Unintended Environmental Consequences of the Demise of Redevelopment in California

California has a rich history of seizing opportunities that, at first glance, seem perilous. Following a significant industrial and manufacturing era in California, many communities in the state were saddled with properties contaminated with hazardous substances. These brownfields properties were often located in otherwise prime development areas, such as near shorelines and along key transit corridors. Recognizing the opportunities for transformation and revitalization these properties presented, California enacted various legislative measures to encourage and incentivize their cleanup and redevelopment. One of these measures, the Polanco Redevelopment Act (California Health & Safety Code, §§ 33459 eq seq.), was enacted more than 20 years ago, and has facilitated the transformation of neighborhoods and communities from San Diego to Emeryville, and many places in between.

These transformations have been good for both the public sector and the private sector. A 2002 Brownfields Programs Progress Report authored by the California Environmental Protection Agency noted that for every government dollar spent on brownfields clean-up, $2.48 in private investment is generated. The report also noted that brownfields redevelopment projects create tens of thousands of jobs in California, and generate hundreds of millions in tax revenue for state and local governments.

From closed military bases to abandoned gas stations, California’s brownfields sites are numerous and varied. Many of these sites have already been transformed and revitalized with the assistance of California’s redevelopment agencies and the legal tools granted to redevelopment agencies through California’s Community Redevelopment Law (California Health & Safety Code, §§ 33000 et seq.).  However, given the demise of redevelopment, the question remains whether California will in the future remain an innovator and thought-leader with respect to brownfields redevelopment.

After almost a year of legal uncertainty, late in 2011 the California Supreme Court issued its opinion in California Redevelopment Association, et al. v. Matosantos, marking the end of California’s 400+ redevelopment agencies and invalidating the alternative by which redevelopment agencies could provide a portion of their funds to the state and continue to operate.

The Supreme Court evaluated the constitutionality of two separate bills – AB 1X 26 and AB 1X 27. AB 1X 26 required that redevelopment agencies be disestablished and that “successor agencies” (defined as the county or city that authorized the agency in the first place) be charged with wrapping up operations of the former redevelopment agencies under the direction of an “oversight board.” AB 1X 27 provided a framework under which cities and counties could elect to continue their redevelopment programs so long as the host agency committed to make annual payments to the state to benefit special districts and education.

The elimination of redevelopment agencies, and the voluntary program proposal, were integral to Governor Jerry Brown’s 2011-2012 budget planning efforts to eliminate California’s $25 billion budget deficit. During briefing and oral argument, the California Redevelopment Association and League of California Cities, together with the Cities of San Jose and Union City, argued that AB 1X 26 and AB 1X 27 were unconstitutional because the bills violated Proposition 1A (2004), Proposition 22, and Article 16, Section 16 of the California Constitution. Specifically, the petitioners argued that because the purpose of AB 1X 26 and 27 is to divert tax increment funds to help solve the state’s budget problems, the legislation violated Proposition 22 which precludes state raids on redevelopment agency funds.

The Court unanimously agreed that the legislature that created the RDAs also had the power to dissolve them stating that “[w]hat the Legislature has enacted it may repeal.” In a 6-1 split, the court determined that AB 1X 27 violated Proposition 22, which protected RDAs from being required to divert funds to other government agencies. Thus, the Supreme Court’s decision upheld AB 1X 26 but struck down AB 1X 27.  In other words – the legislation, and the subsequent Supreme Court decision, marked the end of redevelopment in California.

While neither AB 1X 26 nor AB 1X 27 addressed the issues of brownfields remediation, cost recovery or immunity from further regulatory action, the Polanco Redevelopment Act is undoubtedly affected by the demise of redevelopment as a result of its inextricable link to redevelopment agencies. Because the Polanco Act tools and protections are only available to the remediation of property located in redevelopment project areas, and because redevelopment project areas require redevelopment agencies for creation and ongoing operation, it is unlikely the Polanco Act tools are useful or available in a non-redevelopment context.

The Polanco Redevelopment Act includes two key components. First, the Act allows redevelopment agencies to take any action consistent with state law that the agency determines is necessary to remedy or remove a release of hazardous substances from, on or under property within a redevelopment project area, and recover from responsible parties costs incurred by the agency cleaning up those contaminated properties. Second, once an environmental clean-up is completed, the Act provides immunity to redevelopment agencies and future property owners, developers and lenders, from future regulatory action related to the hazardous substances addressed as part of the clean-up.

In addition to tax increment financing, the cost recovery and immunity provisions of the Polanco Redevelopment Act have been key to serving the blight-eliminating purpose of the Community Redevelopment Law. For more than 20 years, the Polanco Redevelopment Act has promoted cleanup and reuse of sites that might otherwise sit idle. In cities like San Diego and Emeryville, the use of the Act by the respective redevelopment agencies was key to transforming and revitalizing aging industrial and manufacturing districts into thriving retail and residential areas.

It is widely believed that the Legislature never intended for redevelopment to be eliminated in its entirety. Evidence of this belief include the lack of cross-referencing in AB 1X 26 or AB 1X 27 to other key redevelopment provisions – such as the Polanco Redevelopment Act. Efforts are already underway in the Legislature to restore the incentives and protections the Polanco Redevelopment Act has provided for more than 20 years. One such bill, California Assembly Bill 1235 (AB 1235), would apply all authority, rights, powers, duties, obligations and protections provided by the Polanco Redevelopment Act to the designated successor agencies. Amendments to other bills to address the same issue are believed to be forthcoming, and are likely to garner legislative support.

California has had considerable success in the redevelopment of brownfields sites, and the Polanco Redevelopment Act has played a positive and significant role in those achievements. While the days of statutory redevelopment in California have come and gone for budgetary reasons, California must not turn its back on the tools and protections that the Polanco Redevelopment Act provided. Not only have these tools and protections incentivized clean-up and redevelopment, they do so at virtually no cost to the state budget, and with the benefit of the revitalization and transformation of otherwise idle property.

Kristina Lawson is a partner in the Land, Environment and Natural Resources Division of Manatt, Phelps & Phillips’ San Francisco office. Craig Moyer is a partner in Manatt, Phelps & Phillips’ Los Angeles office, and is chair of the firm’s Land, Environment and Natural Resources Division. They can be reached at [email protected] and [email protected], respectively.

This column is part of a series of articles by law firm Manatt, Phelps & Phillips, LLP’s Energy, Environment & Natural Resources practice. Earlier columns have discussed What’s Next for the Renewable Power Industry and Renewable Energy Projects On Tribal Lands.