City Council OKs Ballot Measure On Fund Transfers from Power Company

[UPDATED] Since 1934, Pasadena’s municipal budget has received an annual influx of funds from the city-owned power utility. This transfer from the city’s light and power fund to its general fund — which in fiscal 2020 totaled around $17.3 million — has been, in the words of Mayor Terry Tornek, “a well-established, basic pillar of our whole financial structure.’’

But that regular stream of money to the general fund is now under threat from a class-action lawsuit – and in response, the City Council this week approved a ballot measure for this November that would give voters the chance to ensure the money flow will continue.

By a unanimous margin, the council on Monday approved what is being called the “Pasadena City Services Protection Measure.” To pass, the measure would need the OK from 50 percent of the voters plus one on Nov. 3.

Since 1934, city voters have been asked seven times to approve such fund transfers, and have voted yes all seven times.

“Why are we talking about it now?’’ City Manager Steve Mermell said to council members on Monday, when he recommended passage of the ballot measure.

“Well, currently there is a challenge to the longstanding transfer under Prop 218. Komesar vs. the City of Pasadena is a lawsuit that challenges the validity of our charter-authorized transfers from the light and power fund to the general fund.

“Despite the fact that the transfers have been happening for years and years, this lawsuit asserts that this is a new tax. The lawsuit also seeks to refund transferred monies and would prevent the continuation of the general fund transfer going forward, unless the city obtains voter approval.’’

If the lawsuit were successful, Mermell said, “the general fund would lose approximately $18 million, which would necessitate a significant reduction in essential services which the city has come to rely upon.’’

Mermell also said of the ballot measure, “It’s not a new tax. It does not raise taxes. It does not increase utility rates.’’

However, the lawsuit alleges that Pasadena Water and Power has overcharged customers to guarantee there is money available to transfer to the general fund, Vincent Slavens, a plaintiff’s attorney for the San Diego law firm of Benink & Slavens, told Pasadena Now.

Slavens said the transfer money is “baked into the cake” of the rates — but shouldn’t be, because it exceeds the amount necessary to provide the service. That amounts to a tax, which needs voter approval, he said. Further, he said, the ballot measure does not address that aspect, a point the plaintiffs will pursue in court.

According to a city staff report, “the city is vigorously defending the allegations’’ in the lawsuit.

“There is a Nov. 18, 2020 trial date in the case,’’ the staff report says. “Staff recommends the City Council place the measure on the ballot, which would, if approved by voters, amend the charter, to explicitly approve of (a) the past practice of funding the transfer from electric rates; and (b) such a practice on a going-forward basis.’’

Regarding the lawsuit, City Attorney Michele Beal Bagneris told Pasadena Now, “In the 1930s and 1940s, Pasadena voters added provisions to the City Charter that direct the city to make annual transfers from the electric utility to the general fund to pay for city services and infrastructure. Over the decades these provisions have been reaffirmed and reapproved by the voters a total of seven times.

“This entire time, a significant part of the cost of these transfers was regularly paid out of the electric rates charged to the utility’s customers. In 2017, Eve Komesar, a Pasadena resident, filed this lawsuit challenging this practice of paying for the transfers out of the electric rates, arguing that while the voters may have approved the transfers, they did not explicitly approve paying for the cost of the transfers out of the rates.’’

With Monday’s council approval of the ballot measure, the specific language that will greet city voters on Nov. 3, asking for a “Yes” or “No” verdict, reads:

“Shall the measure maintaining 911 response, fire, paramedic, public health, senior and homeless services, street repairs, and other services by amending the City Charter to continue collecting in electric rates and maintain the longstanding transfer, limited to 12% gross revenue, providing $18,000,000 annually to Pasadena’s General Fund that does not increase taxes or utility rates until ended by voters, requiring financial audits with all funds locally controlled benefitting Pasadena residents, be adopted?’’

The amount of money transferred annually from the light and power fund to the general fund has varied from year to year, depending on the utility’s net income after expenses from the previous fiscal year and the amount the council determines is not detrimental to the proper functioning and administration of the utility during the budget year under consideration, according to the staff report.

Over the last 10 years, the transfer to the general fund has been between 8 and 10 percent, including 10 percent for the last six fiscal years.

The transfer amount has been previously capped at 16 percent of gross revenues of the utility – but the ballot measure would reduce that cap to 12 percent.

Mermell said that, with the city already reeling financially from the COVID-19 pandemic, the potential loss of money to the general fund comes at a particularly tough time.

“The city has already suffered a roughly $30 million loss as a result of the COVID-19 pandemic,’’ he said. “It would be a horrible time to add another $18 (million) a year loss on top of that.’’

Mermell said the city is already dipping into its emergency reserves “to provide much-needed meal support to our residents and also business support to our local restaurateurs … and we’re delaying projects and programs so we can respond to the COVID-19 pandemic. So these revenues are more important than ever.’’

“Were we to lose this longstanding revenue source, we would have to consider a loss of emergency personnel and slower and less robust 911 response,’’ he said.

The ballot measure comes on the heels of Measures I and J, which city voters approved in 2018.

Measure I increased the city’s sales tax by three-quarters of a cent per dollar; Measure J mandated that one-third of all Measure I funds go to the Pasadena Unified School District.

The city-controlled Measure I funds, Mermell said, were split between reinvesting in infrastructure and maintained essential services, and in investing in capital. So far, the city’s two-thirds portion of Measure I funds have totaled around $14 million a year, he said.

But the pandemic has turned the city’s budget plans upside down and made the services named in the ballot measure particularly vulnerable if funds from the power company don’t continue, he added.

“Before the COVID-19 pandemic, we had a capital budget that recommended 8 ½ million dollars of investment directly from Measure I into capital,’’ Mermell said. “Sadly, because of the impact of COVID, we had to realign that to maintain all of our critical services. … Can you imagine if we lose the transfer from the Power Fund, which exceeds the net amount that we receive in Measure I revenues.

“It really pulls the rug out from under the entire city’s financial structure and plunges a hole in our general-fund budget.

“I understand that many people may say, well, you talked about essential services with Measure I and now you’re talking about them again, but it’s because it’s the truth. If we suffer an $18 million a year loss, all the good things that Measure I was going to support irrespective of COVID-19 would probably not be achievable to us.’’

Councilmember Margaret McAustin said the continuation of the fund transfers is key to the city’s fiscal health.

“This is the dividend that we get from having our own utility,’’ she said, adding, “I think it’s important to recognize that $18 million is just about what we lost in the first year due to COVID-19 in fiscal year 2020.

She also said “I think it’s responsible to lower the maximum transfer amount’’ from 16 percent to 12 percent – though the fund transfers have not approached the mandated cap in recent years.

Councilmember Andy Wilson, meanwhile, said, “It’s critical that this (ballot measure) passes.”

But Wilson also worried that some voters might be confused and think the continuation of the transfers represents a new tax — with the language of the ballot measure similar to that contained in the Measures I and J initiatives.

Tornek, however, said the message between now and November will be that the ballot measure does not represent a new tax.

“That’s the messaging – that this is vital to our fiscal integrity, it’s not a new tax,’’ Tornek said.

Tornek also lamented the “litigious society’’ that prompted the need for the ballot measure.

“This is just one of those realities,’’ he said with a resigned laugh. “This is not a self-inflicted one, this is just a reality. But we really rely on these funds, and it’s not a new tax.’’