Turn up the AMP!

Three years ago, the Merry Go-Round urged our readers to say “Thank you, AMP” for the annual payments made by Alameda Municipal Power to the City that enabled Council to adopt a balanced General Fund budget.

Especially, we said, AMP was owed gratitude for the $2.8 million it transferred each year to the General Fund despite the lack of any legal obligation to do so.

This November, Alamedans may get the chance to show their appreciation in a more concrete fashion.  If Council goes along with staff’s recommendation Tuesday night, voters will be asked to approve a ballot measure intended to thwart a pending class action lawsuit that seeks to bar the City from taking money from AMP in the future – and to give back the money it has received in the past.

Let us explain.

According to the annual budget presentations by AMP staff, the utility has made payments to the City totaling more than $5 million in each of the last six fiscal years.  (For purposes of comparison, total annual General Fund revenue averaged about $74 million during that period).

Here’s the breakdown:

AMP chart for 6-5-16 blog

The first two categories are simple enough to account for.  “Cost allocation” refers to AMP’s “share” of the cost of administrative services provided to all City departments.  “Direct costs” consist of charges for specific services like vehicle and computer maintenance.

Then we start getting into murkier waters.  “PILOT” stands for “payment in lieu of taxes”; “ROI” stands for “return on investment.”  In 1993, Council adopted an ordinance requiring AMP (and other so-called enterprise funds) to make PILOT payments to the City; it added the ROI component in 2005.  These ordinances obligate AMP to pay a stated percentage of the value of its fixed assets to the City every year, regardless of its results of operations. The theory is that if a privately owned utility pays property taxes to the local government and provides a return for its owners, why shouldn’t a publicly owned utility do something equivalent?

Finally, we come to the largest item – the General Fund transfer.

Long before the concepts of “PILOT” or “ROI” emerged, the City fathers – and we checked; they were all men – decided that if the City-owned utility was performing well financially, the City itself should share in the good fortune.  Accordingly, they wrote into the Charter a provision requiring that, in any year in which AMP generated “excess” earnings, it must transfer them to the General Fund.  The formula for determining “excess” earnings was complex, but it ensured that no payment would be due unless AMP had made enough money to cover its costs and add to its reserves.

As originally conceived, the General Fund transfer resembled a corporate dividend payable out of profits.  But at some point – we couldn’t find out when – it morphed from a contingent payment into a guaranteed subsidy.  Every year, AMP still uses the formula set forth in the Charter to determine whether “excess” earnings exist, thereby triggering the duty to transfer money to the General Fund.  But even when they don’t – and they haven’t for the last six fiscal years – the Public Utilities Board votes to transfer a pre-determined amount of money anyway.  Essentially, AMP is making an annual gift to the City.

Until last October, no one challenged the legality of any of AMP’s payments to the City. The cost allocation is consistent with generally accepted accounting principles, and surely AMP should pay for specific services it receives.  Similarly, the PILOT/ROI contribution is required by ordinance, and the General Fund transfer may not be required, but neither is it prohibited.

But then last October a class action lawsuit was filed in Alameda County Superior Court alleging that the transfers of funds by AMP to the City amounted to an illegal tax.  The transfers were a “tax,” the complaint asserted, because they were not based on the reasonable cost of providing services.  And they were “illegal” because they had not been approved by the voters.  The complaint sought an order directing the City to stop any future transfers until a vote approving them “be held by the People,” and to refund prior transfers.

The legal theory is a novel one – but it is not unprecedented.  In fact, the California Supreme Court recently agreed to review an appellate decision upholding a very similar claim against the City of Redding based on the PILOT paid by its municipally owned utility.

The City is fighting the suit in court.  (Indeed, it has retained the estimable – and not inexpensive – San Francisco law firm of Farella, Braun & Martel as its counsel.)  But now it appears that staff wants Council to make a preemptive strike.

Last March, Council voted to direct staff to study broadening the scope of the City’s “utility users tax.”  Tuesday night, staff will seek authority to draft a ballot measure for “modernizing” the UUT, but the measure also will ask voters to “amend [the] Charter to reaffirm the annual transfer of approximately $3.7 million” from AMP to the City and “adjust future transfer amounts.”

