Potential Financial Impacts of I–933:
Concerning Government Regulation of Private Property
This paper has been prepared by the Office of Financial Management (OFM) in response to questions concerning the financial impact of Initiative 933, which has qualified to appear on the November 2006 ballot. This information is provided for analytical purposes only and is not intended as an expression of support for or opposition to the proposed measure.
Overview
The initiative would require a government to consider and document certain factors prior to enacting laws regulating private property. The measure also would require, with specific exemptions, a government to pay compensation to private property owners who could show that the use or value of their property would be, or in the case of regulations adopted since 1996, had been damaged by government restrictions. The compensation would be in addition to compensation already afforded by the state and federal constitutions.
Background
The state and local governments enact and enforce laws that affect the use of real property, including laws that impose restrictions on use or development of real property. These laws are subject to constitutional and statutory requirements that provide certain protections to private property owners.
Washington’s constitution requires state and local government to pay an owner of private property just compensation before taking or damaging private property for a public use, and, in general, prohibits government from taking private property for private use. The federal constitution provides similar protections. A common example of the requirement for just compensation occurs when government acquires private property to build a public road. The constitution requires government to pay fair market value for private property taken to build the road and for damages to private property used for the road building but not taken.
The constitutional requirement to pay just compensation also applies under limited circumstances to laws that restrict the use of private property. If the restriction completely eliminates the owner’s economic use of real property, or if the restriction involves a physical intrusion onto the private property, then just compensation is generally required. Whether regulations or restrictions on use of real property otherwise amount to a taking or damaging of private property under the constitution (and thus require payment of just compensation) depends on the particular effects on the property.
A restriction on real property may require just compensation depending on the economic impact of the restriction on the property, how the restriction affects legitimate property uses and the property owner’s reasonable investment-backed expectations, and whether the restriction reflects a reasonable means for achieving an important public objective.
Under the state and federal constitutions, a property owner may bring an action for just compensation to obtain the fair market value of property taken or damaged by the government, if the government has not paid compensation. Under the Washington Constitution, the property owner may also bring an action to invalidate government action that is taking or damaging private property and there is no public use, only a private use.
Under current state law, a property owner who has applied for a permit to use property may recover damages, attorney fees, and other costs where a state or local agency action on the permit application is arbitrary or capricious, or if the state or local agency does not act within time limits established by law (Chapter 64.40 RCW). Under various laws, a property owner may challenge state or local government restrictions on the use of property and obtain an agency review or judicial remedy if a restriction is not allowed under state or local laws. These statutory protections for property owners are in addition to the constitutional right to just compensation described above.
Under current state law, state agencies and local governments are required to follow an orderly and consistent process using advice and education from the Attorney General’s Office to evaluate proposed actions affecting the use of property and to avoid taking or damaging private property without just compensation (RCW 36.70A.370). The process applies to all state agencies and to those local governments that plan and regulate land uses under the Growth Management Act.
Initiative 933 would provide a new avenue for compensation, using a different standard than the current deliberative processes in determining just compensation to property owners. The initiative would allow property owners to require government compensation when owners can show that the use or value of their property would be, or in the case of regulations adopted since 1996, had been damaged by government restrictions.
Summary of Fiscal Impact
Initiative 933 is estimated to cost state agencies $2 billion to $2.18 billion over the next six years for compensation to property owners and administration of the measure. In the same time period, the initiative is estimated to cost cities $3.8 billion to $5.3 billion, based upon number of land-use actions since 1996, and is estimated to cost counties $1.49 billion to $1.51 billion. Costs are derived from the requirement that, with specific exceptions, state agencies and local governments must pay compensation when taking actions that prohibit or restrict the use of real and certain personal property.
Assumptions Supporting Fiscal Impact Statement
The initiative has a number of components that would cost state and local governments to implement or administer. Prior to adopting any ordinance, regulation, or rule which may damage the use of private property, state and local governments would be required to document their impact and evaluate less restrictive alternatives. State agencies assume that this work would be accomplished as part of the rule making process under the Administrative Procedures Act (Chapter 34.05 RCW) and be similar to many of the requirements of the Regulatory Fairness Act’s Small Business Economic Impact Statement (RCW 19.85.030).
