December 13, 2005

Who Pays For Flood-Plain Development?

By Paul Craig Roberts

MY VIEW

Tallahassee Democrat, December 7, 2005

As an economist, I have watched with interest as North Florida developers misuse property-rights arguments to pass costs associated with their developments on to existing homeowners and future generations.

Economists tend to see greed as a positive force that ensures the efficient allocation of resources. However, this point of view has merit only if all costs associated with the activity are internalized to the project and borne by those who organize it.

In the real world, greed often works to externalize costs and to impose them on others. The most effective way market participants can impose costs on others is by using the political process.

Developers' attempts in North Florida to repeal density restrictions on flood plain development are a good example of the use of the political process to externalize costs.

Walton County, between Panama City Beach and Destin, offers a textbook example. Long an undeveloped paradise, Walton County has exploded with development in recent years. Having run out of elevated waterfront property, developers are now turning to the flood plain.

Current law restricts development in the flood plain to one house per 20 acres. Developers say that flood-plain restrictions are discriminatory, unfair and violate their private property rights. Uplands not subject to flooding are permitted a maximum density of eight housing units per acre. Developers argue that the flood plain should have the same density as uplands.

In December 2004, the Walton County Commission voted to remove flood-plain density limitations. The state refused to approve the irresponsible proposal, which would have increased flood-plain density from one unit per 20 acres to 160 units per 20 acres.

The devastating impact of Gulf Coast hurricanes in 2005 underscored the irresponsibility of flood plain and wetlands development. Tidal surges demolished waterfront homes built at low elevations. Low-lying areas away from the coast were devastated by flooding. People thought the experience would be sobering for developers and politicians, but they underestimated the power of greed.

Developers have discovered that they can circumvent flood plain density restrictions by appealing to FEMA for a permit to fill their parcels until they raise them above the flood plain level. FEMA grants fill permits with the county's authorization, and Walton County “has been very liberal in granting such authorization,” to quote the South Walton Community Council.

Flood plain fill is environmentally unsound, and the permitting process is bothersome. Therefore, the Walton County Commission has resurrected its proposal to remove density restrictions in the flood plain. It is unclear why the County Commission believes the state will approve this year what it rejected last year. Perhaps more intense lobbying by developers will be successful.

Property rights activists might cheer the removal of a regulation that suppresses the market price of the flood plain. But what we are really observing is an effort to externalize costs associated with profit maximization by developers and flood plain landowners.

The greater the flood plain density, the greater the casualty losses and the higher the insurance premiums on other properties. Moreover, coverage for wind and water damages is often government provided. Thus, losses can be pushed off onto taxpayers generally.

The most important cost externalized by flood plain development is the cost associated with the destruction of flood plain and loss of its environmental functions. Flood plains and accompanying wetlands provide erosion control and prevent flood damage by absorbing flood waters. They also provide filtration of pollution and habitat for animal, plant and aquatic life. The development of flood plain destroys these valuable benefits and imposes a huge external cost on future generations.

It is difficult to generalize, but the market value of developed flood plain is unlikely to be sufficient to bear a mitigation tax necessary to internalize the cost of flood plain destruction.

There are many other costs that are externalized by real estate developers. Overdevelopment in storm-vulnerable areas imposes on taxpayers infrastructure costs to enable evacuation. Views enjoyed by existing property owners and trees and vegetation that provide buffers against noise and wind are destroyed. The increase in impervious surfaces from more roofs and paved surfaces diverts water onto existing properties. Few of these costs are internalized by profit-maximizing developers.

If restraints on flood-plain density are removed in Walton County, a precedent will be created for developers in other counties. In Louisiana, scientists who pointed out the protective functions of flood plain and wetlands were ignored. Katrina proved how correct they were. Where these natural protections still exist, they must not be converted into developers' profits.

Paul Craig Roberts is a former assistant secretary of the U.S. Treasury Department and associate editor of The Wall Street Journal. He now lives in eastern Walton County. Contact him at pcr3@mac.com.    

MY VIEW:  What we are really observing is an effort to externalize costs associated with profit maximization by developers and flood-plain landowners.