Koontz and the Future of Local Government Finance

At Strategic Economics, we’ve been closely following the commentary on the Supreme Court’s decision last week in Koontz v. St. Johns River Water Management District (and, to speak for myself at least, experiencing some intense flashbacks to land use law class!). For those of you who have been distracted from land use wonkery by the Court’s other major cases last week, Koontz could have important implications for local governments’ ability to mitigate the impacts of development and pay for infrastructure, protection of wetlands, affordable housing, climate change preparation, and other important community needs. The Court’s decision extended the Nollan/Dolan test – under which local governments may only require a land owner to dedicate or relinquish a portion of their property as a condition for a land use permit if there is a “nexus” and “rough proportionality” between the requirement and the permit – to the payment of fees, as well as the dedication of physical property. Previously, development fees had been subject to a less stringent test established under Penn Central Transp. Co. v. New York City, which asked local governments to balance the common good with economic impact on property owners (although many states, including California, had already enacted stricter rules). Now, local governments will need to establish that their fees have a direct relationship and are proportionate in amount to the impacts caused by a development project, or be subject to challenge under the takings clause of the Fifth Amendment. (For a more complete discussion of the case and all the legal mumbo jumbo, see the excellent summaries on The Atlantic Cities blog and CP&DR.) Cities have used development fees to pay for everything from wetland mitigation banks to new affordable housing, schools, streets, and sewers. Now, these fees could be threatened.

We often work with cities to identify potential funding sources for public improvements, and developer contributions can be an important component of these financing strategies. For us, the Koontz decision raises more questions than it answers. Some of the questions we’ve been kicking around the office are:

  • How far do the “nexus” and “rough proportionality” tests now extend, and how will local governments and courts decide what is a development fee (or to use the more technical term, a monetary exaction) and what is a user fee, special assessment, tax, or other types of fee that are not covered by Koontz? For example, will liquor license fees be subject to Koontz? As Justice Elena Kagan points out in her dissent, state courts have long struggled to make these distinctions among different types of fees. Now the distinction will become even more critical.
  • What will the Koontz decision mean for the emerging field of community benefit payments, in which developers voluntarily pay for community benefits (such as parks or streetscape improvements) in return for building at higher densities? Will these type of incentives be subject to the more stringent Nollan/Dolan test?
  • Are local governments in California somewhat protected from the effects of the ruling? California’s Mitigation Fee Act already requires local governments to establish a direct relationship between development projects and the improvement being financed, and to limit the size of the fee to the amount needed to pay for the improvement. However, some types of fees are excluded from the Act, such as park (Quimby Act) fees and fees collected under a development agreement.
  • Is Ehrlich Dead? As Bill Fulton wrote on CP&DR, the California Supreme Court’s ruling in Ehrlich v. Culver City had previously provided more flexibility for exactions that are applied as part of a general policy, rather than on a case-by-case basis. Does Koontz overturn that rule?
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