State Agencies Can’t Say CEQA Mitigation is Infeasible If Earmarked Funds Are Unavailable, High Court Says

When environmental review of a proposed development project by a state agency shows that it will have traffic impacts, a state agency is not allowed to nevertheless approve the project on the grounds that the funds needed to mitigate congestion have not been earmarked by the Legislature, the California Supreme Court has held.

The court’s recent unanimous decision in City of San Diego v. Board of Trustees of the California State University is significant for two important reasons.  First, it is now clear that state agencies cannot shift the costs of off-site environmental mitigation of their projects to local and regional governments, except in very limited circumstances.  Second, the use of a “statement of overriding considerations” by the legislative body of a lead agency will not be given deference by the courts if potential mitigation measures are not “truly infeasible.”

The Board of Trustees of the California State University sought to expand the campus of San Diego State University (“SDSU”) to accommodate more than 10,000 additional students over the next several years.  The environmental impact report for the project showed that it would contribute significantly to traffic congestion off-campus.  Although the Board of Trustees budgeted more than $9.9 billion for campus expansion efforts, the Board of Trustees declined to use those funds, or any of the California State University’s other financial resources, to reimburse other local governments for SDSU’s fair share of the cost of mitigating its project’s off-campus environmental impacts.  The Board of Trustees maintained that it was not required by law to pay for mitigating a project’s environmental effects unless the Legislature made an appropriation for the specific mitigation measures required.

In other words, if the Legislature did not make an earmarked appropriation for specific environmental mitigation, the Board of Trustees argued that it could take the position that mitigation was infeasible and the Board of Trustees could adopt a statement of overriding considerations and approve the project.  A “statement of overriding considerations” is a legal tool under the California Environmental Quality Act (“CEQA”) that allows a reviewing public agency to approve a project because it offers non-environmental benefits that outweigh its unmitigated significant environmental effects.

The California Supreme Court rejected the Board of Trustees’ argument.  The Board of Trustees is not limited to earmarked appropriations to mitigate the environmental effects of its projects.  Indeed, the Board of Trustees must use other available sources of funding to comply with CEQA’s mandate.

The court acknowledged that CEQA permits a lead agency to determine that mitigation measures necessary to avoid a project’s environmental effects are within the responsibility and jurisdiction of another public agency. However, the ability to shift the burden to another agency is strictly limited:  a lead agency may disclaim responsibility “only when the other agency said to have responsibility has exclusive responsibility.”  When the other agency doesn’t have exclusive responsibility, then the lead agency must share the economic costs of mitigating environmental impacts on regional infrastructure.

The high court gave several reasons for requiring cost sharing, but two bear repeating here.  First, nothing in CEQA says or even suggests that funds appropriated by the  Legislature for a project’s overall budget cannot be used for environmental mitigation.  Second, CEQA does not condition or limit the duty of a state agency to mitigate its project’s environmental impacts on the Legislature’s grant of a specific, earmarked appropriation.

The court also pointed out that the Board of Trustee’s position was unreasonable and impracticable. If a lead agency proceeds with a project without paying for the needed mitigation, the cost of addressing the project’s impacts on local infrastructure would be shifted to local and regional governmental agencies.  Under state and federal law, local and regional governments have limited tools to raise funds for local infrastructure projects.  Developer impact fees must be roughly sized to the impact of each developer’s project. Any “gap” in funding not covered by developer impact fees for needed infrastructure would require local government to draw on its general fund or increase taxes.  Thus, in this case, the City of San Diego would be put in the uncomfortable position of solving issues caused by the SDSU project.   Neither CEQA, nor any other state statute identified by the Board of Trustees, gives the California State University the authority to shift its share of the costs of infrastructure improvements to local governments.

This case also reinforces the California Supreme Court’s limits on a lead agency’s use of a statement of overriding considerations to approve a project notwithstanding its significant environmental effects. The court repeated from its decision in City of Marina v. Board of Trustees of California State University: “CEQA does not authorize an agency to proceed with a project that will have significant, unmitigated effects on the environment, based simply on a weighing of those effects against the project’s benefits, unless the measures necessary to mitigate those effects are truly infeasible.”  This “truly infeasible” standard, reaffirmed by the high court, underscores that a mere balancing of “overriding economic, legal, social, technological, or other benefits of the project” against the significant effects on the environment is not enough.  To adopt a statement of overriding considerations, a specific finding in the record that identified mitigation measures or alternatives are infeasible because of “specific economic, legal, social, technological, or other considerations, including considerations for the provision of employment opportunities for highly trained workers” is required.

