Maready v. City of Winston-Salem , 342 N.C. 708 ( 1996 )

Justice Orr

dissenting.

At issue in this case is the City of Winston-Salem and Forsyth County’s authorization, pursuant to N.C.G.S. § 158-7.1, to expend public funds directly to, and for the benefit of, selected private businesses as an inducement to these businesses to either expand or locate in the community. The majority opinion sanctions this practice on the theory that since jobs were created and the tax base increased by virtue of the inducements, the expenditures, totalling $13.2 million for the twenty-four challenged projects, were for a public purpose as required by Article V, Section 2 of the North Carolina Constitution. As a result, it appears to me that little remains of the public purpose constitutional restraint on governmental power to spend tax revenues collected from the public. Because I believe that the majority’s holding in this case is (1) based on a theory unsupported by the evidence, and (2) contrary to established precedent interpreting the intent of the North Carolina Constitution, I respectfully dissent.

The logic upon which the majority opinion rests its conclusion that the expenditure of these funds was for a public purpose can be stated as follows: The creation of new jobs and an increase in the tax base ipso facto benefits the general public. Therefore, local government expenditure of tax dollars to a private business for its private benefit in order to induce the business to either expand or locate in the community is for a public purpose if it creates new jobs and increases the tax base.

The fallacy of this reasoning begins with the assumption that new jobs and a higher tax base automatically result in significant benefit to the public. The trial court’s finding of fact number 9 addresses the factual and evidentiary failings of this assumption:

9. No evidence was presented of economic distress in the City and County from 1990 to the present time. During this period of time, based on the evidence presented, the unemployment rate in Forsyth County was [as] follows:

January, 1993 4.9%

June, 1993 5.0%

December, 1993 3.1%

January, 1994 4.1%

June, 1994 4.0%

December, 1994 2.5%

January, 1995 3.7%

June, 1995 4.1%

No evidence was presented that incentives paid or committed by the City and County improved the unemployment rate or that they otherwise resulted in meaningful economic enhancement. No evidence was presented that the incentive grants made by the City and County reduced the net cost of government or resulted in a reduction in the amount or rate of property taxes paid by, or the level of services rendered to, the citizens of Winston-Salem and/or Forsyth County.

The argument presented by the defendants relies on the evidence of a projected total from the twenty-four projects of 5,532 new jobs and a projected tax base increase of $238,593,000. As impressive as those numbers appear, they must be viewed in the proper context. Based on January 1995 estimates, the work force in Forsyth County totalled 152,030, with an estimated 145,840 employed. Therefore, even if all of the projected 5,532 new jobs came to fruition, it still represents less than four percent of the employed work force in the county. In addition, an estimated eighty-five percent of those new jobs went to individuals already in Forsyth County, many of whom were presumably employed with other businesses. With respect to the increased tax base, the County’s 1995 property tax base was valued at $15,633,231,770. The increase in the property tax base projected by defendants from the projects is $238,593,000, or slightly more than one and one-half percent of the overall tax base. Therefore, the conclusion that there is anything more than limited benefit accruing to the public in this case cannot be supported by the existing evidence.

Although there is undoubtedly some benefit to the general public, as noted with approval in the majority opinion, “direct state aid to a private enterprise, with only limited benefit accruing to the public, contravenes fundamental constitutional precepts.” As Justice Sharp (later Chief Justice) stated in Mitchell v. North Carolina Indus. Dev. Fin. Auth., 273 N.C. 137, 159 S.E.2d 745 (1968):

It is clear, however, that for a use to be public its benefits must be in common and not for particular persons, interests, or estates; the ultimate net gain or advantage must be the public’s as contradistinguished from that of an individual or private entity. Briggs v. Raleigh, 195 N.C. 223, 141 S.E. 597 [(1928)].

Mitchell, 273 N.C. at 144, 159 S.E.2d at 750.

In applying the above test, and juxtaposing the alleged benefits to the public vis á vis the benefits to the private enterprises, it is useful to examine the following table that was included in the trial court’s judgment:

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In examining the stated purposes of the grants, it is obvious that the $13.2 million was authorized for the specific benefit of the companies in question. The money expended was directly for the use of these private companies to pay for such activities as on-the-job training for employees, road construction, site improvements, financing of land purchases, upfitting of the facilities, and even spousal relocation assistance. In weighing these direct “private benefits” paid for by the taxpayers against the limited “public benefits,” only one conclusion can be reached — that the trial court correctly held that the expenditures in question were not for a public purpose. The opposite conclusion reached by the majority can be reached only by ignoring the weight of the private benefits and relying instead on the assumption that simply creating new jobs and increasing the tax base is a public purpose that justifies the payment of tax dollars to the private sector. As previously noted, there is simply no evidence to support such a conclusion, and the majority’s position must fail.