It is assumed that this analysis would apply to all new rules, regulations, and ordinances, although the level of analysis would vary depending upon the action. Given current rule making schedules, state agencies estimate additional costs to the rule making process of $24 million over six years. Based upon permit activity it is estimated to cost cities between $80 million and $103 million and counties $28 million and $36 million over six years.
The Initiative requires state and local governments to pay property owners prior to enforcing or applying any ordinance, regulation, or rule to private property that owners can show results in damage to the use or value of private property. It is assumed that claims for payments would be triggered primarily when private-property owners file permits with state agencies or local governments for activities such as development and harvest, etc. and state agencies or local governments place restrictions or deny a permit that would require compensation. Claims would also be triggered when a state or local government takes an action to enforce an existing rule, ordinance, or permit.
State agencies estimate that claims would likely be made for restrictions placed under the Forest Practices Act (Chapter 76.09 RCW), the Surface Mining Act (Chapter 78.44 RCW), the Hydraulic code (Chapter 77.55 RCW), which protects fish life, Bald Eagle Site Management Plans (RCW 77.12.655), the state Clean Water Act (Chapter 90.48 RCW) and the Shoreline Management Act (Chapter 90.58 RCW). By analyzing historical permit data, state agencies assume that they would be required to process approximately 5,920 claims per year. Based upon the experience of state agencies that currently process claims under other laws, it is estimated to cost state agencies $1.86 million over the next six years to process claims under the initiative.
Some of the programs that likely would result in claims for compensation from local governments include local land-use laws, local shoreline-management plans, and critical-area designations. Claims processing costs for local governments are assumed in the estimates for the additional analysis required for rule or ordinance adoption.
As part of the claims process, state agencies would need to complete detailed analyses to verify compensation claims. Assuming a cost of $7,500 per analysis for real property and $2,600 per timber analysis, it is estimated to cost state agencies $115 million over six years. Using similar assumptions, appraisals are estimated to cost cities between $130 million and $556 million and counties $13 million and $66 million over six years.
Once the amount of compensation is determined by a state agency or local government the potential exists for claimants to disagree with the level of payment. Using existing laws, it is assumed that appeals related to compensation levels would be directed to Superior Court. As a result of the passage of Measure 37, state agencies in Oregon are finding that an average of 6 percent of final decisions are being appealed to court. Because the Initiative is more expansive than Measure 37, it is assumed that 5 percent to 20 percent of all claims (275 to 1,100) for state agencies would be appealed annually to Superior Court. The initiative would increase state agency litigation costs and costs of attorney services between $29.8 million and $98.8 million over the next six years. Using a standard cost based upon population, it is estimated to cost cites between $126 million and $161 million over six years and counties $35 million and $45 million over six years for litigation costs.
The Office of the Administrator for the Courts estimates that it will cost county governments an additional $495,000 to $830,000 over the next six years for appeals to Superior Courts resulting from state agency decisions. The state would also see increased costs of $12,773 to $51,000 over six years because the state pays half the salary and all of the benefits for Superior Court judges. There will be additional costs to the Court system from cases resulting from decisions by cities and counties. Assuming a total of 5,000 appeals were made for state and local government actions there would be an additional $2.6 million in first year costs and $1.5 million in subsequent years. It is likely that some of these decisions will be appealed to the State Court of Appeals. The appeal rate for civil property cases in 2005 was 7.8 percent. For state agency appeals this would result in additional costs to the state of $69,000 to $277,000 annually. Costs of local government appeals was not included but if you assume that 5,000 appeals to Superior Court would result in 390 cases in the Court of Appeals, the total cost to the state would be $1.2 million annually.
Aside from specific exemptions, the initiative requires state and local governments to pay compensation when they take actions that prohibit or restrict the use of private property, which is defined to include all real and personal property protected by the federal and state constitution including but not limited to interest in lands, buildings, crops, livestock, mineral and water rights. Calculating possible compensation amounts is difficult given the large number of jurisdictions (multiple state agencies, 277 cites, and 39 counties), the lack of parcel level information related to valuation, and the number of landowners/parcels that have had a change in land use designations since 1996.
