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

Author:Galie, Peter J.
Position: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 6. Bordeleau through IV. The Future, p. 2053-2090 - Chief Judge Lawrence H. Cooke Sixth Annual State Constitutional Commentary Symposium: The State of State Courts
  1. Bordeleau

    The case of Bordeleau v. State (331) is the latest pronouncement by the Court of Appeals on the applicability of the gift and loan clauses to public authorities. In Bordeleau, the plaintiffs challenged appropriations in the 2008-2009 budget made to the New York State Urban Development Corporation ("UDC"), a public benefit corporation, which were then used to fund payments to private entities (including corporations such as IBM and American Axle) for public development purposes. (332) The supreme court dismissed the complaint, holding that no violation of the state gift and loan clause had been shown. (333) The appellate division unanimously reversed. (334)

    The Court of Appeals reversed the appellate division and upheld the appropriations. Relying on Wein, the Court described the plaintiffs' burden as '"exceedingly strong' because they challenge[d] public expenditures designed in the public interest." (335) The court held that in such cases, unconstitutionality must be established beyond a reasonable doubt and that public funding programs will be upheld unless they are "patently illegal." (336)

    The court noted that although the gift and loan prohibitions prevented gifts or loans of credit to a public corporation such as the UDC, it did not prevent the state from making appropriations of money to such an entity. (337) The difference between a gift or loan of money and a gift or loan of credit is that a one-time gift of state money does not result in long-term liabilities to future generations or risks of enduring financial detriment. (338) Recognition of this difference, the court believed, was evident in the actions of the 1938 Constitutional Convention, which extended the prohibition against gifts or loans of state credit to public corporations while not enacting a companion restriction upon gifts or loans of state money. (339)

    The court reiterated its prior doctrine that authorities are "independent and autonomous, deliberately designed to be able to function with a freedom and flexibility not permitted to an ordinary state board, department or commission." (340) The failure of the 1938 Convention to prohibit gifts and loans of money to public corporations further demonstrated, in the court's opinion, approval of the position that these corporations are entities able to function independently of the state. (341) The court concluded that their distinct status allowed money to be passed to authorities without the possibility of violating the gift and loan clauses: once passed, "such money is no longer in the control of the State." (342)

    Judge Pigott--in a dissent in which Judge Smith joined--noted that "[u]nconstitutional acts do not become constitutional by virtue of repetition, custom or passage of time." (343) The dissent concluded that the state gift and loan clause and its companion case law prohibited making appropriations for the "public purpose of promoting economic development." (344) Using language from both the majority opinion and Judge Cardozo's dissent in Westchester County, (345) Judge Pigott's dissent concluded that the appropriations through UDC were invalid. (346) Judge Pigott further noted the attempt of the 1967 convention to allow public subsidization of economic development as further evidence that such distributions are prohibited--or else, such an amendment would not have been needed. (347)

    Judge Pigott stated that the use of public authorities to channel funds to private companies evaded the constitution by doing indirectly what could not be done directly. (348) He wrote, "[t]here seems to me no fundamental difference between the State directly giving monies to such private enterprises and the State creating a public corporation with the express intention of doing so." (349) He also distinguished Schulz and Wein, reasoning that "[n]either one of those cases sanctions the granting of state money through an intermediary for distribution to a private concern." (350)

    Prior to Bordeleau, all of the Court of Appeals' decisions involving the application of the gift and loan clauses to public authorities involved gifts and loans of credit, rather than money. Various financing arrangements involving public authorities were held not to represent gifts or loans of state or municipal credit. (351) Arrangements such as those in which a municipality was obligated to pay an authority's debt, (352) or in which an authority incurred debt in order to provide necessary operating funds to a municipality (353) were held not to be loans of "credit," as in neither case was the municipality held to be liable for the debt of the authority. (354) The court also held that the state could permissibly incur debt in order to make appropriations to a public authority (355) and the debt issued by a public authority was not debt of the state, (356) because the state was not legally obligated in the event that the authority defaulted. (357) None of these financing arrangements was held by the court to be an impermissible gift or loan of credit.

