San Francisco's practice of using building permit fees to fund long-range planning has been upheld by the First District Court of Appeal. The court rejected arguments that the fee plan violated Proposition 13 and the city charter. Instead, the court ruled that long-range planning is sufficiently related to the regulation of building construction to justify the spending.

Indirectly, the court also upheld a 2002 law that expressly permits local governments to levy building fees to fund general plan updates.

The court's decision leans heavily on two landmark cases that upheld other fees facing Proposition 13 challenges: Sinclair Paint Co. v. State Bd. of Equalization, (1997) 15 Cal.4th 866, and California Assn. of Prof. Scientists v. Department of Fish & Game, (2000) 79 Cal.App.4th 935 (see CP&DR Legal Digest, May 2000).

"We … slightly broaden the import of Sinclair Paint by holding that a municipality may, under its police powers, spend regulatory fee revenues for the purpose of legitimate regulation so long as those revenues do not exceed the reasonably necessary expense of the regulatory effort," Justice Joanne Parrilli wrote for the unanimous three-judge panel of the First District, Division Three.

Stephen Collier, a San Francisco attorney and affordable housing advocate, argued that long-range planning was not a regulatory activity related to the purpose of the building fees. But the court said Collier's view was too limited.

"[W]ere we to adopt a too narrow definition of 'regulatory activities' in applying Government Code § 50076 [which implements Proposition 13], we would risk depriving municipalities of a reasonable degree of flexibility to determine whether regulatory fee revenues collected by their agencies are being spent in furtherance of the purpose for which those fees were assessed," Parrilli wrote. "That, in turn, could hinder a municipality's ability to address burdens placed on the community by the activities of certain classes of individuals. A regulatory fee, after all, ‘is enacted for purposes broader than the privilege to use a service or to obtain a permit. Rather, the regulatory program is for the protection of the health and safety of the public,'" Parrilli continued, citing California Assn. of Prof. Scientists.

Michael Coleman, fiscal advisor to the League of California Cities, was unsure how commonly local governments use building fees for planning purposes. "It's certainly a favorable ruling for local governments, but it's probably too early to tell if it will result in any change in fee rates, or the amounts or use of revenues," Coleman said.

Nick Cammarota, general counsel for the California Building Industry Association, said the decision may have limited implications.

"It's a question of how they can spend money they have already collected," Cammarota said. "It's not a case in terms of how much you can charge in fees." The plaintiff could have argued that the amount of the fee was erroneous because it included the costs of doing things unrelated to plan check and building inspection, he said. But that was not the argument here.

For more than a decade, fee revenue in San Francisco's Building Inspection Fund (BIF) exceeded the cost of operating the Department of Building Inspection. Thus, when it faced a deficit in the 2003-04 general fund, the Board of Supervisors transferred $2.53 million from the BIF to the Planning Department for long-range planning activities, which include preparing adopting and maintaining the general plan and related zoning ordinances. The board also allocated $250,000 from the BIF to the Fire Department for enforcing new sprinkler requirements in multi-family residential buildings and single-room occupancy hotels. For the 2004-05 fiscal year, the city allocated $5.8 million from the BIF for long-range planning, and $250,000 for Fire Department safety and code compliance activity.

In July 2004, Collier and two other individuals who later dropped out of the litigation sued San Francisco. They argued the fee transfer amounted to a special tax prohibited by Proposition 13 and violated San Francisco's charter limiting the use of BIF revenues. San Francisco Superior Court Judge James Warren rejected the arguments, ruling that the city was spending the fee revenue on regulatory services that benefit, or are necessitated by, the fee payers.

On appeal, Collier argued that the fees were a special tax that required two-thirds voter approval under Proposition 13. He also contended that the planning and fire departments should have assessed their own fees rather than used building inspection funds. The First District, however, found an adequate relationship between the fee's purpose and the city's expenditures.

The court noted that the Department of Building Inspection referred more than half of building permit applications to the Planning Department for a determination of compliance with the zoning code and the general plan. "Given this connection between the Planning Department's long-range planning activities and the building permit approval process, we conclude the Planning Department spent the transferred BIF fee revenues for purposes related to the regulatory activities for which those building permit fees were assessed," the court ruled.

The court determined the Fire Department expenditures were appropriate because the department shared responsibility for enforcing the city's sprinkler ordinance. The court further found that the fee amounts were reasonably related to the actual cost of performing the planning and fire safety functions; that the expenditures need not be traceable to individual building permit applicants; and that the fee plan did not violate the San Francisco charter.

In a footnote, the court discussed AB 2936 (Aroner), which the Legislature approved in 2002 as an amendment and addition to Government Code § 66014. The court found that the measure "was intended to clarify the legality of the practice of using building permit fees to finance activities related to the general plan; the legislation did not make legal a practice that had previously been illegal."

That court's acceptance of AB 2936 could embolden more local governments to charge builders for long-range planning activities. Cammarota, however, contended that the opinion does not stand for the proposition that a city may place the entire burden for funding general plan updates on new development.

The Case:
Collier v. City and County of San Francisco, No. A113171, 07 C.D.O.S. 6730, 2007 DJDAR 8661. Filed June 12, 2007.
The Lawyers:
For Collier: Mark A. White, Chapman, Popik & White, (415) 352-3000.
For San Francisco: Wayne Snodgrass, city attorney's office, (415) 554-4700.