NY Court of Appeals, reversing surprise decision, OKs state economic development grants; Daily News, which saluted AY, lauds dissent by Judge Robert Smith (whose AY dissent the paper ignored)

A 5-2 state Court of Appeals decision last week (Bordeleau vs. New York State) upholding state grants for economic development wasn't a surprise, even though the court had to reverse an appellate court that gave the Tea Party-affiliated plaintiffs some measure of hope.

Yes, the state Constitution bans gifts and loans to private entities, but the state has done so for years through intermediary public benefit benefit corporations like the Empire State Development Corporation (ESDC), based on the premise that they are independent. (Of course, the governor controls the ESDC, as we've seen in the Atlantic Yards saga.)

And, judges are reluctant to intervene in such longstanding, however dubious, economic development policy, even if involves the largest state economic development subsidy in history, to upstate chip maker GlobalFoundries, which--no surprise--is already seeking to modify and improve the deal it got.

An editorial surprise

What was a surprise was a scorching 11/26/11 New York Daily News editorial headlined New York Court of Appeals was wrong to toss corporate subsidy suit: Dismissal reveals double standard on taxpayer protection.

After all, while the Daily News criticized the court's endorsement of the ESDC's subsidy practices, it has never looked askance at ESDC support for Atlantic Yards. (The New York Times hasn't covered the subsidy case, either in its news pages or editorial pages.)

The Daily News's criticism

The paper criticized the Court of Appeals for not letting the subsidy case go to trial:

Here’s what Article 7, Section 8 says: “The money of the state shall not be given or loaned to or in aid of any private corporation or association, or private undertaking; nor shall the credit of the state be given or loaned to or in aid of any individual, or public or private corporation or association, or private undertaking.”

Believing these words should mean what they say, advocates sued to challenge a sampling of recent state grants and loans, including $300 million for research and development by IBM and other tech giants, and $650 million to finance construction of a microchip factory upstate.

The conflict between the constitutional prohibition on spending taxpayer money to support private corporations and the state’s practice of doing just that demanded full exploration at trial.

But a 5-to-2 majority on the high court dismissed the suit without further proceedings — on the preposterous grounds that the Empire State Development Corp., which processed the giveaways, is a public benefit corporation that’s theoretically separate and apart from the state.

The Daily News, of course, did not think state or federal courts should conduct more fact-finding in the cases challenging the ESDC's pursuit of eminent domain for Atlantic Yards, even though legitimate questions were raised as to whether the project would benefit a private party more than the public.

Judge Smith the hero (but not with AY)

The Daily News, which condemned "Albany’s big-spending status quo." found a hero:

“When our Legislature commits precisely the folly that a provision of our Constitution was written to prevent, and this court responds by judicially repealing the constitutional provision,” added the always eloquent Judge Robert Smith, “I think I am entitled to be annoyed.”

Absolutely.

The "always eloquent" Smith--one of the court's two most conservative judges--was the only dissenter in the Atlantic Yards eminent domain case.

Significant points in his dissent, which charged that blight was a pretext and that developer Forest City Ratner drew the curious site map, were ignored by the court majority.

Behind the case

Bordeleau vs. New York State,was brought by some 50 plaintiffs, including Buffalo businessman Lee Bordeleau. He objects to the state subsidizing "Bass Pro Shops on the Buffalo waterfront to compete against locally owned sporting goods stores," as the Albany Times-Union reported 10/13/11.

"I'm looking to stop the state from picking winners and losers," he said.

He was represented by Jim Ostrowski, a lawyer, political consultant, writer and founder and President of Free Buffalo, a libertarian who says he's "not a flack for big business or the Republican Party" and runs a web site called Political Class Dismissed: The War Room of the Tea Party Movement.

Ostrowski's goal: "to end all forms of corporate welfare at all levels of government, federal, state and local." Before the oral argument, he led a "first annual National Rally Against Corporate Welfare," stating:

We’re holding this event in Albany since it probably leads the states in doling out taxpayer money to politically-connected business firms.

