Supreme Court Decision Costs Houston More than $2 million
The following article originally appeared in the July 1995 issue of Signs of the Times magazine.
By Richard Rothfelder
On August 26, 1992, A Texas judge held that the City of Houston was unconstitutionally assessing the off-premise sign industry with excessive permit fees. The judgment in Harris County Outdoor Adv. Assn. vs. City of Houston expounded that $40, instead of the $278 previously charged by the City for a 14 x 48-ft. sign, was the reasonable and constitutional fee, and that the City should pay to the plaintiffs $1,403,034.40 in permit-fee overcharges and $326,582.98 in attorneys’ fees though trial.
The Texas Court of Appeals unanimously affirmed the trial-court judgment on June 16, 1994. In so doing, the appellate court reiterated that the City’s fee revenue far exceeded its reasonable costs of regulation. As such, all fees above $40 were deemed a “tax,” which the City could not constitutionally levy on the off-premise sign industry.
On February 15, 1995, the Texas Supreme Court denied Houston’s application for writ of error, thereby allowing the lower courts’ rulings to stand. The City may still seek a final appellate review by the U.S. Supreme Court. However, unless the City finally prevails on this last appellate opportunity, it will owe the Houston billboard operators well over $2.2 million, including appellate attorneys’ fees and post-judgment interest on the judgment. Perhaps more importantly, a judicial precedent will have been established that affords the Texas courts the opportunity to scrutinize similar municipal attempts to regulate other industries, such as the on-premise sign industry perhaps.
This litigation’s genesis can ultimately be traced to the seemingly irreconcilable conflict of escalating costs and decreasing taxes that currently confronts local governments. On the one hand, several legitimate reasons for escalating municipal budgets exist. Among these are the federal government’s cutbacks and re-allocation of costs to local governments, the increase of crime, and the welfare and social costs associated with drug abuse. Simultaneously, however, the modern politician must scrupulously avoid raising taxes. This prevailing sentiment was certainly epitomized by the Republicans’ “Contract with America” and their recent electoral landslide.
Municipalities have been forced to confront this conflict by creating new – and increasing the existing – permit and license fees. These are often referred to as “user fees” because the recipient pays for the cost of the service. For example, the golfer pays a greens fee for the use of the golf course, which in turn is maintained by the City through revenues generated by these greens or user fees.
In contrast, cities pay for general citizen services (as opposed to specific-user services) out of their general funds. Common examples include police and fire protection. General funds are typically financed by ad valorem (in proportion to the value) taxes.
This apparently logical and equitable approach to municipal finance is also politically expedient. Politicians don’t have to use the dreaded “T”! word when they raise or create new regulatory fees. Our American system of accountability also supports the notion that those who receive the services should pay for them.
It also follows that most citizens, at least superficially, don’t bear a tax increase, because the user fee is targeted only at the regulated industry. Of course, the average consumer is ultimately affected as well when the fee is inevitably passed on in the form of higher costs. Perhaps most importantly, permit and license fees become even more favored for the politician when levied against business groups lacking in public sympathy or political power.
The Houston situation
A classic example of such a politically maligned industry has been the off-premise sign industry in Houston, TX, over the last decade. During the late 70s and early 80s, when the price for a barrel of oil exceeded $40, Houston’s economy was booming, and billboard demand from home builders and advertisers was fantastic.
Houston is also one of the last major U.S. cities without zoning. Instead, it relies on a hodgepodge of deed restrictions and building codes to regulate land and sign use. Before May 1980, for example, on- and offpremise signs were regulated by only two employees in the City’s Bldg. Dept., which still permitted new construction and charged only $1 for a permit fee.
This combination of intense demand and lack of regulation caused Houston to earn the infamous moniker of “Billboard Capital of the World”. Indeed, by 1985, Houston had more than 5000 billboards — some exceeding 100 ft. in height and 1200 sq. ft. in size — operated by two dozen separate sign companies.
