Eminent Domain, Private Gain, and Economic Development: Post-Kelo Legal Changes from a Planner’s Perspective

Abstract

                 The Supreme Court’s June 2005 ruling in Kelo v. City of New London, 125 S.Ct. 2655 (2005), raised the hackles of private property advocates across the country, by declaring Constitutional New London’s taking of a group of homeowners’ properties as part of an comprehensive economic development plan for the City’s economically troubled Fort Trumbull area. Significantly, the plan did not call for transferring any of the properties to private parties, but as a whole was designed to capitalize on the recent arrival of a large Pfizer facility located adjacent to the Fort Trumbull area. Though the ruling was a superficial victory for planners and municipalities who wield the power of eminent domain, the major practical effect thus far has been inapposite to this victory. Property rights groups decry it as an unjustified extension of eminent domain, and many states have since passed or are now considering statutory and constitutional changes to limit eminent domain. The seeming prevalence of these voices in the media and the legislatures is the impetus for this report. I intend not to refute them per se, but rather to delve a bit deeper than the typical 30-second news byte into the legal and social principles and historical context behind the debate, to draw out some of the inconsistencies and false assumptions on both sides.

                  This report reviews the current state of the law regarding local and state use of eminent domain for economic development purposes. First and primarily, it discusses the content and legal effect of the Kelo decision, to clarify the underlying legal doctrine and policy issues. Second , it briefly summarizes the trends in states’ constitutional provisions and statutes regarding the use of eminent domain for economic development. Third, it evaluates the effects of Kelo on urban and regional planners. Finally, I will mention some tentative suggestions for legal and practical reform from a economic development planning perspective.

I. What are the federal Constitutional limits on eminent domain for economic development purposes? Did Kelo expand states’ powers beyond what they used to be?

The Constitution prohibits government[1] from taking private property for public use

without just compensation. The question in Kelo was whether economic development, specifically economic development intended in large part to benefit a private business (Pfizer), qualified as a “public use” justifying the taking. In affirming that it did qualify as a public use, the Court made explicit a number of legal principles that have evolved through the last 150 years and been applied in many previous cases, in both Supreme Court and state courts’ rulings. The decision in Kelo did not overrule any precedent or create any new rules or interpretation. There are two basic and interrelated legal doctrines at play: the public purpose (police power) doctrine, and federalism/deference doctrine.

a. Public Purpose / Public Use Doctrine:

In adjudicating the whether the taking is for a public use (thus constitutional) or not for public use (thus unconstitutional and illegal), the first “given” is that a taking for purely private benefit is not legitimate. Missouri Pacific R. Co., v. Nebraska, 164 U.S. 403 (1896). This rule was not in play in Kelo. New London’s plan incorporated a number of traditional public uses, such as parks and a museum. Also, the development plan specifically validated the private benefits to Pfizer and other businesses, for their spillover and multiplier effects on the greater New London economy. Therefore the takings in Kelo were not for purely private benefit, so they passed this initial test. The Court implied that it would impose a higher standard of scrutiny to a taking where the primary effect of the taking was a transfer of the property to a private party. This dicta has been seen as a significant victory for the private property rights advocates.[2]

The second doctrinal point on the meaning of public use concerns the evolution of judicial interpretation. The original Constitutional meaning of the term likely comported with the contemporary British perspective of public use: public use is any use authorized by the legislature, because property owners have already given constructive consent to legislative decisions via their parliamentary representatives. In other words, public use meant whatever the legislature said it meant, because the legislature spoke for property owners and therefore public use would never unduly or unjustly burden property owners.[3]  However, American courts’ first interpretations in the mid 19^th century reflected the opposite view: that a taking was legitimate only where the property was actually used by the public, for public parks, rights of way, etc. The Supreme Court explicitly rejected this view as early as 1896. Fallbrook Irrigation District v. Bradley, 164 U.S. 112, 158-164 (1896). Over time, “public use” came to mean “public purpose,” a much more inclusive concept: a taking could serve a public purpose by benefiting a public or private utility company (i.e., providing a service traditionally provided by the government), or by serving only a substantial portion of the public (e.g., a sports stadium), etc. By the time of Kelo, a taking for “public use” involved more or less anything except for a facially illegitimate transfer benefiting only a private party. As the majority opinion in Kelo wrote, “The disposition of this case therefore turns on the question whether the City’s development plan serves a “public purpose.” Note, Justice Stevens substituted “public purpose” for “public use”, not likely a semantic slip of the pen, but rather a reflection of the identity of these concepts in 5^th Amendment adjudication.