The appellate decision

What led to the Court of Appeals decision was a surprising and unanimous 6/24/10 decision from the Supreme Court, Appellate Division, Third Judicial Department, which stated:

Defendants do not dispute plaintiffs' allegation that the challenged funds were ultimately distributed by the Department and the PBCs [public benefit corporations] to private entities. Instead, they contend that, as a matter of law, the appropriations did not violate the NY Constitution because the grant of state funds to the Department and to the PBCs was permissible, those entities then disbursed the funds for proper public purposes with only incidental private benefits and, in any event, the private recipients agreed to perform services or provide other consideration in exchange for the funds... Gving the funds to private entities by channeling them through authorized public entities will not shield these appropriations from challenge, for the State may not do "'indirectly that which cannot be done directly'"

Moreover, the court dismissed an argument about a public purposes:

Nor can we accept defendants' argument that proof of a public purpose for the funds that were disbursed by the intermediaries here establishes the legitimacy of the appropriations. The Court of Appeals has made clear that the existence of a public purpose for an appropriation that aids a private undertaking is not the test of whether it is lawful. 

The oral argument

The 10/12/11 Court of Appeals oral argument (video) was covered by some news outlets but not the New York Times. The Albany Times-Union reported 10/13/11, in Top court hears funding challenge: Case contends private projects improperly get millions in subsidies:

Ostrowski argued before the seven judges on the state's top court that the system of distributing most state economic development aid through the Urban Development Corporation -- created in 1968, but now known as Empire State Development -- was simply "money laundering." And several of the judges grilled the state's lawyers, wondering, as Associate Judge Robert Smith did, how this was not "evasion."
State Solicitor General Barbara Underwood explained the Legislature created the UDC, tasked it with economic development and granted it money and bonding authority -- the ability to borrow. It's not state money, she said, nor is it state-controlled.
Legislators saw a "public purpose" in doing so, Underwood argued, and since they're the state's elected lawmakers, their wishes and intent should be respected.
..."So you're saying you can do indirectly what you can't do directly, so long as you've been doing it for a long time and you're the state?," Smith countered.
"And the constitution and the laws and the precedents of this state have authorized it," Underwood replied.

A prescient prediction

After the oral argument, Scott Fein, director of the Public Authorities Project at Albany Law School's Government Law Center, wrote 10/13/11:

The court of first impression saw little merit in the citizens’ claims and dismissed, holding that the State can give money to private entities to promote economic development, which is presumed a public purpose. Surprisingly, the Appellate Division, Third Department reversed, finding in its decision that such grants may constitute illegal gifts in violation of the State Constitution, and to be lawful would require that the intended public benefit be the key objective and significantly outweigh any incidental private benefit. Some suggested that seeking to quantify the respective public and private benefit of projects would be too theoretical and not susceptible to meaningful analysis. Others respond that when alienating public money, it is the minimum that should be expected.

Fein concluded:

Perhaps the overarching question is whether the Court will choose to upset the State’s economic development strategy… some would say, particularly given the current state of the economy, that this is unlikely.

He was right.

Indeed, what seems unmentioned in the decision issued last week is that this is a political strategy practiced by most states and, however it seems to violate the language of the constitution, the court was mindful that New York is competing with other states that do the same.

The decision

After the court ruled last week, Fein observed 11/21/11:

Commentators have suggested that had the court ruled to the contrary, it may have paralyzed many of the larger economic development projects in the state.

He may have been referring to a quote from Albany Law School constitutional law expert Paul Finkelman, who told Reuters 10/13/11 that court review of economic development grants would be "insane."

Fein's summary of the decision:

The court traced the history of two state constitutional provisions which, according to the plaintiffs, prohibited the use of public funds to aid private entities. Taking issue with the plaintiffs’ view, a majority of the court concluded that: (i) public authorities are legal entities separate from the state; (ii) the state may give money to public authorities and they may in turn disperse it to private entities for public purposes; and (iii) state agencies may support marketing measures to promote state industries.
While a majority of the court signed onto the opinion drafted by Judge Jones, two judges (Pigott and Smith) dissented, concluding that the state constitution’s prohibition on the provision of state money to private entities is unambiguous and should bar the grants and loans at issue.

His conclusion: the court has finally put to rest challenges to the use of public funds to aid economic development, particularly through the operation of public authorities.

The ruling

In the 5-2 majority decision, Judge Theodore Jones noted the Constitutional provision banning state gifts or loans "in aid of any private corporation or association," but said there's no prohibition in that provision against making appropriation to public corporations like the ESDC. (Here are most of the case files.)

The clause was added in 1846 in response to defaults by private railroad corporations on obligations based on "liberally granted state credit," leaving the state holding the bag. But one-time gifts, Jones wrote, did not bind future generations, according to case law.

