The Final Content of California's Budget-Revised Infrastructure and CEQA Reform Trailer Bills

As stated in Holland & Knight's recent alert detailing Gov. Gavin Newsom's package of 11 bills to amend the venerable California Environmental Quality Act (CEQA), meaningful reforms to CEQA have eluded all past governors in the state. (See "A Practical Guide to Gov. Newsom's May 2023 Budget-Revised CEQA Trailer Bills," May 23, 2023.)

For the past five decades, CEQA has been finely tuned to protect the status quo even in the face of California's urgent housing and infrastructure needs. CEQA lawsuits (and lawsuit threats) are the go-to tool for "NIMBYs" (not in my backyard organizations) and anyone with the resources to file a lawsuit who wants to leverage a project approved by elected and appointed officials to further their own special interests. For example, as reported in Part 3 of the "In the Name of the Environment" series authored by Holland & Knight attorneys, examining all CEQA lawsuits filed from 2019 to 2021,¹ local and regional land use plans to allow more than 1 million new homes were targeted by CEQA lawsuits.

As originally proposed, Gov. Newsom's reform package included 11 bills. As finally enacted, the content was consolidated into five bills: Senate Bill (SB) 145, SB 146, SB 147, SB 149 and SB 150, including some provisions that have been watered down from the original versions. The governor signed the consolidated version on July 10, 2023.

Below is a closer look at the final content approved by the California Legislature and signed into law by Gov. Newsom.

1. Updates to CEQA "Reform" for All Projects (Including Housing): Administrative Record Preparation Cost and Schedule. The governor's package did not include exemptions, streamlining or more predictable and legally sufficient CEQA content for any type of project. To reduce the time required to complete the CEQA litigation process at the trial court, Gov. Newsom proposed two changes:

First, the governor proposed to eliminate internal agency emails from the "administrative record" that must be prepared and provided to the trial court judge to allow the parties to file legal briefs and argue the merits of the case. Gathering, and then combing through emails to identify irrelevant or privileged emails is a significant time and cost burden that can delay the trial court schedule by several months to over one year. This meaningful proposal was killed in the California Legislature by CEQA's status quo defenders; instead, weakened text that is already consistent with existing law allows the exclusion from the administrative record of non-substantive emails such as arranging meeting times.

Second, existing law requires parties who file CEQA lawsuits challenging agency approvals of housing or other projects to either prepare the administrative record themselves (at their expense), or pay to have the agency they have sued prepare the record. As enacted, the lawsuit petitioner has a "free" 60 days to prepare the record themselves, and if they fail to do so, the agency can prepare the record at taxpayer expense (for public agency projects) or at an applicant's expense (for affordable housing projects for example). This "reform" actually makes it much cheaper, and easier, for project opponents to file CEQA lawsuits challenging projects. Numerous versions of this cost-shifting provision, which burdens taxpayers or project applicants, had been rejected for many years by the Legislature. Instead of requiring petitioners to timely pay for record preparation or risk dismissal of their lawsuit, which would clarify and enforce existing law, this bill demonstrates the raw political power of CEQA's ardent defenders in the Legislature and their disregard for labor-supported infrastructure projects as well as urgently needed, less costly and affordable housing. The package does authorize a lead agency (at its own cost or the real party in interest's cost) to opt to prepare the record without waiting for the petitioner to so do.

2. Updates to CEQA Reforms for Designated Water, Transportation, Clean Energy and Advanced Manufacturing Projects: Most – nine of 11 – of the governor's original trailer bills applied primarily to projects that are eligible for significant federal funding under the Inflation Reduction Act (IRA) and/or Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act.² These reforms emerged after months of work by former Los Angeles Mayor Antonio Villaraigosa and the nonpartisan group California Forward.³ The most significant of these reforms requires that CEQA lawsuit challenges be resolved within 270 days of the filing of the certified administrative record with the trial court, consistent with existing laws allowing for expedited judicial review of environmental leadership projects.⁴ The administrative record component of the litigation process is required to be completed and funded by the project sponsor concurrently with the CEQA compliance and project approval process but would, if the prior reform is enacted, now largely exclude internal agency electronic communications.

