As economists read news of a recent ruling by the Minnesota Court of Appeals denying certain infrastructure charges imposed on land developers, many probably reacted: “Where was Judge Posner when we need him?”
Sometimes law and economics are in basic agreement on public policy issues. And sometimes they differ. This is one of those times, although some jurists might reach a different conclusion than this court.
Richard Posner, who stepped down after 36 years as a Federal Appeals Court judge three weeks ago, is relevant because he pioneered a movement within legal scholarship to weigh practical economic considerations when reaching decisions. This has had greatest impact on antitrust and patent law, but also involves myriad other legal issues.
The policy question here in Minnesota is whether a municipality, in this case Woodbury, can charge a property developer for future infrastructure improvements not actually part of a proposed project. Developers clearly can be made to pay for new infrastructure such as sewer mains, street widening and storm water channeling that are directly and immediately related to a new development. The question was about upfront payments imposed to fund more general municipal infrastructure capacity for impact that may be caused by the development at some future date, and at perhaps at a distant location.
Most municipalities have not used such mandatory fees, although many negotiate payments as part of general regulatory approval of projects. That’s fine. But the court of appeals ruled that mandatory fees are not legal.
This is an old issue in urban planning and in microeconomics. At heart it is about whether the process for managing new urbanization is economically efficient in using resources to meet the needs of society. Decades ago, research indicated that usual practices were not efficient.
The problem is one of “average costs” versus “marginal costs” of new development and how these are born by purchasers of new homes versus existing property owners in the municipality in question.
Say a new development of 100 houses will mean that an existing sewer main will need to be 24 inches in diameter instead of 18 or that increased traffic will require widening of a half mile of two-lane street and installation of signals at two intersections. The increase in the costs of operating and amortizing the sewer or street systems, compared to what these costs would have been with the 100 new houses, is the marginal cost of the project.
Existing homeowners will be no better off than before. The increment to societal benefits goes to those who can have a new suburban home. This increase in total satisfaction to society is the marginal benefit.
If the policy of the municipality is to simply build the new infrastructure in response to developer initiatives, and then pay the increased costs by upping utility user fees or local property taxes, the average cost rises. All residents or property owners pay more. New ones don’t pay any more than existing ones. The increase in benefit goes to a few but the increase in cost goes to all.
It is a central principal in microeconomics that any time marginal benefits do not equal marginal costs, resources are wasted. That is another way of saying economic efficiency is reduced. In this case, the outcome is that too many resources will go into development of non-urbanized land at the fringes of cities. This is the problem of “urban sprawl.”
This is not a controversial topic among economists that varies with their political orientations or which school of thought within the discipline they identify. It is a consensus view
As this inefficiency became clear to economists, urban planners and local government managers decades ago, there was a move to make developers pay for needed infrastructure upgrades — the pass-through being higher prices for the homes in the development, not higher taxes throughout the city. Directly related increments to water or sewer system capacity, streets and roads, surface water drainage and the like were charged to new projects. These charges are no longer being challenged in court. Their legality is clear.
However, there are not clear demarcations between direct and indirect. One 50-house project taken alone doesn’t necessitate a major increase in a sewage treatment plant or changing a two lane arterial street with signals at half-mile intervals to a six-lane one with signals every two blocks. But as multiple small developments accumulate over time, at some point major projects are triggered.
To economists, the fact that identifiability gets harder does not change the fact that when new homeowners don’t face the marginal costs to society, resources are wasted, And it is pretty clear to economists that it is home purchasers rather than property developers who ultimately pay the costs. But developers must write the initial checks, and it does skew the attractiveness of their product relative to alternatives. If a young double-income no-kids couple is considering a loft in a renovated warehouse right on the Green Line versus a townhouse in Eagan, an extra $5,000 added to the price of the latter because of municipal assessment for future general infrastructure improvement will affect their decision. So the developers are the ones who went to court.
Economists also know that, at some point, transaction costs and imperfect information overwhelm the efficiency benefits of allocating every possible future cost to specific current projects. Some costs of municipal growth eventually must be spread across general taxpayers.
So what might Judge Posner say? The economics of the underlying issue are neither complicated nor controversial among economists. Drawing a workable administrative line is. It is not clear that Woodbury or other municipalities with similar fees will appeal or seek new legislation authorizing their practice. I think the chances of the latter are slim to none in the existing political climate. But Posner has a gift for identifying the practical legal issues and economic tradeoffs inherent in situations precisely like this. If he had been available as an expert witness or to draft a friend-of-the-court brief two years ago, perhaps the appeals court decision might have been different. At least the level of the debate and of public understanding of the issue and why it mattes could have been higher.