A recent ruling by New York state”™s highest court allows Empire State Development Corp. to continue awarding state funds to private companies, a key element of the state”™s public-private partnership projects that faced a legal challenge by upstate taxpayers.
IBM Corp. in Armonk was among the defendants named in a 3-year-old lawsuit brought by Lee Bordeleau, a Western New York businessman and anti-tax advocate, and about 50 upstate New Yorkers. They claimed that economic development loans and grants funneled by the state to private companies through the state Urban Development Corp., a public benefit corporation that does business as Empire State Development Corp., violated a constitutional ban on gifts of state monies to private companies.
A state Supreme Court judge in Albany in early 2009 dismissed the lawsuit, agreeing with the state that ESDC-funded projects fostered the public purpose of economic development. Justice Michael C. Lynch noted that companies receiving Empire State Development funds must meet job creation and job retention requirements and other economic development goals as part of the agreement.
One of several corporate targets of the taxpayers”™ lawsuit, IBM in late 2008 received an approximately $44.35 million grant from ESDC to expand its nanotechnology research, development and manufacturing activities in the state.
A state appellate court last year overturned the Albany judge”™s dismissal of the case. The court ruled the constitutional ban on giving state money to private firms still applied when state funds are channeled through public authorities, “for the state may not do indirectly that which cannot be done directly.”
That ruling threatened the state”™s and its chef economic development agency”™s long-standing practice of awarding financial incentives to private companies for projects that create and retain jobs in the state.
However, the Court of Appeals, the state”™s highest court, in November reversed the lower appellate court”™s decision and dismissed the lawsuit.
In a 5-2 decision, the court ruled that because public benefit corporations such as ESDC are “separate and apart” from the state, Â state funds passed to them are not subject to the constitutional ban against gifting or loaning state money because the money “is no longer in the control of the state.”
Dissenting from the majority, Court of Appeals Judge Eugene F. Pigott said New York voters in 1967 rejected a proposed constitutional amendment that would have allowed state funds to be distributed to private businesses “for the purpose of economic development in the same manner that ESDC is distributing funds now.”
“Unconstitutional acts do not become constitutional by virtue of repetition, custom or passage of time,” Pigott said in his dissent.
In another dissenting opinion, Judge Robert S. Smith said giving taxpayers”™ money to “favored businesses” to achieve prosperity is a “self-destructive practice” to which the state Legislature is devoted.
He pointed to one of the expenditures challenged in the lawsuit, a $140-milion commitment by the state to IBM for a computer wafer packaging facility and continued research and development, that “works out to roughly $60,000 of state money per job.”
“I seem to remember a time when IBM could make money by selling its products for more than it cost to produce them,” Smith wrote.
