Justice Calogero on Tax Increment Financing
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- Justice Calogero concurred in Justice Kimball's majority opinion of the Court, which, over the strong dissenting opinion of Justice Chet D. Traylor, held that a Tax Increment Financing (TIF) plan (1) did not constitute a gratuitous handout, loan, or donation of public funds to a private entity where it used public funds to construct a retail development and accompanying infrastructure for Cabela's Retail Center; (2) could be funded through the issuance of municipal bonds pursuant to Louisiana's TIF statute; and (3) did not violate the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution where it handed out public funds to Cabela's, a private retailer, but not to already-existing, smaller local retailers.
ISSUES:
- The issues before the Court were: (1) whether the Cabela's project at issue was beyond the scope of the type of economic development projects authorized by Louisiana's TIF Act because it goes beyond "assisting" private business and instead results in a direct handout;
(2) whether the TIF Act itself and this particular arrangement with Cabela's were unconstitutional to the extent that they authorized government to loan, pledge, or donate pulbic funds for private uses such as the construction of a private retail outlet and accompanying infrastructure; and (3) whether, pursuant to the Equal Protection Clause there was a rational basis for funding the contruction of a Cabela's retail center when other existing retailers had already funded, developed, and equipped their retail stores on their own, and whether such a disparity in funding created an unfair advantage.
HOLDING:
- The Majority held that (1) the project did not constitute a prohibited loan, pledge or donation of public funds, since the city expected to receive something of value in exchange for the expenditure of public funds, namely, an increse in sales tax revenue; and (2) the dedication of public funds to Cabela's did not violate the Equal Protection Clause because this was an economic regulation to promote economic development, which although it serves a private business, also serves a public interest.
MAJORITY REASONING:
The court offered 10 basic reasons in support of its conclusion that this project did not constitute an impermissible uses of public funds. Included amongst these were findings that the city would derive a benefit, and a justification that required the court to overturn its prior precedent on the matter:
- (1) The TIF Act allows the public financing of any project in any industry that the local governmental subdivision has determined will create economic development."
- (2) Louisiana law, specifically La. R.S. 33:9038.4(M), provides that economic development projects included, amongst other things, "projects to assist commercial and retail industries."
- (3) "[I]n light of the broadly inclusive language utilized in the statute, we conclude that the legislature intended the TIF Act to be utilized for a project such as the one presented in this case."
- (4) The government's contribution is not a "donation" of public funds to a private entity because donations are gratuitous, and in this case, the city lacks "gratuitous intent," since it plans on deriving a benefit from the contribution of funds. "The underlying concept underlying the prohibition of the loan and donation of public funds is one of gratuitous intent."
- (5) The prior Louisiana Supreme Court precedent on the subject, which indicates that Section 14 of the Louisiana Constitution is violated "whenever the state or a political subdivision seeks to give up sometihng of value when it is under no legal obligation to do so," in the opinion of the majority "presents an unworkable and incorrect interpretation of [the Louisiana Constitution]. Consequently, we repudiate that interpretation of [the Louisiana Constitution]."
- (6) "Applying these principles to the facts of the instant case, we conclude the Project does not constitute a prohibited loan, pledge or donation of public funds. The project documents clearly state that the bonds are not secured by the full faith and credit of the state or of any political subdivision. The documents clearly reveal that both the State and the City have not entered into the obligations at issue gratuitously. Clearly, both parties expect to receive something of value in return for the performance of their obligations. As evidence of the non-gratuitous intent of the public parties, the Agreement contains a provision that states unequivocally:
"The City and State have determined that the Project serves a public purpose and that, based solely on financial projections and other information provided to it by the [District], the Annual Pledged Local Increment and the Annual Pledged State Increment pledged and dedicated hereby, collectively is less than the financial benefits to be received by each as a result of the Project."
"The State hereby acknowledges that there is a reasonable expectation that the Project will result in economic development within the State which will exceed the value of the obligations of the State contained herein thereby serving a public purpose."
- (7) "[T]he property comprising the District is not currently providing the State and the City with any sales tax revenues. If the Project is successful, significant sales tax revenues will be generated. Although the State and the City have each pledged 1.50% of their portion of the sales taxes collected within the District, the State sales tax rate is 4% and the City sales tax rate is 2%. Thus, from the beginning of the Project, it appears that 2.50% the sales taxes collected by the State and 0.50% of the sales taxes collected by the City are not pledged to finance the bonds."
- (8) "The non-gratuitous nature of the Project is also plainly demonstrated by the obligations imposed by the project documents upon Cabela's and Carlisle in exchange for the State's and City's participation in the Project. In exchange for the obligations undertaken by the public parties, Cabela's will acquire the 49.22 acres upon which its Retail Center will be built. It will then construct, furnish and equip the retail center. When the bonds are issued, Cabela's will transfer title of the property and facilities located on the property to the Board, which will then lease the property and facilities to Cabela's."
- (9) "The State's contribution of the Annual Pledged State Increment is contingent upon Cabela's employment of at least 300 full- and part-time workers at the prevailing wage rate and with the health insurance benefits typically provided to Cabela's employees."
