Lead Opinion
OPINION OF THE COURT
The issue before this Court is whether plaintiffs’ challenge to appropriations in the New York State 2008-2009 budget, pursuant to article VII, § 8 (1) of the New York State Constitution, can survive a motion to dismiss. We conclude that it cannot.
Plaintiffs, a group of 50 taxpayers of the State of New York, commenced this declaratory judgment action against the State, New York State Urban Development Corporation (UDC) doing business as Empire State Development Corporation (ESDC), International Business Machines Corporation (IBM), Advanced Micro Devices, Inc., West Genesee Hotel Associates, American Axle & Mаnufacturing, Inc., among other defendants, challenging numerous loans and grants issued by public defendants to private entity defendants and other private companies in order to stimulate economic development. Plaintiffs broadly allege that certain grants to private entities violate the constitutional ban on gifts of state monies to private firms. More specifically, they challenge the State’s practice of designating state funds for the purpose of economic development as unconstitutional.
State defendants, IBM, Advanced Micro Devices, West Genesee Hotel Associates, and American Axle & Manufacturing, Inc. moved to dismiss the complaint pursuant to CPLR 3211 (a) (1) as barred by documentary evidence and CPLR 3211 (a) (7) for failure to state a cause of action. Supreme Court granted defendants’ motion and dismissed the complaint (
The Appellate Division modified Supreme Court by reversing so much thereof as granted defendants’ motions to dismiss the first cause of action (
*313 “Did this Court err, as a matter of law, in modifying, on the law, the order of the Supreme Court by reversing so much of the order which granted defendants’ motions to dismiss the first cause of action, and remitting the matter to the Supreme Court for further proceedings no[t] inconsistent with this Court’s decision and, as so modified, affirming the order?” (2010 NY Slip Op 82494[U] [2010]).
We now reverse and answer the question in the affirmative.
At the outset, we observe that plaintiffs’ “burden is a heavy one” (Schulz v State of New York,
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 undertаking.”
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. Hence, while the State may not lend its credit to a public corporation, such as the UDC, nothing in article VII, § 8 (1) prohibits the State from adopting appropriations directed to such public entities. Before addressing the specific arguments of the parties, it is helpful to briefly trace the history of article VII, § 8 (1).
In 1846, the voters of the State of New York amended the Constitution to prevent the giving or lending of the State’s credit to private corporations (see Wein,
The 1846 Constitution, however, did not bar gifts of state money because, as this Court recognized over a century later, the granting of state money was a one-time event that “does not bind future generations or create the same dangers of collapse, insolvency and crisis associated with the abuse of credit” (Schulz I,
More than 60 years later, the Constitutional Convention of 1938 combined the two separate provisions dealing with gifts or loans of state money and credit into article VII, § 8 (para 1). The 1938 Constitution also amended the scope of the prohibition against giving or lending the State’s credit, for the first
Defendants contend that the first category of the challenged appropriations—those given to the ESDC to expend for its statutorily authorized purposes, including economic development—falls outside the scope of article VII, § 8 (1) because that provision permits gifts and loans of money to public benefit corporations. Characterizing public benefit corporations as “agencies of the State,” plaintiffs counter that State defendants have given or are about to give, and that private defendants have received or are about to receive, state funds as gifts. Plaintiffs highlight certain grants designаted to private corporations by the ESDC. At bottom, plaintiffs claim, and the dissent agrees, that the appropriations to the ESDC are unconstitutional because the State may not achieve indirectly that which cannot be done directly. We believe that defendants have the more accurate argument.
With an apparent goal to “insulate the State from the burden of long-term debt,” the Legislature, beginning in 1921, created “legally separate public benefit corporations, known as public authorities, to discharge particular functions” (Schulz I,
It is well settled that “public benefit corporations exist[ ] independently of the State” (Schulz I,
Concurrent with their status as entities separate from the State, the ability of public authorities and public benefit corporations to receive public funds was acknowledged in Matter of Dormitory Auth. of State of N.Y. (Span Elec. Corp.) (
There is no doubt that the constitutional limitations at issue serve to prevent improvident fiscal decision-making and preferential treatment (see Westchester County,
Turning to the narrower second category—involving appropriations to the State Department of Agriculture and Markets to fund agreements with not-for-profit organizations for the promotion of agricultural products grown or produced in New York, namely apple and grape crops and products—defendants contend that the complaint fails to state a claim even though such funds were given directly by the State to private recipients. Relying on Murphy v Erie County (
In Murphy, the county issued bonds to finance the construction of a stadium that would be leased to, or managed by, a private entity. The transaction was challenged under article VIII, § 1 of the New York State Constitution
We conclude that Murphy, not Westchester County, provides the appropriate standard for resolving a challenge tо an appropriation, whether under article VIII, § 1 or article VII, § 8 (1). Here, the very purpose of the Department of Agriculture and Markets is to obtain specialized marketing services to promote a major industry in New York—the agriculture industry—for the overall benefit of the public and the State’s competitiveness to foster growth in this important sector of the State’s economy (see Agriculture and Markets Law § 3). Moreover, the Department is authorized to assist in the promotion and marketing of New York’s wine and fruit products (see Agriculture and Markets Law § 16 [2-b]). The appropriations at issue here, which provide funding for contracts between the Department and the New York State Apple Growers Association, New York Wine and Grape Foundation and Long Island Wine Council, all fulfill a predominantly public purpose and are not prohibited under article VII, § 8 (1).
