New York Economic Development Payments Lawful, Court Says

New York’s funding of public benefit corporations that promote economic development are constitutional, the state’s high court ruled, dismissing a challenge by a group of taxpayers.

The New York Court of Appeals in Albany threw out a suit brought by about 50 taxpayers who argued that loans and grants to public corporations such as as the New York State Urban Development Corp. violated a constitutional ban on gifts of state money to private firms.

The court found that while the state constitution prevents New York from giving or loaning money to companies, it doesn’t stop the state from appropriating funds for public benefit companies that use the money to support private enterprises.

“While the state may not lend its credit to a public corporation, such as the UDC, nothing” in the constitution “prohibits the state from adopting appropriations directed to such public entities,” Judge Theodore T. Jones wrote for the majority.

Judges Eugene F. Pigott and Robert S. Smith dissented, with Piggott saying that Article VII of the state’s constitution “explicity forbids” what the defendants were accused of doing.

‘Passage of Time’

“Unconstitutional acts do not become constitutional by virtue of repetition, custom or passage of time,” Pigott said. “But that is what the majority opinion holds today.”

The group of taxpayers, led by Lockport, New York, financial adviser Lee Bordeleau, sued the state, the Urban Development Corp. and companies including International Business Machines Corp. (IBM) and Advanced Micro Devices Inc. (AMD) in August 2008.

The plaintiffs challenged appropriations in the state’s budget, most of which went to the Urban Development Corp. for payments to private entities for public developments such as the expansion of semiconductor manufacturing facilities at the University of Albany.

The taxpayers, most of them affiliated with the Tea Party or tax reform movements, also challenged funds allocated to the state’s Agriculture Department to fund contracts with not-for- profit companies, such as the New York State Apple Growers Association and the New York Wine and Grape Foundation, to promote and market the state’s agricultural products.

An appeals court rejected the defendants’ argument that the state may grant public funds to corporations for public-private partnerships or to spur economic development while it passed the case along to the state’s highest court.

“We’re very disappointed in the decision,” said James M. Ostrowski, an attorney for the plaintiffs. “Obviously we agree with the two dissents that the majority has judicially amended the constitution. The words of the constitution are clear. The politicians have been doing an end run around that by using the public authority.”

The appeal is Bordeleau v. State of New York, No. 190, New York State Court of Appeals (Albany).

To contact the reporter on this story: Chris Dolmetsch in New York at cdolmetsch@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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