BILL ANALYSIS Ó SB 841 Page 1 Date of Hearing: June 21, 2011 ASSEMBLY COMMITTEE ON JUDICIARY Mike Feuer, Chair SB 841 (Wolk) - As Amended: May 12, 2011 As Proposed to Be Amended SENATE VOTE : 39-0 SUBJECT : SOLID WASTE: ENTERPRISES: CONTRACTS KEY ISSUE: SHOULD A LOCAL AGENCY BE RESTRICTED, AS SPECIFIED, FROM ENFORCING AN INDEMNITY OBLIGATION AGAINST A SOLID WASTE ENTERPRISE FOR CLAIMS ARISING FROM FAILURE TO OBTAIN VOTER OR PROPERTY OWNER APPROVAL OF A FEE OR OTHER CHARGE IN VIOLATION OF ARTICLES XIII C OR XIII D OF THE CONSTITUTION? FISCAL EFFECT : As currently in print this bill is keyed non-fiscal. SYNOPSIS This bill, sponsored by members of the solid waste industry, seeks to restrict the ability of local governments that negotiate solid waste fees and franchise agreements with solid waste companies to obligate those companies to indemnify them for any portion of franchise fees that may be found by a court to violate voter approval requirements under Propositions 218 and 26. As proposed to be amended, this bill would apply a qualified enforceability rule to an indemnity obligation, as specified, that would render it unenforceable to the extent that claims for failure to obtain necessary voter approval for the fee at issue arise out of, pertain to, or relate to the liability of the local agency for failure to comply. In addition, this bill would deem an indemnity obligation unenforceable if it requires a solid waste enterprise to refund fees to its customers that have not been retained by the solid waste company but that are being held by the local agency instead. Proponents of the bill, primarily associations of solid waste handling companies, argue that these restrictions on indemnity obligations are needed to protect waste companies from unfairly being required to indemnify local agencies for Prop 218 and 26 compliance decisions, particularly when, as the companies contend, they have no ability to determine the amount of these SB 841 Page 2 fees or to impose them in the first place. The bill is opposed by the El Dorado Board of Supervisors, who argue that the bill is unnecessary because it addresses a problem that does not appear to exist, and in any case, may weaken public safeguards associated with indemnification provisions. This bill is double referred to the Assembly Natural Resources Committee. SUMMARY : Restricts the enforceability of any indemnity obligation, as specified, in a contract or request for proposal between a solid waste enterprise and a local agency, related to liability for failure to obtain voter approval of fees or charges in violation of constitutional requirements enacted by Propositions 218 and 26. Specifically, this bill : 1) Defines "indemnity obligation" to mean an indemnity obligation related to the failure of a local agency to obtain voter or property owner approval of a fee, levy, charge, assessment, or other exaction that may be required by articles XIII C or XIII D of the state Constitution, if that indemnity obligation is expressly assumed by or imposed upon the solid waste enterprise, including pursuant to ordinance, contract or franchise, for the benefit of the local agency. 2) Provides that an indemnity obligation, including the duty and cost of defense, shall be subject to the following restrictions: a) An indemnity obligation or other provision, clause, covenant, or agreement that purports to obligate a solid waste enterprise to indemnify a local agency against liability for claims by a third party for failure to obtain voter or property owner approval of a fee, levy, charge, assessment, or other exaction in violation of Article XIIIC or Article XIIID of the California Constitution, is not enforceable to the extent the claims arise out of, pertain to, or relate to the liability of the local agency. b) An indemnity obligation is not enforceable if it requires a solid waste enterprise to refund fees to its customers, if the fees are collected and retained by the local agency, or collected on behalf of the local agency by the solid waste enterprise and have been remitted by the solid waste enterprise to the local agency, and in either case have been found by a final judgment of a court SB 841 Page 3 to have been imposed in violation of Article XIII C or Article XIII D of the California Constitution. 3) Provides that an indemnity obligation is subject to the above restrictions if it meets either of the following conditions: a) The indemnity obligation is imposed or required by a provision, term, condition, or requirement contained in an ordinance, contract, franchise, license, permit, or other entitlement or right adopted, entered into, issued, or granted by a local agency for solid waste handling services, including the recycling, processing, or composting of solid waste. b) The indemnity obligation is authorized or required in a request for bids or proposals in connection with a contract or franchise specified above. 4) Provides that provisions of this bill are not subject to waiver, and any attempted waiver must be null and void as against public policy. 5) Provides that this bill cannot be intended to do any of the following: a) Add to or expand local agency authority to determine aspects of solid waste collection and handling specified in Section 40059 of the Public Resources Code. b) Alter the authority of business entities to collect or process materials that are not solid waste. c) Determine whether or not a fee, levy, assessment, or exaction requires voter or property owner approval by articles XIII C or XIII D of the state Constitution. 