The third point follows from the second: economic development, based on the support and development of private enterprise, is a constitutionally valid public use. This issue was settled long before the Kelo decision. In Fallbrook (1896), the Court held that a taking was justified for the “prosperity of the community”. In Clark (date), a similar taking was justified because of its impact on the state’s “growth and prosperity”.[4] In the City of New York’s Planning Commission Report (1913), the government’s zoning power was justified as a protection of property values, and by implication, the protection of municipal property tax revenue.[5] In 1954, Berman v. Parker 348 U.S. 26, 33 (1954), validated takings of blighted property for redevelopment (partly for transfer to private parties): “The concept of the public welfare is broad and inclusive… . The values it represents are spiritual as well as physical, aesthetic as well as monetary.” Finally, in 1984’s Hawaii Housing Authority v. Midkiff 467 U.S. 229 (1984), where property was taken for private retransfer, the Court wrote that it was more interested in the public ends, not the means, of the state action in determining fairness. Thus, the public purpose/ public use doctrine encompasses economic development, and has done so through the 20^th Century.

The primary objection to the breadth of the public use doctrine is a slippery slope argument. It was expressed in spicy language in Kelo’s minority opinion, and has been much quoted in the popular press and delighted in by property rights advocates: “Nothing is to prevent the State from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.”[6] Given the above discussion, this language clearly takes a step too far. The majority explicitly declined to extend public use doctrine in this manner and instead limited the holding by pointing out the comprehensive and well-reasoned redevelopment plan upon which the takings were based. Without such  a plan, and without the level of economic blight evident in the redevelopment area, it remains unsettled even now whether a taking “for economic development” would be validated by the Supreme Court. While economic development may be a legitimate public use, there is plenty of room left for striking down takings that use “economic development” as a convenient façade for private development and gain. The slippery slope argument is largely a ghost argument, because the very nature of legal precedent protects against such extension.

 b. Federalism and Deference:

As interpreter of the Constitution, the Supreme Court’s role is to define the federal Constitutional limits of state and local action, not to judge the states’ internal rules and regulations, which might be more stringent than the Constitution requires. This is a fundamental precept of federalism. The primacy of state sovereignty (i.e., power up to the bounds of federal power) is the ground of the police power, to protect public health, welfare, and morals, which is in turn the ground of state and local power over land use, planning, economic development, etc. validating the preeminence of state and local power over planning, land use, economic development, etc. Therefore, even after Kelo, states determine the extent of their powers to exercise eminent domain, and may set a more restrictive standard than the federal constitution’s broad public use doctrine. For example, state law or municipal law may prohibit eminent domain for economic development purposes, without conflicting in any way with the 5^th Amendment. A state could even prohibit eminent domain altogether without a constitutional problem. Where state law is restrictive, the Supreme Court has no power to require the states to expand “public use” to all possible exercises of the police power, and where state law is expansive, the Supreme Court only has the power to limit it by prohibiting takings for purely private gain. Kelo does not allow eminent domain to the extent of the 5^th Amendment, but rather allows states to determine whether and how to limit eminent domain, up to the limits of the 5^th Amendment.

Furthermore, the courts (Supreme, federal, and state) have always maintained a level of deference to the legislature and executive branches of government. This is as basic a principal as the separation of powers: courts provide a check on the legislative and executive branches, but must not interfere unduly. In the realm of eminent domain law, state and local decisions are presumed valid unless their rationale or circumstances suggest some sort of non-public purpose or shell game. The Kelo decision maintained, but did not surpass, this level of deference to the states. The Court has long recognized that “[w]hen the [state] legislature has declared the use or purpose to be a public one, its judgment will be respected by the courts, unless the use be palpably without reasonable foundation.” United States v. Gettysburg Elec. Ry., 160 U.S. 668, 680 (1896). Of the 31 federal appellate decisions on public use doctrine since Berman, only one found a condemnation not to be a legitimate public use, and this was based on an interpretation of the more-restrictive Indiana state law.[7]

