Topic: Regulatory Studies

Luxury Mobile-Home Parks Don’t Need Rent Control

Contempo Marin isn’t your stereotypical mobile-home park. The park sits two miles from San Francisco Bay and offers tenants a pool, spa, clubhouse, and lagoon. Because of the location and amenities, these mobile homes—some of which offer vaulted ceilings, gas fireplaces, walk-in closets, and jetted tubs—can sell for over $300,000. That’s what makes the rent- and vacancy-control ordinance imposed on the park by the City of San Rafael in the name of “affordable housing” so outrageous.

The ordinance caps the amount that MHC Financing, the owner of Contempo Marin, may charge its tenants—who own their mobile homes but rent the land underneath—and mandates that the land be rented at the same price to each homeowner. The result isn’t lower costs for incoming tenants, but a redistribution of the value from the below-market rent directly to the mobile-home owners, whose homes now sell at a premium of nearly $100,000 above their pre-existing value. Thus far, the ordinance has transferred more than $95 million from MHC to its tenants.

MHC challenged the ordinance in federal court as an unconstitutional taking. The district court ruled in MHC’s favor, finding that the alleged public purpose of the ordinance—“affordable housing”—was merely a pretext, such that the ordinance violated the Fifth Amendment’s mandate that property only be taken for a “public use.” As Justice Kennedy clarified in Kelo v. City of New London (2005), “transfers intended to confer benefits on particular, favored private entities and with only incidental or pretextual public benefits, are forbidden by the Public Use Clause.”

The U.S. Court of Appeals for the Ninth Circuit, however, reversed the district court, holding that rent control generally, rather than the specific rent-control scheme at issue here, is “rationally related to a conceivable public purpose” and thus automatically meets the public-use requirement. MHC is now asking the Supreme Court to review that ruling and Cato has filed a supporting amicus brief, encouraging the Court to clarify the standard of review applied to pretextual takings claims and to confirm that the Takings Clause isn’t rendered inoperative when property is transferred.

The Ninth Circuit’s approach essentially bars future pretextual takings claims; any regulatory scheme viewed at its broadest theoretical level could have some “conceivable public purpose.” This evisceration of the Public Use Clause leaves the appropriate standard for determining if a government’s public-use justification is mere pretext in desperate need of Supreme Court clarification. The Ninth Circuit also undermined the Fifth Amendment by finding that no taking had even occurred because MHC had bought Contempo Marin after the rent- and vacancy-control provision had been enacted and therefore could have no investment-backed expectation as to the property value taken by the city. This decision directly conflicts with Palazzolo v. Rhode Island (2001), in which the Supreme Court held that buying property with knowledge of a regulation doesn’t preclude a takings challenge. The Ninth Circuit ignored the same precedent in Guggenheim v. City of Goleta in 2011—a case in which Cato also filed a brief supporting a petition for review—and the lower court’s continued misapplication of the law here reiterates the need for the Supreme Court to reaffirm that the Takings Clause has no “expiration date.” 

The Court will decide whether to take the case of MHC Financing LP v. City of San Rafael later this fall.

This blogpost was co-authored by Cato legal associate Lauren Barlow.

Shutdown Could Shut Down Waste

A benefit of the government shutdown may be that it slows the stream of waste and bad behavior flowing from the federal bureaucracy. Catching up on my reading, I noticed these items in just the last few days of the Washington Post:

  • To maximize their budgets over time, federal agencies drain their bank accounts on often wasteful items at the end of every fiscal year. The rule is “use it or lose it.”
  • A high-level EPA official ripped-off taxpayers $900,000 over two decades, apparently duping administrators, supervisors, and auditors over many years.
  • About $800,000 of federal unemployment insurance benefits were bilked by employed D.C. government workers.
  • The availability of federal subsidies for dredging may induce Key West to destroy an area of unique coral and other sea life. Historically, the Army Corps of Engineers has been an environment-destruction machine, so residents should think twice before going that route.
  • The Department of Commerce has kicked out the National Aquarium from its building after 80 years. There is no bad behavior here, just a sad story since the aquarium is an example of successful privatization. Federal funding was eliminated in 1982, and the aquarium was converted into a nonprofit corporation and supported by admission fees, donations, and volunteer efforts.
  • The FHA is asking for a $1.7 billion taxpayer bailout.
  • Environmentalists are concerned that grasslands and wetlands are being turned into farmland at a rapid pace across the northern prairies. This story mentions the effect of ethanol subsidies, but another cause of the change is the $30 billion of farm subsidies pumped out each year.
  • The central figure in the IRS scandal, Lois Lerner, was finally pushed out. It is pretty obvious that a political and ideological agenda was at work in the targeting of conservative groups, but it has been very difficult to squeeze even an apology out of IRS officials and the Obama administration. Bart Simpson’s line “I didn’t do it” has long been the approach taken by government officials caught violating the public trust.
  • A recent Washington Post article by Joe Davidson—the paper’s advocate for federal workers—was headlined “Shutdown Would Corrode Our View of Government.” I don’t think we need a shutdown for that.