This reform is intended to resolve CEQA lawsuits (including review by the Courts of Appeal and California Supreme Court) in less than one year, instead of the four- to 10-year CEQA lawsuit durations common to complex infrastructure projects such as management of the Bay-Delta, desalination plants, wind farms, transmission lines and manufacturing facilities.

As enacted, the types of projects eligible for this expedited litigation track were substantially reduced, the cost burdens for these projects were substantially increased, and whether or when an otherwise eligible project would become eligible for fast-tracked litigation became a political uncertainty requiring pre-approval by both the governor and the California Air Resources Board (CARB).

Chapter 7, commencing with Section 21189.80, would add seven new statutes to CEQA. The most critical is the list of eligible projects, defined in 21189.80, all of which include, except as otherwise noted, mandatory compliance with designated state labor standards:

• Energy. "Clean energy" projects include solar and onshore wind electricity generation, energy storage systems, electric transmission lines and projects for the manufacturing, production or assembly of energy storage, wind or solar energy systems, all of which must meet applicable labor standards except for solar/wind generation projects with a 20-megawatt capacity or less and storage projects with a capacity of less than 80 megawatts of energy.
• Water. Gov. Newsom's original proposal included surface water storage projects already approved by voters and the Bay-Delta Conveyance Project to replace the existing fragile levee surface water transfer infrastructure with a single tunnel that bypasses Bay Delta levees and sensitive habitat. These projects, as well as other significant new sources of water such as ocean desalination, were expressly rejected by the Legislature as being eligible for fast-tracked resolution of lawsuits. It is important to note that these excluded projects would still have been required to comply with all aspects of CEQA, as the sole "streamlining" offered was prioritizing the resolution of CEQA lawsuits. The Legislature, again demonstrating the power of environmentalists to block voter- and labor-supported climate resilient water infrastructure, effectively assured the ongoing indefinite delay in using state or federal funding to address the state's critical water needs – including the needs of the more than 1 million Californians who lack access to safe drinking water today. Environmentalist-endorsed "water" projects such as habitat restoration and preservation, as well as maintenance and limited "improvements" to existing water infrastructure, were the sole water projects entitled to expedited judicial review. Using CEQA lawsuits to indefinitely delay, and ultimately derail, even voter-approved infrastructure projects has proven especially effective in blocking water infrastructure. Infrastructure generally, especially water projects, are the second most likely target of CEQA lawsuits as shown in Part III of our In the Name of the Environment Study. (See footnote 1.)
• Transportation. Includes "up to 10" local and state transportation projects that achieve "at least one" and are "not inconsistent with any" of the myriad goals in the California Transportation Action Plan. Public transit, as well as bike and pedestrian improvements, would generally be eligible – as would high-speed rail, other rail and multimodal projects, and the addition of carpool lanes on state or local roads. As it did with water projects, the Legislature took a meat cleaver to transportation projects in rejecting the governor's proposal. For example, transportation projects would be "inconsistent" with the state's transportation plan if they fail to "protect natural and working lands" or "increase passenger vehicle travel," or would "promote compact infill development while protecting residents and businesses from displacement."
• Advanced Manufacturing Plants for Semiconductors and Microelectric Projects. Newsom's proposal includes semiconductor and microelectronic research and development and manufacturing projects meeting federal funding requirements, and were actually awarded funds, under the federal CHIPS Act. This was deleted in its entirety, and instead manufacturing plants can apply to the governor and CARB for inclusion in the Environmental Leadership Project (ELP) program, if additional (and costly) ELP program criteria are met. California currently has only one major CHIPS project seeking federal funding, which would reuse an existing manufacturing plant and thereby reduce the scope of any required CEQA review. The governor's proposal would have assured that eligible CHIP projects could complete the litigation process in time to qualify for federal CHIPS funding, but the Legislature did not share the governor's (or labor's) policy goal of bringing CHIPs funding and advanced manufacturing jobs to California by fast-tracking CEQA lawsuits.

