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NY Court of Appeals Upholds Economic Development Grants

November 21, 2011

In one of the more anticipated decisions clarifying the role of public authorities in economic development, the New York State Court of Appeals held today in Bordeleau v. New York State that public authorities and state agencies, with appropriate legislative authorization, may provide grants and loans to private companies in an effort to spur economic development. The court, with two judges dissenting, concluded that such assistance is constitutionally defensible. Commentators have suggested that had the court ruled to the contrary, it may have paralyzed many of the larger economic development projects in the state.

Initiated by a group of taxpayers in western New York, the lawsuit challenged subsidies granted by the Urban Development Corporation (also known as the Empire State Development Corporation) to IBM and Global Foundries, among others, as well as subsidies issued by the State Department of Agriculture and Markets to various not-for-profits for the purpose of promoting New York agricultural products.

The court traced the history of two state constitutional provisions which, according to the plaintiffs, prohibited the use of public funds to aid private entities. Taking issue with the plaintiffs’ view, a majority of the court concluded that: (i) public authorities are legal entities separate from the state; (ii) the state may give money to public authorities and they may in turn disperse it to private entities for public purposes; and (iii) state agencies may support marketing measures to promote state industries.

While a majority of the court signed onto the opinion drafted by Judge Jones, two judges (Pigott and Smith) dissented, concluding that the state constitution’s prohibition on the provision of state money to private entities is unambiguous and should bar the grants and loans at issue.

The use of public funds to aid economic development in one form or another, and particularly through the operation of public authorities, has by my count been subject to challenge before the Court of Appeals at least ten times since 1926. It appears that with this decision the court has sought, with some finality, to conclude the discussion.

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