June 18, 2014

System Development Charges Ruled Constitutional


In tough economic times, local governments look to new or increased fees and charges to make ends meet, and private industry looks for ways to cut costs — including government-imposed fees and charges. When these interests collide, challenges to government financing mechanisms increase. One recent example is Homebuilders Association of Metropolitan Portland v. Tualatin Hills Park and Recreation District, an Oregon Court of Appeals case that in January considered the constitutionality of system development charges ("SDCs").

Local government entities are authorized by law to impose SDCs to mitigate the costs of capital projects relating to park and recreation facilities; water, wastewater and sewer facilities; transportation; and drainage and flood control. Under this authority, in 1998 the Board of Directors of the District adopted an SDC for new facilities, to be collected upon issuance of building permits.

In Homebuilders, the plaintiffs alleged that the District's SDC resolution violated the Takings Clauses of the Oregon and U.S. Constitutions, respectively, and of substantive due process under the Fourteenth Amendment. The lower court ruled in favor of the District, and the plaintiffs appealed the denial of their constitutional claims.

First, the Court of Appeals concluded that the SDC did not deprive the owner of "all substantial beneficial or economically viable use of the property," which is the "takings" standard under state law. The Court also relied on precedent: No Oregon court has concluded that a legislatively imposed exaction of money, applicable generally to a large group of people, can be challenged as a taking. Therefore, the resolution did not violate the Oregon Constitution.

The alleged violation of the Takings Clause of the U.S. Constitution proved more difficult to sort out, because federal case law relies on such inexact tests as "rough proportionality," "reasonable relationship," and "rational basis." However, the court ultimately applied the same reasoning it used to decide another recent case, Rogers Machinery, Inc. v. Washington County (2002). (In that case, the court held that the county's "Traffic Impact Fee" was a species of SDC, and thus was not within the scope of government action affected by federal "takings" cases.) The Court concluded that the SDC resolution was ordinary economic legislation, which is constitutional except in rare circumstances where government action is so flawed that it offends fundamental rights "implicit in the concept of ordered liberty."

Because the challenge was to the legislation itself, and not its application, the Court concluded that the plaintiffs' due process claim was the appropriate challenge. Due process challenges require a "rational basis" test — i.e., the legislative act must bear a "rational relationship" to the purpose for which it was enacted. The court concluded that the District's methodology for calculating the amount of the SDCs bore a "reasonable relationship" to the end being achieved: to build facilities for park and recreation services. Therefore, it also met the less stringent "rational basis" test, and was constitutional.

The Homebuilders decision supports the constitutionality of lawfully adopted SDCs. However, for those in private industry, the case serves as a reminder that proper procedures and careful analysis on the part of the government are required before such legislation is enacted, and that challenges to improperly enacted legislation can and should succeed when such care is lacking.

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