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Post-Matosantos: Are California cities deprived of both a carrot and a stick to clean up and develop contaminated properties?

On December 29, 2011, the California Supreme Court in California Redevelopment Agency Association v. Matosantos (“Matosantos”) upheld Assembly Bill X1 26 (codified as Health and Safety Code Sections 34161-34191) and invalidated AB X1 27.  Matosantos actuates the dissolution of all California redevelopment agencies (“RDAs”) effective February 1, 2012.  Legal experts sympathetic to the RDAs’ plight still continue to play Monday morning quarterback regarding the case.  However, the reality that California’s highest court played the RDAs’ swan song must now set in, and the appointed Successor Agencies must be prepared to handle a large number of issues immediately.  Not the least important of which is how cities plan to handle contaminated sites within their borders.

That the RDAs are now gone, does not mean the contaminated properties that plague our communities can be forgotten.  California’s municipalities now shoulder the burden of guiding our state’s most toxic sites through remediation and closure, and likely without the RDAs most potent legal tool – the Polanco Redevelopment Act (“Polanco”) (Health & Safety §§33459 et seq.).  RDAs widely used Polanco to pursue redevelopment of Brownfields. The law was designed for RDAs, and identifies the processes they should follow when cleaning up a hazardous substance release in a redevelopment project area.  Matosantos creates a vacuum within the Polanco framework by dissolving RDAs and their ability to designate redevelopment areas. 

Notably, Polanco’s most important aspect is the provision of immunity from liability for RDAs, and subsequent property purchasers, for sites cleaned up under a cleanup plan approved by the California Department of Toxic Substances Control (“DTSC”) or a Regional Board Water Quality Control Board (“RWQCB”).  Courts have not yet had to evaluate whether the same immunity applies to cities or their chosen Successor Agency.  The issue is particularly difficult where no prior designation of redevelopment area was made by a now-defunct RDA.

Still, cities and their chosen Successor Agencies must act in the vortex created by Matosantos regarding the fate of contaminated sites.  Fortunately, cities are equipped with the legal tools to address the nuisance conditions imposed by Brownfields.  Indeed, California cities have been enforcing the abatement of public nuisances for over 100 years.  Cities, as Successor Agencies or not, should take a fresh look at their Brownfields sites and consider how they can best protect public health, welfare, and the environment while at the same time bringing these properties back into economic use.

In addition, there are a number of other issues facing cities and their Successor Agencies, which have been highlighted by California Redevelopment Association (“CRA”), specifically:

  • Bond Defaults. As already noted by the three bond rating agencies, because of conflicts and ambiguities in the dissolution legislation, there is a very real prospect of bond defaults, depriving the holders of these California municipal bonds of their rights and opening the state and local agencies to significant litigation costs.
  • Loss of Critical Staff. Lack of clarity about limits on administrative costs and conflicts in the legislation mean many talented staff will be laid off who may not have to ultimately be let go as quickly if the law is amended to clarify these issues. These experienced staff will not be around to help implement the law and support the work of the Oversight Boards who must supervise the Successor Agencies.
  • Loss of Taxpayer Funds.  The CRA has documented dozens of problems and questions about the implementing legislation that should be cleaned up before it is implemented. If not, valuable taxpayer funds will be potentially lost. One example is that the legislation may force successor agencies to “defease” bonds issued for projects that have been designed but not yet constructed. In such cases, federal law and most bond covenants will require most successor agencies to do this by setting-aside bond proceeds in low-interest bearing escrow accounts while paying bondholders much higher interest rates. Taxpayers will shoulder the cost of this loss.
  • Possible Violations of Federal Law. Various parts of the legislation appear to require that local successor agencies violate federal tax law on how bond proceeds can be used or contracts with federal agencies requiring prior approval of real estate before it is conveyed.
  • Stranded Public Infrastructure Projects. The current law appears to prevent the completion of many infrastructure projects for which the bonds have been issued, engineering design has been completed, but for which no construction contracts have been let. In other cases, design contracts will have to be completed for projects that will never be built under the law. These projects, the jobs they create, and the revenue they provide to the state and local governments will be lost. In other cases, environmentally contaminated land will never be cleaned up and reused.

In conclusion, the immediate steps following the RDAs dissolution are critical for cities, and should be discussed in detail with a legal expert.  For Brownfields in particular, cities should consider the legal tools available and develop a new strategy for cleaning up contaminated sites.

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