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New York State Court of Appeals Considers Economic Development Grants

October 13, 2011

In New York, the provision of State funds for economic development has been the source of much discussion and some litigation. The transfer of funds among public entities for economic development has been settled. A series of Court of Appeals decisions—including Comersky v. City of Elmira, Wein v. StateWein v. Levitt, and Schulz v. State—made clear that State agencies and public authorities may freely give money to other governmental entities without violating the lending or giving credit or gifts and loans provision of the State Constitution. The IDAs using public funds for private entities largely escaped judicial review because the recipient was typically responsible for paying the debt.

But what about the State’s historic practice of appropriating funds to public authorities for distribution to private projects that could spur economic development? Last year the practice was challenged in Bordeleau v. State. The court of first impression saw little merit in the citizens’ claims and dismissed, holding that the State can give money to private entities to promote economic development, which is presumed a public purpose. Surprisingly, the Appellate Division, Third Department reversed, finding in its decision that such grants may constitute illegal gifts in violation of the State Constitution, and to be lawful would require that the intended public benefit be the key objective and significantly outweigh any incidental private benefit. Some suggested that seeking to quantify the respective public and private benefit of projects would be too theoretical and not susceptible to meaningful analysis. Others respond that when alienating public money, it is the minimum that should be expected.

Yesterday, the Court of Appeals heard arguments in the case. It would appear that the Court’s answer to the threshold question, “Is economic development, without more, a public purpose?” will be determinative. After addressing the issue of public purpose, the Court may turn to the appropriate funding mechanism, should it be a public authority whose mission embraces economic development, or a State agency that provides grants.

Perhaps the overarching question is whether the Court will choose to upset the State’s economic development strategy… some would say, particularly given the current state of the economy, that this is unlikely. The Court’s answer is expected within the next several months.

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