The proper extent of “public use” cannot be standardized federally. The states are the primary protectors of the public welfare, and local planning situations, in all their economic, political, and social complexity, are not well-suited for general rules. For the Kelo court to have imposed a federal prohibition on takings for economic development would have interfered in state decision-making in an unprecedented and revolutionary manner.[8]

II. How do states limit their own and their municipalities’ eminent domain power for economic development purposes?

Before Kelo, state statutes and constitutions limited eminent domain in a number of ways. Eight states prohibited takings for economic development, except where there is blight: Arkansas, Florida, Illinois, Kentucky, Maine, Montana, South Carolina, and Washington. “Blight” itself was defined differently in different states, as were the rules of how, whether, and when the locality exercising eminent domain must prove the existence of blight before proceeding. Other states simply remained silent, tacitly leaving takings decisions up to localities, though these are a minority and quickly shrinking in number. Generally, for all systems and rules of different states, state courts rarely annulled takings decisions. Of 513 cases in state appellate courts since Berman, only 17% held the taking was not for a legitimate public use, as defined by the relevant state law or constitution.[9]

After Kelo, by early August 2005, Alabama joined the allowing takings only for blighted property, 16 others proposed such laws, 7 more expected such proposals, and 6 were considering constitutional amendments for the same purpose: Alabama, California, Florida, Michigan, New Jersey, and Texas. The Castle Coalition (www.castlecoalition.org) maintains an up-to-date list of state and federal legislative activity on this issue. Legislation was proposed in both the federal House and Senate ("Protection of Homes, Small Businesses, and Private Property Act of 2005" (S.B. 1313)) to prohibit federal takings for economic development, and to prohibit the use of federal funds for any such takings by states or localities. The final outcome in state and federal law remains to be seen, but one observation is clear from the outset: all states reacting to the Kelo decision have reacted to restrict, not expand, their own and their municipalities’ power of eminent domain.

III. How does the Supreme Court precedent change or limit state and local powers? How do states’ laws restrict local planning and eminent domain?

Superficially, Kelo affirms local power to regulate and take property for economic development, and specifically recognizes the power of the comprehensive plan as evidence of  a legitimate public purpose. It also legitimizes the long-held practice of private-public partnerships in local planning. These have been an essential part of local planning since federal support of local development was cut in the 1980s, forcing municipalities to shift from traditional physical planning to more innovate and aggressive fiscal planning. Therefore, Kelo itself changes little in practice for municipalities and planners, merely reaffirming their existing power to set whatever level of restriction they desire on eminent domain.

In practice, the reaction of states to the Kelo decision might overwhelm Kelo’s superficial blandness and deferential (“pro-planning”) stance. The states reacting to the decision have all reacted to restrict local powers of eminent domain, not extend or explicitly preserve it. As discussed above, the many different flavors of restrictions make generalization difficult.

However, just as the states’ reaction to Kelo is the “flip side” of the Kelo coin, so is there a flip side to the new and potential state regulation of eminent domain. That is to say, extensive state restrictions on eminent domain for economic development will not necessarily tie the hands of planners in economic development projects. There are other legal doctrines and traditional practices that support economic development planning and provide alternative rationales for takings where economic development alone is no longer a legitimate public purpose. For instance, where takings are not allowed for economic development except where there is blight, there is often plenty of play in the definition of “blight” – it may be interpreted to mean both physical blight and also economic blight or depression. Similarly, other land use regulations based on the police power can influence or force land use patterns and patterns of ownership without rising to the level of full takings (such as re-zoning, environmental restrictions, etc.), thus avoiding the takings question entirely. Finally, restrictive state eminent domain laws are not necessarily deadly for local economic development planning because “good” planning will rarely, if ever, require the use of eminent domain.[10] A healthy public planning process, the development of reasonable alternatives to condemnation are two fundamental aspects of good planning that reduce the need for eminent domain. In most cases, properties that must be acquired for redevelopment projects are bought on the open market (this was the case even in Kelo). Thus, the extent of planners’ power to use eminent domain or other measures approximating eminent domain for economic development purposes remains to be seen, even in states where the law has been or soon will be changed to restrict local power.

