Eminent Domain Report

Yesterday, we reported briefly on the Supreme Court’s decision in California Redevelopment Assn. v. Matosantos.  As many of you undoubtedly know by now, the outcome was the nightmare redevelopment agencies feared most, but that many (including us) had forecast after listening to oral argument last month. 

The Court upheld ABX1 26, allowing the dissolution of California’s redevelopment agencies to proceed, but struck down ABX1 27, the voluntary buy back program that would have allowed redevelopment to continue.  In particular:

• The Court had little difficulty upholding ABX1 26, the law eliminating California’s redevelopment agencies. The Court reasoned that because redevelopment agencies were created by the Legislature, the Legislature could also eliminate them:  A corollary of the legislative power to make new laws is the power to abrogate existing ones. What the Legislature has enacted, it may repeal. 
• When it came to ABX1 27, the Court felt differently.  All but Chief Justice Cantil-Sakauye concluded that the voluntary payment portions of ABX1 27 run afoul of Proposition 22, adopted by voters in November 2010. The Court further concluded that the balance of ABX1 27 was not severable from the improper payment provisions, and the Court struck down ABX1 27 in its entirety. 

Though as a technical matter the CRA obtained a split decision (successfully attacking one of the two laws), the outcome represents a self-described worst case scenario that is obviously not what redevelopment proponents had in mind when they filed the lawsuit.  That said, the result is not too surprising to those who followed the oral argument, which focused largely on three issues:

1. The fact that redevelopment agencies were created initially by the Legislature, which would, absent some constitutional prohibition, mean that the Legislature could also abolish them.
2. The fact that the voluntary payments under ABX1 27 were not particularly voluntary, since failure to make them meant the redevelopment agency would be eliminated.  And, if not voluntary, the payments seemed to run afoul of Proposition 22.
3. The question of whether the two laws were so intertwined that striking down one (presumably, ABX1 27) would necessitate striking down both. 

Much as it telegraphed during oral argument, the Supreme Court started by concluding that ABX1 26 – the dissolution bill – passed constitutional muster.  Rejecting the argument that Proposition 22 created a constitutional right for redevelopment agencies to exist, the Court found no discussion of redevelopment agencies taking on constitutional stature, and without some explicit mention of such a profound shift in the law, the Court would not imply any such intent.  As the Court summarized, the drafters of legislation do not, one might say, hide elephants in mouseholes. 

The Court moved on to ABX1 27, focusing its attention on the voluntary payment program.  The Court concluded that ABX1 27 was substantively indistinguishable from earlier efforts by the State to shift property tax increment from redevelopment agencies to the State’s educational revenue augmentation funds (ERAFs) – the very circumstance Proposition 22 sought to prevent. 

The Court then put the nail in the ABX1 27 coffin: A condition that must be satisfied in order for any redevelopment agency to operate is not an option but a requirement.  Such absolute requirements Proposition 22 forbids. 

Finally, the Court turned to the severability question, needing to decide whether ABX1 26 could stand alone, or whether it must fall given ABX1 27’s fate. The Court responded to claims that a number of legislators had reportedly opined that the Legislature would not have wanted such an outcome by looking at the statute’s specific severability clause stating the opposite, concluding that

whatever individual legislators may have said at one point or another, what the Legislature actually did establishes it would have passed [ABX1 26] irrespective of the passage of [ABX1 27], and that [ABX1 26] is volitionally separable. Consequently, it is severable.

Thus, the Court’s final conclusion: ABX1 26 stands, while ABX1 27 falls. 

What Happens Next: the Mechanics? The Court examined some of the mechanics of ABX1 26’s implementation in light of the partial stay and the passage of time that has rendered some of the law’s time frames impossible. The Court concluded that it had the power to reform the law, and it chose a superficially simple solution: all initial dates in ABX1 26 are shifted four months, representing the time period during which the Supreme Court’s partial stay was in place. 

But there is a twist. For any obligations that span multiple fiscal years, the Court did not reform the deadlines. Instead, only those trigger dates which fall before May 1, 2012, get shifted. This means, for example, that for the distributions required to be made on January 16 and June 1 every year, the January 16, 2012, distribution is now due May 16, 2012, but the June 1, 2012, distribution (and all future distributions) remain due as set forth in ABX1 26. 

What Happens Next: Implementation? Moving beyond the technical issues, the real question is what happens to redevelopment obligations and assets. This will be the subject of considerable discussion in upcoming weeks, but there are a few, bright-line rules people should know:

1.  For obligations incurred prior to January 1, 2011, the obligations remain valid and binding. 
2. For deals under negotiation when the Supreme Court stay was issued, the redevelopment agencies have no power to consummate the deals. 
3. Remaining redevelopment assets will be sold. 
4. If the agency transferred any assets to its city/county or another public agency after January 1, 2011, the transfer is potentially subject to ABX1 26’s claw back provisions. 

What Happens Next: a Legislative Compromise? Finally, entering into the realm of pure speculation, there is already some murmuring about a possible legislative compromise designed to reinstate some form of redevelopment. Whether any such compromise sees the light of day remains to be seen. And even if it does, considerable obstacles may exist. 

In particular, any legislative effort to reinstate some form of redevelopment must overcome the very problem that led to the demise of ABX1 27: how to fund Redevelopment 2.0 without running afoul of Proposition 22. Moreover, a legislative compromise only works if the Governor approves it, and Governor Brown’s early comments do not suggest he is dissatisfied with the Court’s holding. 

For more information on the opinion and its aftermath, please join us for a webinar, Supreme Court Upholds Elimination of Redevelopment in California - Now What? It will take place on January 4, 2012, at 2:00 p.m.