6) Makes several Legislative declarations, including that these provisions are not intended to address or to determine whether fees for solid waste handling services are fees imposed as an incident of property ownership or fees imposed for a property-related service, within the meaning of Section 2 of Article XIII D of the California Constitution. 7) Provides for prospective application of these provisions to any provision, term, condition, or requirement contained in an ordinance, contract, franchise, license, permit, or other entitlement or right adopted, entered into, issued, or SB 841 Page 4 granted on or after January 1, 2012. 8) Establishes that these provisions shall become operative on July 1, 2012. EXISTING LAW : 1)Provides that indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or some other person. (Civil Code Section 2772.) 2)Provides that in the interpretation of a contract of indemnity, unless a contrary intention appears, the person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if he chooses to do so. (Civil Code Section 2778.) 3)Provides that a contractual duty to defend another against specified claims necessarily arises as soon as such claims are made against the promise, and may continue until they have been resolved. (Crawford v. Weather Shield Mfg. Inc. (2008) 79 Cal.Rptr.3d 721.) 4)Provides that any indemnity obligation, related to the failure of a local agency to comply with solid waste diversion requirements under the Integrated Waste Management Act of 1989, that is expressly assumed by, or imposed upon, a solid waste enterprise for the benefit of the local agency shall be subject to specified restrictions, including but not limited to the following: a) An indemnity obligation shall not be enforceable if the board imposed penalty is based solely upon the failure of the local agency to establish and maintain a source reduction and recycling element, as specified. b) Any board imposed penalty based upon a local agency's failure to meet the solid waste diversion requirements resulting in whole or in part from the solid waste enterprise's breach of contract or noncompliance with any other authorization, shall be apportioned in accordance with the percentage of fault of the local agency and the solid waste enterprise. SB 841 Page 5 c) A solid waste enterprise is not liable for the indemnity obligation to the extent that the solid waste enterprise's breach or noncompliance resulted from the action or failure to act of the local agency. (Public Resources Code Section 40059.1(c).) 5)Provides, generally, that any agreement affecting a construction contract that purports to insure or indemnify, including the cost to defend, the builder or the general contractor by a subcontractor against liability for claims of construction defects are unenforceable to the extent the claims arise out of, pertain to, or relate to the negligence of the builder or contractor, among other things. (Civil Code Section 2782(c).) 6)Provides that local government bears the burden of proving by a preponderance of the evidence that a levy, charge, or other exaction is not a tax, that the amount is no more than necessary to cover the reasonable costs of the governmental activity, and that the manner in which those costs are allocated to a payor bear a fair or reasonable relationship to the payor's burdens on, or benefits received from, the governmental activity. (Sec. 1 of Article XIII C of the California Constitution, as amended by Proposition 26 (2010).) 7)Prohibits local government from imposing, extending, or increasing any general tax unless and until that tax is submitted to the electorate and approved by a majority vote, or any special tax, as defined, unless and until that special tax is submitted to the electorate and approved by a two-thirds vote. (Sec. 2 of Article XIII C of the California Constitution.) 8)Provides that, except for fees or charges for sewer, water, and refuse collection services, no property-related fee or charge shall be imposed or increased unless and until that fee or charge is submitted and approved by a majority vote of the property owners of the property subject to the fee or charge or, at the option of the agency, by a two-thirds vote of the electorate residing in the affected area. (Sec. 6(c) of Article XIII D of the California Constitution.) COMMENTS : This bill, sponsored by members of the solid waste industry, seeks to restrict the ability of local governments SB 841 Page 6 that negotiate solid waste fees and franchise agreements with solid waste companies to obligate those companies to indemnify them for any portion of franchise fees that may be found by a court to violate voter approval requirements under Propositions 218 and 26. As proposed to be amended, this bill would apply a qualified enforceability rule to an indemnity obligation, as specified, that would render it unenforceable to the extent that claims for failure to obtain necessary voter approval for the fee at issue arise out of, pertain to, or relate to the liability of the local agency for failure to comply. In addition, this bill would deem an indemnity obligation unenforceable if it requires a solid waste enterprise to refund fees to its customers that have not been retained by the solid waste company but that are being held by the local agency instead. The author and sponsor contend that these restrictions on indemnity obligations are needed to protect waste companies from unfairly being required to indemnify local agencies for Prop 218 and 26 compliance decisions particularly when, as the companies contend, they have no ability to determine the amount of these