EconWar




AMICUS CURIAE BRIEF


of the North Carolina Economic Developers Association,
and Others




INDEX


TABLE OF CASES AND AUTHORITIES

QUESTION PRESENTED

STATEMENT OF THE CASE

STATEMENT OF THE FACTS

ARGUMENT AND CITATION OF AUTHORITY
I. N.C. Gen. StatT. § 158-7.1 is constitutinoal under the "Public Purpose" clause of Article V, Section 2(1) of the North Carolina Constitution, given the comditions and limitations imposed by the statute, and in light of current societal conditions.

A. Interest and Position of the Amicus

B. Economic Development Activities of Government in North Carolina -- The Historical Context and The Current Competitive Environment
(1) The Evolution of Governmental Economic Development Programs in North Carolina

(2) The Current Competitive Environment

(3) What the Statute Provides

(4) What Is at Stake in The Case

C. Appellees Face a Stringent Standard in Attempting To Establish The Unconstitutionality of The Statute

D. In Light of The Historical Context and Current Societal Conditions, Local Government Activities Authorized by N.C. Gen. Stat. § 158-7.1 Meet The Public Purpose Test
(1) Public purpose is a changing concept. The analysis requires not only a determination that the intended result of an activity is a legitimate focus of governmental concern, but also an evaluation of whether the particular government activities proposed to achieve the desired ends are within the scope of proper government activity

(2) Mitchell remains an important case in the analysis of the public purpose requirement, but it does not purport to establish a factual test for determining all public purpose cases

(3) Under Mitchell and the other public purpose cases, a government activity will be found to be for a public purpose if it is found to be within the scope of appropriate governmental activity, as defined over time by the Court with reference to certain consistent principles

(4) The overall purposes of N.C. Gen. Stat. § 158-7.1 have been accepted by the Court as legitimate objectives of governmental policy. In addition, the activities authorized by N.C. Gen. Stat. § 158-7.1, as evaluated under the test developed in Mitchell and Madison Cablevision, among other cases, are within the scope of proper governmental activity

(5) The statutory structure of N.C. Gen. Stat. § 158-7.1 is free of the particular infirmities which have caused the Court in other cases to find that proposed activities were outside the scope of proper governmental activity
CONCLUSION

APPENDIX
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A. Interest and Position of the Amicus


The North Carolina Economic Developers Association ("NCEDA"), a North Carolina nonprofit corporation, is the lead association of professionals who work to attract new business and industrial facilities to North Carolina, and to retain and encourage the expansion of existing facilities within North Carolina. Joining NCEDA in this brief are over sixty local governments and other entities from across North Carolina which also have a vital interest in North Carolina's economic competitiveness. Attached as Appendix A is a list and brief description of the various parties joining this brief.

Although the parties joining in this brief are varied in their overall interests, they come together to support the principles asserted in this brief:
- Attracting and retaining high-quality jobs and securing an expanding tax base constitute legitimate objectives of State and local governmental policy in North Carolina.

- It is necessary and proper for local governments in North Carolina to work toward the economic development of their localities, (1) because the current competitive environment requires local government expenditures to help attract and retain business and industry, (2) because of the absence of any other entity with the ability to carry out this mission effectively, and (3) because this participation is consistent with both other governmental activities of a long-standing and similar nature and a common understanding of government's role in striving to achieve goals beneficial to citizens.

- Therefore N.C. Gen. Stat. § 158-7.1 is a constitutional authorization for local governments to undertake public activities and to spend public funds for economic development purposes under the conditions and limitations imposed by the statute.
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B. Economic Development Activities of Government in North Carolina -- The Historical Context and The Current Competitive Environment


This case tests the propriety of contemporary local government actions in spending money for purposes which have the effect of encouraging business expansions in, and relocations to, North Carolina. Those expenditures are now to be evaluated under the North Carolina Constitution's "public purpose" clause. Because public purpose is an evolving concept, it is helpful in evaluating the question currently before the Court to review North Carolina's historical tradition of using reasonable business incentives to be competitive in business and industrial development.

The first task is to define what is an "incentive." An "incentive," in the context of the case before this Court, is an investment which directly supports an industrial recruitment or existing industry expansion project, which project will result in a net public gain in terms of tax revenues, the creation of new and better quality jobs for the citizens of the area, and which will comport with sound public policy principles. This definition reflects the focus the North Carolina General Assembly has always put on producing a net public gain for the citizens of our State by way of quality jobs and a tax base to support essential services.