(The $3.7 million figure includes not only the $2.8 million annual transfer to the General Fund but also $900,000 that AMP “funds” for citywide streetlights.  Notably, it does not include the annual PILOT/ROI contributions, presumably because they already have been authorized by ordinance.)

The City’s strategy is clear.  “Okay, fine,” it’s telling the class action plaintiffs, “if you contend voter approval is needed to make the annual transfers from AMP to the City legal, well, voter approval is what we’ll get.”  If the voters pass the ballot measure, the legal basis for the injunction claim arguably will disappear.  And, since the measure is drafted in terms of “reaffirming” a prior practice, its passage can be construed as a ratification of the previous transfers.  If so, the refund claim should be denied as well.

The staff report characterizes the recommendation as being made “in an abundance of caution,” and, indeed, it bears all the hallmarks of a plan designed by our notoriously litigation-averse City Attorney.  Rather than let Farella defend the legality of the transfers from AMP to the City on the merits, the approach is to give the plaintiffs most of what they want and hope they’ll go away.

Unfortunately, the success of the strategy is by no means assured.

In the first place, the politicians will find themselves in a somewhat awkward position in making the case for the measure to the voters.  The City never has acknowledged publicly the extent of its reliance on AMP to subsidize the General Fund.  Now, however, it is telling the public – at least in the staff presentation – that the annual $2.8 million transfer “provides the City of Alameda with key financial support to fund essential services, which maintain Alameda’s quality of life.”  The presentation then goes on to recite the usual litany of items voters say they care about like emergency police and fire response.

(Interestingly, the pitch for broadening the UUT contains exactly the same language.  The redundancy makes us nostalgic for the verbal dexterity of former City Manager John Russo’s designated wordsmith, Alex Nguygen).

There may be other reasons for concern.  Combining the revision to the UUT and the reaffirmation of the AMP transfers into one measure risks losing support from voters who like (or don’t care about) the transfers but oppose broadening the UUT.   In addition, the November ballot handed to Alamedans already will contain measures seeking to impose parcel taxes to generate funds for schools, wetlands restoration and flood control, and maybe affordable housing.  If the City adds its own tax measure, there may be voters who throw up their hands and say, “A pox on all your houses.”

Nevertheless, it’s hard to find legitimate grounds not to vote to approve the transfers from AMP to the City.  The only benefit of stopping the transfers would be to induce AMP to lower electric rates, but does anyone really think that would happen?  (Indeed, AMP claims that the transfers do not “preclude [it] from establishing sufficiently competitive retail rates”; if that’s true, stopping them wouldn’t be expected to lead to a rate decrease.) And to those who say that the City shouldn’t be milking the AMP cow, the short answer is:  Well, it’s our cow.

Yet there is a risk.  Suppose the ballot measure doesn’t pass.  Will AMP continue making the annual transfers to the General Fund anyway?  The staff report says it will, but this seems problematic to us:  It’s one thing to engage in a practice when the voters have not spoken one way or the other; it’s quite another to continue that practice when the voters have specifically refused to approve it.

And what about the class action lawsuit?  We can’t imagine that, if the voters turn down the measure, the plaintiffs’ lawyers would declare themselves satisfied simply because the City had submitted the issue to the electorate.  To the contrary, we’d think they’d see a defeat at the polls as strengthening their case.

And what if the suit went forward and plaintiffs won?  Here’s the answer in the staff report:  “[S]hould the plaintiffs prevail, staff would immediately return to Council to discuss cuts to existing staff and city-wide services to absorb the loss in revenue to the General Fund.”  Anyone feeling threatened yet?

We’re hoping that someone on Council – on which sit three non-practicing lawyers – takes the time to sort through these ramifications before rubber-stamping staff’s recommendation.  We don’t want to be the only ones out there who believe it’s sometimes better to stand and fight than to cut and run.

