Koontz v. St. Johns (2013) – how US communities combat externalities…

Good schools, clean water, effective sewage treatment, road maintenance, great parks & recreation facilities: communities that score well on this are the desirable, “livable” ^[1]This is becoming even more important in preparing for an aging society, as AARP’s recently released “livability-index” illustrates. places with growing economies^[2]Richard Florida, Charlotta Mellander, and Kevin Stolarick, “Inside the Black Box of Regional Development—human Capital, the Creative Class and Tolerance,” Journal of Economic Geography 8, no. 5 (September 1, 2008): 615–49, doi:10.1093/jeg/lbn023.

Staying “livable”, however, requires perpetual reinvention and reinvestment. It takes vision and a community pulling together. And, of course, money. When growth happens, or expensive infrastructure like sewage treatment needs updating, ongoing (tax) revenues are rarely sufficient. Borrowing through bonds used to be the solution, but fast-growing cities outpaced even their borrowing capacity. So they started passing some cost on to developers through ‘exactions’. The rational was straightforward: if the presence of public infrastructure is expected when someone buys a house (and is thus reflected in the house’s price), the developer’s cost should reflect that investment – otherwise it would be a community-paid-for windfall for the developer.

Externalities

Exactions were, of course, challenged in court, but are now common practice^[3]TIF (Tax Increment Financing), where local governments borrow against expected increases in property taxes, became another popular method of financing infrastructure. The reasoning was that, if revitalizing a downtown would be bound to increase tax revenues, a downtown district could then agree to set aside those increases for loan paybacks. When property values plummeted with the Great Recession of 2007 TIF financing became risky, and experienced state-imposed restrictions.. They not only contribute to infrastructure, they also create an opening for steering development the right way. Think of developments in flood-prone areas, or remote areas subject to frequent wildfires. Whereas signs like Nashville’s “High water mark” may create awareness, exactions put a price tag on decisions. Exactions can then pay for the infrastructure to prevent the flooding disasters (and flood insurance payouts) that we have seen in recent decades, or signal that a particular development is simply uneconomical. Having developers internalize the cost of these risky developments, i.e. making the cost of infrastructure or mitigation part of the development instead of pushing it to the community, makes economic sense. The trick, then, is for developers and community to agree on who should pay for what costs.

Nexus

This is where the 2013 Supreme Court case Koontz v. St.Johns comes in. Coy Koontz Senior wanted to develop his property. The problem was that 90% of the proposed development was protected wetland. When Florida’s St. Johns River Water Management District wanted mitigation, Koontz offered to deed a conservation easement on about three quarters of his property. The district did not feel this was sufficient, and one of their suggestions for additional mitigation was for Koontz to hire contractors and make improvements to District owned wetlands several miles away. Koontz sued, stating that excessive government demands prevented him from reasonable development of his property (i.e. a Fifth Amendment property “taking”). The case ended up at the Supreme Court, which referred it back for additional judicial review, but with the following ruling: (1) a permit denial can indeed still cause a taking (one of the reasons the Florida Court had decided against Koontz), and (2) the level of monetary exactions should have a fair relationship to the issue. Planning organizations and law schools alike immediately zoomed in on the difficulty of “The Federal Constitution thus [deciding] whether one town is overcharging for sewage, or another is setting the price to sell liquor too high.” As an American Planning Association amicus brief cites the Supreme Court’s dissent: “If every suggestion [for mitigation] could become the subject of a lawsuit […], the lawyer can give but one recommendation: Deny the permits, without giving Koontz any advice — even if he asks for guidance.”

Koontz is seen by some as just another hurdle to deal with economic externalities: situations where, unchecked, developments or activities push costs on to us as a community. Others see the glass as half-full, however, where Koontz inspires a more transparent way to calculate the cost of externalities. They argue that Koontz may lead to a more transparent way to deal with Climate Change^[4]See also: “Legal Lessons”, Aug/Sep 2015 APA Planning Magazine August 2015. Available to subscribers at: https://www.planning.org/planning/2015/aug/legallessons.htm, and allow us to put a price on carbon.

Scarcity

British Economist Lionel Robbins is often quoted for his 1935 definition of economics: “the science that studies the relationship between ends and means that have alternative uses” (this quote is from the Britannica). What Robbins actually said was: “the relationship between ends and scarce means”^[5]Lionel Robbins, An Essay on the Nature & Significance of Economic Science, (London: Macmillan, 1935), 15, Available at https://mises.org/library/essay-nature-and-significance-economic-science.. Scarcity makes all the difference. In a world where an increasing population challenges the carrying capacity of our environment, economics can help make exactions a tool to manage that scarcity. I better side with the “glass-is-half-full”…