OPINION by STEWART JENKINS
Public private partnerships are in vogue. The notion is that private companies contribute something to provide what a government should provide, with the company profiting and the government saving money.
Offering tax breaks and easing permit requirements is typically used to bring private enterprise into the “partnership.”
But, have a care. Public officials and companies manipulating tax obligations can find that they have been too clever, by half. An electric company and the City of Hayward recently learned this the hard way in Russell City Energy Company v. City of Hayward (2017) 14 Cal.App.5th 54.
A deal that promised the city jobs, land and money, and promised Russell City Energy Company a plant site and tax freedom, ended up costing both big-time. Legal costs, management disrepute, and high tax obligations for Russell Energy; and legal costs, election losses, and huge restitution obligations for the City of Hayward promise to be the outcome, now that the company and city fought their way to the Court of Appeal.
In 2005, Hayward’s “outside-the-box” city council negotiated a contract with Russell Energy to build a gas fired electric generating plant in the City of Hayward by promising that Russell Energy would never have to pay any city taxes other than real property taxes. The city council was so anxious to get the electric plant that they threw in 12 acres of land for the plant site, and promised to fast-track permits.
Relying on that tax waiver, Russell Energy paid Hayward ten million dollars, deeded Hayward 3 acres somewhere else in town, and spent tens of millions of dollars building and opening the electric plant in Hayward during 2010, even though the city of Hayward went ahead in 2009 and adopted a 5.5 percent utility tax on the cost of electricity and of natural gas used by any person.
In 2011, Hayward sent Russell Energy a $10 million dollar tax bill on the natural gas used to generate electricity.
Now, to challenge a tax bill, you generally have to pay it, and then challenge the bill. Russell Energy did just that, and then brought suit. Their suit to recover the taxes paid, and to obtain remedies for breach of contract, was met with the City of Hayward’s “demurrer,” filed to kick the case out of court. “Demurrer” is legalese from the French that roughly translates, “if everything you said is true, so what.” And here’s where one needs to ask, who is fooling who.
As noted by the Court of Appeal, Russell Energy entered the deal in good faith, and paid big money to build the electric plant in Hayward when they could have built it somewhere else. But the City of Hayward’s demurrer pointed out that in the California Constitution, Article 13, Section 31, cities and counties are stripped of the power to “surrender or suspend the power to tax by grant or contract.”
The Alameda County Superior Court sided with the city, and even declined to let Russell Energy amend their complaint to ask for restitution of the $10,000,000 and 3 acres of land that the company had originally paid to get into this “collaborative” deal with Hayward. Although the First District Court of Appeal agreed that the California Constitution squelched a city’s promising not to collect taxes in exchange for agreeing to build and start a business in the city, the Court of Appeal held that the business owners should be able to amend their complaint and sue the city for restitution of the payments the city had received for the promise that it never could have made.
The opinion reveals sharp and unfair positions taken by Hayward’s legal counsel during the case. But the opinion does not reveal whether Hayward’s city council, or city attorney, or city manager knew that the promises they were making to Russell Energy always were unenforceable. Those types of issues bearing on fairness, fault, and remedies now available to Russell Energy were left by the Court of Appeal to be tried in the Alameda County Superior Court.
All we know now is that Russell Energy and the city of Hayward are headed back to court where the tens-of-thousands of dollars they have each spent will no doubt be multiplied, and added to the cost of electricity for Russell’s customers, and added to the burden on city tax payers.
Hopefully, next time a San Luis County County supervisor or a city council member waxes dewy-eyed about luring private investment into a private-public partnership, voters will demand a second and third look at such risky proposals.
Stew Jenkins is a San Luis Obispo County attorney practicing in San Luis Obispo since 1978. Jenkins’ handles municipal law, Brown Act and Public Records Act cases, estate planning and family law. He supports open government, the rights of working people to organize unions, growing the local economy by project labor agreements, the right of all people to health care and equal access to justice. He may be reached at firstname.lastname@example.org.