Faster. Cheaper. Unconstitutional: why the public's subsidy of JobsOhio violates article VIII, sections 4 & 6 of the Ohio Constitution.

• Author: Osmer, Sarah

INTRODUCTION

On February 18, 2011, Ohio Governor John Kasich signed the 129th Ohio Assembly House Bill 1 into law, (2) authorizing the state to replace Ohio Department of Development activities with a new, private entity called JobsOhio. (3) JobsOhio aims to attract jobs to the state and help local companies expand. (4) It touts that by "[u]sing a private-sector approach, [it] will work at the speed of business, enabling Ohio to be more nimble and flexible and thus more competitive in its economic development efforts." (5) However, in its need for speed, JobsOhio cuts comers with the Ohio constitution.

The Ohio Constitution contains multiple provisions designed to prohibit state funding of private enterprise, (6) and this Comment focuses on two of them: article VIII, sections 4 and 6, as well as the exception found in section 13. (7) Part I of this Comment explores a brief history behind the state's adoption of article VIII, sections 4 and 6, and analyzes Ohio courts' jurisprudence interpreting and applying these provisions. (8) Part II provides background and analysis on the function and purposes of House Bill 1 ("H.B. 1"), the enacting legislation for JobsOhio. (9) Finally, Part III analyzes how article VIII, sections 4 and 6 apply to H.B. 1, and concludes that certain provisions of JobsOhio violate these sections of the Ohio Constitution. (10)

1. HISTORY AND ANALYSIS OF OHIO CONSTITUTION ARTICLE VIII

   1. Historical Background

      In the early 1800s, the young state of Ohio played an active role in developing its economy. (11) State assistance took the form of public financing of private enterprise with the goal of developing a statewide transportation network, including railroads, canals, and turnpikes. (12) The public initially supported investments designed to expand the state's access to markets, but that enthusiasm quickly soured. (13) State-subsidized corporations failed or squandered the government funds, leaving the public to bear the cost--and those costs were great. (14) Between 1825 and 1830, Ohio's debt increased "nearly eleven-fold, from $400,000 to $4,333,000." (15)

      While the state's debts accumulated, private transportation developers misused state funds. (16) Massive inefficiencies resulted. It is estimated that less than half of the 30,000 miles of railroad built between 1880 and 1882 was necessary for development. (17) Developers wasted public money building duplicate railroad lines, and, in some instances, never building the promised lines at all. (18) Development was often uneven and only benefited certain regions of the state. (19)

      On top of the massive debt and inefficiencies, public financing of private enterprises resulted in widespread corruption. (20) According to one scholar's account, "railroads, through 'practices of rate discrimination, favoritism, wastefully duplicated lines, stock gambling, frauds on investors, monopolies and political corruption' constituted an 'aid to plutocracy [and] a danger to the republic.'" (21)

      Public outcry over corruption and accumulation of debt, particularly among the anti-corporation Democrat party, contributed to the push for the 1850-51 state constitutional convention. (22) This convention marked the start of a new era for the state, focused on reducing public support for private enterprise. As one commentator noted, "[i]t cannot be gainsaid that during the period from 1850 to about 1920, the judiciary and the legislative branch exerted prodigious efforts to prevent the entanglement of the government and the private sector in an attempt to insure that the government worked for the good of all the people." (23)

      Ohio's 1850-51 convention led to the adoption of a new constitution containing several provisions aimed to limit public aid for private endeavors. (24) The resulting constitution, like many other constitutions that states adopted during a wave of mid-nineteenth-century constitutional reforms, included numerous provisions designed to limit the use of public funds to support private enterprise. (25) Among these are article VIII, sections 4 and 6. (26)

   2. Analysis of Article VIII, Sections 4 and 6

      Article VIII, sections 4 and 6 of the Ohio Constitution, as well as article VIII, section 13, which limits sections 4 and 6, are particularly relevant in analyzing the constitutionality of JobsOhio. (27)

      Even before implicating these constitutional provisions, at a minimum, public funds in Ohio must be spent for a public purpose. (28) In determining whether public funds support a public purpose, the Ohio Supreme Court gives great deference to the legislature and will only overturn a legislative determination based on a "manifestly arbitrary or unreasonable" standard. (29) Despite the Court's great deference to the legislature in determining what constitutes a public purpose, any legislative scheme must still overcome the restrictions of article VIII, Sections 4 and 6.