Not surprisingly, Houston’s elected officials became politically correct in urging greater control of the outdoor advertising industry. The party came to a screeching halt for the Houston sign industry on May 8, 1980, when the Houston City Council passed some of the nation’s most comprehensive outdoor-advertising regulations. The Code prohibited the construction of new off-premise signs; strictly regulated the height, size and location of existing signs; and imposed an amortization period, after which grandfathered signs had to conform or be removed.
The Houston Sign Code also created a new bureaucracy to regulate signage, the Houston Sign Administration. This administration has had annual budgets in excess of $3 million, as many as 77 employees, and more city-owned vehicles than it has had employees. The Sign Administration has been riddled with inefficiency and waste since its inception, having been forced to borrow a total of $725,000 in four separate loans from the city’s General Fund to meet its spiraling expenses.
Additionally, the Houston Sign Code ensured that the costs of this inefficient and wasteful bureaucracy were totally borne by Houston’s sign operators. Specifically, the Sign Permitting Fund was also created by the Houston City Council in enacting the Sign Code. Previously, the sign-regulating costs incurred by the Bldg. Dept. were absorbed by the General Fund. After May 8, 1980, the Sign Permitting Fund was required to pay all of the Sign Administration’s costs for code enforcement. The fund also derives the revenue to cover these costs solely from the various permit and license fees charged to sign owners and operators. Therefore, the Sign Administration was designed to be “self-sufficient.”
Thus, the Houston City Council apparently accomplished several politically expedient goals by passing the sign code. The general citizenry suffered no tax increase despite increased costs caused by more rigorous sign regulations. Instead, the user-fee concept prevailed, with all sign-regulation costs borne by the permit-fee revenue. Finally, because only sign owners and operators had to pay these permit fees — a group with negligible political clout in 1980 – no significant criticism was anticipated.
To keep its Sign Administration self-sufficient, the City of Houston established the nation’s highest sign-permit fees. In the first nine years, Houston increased sign-permit fees six times. Off-premise sign fees increased 450% during this period, from $20 to $90 for the first 200 sq. ft.
The operating permit for a standard 14 x 48-ft., off-premise sign now costs $278; prior to the Sign Code, the fee was as low as $1. Remarkably, the requisite administrative work is merely an inspection of the sign, the issuance of the permit and maintenance of records – all of which takes approximately 45 minutes.
Despite the exorbitant permit fees, the City nearly doubled the sign-permit fee schedule on May 24, 1989, via a new ordinance, No. 89-767.
Previously, the City hired the independent accounting firm of Deloitte, Haskins & Sells to study the costs and revenues of city services, including those for the Sign Administration. Regarding off-premise-sign permits, Deloitte concluded that the City’s expenses were minuscule compared to the permit fees paid. More specifically, Deloitte determined that such permits cost the city $19.73 to process. Yet it also calculated the City’s corresponding revenue at $89.50 — a recovery rate of 430.5% ($89.50 divided by $19.73). Deloitte concluded that, overall, the City garnered an annual average of $171,916 beyond its actual costs. The City had anticipated the study would justify a fee increase; obviously, it seriously miscalculated.
Amazingly, the Houston City Council doggedly pursued 89-767 less than three months after having received Deloitte’s report. According to its own accountants’ report, 89-767 would net the city a recovery rate of 861% – an average of $395,849 in annual revenue in excess of the costs.
When analyzing standard 14 x 48-ft. billboards – as opposed to the average or unit-size sign addressed by Deloitte – the comparison becomes even more dramatic: Despite the static administrative cost of $19.73, the permit fee is $278 – a recovery rate of more than 1300%!