3. Updates to Streamlined National Environmental Policy Act (NEPA) Compliance for Transportation Projects: NEPA applies to federal agency funding and approval of many highway, transit, roadway and other transportation projects and in most respects largely duplicates the environmental review already required by California currently has delegated authorization to complete the NEPA process for eligible state transportation projects, which expires in 2025. Other federal agencies, such as those that fund affordable housing and other types of infrastructure, do not have such delegation agreements. The Legislature largely accepted (SB 146) Gov. Newsom's proposal.
4. Updates to Recategorization of "Fully Protected Species" as "Endangered Species" Regulated Under the California Endangered Species Act: Prior to enactment of the California Endangered Species Act (CESA),⁵ California had adopted several statutes designed to protect designated rare, threatened or endangered species.

While CESA includes a permit process allowing the "incidental take" of CESA species (under appropriate approval and mitigation conditions), these non-CESA statutes did not include an incidental take permit process, and these species came to be referred to as "fully protected," even from CESA permitting. The different species protection statutory schemes resulted in legal uncertainties in both the CEQA compliance and species permitting process.

Gov. Newsom proposed to generally use CESA to regulate these pre-CESA, fully protected legacy species. The Legislature rejected the governor's proposal, and instead agreed to include fully protected species in CESA for only a limited time – and only for a very limited category of projects, most notably including wind and solar photovoltaic systems and related transmission lines. The proposal also would delete the peregrine falcon and brown pelican from the list of fully protected birds, benefiting projects affecting these widespread species. However, other legacy fully protected species, even if not endangered, continue to present a daunting obstacle to building anything in their vicinity.

5. Updates to Authorized Participation in Federal Green Bank Financing Fund: The federal IRA created a Greenhouse Gas Reduction Fund (sometimes called the "Green Bank") to be administered by the U.S. Environmental Protection Agency (EPA) to help achieve climate change goals. The Biden Administration has required that 40 percent of these funds be directed to assist disadvantaged communities. These federal funds are awarded competitively in three programs and generally include both direct funding and tax credits. There is no cap on the number of tax credits that can be awarded. The $14 billion National Clean Investment Fund will fund two to three national nonprofits to partner with capital providers to provide financing for climate projects. The $6 billion Clean Communities Investment Accelerator will fund two to seven "hub nonprofits" to build the financing capacity of local nonprofits and other entities to finance climate technology deployment in low-income and disadvantaged communities. The $7 billion Solar for All program will provide 60 grants to states, tribes, municipalities and nonprofits to expand the number of low-income and disadvantaged communities ready to accept solar power.

Gov. Newsom proposed to allow nine state agencies to work on securing Green Bank funding for the state. The Legislature rejected this proposal (and the promise of some return of Californians' federal tax payments to California).

6. Updates to Caltrans and DWR Contracting Authority Reforms: The remaining proposed reforms apply only to the California Department of Transportation (Caltrans) and/or the Department of Water Resources (DWR) and are directly related to expediting the project design, approval, construction and/or mitigation processes of these These reforms were largely accepted by the Legislature, and should expedite and improve construction and maintenance of Caltrans and DWR infrastructure.

Notes

¹ Jennifer Hernandez, In the Name of the Environment, Part III: CEQA, Housing, and the Rule of Law, 26 CHAP. L. Rev. 57 (2022).

² Inflation Reduction Act of 2022, H.R. 5376, 117th Congress (2021-2022); Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, H.R. 4346, 117th Congress (2021-2022) (Public Law 117-167).

³ "Building a More Inclusive and Sustainable California: Maximizing the Federal Infrastructure Funding Opportunity," May 2023. For disclosure purposes, co-author Jennifer Hernandez is a longtime member of the California Forward Leadership Council.

⁴ Pub. Res. Code Sections 21178 through 21189.3, adopted as SB 7 (2021).

⁵ Fish & Game Code Sections 2050 et seq.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.