IV. Suggestions for Meaningful Reform

A.     The Planners’ Argument for Using Eminent Domain for Economic Development:

Before evaluating current reforms or suggesting alternatives, it is worth recapitulating and clarifying the argument (from a planning perspective) for using the power of eminent domain for economic development, even based on property transfers to private parties. There are three major steps.

First, the health of the economy affects public health and welfare, and is therefore a legitimate object of the application of state power. The products of a healthy economy include the availability of goods and services, employment, income, tax revenue, and etc., all of which increase the public good. Merely increasing the tax base through private industrial or commercial growth is not the type of economic development at issue here, and should not be (and generally is not) suggested by planners to justify eminent domain. Though this is a favored argument of private property advocates, it sets up a straw man of “economic development”, reducing it to the narrower concept of “economic growth”. Development, as planners see it, includes not only improving local property values, but all aspects of social welfare achieved or improved through economic growth – job creation, increased income, more revenue for city services and infrastructure, increased civic engagement and pride, etc.

Second, the transfer of land and other incentives to private businesses by the government are in some circumstances necessary for the protection and expansion of a healthy economy. This step is where people get nervous about public-private partnerships and the potential for corruption and favoritism. Our economy is built upon private enterprise, so to protect the health of the economy necessarily requires the protection and promotion of private businesses when the market for whatever reason fails to develop and maintain them.

The critical question for planners remains open: in practice, does transferring or selling land below market price to private developers lead to economic development? Certainly private business development does not necessarily develop the local economy. Some case-based research suggests that private development can in fact retard growth by displacing driving out local competitors, displacing jobs, etc.  But in other cases, large-scale development induced in part by large property transfers can increase public welfare.[11] The practical legitimacy of public support of private or private-public economic development projects is largely a matter of circumstance: the strength of the proposed project, local economic conditions, public support for the project, etc.

The third step, the power to take private property for economic development, is quite obviously the most controversial. Private property rights must be viewed relative to the public’s interest in a healthy economy. Put differently, neither private property rights nor the public interest in a strong economy (and the state power to appropriate land) are absolute. If private property rights were indeed absolute, or even if the one property right at issue, transferability, were absolute, private property could be held for an exorbitant price when its provision was deemed necessary for the public good. This is the “holdout problem”, and many property rights advocates and property-protective courts recognize it as a valid exception to their anti-takings stance.[12] To hold property rights absolute in this manner would make property owners quasi-sovereigns, able to hold the public good ransom for a price of their choosing. The opposite extreme possibility, advanced rhetorically by property rights advocates, is that the government’s taking power is despotic, nullifying the value and security of the fundamental property right of transferability. Certainly no one is arguing that this should be the case, and our system of checks and balances, public participation in a representative government, and the protection of due process and the 5^th Amendment protect against it. Neither extreme, therefore, is realistic or desirable. Rather, the private and public interests in property are, therefore, relative interests and must be weighed situationally. They cannot be compared or determined by a general rule or by reference to unrealistic extreme cases– our laws and tradition of property rights do not tolerate despotic local control nor do they tolerate despotic private control.  The trick is to find the right (i.e., socially, politically, legally acceptable) balance between property rights and public interest, a balance that can only be found locally, situationally, and democratically.[13]

B. Suggestions for Reform:

The prohibitory state measures discussed above are not the best way to guard against local governments abusing the power of eminent domain or against private parties benefiting unjustly. Laws premised on the existence of blight just set up a new debate (“what is blight”). The most highly-restrictive state laws could create a reverse private-benefit problem noted above: property owners not wishing to sell voluntarily to the government for a redevelopment project would effectively hold the public interest for ransom, extracting whatever price they wish.

A better way to protect against the over-use of eminent domain and the potential for corrupt private-public cronyism would be process-oriented reform.[14] For instance, state law could require public hearings prior to takings, public explication of the rationale and projected purpose, etc. Requiring more extensive public participation (i.e., greater transparency) could reduce improper public-private partnerships. Another process reform could require an explication of all feasible alternatives to takings (to guard against any unnecessary takings) or require a percentage surcharge on takings to at least roughly compensate for the difference between market price and the property owner’s valuation of the property. Another process reform would be a state-wide oversight committee for all proposed takings, thus systematizing and requiring documentation and validation of public-private partnerships.