The rationale for overcharging
Reason cries out: How could the City begin to justify this? The answer is simple: a bureaucratic obsession to keep a bloated bureaucracy self-sufficient while The Sign Administration shouldered myriad expenses that were: unrelated to proper sign regulation, wasteful and otherwise unreasonable. The following summarizes a few of the more blatant examples:
- The Sign Administration’s automobile policy, characterized by breakdowns and waste, including specifically:
- Fiscal year 1986 purchases of more than $200,000 in vehicles, which were soon not needed due to loss of jurisdiction;
- Failure to sell and recoup revenue for eight vehicles that were not even assigned to inspectors;
- Maintenance of more vehicles than there were employees;
- Paying commercial rates for vehicle repairs at the City’s garage, which its former manager complained was “incredibly slow” and caused excessive downtime; and
- Admitted violations of the City’s written policy preferring utilization of vehicle allowances rather than home storage of vehicles.The Sign Administration’s automobile policy, characterized by breakdowns and waste, including specifically:
- Requiring off-premise sign operators to absorb the following costs associated with non-revenue activities of the Houston Sign Administration:
- Charging 100% of the cost of the Municipal Board on Sign Control ($215,520) to off-premise sign operators and none to on-premise permit holders, even though the state law that created the Board applies equally to both on- and off-premise signs. (And the Sign Administration has incurred on-premise costs connected to Board regulations.) The Board’s ultimate objective is to reduce the number and size of signs, causing a plaintiff to characterize forced payment to the Board as “like paying the executioner.”
- Charging 50% of the cost of impoundment operations ($114,473), despite the fact that none of the plaintiffs’ signs, nor even any billboard, has ever been impounded by the Sign Administration. And off-premise sign permittees must post a $25,000 bond to finance the removal of their own signs should they be deemed illegal.
- Charging the $526,411.90 settlement of City of Houston v. DeTrapani to off-premise, sign-permit holders via the Sign Permitting Fund rather than to the public through the City’s General Fund. The DeTrapani case involved admitted mistakes by the Sign Administration in ordering the removal of portable signs, and then refusing to allow the errors to be corrected by replacing the signs.
- Assessing the Sign Permitting Fund for all legal fees associated with the City’s defense of litigation over sign issues, including the DeTrapani case and this litigation. In fiscal year 1990, the City’s legal department billed the Sign Administration $152,326.25.
- Levying the interest expense associated with the Sign Administration’s $725,000 loan from the City’s General Fund against sign owners and operators through the Sign Permitting Fund.
- Inflating the projected staffing requirements of the Sign Administration. At the time of trial, the Sign Administration was using 17.5% fewer employees than was projected for purposes of the Deloitte study, which formed the basis for the permit-fee increase in 1989. This discrepancy between the projected and actual staffing costs translates to a savings of more than $414,888 per year.
These and other examples paint a truly shocking picture of a bureaucracy completely unaccountable to taxpayers. The unfortunate, but irrefutable, conclusion is that as long as sign owners and operators can pay for mistakes, inefficiency, unnecessary services, overstaffing and irrelevant costs, there is no incentive to balance the budget. And permit fees continue to escalate.
The former manager of the Sign Administration candidly admitted as much. When someone suggested Houston taxpayers could save money by streamlining Sign Administration procedures, he responded: “It doesn’t cost the taxpayers any money now. It comes out of the Sign Permitting Fund.”
Outdoor Adv. Assn. vs. Houston
Given these numerous examples, surely Houston’s off-premise operating permit fees would be found illegally excessive and unconstitutional under virtually any conceivable legal test. The appellate court correctly relied upon an oft-cited test first articulated 60 years ago by the Texas Supreme Court. Courts subsequently have been required to compare licensing-fee revenue raised to reasonable regulatory costs to ascertain whether the fee was, in fact, a tax.
The Texas Supreme Court explained in the venerable case of City of Ft. Worth vs. Gulf Refining Co., and reaffirmed two years later in Hurt vs. Cooper, that this comparison of fee revenue and regulation costs determines if the fee is levied primarily to raise revenue. If so, it is a tax, regardless of what the municipality calls it, and an unauthorized tax as well.
The appellate court in Harris County Outdoor Adv. Assn. vs. City of Houston carefully followed this Texas Supreme Court test and determined “the fees charged by the City’s Sign Administration for off-premise operating permits were excessive and merely to raise revenue.”
The Court also agreed that “the earlier fees and the fees set by Ordinance No. 89-767 were not so much intended to regulate the billboard industry as to raise revenue to remedy the Sign Administration’s budget problems caused by its own inefficiency.”
