After being ordered to refund more than $12 million to its gas customers, Palo Alto suffered another court setback this month, when a Santa Clara County Superior Court judge rejected the city's plan to pay back half the funds in small increments over the next decade.

The city was ordered to issue refunds following a lawsuit from resident Miriam Green, who challenged the city's historic practice of transferring funds from municipal utilities to the general fund, which pays for police, fire, libraries and other basic community services. While the court affirmed the city's ability to make the transfers from its electric fund, it concluded that the transfers from the gas utility constituted an "illegal tax" under Proposition 26, which governs rate increases.

Since the 2020 ruling, the city and Green's attorneys have struggled to reach a consensus on the payment plan. The city proposed paying 50% of the sum immediately and spreading the rest out over the next decade by paying 5% per year. Green's attorneys rejected the idea. And now, so has the court.

In a Sept. 7 judgment, Superior Court Judge Sunil Kulkarni ordered the city to immediately issue refunds for the first half of the $12.6 million judgement and to pay the remaining half, or $6.3 million, in a lump sum over the next two years. In the judgment, Kulkarni concurred with the suggestion from Green's attorneys that spreading out the payments over 10 installments would entail more costs, given the large size of the class.

"Fewer payments mean fewer administrative costs," Kulkarni wrote in the judgment. "And the City has not adequately shown why it needs 10 years to pay the remaining 50% of the judgment."

Kulkarni also ordered the city to pay 75% of the cost for the public noticing process for the payments, given that it was the city that chose to pay off the fees in multiple installments stretched out over several years.

Given the order, Palo Alto would have had to issue 50% of the refunds in the first week of October had the council not approved in a Monday night closed session an appeal of the court ruling. The city filed the appeal with the state's 6th District Court of Appeal on Tuesday, according to court records.

On Friday, the city issued a statement explaining its reason to appeal. The statement notes that while Proposition 26 was approved in 2010, it has never been applied to a municipal gas utility. As such, "significant open questions about the measure remain to be answered by the courts."

"The results of this lawsuit will have important implications for Palo Alto, as well as for other municipal utilities and cities in California," the city's statement reads. "The Council therefore authorized an appeal to seek guidance from the Court of Appeal on these novel legal questions."

One point of dispute between the city and Green is whether the gas transfers constitute an illegal tax or a voter-authorized method for managing finances. The city's attorneys point to the city charter, which lays out how the utility revenue should be spent. Under language that voters approved in 1950, the charter authorizes the city to use utility revenues for all the necessary employee, operational, maintenance, debt and capital costs and states the "remainder shall be paid into the general fund by quarterly allotments."

While the city had contended that this charter provision effectively makes the equity transfers "voter-approved" and, hence, legal, the court disagreed.

The language, Kulkarni wrote, makes it clear that the voters "did not approve a specific GFT (general fund transfer) or a specific methodology for calculating the (transfer)."

"Moreover, as a matter of voter intent, it is hard to imagine (and we have precious little evidence) that the voters knew if they were approving a "fee" or a "tax." … Thus, in the Court's view, the 1950 vote by Palo Alto voters does not help the City's case," Kulkarni wrote in the Sept. 7 order denying the city's motion for a new trial.