How Real is the State Constitutional Restriction on Gifts or Loans of State and/or Local Money and Credit for Private Purposes?

Professor's Piece: 

How Real is the State Constitutional Restriction on Gifts or Loans of State and/or Local Money and Credit for Private Purposes?

Gerald Benjamin and Emily Sobel

November 17, 2011

Two sections of the New York State Constitution limit the use of state and local resources in support of private interests (Galie, New York State Constitution: A Reference Guide 173, 185-6). Regarding state government, Article VII, Section 8 provides that:

“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, but the foregoing provisions shall not apply to any fund or property now held or which may hereafter be held by the state for educational, mental health or mental retardation purposes.”

Similarly, but not identically, Article VIII, Section 1 says that:

“No county, city, town, village or school district shall give or loan any money or property to or in aid of any individual, or private corporation or association, or private undertaking, or become directly or indirectly the owner of stock in, or bonds or, any private corporation or association, or private undertaking, except that two or more such units may join together pursuant to law in providing any municipal facility, service, activity or undertaking which each of such units has the power to provide separately.”

In the early 1800s the development of the state’s then “rapid transit system,” its network of canals, was funded in part from public resources. For example, to finance the Erie Canal, opened in 1825, a quite modern-appearing revenue bond scheme was invented; repayment of principal and interest to private investors was pledged from tolls levied on canal users.

It worked spectacularly. That canal was the driver of New York’s transformation into the Empire State and established New York City as the nation’s center of trade and commerce. Within 20 years, the canal more than paid for itself (Schoff 326-7; Bernstein,). The tolls were thereafter revoked.

When the development of railroads began in earnest in the 1830s New York State was heavily invested in canals, and suspicious of the viability of this alternative modality. The resulting public policy was schizophrenic.  New York supported millions of dollars of borrowing to benefit various railroad companies. But legislators also instituted policies and restrictions on the railroads that favored the canal system, diminishing their ability to provide timely returns on the State’s investments. The Panic of 1937 led many railroads into financial straits and then bankruptcy. One consequence was that the State’s debt tripled between 1837 and 1842 (Pierce 16).  The adoption of a constitutional restriction on the use of state resources benefiting private interests followed at the 1846 constitutional convention.

The restriction on local governments’ aid to private interests also stems from the development of the railroads. After the constitutional restriction was placed on the state, the companies turned to local governments for financial assistance. Similar debt problems ensued. The adoption of local constitutional restriction followed in the 1870s (Galie, 186).

Originally, there was no restriction on the state bestowing either gift money or loans on a public entity; this was added in 1938, as New York was emerging from the Great Depression. The aim was to prevent severely Depression-stricken New York municipalities from turning to the state for financial support (Galie, Ordered Liberty 244). As a result, then, the state cannot give or lend assets to either public or private entities, while local governments are only restricted from giving or lending to private ones.

Although there is a long history of states offering companies various incentives for settling within their borders, the practice had modern takeoff during the Depression, when the southern states sought to encourage Northern companies to relocate. (State Economic Development Programs; A Brief History of State Economic Development). New York was constrained in the resulting competition by its 19th century constitutional legacy. As a consequence, changes were proposed to articles VII and VIII during the 1967 New York State Constitutional Convention. One, for example, allowed the State to appropriate funds for “community and economic development” (Dullea, 236). These constitutional changes failed of adoption, however, when the entire proposed constitution was voted down.

Ensuing decades were a time of massive economic and social change in the nation and the world.  Interstate competition for economic primacy accelerated in the late 1970s. (State Economic Development Programs). New York State and local economic development efforts grew apace, with the effect of providing significant public aid to private entities, constitutional constraints notwithstanding.   As illustrated in Table I below, the economic development incentives now offered by New York to private ventures are equal to or exceed those given by other states.

State constitutional “gift and loan” restrictions are most commonly bypassed in New York through the creation of public authorities, not-for-profits, or local development corporations (hereafter LDCs) (“Memorandum Re an Act, OSC No. 2”). These receive public funds but are not the state itself, and are also not general purpose local governments.  They are specifically structured to operate without regard to the constitutional limits. Of course, this method of circumventing the constitutional prohibition has not gone unnoticed or unchallenged. At least half a dozen lawsuits have challenged the legality of disbursements by state and local governments to these entities.[1] In every case, the plaintiffs’ main argument was that the money was being given to these entities in direct contradiction to the Constitution. Except in Ruotolo vs. New York, which concerned the financial support of survivors of police officers killed in the line of duty, courts found no constitutional violation in these arrangements.

Of particular interest is the argument that “practical realities” may trump the plain meaning of constitutional language.  In Comereski vs. Elmira, for example, a relationship between the City of Elmira and the city’s parking authority was constructed to allow some parking meter income to be used to service authority debt. The plaintiff claimed that the city was lending its credit, as expressly prohibited by the Constitution. The court countered that there was no restriction on the city lending its credit to a public use, and moreover that “the problems of a modern city can never be solved unless arrangements like these…are upheld” (308 A.D.2d 248).