The second aspect of the majority’s opinion with which I disagree is its assertion that Mitchell and Stanley v. Department of Conservation & Dev., 284 N.C. 15, 199 S.E.2d 641 (1973), do not control this decision and are distinguishable. In reaching its conclusion, the majority distinguishes one aspect of Mitchell from the instant case by observing that the General Assembly unenthusiastically passed the legislation in question in Mitchell, declaring it to be “bad policy.” Granted, our legislature has not expressly stated that the practice of granting economic incentives as authorized by N.C.G.S. § 158-7.1 is “bad policy,” but it is evident from a wide range of sources included in the record that the primary argument for such assistance to private industry is that “all the states are doing it” and, thus, that North Carolina must do it too in order to be competitive. The necessity of forcing communities and states to bid against each other with promises of government subsidies in an effort to induce industries to expand or locate in the community is a practice just as distasteful as the practice objected to in Mitchell. Therefore, the fact that the General Assembly was unenthusiastic in passing the legislation in question in Mitchell in no way lessens the impact of Mitchell.

Two other rationales espoused by the majority for distinguishing Mitchell (and also Stanley) from the case sub judice arise out of the passage of two 1973 amendments to the North Carolina Constitution. The first amendment, Article V, Section 9, allows counties to create authorities to issue revenue bonds for industrial and pollution control facilities. N.C. Const, art. V, § 9. As acknowledged by the majority, the first amendment was narrowly tailored to address a specific situation, but the majority claims that it nonetheless diminishes the significance of Mitchell and Stanley. For whatever diminishment there may be, nothing appears to indicate nor does the majority contend that Mitchell and Stanley were not correctly decided as a matter of law, nor does the majority contend that the principles of law dealing with the public purpose doctrine are no longer valid.

The second amendment, Article V, Section 2(7), allows the government to “contract with and appropriate money to any person, association, or corporation for the accomplishment of public purposes only.” N.C. Const, art V, § 2(7). I find the majority’s reliance on Article V, Section 2(7) to be of no significance in that a straightforward reading of the amendment simply permits the payment of tax dollars to private enterprise “for the accomplishment of [a] public purpose[].” As previously noted, unless one is willing to conclude that any expenditure that creates jobs and increases the tax base is “a public purpose,” that amendment has no substantive effect on the holdings in Mitchell and Stanley, and thus not on this case. In fact, the amendment merely allows government to perform a public purpose by contracting with the private sector to actually accomplish the public purpose.

The majority also relies on a “changing times” theory to ignore the law as set forth in Mitchell and Stanley. While economic times have changed and will continue to change, the philosophy that constitutional interpretation and application are subject to the whims of “everybody’s doing it” cannot be sustained.

Finally, the majority chooses to ignore the principles set forth in the Stanley case for determining what is a public purpose. Justice Sharp, writing for a unanimous Court, stated:

Because the concept of public purpose must expand to meet the necessities of changed times and conditions, this Court has not attempted to confine public purpose by judicial definition but has “left each case to be determined by its own peculiar circumstances as from time to time it arises.” Keeter v. Lake Lure, [264 N.C. 252, 264, 141 S.E.2d 634, 643 (1965)]. Our reports contain extensive philosophizing and many decisions on the subject. Most recently we have considered the question whether a purpose was public or private in Foster v. Medical Care Comm., 283 N.C. 110, 195 S.E.2d 517 (1973); Martin v. Housing Corp., [277 N.C. 29, 175 S.E.2d 655 (1970)]; Redevelopment Comm. v. Guilford County, [274 N.C. 585, 164 S.E.2d 476 (1968)]; Mitchell v. Financing Authority, [273 N.C. 137, 159 S.E.2d 745]. These decisions, and the cases on which they are based, establish the following principles:

(1) An activity cannot be for a public purpose unless it is properly the “business of government,” and it is not a function of government either to engage in private business itself or to aid particular business ventures. See Note, 49 N.C. L. Rev. 830, 833 (1971). It is only when private enterprise has demonstrated its inability or unwillingness to meet a public necessity that government is permitted to invade the private sector. In Martin v. Housing Corp., [277 N.C. 29, 175 S.E.2d 655], and Wells v. Housing Authority, [213 N.C. 744, 197 S.E. 693 (1938)], revenue bonds issued by two public housing agencies for the purpose of providing housing for low-income tenants were held to be for a public purpose. Governmental activity in that field was not an intrusion upon private enterprise, which had eschewed the field. Further, the primary benefits passed directly from the public agency to the public and not to a private intermediary.

(2) Aid to a private concern by the use of public money or by tax-exempt revenue-bond financing is not justified by the incidental advantage to the public which results from the promotion and prosperity of private enterprises.