fees or to impose them in the first place. Background on solid waste franchise fees : Solid waste enterprises are companies engaged in the business of collecting, transporting, storing, or processing solid wastes. (Public Resources Code Sections 40193, 40195.) The California Integrated Waste Management Act of 1989 (Division 30 of the Public Resource Code, commencing with Section 40000) allows local governments to determine most aspects of solid waste handling and recycling services, including the means of collection and transportation and the assessment of charges and fees. The Act also authorizes local governments to contract those services to private solid waste companies, by means of nonexclusive franchise, contract, license, or otherwise, under terms and conditions prescribed by the local agency. (Public Resources Code Section 40059.) According to representatives of solid waste companies sponsoring and supporting this bill, local governments have the upper hand in negotiating franchise agreements because there is a very limited demand for large-scale solid waste handling services, i.e. there are a limited number of municipal "suppliers" of solid waste in a particular geographical region. Local government agencies typically impose so-called "franchise fees" in solid waste franchise agreements that, according to supporters of the bill, are added only after a company is chosen SB 841 Page 7 from the competitive bidding process, ratepayer fees for solid waste handling service are determined from the bid, and the franchise agreement is ratified. Furthermore, the sponsor and supporters of the bill contend that such franchise fees are not negotiated between the local agency and the solid waste company, often exceed the costs to local governments in overseeing or supervising franchises, and are usually imposed without voter approval-circumstances which, if true, would potentially render such fees constitutionally impermissible under Propositions 218 and/or 26. For these reasons, the solid waste companies assert that they "have no role in determining the amounts or types of these fees", and that local governments should not be permitted (through indemnification obligations) to pass their risk of imposing potentially unconstitutional fees on to private companies "that had no responsibility for determining the amount of these fees or imposing them in the first place." Stated Need for the Bill. According to the sponsor, although no court has yet held that solid waste fees are subject to Proposition 218, some municipalities are nevertheless seeking indemnification from the solid waste industry, even with respect to that portion of waste collection rates that are retained by local government as franchise fees. The author and sponsor state that even though Proposition 218 indemnification has been proposed in only a handful of situations to their knowledge, they fear that recent passage of Proposition 26 will contribute to a sharp increase in the use of such indemnity provisions. According to the author: With the passage of Proposition 26, franchise and other fees imposed on solid waste handling enterprises by local agencies as a condition of their franchise agreements may be limited to the actual costs of these agencies in granting and supervising these franchises. Therefore, these fees would no longer be valid for the purposes of providing a subsidy to the general funds of cities and counties, and will likely be subject to legal challenge under Propositions 26 and 218. Since the passage of Proposition 218, and increasingly after the passage of Proposition 26, local agencies are likely to require that private solid waste handling firms indemnify these local agencies if their franchise and other fees are successfully challenged in court. This practice, however, removes the incentive on local SB 841 Page 8 agencies to responsibly moderate their own fees and charges. SB 841 is consistent with existing policy . . ., which establishes reasonable limits on the form of indemnity obligations local agencies can require from their solid waste franchisees. To prospectively address this perceived problem, this bill is specifically intended to restrict the ability of local governments that negotiate solid waste fees and franchise agreements with solid waste companies to cause those companies to indemnify them for any portion of franchise fees that may be found by a court to violate constitutional voter approval requirements pursuant to Propositions 218 and 26. As proposed to be amended, this bill adopts a rule based on proportional responsibility to limit enforceability of an indemnity obligation. Existing law, Section 40059.1 of the Public Resources Code, places certain restrictions on the ability of local agencies to require their solid waste franchisees to indemnify local government from fines and penalties for the agency's failure to meet state waste diversion requirements, including a provision that liability "shall be apportioned in accordance with the percentage of fault of the local agency and the solid waste enterprise." A similar type of proportionality rule applies in construction defect cases with respect to indemnity of builders or contractors by a subcontractor. In those cases, the law provides an indemnity obligation is unenforceable to the extent that the claims of construction defect arise out of, pertain to, or relate to the negligence of the builder or contractor (i.e. the indemnified party.) In order to more closely track the qualified indemnification restrictions in the solid waste diversion statute (after which this bill is openly