Burrowing In at the Bank — And Your Business Next?

John Cochrane, who is an adjunct scholar at Cato as well as a professor at the University of Chicago Booth School of Business, had a nice post on the evolving nature of modern regulation earlier this month. He starts by quoting a Wall Street Journal account:

Your No. 1 client is the government,” John J. Mack, Morgan Stanley’s chairman and chief executive from 2005 to 2009, told current CEO James Gorman in a recent phone call. Mr. Gorman, who was visiting Washington that day, agreed…

….regulators prowl the office floor looking for land mines, and Mr. Gorman phones Washington before making major decisions…

About 50 full-time government regulators are now stationed at Morgan Stanley. There were none before 2008, when it was regulated as a brokerage firm instead of a bank.

Cochrane adds that this is “a useful anecdote to remind people what ‘regulation’ means.” People often imagine, he says, that it means something like enacting a knowable, impartial equivalent of a speed limit and enforcing it by putting more cops on the road.

No, we put 50 cops in your car. And how long can this possibly go on before the cops start asking where you’re going and why? How long can 50 regulators sit in the bank approving every decision, before “you know, you haven’t made any green energy loans in a long time” starts coming up? But contrariwise, how long before those 50 regulators come to the view that Morgan Stanley’s survival and prosperity is their job? 50 full-time government employees calling the shots on every deal at a supposedly private bank is a good picture to keep in mind of what “regulation” means.

And it isn’t just banking. On-site government inspectors are becoming more common in other lines of business, especially when a company has copped a deal to some earlier charge of regulatory violations – and few big companies have not been hit with charges of that sort. Notre Dame law professor Veronica Root explains what happens next:

…the corporation and the government often enter into an agreement stating that the corporation will retain a “monitor.” … A monitor, unlike the probation officer, is not solely charged with ensuring that the corporation complies with a previously determined set of requirements. Instead, a corporate compliance monitor is responsible for (i) investigating the extent of the wrongdoing already detected and reported to the government, (ii) discovering the cause of the corporation’s compliance failure, and (iii) analyzing the corporation’s business needs against the appropriate legal and regulatory requirements. A monitor then provides recommendations to the corporation and the government meant to assist the corporation in its efforts to improve its legal and regulatory compliance — the monitor engages in legal counseling.

Something to keep in mind next time you wonder why government officials and the leadership of big business so often seem to be working in harness, on issues where you might expect them to oppose each other. 

Obama Administration Imposes Disabled Hiring Quotas On Federal Contractors

On Aug. 27, during the reporter-vacation lull before Labor Day, the Department of Labor’s Office of Federal Contract Compliance Programs finalized its controversial rules requiring federal contractors to adopt “benchmarks” of 7 percent disabled employees in their workforce, a higher percentage than apparently prevails in the workforce at large. [Earlier here and here] OFCCP director Patricia Shiu insists the initiative should not be described as quotas, since contractors falling short will not suffer automatic penalty. Instead, they’ll be thrown into a process of auditing and having their internal procedures put under review and having to demonstrate progress and that sort of thing. Nothing penalty-like about that! Also, if their willingness to go along with this process doesn’t please the federal overseers, they can eventually be debarred from any future contract work, a devastating economic sanction for many firms. [Cleveland Plain DealerOFCCPGovernment ExecutiveFederal News Radio]

Crucially, the feds are applying the regulation to a firm’s entire workforce even if only one of its divisions has federal contracts, so that if, say, a food company has a single business unit that caters to military needs, and nineteen others that do no federal contracting whatsoever, all twenty units must adopt the quot… sorry, benchmarks.

Competitive Enterprise Institute scholar Hans Bader makes several additional points:

  • Under the regulations, contractors will be obliged to aim for a seven percent quota for each division, a significantly harder task than if it were just a company-wide quota.
  • Dodgy terminology to conceal the reality of quotas is nothing new; federal officials have a long history of resorting to euphemism and vagueness to characterize them as benchmarks, goals, and so forth.
  • While disabled quotas, in contrast to racial quotas, do not raise immediate red flags of unconstitutionality, there are serious doubts whether they’re actually a lawful application of the statutes Congress has passed in this area. While one such law does refer vaguely to affirmative action for the disabled, that does not necessarily provide a broad enough basis to authorize the new scheme.
  • Will compliance and paperwork on this and a related veteran-quota measure cost federal contractors $6 billion a year, as the Associated General Contractors of America has it? Or less than one-fifth that sum, as OFCCP insists? And will OFCCP face even the slightest consequences if its estimates turn out to be low-balls and the contractors turn out to be right?