Finally, the Court concluded that “the revenue generated by the City’s fees for off-premise operating permits exceeded the reasonable cost of regulation and that such fees constituted an impermissible occupation tax.”
Having found that the fees were actually taxes, the Court held they also violated the Texas Constitution, which prohibits municipalities from levying occupation or other taxes without express constitutional or legislative authority. Because no such authority exists for Texas’ outdoor-advertising industry, the purported permit fee violated Article VIII, 1(1) of the Texas Constitution. The Court also found that the City violated several provisions of the US Constitution by assessing this tax on Houston sign operators:
- First, the City’s collection of the unlawful occupation tax violated the plaintiffs’ rights to procedural due process under the Fourteenth Amendment, because the City failed to provide a post-payment remedy that would give the taxpayers an opportunity to obtain a refund.
- Second, the exaction of the tax violated the rights to free speech and freedom of the press guaranteed by the First Amendment, because it imposed an impermissible financial impediment in suppressing protected expression.
- Third, the levy of a $278 charge for a service costing only S19.73 was considered so arbitrary and excessive as to be confiscatory, violating the substantive Due Process Clause of the Fifth Amendment.
- Fourth, the preferential treatment afforded by the City to the more politically powerful owners of on-premise signs, who had not been targeted with the same type of abusive regulatory scheme imposed upon billboard owners, was held violative of the Equal Protection Clause of the Fourteenth Amendment.
Once the Court concluded the City had violated the Federal Constitution, the way was cleared for the award of substantial monetary damages and attorneys’ fees to sign operators against the City. Under the Civil Rights Act, “every person who, under color of any . . . ordinance subjects . . . any citizen of the United States . . . to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress.” In this case, the “redress” appropriate for the plaintiffs was a refund of the illegally excessive permit fees they paid to the City.
In calculating these damages, the trial court determined (and the appellate court affirmed) the reasonable and constitutional off-premise-sign operating permit fee should be no more than $40. The balance was simple mathematical computation, ie, subtracting, from the amount actually paid for permit fees during the period before expiration of the statute of limitations, the amount that would have been paid given a $40 fee. The total result of this computation was S 1,403,034.40, which, along with interest, was awarded to the plaintiffs in actual damages.
Another section of the Civil Rights Act, Section 1988, also authorizes the successful plaintiff to recover attorneys fees and court costs from the defendant. Therefore, the Court also awarded the Harris County Outdoor Adv. Assn. and its members $326,582.98 in attorneys’ fees through trial, plus an additional $60,000 in appellate attorneys’ fees.
All told, the City currently owes the plaintiffs more than $2.3 million. Moreover, it must reduce its off-premise sign operating permit fee to $40, a $238 decrease and revenue loss for each one of the thousands of permits issued annually for standard 672-sq.-ft. billboards.
A judicial precedent also has been established that authorizes the Texas courts to review the sign-permit, fee-setting practices of Houston and other Texas cities, and striking them down as illegally excessive whenever they cease to bear a reasonable relationship to regulatory costs. Finally, this precedent may be broad enough to apply to other regulated industries subject to abusive permit and license fees, such as the on-premise sign industry.
With so much at stake, the City has vigorously pursued every avenue to appeal this decision. For its appeal, it retained both the largest law firm in Texas and perhaps the most prominent individual appellate specialist in the state. The City has already paid these firms an initial retainer of $100,000 — interestingly appropriated from its General Fund instead of the Sign Permitting Fund.
On March 23, 1995, the Texas Supreme Court overruled the City’s motion for rehearing of the previous denial of the application for writ of error. The City’s last-ditch opportunity for appeal, therefore, is the U.S. Supreme Court. If upheld on appeal, this decision will have a far-reaching effect upon the relationship between government and its citizens, as well as on the City of Houston and the plaintiffs.
Richard L. Rothfelder is board-certified in civil trial law and a partner in the Houston law firm of Kirkendall, Isgur & Rothfelder. A 1979 cum laude graduate of the University of Houston Law School, Rothfelder is also currently sewing his second term as a city councilman for the City of Southside Place, a suburb of Houston.
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