State agencies have estimated a range of compensation of $344 million to $352 million annually or $1.89 billion to $1.9 billion over six years. Programs included in this estimate are permits issued by state agencies under the Forest Practices Act (Chapter 76.09 RCW) and the Surface Mining Act (Chapter 78.44 RCW) by the Department of Natural Resources; Bald Eagle Site Management Plans (RCW 77.12.655) for residential construction issued by the Department of Fish and Wildlife; 401 Water Certification Permits for the protection of wetlands, and for Shoreline Conditional Use Permits and Variances issued under the Shoreline Management Act (Chapter 90.58 RCW) by the Department of Ecology.
This estimate does not include compensation that may be required under the Hydraulic code (Chapter 77.55 RCW). The Department of Fish and Wildlife estimates that it issues 900 Hydraulic permits annually that are likely to impose restrictions requiring compensation under the Initiative. However, it is impossible to estimate a level of compensation due to the highly site-specific requirements for these permits. Also not included are estimates of compensation under the Forest Practices Act for restrictions associated with harvest on unstable slopes or for marbled murrelet habitats. An estimate for restrictions for Bald Eagle Site Management Plans occurring on nonresidential permits is also not included. However, there are likely to be some overlap between the compensation estimates made for the Forest Practices Act and Bald Eagle Site Management Plans for forest practices. Also not included are potential claims related to Department of Health requirements for setbacks to protect drinking water systems or requirements for setback and lot size for onsite sewage systems since it is assumed that these requirements are necessary to protect immediate harm to human health and safety and are exempted by the Initiative.
It is estimated that cities would be required to pay between $3.5 billion and $4.5 billion in compensation for actions that may have occurred since 1996. These estimates were calculated based upon a representative survey of 26 cities across the state. This survey asked cities to estimate the impact of the initiative but did not proscribe a particular methodology. Each city responded using a variety of methods including consideration of developed and undeveloped parcels, building permit activity levels, valuation of land under critical areas or shorelines regulations, and calculations of assessed values.
Cities were then grouped into five impact categories based upon their growth rates between 1996 and 2006 as determined by the Office of Financial Management. Cities were assigned impact factors that increased with higher levels of population growth and were based on a conservative range of individual city survey responses. These impact factors were then multiplied by the assessed value for each city to determine total compensation. This calculation resulted in potential obligations for actions that may have occurred from 1996-2006. These compensation estimates are likely to be conservative in that they only total approximately 1 percent of overall statewide city assessed value.
It is estimated that county governments planning under the Growth Management Act could see potential claims for compensation of approximately $1.4 billion over six years. These estimates were made first by estimating the privately owned acreage within unincorporated county contained within the Urban Growth Area (UGA). It was assumed that an equivalent amount of privately owned land outside the UGA would most likely be impacted under the initiative. This acreage was used as a proxy for the potential area adjacent to the UGA most likely to be developed into a more intensive use. On a statewide basis, this represents an average of 2.5 percent (median 1.4 percent) of all private acres outside the UGA. The number of acres per county was then multiplied by the per acre difference in assessed value between open space, forest and agriculture lands and the true and fair market value as determined by the Department of Revenue. This value was then multiplied by the annual conversion rate of open space, and agricultural lands for each county to obtain an annual estimate. This estimate is conservative because there is still a difference in fair market value as determined by DOR and the actual market value for a parcel.
For counties not planning under the Growth Management Act, potential compensation is most likely to occur for restrictions on lands contained in critical areas (fish and wildlife habitats, geologic hazards, frequently flooded areas, etc). No estimate is included for a loss in value for counties not planning under the Growth Management Act because of the inability to determine the number of acres in each county designated in these categories.
Although these compensation numbers seem large, they are in a range of what has been occurring in Oregon following the passage of Measure 37 in November 2004. As of August 11, 2006, 2,949 claims had been made, affecting 168,677 acres, worth $3.9 billion. Since the Initiative is broader in scope than Measure 37, higher compensation values are anticipated.
These compensation estimates are based upon the assumption that state agencies and local governments will be unable to waive any current restrictions that may reduce the use or value of private property. It is also assumed that the state will not delegate back to the federal governments federally delegated programs (i.e. Clean Water Act, Clean Air Act etc.). No estimate has been made for any future actions taken by governments that may require compensation or attempt to reduce liability caused by the Initiative.
The compensation estimates are also based primarily upon potential loss in value to real property. No estimate has been made for any potential loss to personal property.
