Ripeness, Permitting, and Public Choice

Administrative Law Practice Group Newsletter - Volume 2, Issue 3, Winter 1998

December 1, 1998

Donald J. Kochan

This article attempts to explain the incentives involved in the permitting process in light of the insights of the public choice theory of regulation. A large number of personal and economic activities in society now require that individuals receive governmental permission before they may legally act. Perverse incentives can sometimes flow from the power to grant or withhold such permission.

Part I describes the current state of the ripeness doctrine for regulatory takings review. Part II presents a very brief summary of public choice theory. And Part III posits that because the ripeness doctrine decreases the judiciary’s check over agency action, institutional biases against granting permits are formed. While the theories developed here apply to all "permission" oriented activities in society, from obtaining a liquor license to receiving a permit for constructing a house, and similar ripeness standards apply for other challenges including due process claims, this article will apply the theory by addressing regulatory takings claims in federal courts.

I. Ripeness

In addition to the "case or controversy" requirements of Article III, a regulatory takings claim must overcome prudential hurdles of ripeness before a court will adjudicate a permit denial. Only a regulation that "goes too far" results in a taking under the Fifth Amendment.1

Thus, many takings claims are blocked by the ripeness doctrine because "[a] court cannot determine whether a regulation has gone 'too far' unless it knows how far the regulation goes."2

A few select cases develop the doctrine. In Agins v. City of Tiburon,3 landowners facing zoning ordinances restricting the number of houses they could build on their property sued. Because they did not seek approval for any particular development on their land, the Supreme Court declined to reach the merits of this claim. In Hodel v. Virginia Surface Mining & Reclamation Assn., Inc.,4 coal producers and landowners challenged the enactment of the Surface Mining Control and Reclamation Act as a taking of their property. Hodel held that where the regulatory regime offers the possibility of a variance from its facial requirements, a landowner must not only submit a development plan but must also seek a variance to ripen his claim.

Williamson County Regional Planning Comm'n v. Hamilton Bank of Johnson City,5 reaffirmed by the Supreme Court in the 1997 case of Suitum v. Tahoe Regional Planning Agency,6 set the standard for ripeness review of takings claims. There, a developer's plan to build a residential complex was rejected by the local planning commission as inconsistent with zoning ordinances and subdivision regulations. Williamson requires that the plaintiff receive a final and conclusive determination from an agency on the permissible use of the developer's property. As the Court later indicated in MacDonald, a determination that one proposal is not permissible does not conclusively resolve the issue of what is permissible. Thus, at least resort to the procedures for obtaining variances is required to establish ripeness.

In MacDonald, Sommer & Frates v. Yolo County a local planning commission rejected a developer’s subdivision plan as inconsistent with the zoning regulations. MacDonald’s application of the Williamson County "final decision" requirement indicates that multiple proposals or variance applications will sometimes be necessary for a landowner's case to ripen. Because "[r]ejection of exceedingly grandiose development plans does not logically imply that less ambitious plans will receive similarly unfavorable reviews,"7 it cannot be said that every denial is the conclusive and final word on the use of property.

II. The Public Choice Theory of Regulation

The public choice or economic theory of legislation explains governmental behavior as the result of interest-group processes. Legislation, including the receipt of governmental "permission" to act, is a commodity supplied and demanded much the same as any other economic good. As such, permission or legislative protection passes to those that gain the greatest value from it — i.e., those who are willing to pay the most for it — independent of any concerns for overall social welfare. The payments through which this sale of legislation is accomplished include political support, trading of political favors, honoraria for speaking engagements, promises of future employment (in lobbying or elsewhere), bribes, or anything else of value to the politician. These are traded for governmental action beneficial to the interest group.