    Unlike these prior decisions, Bordeleau involved gifts of money, rather than credit. Bordeleau did more, however, than just apply existing precedent to monetary gifts and loans. The previous decisions involved public authorities that provided financing for other public entities for a state or public purpose; in Bordeleau, the public authority provided funds to a private association. (358) Bordeleau suggests that so long as an appropriation to a public authority has a public purpose, (359) it is unreviewable, whether or not the funds are destined for receipt by a private corporation. (360) Since public authorities are created by special law, rather than constitutional amendment, gifts and loans of money may be made to private companies through ordinary legislation simply by channeling funds through existing or newly created public authorities. Although direct gifts from the state or local treasuries to private corporations may still be prohibited by the gift and loan clauses, the ease with which these prohibitions may be circumvented through the use of public authorities has made aiding private enterprises no more difficult than it was before the clause was adopted.

    1. The Evolving Notion of Public Purpose in Gift and Loan Jurisprudence

    Another way in which the gift and loan prohibitions of the state constitution have been blunted has been through the expansion of "public purpose" to uphold governmental expenditures that may otherwise be deemed gifts or loans. It has long been the law in New York that contracts between governments and private entities that serve a public purpose are permitted even if a private benefit exists. (361) Recent cases and opinions of the Attorney General have shown significant deference to the applicable legislative body as to both what constitutes a public purpose and whether that public purpose outweighs the private benefit. In some Attorney General's opinions, expenditures in the absence of a contract or legal obligation have been upheld solely on the basis that they served a public purpose; (362) the language of Bordeleau can be read as endorsing this approach.

    The concept of public purpose as a sword to permit government action is far removed from the initial notion of public purpose as a shield to prevent the use of public funds for private purposes. Starting in the nineteenth century, courts began to impose a "public purpose" requirement as a check upon legislative authority in the areas of taxation, eminent domain, and spending. (363) The public purpose doctrine provides that the government may impose a tax, take private property, or spend public money only for a public purpose; it may not do so for purely private purposes. (364) New York had recognized the concept of public purpose in takings law as early as 1816. (365) Even though courts in other states were beginning to impose a public purpose requirement upon the taxation power as early as 1853, (366) the New York courts were not as quick to impose such a requirement.

  2. Weismer

    Weismer v. Village of Douglas (367) brought the state in line with the concept of public purpose that had been enunciated by other state courts and the U.S. Supreme Court. (368) In Weismer, the Village of Douglas had been authorized by statute to subscribe for and take capital stock of a manufacturing company, to issue municipal bonds to raise money to pay for the stock, and to use its taxation powers to collect moneys to pay the bonds. (369)

    The court invalidated the bonds issued pursuant to the law, holding that the corporation being financed was "a private business, to be carried on for private profit, to be controlled by private rules, or even private caprice." (370) Weismer also provides perspective on the protean nature of public purpose. Rejecting the argument that a public purpose was present since the lumber mill would create job opportunities and increase the village's taxable base, the court noted that "[a]ny such enterprise tends indirectly to the benefit of every citizen.... [T]hese are not the direct and immediate public uses and purpose to which money taken by tax may be directed." (371)

    One commentator has characterized the Weismer court's definition of public purpose as follows:

    (1) it must produce a "benefit or convenience to the public";

    (2) the public may be the "whole commonwealth or of a circumscribed community";

    (3) if a circumscribed community, "the benefit or convenience must be direct and immediate, not collateral, remote or consequential"; and

    (4) the benefit must be non-exclusive; that is, available to all, and one person's use of the good does not diminish or impair another's use of the same good. (372)

    Even a cursory reading of more recent decisions of the Court of Appeals and opinions of state Attorneys General and Comptrollers over the past half century reveals the distance between current understandings of public purpose as applied to taxing and spending...

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