In sum, we find no constitutional infirmity to the challenged appropriations. Although some, like plaintiffs and the dissent, may question the wisdom of the policy choices, “the Legislature has made a valid legislative judgment” (Dalton v Pataki,
Aсcordingly, the order of the Appellate Division should be reversed, with costs, the first cause of action of plaintiffs’ complaint dismissed, and the certified question answered in the affirmative.
Notes
. The UDC was created in 1968 by the New York State Urban Development Corporation Act (see McKinney’s Uncons Laws of NY § 6254). The legislative findings emphasized that
“[ilt is hereby declared to be the policy of the state to promote a vigorous and growing economy, to prevent economic stagnation and to encourage the creation of new job opportunities in order to protect against the hazards of unemployment, reduce the level of public assistance to now indigent individuals and families, increase revenues to the state and to its municipalities and to achieve stable and diversified local economies” (McKinney’s Uncons Laws of NY § 6252).
The Act created the Empire State Economic Development Fund and the JOBS Now Program, which authorize the UDC to make grants and loans for economic development purposes (see McKinney’s Uncons Laws of NY §§ 6266-h, 6266-i).
. In 1961, subdivision (3) of this provision was added to ease the limitations on the use of state loans for job creation purposes.
. Articlе VIII, § 1 is the local analogue to article VII, § 8 (1), prohibiting local governments from giving or loaning any money to private recipients or giving or lending their credit to private or public corporations.
Dissenting Opinion
Unconstitutional acts do not become constitutional by virtue of repetition, custom or passage of time.
Far from being complex, article VII, § 8 (1) of the New York State Constitution (the Gift Clause) explicitly forbids what plaintiffs claim the State defendants are doing in this case. It states:
“1. The 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, but the foregoing provisions shall not apply to any fund or property now held or which may hereafter be held by the state for educational, mental health or mental retardation purposes” (emphasis supplied).
According plaintiffs’ complaint a fair reading, it is clear that they assert that money of the State is being “given or loaned to or in aid of . . . private corporation^] ” for the purpose of economic development. Defendants’ assertion that the appropriations serve the “public purpоse of promoting economic development” contravenes not only our case law but the underlying purpose of the Gift Clause itself. Our State Constitution’s prohibition against giving or loaning money to private corporations dates back to 1874,
“Whether the purpose [of the gift or loan of credit] is a public one ... is no longer the sole test as to the proper use of the state’s credit. Such a purpose may not bе served in one particular way. However important, however useful the objects designed by the [L]egislature, they may not be accomplished by a gift or a loan of credit to an individual or to a corporation. It will not do to say that the character of the act is to be judged by its main object—that because the purpose is public, the means adopted cannot be called a gift or a loan. To do so would be to make meaningless the provision adopted by the convention of 1846. Gifts of credit to railroads served an important public purpose. That purpose wаs distinctly before the [L]egislatures that made them. Yet they were still gifts and so were prohibited” (231 NY 465 , 475 [1921] [emphasis supplied]).
Perhaps most telling is that Judge Cardozo disagreed with the majority’s holding that the proposed payments to the returning soldiers violated the Gift Clause, and elucidated that the true purpose of the clause was not to prohibit the Legislature from pledging the credit of the State “in recognition of an honorable obligation” but rather “was to put an end to the use of the credit of the state in fostering the growth of private enterprise and business” (id. at 483-484 [Cardozo, J., dissenting]). And this is what plaintiffs have asserted in their complaint. The fаct that the Westchester County Natl. Bank case dealt with the gift of credit as opposed to a gift of money is irrelevant; it is evident from that case that, even if the Legislature had proposed paying cash to the World War I veterans instead of using the State’s bonding authority, the outcome would have been the same, because the issue was whether the issuance of bonds on behalf of the veterans was a gift, irrespective of its form.