CEQA is not only a procedural statute.  Many provisions of CEQA have as their focus the preparation of environmental documents to inform the public and decision makers of the significant environmental impacts of proposed projects.  However, as this case makes clear, CEQA’s “substantive” limitations on the powers of state agencies and local legislative bodies to make decisions should not be overlooked.

Nonprofit medical facilities and California real estate transfer taxes

Owners of nonprofit health care facilities in California should be careful not to assume that because their organization is exempt from regular property tax assessments, they need not pay real estate transfer taxes when the real property is purchased or sold.

Even though a nonprofit health care facility may qualify for California’s “welfare” exemption for property tax assessment purposes, the nonprofit corporation owner may still be subject to a real property transfer tax at the time real property is transferred.  This tax can be a significant sum and can be negotiated as part of the transaction. 

California law authorizes each county and some cities to impose a transfer tax in connection with the transfer of real property within the state.   

Counties may impose a tax on instruments transferring real property at a rate of 55 cents for each $500 of the value of the property.  (California Revenue and Taxation Code section 11911(a).) 

As for cities, the applicability of the transfer tax depends on whether the city is a “general law” city or a “charter city.”  If the city is “general law,” the city may not impose a transfer tax on the sale of real property.  (California Government Code section 53725, enacted as Proposition 62 on November 4, 1986).  If the City is a “charter city,” the city may impose a transfer tax.  (Fielder v. City of Los Angeles (1993) 14 Cal.App.4th 137.)  The tax is applicable to “realty sold,” but California courts have construed that phrase to include a “change in ownership” too, not just a conveyance of title. 

Transfer taxes vary among charter cities and can be substantial.  For example, as of this writing, the transfer tax rate in the City of Oakland is $15.00 per $1,000 of property value and the transfer tax rate in the City of San Diego is $1.10 per $1,000 of property value.  Therefore, in a $50,000,000 medical office building sale, transfer taxes can be $750,000 in Oakland or $55,000 in San Diego.  (Note: Due to the budgetary challenges currently faced by many cities, there is growing pressure to increase transfer tax rates, especially in those charter cities where the transfer tax rate is low.)

During the negotiation of a purchase and sale agreement, buyers and sellers will often discuss who will be responsible for the payment of transfer taxes.  Nonprofits should not assume that they are exempt from the payment of the tax because they otherwise may qualify for an exemption from the payment of ordinary “property taxes.”  Nonprofits should also be careful not to fall automatically into the trap of the county “custom” in the payment of transfer taxes.  Allocating the responsibility for payment of transfer taxes is fully negotiable in the purchase and sale agreement. 

There is a short list of exemptions to the application of the transfer tax.  While none of the exemptions are similar to the broader “welfare” exemption available to nonprofits for regular property taxes, counsel should be consulted to determine whether any of those exemptions might apply in your given situation.

Charter Cities Not Required To Pay Prevailing Wages to Private Construction Workers on Locally Funded Public Works

In July, the California Supreme Court issued an opinion with far-reaching impact on the payment of prevailing wages in public works projects. In State Building Construction Trades Council of California, AFL-CIO v. City of Vista, 54 Cal.4th 547 (July 2, 2012), the court exempted charter cities and their contractors from the obligation to pay workers state-mandated prevailing wages when a public improvement project is a “locally funded public work.”

In City of Vista,  the court held that the wage levels of contract workers building locally funded public works are a “municipal affair” and not a matter of “statewide concern.” As a result, the California Constitution protected Vista’s adoption of an ordinance prohibiting the payment of prevailing wages, because the ordinances of charter cities supersede state law with respect to “municipal affairs.”


In 2006, while Vista was a general law city rather than a charter city, city voters approved a sales tax to fund renovation of several public buildings. In February 2007, following a special election, Vista changed from a general law city to a charter city. One of the purposes of the change was to give the council the power to decide whether to impose prevailing wages on the construction of its planned public works projects.

Shortly after that, the Vista City Council enacted a city ordinance to prohibit city contracts from requiring payment of prevailing wages, except in three limited circumstances: “(a) such payment is compelled by the terms of a state or a federal grant, (b) the contract does not involve a municipal affair, or (c) payment of the prevailing wage is separately authorized by the city council.”  The city council then enacted a resolution approving contracts for the public buildings to be financed by the sales tax, but did not require compliance with the state’s prevailing wage laws. The State Building and Construction Trades Council of California (“the union”) then filed suit.

The Court’s Decision

The court started its analysis with what is commonly known as California’s “home rule doctrine.”  This doctrine is set forth in Article XI, section 5, subdivision (a) of the California Constitution, which provides, “It shall be competent in any city charter to provide that the city governed thereunder may make and enforce all ordinances and regulations in respect to municipal affairs, subject only to restrictions and limitations provided in their several charters and in respect to other matters they shall be subject to general laws. City charters adopted pursuant to this Constitution shall supersede any existing charter, and with respect to municipal affairs shall supersede all laws inconsistent therewith.”

