Funds if They Fail to Make Specific and Detailed Findings in Support of the Fee Collection and Retention

September 9, 2015 | Bulletin No. 1273977.1

In the recent case of Walker v. City of San Clemente (August 28, 2015, Civil No. G050552) __ Cal.App.4th __, the Court of Appeal found the City of San Clemente ("City") violated the Mitigation Fee Act ("Act"), Government Code section 66000, et seq., and as a result, the City has to refund almost $10 million to certain property owners.  The Act authorizes local agencies to impose fees on specific development projects to help fund new or additional public facilities necessitated by the development.  The Act, however, contains various provisions to help ensure that the funds collected will actually be used for facilities to serve the new development rather than simply become a source of general revenue.  One such provision requires that the agency make new findings every five years to justify the retention of any fees it has collected but failed to use.  The agency must return the unused funds to the current owners of the affected properties if it fails to make these findings every five years.  A group of City residents challenged the findings in the City's 2009 Five-Year Report, and both the trial court and the Court of Appeal agreed the findings were inadequate which requires a refund of the unexpended fees.

Factual Background

The City began collecting a "Beach Parking Impact Fee" in 1989 after studies indicated development in the City's interior would necessitate additional parking in the City's coastal zone.  Between 1989 and 2009, the City collected nearly $10 million in fees from new residential development for the purpose of acquiring and constructing these new beach parking facilities.  The City, however, only spent less than $350,000 of the funds when it purchased one lot to construct parking facilities, and the lot still remains vacant.  A group of residents challenged the City's 2009 Five-Year Report claiming it failed to support continued collection and retention of the fees.  The trial court agreed and ordered the City to refund the unexpended fees.

Court's Analysis

On appeal, the Court affirmed the refund since the City failed to make the five year findings required by the Act.  As summarized by the Court, "[f]or all unexpended development fees, the agency must make findings every fifth year that identify how the fee will be used, demonstrate a reasonable relationship between the fee and the purpose for which it is charged, identify all sources and amounts of funding anticipated to complete financing for incomplete improvements that were identified when the fee was established, and designate the approximate dates for that funding to be deposited into a dedicated account."  In other words, the agency must "affirmatively demonstrate that it still needs the unexpended fee to achieve the purpose for which it was originally imposed, and that the agency has a plan on how to use the unexpended balance to achieve that purpose."  By requiring these findings every five years, the Act seeks to prevent a local agency from holding fees for an extended period without a "clear and demonstrable plan" to use the fees for the purpose they were imposed.

In its decision, the Court determined that the 2009 Five-Year Report's findings: "fail to demonstrate the City still needs the nearly $10 million in fees and interest it collected to address public beach parking issues created by new development in the noncoastal area.  The report also fails to show how it will use those funds to address beach parking issues, what improvements the City intends to construct with the funds, the cost of those improvements, whether the City requires more money, and if so, when the City anticipates receiving that money."  The Court held that the Act requires this information, but the City failed to provide it.

In support of its findings, the City argued it was still in the process of identifying specific beach improvements, and that nothing had changed since its original findings.  The Court rejected this argument by noting that the five year findings requirement imposes a duty to reexamine the need for the unexpended fees.  "[T]he Act required the City to make new findings demonstrating its continuing need for beach parking improvements caused by new development in the noncoastal zone." 

The Court also rejected the City's argument that it should send this matter back to the City for further findings.  Instead, the Court held that the Act clearly and unambiguously mandates a refund of the retained funds if the City's findings are inadequate.  "[T]he statute requires the City to refund the unexpended impact fees" since the City failed to make the findings required by the Act.

In addressing the parties' other arguments, the Court held that the City was not required to sell the still vacant property it had purchased for purposes of constructing parking.  The Act only requires the refund of money actually held by the City especially since the lot remained undeveloped and its use was not inconsistent with public beach parking.   The public might have a valid challenge if the City were to use the lot in a manner inconsistent with fee's purpose.  The Court also held that the City could use some of the collected fees for administrative tasks related to the maintenance of the funds as long as the funds were not used simply for general revenue purposes.  Finally, the Court expressly did not decide whether the 2009 Report would have been adequate if the City had explained that parking conditions had changed and the City was studying whether it could satisfy the purpose of the assessment by financing different projects.

What This Decision Means To You

This case shows the importance of closely following the requirements of the Act in preparing and adopting the five-year reports including providing sufficient specific and detailed information in the report.  If the report's findings are not sufficient, the agency may not get a second chance to revise the findings.  Instead, a court may simply order the agency to refund any unexpended funds which, as was the case with the City, could amount to millions of dollars.

Questions

If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult:

William Chisum or Mona Ebrahimi  | 916.321.4500