Bordeleau vs. New York, pending decision in the New York State Court of Appeals, differs from previous litigation in that it directly attacks the root of the matter: the very constitutionality of LDC’s and similar structures, whose purpose is essentially to convert public funds into economic incentives for private institutions. The plaintiffs are taxpayers, claiming that funds appropriated to the state’s Department of Agriculture and Markets and the Empire State Development Corporation (ESDC) and used for specific projects were unconstitutional, not because state funds were given to these entities at all, but because they were then bestowed upon private interests. They argue that a single degree of separation between the state and a prohibited action is insufficient is insulation from the constitutional prohibition (i.e. that the State cannot do “indirectly that which cannot be done directly”) (17 A.D. 165).

The state does not contest the facts.  It says, however, that its relationship with private recipients of benefits is contractual, and that the express purpose of agencies such as the ESDC - to incentivize private investment in New York State - provides a public benefit. And it argues the practical realities. “Everyone does it. To be competitive, we must too.”  

The Supreme Court agreed with the state. The Appellate Division agreed with the plaintiffs. Now the Court of Appeals has before it a decision that might massively roil the way the state that has declared itself “Open for Business” can actually do business.

Does the state constitution mean what it says? Stay tuned.



[1] Full citations are in the Works Cited, but for easy reference: “Wein v. New York,” 47 A.D.2d 367; “Schulz v. New York,” 84 A.D.2d 231; “Ruotolo v. New York,” 83 A.D.2d 248; “Comereski vs. Elmira,” 308 A.D.2d 248; “Murphy v. Erie County,” 34 A.D.2d 295; “Union Free v. Town of Rye,” 256 A.D. 456.

Works and Cases Consulted or Cited

 

“Comereski vs. Elmira.” 308 A.D.2d 248; 125 N.E.2d 241; 1955 NY LEXIS 1012 (1955). LexisNexis. Online database. 20 Oct. 2011.

“Memorandum Re an Act, OSC No. 2.” Albany: New York State Office of the Comptroller, n.d. Online.

“Murphy v. Erie County.” 34 A.D.2d 295; 310 N.Y.S.2d 959; 1970 NY Spp. Div. LEXIS 4852 (1970). LexisNexis. Online database. 24 Oct. 2011.

“People ex rel. Burby v. Howland.” 17 A.D. 165; 45 N.Y.S. 347; 1897 N.Y. App. Div. LEXIS 858 (1897). LexisNexis. Online database. 24 Oct. 2011.

“Ruotolo v. New York.” 83 A.D.2d 248; 631 N.Y.S.2d 90; 609 N.Y.S.2d 148; 1994 NY LEXIS 122 (1994). LexisNexis. Online database. 24 Oct. 2011.

“Schulz v. New York.” 84 A.D.2d 231; 639N.Y.S.2d 1140; 616 N.Y.S.2d 343; 1994 NY LEXIS 1430 (1994). LexisNexis. Online database. 24 Oct. 2011.

State Economic Development Programs. St. Paul: Minnesota Office of the Legislative Auditor, n.d. Online.

“Union Free v. Town of Rye.” 256 A.D. 456; 10 N.Y.S.2d 333; 1939 NY App. Div. LEXIS 4755 (1939). LexisNexis. Online database. 20 Oct. 2011.

U.S. Census of Population and Housing, 1960: Summary Population and Housing Characteristics: New York. Washington: Government Printing Office, 1960.

“Wein v. New York.” 47 A.D.2d 367; 366 N.Y.S.2d 885; 1975 NY App. Div. LEXIS 9248 (1975). LexisNexis. Online database. 24 Oct. 2011.

Benjamin, Gerald, and Richard P. Nathan. Regionalism and Realism: A Study of Governments in the New York Metropolitan Area. Washington, DC: Brookings Institution Press, 2001. Print.

Dullea, Henrik. Charter Revision in the Empire State: The Politics of New York’s 1967 Constitutional Convention. Albany: Rockefeller Institute Press, 1997. Print.

Galie, Peter J. The New York State Constitution: A Reference Guide. New York: Greenwood Press, 1991. Print.

---. Ordered Liberty: A Constitutional History of New York. New York: Fordham University Press, 1996. Print.

Lafaive, Michael D. A Brief History of State Economic Development. Midland: Mackinac Center for Public Policy, 6 Oct. 2005. Online.

Pierce, Harry H. Railroads of New York: A Study of Government Aid, 1826-1875. Cambridge: Harvard University Press, 1953. Print.

Schoff, Wilfred H. “The New York State Barge Canal. Part I.” Bulletin of the American Geographical Society  Vol. 47.5 (1915): 321-333. JSTOR. Web. 1 Nov. 2011.

 

 

 

A Project of the Howard Samuels New York Policy Center, Inc.
Web Development by Kallos Consulting 

Creative Commons License