- (10) The agreement provides that Cabela's will pay taxes on the building.
The court also offered reasons why offering the money to Cabela's, but not to already existing businesses did not violate the Equal Protection Clause:
- (1) "The [other] businesses have not attempted to avail themselves of the TIF act, and consequently have not been denied Tax Increment Financing."
- (2) A statutory classification which does not proceed along suspect or semi-suspect lines , nor infringe on fundamental rights, need only be rationally related to a legitimate government interest."
- (3) The TIF Act * * * was enacted to promote economic development, which serves private business as well as the public interest. As such, it is rationally related to legitimate government interest."
DISSENT'S REASONING:
In finding that the Cabela's project was not a constitutionally permissible use of public funds by a government entity, and that the "Project's financing structure amounts to a donation of public funds in violation of * * * the Louisiana Constitution," the dissenting opinion, written by Justice Chet D. Traylor and concurred in by Justice Jeannette Theriot Knoll, reasoned as follows:
- (1) "The words contained in Article VII, Section 14(A) of the Louisiana Constitution are clear and unambiguous. Interpreting the words, using their ordinary meaning, it is clear that this constitutional provision prohibits the loan, pledge or donation of anything of value belonging to the state or political subdivision. I find no ambiguity in this provision, for the meaning is easily ascertained from the plain language of the provision. Unless another provision of our constitution allows such action, any use of public funds or property which falls within one of these three categories, i.e. loan, pledge or donation, violates this provision of the constitution."
- (2) "[T]here is little jurisprudence interpreting the meaning of the 1974 provision. * * * The cases that do exist hold primarily that this section is violated whenever the state or a political subdivision seeks to give up something of value when it is under no legal obligation to do so."
- (3) "The majority opines that our prior jurisprudence is 'neither persuasive nor particularly applicable.' I disagree with this conclusion. The cases cited above demonstrate that the key factor in determining whether Article VII, Section 14(A) is violated is whether the consideration given to the Board, under this agreement, is sufficient to find that the Board's corresponding use of public funds and property does not amount to a loan, pledge or donation in violation of Art. VII, Section 14(A). To find this agreement complies with the constitution would be inconsistent with this court's existing jurisprudence regarding Article VII, Section 14(A)."
- (4) I do not believe that the use of public funds to wholly finance a private for-profit business, at the expense of small business owners and tax payers, was one of the envisioned uses of the TIF statute.
- (5) "This court has never stated that the TIF statute grants a political subdivision the authority to use public funds to finance private endeavors without consideration under the guise of economic development. Such action is impermissible and in violation of Article VII, Section 14(A). Moreover, this court has consistently held that in the exercise of legislative power, the legislature may not enact any legislation that is prohibited by the state's constitution." * * * Thus, the TIF Act cannot grant a political subdivision authority to take action which would otherwise be prohibited by the constitution.
- (6) "Under the proposed financing structure, the Board purchases land from a private entity; issues bonds; and uses public funds to repay the bonds. In return, Cabela's pledges to encourage other businesses to relocate to the area and provides that it will pay 'rent' for its use of the land. The categorization of certain payments as 'rent' is deceptive and illusory. Under the lease agreement Cabela's agrees to pay property taxes on the land to the tax official for the parish. Cabela's also agrees to pay maintenance cost, insurance premiums and improvement cost. Significantly, these payments are made to third parties and not to the Board. As the majority points out, Cabela's will 'expend its own funds for the proper maintenance and repair' of the building. However, the payments made to the third parties, for insurance and maintenance cost will be credited to Cabela's in the event it exercises its option to purchase. Cabela will also be compensated handsomely to undertake management responsibilities under the Agreement with a salary of $1.9 million per year for those services. In addition, this management fee will also be credited to Cabela's in the event it exercises its option to purchase. This sum could amount to as much as $57,000,000 should the lease extend to the full thirty year bond period, more than the initial bond amount."
- (7) "Cabela's also states that its facility will employ residents of the community. However, Cabella's is not inextricably bound to employ Gonzales residents, Cabella's must only 'use reasonable efforts to employ residents of the City.' The creation of jobs in our communities is paramount to uplifting the economy and is valuable consideration. However, the substantial credit Cabela's receives for employing workers negates any altruistic motive on the part of Cabela's."
- (8) [T]he Board, and the Board alone, is bearing all the financial burden of financing this privately owned enterprise, an act specifically prohibited by Article VII, Section 14(A). The financing scheme appears more akin to a disguised donation of public lands and funds rather than a lease agreement, and should Cabela's elect not to exercise its option to purchase, would amount to a loan of public funds and property.
- (9) "I cannot see how Cabela's is taking any greater risk than any other business owner. A local business owner is more apt to employ local employees and have greater ties to the community. That same local business owner is not receiving credits for its business expenses nor is it being paid a 'management fee' of $1.9 million dollars per year to engage in a for-profit business."