(adapted from Overlawyered and followup post)

Obama Administration Decrees Overtime for Home Health Companions

In a long dreaded move, the U.S. Department of Labor has issued a final rule requiring that time-and-a-half overtime be paid to at-home attendants who put in more than 40 hours a week caring for a disabled or elderly person. “Many home health aides provide live-in services, and overnight and weekend hours could result in their receiving substantial amounts of overtime pay,” notes Steve Miller at the Society for Human Resource Management. Families employing such attendants will also be required to keep records of time worked. There are a few narrow, hard-to-use exceptions. The rule also brings attendants under minimum wage laws, but it’s the overtime provision that has raised the most fear.

This is a terrible rule. The fear and anger it has stirred is coming not just from commercial employment agencies, as some careless media accounts might leave you to think, but above all from elderly and disabled persons and their families and loved ones, who know that home attendant services are often the only alternative to institutional or nursing home care. 

Even if you’ve followed this issue you probably had no idea that in April, ADAPT, a well-known disability-rights group, staged a demonstration in Washington, D.C. to protest the proposed overtime rule and even blocked all the entrances to the Department of Labor to make its point. That was hardly reported at all in the media; I learned about it through Prof. Samuel Bagenstos’s blog on disability rights law

The Fight against Low-Wage Work

The Washington Post reports on its front page today:

Mayor Vincent C. Gray vetoed legislation Thursday that would force the District’s largest retailers to pay their workers significantly more, choosing the potential for jobs and development at home over joining a national fight against low-wage work.

That last is an interesting phrase: a national fight against low-wage work.

When laws like this are passed, there is indeed less low-wage work. As Robert J. Samuelson writes:

In the short run, even sizable increases in mandated wages may have moderate effects on employment, because businesses won’t abandon their investments in existing operations. But companies that think themselves condemned to losses or meager profits won’t expand. Not surprisingly, a study by two economists at Texas A&M finds that the minimum wage’s biggest adverse effects are on future job growth, not current employment.

In the case of the District’s proposed law, we won’t have to wait for future effects. The target of the legislation, Wal-Mart, is about to open six stores in the District of Columbia, where the unemployment rate is 8.5 percent. But the company says it won’t open three of those stores if it is forced to pay a minimum wage 50 percent higher than other retailers.

Minimum wage and “living wage” laws can reduce employment in several ways. Jobs may be eliminated—ask your father about the guys who used to pump your gas for you, or your grandfather about movie ushers, or notice how groceries and drug stores are eliminating cashiers. Firms may hire a few high-skilled, high-productivity workers rather than many low-skilled, low-productivity workers. They may shift from labor to technology.

With total U.S. employment still lower than it was in 2007, we should stop the fight against low-wage work. Many Americans would rather have low-wage work than no work at all.

Set Back 9-0 At High Court, SEC Turns To Congress

In February, in Gabelli v. SEC, a unanimous Supreme Court rejected the Securities and Exchange Commission’s argument that a statute of limitations deadline for its enforcement actions should not begin ticking until it gets around to discovering that securities laws have been violated. In so ruling, as Cato had urged in our amicus brief, the Court struck a blow for basic fairness as well as reasonable statutory interpretation: stale charges are the hardest to defend against, given that witnesses, memories, and documents have often scattered, and citizens deserve a right to get on with their lives rather than face battles over how to interpret financial transactions that took place many years in the past.

It’s hard to win really lasting victories against the continued advance of federal power, however, because agencies so often just come back for another round. Sure enough, the commission is now seeking to recapture much of the ground denied to it by the Court, and even some new ground. Here’s Mike Koehler’s analysis at FCPA Professor:

The SEC is now pushing Congress to double its existing five-year time limit (applicable to Foreign Corrupt Practices Act offenses and many others) to ten years.  Senator Jack Reed (D-RI), a high-ranking member of the Senate Banking Committee, reportedly intends to introduce legislation this fall.

But the SEC already has several arrows in its quiver, such as the discovery rule [which by statute applies to some claims not at issue in Gabelli] and the fraudulent concealment doctrine, to extend the five-year statute of limitations in many cases.  Moreover, a statute of limitations is largely [meaningless in practice] in most corporate SEC enforcement actions given that [pressures for] cooperation, and not necessarily the law and the facts, … motivate most corporations under SEC scrutiny to sign tolling agreements suspending the statute of limitations or to waive statute of limitations defenses altogether.

In short, the SEC faces few meaningful time constraints in bringing corporate enforcement actions.  For instance, the SEC’s most recent Foreign Corrupt Practices Act enforcement action – in May against the French oil giant Total S.A. – was based on conduct that allegedly occurred between 1995 and 1997 and which the SEC began investigating in 2003.

The gray cloud and uncertainty that SEC scrutiny represents hangs over companies and its shareholders for far too long and can have wide-ranging, negative business implications.  Justice is not promoted by extending this period of uncertainty by doubling the statute of limitations to ten years.

The SEC not surprisingly supports this proposal.  Simply put it would make the SEC’s job easier.  However, ease of enforcement has never been a proper consideration in a legal system based on due process and the rule of law…. 

Read the whole thing here.