      In particular, sections 4 and 6 create an additional hurdle by (1) prohibiting joint ownership between the government and private entities, (2) prohibiting private financial gain, and (3) prohibiting government subsidies for commerce or industry. These prohibitions are relevant to JobsOhio because while its proponents may argue the program constitutes a public purpose, the program cannot overcome the hurdle created by section 4 and 6 because JobsOhio authorizes joint ownership between the state and private entities, fosters private financial gain, and allows for government subsidy of commerce in violation of the Ohio constitution.

      1. Article VIII--Public Debts and Public Works

         Article VIII of the Ohio Constitution concerns "Public Debts and Public Works." (30) In Grendell v. Ohio Environmental Protection Agency, an Ohio court of appeals described article VIII as "an expression of concern with placing public tax dollars at risk to aid private enterprise... [and an] interest in not placing state tax dollars at risk in unwise investments." (31) Specifically, article VIII, sections 4 and 6 prohibit the government from using public funds to finance private enterprise, whether at the state or the county or township level. (32) Article VIII, section 4 of the Ohio Constitution states the following:

         The credit of the state shall not, in any manner, be given or loaned to, or in aid of, any individual association or corporation whatever; nor shall the state ever hereafter become a joint owner, or stockholder, in any company or association, in this state, or elsewhere, formed for any purpose whatever. (33) Similarly, article VIII, section 6 also bans public financing of private enterprises, but does so only at the city, town, or township level:

         No laws shall be passed authorizing any county, city, town or township, by vote of its citizens, or otherwise, to become a stockholder in any joint stock company, corporation, or association whatever; or to raise money for, or to loan its credit to, or in aid of, any such company, corporation, or association: provided, that nothing in this section shall prevent the insuring of public buildings or property in mutual insurance associations or companies. Laws may be passed providing for the regulation of all rates charged or to be charged by any insurance company, corporation or association organized under the laws of this state, or doing any insurance business in this state for profit. (34) a. Sections 4 and 6 Prohibit Joint Ownership

         The Ohio Supreme Court first interpreted article VIII, section 6 in Alter v. City of Cincinnati. (35) Alter concerned the constitutionality of a waterworks act authorizing the city of Cincinnati to contract with a corporation for the expansion of water services, as well as to confer joint ownership of the waterworks with the corporation. (36) The Alter Court interpreted section 6 to mean that "[t]here can be no union of public and private funds or credit, nor of that which is produced by such funds or credit." (37)

         In applying the rule prohibiting the union of public and private funds, the Alter court determined that the joint-ownership provision of the act was unconstitutional, stating:

         [section 6] not only prohibits a "business partnership," ... but it goes further, and prohibits a municipality from being the owner of part of a property which is owned and controlled in part by a corporation or individual ... [a] union of public and private funds or credit, each in aid of the other, is forbidden by the constitution. (38) Furthermore, In State ex rel. Ryan v. City Council of Gahanna, (39) the Ohio Supreme Court elaborated on the meaning of "joint venture" to hold that a municipality's financing of an enterprise in ways favorable to the private entity constituted "joint ownership," which the state constitution prohibited. (40) In Ryan, the city of Gahanna purchased and developed an industrial park, financing it by issuing notes. The notes "were issued in anticipation of long-term bonds, at a favorable rate to private corporations," and the Court concluded that "[t]his [was] as much a joint enterprise as if the city ... had given the money directly to the corporations to develop the land, to construct their buildings and to carry on their activities in the industrial park." (41)

         Simply put, the Ohio Supreme Court has affirmed that the "primary purpose" of article VIII, section 6 "is to prohibit the use of county funds or credit for private purposes ... [in that it] shall not be used for economic gain by private interests." (42) Sections 4 and 6 always "forbid [the] government to hold stock in private companies or to raise money for or [to] loan its credit to private individuals or businesses." (43)

         One rationale for the prohibition on the union of private and public funds is the desire for full governmental control. As the Alter court wrote:

         [t]he whole ownership and control must be in the public.... [A city] cannot engage in an enterprise with an individual or corporation for the construction ... of a property which, as a...