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Free Market Minute

NC Coastline in Transition

More than just shifting sands

Oct. 28th, 2007
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North Carolina's coastal towns and counties are in the midst of a period of tremendous flux, and markets, consumers, and regulators are all struggling with the problem. The issue: how to craft a situation that will deliver either property owner security, or fairness, or tax revenues, or environmental protection, or some or all of the above. We may as well try to stabilize grains of sand along the shore. And in fact, that's the problem.

North Carolina has approximately 320 miles of shoreline, and about 240 miles of that shoreline—75 percent—is experiencing some erosion. The remaining 25 percent of the NC coast is gaining additional sand through the natural process of wind, wave, tide, and weather patterns. Our southern shores are the most severely affected, as maps indicate. This is one reason that state-of-the art tide, temperature, and water speed monitoring equipment has been installed off Oak Island and Wrightsville Beach. Researchers hope to use these readings to assist in trying to manage beach erosion.

Current regulation on beachfront building and rebuilding uses a combination of setbacks and static vegetation lines to determine whether properties are 'conforming' or 'non-conforming' with respect to regulation. The placement of setbacks and static lines determines whether lots are 'buildable' —for new structures, or repairable—for existing ones.

Many coastal towns, meanwhile, are arguing for changes in the rules for establishing setbacks or determining static vegetation lines, and in some cases the rules are in dispute. In the past, the rule has been that a 'static vegetation line' was the established vegetation line prior to the point at which any beach renourishment took place. Minimum building setbacks were calculated from that point.

Recently, property owners and some towns have argued that completed beach renourishment projects, placing hundreds of cubic yards of additional sand between the shoreline and the pre-existing vegetation, mean regulators ought to revise their maps. Non-conforming lots could become eligible for construction. In addition, repairs to badly damaged structures on some lots would then be allowed (in lieu of condemnation), property values would rise, and local and county tax revenues would rise as well.

But the issues are complex, and the Coastal Resources Commission, scheduled to meet for a public hearing on the methodology of determining setbacks on November 29-30 in Greenville, NC, will consider the alternatives before them. Unfortunately, it appears that the Commission's work will not address one of the most fundamental problems that affect property and property owners along the North Carolina coastline--the issue of moral hazard.

In the case of shoreline properties, the Federal Emergency Management Agency along with the Insurance Federation of NC have protected property owners from catastrophic losses, and specifically encouraged more construction on oceanfront property than would otherwise be the case. It should come as no surprise, therefore, that both the dollar amount and the incidence of property damages have risen steadily over the years. Partly because these policies have enormous opportunity costs, researchers are taking seriously the threat to coastal stability as well as the staggering cost of the on-the-oceanfront welcome mat.

Regulators are taking notice as well, and property owners will be caught both ways in any shifting regulatory sands. Existing FEMA—Federal Emergency Management Agency —protection has clearly encouraged risky and even ecologically damaging shoreline construction. But if local or federal regulators decide to increase protection for the coastline, undeveloped lots within redrawn setbacks will become unbuildable. Those property owners will automatically lose part of their current wealth.

Homeowners with existing homes are also at risk. Any home or business sitting on a lot that falls within the stricter setbacks will be condemned if damaged severely—including damage from termites, fire, or other reason, not just ocean storms. Once condemned, the lot is rendered unbuildable. Property owners cannot even bring their structure up to new codes, under proposed statutes. Prohibited from carrying out repair or replacement of damage, the property is virtually a condemnation, and a huge economic loss, waiting to happen.

Is the only alternative to the scenario above to allow federal disaster insurance programs to benefit a few taxpayers, at the expense of all other taxpayers? Not necessarily.

There are ways to reduce the moral hazard associated with oceanfront building, and the most obvious one is to allow market pricing of insurance for coastal properties. Property owners would then have to decide for themselves whether the risk of damage and cost of replacement is worth the premium one might have to pay. It will probably cause a shift in preferences for ownership at the coast as well. Removing the distortion of low risk will be painful, but that's due to the loss of public subsidy to the value of private property, and what should be a private rather than a public cost.

No matter what the regulators decide to do, this is a risk-return situation in which the market has largely been prevented from functioning, so any change from the status quo is likely be painful in the short run. For example, increasing regulation and imposing stricter setbacks reduces public exposure to insurance loss, but constitutes a 'taking' of private property. Reintroducing the market through risk-rated insurance costs, to be paid by property owners themselves, changes the rules of the game under which many people made plans and committed resources. Their plans will be frustrated, and they will certainly feel unfairly treated by the market. In truth, however, it is government's ability to regulate and mask the true cost of high risk investment that should properly receive the blame. Either way, deregulation is likely to be an unpopular and unlikely solution.

So short run, we are in a lose-lose situation. The fact is that regulation—whether it restricts or promotes an activity—begets the need for more regulation. Regulatory takings are losses, though, and so are unwarranted risks. There are no easy solutions.

A return to market options is an unavoidably painful lesson. We have delayed learning it long enough, though, in coastal management. Since we really cannot fight the tide, maybe it's time to think about the more difficult choices, and deal with them realistically.