In view of the language of the California Constitution, the court said, “[T]he controlling inquiry is how the state Constitution allocates governmental authority between charter cities and the state.”

The court then applied the framework for determining whether an ordinance of a charter city concerns “municipal affairs” or whether the ordinance would be superseded by state law as dealing with matters of “statewide concern.” California Fed. Savings & Loan Assn. v. City of Los Angeles, 54 Cal. 3d 1, 17 (1991) (“California Fed. Savings”).

The court concluded “that the wage levels of contract workers constructing locally funded public works are a municipal affair (that is, exempt from state regulation), and that these wage levels are not a statewide concern (that is, subject to state legislative control),” reaffirming City of Pasadena v. Charleville, 215 Cal. 384, 389 (1932). 

In support of its holding, the court reasoned as follows: 

  • First, “the construction of a city-operated facility for the benefit of a city’s inhabitants is quintessentially a municipal affair, as is the control over the expenditure of a city’s own funds. Here, the two fire stations in the City of Vista, like the municipal water system in Charleville, … are facilities operated by the city for the benefit of the city’s inhabitants, and they are financed from the city’s own funds. We conclude therefore that the matter at issue here involves a ‘municipal affair.’” Second, noting that the prevailing wage laws expressly cover public works of a city, whether a charter city or not, the court found that “an actual conflict exists between state law and Vista’s ordinance.”
  • The court rejected the union’s arguments that what may have once been a “municipal affair” was now a state concern because (i) the prevailing wage is now set by the Director of the California Department of Industrial Relations, rather than the local contracting body, as when Charleville was decided, (ii) the state’s economy is interconnected at the state level and regional levels, and (iii) that prevailing wages support state-wide apprenticeship programs in skilled crafts. The court considered these arguments and instead stated: “[T]he question presented is whether the state can require a charter city to exercise its purchasing power in the construction market in a way that supports regional wages and subsidizes vocational training, while increasing the charter city’s costs. No one would doubt that the state could use its own resources to support wages and vocational training in the state’s construction industry, but can the state achieve these ends by interfering in the fiscal policies of charter cities?” The court answered “no.” The same principle that applies in the court’s prior decisions with respect to public employees held true for private employees as well.

Factors Cities and Developers Should Consider

City of Vista significantly changes the trend in California on the issue of the payment of prevailing wages. Over the past 10 years, the legislature has expanded the types of projects that qualified as “public works” and were subject to the payment of prevailing wages. This ruling allows charter cities to separate themselves from the legislature’s prevailing wage requirements. Today, charter cities can exert much greater control over their capital improvement expenditures. 

The court’s decision helps financially strapped charter cities and struggling real estate developers.   Construction spending can go farther with potentially greater public benefit. Public works that had been put on hold because construction was too expensive may be possible. A private development dependent on significant public improvements may not have been financially feasible if prevailing wages (and benefits) had to be paid, but now the project may be possible, simulating the local economy. On the other hand, union employees may find that the wages they will be paid on public works projects will drop in the aftermath of this decision, affecting their wallets.

What’s more, developers and charter cities may need to more closely evaluate Project Labor Agreements (“PLAs”) on multi-craft construction contracts, balancing their costs against the labor relations benefits they offer.

The important question is whether a charter city’s proposed improvement is a “locally funded public work” — something the court does not specifically define. However, the expenditure of “a City’s own funds” was identified as a municipal concern exempt from prevailing wages. But what constitutes “a City’s own funds”? A voter-approved sales tax measure for public construction purposes qualified in City of Vista. If a charter city received money under a development agreement from a developer for constructing a public park, would the use of those proceeds be an expenditure of “a City’s own funds”? If a charter city received mitigation fees or impact fees for a new public library, would the spending of those dollars be “an expenditure of a City’s own funds”? A good argument can be made for each of these, if properly structured.

An interesting strategy worth considering is whether a charter city can create a Mello-Roos communities facilities district, or another special taxing district, and cloak the funds expended by those entities with the constitutional “home rule” protection granted to charter cities. A particularly plausible alternative is using charter city-created public finance tools, such as facilities benefit assessments used by the City of San Diego and the City of Sacramento, to shield a charter city from the payment of prevailing wages.  

The case also raises the issue that unions may take actions to press their agenda on charter cities which refuse to opt into the state’s prevailing wage mandate.  Those strategies could include direct political pressure of city council, the ballot box or use of other legal tools (such as environmental laws and regulations) that prevent or delay the commencement of construction.

— Kenneth Kecskes