Anything goes: a history of New York's gift and loan clauses.

• Author: Galie, Peter J.
• Position: I. A Brief History of the Text of the Gift and Loan Clauses to II. The Approach Taken By the Court of Appeals to the Gift and Loan Clauses C. Use of Public Authorities to Avoid Gift and Loan Clauses 5. Schulz, p. 2005-2052 - Chief Judge Lawrence H. Cooke Sixth Annual State Constitutional Commentary Symposium: The State of State Courts

"[M]oney in the hands of an authority is not state money....

[T]he gift and loan clause does not apply to the authorities."

-Barbara D. Underwood, Solicitor General of the State of New York

"So anything goes?"

-Honorable Jonathan Lippman, Chief Judge of the State of New York

Oral Argument on Bordeleau v. State, New York Court of Appeals, Oct. 12, 2011 (1)

The New York constitution prohibits gifts or loans of money or credit from state and local governments to private enterprises. (2) Adopted between 1846 and 1874, (3) these clauses were a response to widespread corruption and mismanagement of public moneys on the part of the state legislature and municipalities. (4) The gift and loan restrictions, coupled with other constitutional amendments adopted during that period--such as a referendum requirement for state full faith and credit debt, (5) a maximum length of time debt could extend, (6) a "single work or object" requirement for debt, (7) and debt and tax limitations for municipalities (8)--combined to strictly limit the state and local governments in their taxing and spending powers.

Notwithstanding the unequivocal nature of New York's gift and loan clauses, (9) during the twentieth century these provisions have been amended numerous times, adding exception upon exception to the broad prohibitions. They have been circumvented or diluted in the name of meeting the growing demands being placed upon the modern state and its political subdivisions. (10) The tension between the restraints provided by these provisions and the public programs called for by advocates for a greater role for government in solving social problems has been resolved in favor of the latter. (11) Moreover, the use of public authorities and an interpretation of the clauses which substitutes public purpose for consideration as the critical element in public-private agreements, while affording extensive latitude to the government's determinations as to what constitutes such a public purpose, has resulted in a body of state constitutional law at some remove from the text of the state constitution. (12)

The recent case of Bordeleau v. State, (13) represents the latest word by the Court of Appeals concerning New York's ability to give or loan public money to private enterprises. This decision provides the legislature a substantial amount of flexibility in granting money to private enterprises and raises serious questions as to the continued viability and efficacy of the gift and loan clauses as a means of controlling the use of public moneys. (14)

Part I of this article will present a brief textual history of the gift and loan clauses--the conditions which gave rise to them, subsequent amendments, and calls for revision. Part II will examine the decisions of the New York Court of Appeals that have interpreted these clauses, and in particular will show ways in which the court has allowed state and local governments to circumvent them. Part III will analyze the Court of Appeals' own understanding of its role in gift and loan jurisprudence. The court's deference in this area will be juxtaposed with the expansive, activist role it has played when analyzing other provisions of the state constitution. Part IV will offer some reflections on the future of the gift and loan clauses. (15)

1. A BRIEF HISTORY OF THE TEXT OF THE GIFT AND LOAN CLAUSES

   Among the differences between the Federal Constitution and state constitutions is the extent to which the latter address the topic of finance. In contrast to the Federal Constitution, which contains relatively limited mention of finance and debt, (16) all but four of the twenty articles in the New York Constitution bear directly on the topic. (17) Two of the longest articles in the constitution, articles VII and VIII, are entirely devoted to state and local finances, respectively. (18) In addition to the gift and loan clauses, each of these articles contains multiple, detailed sections governing the issuance and payment of debt. (19) The state budget and appropriations processes are detailed in the state finance article. (20) Public benefit corporations, also known as authorities, are addressed in article X of the constitution. (21) In addition to having an entire article devoted to the topic of taxation, (22) aspects of that power are treated in several other places. (23) The remaining provisions concerning finance are scattered throughout the constitution, (24) and in one instance adjacent to the people's right to assemble and petition the government. (25)

