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:

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 measure; 2016-06-07 staff presentation re bond measure

AMP annual budget presentations: 2010-04-19 staff presentation re FY 2011 budget; 2011-04-18 staff presentation re FY 2012 budget; 2012-04-16 staff presentation re FY 2013 budget; 2013-04-15 staff presentation re FY 2013-14 budget; 2014-04-21 staff report re draft FY 2015 budget; 2015-04-20 staff presentation re FY 2016 budget; 2016-04-18 staff presentation re 2017 budget

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