Bordeleau v. State

OPINION OF THE COURT

The issue before this Court is whether plaintiffs’ challenge to appropriations in the New York State 2008-2009 budget, pursuant to article VII, § 8 (1) of the New York State Constitution, can survive a motion to dismiss. We conclude that it cannot.

Plaintiffs, a group of 50 taxpayers of the State of New York, commenced this declaratory judgment action against the State, New York State Urban Development Corporation (UDC) doing business as Empire State Development Corporation (ESDC), International Business Machines Corporation (IBM), Advanced Micro Devices, Inc., West Genesee Hotel Associates, American Axle & Manufacturing, Inc., among other defendants, challenging numerous loans and grants issued by public defendants to private entity defendants and other private companies in order to stimulate economic development. Plaintiffs broadly allege that certain grants to private entities violate the constitutional ban on gifts of state monies to private firms. More specifically, they challenge the State’s practice of designating state funds for the purpose of economic development as unconstitutional.

“Did this Court err, as a matter of law, in modifying, on the law, the order of the Supreme Court by reversing so much of the order which granted defendants’ motions to dismiss the first cause of action, and remitting the matter to the Supreme Court for further proceedings no[t] inconsistent with this Court’s decision and, as so modified, affirming the order?” ( 2010 NY Slip Op 82494 [U] [2010]).

We now reverse and answer the question in the affirmative.

At the outset, we observe that plaintiffs’ “burden is a heavy one” (Schulz v State of New York, 84 NY2d 231 , 241 [1994] [Schulz I]). It is well established that “enactments of the Legislature—a coequal branch of government—enjoy a strong presumption of constitutionality” (id.). In this case, plaintiffs’ burden is “exceedingly strong” because they challenge public expenditures designed in the public interest (Wein v State of New York, 39 NY2d 136 , 145 [1976]). Indeed, we have recognized the need for deference involving “public funding programs essential to addressing the problems of modern life, unless such programs are ‘patently illegal’ ” (Schulz I, 84 NY2d at 241). As such, unconstitutionality must be proven beyond a reasonable doubt.

Article VII, § 8 (1) of the State Constitution broadly declares, in relevant part,

“[t]he 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.”

This provision contains two separate prohibitions: first, it precludes the State from giving or loaning “money” to private recipients and, second, it more broadly forbids the State from giving or lending its “credit” to private recipients or public corporations. Hence, while the State may not lend its credit to a public corporation, such as the UDC, nothing in article VII, § 8 (1) prohibits the State from adopting appropriations directed to such public entities. Before addressing the specific arguments of the parties, it is helpful to briefly trace the history of article VII, § 8 (1).

In 1846, the voters of the State of New York amended the Constitution to prevent the giving or lending of the State’s credit to private corporations (see Wein, 39 NY2d at 143-144 ; see

The 1846 Constitution, however, did not bar gifts of state money because, as this Court recognized over a century later, the granting of state money was a one-time event that “does not bind future generations or create the same dangers of collapse, insolvency and crisis associated with the abuse of credit” (Schulz I, 84 NY2d at 246). Nevertheless, the constitutional prohibition was later expanded in the 1874 Amendments to the Constitution to preclude the giving and lending of public money to aid any private entity or undertaking (see Ohrenstein, 77 NY2d at 50 [“Neither the credit nor the money of the State shall be given or loaned to aid or in aid of any association, corporation or private undertaking (former art VIII, § 9)”]). The purpose of that amendment was to prevent the State’s practice of freely granting “public funds to railroads and to charitable associations” (People v Westchester County Natl. Bank of Peekskill, N.Y., 231 NY 465 , 473 [1921]) because a concern had arisen regarding the inability of the State to “superintend the expenditure of the money, or even control it, so far as to compel its use for the purposes for which it was appropriated” (1873 NY Senate Doc No. 70, at 39).

More than 60 years later, the Constitutional Convention of 1938 combined the two separate provisions dealing with gifts or loans of state money and credit into article VII, § 8 (para 1). The 1938 Constitution also amended the scope of the prohibition against giving or lending the State’s credit, for the first

It is well settled that “public benefit corporations exist[ ] independently of the State” (Schulz I, 84 NY2d at 246). This Court has “consistently recognized public authorities as legal entities separate from the State, enjoying an existence separate and apart from the State, its agencies and political subdivisions” (i d. at 246 n 4). And significantly, it is undisputed that article VII, § 8 (1) permits the granting of public funds to public benefit corporations for a public purpose (Wein, 39 NY2d at 140 ; see also Schulz I, 84 NY2d at 246 [“While the provision bars the State from lending its ‘credit’ to a public corporation, the State is nonetheless free to give money to a public authority and to commit itself to giving future gifts”]). These two principles do not, however, stand alone as both have been recognized since the inception of public authorities.