Sources:

 June 7, 2016 staff report and presentation: 2016-06-07 staff report re bond measure2016-06-07 staff presentation re bond measure

AMP annual budget presentations: 2010-04-19 staff presentation re FY 2011 budget2011-04-18 staff presentation re FY 2012 budget2012-04-16 staff presentation re FY 2013 budget2013-04-15 staff presentation re FY 2013-14 budget2014-04-21 staff report re draft FY 2015 budget2015-04-20 staff presentation re FY 2016 budget2016-04-18 staff presentation re 2017 budget

Ginsburg v. City of AlamedaGinsburg v. Alameda – 2nd amended petition

About Robert Sullwold

Partner, Sullwold & Hughes Specializes in investment litigation
This entry was posted in Budget, City Council and tagged , , , . Bookmark the permalink.

20 Responses to Turn up the AMP!

  1. DHL says:

    Robert: it might be useful to explain to readers that this transfer of monies is how Gilmore et al avoided city bankruptcies in prior years. I believe it’s also the reason the undergrounding program was discontinued by Russo. Undergrounding of the electrical wires, in addition to the protection and expansion of our urban forest, is one of the most significant things a city can do to enhance and protect our quality of living. For the city to state that they need the AMP monies specifically to provide for residents, that’s a load of crap. What the city needs is prudent financial strategies that are consistent with the principles and standards and norms for municipal management, and not the nearly 70% of annual budget for fire and police. The new fire station is being built in the single location in our city that is redundant for fire services, i.e., not needed, and will cost us well into six figures annually to staff—and that doesn’t include the hard costs of vehicles, etc. That we need a larger fire station to handle development at The Point will—I’m betting—be the next request of AMP and the fire union. That the city faces bankruptcy is the issue here . . . and why. Hint: that cause for bankruptcy is not related to the AMP monies. That the city used the AMP monies to stave off bankruptcy is wrong. AMP should have all its monies to serve we-the-residents who pay the agency to do so, so they can within the agency optimize their services to us and substantively improve our lives by undergrounding. If they had all their ‘revenue’, perhaps undergrounding could be done in such a way that is not so burdensome to each property owner. Imagine, a city that prioritizes its trees (ours doesn’t, budget therefor has been cut year after year) and undergrounds all of the electrical wires over time. What a great city that would be!

  2. Tom says:

    Bob:

    Who is behind this lawsuit?

    Tom

    • Tom,

      The staff report suggests the suit is lawyer-driven (“Last October several southern California attorneys filed a lawsuit . . .”). From personal experience I know that there are cases in which a law firm comes up with a claim and then finds a plaintiff to assert it on behalf of a class, but I DNK if that’s what happened here. The named plaintiff is alleged to be an Alameda resident, and, according to Google, there are two people named Zachary Ginsburg with connections to Alameda.

      • David Howard says:

        Blame Alameda County for newly charging fees to access court records online. A prohibitive expense for citizen and journalists that prevents clear answers to the fair question, “who is behind the lawsuit?”

  3. Steve Gerstle says:

    Unfortunately, the transfer of funds leaves AMP assets neglected. For example, while AMP restored many of the historic streetlights, some in the West End have not had basic maintenance in decades. Instead of restoration, either nothing is done or the rust simply painted over. Cross Webster Street at Central or Santa Clara and you will see the stark difference. AMP cannot claim that it does not have the funds if it transfers $2,800,000 to the General Fund each year. The City takes that money knowing that AMP assets are being neglected. That money should be used to restore all of the historic streetlights and perform basic maintenance as needed. That is not happening. Once in the general fund, that money can be spent anywhere and those neighborhoods that have historically suffered from disinvestment will continue to do so.

      • Steve Gerstle says:

        A transformer blew in the West End this morning leaving much of the area without power for varying periods of time. The power first flickered several times and then went out.
        https://local.nixle.com/alert/5655379/?sub_id=716539

      • Steve Gerstle says:

        I had written to the head of AMP previously regarding the light posts. Just heard back that they will be repainted in the next six months. I can’t judge the condition of a transformer or know when one needs repair or replacement, but I can look at a lamp post and see its condition. How often do transformers just blow? Is there some sort of maintenance that can take place to prevent it from happening, or is just considered an act of God?

  4. carol says:

    Actually in California, when there is record heat, transformers blow-ups are rather common. When I first moved to LA in the 1980s, my roommates told me to watch for them. Now that temps are rising and the transformers are aging, it may happen more often up here..

