ALBANY, N.Y., Oct. 13 (Reuters) - The state's top court on
Wednesday heard arguments in a case claiming that New York's
economic development policies are unconstitutional because they
allow taxpayer money to be used for the purely private benefit
A group of 50 individuals and small businesses coordinated
by James Ostrowski, a Buffalo attorney and vocal member of the
Tea Party, claim in Bordeleau v. New York State that certain
economic-development initiatives tucked into the budget for the
fiscal year 2009, including grants to agriculture trade
associations and subsidies for technology firms and a hotel,
violate a provision of the state constitution that prohibits
the state from giving gifts or loans to private entities.
An investigative report last week by the Albany Times Union
found that GlobalFoundries, a semiconductor manufacturer and
one of the defendants in the case, spent some of the $665
million cash grant it received in 2008 -- the largest such
grant in U.S. history -- on luxury apartments, flat-screen TVs
and catering for private parties. Overall, the company received
$1.4 billion in subsidies after pledging more than $7 billion
to build a new plant outside Albany.
Wednesday's arguments, before the Court of Appeals in
Albany, focused largely on the role of public authorities,
which are quasi-public entities created to foster economic
development, and whether the powers afforded to those
authorities are constitutional.
Public authorities, whose boards are appointed by the
legislature, wield a number of extraordinary powers not
afforded to state agencies, such as the ability to issue
tax-exempt bonds and overrule local zoning ordinances. New
York's largest such authority, the Empire State Development
Corporation, is also a defendant in the case.
AKIN TO 'MONEY-LAUNDERING OPERATION'
Ostrowski, who represents the plaintiffs, likened the
authorities to a "money-laundering operation" that allows the
governor and lawmakers to steer economic development money to
"If you're going to say 'A can't give money to B,' then it
is only logical that A can't give money to C to give to B,"
Ostrowski is the founder of Free New York, a nonprofit
group that advocates for smaller government and claims the
state's economic-development policies have done more harm than
good, particularly to upstate communities.
Under the "gift and loan" provision of the New York
constitution, the state must show the grants in question not
only provided a public benefit, but that any private benefits
were "merely incidental," according to the ruling by the
Appellate Division, Third Department, currently on review.
The defendants argued that because the state does not
directly fund public authority projects, the "gift and loan"
argument does not apply. The state does provide funding to some
public authorities, but it falls to the groups to decide how to
spend the money.
"Public authorities were designed to do indirectly what the
state cannot do directly," said Deputy Solicitor General
Barbara Underwood, who pointed to a number of Court of Appeals
decisions that strengthened the powers of public
'INSANE' FOR COURT TO REVIEW ALL GRANTS
Underwood and attorneys for the defendant companies, which
include IBM, also said grants given directly to private groups
by the state, such as those given to trade groups to promote
New York agriculture, are not "gifts" because they are
conditioned on the performance of the recipient in creating
jobs and otherwise realizing economic growth.
"If we violate that contract, the state has extensive
remedies, including the right to claw back some of the money,"
said Harold Iselin of Greenberg Traurig, who argued on behalf
Some legal experts said a decision in favor of the
plaintiffs -- which would send the case to trial -- would upset
decades of case law and state policy, as well as open the
floodgates for legal challenges to any individual grant doled
out by the state.
Paul Finkelman, a constitutional law expert at Albany Law
School, said that because grant-making discretion has
traditionally been left to the legislature, "the notion that
the courts should review every economic development grant by
the legislature is insane."
But Ostrowski argued Wednesday that the legislature's
policies have been failing for more than four decades, pointing
to the steady decline of manufacturing and other industries in
New York despite public authorities steering billions of
dollars into development projects.
"We are here to put an end to this type of illegal spending
moving forward," he said.
The case is Bordeleau, et al v. New York State, et al, New
York State Court of Appeals No. 190.
For the plaintiffs: James Ostrowski.
For the state: Deputy Solicitor General Barbara Underwood.
For GlobalFoundries: Harold Iselin of Greenberg Traurig.
(Reporting By Dan Wiessner)
Follow us on Twitter: @ReutersLegal