An air pollution fee levied on new development in the San Joaquin Valley has been upheld by the Fifth District Court of Appeal.
In rejecting all arguments presented by the California Building Industry Association and its allies, the court concluded that the San Joaquin Valley Air Pollution Control District fee is not bound by restrictions in the Mitigation Fee Act and is a properly adopted regulatory fee.
In early 2006, the air district became the first agency in the country to assess what amounts to a smog mitigation fee on nearly all new development. The fee applies to projects with at least 50 residential units, 2,000 square feet of commercial space or 25,000 square feet of light industrial space, as well as to certain office and public projects (see CP&DR Environment Watch, April 2009, January 2004). The district relies on a customized urban emissions model known as URBEMIS, which determines the amount of nitrogen oxide (NOx) and particulate matter (PM 10) a project would produce. Projects with "smart growth" features, such as higher densities and locations near transit, may reduce their fees, as may projects that incorporate energy efficiency features, are built with clean-air construction vehicles and that do not have wood-burning stoves and fireplaces.
The fees currently are $9,350 per emitted ton of NOx and $9,011 per emitted ton of PM 10. This translates to approximately $100 to $650 per dwelling unit, or an average of about $475, according to Arnaud Marjollet, the valley district's permit services manager. The amount of the fees is based on the district's cost of implementing off-site mitigations, such as replacing diesel engines with cleaner-burning engines and paving dirt roads to eliminate dust. The program has generated $9.4 million in fees thus far, although the district has only spent or contracted to spend about $700,000, according to Marjollet.
The air pollution district's program, known as "indirect source review," or ISR, applies to any building or facility that "attracts or generates mobile source activity that results in emissions of" NOx and PM10 – meaning projects that generate automobile trips. Because the San Joaquin Valley qualifies under federal standards as an area of "serious nonattainment" for PM 10 and "extreme nonattainment" for NOx, the district has prepared federally required plans to demonstrate how the region will comply with air standards in the future. The ISR is part of the compliance plan. In addition, a fee on indirect sources of emissions in the San Joaquin Valley is required under legislation approved in 2003 by state lawmakers concerned about the valley's dismal air quality.

Developers and landowners fought the ISR throughout the district's rule-making process. In the end, the Building Industry Association, the Modesto Chamber of Commerce, the Coalition for Urban Renewal Excellence and Valley Taxpayers Coalition sued to block the air pollution fee. They contended that the levy violates the Mitigation Fee Act because there is no nexus between the effects of a development and the fee. Alternatively, the plaintiffs said that if the fees were regulatory in nature, the district's methodology for determining and apportioning them was illegal. Fresno County Superior Court Judge Donald Black ruled for the district, and a unanimous three-judge panel of the Fifth District upheld the decision.
The appellate court explained that an agency may levy three types of fees or assessments without voter approval: special assessments based on the value of benefits to a specific property; development fees exacted in return for permits or entitlements to build; and regulatory fees imposed under the police power.

Builders argued that the ISR levy is a development fee because it is imposed when a project is approved and the money is used to alleviate the project's air quality effects on the larger community. Thus, the fee should be subject to the Mitigation Fee Act and its requirements for a detailed study linking effects with fees, the builders contended.
The court ruled, however, that the ISR fee is not a development fee because approval of a project is not conditioned on payment of the fee. "The ISR fees are not exacted in return for permits or other government privileges. Thus, the ISR fees are not development fees and, therefore, are not subject to the Mitigation Fee Act," Justice Herbert Levy wrote for the court. "Rather, the fees are regulatory in nature. They are designed to mitigate growth in air pollution from new development in order to achieve and maintain federal air quality standards."
The court then considered whether the regulatory fees are valid. The builders argued that the district did not establish a reasonable relationship between the fees and the burden they impose on new development. Much of their argument centered on the district's use of URBEMIS to determine a project's emissions. The builders said a travel demand model would be more appropriate.
The court, though, found that the district "undertook extensive efforts to ensure the URBEMIS was the best tool … [and] initiated an extensive statewide effort to update the URBEMIS model." The district documented and justified its reliance on URBEMIS to determine emissions, and the district based its fees on the estimated cost of mitigating emissions, the court said.
"The calculation need not be exact, just reasonable," Levy wrote. "Appellants' criticisms are nothing more than a difference in expert opinion. Contrary to appellants' position, the district has shown that the fees charged are reasonably related to the amount of pollution, or ‘burden,' attributable to each new development. The more a new development increases air pollution, the more the developer pays."
The court also ruled that not only is the district authorized to regulate and assess indirect sources of pollution, it is required to do so under the 2003 legislation (Health and Safety Code § 40604).
The case was closely watched because the air pollution district broke new ground and because fees tied to greenhouse gas emissions, or climate change, could become the norm. William Abbott, a Sacramento attorney who co-authored Exactions and Impact Fees in California, said the case reflects "the increased sophistication by consultants in justifying regulatory and development impact fees."
District officials say the point of the ISR program is to hold developers accountable for their contributions to air pollution. "We hope the state Building Industry Association will now join the many valley developers who have taken this rule to heart and designed their projects to reduce air quality impacts," said Seyed Sadredin, the district's executive director.
The Case:
California Building Industry Association v. San Joaquin Valley Air Pollution Control District, No. F055448, 2009 DJDAR 14570. Filed October 6, 2009.
The Lawyers:
For CBIA: David Lanferman, Sheppard, Mullin, Richter & Hampton, (415) 774-2996.
For the district: Philip Jay, SJVAPCD, (559) 230-6033.