  5. carol says:

    My home address has had an account with the Bureau of Electricity since 1949. I do remember that our home-owned utility used to be known for its low rates. When rates went up, the APT failure was to blame. I for one would like lower electric bills. And a better explanation as to how price is divvied up between the 3 Tiers on my bill. My usage in Tier 2 is always the lowest of the 3, yet the cost of Tier 2 is intermediate between Tiers 1 and 3. Some years ago, I went in person to AMP to ask why, and was told that once I used up my Tier 1 allotment, it was charged at the higher rate. But why isn’t that the NEXT higher rate=Tier 2? Why does my power price automatically jump into the highest tier next? No one at AMP would/could answer my question. I’m a Residential user only. I don’t even use a home computer. Could it be that the 3 tiers are some sort of shell game AMP plays to charge residential customers more than commercial customers? I have now read the actual plea for Writ of Mandate. I think Mr. Ginsburg may be onto something. Thanks, Robert!
    And what DHL said, too…what happened to all that talk about undergrounding the wires?

  6. Tom says:

    So if the UUT proposal is approved for submission for the November ballot what does this mean to future electricity rates? I suppose they will rise to meet the subsidy tax for the City budget!

    I just received a mailer from the City of Alameda signed by the mayor and city manager
    What a bunch of propaganda….stating no increase in city taxes for this money but no mention of long range effects on the electricity rates of AMP on Alameda Citizens in future years!!

    Bob what is your take on the effects on electricity rates in the future with passage of a UUT proposal?

    Tom

    • David says:

      The city desperately needs the AMP money to keep the slop trough full for the public safety unions, which have become increasingly powerful.

      To that end, Malia Vella is the fire department union stooge for city council this fall – a vote for her is a vote to continue on this same path of neglecting AMP assets like utility poles and transformers, refusing to underground wires to improve neighborhoods, and continuing to make giveaways to the fire department and other public safety unions.

    • Tom,
      As I understand it, the $5 million subsidy is built into the existing cost structure upon which current rates are based, so I don’t think passage of a measure “re-affirming” it would lead, in and of itself, to a future rate increase. I hesitate to speculate beyond that.

  7. Steve Gerstle says:

    Here’s some useful information for seniors who either want to reduce their UUT or donate the reduction to Mastick Senior Center. Information is from the Mastick website. I just filled out the form to direct the reduction to Mastick and mailed it to the City.

    “2% Utility User’s Tax Exemption
    Alameda residents 62 years of age, or low income, are eligible for a 2% exemption on the Utility User’s Tax (UUT) on the following services: electrical, gas, and cable.Residents have the option of directly benefiting from the 2% reduction, or designating the cost savings as a restricted gift to be used only for funding Mastick Senior Center programs. UUT Exemption forms are available in Mastick’s office. In 2013 $4,151.86 was generated for Mastick programs as a result of residents designating their cost savings to us! ”
    http://www.mastickcenter.com/fundraisers

  8. Steve Gerstle says:

    Does the ballot measure raise the senior exemption from age 62 to 65?

    • The proposed ordinance provides that:
      “Alameda residents whose gross annual household income meets guidelines for low income designation as established, and as adjusted, by resolution of the City Council, or seniors who are 65 years old or older, are eligible for an exemption from two percent (2%) of the tax rates imposed by this Section 3-59.”

  9. Steve Gerstle says:

    Recently, someone documented AMP’s rotting and rusting infrastructure.
    https://alamedaca.gov/submit-request
    In the meantime, the City of Alameda siphons off $2,800,000 a year of ratepayer money that should be going maintain and improve AMP.

    I do not understand why this is legal. There are obvious problems of infrastructure neglect, but the City is diverting funds from AMP to its general fund.

    Who is ordering this?

  10. egorelick says:

    Does the increase in revenue benefit the police and fire union (does it contribute to the calculation of their raise?). How much of the increased revenue goes right back into the pocket of the public safety employees on the margin? The answer to this would determine my vote most likely. My default is “yes”, but if a substantial portion just recycles to the usual suspects in raises then I probably will vote “no”.

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