Still, in 1874, the constitutional prohibition was expanded. In 1938, two separate provisions were combined into one clause, preventing public corporations from granting the State's credit--hence, I'd point out, the state-authorized arena bonds do not put the state in the hole. 

But, Jones wrote, the 1938 Constitution "did not extend the prohibition against the giving or loaning of the State's money, which continues to apply only to private recipients."

And public benefit corporations like ESDC, case law states, "exist independently of the state."

However, I'd point out, the ESDC is controlled by gubernatorial appointees.

Jones wrote:

Because public benefit corporations benefit from a status separate and apart from the State, money passed to public corporations consequently cannot be subject to the article VII, § 8(1) prohibition against gifting or loaning State money as such money is no longer in the control of the State.

I'd suggest that's a legal fig leaf, but obviously a useful one to elected officials.

Public purposes

The second part of the case involved appropriations to the state Agriculture Department to fund agreements with not-for-profit organizations to promote apple and grape crops and products.

Jones agreed with the defense, which cited a case known as Murphy, which backed the legality of Erie County's issuing bonds to finance the construction of a stadium leased to, or managed by, a private entity. He wrote:

We rejected the constitutional claim, reasoning that although a private firm "will also derive a benefit from" the transaction, the stadium would serve a "very public purpose."  The Court distinguished Westchester County -- the 1921 precedent upon which the dissent hinges its analysis -- on the basis that the benefit of the challenged expenditure in that case "accrued only to a private party." We held that "an incidental private benefit" will not "invalidate a project which has for its primary object a public purpose."

In this case, he wrote, "the appropriations at issue... fulfill a predominantly public purpose." His conclusion:

In sum, we find no constitutional infirmity to the challenged appropriations.  Although some, like plaintiffs and the dissent, may question the wisdom of the policy choices, "the Legislature has made a valid legislative judgment"

The main dissent

In dissent, Judge Eugene Pigott wrote:

Unconstitutional acts do not become constitutional by virtue of repetition, custom or passage of time.  But that is what the majority opinion holds today.  The arguments made by these defendants are precisely the kind of claims that sully taxpayers' view of our State government. .  

Pigott challenged the distinction between granting cash and a loan:

The fact that the Westchester County Natl. Bank case dealt with the gift of credit as opposed to a gift of money is irrelevant; it is evident from that case that, even if the Legislature had proposed paying cash to the World War I veterans instead of using the State's bonding authority, the outcome would have been the same, because the issue was whether the issuance of bonds on behalf of the veterans was a gift, irrespective of its form.
In 1967, the voters rejected a proposed amendment to the state constitution that would have allowed the distribution of funds to private businesses for the purpose of economic development in the same manner the ESDC is distributing funds now.  

He added that the use of an intermediary like the ESDC didn't improve things:

But we have cautioned on more than one occasion that "[w]hen the main purpose of a statute, or part of a statute, is to evade the Constitution by effecting indirectly that which cannot be done directly, the act is to that extent void, because it violates the spirit of the fundamental law"

He concluded:

But this error [holding that the Legislature may use a public corporation to get around the Constitution] is apparently of only academic importance, because the majority, after discussing the indirect appropriations at length, goes on to hold that the Legislature may also do directly what the Constitution forbids.  Some of the appropriations that plaintiffs challenge do not go through conduits, but are routed directly to trade associations made up of private firms - and the majority upholds these also.  Either overruling Westchester County Natl. Bank or shrinking it beyond recognition, the majority seemingly decides that any gift or loan of money to private recipients is valid as long as it has "a predominantly public purpose".  It is hard to see what is left of the constitutional prohibition.

Smith's dissent

Smith joined Pigott's dissent and added his own, scoffing at the notion that subsidies were needed to create jobs:

I seem to remember a time when IBM could make money by selling its products for more than it cost to produce them.  I would have thought semiconductor manufacturers could do the same.  If they cannot, a bail-out for their shareholders is not a prudent use of more than a billion dollars in taxpayer funds.

Of course, the New York Legislature, so long as it stays within constitutional limits, is free to disregard both received economic teachings and common sense.  I have defended before, and will no doubt defend again, the right of elected legislators to commit folly if they choose.  But when our Legislature commits the precise folly that a provision of our Constitution was written to prevent, and this Court responds by judicially repealing the constitutional provision, I think I am entitled to be annoyed.

Protection for the state?

