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UC Tax Exemptions Rooted In Law and Court Rulings

Friday May 14, 2004

EDITOR’S NOTE: This is the second of a two-part series on taxation issues between the City of Berkeley and the University of California. In the May 11 edition, we compared the Berkeley/UC tax relationship with similar relationships in other university cities around the country. 


Under federal and California law, all state and federal property is exempt from taxation, as are public libraries and museums, aerospace museums, churches, hospitals, charitable facilities, nonprofit schools and colleges, nonprofit cooperative housing, nonprofit scientific institutions, burial plots and modifications to buildings to accommodate the disabled. 

Berkeley’s biggest non-taxpayer by far is the University of California, and therein lies the rub. 

The key to UC’s place in the realm of taxation can be found in two articles of the California Constitution: 

• Article IX Section 9 grants the University of California system “full powers of organization and government,” including the full control and management of property.  

• Article XIII Section 3 specifically exempts state-owned property from all property tax liability. Two sections of the state Education Code define the UC Board of Regents as a state agency, thus allowing the UC system to qualify for the constitutionally-mandated tax exemption. 

Questions involving special assessments levied to finance specific improvements that serve the university have a more complex history. 

Just what other governments can and can’t do to collect taxes and fees from the university system has been hashed out in a series of court decisions starting with the unanimous 1929 California Supreme Court ruling in the case of the City of Inglewood v. Los Angeles County. 

Three county districts—flood control, sanitation and drainage—tried to collect special assessments from the city, but the state high court unanimously ruled that “while publicly owned and used property is not exempt from special assessments under the constitution or statutory law of this state, there is an implied exemption of such property from burdens of that nature.” 

Under that decision, local governments generally paid for the actual services they received, but not the taxes levied to build the facilities that provide them. 

A series of decisions between 1979 and 1983—most notably another unanimous state Supreme Court ruling in 1981—led the State Legislature to make a change in the way government agencies pay such service fees. 

In two appellate rulings, one in 1979 and the other in 1983, the judges ruled that UCLA was exempt from special assessment fees it had paid under protest to the City of Los Angeles for sewer facilities construction. 

The July 21, 1981, high court ruling in San Marcos Water District v. San Marcos Unified School District laid out the definitive legal standard in striking down the water district’s attempt to assess the school district for a capital improvement fee to improve sewer service: “Because the capacity fee is a special assessment that has not been authorized by the Legislature, we hold that the school district is not required to pay the fee.” 

In the wake of San Marcos, the Legislature enacted California Government Code sections 54999 through 54999.6, “Liability of Public Entities for Public Utility Capital Facilities Fees,” which went into effect in March, 1988.  

The new law specified that the San Marcos decision “should be revised to authorize payment and collection of capital facilities fees” from governmental agencies, though it set a higher standard for fees imposed on school districts, county education offices, community college districts, UC, the CSU system and any state agencies. 

The law places the burden of proof on the taxing agency to justify the costs of the assessments. 

Those statutes were reinforced by Proposition 218, a statewide ballot initiative passed by voters in November, 1996, which mandated that local, state and federal agencies can’t be exempted from special assessments unless they offer “clear and convincing evidence” that they receive no benefit from the improvements financed by the fees. 

An appellate decision in June, 2003, clarified Prop. 218, limiting assessments that can be collected to fees for “provision of water, light, heat, communications, power, or garbage service, for flood control, drainage or sanitary purposes, or for sewage collection, treatment, or disposal.” 

The decision came after the City of Marina sought funds to pay for increased traffic and fire safety facilities needed to meet the needs of the new California State University-Monterey Bay campus. 

Though the CSU Environmental Impact Report concluded the new campus would impose fire protection costs and traffic congestion problems on the adjacent community, the university refused to pay anything toward the required improvements. The city sued to force the university to pay mitigation costs under the provisions California Environmental Quality Act (CEQA). 

Marina won at the trial court level, but their was reversed by the State Court of Appeal. 

The city has challenged the reversal, and the case now set for arguments before the California Supreme Court. Berkeley City Attorney Manuela Albuquerque signed the formal friend of the court brief—drafted by Assistant City Attorney Zach Cowan—siding with the City of Marina on behalf of the League of California City and the California State Association of Counties. 

Assemblymember and former Berkeley Mayor Loni Hancock has launched a legislative attempt at an end run around the Marina decision in her Assembly Bill 2092, which would mandate that colleges, universities and other normally exempt institutions pay their fare share of impacts on other agencies in projects governed by the CEQA. 

Whether an act of the Legislature can trump provisions enshrined in the state constitution is an issue that only the courts can decide. Judging from previous rulings by the state’s high court, Hancock will be fighting an uphill battle. 

The courts have also ruled that universities are exempt from building permit and inspection fees when the system is building facilities for educational uses—even on leased property. 

In the unanimous 1978 decision Regents of the University of California v. City of Santa Monica, a Southern California appellate court unanimously ordered the city to refund fees it had assessed after the university installed an air conditioning system and moved wall partitions in a leased building in the city. 

One area where the courts have consistently allowed local governments to levy taxes is on commercial activities conducted on land owned by colleges and universities. 

In a 1975 decision, the appellate court ruled that Los Angeles could levy business taxes on a circus that held commercial performances at Devonshire Downs, owned by CSU-Northridge. The court ruled that a city could assess fees when the university crossed the line “between governmental and proprietary activity.” 

The following year, a Northern California appellate court ruled that the City of Berkeley could levy a 10 percent gross receipts tax on Oakland Raiders pro games held at Cal Stadium. The court cited earlier decisions holding that cities were entitled to tax all business activities within their borders. ›