Jan. 23 (Bloomberg) -- The Ohio Supreme Court will consider whether a nonprofit group is eligible to challenge the use of state liquor profits to fund a private economic-development program backed by Governor John Kasich.
The high court today agreed to hear an appeal by the nonprofit, ProgressOhio.org Inc., without further comment, according to a posting on the court website. Two lower courts have held the group lacks a sufficient stake to pursue the case.
JobsOhio, the private entity created by Kasich, a Republican, to spur job growth, plans to sell $1.5 billion in taxable and tax-exempt bonds backed by profit from the state-owned liquor business.
“For those who are worried about public accountability and the spending of public dollars, this is potentially quite significant,” Daniel P. Tokaji, a professor at Ohio State University’s Moritz College of Law, said today in a phone interview.
ProgressOhio, which described itself as “providing a progressive voice for Ohio citizens” in its 2011 state court complaint filed in the Columbus, contends the program violates the state constitution by funneling public dollars to a private entity and isn’t transparent or accountable to the public.
Joining the group in the litigation were two Democratic state legislators.
“We are confident in our legislated mission to help businesses grow and create jobs for Ohioans,” Laura Jones, a JobsOhio spokeswoman, said today via e-mail.
Asked about the status of the bond issuance, Jones replied that “there are a number of steps in a bond sale that must take place before the transaction occurs and we continue to work on those steps.”
The group doesn’t comment on pending litigation, she said.
Citigroup Inc. and JPMorgan Chase & Co. are lead underwriters on the deal. Elizabeth Seymour, a JPMorgan spokeswoman, and Scott Helfman, a spokesman for Citigroup, both declined to comment on the bond issuance.
The enabling legislation requires transfer of the state’s wholesale liquor distribution to JobsOhio for 25 years, providing it with a stream of income.
In Ohio, the state buys and distributes alcohol to retailers. Liquor profits rose to an all-time high of about $251 million in fiscal 2012, according to the Ohio Office of Budget and Management.
Kasich, 60, sought the creation of JobsOhio when he took office in 2011. The legislature approved the plan and the entity was set up the same year. The bond sale to fund it has been delayed by legal challenges.
Brian Rothenberg, executive director of ProgressOhio, said it’s “reckless” for JobsOhio to move forward with the bond sale until the courts resolve legal questions about the entity. Until then, “it’s buyer beware” with the debt, he said.
“It’s irresponsible both of the state and the bond market not to respect the constitutional issues swirling around this program,” Rothenberg said today in a phone interview. “I’m all for jobs, but I’m also for doing things constitutionally.”
Kasich’s office doesn’t comment on pending litigation, though the administration is confident that the state Supreme Court will eventually uphold the lower-court rulings that the plaintiffs have no standing, the governor’s spokeswoman, Connie Wehrkamp, said.
“It continues to be beyond our understanding why anyone would fight against job creation when it’s so important to Ohio and our continued economic recovery,” she said in an e-mail.
The program’s goal is to complete deals more quickly and creatively to give Ohio an advantage over states such as Michigan and Indiana in competing for jobs. Kasich’s administration said it expects about $100 million will be available yearly, more than development entities such as the Michigan Economic Development Corp. have to spend.
JobsOhio has agreed to pay the state $500 million from the proceeds of the bond sale for the transfer of profits, while using about $850 million to retire debt backed by the liquor money and $225 million for uses including previously committed economic revitalization projects and working capital, John Minor, the group’s president in Columbus, has said.
The trial court rejected ProgressOhio’s lawsuit in December 2011, ruling that the challengers lacked standing to pursue the case.
A Columbus-based appellate court in June affirmed that decision, concluding that while the JobsOhio plan “makes significant changes to the organizational structure of state government,” that was not enough to give the plaintiffs a sufficient interest in the outcome.
Tokaji, the Moritz law professor, said the appellate ruling wasn’t well reasoned.
“Significant changes? What could be more important than that?” he asked. “The court is making a very subjective and contestable judgment about what is important and what’s not.”
The legal issues touch on the basic structure of state government, he said. “This is something that’s important for the judiciary to weigh in on.”
While liquor profit provides a strong backing for the bonds, investors may be wary about the new debt without a court resolution, said Howard Cure, director of muni research in New York for Evercore Wealth Management, which oversees about $3.8 billion.
Having the Ohio Supreme Court take the appeal “just highlights the legal concerns more,” Cure said in a phone interview.
The lingering legal challenge is crimping the debt’s credit standing. Standard & Poor’s Ratings Services assigned an AA rating, its third-highest, while Moody’s Investors Service issued an A2 grade, only its sixth-highest.
The debt would have been rated more along the lines of other Ohio bonds backed by liquor profits, two or three levels higher, without the legal risk, Ted Hampton, a New York-based analyst at Moody’s, has said.
The case is ProgressOhio.org Inc. v. JobsOhio, 12-1272, Supreme Court of Ohio (Columbus).