According to the video of the oral argument, attorney Harold Iselin, representing defendant GlobalFoundries, a semiconductor manufacturer, said it was getting a $650 million grant from bonds financed through ESDC.

Iselin agreed with a judge's observation that, even if ESDC makes a bad investment that doesn't promote economic development, that's a different issue than the plaintiff's charge that the gift and loan clause violates the constitution.

What if GlobalFoundries doesn't perform what it promised?

"The state has extensive remedies, including the right to claw back the funding that ESDC has provided pursuant to that agreement, along with numerous other remedies," Iselin responded. (Such "extensive remedies," in the case of Atlantic Yards, are pretty gentle.)

Smith's challenge

Near the close of oral argument, Smith asked, "Doesn't People v. Westchester make it clear that no amount of public benefit, in itself, will justify the gift...?"

State attorney Underwood responded, "Westchester involved no quid pro quo at all."

Smith asked about subsidies to the railroads.

"There was no way to get the money back," Underwood responded. "A contract--"

The "Atlantic Yards" of upstate?

As Reuters reported 10/13/11, the state didn't seem to be looking hard at GlobalFoundries' performance:

An investigative report last week by the Albany Times Union found that GlobalFoundries, a semiconductor manufacturer and one of the defendants in the case, spent some of the $665 million cash grant it received in 2008 -- the largest such grant in U.S. history -- on luxury apartments, flat-screen TVs and catering for private parties. Overall, the company received $1.4 billion in subsidies after pledging more than $7 billion to build a new plant outside Albany.

Those subsidies, according to the Times Union, involve $665 million in cash, plus $700 million in tax credits, so the total is not worth $1.4 billion. Still, it's the largest public incentive package in state history, according to the state. (Some might dispute that, with Atlantic Yards.)

Here's the Times-Union's special report page on GlobalFoundries.

State subsidy policy changed?

The newspaper reported 10/10/11, while noting the curious spending by the firm, that the Cuomo administration looks askance at a project greenlighted in 2006 by the administration of Gov. George Pataki:

Such a mega deal likely won't be offered again, according to the top economic development official in Gov, Andrew Cuomo's administration -- not even to land a second fab at Luther Forest Technology Campus in Malta, where GlobalFoundries owns 223 acres.

"We don't see massive subsidies as good economic development policy or a good investment of taxpayer money," said  Ken Adams, who became president of ESDC in April under Cuomo. "We're no longer fronting money. There's a lot of lessons we learned from past experience."

No more "fronting money"?

That might rule out subsidies for projects like Atlantic Yards, though the state funds were designated for infrastructure--albeit infrastructure not merely to prepare a site for potential better but infrastructure in pursuit of a specific project.

The Times-Union noted 11/11/11 that the government of Abu Dhabi is the majority stakeholder in GlobalFoundries, and said the firm was seeking more state assistance to continue development in the town of Malta.

The newspaper reported 11/7/11 that the firm wants to trade $700 million in tax credits for $165 million in immediate cash--a discount on the value but a source of immediate cash flow. The newspaper reported 6/30/11 that the Cuomo administration "risks the loss of a second massive factory in Malta by refusing the company's heavy demands for more cash."

The fallout

Plaintiffs' attorney Ostrowski commented to the 11/22/11 Albany Business Review:

"There is no clear path to reform anymore," said James Ostrowski, the attorney in Buffalo who argued the case. "We were the underdog, up against huge multinational corporations. I was really hoping this would lead to real change.

"Maybe every business, everyone, should call up their assemblyman and ask for as much money as you can get, because apparently there are no limits on the state giving out money," Ostrowski added.

By contrast, Gannett reported 11/21/11:

Ken Pokalsky, the Business Council of New York State's senior director of government affairs, said Smith was missing the point.

State incentives garnered a "$2 billion capital investment from the company, which cemented IBM's longstanding presence in this state, produced direct jobs and indirect jobs, and guaranteed their ongoing presence here," he said.

"You can't judge manufacturing solely on headcount," Pokalsky said.

The Daily News covered the ruling in an 11/21/11 article, as did several upstate publications and wire services.

Ostrowski added 11/23/11 on his blog:

I firmly believe that if this case stands, and is not somehow overturned, NY State is doomed since corporate welfare is the glue that holds the whole corrupt regime together.

He doesn't have much traction, though the Daily News, at least on this issue, seems to be joining him.