   At the national level, finance is almost exclusively a matter of public policy. (26) Few constitutional provisions limit decision-makers. In their first incarnations, state constitutions, like their national counterpart, had few provisions concerning finance. (27) The first two constitutions of New York, adopted in 1777 and 1821, did not contain any restrictions on public aid to private enterprise. (28) On the contrary, grants and loans of state money and credit to private corporations were fairly common occurrences, justified by the general view that the state had an obligation to promote the prosperity of all its members. (29) New York's first foray into government stimulus to create jobs dates back to 1790, when the legislature incorporated the New York Manufacturing Society and authorized the state treasurer to use public funds to acquire one hundred shares of stock in the company. (30) That organization, according to the preamble to the act, had associated "for the laudable purposes of establishing manufacturies, and furnishing employment for the honest industrious poor" (31) and the organization sought incorporation "to enable them more extensively to carry into effect their patriotic intentions." (32)

   The 1938 reports of the New York State Constitutional Convention Committee, commonly known as the Poletti Report, has divided pre-1846 gifts and loans to private enterprises into two periods: "moderate subsidizing" between 1790 and 1816 and "very extensive and highly speculative subsidizing" between 1816 and 1846. (33) This transformation resulted from an increase in the need for infrastructure projects, "such as roads, turnpikes, canals and railroads," and the realization that these enterprises were too great for private capital to support; (34) the state either had to undertake these large projects and their commensurate costs or provide assistance to private entities who would assume the projects. (35)

   By the time of the 1846 constitutional convention, state aid had been authorized by statute to thirty-three corporations, including banks, companies providing transportation and infrastructure, health care facilities, and educational institutions. (36) Many of these companies received multiple grants and loans. (37) State debts created to aid projects like canals and railroads were expected to be self-supporting, and there was never an expectation that the state would have to actually answer for this debt. (38) A constant refrain offered by governors and legislators throughout the first half of the nineteenth century was the importance of such aid to the state's growth and prosperity. (39) In response to public criticism of private projects, Governor William Seward stated:

   [I]t is not only the right, but the bounden duty of the legislature to adopt measures for overcoming physical obstructions to trade and commerce in this state, and for furnishing to each region, as far as reasonably practicable, facilities of access to the great commercial emporium of the union, fortunately located within our own borders ... that the legislature may direct the construction of such works at the expense of the state, or authorize their construction by associations, and may aid them by loans of the credit of the state upon conditions of perfect indemnity...." (40) Calls for the discontinuance of state assistance, even those made by officials such as Comptroller Azariah Flagg, (41) met with threatened responses of unemployment. (42) In his transmission to the legislature of a March 1842 letter from the president of the New York and Erie Railroad Company, a company that had been issued $3 million in state stock in 1836, (43) Governor Seward detailed the devastating effects that would occur if additional aid was withheld:

   [T]he laborers employed must be discharged; the interest on the three million state loan, which will accrue on the first of April next, will remain unpaid; the contingent debt will fall immediately upon the treasury; the capital invested in the enterprise by our fellow citizens will be lost; the New York and Erie railroad in its scarcely half-completed condition be exposed to auction at the suit of the state; and the just expectation of immeasurable benefits to result from the enterprise will be suddenly and hopelessly disappointed. (44) Seward went further: "[t]he association can only be regarded by the people as an agent of the legislature...." (45)

   The Panic of 1837 revealed the consequences of this intertwining of state finance and private enterprise. The state had to redeem almost $3.7 million of the nearly $4.4 million of stock issued to railroads prior to 1842. (48) Even when the state did have security for its debts, such security was sometimes later found to have little or no value. (47) The first mortgage lien on the New York and Erie Railroad Company's assets securing the $3 million loan described above covered only the track and roadbed, and not the much more valuable rolling stock, stations, or yards. (48) In the words of Comptroller Flagg in 1843:

   Experience is teaching the inhabitants of this state a severe lesson in relation to the policy of loaning the credit of the people to railroad corporations. These loans were solicited under the plausible pretense of developing the resources of the state, and conferring benefits on the people. But in most cases instead of conferring benefits these measures have inflicted lasting...