A dispute between a 72-year-old retiree in Placerville and El Dorado County over a $23,420 building fee got its day before the country鈥檚 highest court Tuesday morning in a case with potentially seismic consequences for local government budgets and housing markets across California and the country.
At issue is just how far cities and counties have to go to justify 鈥渋mpact fees鈥�: fees slapped on new construction projects in order to offset the toll new developments take on local infrastructure.
The stakes are especially high in California, where impact fees can tack on hundreds of thousands of dollars to new housing projects that are already .
The plaintiff in this case wants to put new guardrails on those fees. But that would come at a sharp cost: Local governments, restricted by California law from raising property taxes and borrowing funds, disproportionately rely on impact fees to pay for infrastructure like roads and sewer lines.
The justices waded deep into the legal weeds of the case during oral arguments today and seemed alternately frustrated and bemused as they grappled with whether El Dorado County鈥檚 fee should be treated like the government were seizing a homeowner鈥檚 property, a simple tax or something in between.
The legal saga began in 2016 when George Sheetz, a retired engineering consultant, built a small manufactured home on a vacant tract in the Sierra foothill city of Placerville. The county stuck Sheetz with the five-figure 鈥渋mpact fee鈥� to fund local roads, highways and bridges. Sheetz paid up, but then sued.
With the backing of a conservative legal nonprofit, the Pacific Legal Foundation, he argued that, contrary to a , the county had failed to prove that the fee accurately reflected the wear and tear his small project would likely leave on local roads.
鈥淓veryone loves good roads and schools and public infrastructure, so the government certainly has many tools at its disposal, including taxes to pay for those,鈥� said Paul Beard, Sheetz鈥檚 attorney, in presenting his case before the court today. 鈥淲hat we鈥檙e saying is that the government can鈥檛 select a few鈥roperty owners who happen to need a permit at any given time 鈥� to select them to bear the burdens of paying for that public infrastructure.鈥�
The lawyer representing the county countered that officials had done the legally required due diligence to justify the fee. But even if they hadn鈥檛, they added, fees passed by local elected bodies that apply equally to all applicants 鈥� as opposed to one-off exactions levied on a specific development 鈥� don鈥檛 warrant such close judicial scrutiny.
Requiring cities and counties to enact fees only after they鈥檝e done a thorough, property-specific analysis of the impact a proposed development would have on local roads, for example, 鈥渨ould disrupt if not destroy their ability to fund capital intensive infrastructure necessary to serve new development, bringing such development to a grinding halt,鈥� said Aileen Marie McGrath, the attorney for El Dorado.
With so much potentially at stake, the case has drawn the attention of a wide array of competing interests. Building industry groups, conservative property right defenders and Yes In My Backyard advocates have all filed briefs pleading with the court to force local governments to clear a higher bar before charging for the right to build.
A decision against Sheetz would only encourage 鈥渦nconstrained exactions on new development, further adding to the crushing costs of housing in California and other jurisdictions that refuse to require governments to show any proportionality between the amount of fees demanded and the alleged impacts of new development,鈥� the from June.
鈥淯nless you want a dirt road and like, you know, bandits out there because we don鈥檛 have a sheriff, we need to have some level of an assessment done.鈥�MARK NEUBURGER, LEGISLATIVE ADVOCATE, CALIFORNIA STATE ASSOCIATION OF COUNTIES
City and county government groups, along with the governments of both the state of California and the United States, have come to El Dorado County鈥檚 defense.
Many court watchers expect the court鈥檚 conservative majority to side with the burdened property owner and require the cities and counties to work a bit harder to justify the fees they impose on new home construction. It remains unclear for now just how far such a ruling could go and whether it might place fresh limits on other widely used housing and revenue-raising policies.
鈥淚t seems kind of like a nightmare to figure out where the line should be drawn,鈥� Justice Amy Coney Barrett said.
A uniquely California case
Though today鈥檚 debate took place in the ethereal clouds of abstract constitutional consideration, for California developers, the issue at hand is plenty concrete. As a group, they鈥檝e spent a generation griping about impact fees.