(3) In determining what is a public purpose the courts look not only to the end sought to be attained but also “to the means to be used.” Turner v. Reidsville, 224 N.C. 42, 44, 29 S.E.2d 211, 213 (1944). See Wells v. Housing Authority, [213 N.C. at 750, 197 S.E. at 697]. Direct assistance to a private entity may not be the means used to effect a public purpose. “It is the essential character of the direct object of the expenditure which must determine its validity, and not the . . . degree to which the general advantage of the community, and thus the public welfare, may be ultimately benefited by their promotion.” 63 Am. Jur. 2d Public Funds § 59 (1972).

Stanley, 284 N.C. at 33-34, 199 S.E.2d at 653-54 (alteration in original).

I acknowledge that in Madison Cablevision v. City of Morganton, 325 N.C. 634, 386 S.E.2d 200 (1989), this Court disavowed a portion of the language in the first prong of the Stanley test above: “It is only when private enterprise has demonstrated its inability or unwillingness to meet a public necessity that government is permitted to invade the private sector.” Id. at 647, 386 S.E.2d at 207. However, the Madison Court did not disavow any other portion of the quote from Stanley. In fact, Madison relied on an abbreviated statement of the principles set out in Stanley for determining whether a particular undertaking by a local government is for a public purpose: “(1) it involves a reasonable connection with the convenience and necessity of the particular municipality, Airport Authority v. Johnson, 226 N.C. 1, 36 S.E.2d 803 (1946); and (2) the activity benefits the public generally, as opposed to special interests or persons, Martin v. Housing Corp., 277 N.C. 29, 175 S.E.2d 665.” Madison, 325 N.C. at 646, 386 S.E.2d at 207 (emphasis added).

I further acknowledge that the sentence in the third prong of the Stanley test — “Direct assistance to a private entity may not be the means used to effect a public purpose,” Stanley, 284 N.C. at 34, 199 S.E.2d at 653 — is no longer accurate in light of the passage of Article V, Section 2(7) permitting such assistance. However, the ultimate test for determining public purpose as set forth in Mitchell and Stanley and even in Madison remains basically the same and applicable to this case: Does the expenditure benefit the public generally as opposed to special interests or persons? As stated in the second prong of the Stanley test, “[a]id to a private concern by the use of public money ... is not justified by the incidental advantage to the public which results from the promotion and prosperity of private enterprise.” Id. at 33, 199 S.E.2d at 653. The facts of this case fit squarely into this principle and thus, compel a finding that the trial court was correct.

Finally, many of the arguments presented to this Court rest on public policy. Advocates for these business incentives contend that without them, North Carolina will be at a significant competitive disadvantage in keeping and recruiting private industry. They further contend that the economic well-being of our state and its citizens is dependent on the continued utilization of this practice. These arguments are compelling, and even plaintiff admits that a public purpose is served by general economic development and recruitment of industry. However, plaintiff and those supporting his point of view argue that direct grants to specific, selected businesses go beyond the acceptable bounds of public purpose expenditures for economic development. Instead, they say that this is selected corporate welfare to some of the largest and most prosperous companies in our State and in the country. Moreover, these opponents contend that the grants are not equitably applied because they generally favor the larger companies and projects and, in this case, under the County’s Economic Incentives Program Guidelines, completely eliminate retail operations from being considered. In challenging the actual public benefit, a question also is raised about the economic loss and devastation to smaller North Carolina communities that lose valued industry to larger, wealthier areas. For example, the move of Southern National Bank headquarters from Lumberton to Winston-Salem undoubtedly adversely affected Lumberton.

Also troubling is the question of limits under the majority’s theory. If it is an acceptable public purpose to spend tax dollars specifically for relocation expenses to benefit the spouses of corporate executives moving to the community in finding new jobs or for parking decks that benefit only the employees of the favored company, then what can a government not do if the end result will entice a company to produce new jobs and raise the tax base? If a potential corporate entity is considering a move to Winston-Salem but will only come if country club memberships are provided for its executives, do we sanction the use of tax revenue to facilitate the move? I would hope not, but under the holding of the majority opinion, I see no grounds for challenging such an expenditure provided that, as a result of such a grant, the company promises to create new jobs, and an increased tax base is projected.

In conclusion, for the foregoing reasons and for the reasons stated by the trial court, N.C.G.S. § 158-7.1, as broadly interpreted and applied by the majority, is unconstitutional on its face and as applied because it is impermissibly vague, ambiguous, and without reasonably objective standards and because it violates the public purpose clause of the North Carolina Constitution. Therefore, I would affirm the decision of the trial court.

In addition, even though I concur with the majority on the issue of the open meetings law violation, I am compelled to observe that although the open meetings law statutory exemptions may technically cover the practice complained of, what transpired appears to violate the spirit of the law and result in the abuses the law is intended to prevent.

JUSTICE LAKE joins in this dissenting opinion.