“The state, any local government and any other public corporation may grant to any person, association or private corporation in any year or periodically by contract, or loan its money for economic and community development purposes,[2 ] but the proceeds of indebtedness contracted for any such purpose shall be used only for loans for capital construction” (12 Proceedings of 1967 NY Constitutional Convention, at 31 [emphasis supplied], quoting Proposed Constitution, art X, § 12 [b]).
The rejection of this amendment did nothing to deter the State’s current practice of distributing taxpayer funds to foster the growth of private industry, which defendants call “econоmic development.” Defendants make the specious assertion that the appropriations here do not violate the Gift Clause because the monies are not made “directly” to private companies but, rather, are first funneled through public corporations, which then distribute the funds to private entities. In other words, because the State distributes taxpayer funds through an intermediary like the ESDC, it is not the State that is loaning money to a private corporation or undertaking, but rather a public corporation that is loaning money to private enterprise. But we have cautioned on more than one occasion that “[w]hen the main purpose of a statute, or of part of a statute, is to evade the Constitution by effecting indirectly that which cannot be done directly, the act is to that extent void, because it violates the spirit of the fundamental law” (People ex rel. Burby v Howland,
Here, plaintiffs state a valid claim that the disbursement of funds through intermediaries constitutes gifts of money “in aid
. The prohibition against loaning the credit of the state “to, or in aid of any individual, association or corporation” goes baсk even farther, to 1846 (1846 NY Const, art VII, § 9). That prohibition was, in part, in response to the state utilization of the public credit to finance failing and/or insolvent private railroads (see 2 Lincoln, Constitutional History of New York, at 91-101, 179-182, 552 [1994]).
. The phrase “economic and community development purposes” is defined in the proposed amendment as including “the renewal and rebuilding of communities, the development of new communities, and programs and facilities to enhance the physical environment, health and social well-being of, and to encourage the expansion of economic opрortunity for, the people of the state” (12 Proceedings of 1967 NY Constitutional Convention, at 31, quoting Proposed Constitution, art X, § 12 [a]).
. Although the majority places significant emphasis on our holdings in Schulz v State of New York (
Dissenting Opinion
I heartily join Judge Pigott’s dissent, and add a few words to vent my own frustration at today’s result.
It is an illusion—one that seems to have the persistence of original sin—that prosperity can be attained by taking money from taxpayers and handing it to favored businesses. A recent article restates well-established economic doctrine: “The idea of government intervention to influence the composition of a country’s output has long been derided by economists for breeding inefficiency, reducing cоmpetition, encouraging lobbying and
The New York Legislature’s devotion to this self-destructive practice is no small matter. Among the expenditures at issue in this case is one described by the State as a commitment of “$140 million to support the construction of a wafer packaging facility and continued research and development efforts” to a joint venture of which International Business Machines Corporation is a member. This expenditure, it is said, will “result in the creation of at least 675 jobs” and the “retention” of 1,400 others. That works out to roughly $60,000 of state money per job. Another is an expenditure of $300 million to help an “international consortium of semiconductor manufacturers” expand a research and development program. This, we are told, will result in the creation of 450 jobs and the saving of 250 others: more than $400,000 per job. And the brief of defendant Globalfoundries U.S., Inc. discloses that the Legislature has appropriated $650 million to subsidize that company’s semiconductor manufacturing (an appropriation distinct, as far as I can tell, from the $300 milliоn semiconductor subsidy described by the State). Global-foundries says that its manufacturing facility “is expected to employ more than 1,500 people, with an additional 5,000 jobs created by supplier firms”—implying a cost to the State of roughly $100,000 per job.
I seem to remember a time when IBM could make money by selling its products for more than it cost to produce them. I would have thought semiconductor manufacturers could do the same. If they cannot, a bailout for their shareholders is not a prudent use of more than a billion dollars in taxpayer funds.
Of course, the New York Legislature, so long as it stays within constitutional limits, is frеe to disregard both received economic teachings and common sense. I have defended before, and will no doubt defend again, the right of elected legislators to commit folly if they choose. But when our Legislature commits the precise folly that a provision of our Constitution was written to prevent, and this Court responds by judicially repealing the constitutional provision, I think I am entitled to be annoyed.
Order reversed, etc.