On August 28, 2015, the Court of Appeal for the Fourth District (the “Court”) published its opinion in Walker v. City of San Clemente (“Walker”), declaring that the City of San Clemente (“San Clemente”) must refund approximately $10.5 million of its unused Beach Parking Impact Fee. The Walker decision requires the City of San Clemente to issue the largest impact fee refund ever in a published opinion over the Mitigation Fee Act (Gov. Code § 66000 et seq.). All cities should now be on notice that they are subject to significant legal exposure for failing to properly report impact fee revenues and expenditures under the Mitigation Fee Act.

(1)  The Mitigation Fee Act

The Mitigation Fee Act (the “Act” or “AB 1600”) authorizes cities and local agencies to impose impact fees to fund the cost of public facilities needed to serve new development. The Act requires local agencies to use impact fees to fund public facilities rather than diverting them for general revenue purposes. The local agency must identify how it will use the impact fee, and the relationship between the fee and the type of development on which the fee is imposed. To meet these requirements, most local agencies impose impact fees when they adopt a “nexus report”, which catalogs the improvements identified in the agency’s five-year capital improvement plan. The Walker decision addresses the ongoing accounting requirements under the Act for impact fees previously collected. Cities and local agencies must make findings every five years to justify the continued retention of unused impact fees. If a public entity does not make these findings, or if the agency’s findings do not meet the legal requirements, the Act requires the agency to refund the unused fees to the current owners of the affected properties.

(2)  Beach Parking Impact Fees

In the 1980’s, new development in San Clemente created concerns surrounding a lack of beach parking. In response, San Clemente imposed a Beach Parking Impact Fee to balance the cost of acquiring and constructing new parking facilities. Between 1989 and 2009, San Clemente collected nearly $10 million, but during that time spent less than $350,000 of the collected Beach Parking Impact Fee. Unexpended impact fees were held in an interest-bearing account. The only reports provided by San Clemente to account for the Beach Parking Impact Fee were staff reports in 2004 and 2009, which were identical and provided minimal description of the purpose of the fees or the relationship of the fees to public improvements. Owners of property who paid the Beach Parking Impact Fee filed suit soon after the 2009 staff report, seeking a refund of all unexpended funds in the Beach Parking Impact Fee account.

(3)  Failure to Report Required Refund of All Unused Fees and Interest

The Court determined that the 2009 staff report did not satisfy the AB 1600 accounting requirements, as the findings were conclusions, not specific findings as required by the Act. The Court held that San Clemente could not rely on findings dating back to the original establishment of the Beach Parking Impact Fee, or the findings it made 13 years prior, as a basis for the five-year accounting. AB 1600 requires cities to make new findings every five years to demonstrate a continuing need for any unexpended fees. Consequently, the Court ruled that San Clemente failed to justify its continued retention of the unused impact fees. The Court also ruled that the refund provisions of AB 1600 are the only available remedy against cities that fail to properly perform the five-year accounting. As a result, the Court required San Clemente to refund all of its unexpended Beach Parking Impact Fee – an amount totaling approximately $10.5 million.

(4)  Implications

Although Walker involves a wealthier coastal city that failed to make expenditures out of its impact fee fund, smaller cities that rely on impact fees for public improvements could similarly be required to issue significant refunds if they are not properly accounting for their unused impact fees. Severe penalties await any city or local agency that fails to comply with the five-year accounting provisions of the Act. The Mitigation Fee Act contains very specific accounting requirements and cities must produce reports every five years in compliance with these accounting requirements. If staff does not have capacity to handle this accounting, there are numerous consultants who can perform this task.

We will continue to monitor this case to see if San Clemente appeals to the California Supreme Court or if any requests for depublication are filed. For any questions regarding the decision and its implications, please contact Douglas L. White at doug@whitebrennerllp.com, or Robin Baral at robin@whitebrennerllp.com.