Eminent Domain Report

On Thursday we reported the California Supreme Court’s decision to assert jurisdiction over the writ petition challenging the constitutionality of AB 26 X1 and AB 27 X1.  The Court also issued a partial stay of AB 26 X1 and a complete stay of AB 27 X1.  While the Court’s actions were designed to preserve the status quo until it renders a final decision in January, the status quo can mean very different things to different agencies.

For those that could not afford the payments necessary to re-establish themselves, the Court’s action is nothing short of a stay of execution.  But for those that planned on making the payments and continuing on with business as usual, the stay is an unwelcome barrier to new projects.  

To get a handle on what this all means, we need to first take stock of where things stood before the partial stay was issued.  

A. The Death and Rebirth of Redevelopment

In June, the Governor signed two budget trailer bills that substantially reshaped the California Community Redevelopment Law (Redevelopment Law):  AB 26 X1 immediately stripped redevelopment agencies of their authority to issue or sell bonds, incur new indebtedness, acquire or dispose of real property, enter into new contracts, etc.  However, until their dissolution, redevelopment agencies retained the power to honor existing contracts and legal obligations, pay existing debts, etc.  Arguably, cooperation and reimbursement agreements between cities or counties and their redevelopment agencies entered into prior to January 1, 2011, also remained in effect until October 1, 2011.  Thus, many agencies have continued to fund ongoing city or county projects as preexisting obligations.  

Unless they opted to participate in the Alternative Voluntary Redevelopment Program under AB 27 X1, as of October 1, 2011, all redevelopment agencies were to be dissolved.  Their assets, contracts and obligations were to be transferred to successor agencies.  Most agreements between cities and counties and their redevelopment agencies, including cooperation and reimbursement agreements, were also slated for termination.  

If a city or county elected to participate in the Voluntary Alternative Redevelopment Program, it could do so by adopting an ordinance re-establishing its redevelopment agency and committing to annual community remittances to local school and special districts.  For some cities, the amount of these so-called pay to play fees were so great as to present an insurmountable barrier to re-establishment of their redevelopment agencies.  Others ran the numbers and determined that the benefits of continued redevelopment activities outweighed the burdens imposed by the pay-to-play fees.      

Not surprisingly, the constitutionality of AB 26 X1 and 27 X1 was immediately challenged.  On July 18, 2011, the California Redevelopment Association, League of California Cities, and the cities of San Jose and Union City filed a petition for writ of mandate and application for stay in the California Supreme Court.

In the meantime, cities and counties throughout the state adopted ordinances reestablishing their redevelopment agencies under the Voluntary Alternative Redevelopment Program, but often with a catch.  In agreeing to make the requisite community remittances, most of the ordinances state that they are being made under protest and without prejudice to recovering such payments if AB 26 X1 and 27 X1 are declared unconstitutional. 

B. Preserving the Status Quo

The partial stay issued last Thursday was designed to preserve the status quo as it existed at that moment in time.  AB 27 X1 was stayed in its entirety, as were the sections of AB 26 X1 which dissolved redevelopment agencies.  However, the section of AB 26 X1 which stripped redevelopment agencies of their power to take on new obligations was not stayed.  

On the one hand, agencies are today in the same position they were a week ago.  They are powerless to initiate new projects or enter into new contracts, but they can continue to function as they have since the two bills were signed by the Governor in June.  For those cities or counties relying on cooperation and reimbursement agreements with their redevelopment agencies to fund ongoing projects, their day of reckoning has been postponed.  So to, those cities unsure of their ability to make the pay-to-play payments by October 1 now have a bit of breathing room.

On the other hand, agencies that can afford the payments and would have reconstituted themselves under AB 27 X1 are arguably not in the same position that they were a week ago.  To the extent they had plans for new projects to be pursued this calendar year, those plans are now on hold, at least until the Court issues its ultimate ruling in January 2012.  Compounding their uncertainty is a fear that the Court may ultimately uphold the constitutionality of AB 26 X1 but strike down 27 X1, thus removing any pathway to survival. 

Finally, the stay throws a bit of a monkey wrench into the Governor’s budget projections.  He was counting on diverting $1.7 billion from redevelopment agencies to balance California’s 2011-12 budget.  While the money may ultimately be diverted, in the short run the budget continues to fall further behind in its revenue projections.