modeled), the author proposes to amend the bill to adopt a similar rule, based on proportional responsibility, to restrict but not completely prohibit enforceability of an indemnity obligation. The amendment is: On page 3, strike lines 27 to 31 and insert: An indemnity obligation or other provision, clause, covenant, or agreement that purports to obligate a solid waste enterprise to indemnify a local agency against liability for claims by a third party for SB 841 Page 9 failure to obtain voter or property owner approval of a fee, levy, charge, assessment, or other exaction in violation of Article XIIIC or Article XIIID of the California Constitution, is not enforceable to the extent the claims arise out of, pertain to, or relate to the liability of the local agency. Under the proposed amendment, a solid waste company will continue to have zero liability if the extent of its responsibility for failure to comply with Propositions 218 and 26 is also zero. In other situations, the bill would operate to apportion liability to the extent the solid waste handler and the local agency are found responsible for the failure to comply. As proposed to be amended, the bill clarifies the collection and retention of fees that are the subject of the second restriction on indemnity obligations. In order to address concerns that were articulated in a previous Senate committee, the author proposes to amend the bill to clarify that solid waste companies sometimes collect required fees on behalf of the local agency and then remit those sums to the local agency, and sometimes the local agency collects and retains the fees itself. In either case, however, the local agency retains the benefit of the fees, not the solid waste company, and therefore, according to the author, any provision to obligate a solid waste company to refund fees it does not retain should not be enforceable as a matter of sound policy. These proposed amendments are: On page 3, line 32, strike "Requires" and insert "An indemnity obligation is not enforceable if it requires" On page 3, line 33, after "are", insert "collected and retained by the local agency, or" On page 3, line 35, strike "and if the fees are" and insert ", and in either case have been" Prospective application of this bill to avoid affecting existing contracts and requests for proposals. In order to avoid impacting existing contracts and to give parties time to become aware of the proposed restrictions on indemnification, this bill would apply prospectively and not become operative until July 1, SB 841 Page 10 2012, representing the date six months after January 1, 2012, the date the bill otherwise becomes effective if ultimately signed into law by the Governor. In other words, the indemnification restrictions under this bill would only apply to contract terms entered into after July 1, 2012, and would not affect any agreements adopted or entered into before that date. ARGUMENTS IN SUPPORT : Several associations of solid waste companies wrote to the Committee in support of this bill. According to these associations: We support this bill because it properly balances the interests of local government with those of the private sector by establishing reasonable limits of the ability of cities and counties to require Proposition 218 indemnity protection from waste haulers. SB 841recognizes that solid waste enterprises play no role whatsoever in determining the amounts or types of these local agency fees, or in deciding whether or not to observe the requirements of Proposition 218 (in case the law is one day interpreted to apply to such fees.) In short, industry members have no ability whatsoever to mitigate whatever risk may follow the decision not to comply with 218. SB 841 will preserve a vital and important degree of accountability on local governments and will help ensure that liability for fees retained by local governments remains where it should, namely, with the very local governments imposing the fees. ARGUMENTS IN OPPOSITION : The El Dorado County Board of Supervisors writes in opposition to the previous version of this bill: We believe SB 841 will result in additional legal requirements where none are needed and will remove public safeguards . . . against malfeasance by a less than honest service provider. The procedures, scope and limitations related to indemnification are clearly and appropriately defined in the Civil Code. Elimination of the indemnities is a victory for those with less than honest intentions as the responsible providers will always honor their contract. It is our understanding that, to date, there is no SB 841 Page 11 evidence that a local government entity has entered into a contract or has attempted to require a contract for solid waste disposal services (that violates Proposition 218 or 26.) If enacted in its current form, SB 841 can only serve to complicate, frustrate, and potentially burden a local agency's ability to comply with Ýwaste diversion] mandates through the implementation of requirements to address a problem that does not appear to exist. It is not known at this time whether the proposed amendments address the opposition's concerns or whether El Dorado County continues to be opposed. REGISTERED SUPPORT / OPPOSITION : Support California Refuse Recycling Council (sponsor) Central Contra Costa Solid Waste Authority Inland Empire Disposal Association Los Angeles County Waste Management Association Republic Services Solid Waste Association of Orange County Waste Management Opposition El Dorado County Board of Supervisors Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334