- (10) "When the benefits of the public entity are weighed against that received by the private entity, it is unimaginable how this financing structure amounts to anything other than a loan or donation of public property and funds. This financing structure uses public funds and property in a manner prohibited by Article VII, Section 14(A) of the Louisiana Constitution."
- (11) "In addition, I also find that this funding structure does not fall within one of the 'authorized uses' of Article VII, Section 14(B). Specifically, Section 14(B)(3) allows 'the pledge of public funds, credit, property, or things of value for public purposes with respect to the issuance of bonds or other evidences of indebtedness to meet public obligations as provided by law.' The key to this constitutional provision is 'indebtedness to meet a public obligation.' The Board seeks to use public funds to finance a retail facility which is privately owned. By entering into this agreement, the Board is creating a debt, without any obligation to do so. As we stated in City of Port Allen, a municipality may not obligate itself for debts of another if the debt is not otherwise legally owed. The Board maintains that this Project will help the public by promoting economic development. However, the financing structure, as set forth in the Agreement, grants enormous financial benefits to the private retailer and developer, all at the public's expense."
FURTHER POTENTIAL FLAWS IN THE COURT'S REASONING:
- (1) Importantly, in considering whether the project constiutes a donation of public funds to a private entity, the Majority only discuss the purposes of the project, and fail to consider the actual impacts or effects of the project. If the Majority had considered apparent outcomes, rather than the governmnent's avowed intent, it may well have reached the results articulated by Justice Chet D. Traylor in his dissent.
- (2) The court explicitly overturns its own precedent, noting only, and perhaps somewhat arbitrarily, that the precedent expressed in City of Port Allen, that Section 14 of the Louisiana Constitution is violated "whenever the state or political subdivision seeks to give up soemthing of value when it is under no legal obligation to do so," presents an unworkable and incorrect interpretation" of the Louisiana Constitution.
- Justice Calogero concurred in the majority opinion, written by Justice Jeannette Theriot Knoll, which held that (1) the government did not violate the due process rights, under the Due Process Clause of the Fourteenth Amendment, of local citizens by notifying them of a $50 million Tax Increment Financing (TIF) plan for Bass Pro Shops only by mail, rather than by personal service, even though they were, as a group, easily identifiable; and (2)
ISSUES:
- The issue in this case was whether the district court erred in allowing the development district to use the notice by publication provisions of a statute to avoid actual service on known opposition, to avoid any attempt to provide actual notice to known, easily identifiable parties, and to prevent the public from having a fair opportunity to challenge a Bass Pro TIF project.
HOLDING:
- The Majority held that local citizens who had not recieved the notice of the Bass Pro TIF project through its publication in a local newspaper were not deprived of a constitutionally protected life, liberty, or property interest where their capacity to challenge the Bass Pro TIF project expired.
MAJORITY REASONING:
- (1) "[T]he appellate court found the record contained no evidence th the identity, addresses, or alleged interests of the individual defendants were known to the District."
- (2) "The individual defendants' right to challenge the provisions of the Bond Resolution made for the security and payment of the bonds does not bear the hallmarks of a constitutionally protected liberty or property interest."
POTENTIAL FLAWS IN THE COURT'S REASONING:
(1) Pursuant to Mullane v. Central Hanover Bank & Trust Company, government must provide "notice reasonably calculated, under all circumstances, to apprise interested parties of their pendency of the action and afford them an opportunity to present their objections." In Mullane, the United States Supreme Court further stated:
- "Chance alone brings to the attention of even a local resident an advertisement in small type inserted in the back pages of a newspaper, and if he makes his home outside the area of the newspaper's normal circulation the odds that the information will never reach him are large indeed. The chance of actual notice is further reduced when ... the notice required does not even name those whose attention it is supposed to attract, and does not inform acquaintances who might call it to attention. In weighing its sufficiency on the basis of equivalence with actual notice we are unable to regard this as more than a feint."
- The Louisiana Supreme Court further noted, in Lewis v. Succession of Johnson (2006), that it was bound to follow U.S. Supreme Court precedent from Mennonite Board of Missions v. Adams (1983), holding “notice by mail or other means as certain to ensure actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests of any party, whether unlettered or well versed in commercial practice, if its name and address are reasonably ascertainable.”
- In other words, where a liberty or property interest exists, the Due Process Clause requires that known people be contacted, at least by mail.
- Here, the Court's simple recitation that the Denham Development District lacked evidence necessary to contact individual homeowners affected by the project is horribly unconvincing. All that was necessary was a letter to all homes within the development district, the geographic boundaries of which were readily ascertainable.
(2) The court notes that "only when protected interests are implicated does the right to some kind of notice or hearing attach." The homeowners and others claimed to have been deprived of their right to challenge the legality of the Bass Pro TIF project. The court noted that the parties lacked a sufficient interest in challenging the TIF project because that right was statutory, and the right expired after 30 days. This conclusion overlooks the entire krux of the argument-- that, the only reason they did not challenge the TIF project within 30 days was that they recieved insufficient notice. Thus the court has effectively concluded that the challengers did not have a right to notice, because they did not have a property interest, while simultaneously holding that they lacked a property interest only because they did not receive proper notice.