Concurrent with their status as entities separate from the State, the ability of public authorities and public benefit corporations to receive public funds was acknowledged in Matter of Dormitory Auth. of State of N.Y. (Span Elec. Corp.) ( 18 NY2d 114 [1966]). And in Schulz I, we noted that the Constitution of 1938 accepted the creation of the “new vehicle” devised by the Legislature by giving “full recognition to the existence of public benefit corporations, their independent capacity to contract debt, and the continued power of the State to make gifts of money to those authorities” (Schulz I, 84 NY2d at 244, 246). More specifically, the 1938 Constitution not only recognized the viability of public benefit corporations, but also limited the prohibition of giving or loaning state money to “any private corporation or association, or private undertaking,” rather than the former, broader prohibition “in aid of any association, corporation or private undertaking” (NY Const, art,VII, § 8 [1]; former art VIII, § 9; see Quirk and Wein, A Short Constitutional History of Entities Commonly Known as Authorities, 56 Cornell L Rev 521 , 577, 579 [1971]). Because public benefit corporations benefit from a status separate and apart from the State, money passed to public corporations consequently cannot be subject to the article VII, § 8 (1) prohibition against gifting or loaning state money as such money is no longer in the control of the State (see generally Matter of New York Pub. Interest Research

We conclude that Murphy, not Westchester County, provides the appropriate standard for resolving a challenge to an appropriation, whether under article VIII, § 1 or article VII, § 8 (1). Here, the very purpose of the Department of Agriculture and Markets is to obtain specialized marketing services to promote a major industry in New York—the agriculture industry—for the overall benefit of the public and the State’s competitiveness to foster growth in this important sector of the State’s economy (see Agriculture and Markets Law § 3). Moreover, the Department is authorized to assist in the promotion and marketing of New York’s wine and fruit products (see Agriculture and Markets Law § 16 [2-b]). The appropriations at issue here, which provide funding for contracts between the Department and the New York State Apple Growers Association, New York Wine and Grape Foundation and Long Island Wine Council, all fulfill a predominantly public purpose and are not prohibited under article VII, § 8 (1).

In sum, we find no constitutional infirmity to the challenged appropriations. Although some, like plaintiffs and the dissent, may question the wisdom of the policy choices, “the Legislature has made a valid legislative judgment” (Dalton v Pataki, 5 NY3d 243 , 272 [2005]; see also Local Govt. Assistance Corp. v Sales Tax Asset Receivable Corp., 2 NY3d 524 , 528 [2004] [“The wisdom of this legislation is not a matter for this Court to address”]).

Accordingly, the order of the Appellate Division should be reversed, with costs, the first cause of action of plaintiffs’ complaint dismissed, and the certified question answered in the affirmative.

Unconstitutional acts do not become constitutional by virtue of repetition, custom or passage of time.

“Whether the purpose [of the gift or loan of credit] is a public one ... is no longer the sole test as to the proper use of the state’s credit. Such a purpose may not be served in one particular way. However important, however useful the objects designed by the [L]egislature, they may not be accomplished by a gift or a loan of credit to an individual or to a corporation. It will not do to say that the character of the act is to be judged by its main object—that because the purpose is public, the means adopted cannot be called a gift or a loan. To do so would be to make meaningless the provision adopted by the convention of 1846. Gifts of credit to railroads served an important public purpose. That purpose was distinctly before the [L]egislatures that made them. Yet they were still gifts and so were prohibited” ( 231 NY 465 , 475 [1921] [emphasis supplied]).

Perhaps most telling is that Judge Cardozo disagreed with the majority’s holding that the proposed payments to the returning soldiers violated the Gift Clause, and elucidated that the true purpose of the clause was not to prohibit the Legislature from pledging the credit of the State “in recognition of an honorable obligation” but rather “was to put an end to the use of the credit of the state in fostering the growth of private enterprise and business” (id. at 483-484 [Cardozo, J., dissenting]). And this is what plaintiffs have asserted in their complaint. The fact that the Westchester County Natl. Bank case dealt with the gift of credit as opposed to a gift of money is irrelevant; it is evident from that case that, even if the Legislature had proposed paying cash to the World War I veterans instead of using the State’s bonding authority, the outcome would have been the same, because the issue was whether the issuance of bonds on behalf of the veterans was a gift, irrespective of its form.

The New York Legislature’s devotion to this self-destructive practice is no small matter. Among the expenditures at issue in this case is one described by the State as a commitment of “$140 million to support the construction of a wafer packaging facility and continued research and development efforts” to a joint venture of which International Business Machines Corporation is a member. This expenditure, it is said, will “result in the creation of at least 675 jobs” and the “retention” of 1,400 others. That works out to roughly $60,000 of state money per job. Another is an expenditure of $300 million to help an “international consortium of semiconductor manufacturers” expand a research and development program. This, we are told, will result in the creation of 450 jobs and the saving of 250 others: more than $400,000 per job. And the brief of defendant Globalfoundries U.S., Inc. discloses that the Legislature has appropriated $650 million to subsidize that company’s semiconductor manufacturing (an appropriation distinct, as far as I can tell, from the $300 million semiconductor subsidy described by the State). Global-foundries says that its manufacturing facility “is expected to employ more than 1,500 people, with an additional 5,000 jobs created by supplier firms”—implying a cost to the State of roughly $100,000 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. I would have thought semiconductor manufacturers could do the same. If they cannot, a bailout for their shareholders is not a prudent use of more than a billion dollars in taxpayer funds.

Of course, the New York Legislature, so long as it stays within constitutional limits, is free to disregard both received economic teachings and common sense. I have defended before, and will no doubt defend again, the right of elected legislators to commit folly if they choose. But when our Legislature commits the precise folly that a provision of our Constitution was written to prevent, and this Court responds by judicially repealing the constitutional provision, I think I am entitled to be annoyed.

Order reversed, etc.