As of 2015, the in California was more than quadruple what it was in other states, according to a survey. While such fees were found in a 鈥渕inority鈥� of jurisdictions outside of California, they were 鈥渧irtually universal鈥� here.
In a 2018 study from , impact fees in a survey of California cities ranged from between 6% to 18% of the local median home price.
It鈥檚 not especially surprising that California cities and counties have come to rely so heavily upon this particular form of financing.
During the high-growth decades of the 1950s and 鈥�60s, local governments could easily assume that new development would pay for its own added toll on publicly funded roads and pipes through increased property tax revenue. That changed in 1978, when voters passed , capping local property taxes and muzzling the ability of local governments to borrow or raise new taxes.
That鈥檚 led to some frustration from El Dorado County and its defenders. If impact fees are intolerable, some have asked, what are the alternatives?
鈥淯nless you want a dirt road and like, you know, bandits out there because we don鈥檛 have a sheriff, we need to have some level of an assessment done,鈥� said Mark Neuburger, a legislative advocate for the California State Association of Counties. 鈥淚t鈥檚 unfortunate when it鈥檚 a noticeable size of your project, but we live in a modern society and this is just part of the expense of paying for it.鈥�
Sheetz and his supporters contend that these fees aren鈥檛 justified solely on meeting specific, related infrastructure costs and point to the wide variability in fees from one city to the next 鈥� even between neighboring jurisdictions.
As the city of Oakland , its typical fee on large apartment projects comes out to $39,264 per unit. The neighboring city of Berkeley, sets the tab at $66,594. Across the Bay in San Francisco, the fee is $74,597.
At the more extreme end, the 2018 Terner Center study found that the city of Fremont imposed a single-family home impact fee of $157,000.
鈥淵ou look at places like Fremont and they have these immaculate parks that are funded very significantly by impact fees,鈥� said David Garcia, the center鈥檚 policy director. 鈥淭here鈥檚 a question whether it鈥檚 reasonable to want to have top notch services and infrastructure, but for that to come on the backs of new residents.鈥�
A fee or 鈥渙ut-and-out鈥� extortion
The origins of this particular debate date back to another legal dispute brought by Californians trying to build a new house.
In the early 1980s, James and Marilyn Nollan, a Ventura County couple, decided to convert their coastal bungalow into a two-story home. The California Coastal Commission, which regulates land use along the state鈥檚 coastline, issued a construction permit, but only on the condition that the couple give up a slice of their property to allow for a public walkway to the beach.
In 1987, the U.S. Supreme Court ruled that the Coastal Commission had overstepped. If the government wants to take someone鈥檚 private property in exchange for granting them a land-use permit, there has to be some obvious connection between the property being seized (in this case, a slice of land for a walking path) and the government鈥檚 purpose in restricting development in the first place (capping a building for the preservation of ocean views), the court held. Because there was no 鈥渆ssential nexus鈥� between the two in this case, , taking the Nollans鈥� property was 鈥渘ot a valid regulation of land use,鈥� but amounted to 鈥渁n out-and-out plan of extortion.鈥�
鈥淲hy is a fee attached to a development any different from any other kind of tax? No one has a good explanation for that.鈥�CHRIS ELMENDORF, LAW PROFESSOR, UC DAVIS
In subsequent rulings, the Supreme Court laid out further limits on this kind of public-sector 鈥渆xtortion.鈥� In the 1990s, the court found that the cost of getting a permit also has to be to the impact a development is likely to have on the public. In 2013, the court ruled that these 鈥渘exus鈥� and 鈥減roportionality鈥� standards don鈥檛 just apply to the taking of physical property, but made in lieu of giving up land, too.
Sheetz and his legal supporters argue that it鈥檚 time for the court to apply the 鈥渘exus鈥� and 鈥減roportionality鈥� rules to El Dorado 鈥� and to local impact fees across the country.
The California exemption
In response, El Dorado County and its cavalcade of legal allies put up a double-barreled defense.
