Real Estate and Land Use

Use It or Lose It: San Clemente Required to Refund $10 Million in Unused Impact Fees

Walker v. City of San Clemente (August 28, 2015, G050552)

Author: Susan Hori

Why It Matters: In a strict reading of a local agency’s responsibilities under the Mitigation Fee Act (Gov’t Code §§ 66000 et seq.), the Court of Appeal held that San Clemente’s failure to make the proper findings under the Act to retain almost $10 million in mitigation fees collected from developers, and failure to justify holding these fees when it had not spent the money to alleviate the alleged problem which the fees were originally intended to address, required full refund of the unspent impact fees to the current property owners. This decision emphasizes the importance of agency findings and having substantial evidence in the record to support those findings, and the costly consequences of failing to comply.

Facts: In 1989 the City of San Clemente adopted the “Beach Parking Impact Fee,” which was imposed on all new residential developments outside the City’s coastal zone. The City anticipated that the substantial number of residential development projects proposed to be built in the inland areas of the City would result in increased demand for beach parking. The impact fee was to be used to acquire and construct new beach parking facilities.

Between 1989 and 2009 the City collected almost $10 million in Beach Parking Impact Fees and accrued interest. During that same time the City expended only $350,000 of those fees to purchase a vacant parcel on which no parking facilities have been built.

The Decision: This case involves a challenge brought under the State’s Mitigation Fee Act. The Act was adopted in 1987 to create uniform procedures for local agencies to follow in establishing, imposing, collecting, using, and accounting for impact fees charged to development projects. The Act created mechanisms and procedures to ensure that those fees were (1) used only to fund improvements for which a nexus existed between the development and improvement, (2) timely used to pay for those improvements, (3) not diverted for general revenue purposes, and (4) refunded if the fees go unused.

At the end of each fiscal year the Act requires a local agency to separately account for the fees that have been collected, to disclose the beginning and ending balance of the account in which the fees are deposited, and identify the public improvement on which the fee was expended, and dates of construction for any incomplete or proposed public improvement to be funded by the collected fees.

The Mitigation Fee Act also requires a local agency to make findings every five years to justify its continued retention of collected but unspent fees. The agency must identify how the fee will be used, demonstrate a reasonable relationship between the fee and the purpose for which it was charged, and identify all sources and amounts of funding anticipated to complete financing any incomplete public improvements. Failure to make these findings requires a refund of the unused fees to the current owners of the affected properties.

In 2004 San Clemente received and filed its Five-Year Report for the Beach Impact Parking Fee per the requirements of the Act. In 2009 the City once again received and filed the Five-Year Report for the fee. The 2009 Report was the same as the 2004 Report. In 2012 the plaintiffs filed an action to compel the City to refund the unspent Beach Impact Parking Fees. Both the trial court and the Court of Appeal decided in favor of the plaintiffs and ordered the City to refund the fees.

In its examination of the City’s 2009 Five-Year Report, the Court of Appeal concluded that the City failed to make the specific findings required by the Mitigation Fee Act. The City failed to discuss the relationship between the unspent fees and the purpose for which the fee was collected, failed to evaluate whether the residential developments that paid the fees had any impact on beach parking, or what the City had done since 1989 to address beach parking. The Court was highly critical of the City’s reliance in 2009 on prior reports and the original findings made when the fee was adopted in 1989. According to the Court, the five-year findings requirement “imposed a duty on the City to reexamine the need for the unexpended Beach Parking Impact Fees to finance beach parking improvements.” The Court held that the City should make new findings to justify its continued retention of the fees and any improvements it proposed to construct to remedy the beach parking problems that arguably were the catalyst for the imposition of the fees.

Practice Pointers:

  • Any developer or builder that has paid fees subject to the Mitigation Fee Act should carefully monitor and review the local agency’s five-year reports and findings to confirm that the required findings were made and that the public improvements to be funded by the fees have actually been constructed, or that a time frame and funding plan for their development are disclosed in the reports.
  • Local agencies adopting development impact fees must carefully comply with the reporting requirements of the Mitigation Fee Act and ensure that they take a “hard look” during each reporting period to justify the continued collection of the fees and retention of fees for public improvements.

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Show Your Homework: School Closures Not Supported by District’s Categorical Exemptions

Save Our Schools v. Barstow Unified School District Board of Education (September 2, 2015, E060759)

Why It Matters: The Barstow Unified School District Board of Education (District) relied upon a CEQA categorical exemption to support its decision to close two elementary schools. The Court of Appeal held that the District’s reliance on the categorical exemption was not supported by substantial evidence in the record. The District’s decision was not supported by substantial evidence demonstrating that the school closures would not result in increased student enrollment at the recipient schools that would exceed the limits set out in the categorical exemption. This decision reflects the importance of having evidence in the record to support the use of a categorical exemption.

