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Public authorities and the “gift and loan clauses” in the NY constitution

January 13, 2012

Under the state constitution’s gift and loan clauses, New York State and its local governments are prohibited from giving or loaning public money or credit to private corporations. This restriction, however, has generally been interpreted not to apply to public authorities, as in the Court of Appeals’ recent decision in Bordeleau v. State of New York.

The plaintiffs in Bordeleau challenged the constitutionality of appropriations made to the Urban Development Corporation for economic development purposes, and specifically those that would be disbursed to private entities. As the court explained:

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.

(The corresponding provision for local governments is found in article VIII, § 1.) The gift and loan clause, the court explained, was included in the state constitution in the nineteenth century in response to the state’s prior practice of subsidizing railroad and canal companies through long-term debt—a practice that ultimately had disastrous fiscal consequences for New York after the railroads defaulted on their debts during the economic depression of 1837.

In upholding the economic development funding at issue in Bordeleau, the court emphasized that public authorities were created to “insulate the State from the burden of long-term debt,” not to exacerbate it. Moreover, the court stated, “it is undisputed that [the constitution] permits the granting of public funds to public benefit corporations for a public purpose.” The court continued:

There is no doubt that the constitutional limitations at issue serve to prevent improvident fiscal decision-making and preferential treatment. Such concerns were the subject of debate during the 1938 Constitutional Convention. But the Convention and subsequent ratification of the amendments by the electorate demonstrated the approval for the ability of public benefit corporations to receive and expend public monies, enable the development and performance of public projects and be independent of the State. Thus, plaintiffs cannot challenge the grants at issue by a public benefit corporation, like the UDC, under article VII, § 8(1) of the State Constitution.

Two judges dissented, cautioning that “unconstitutional acts do not become constitutional by virtue of repetition, custom or passage of time. But that is what the majority opinion holds today.”

Bordeleau, indeed, is just the last in a line of cases rejecting gift and loan challenges to public authority funding mechanisms.

One of the earlier cases dealing with this issue was Comereski v. City of Elmira, which involved a contract between the City of Elmira and the Elmira Parking Authority that allowed the city to pay off the authority’s bonds. Concluding that this arrangement was permissible under the municipal gift and loan clause, the court explained that the constitution wasn’t intended to “prohibit gifts of money by a city or county to another public corporation for a public purpose.” The court also ruled that the funding agreement wasn’t precluded by the parking authority’s enabling legislation, which provided that the authority’s obligations wouldn’t be considered “a debt of the state of New York or of the city, and neither the state nor the city shall be liable thereon, nor shall they be payable out of any funds other than those of the authority.” As the court explained, these provisions might have disclaimed liability, but they didn’t “forbid the (voluntary) transfer of money or property by State or city to an authority.”

The gift and loan issue came up again in Wein v. State of New York, which involved a $500 million appropriation to the Municipal Assistance Corporation for the City of New York (MAC). The state had authorized the funding in response to the “desperate fiscal crisis” that arose in New York City in 1975. Under the legislation, the city and MAC entered into repayment agreements with the State Budget Director, and the State then sold short-term revenue anticipation notes to finance the arrangement. As in Comereski, the court recited that “the State may give or lend money, as distinguished from its credit, to assist a municipal or other public corporation in a public purpose.” The court then explained that under article VII, § 9 of the Constitution, “[i]t is also undisputed that the State may validly contract debts in authentic anticipation and receipt of taxes and revenues,” so long as the notes are paid from the taxes or revenues within one to two years from the date of issue, depending on the purpose and type of note issued. As a result, the temporary notes issued on MAC’s behalf were “validly issued in authentic anticipation of taxes and revenues to be received within one year of their date.” The court noted, however, that constitutional problems could arise if the city’s financial troubles continued and the revenue anticipation notes were made payable out of previously impounded revenues, as this would “roll over” the debt and violate the constitutionally mandated time limit.

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