First, California courts, along with those in many other blue states, have carved out a major exception to the Supreme Court鈥檚 rules. Fees slapped on individuals on an ad hoc basis 鈥� by say, by the Coastal Commission in adjudicating a single permit 鈥� might lack transparency, political accountability and be ripe for abuse. But fee schedules 鈥� voted upon by city councils or county boards of supervisors and that apply to all applicants across the board 鈥� don鈥檛 deserve such special treatment, the state鈥檚 courts have found.
The logic for that distinction, in part, comes down to political accountability.
鈥淎 city council that charged extortionate fees for all property development, unjustifiable by mitigation needs, would likely face widespread and well-financed opposition at the next election,鈥� the in 2022.
The fee that El Dorado County levied on Sheetz was passed as part of a general road and highway funding program. Sheetz鈥檚 specific fee was based on the size and location of his single family project, as listed on a .
In bringing the case, Sheetz鈥� legal team asked the U.S. Supreme Court to do away with this 鈥�.鈥� Some members of the court鈥檚 conservative majority appeared ready to do exactly that.
鈥淭here鈥檚 just no categorical exemption from legislative enactments 鈥� what would be wrong with that holding today?鈥� said Justice Neil Gorsuch.
Treating such a set of fees as comparable to the seizing of an individual鈥檚 private property could open a whole can of constitutional worms, said UC Davis law professor Chris Elmendorf.
鈥淲hy is a fee attached to a development any different from any other kind of tax? No one has a good explanation for that,鈥� he said. He also pointed to local inclusionary zoning rules, in which cities permit new housing projects in exchange for a developer making a certain share of the units affordable, as another policy that could find itself on the chopping block if Sheetz succeeds at the Supreme Court.
Another local policy that could find itself ensnared in a ruling for Sheetz: Requirements that large developments set aside space for public art or pay a fee if they don鈥檛.
Many of the justices, especially the court鈥檚 three-member liberal minority, seemed to have a hard time identifying a distinction between across-the-board impact fees and other types of taxation that don鈥檛 require a court鈥檚 fine-toothed once-over.
Justice Sonia Sotomayor likened El Dorado County鈥檚 impact fee system to a set of user fees, building permits or even a road toll.
鈥淚f you鈥檙e going to start saying, as you did, that you鈥檙e reserving the right to say that a toll could be an unconstitutional taking, I bet New York City is going to be sued very soon on that on that toll to come down into Lower Manhattan,鈥� Sotomayor, who was born in the Bronx, told Sheetz鈥檚 counsel. 鈥淎t what point do we stop interfering?鈥�
Already complying
If the court doesn鈥檛 buy that particular argument, the county put up a second one: It is already abiding by the court鈥檚 prior rulings.
A, known as the Mitigation Fee Act from 1987, requires local governments to justify the fees that they impose with detailed studies that show a connection between the fee levied on a new development and the financial impact that development is likely to impose on local infrastructure.
In conducting those analyses, they argue, California counties are already complying with the Supreme Court鈥檚 standards.
For Sheetz鈥檚 proponents, those 鈥渘exus studies鈥� are a paltry substitute for heightened judicial scrutiny.
These studies often amount to 鈥渉igh-level black boxes鈥� that can justify a wide range of potential charges, said the Terner Center鈥檚 Garcia. In California, state courts have historically been reluctant to second-guess those analyses.
If the high court does ultimately decide that a more rigorous, project-by-project analysis is required, the implications could be dramatic 鈥� and not in the way that plaintiffs either imagine or hope, warned Jennifer Henning, a lawyer with the California State Association of Counties.
鈥淚 don鈥檛 think it鈥檚 going to result in zero fees,鈥� she said of a possible Sheetz victory.
What it would almost certainly do is 鈥渞eally slow down and make more expensive the process of pulling permits and doing other kinds of development projects,鈥� she said. 鈥淲e鈥檙e just concerned, particularly in the middle of a housing crisis.鈥�
Even Trump-appointed Justice Brett Kavanaugh worried about the practical workability of that requirement in his back-and-forth with Beard, Sheetz鈥檚 lawyer.
鈥淵our way is going to be more time consuming (and) administratively burdensome,鈥� he said.
鈥淚t very well may be,鈥� said Beard. 鈥淏ut this is a constitutional standard.鈥�
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