Facts: After spending a year of public meetings on whether to close schools to cut costs so that it could meet its financial obligations, on February 22, 2013, the District adopted resolutions to close both the Hinkley Elementary School and Thomson Elementary School for the 2013-2014 school year and subsequent years. In deciding to close these schools, the District noted that the students from both schools could choose to transfer to any one of several District receptor schools.

The District determined that its action was exempt from CEQA compliance pursuant to Public Resources Code Section 21080.18, which excludes the closing of any public school if the physical changes involved are categorically exempt from CEQA. Because of the cross-reference to the CEQA categorical exemptions, the District also relied upon the “minor additions” to schools exemption in CEQA Guidelines Section 15314. This exemption exempts “minor additions to existing schools within existing school grounds where the addition does not increase original student capacity by more than 25% or ten classrooms, whichever is less. The addition of portable classrooms is included in this exemption.” (CEQA Guidelines Section 15314.) When the District adopted the closure resolutions, it did not limit the number of students that could transfer to any of the District receptor schools in order to keep enrollment at receptor schools below the levels that are allowed by the “minor additions” exemption.

Save Our Schools (SOS), a local citizens group, challenged the closure and sought an injunction that would prevent the District from closing the two schools pending the adjudication of their lawsuit. In the spring of 2013, the District closed the schools and the students from the schools were transferred to District receptor schools beginning in the 2013-2014 school year. The trial court denied SOS’s petition.

The Decision: The Court of Appeal reversed the trial court’s decision finding that the District’s decision was not based upon substantial evidence to support its determination that the closures and student transfers were exempt from CEQA review. In order to qualify for the “minor additions” categorical exemption, CEQA requires that the addition must not increase the original student capacity by more than 25% or ten classrooms, whichever is less. Prior to making its decision, the District was presented with the enrollment figures of the two schools proposed for closure. Together, the closure would mean that 610 students would have to transfer to other District receptor schools. The District also had before it the current number of students enrolled at each of the receptor schools. What the District did not have was the “original student capacity” or “enrollment capacity” of each of the receptor schools. Therefore, it was impossible to know whether the receptor schools were at 100% capacity or 60% capacity, and thus there was no evidence in the record by which the District could determine whether the closure of the schools would increase the receptor schools’ “original student capacity” by more or less than the 25% or ten classrooms identified in the categorical exemption. The absence of the enrollment capacity for each of the receptor schools was viewed by the court as a “critical gap in the evidence.” The District failed to have substantial evidence in the record at the time it made the closure decision to support its finding that the addition of the students from the closed schools would not exceed the limits set forth in the categorical exemption.

As an alternative argument, the District also asserted that the closures and student transfers were exempt under CEQA Guidelines Section 15378(b)(5), which provides that “[o]rganizational or administrative activities of governments that will not result in direct or indirect physical changes in the environment are not considered projects under CEQA.” The court noted that the District conceded that an increase in student enrollment would be viewed as a significant environmental impact if the increase in enrollment exceeded the 25% or ten-classroom threshold set out under CEQA Guidelines Section 15314, and since there was no evidence to support a conclusion that these thresholds would not be exceeded, the court held that the student transfers would not be exempt under CEQA Guidelines Section 15378(b)(5) either.

The School Closures Did Not Moot the Litigation. Both schools were closed by the beginning of the 2013-2014 school year—well before the Court of Appeal rendered its decision. Nevertheless, the court agreed with SOS that the school closures did not moot the litigation. The court explained that if the District, on remand, is unable to determine that the closures and transfers were exempt from CEQA, the trial court may be able to provide SOS with effective relief. For instance, the trial court could potentially order the District to reopen the schools or take other steps to mitigate any adverse environmental impacts of the closures and transfers.

Practice Pointers:

  • An agency’s decision that a project is categorically exempt from CEQA must be supported by substantial evidence. Substantial evidence to support the agency’s exemption determination must be in the administrative record at the time the agency made its decision.
  • Read the language of the categorical exemption carefully to ensure that the correct information required by CEQA is before the decisionmakers. Current enrollment figures of all of the affected schools were not enough to support the District’s decision when the CEQA Guidelines required the enrollment capacity.
  • Proceeding with a project that is in litigation will not moot an adverse outcome. Even though the schools had been closed for two years by the time the court decided this case, if the District cannot support its decision on remand, it may be required to reopen the schools.

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