COLLECTION: What is Just Compensation?

April 1, 2000

4 Min Read
COLLECTION: What is Just Compensation?

Jonathan Burgiel

As more unincorporated areas become annexed, the private haulers servicing these areas face losing some, if not all of their business. To help protect those interests, several states have passed "just compensation laws."

Historically, private haulers primarily have collected residential solid waste in unincorporated areas. Once annexed, the areas will receive the same service as everyone else in the jurisdiction. As a result, private haulers previously servicing this area may lose their collection routes to a public collection system or to a contracted service provider.

Exclusive franchise arrangements by municipalities, regional authorities and special districts, and the trend toward limiting the number of private waste service providers also are displacing private firms.

Most private haulers believe they are entitled to compensation for business losses from annexation or government intervention. These firms want to recover investments made in vehicles, facilities and personnel. The public sector, however, often views annexation as a foreseeable risk that collection firms should incorporate into their business planning, especially in areas where annexation is a possibility.

Although the Fifth Amendment states, "Nor shall private property be taken for public use without just compensation," how much compensation is just? In U.S. vs. Reynolds [397 U.S. 14 (1970)], just compensation was defined as the full monetary equivalent of the property taken and considered the cost of reproducing the property, its market value and resulting damages to the owner's remaining property.

Most private haulers who have sued municipalities for just compensation have experienced limited success. Court decisions have deemed business losses due to annexation as compensable. However, some decisions have considered the loss an understood business risk. Because litigation hasn't always resulted in favorable rulings, the industry's private sector has sought remedy through state legislatures.

Currently, at least 10 states have statutory provisions to protect private haulers from business loss due to local government. These statutes vary in the protection offered, but they generally fall into two categories:

* protection of existing businesses/franchises; and

* compensation for lost business.

Some states that don't have statutes have elected initiatives in the interest of being fair.

Business/franchise protection approaches vary considerably from state to state, but five years is the most common retention period. Here are some ways in which states have protected their haulers:

* Florida protects franchises for five years or the remainder of the franchise term, whichever is shorter.

* California protects franchises through five-year license extensions or by allowing existing contracts to continue through the remainder of their terms.

* Iowa municipalities have the option of extending franchises or contracts an additional five years or paying the hauler fair market value for its equipment.

* Montana resembles Iowa, however, the state also requires residents to petition for municipal service if a franchise or contract is canceled after the five-year period.

* Virginia, on the other hand, requires public entities to give five years notice or 12 months of gross receipts to a private hauler.

* Missouri protects franchises only for two years.

* North Carolina also only protects franchises for two years, but combines protection and compensation. There, municipalities can purchase a franchise for just compensation and then terminate the contract after one year for a prorated just compensation rate. This rate is defined as 12 times the average monthly revenue for the last three months prior to resolution. The franchisee can appeal these decisions.

* Texas allows, but does not require, customers in an annexed area to maintain their current service provider for two years.

* Oregon also combines protection with compensation options by allowing its municipalities to purchase a franchise for fair market value and severance damages. Or franchises are protected for 10 years or the remainder of the franchise term, whichever is longer.

* Washington protects existing franchises or permits for seven years or the remainder of the franchise or permit term, whichever is shorter.

* Oklahoma's legislation sets up a compensation-only approach through an arbitration procedure to determine fair market value.

* Colorado's more hands-off approach states that local government may not require industrial, commercial or multi-family units of eight or more to use or pay for local government-provided solid waste services.

Based on the states that currently have such legislation, it seems just compensation legislation is more likely to be adopted if presented separately and evaluated on its own merit. However, the debate often is heated.

Recently in Florida, a strong public sector lobby defeated just compensation legislation. A renewed effort currently is underway to pass legislation requiring local governments to keep detailed accounting of revenues and expenses (including depreciation) for their solid waste systems; provide solid waste services without using other public money (other than state awards or grants); and comply with any local requirements that apply to their private sector counterparts.

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