BILL ANALYSIS Ó SB 841 Page 1 SENATE THIRD READING SB 841 (Wolk) As Amended June 22, 2011 Majority vote SENATE VOTE :39-0 JUDICIARY 10-0 NATURAL RESOURCES 9-0 ----------------------------------------------------------------- |Ayes:|Feuer, Wagner, Atkins, |Ayes:|Chesbro, Knight, | | |Dickinson, Beth Gaines, | |Brownley, Dickinson, | | |Huber, Huffman, Jones, | |Grove, Halderman, Hill, | | |Monning, Wieckowski | |Monning, Skinner | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- 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 the California Constitution, Articles XIII C or XIII D, 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 the California Constitution, Article XIII C or Article XIII D, SB 841 Page 2 is not enforceable to the extent the claims arise out of, pertain to, or relate to the liability of the local agency; and, 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 to have been imposed in violation of the California Constitution, Article XIII C or Article XIII D. 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; or, 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 Public Resources Code Section 40059; b) Alter the authority of business entities to collect or process materials that are not solid waste; and, c) Determine whether or not a fee, levy, assessment, or SB 841 Page 3 exaction requires voter or property owner approval by the California Constitution, Articles XIII C or XIII D. 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 the California Constitution, Article XIII D, Section 2. 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 granted on or after January 1, 2012. 8) Establishes that these provisions shall become operative on July 1, 2012. FISCAL EFFECT : None COMMENTS : 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. This bill provides that an indemnity obligation, as specified, shall be 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 deems 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 Proposition 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. Solid waste enterprises are companies engaged in the business of SB 841 Page 4 collecting, transporting, storing, or processing solid wastes. The California Integrated Waste Management Act of 1989 (Act) 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. According to representatives of solid waste companies backing 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 from the competitive bidding process, ratepayer fees for solid waste handling service are determined from the bid, and the franchise agreement is ratified. Furthermore, proponents 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." 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 SB 841 Page 5 passage of Proposition 26 will contribute to a sharp increase in the use of such indemnity provisions. 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 ultimately may be found by a court to violate constitutional voter approval requirements pursuant to Propositions 218 and 26. Existing law 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, this bill now adopts a similar rule, based on proportional responsibility, to restrict but not completely prohibit enforceability of an indemnity obligation. Under the bill, a solid waste company should continue to have zero liability if the extent of its responsibility for failure to comply with Propositions 218 and 26 is also zero. Otherwise, the bill operates to apportion liability to the extent the solid waste handler and the local agency are found responsible for the failure to comply. This bill also clarifies 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 SB 841 Page 6 sound policy. In order to avoid impacting existing contracts and to give parties time to become aware of the proposed restrictions on indemnification, this bill applies prospectively and does not become operative until July 1, 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 apply to contract terms entered into after July 1, 2012, and do not affect any agreements adopted or entered into before that date. Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334 FN: 0001426