The primary phenomenon in the process described by this theory is that of "rent-seeking,"the process of expending resources in an effort to obtain favors from government. Special interests—including both those in favor of and opposed to land use regulation—seek to use the government to obtain higher prices for goods or services than would otherwise be obtainable under competitive market conditions. By successfully lobbying to impose regulations (and, therefore, costs) on a competitor, the interest group can make it too expensive for their competitor to act. The higher prices are called "economic rents." Similarly, a market participant may seek to obtain goods (e.g., environmental preservation) directly from the government at a lower cost than they might otherwise need to pay on the open market. Interest groups not only seek out affirmative acts by government officials, but may often bargain to block legislation or to receive regulatory forbearance. Realizing this, regulators have an incentive to engage in rent-extraction—a type of extortion in which negative regulatory action is threatened to occur unless the regulator receives a payment, or positive regulatory action is conditioned upon a payment.

Thus, in the permitting process, interest groups work to obtain favorable underlying regulations as well as to obtain favorable applications of those regulations, lobbying for either a grant or denial of a permit. The price of regulation is directly proportional to the durability of the agency’s action. Landes and Posner contend that judicial enforcement of interest-group bargains is a critical factor in lending such durability.8 As such, a high ripeness hurdle created prudentially by the courts insulates many permit denials from invalidation, thereby increasing the price those opposed to development will be willing to pay to secure such a denial.

III. Implications

In Suitum, the Court recognized that when an agency is vested with a high degree of discretion, an attribute characteristically possessed by land use boards and other permitting agencies, it becomes increasingly difficult to prove that the agency’s acceptance of an alternative proposal will not occur. If the agency would accept such a proposal, no regulatory taking has occurred because the regulation has not gone too far—i.e., it has not denied the landowner any economically viable use of his land. Thus, the ripeness doctrine prevents review and allows the agency broad powers to deny a permit or variance application without consequence. In fact, the Court recognized in MacDonald that "local agencies charged with administering regulations governing property development are singularly flexible institutions; what they take with the one hand they may give back with the other."

This is precisely the type of control that facilitates rent-extraction opportunities. Consequently, there are a number of reasons to predict that an agency will favor denials precisely because their non-final nature presents opportunities not available from granting permits.

First, the permitting system allows agencies to extract two types of payments. We assume that A will make a payment with his initial application to obtain the permit. Next, competitor C will make payments to the agency to facilitate a denial. The ability for A, the applicant, to reapply decreases durability of that denial, so it decreases the amount C will pay (conversely, the amount L, the regulator, can extract).

After the initial denial, L can hold out the possibility of reapplication. And because the initial denial is not ripe for review by the courts, reapplication may become A’s only option. This means that L can extract payments from both A and C again. The process might continue perpetually so long as both A and C are willing to pay to play, or at least until the issue becomes ripe for review. Of course, even then the process might continue if A has a greater likelihood of receiving the permit from the agency than receiving a ruling invalidating the agency’s action.

Multiple payments are likely to be in an agency official’s best interest. While a legislator may fear losing an election and will try to make a more durable commitment to obtain as large a payment in the first instance as possible, agency officials often have career positions and will be net winners by promoting several smaller payments over time rather than receiving one larger initial payment.

Additionally, the interest group’s initial payment may be larger than expected. While the ability to reapply decreases durability of the initial deal, a strong ripeness doctrine means that C need not worry about a judiciary upsetting the durability of the initial denial.

A high ripeness hurdle also uniquely affects L’s willingness to engage in a deal. The hurdle diminishes one of the functions of the compensation component of the takings clause. It increases at least marginally the political liability to government officials when engaging in rent-seeking because the taxpayers, though dispersed, must pay if a taking is found and the award is likely to be more transparent. When an official’s decision cannot be challenged because it is not ripe, the merits are not reached so compensation cannot be awarded. L will not demand as high a price for a denial because his liability is lower than with similar actions. A cheaper commodity attracts more business and the clause fails to function to impede rent-seeking.

Also supporting the prediction that an agency will favor denials is the relative bargaining power of the typical parties in a land-use permitting situation. The special interest is likely to have a larger influence in the political process, because unlike the landowner, the interest group is probably a repeat player in the political process and thereby able to offer more to legislators. Property owners are burdened by their limited involvement with the regulators relative to other concentrated groups with more clout, such as environmental groups, the historical preservation lobby, or other supporters of land use regulation.

Rent-seeking usually works because it concentrates a benefit on a particular interest group while dispersing the costs among the general public. While the denial of a land use permit concentrates a cost on an individual landowner and his information costs in discovering the impact of the regulation are low, there is little incentive in the individualized permitting process for others to join in his effort to obtain a permit or variance; and he faces the repeat-players who are not only more organized in their opposition but are also able to offer the regulator more. As a result, the economically rational regulator is likely to be more responsive to the lobby opposing a permit. For example, if a regulator too often grants variances to a specific land-use regulation, the durability of future regulations will be questioned. Thus, the price an interest-group seeking to obtain another regulation in the future is willing to pay for that regulation is lowered due to the decreased confidence that the regulation will be applied to reach that interest’s goals.

Finally, an agency is likely to exhibit the self-perpetuating tendencies exhibited in bureaucracies—i.e., an incentive for the agency to justify its existence and growth. If all applications are granted, the perception is that very little "regulating" is occurring and it becomes difficult to justify the agency’s existence. Moreover, when a denial allows another application, the agency creates more work for itself. An initial permit approval gives it only one job with relation to that property, plan, etc. However, a denial, even when not everyone will reapply, often gives it additional work. It makes sense for the agency, even if it plans to grant the permit, to at least require some changes in a proposal.

Nonetheless, permit applications do get approved. Some activities are too clearly permissible under the regulations to deny them without bringing transparency to interest-group politics. Moreover, sometimes it will be of marginal interest for the anti-development lobby to oppose a permit. Thus, an applicant may outbid the opposing interest group. Furthermore, the development lobbies are somewhat influential, although not as much so for the simple, unconnected landowner. But finally, too many denials may discourage initial applicants. L will take this into account. If any payments are to flow to L from the potential applicants, they must believe there's at least a reasonable chance of success (as must reapplicants so as to be encouraged to reapply). Similarly, the interest groups opposing a permit must believe that there is some risk that an application to which they are opposed will be granted. If there is not, there will be little incentive to make a payment to L when the same result will obtain absent such a payment. For this reason, it is in L’s long term interest to hold out the possibility of harm to C’s interest by granting some permits.

This article presents only a positive analysis and theory, admittedly simplistic at times due to format. Empirical testing of the theories and assumptions presented is necessary before any confident conclusions can be drawn as to the validity of these hypotheses. Should these theories prove accurate, however, further research into solutions is also appropriate given the well-documented literature indicating the inefficiencies and inequities of rent-seeking and rent-extraction. For example, the Court in Suitum was encouraged to adopt a rule holding that a single variance application is sufficient to make a claim ripe, but it declined to do so. Even if such a rule were adopted, however, only the ripeness hurdle would be lowered while the difficult task of establishing a taking of private property under the current jurisprudence would remain.

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   1. Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922).
   2. MacDonald, Sommer & Frates v. Yolo County, 477 U.S. 340, 348 (1986).
   3. 447 U.S. 255 (1980).
   4. 452 U.S. 264 (1981).
   5. 473 U.S. 172 (1985).
   6. 520 U.S. 725, 117 S.Ct. 1659 (1997).
   7. 477 U.S. at 353, n. 9.
   8. William M. Landes & Richard A. Posner, The Independent Judiciary in an Interest-Group Perspective, 18 J.L. & Econ. 875-901 (1975).

Donald J. Kochan received his J.D. from Cornell Law School. Among Mr. Kochan's publications are studies on the property rights implications of takings law and forfeiture law, both written while an adjunct scholar with the Michigan based Mackinac Center for Public Policy.