It has been the consistent practice in this State to define incentives with a focus on job creation, tax base growth and overall benefit to our citizens. The benefits to the companies which are the beneficiaries of these investments have always been, and continue to be, secondary considerations. This is particularly the case with regard to N.C. Gen. Stat. § 158-7.1.


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(1) The Evolution of Governmental Economic Development Programs in North Carolina


North Carolina has always been a pioneer in economic development. In the mid-nineteenth century, North Carolina built the North Carolina Railroad, which was at that time the longest railroad in the world, to promote exports through the State port at Morehead City. In the late 1950's and early 1960's, the Research Triangle Park grew out of a visionary level of public-private cooperation. Former Governor Luther Hodges pioneered industrial recruitment in the 1960's. In 1989, Governor James Martin's proposal was accepted by the General Assembly to create a $9.2 billion intrastate freeway system in North Carolina, which will complete the groundwork for the State's lesser-developed areas to enjoy a higher level of economic growth. In 1991, Governor Martin implemented planning for the Global TransPark, which project has also been a priority for Governor James B. Hunt.

Just as North Carolina has been a leader in doing the basic things which support economic growth, such as building infrastructure, developing visionary research parks, and actively pursuing industry, it has also been a leader in creating quality programs by which to make investments in quality businesses, when those investments are reasonably necessary to remain competitive among other states and localities within other states.

North Carolina has generally been on the conservative side in providing incentive programs, doing less than most states. A recent KPMG Peat Marwick study, as reported in CORPORATE FINANCE magazine, ranked North Carolina 34th among the states in the level of incentives provided to industrial recruitment projects. Certainly if the trial court's judgment is allowed to stand, our State will fall far below its current ranking of 34th. North Carolina may now be on the trailing end of the spectrum of incentives in the United States, but with the loss of North Carolina Gen. Stat. § 158-7.1, our State will simply not even be on the chart.

North Carolina has nevertheless been highly successful in recruiting new industry and inducing existing industry to expand here, because of its excellent business environment and its professionally managed marketing programs at local, regional and State levels. In addition, the judicious use of incentives has always been a part of this success, and North Carolina's future economic welfare rests upon the State's continuing ability to be able to make quality investments in quality industrial projects.

The incentives used through the years by North Carolina in recruiting industry, and inducing existing industry to expand at North Carolina facilities, have included the following:
- North Carolina was a leader in providing customized employee training, at State expense, through the community college system. This program was created and funded by the General Assembly in 1958. In just the fiscal year 1994-95, 18,770 North Carolina citizens were trained for 197 different industrial projects. Since the inception of this program, the use of these public funds has been a critical factor in locating thousands of projects in North Carolina, creating hundreds of thousands of new jobs for this State's citizens and providing billions of dollars in increased tax base. Although a direct cash savings has been secondarily realized by the companies which located in this State, this State realized a much greater net public gain. This program was unique when created, but now every competitor state has a similar program, many of which programs are better funded than North Carolina's.

- The Jobs Creation Tax Credit was created in 1987. See N.C. Gen. Stat. §§ 105-130.40 and 105-151.17. It provides a tax credit of $2,800 per qualified employee to companies locating facilities in the fifty most economically distressed counties of our State. This has provided direct benefits to many companies locating in this State, but these benefits have been greatly offset by the net public gain realized through the judicious use of this incentive measure. Virtually every competitor state has a similar jobs tax credit, which are usually more generous than our State's program, and most of which are applicable to all areas of a state.

- to industrial recruitment and expansion projects for grants and low interest loans. Uses of these funds include renovations of existing industrial buildings, and providing infrastructure to new and renovated buildings. It is also available only in the State's fifty most distressed counties. The use of these funds has been an integral part of this State's success in industrial recruitment and expansion development in the last several years. The conservative use of these funds has been repaid many times over by the tax revenues which have resulted from the economic growth due in part to the availability of this program. Almost all competitor states offer low interest loans such as these.

- Since the 1980's it has been routine for the North Carolina Department of Transportation to provide and pay for needed improvements in the public roads serving proposed industrial facilities or expansions. These have included improvements such as deceleration lanes, turning lanes, roadway expansions and signalization of intersections. In other circumstances, the developer of land which is causing an increased traffic flow will often be required to pay for these types of improvements. The types of needed improvements, and hence the value of those improvements in each individual case, are negotiated between the company and the Department of Transportation. This provides a direct benefit to the company, but this benefit is secondary to the primary purpose of attracting quality industry to North Carolina. Every competitor state will make needed road improvements at state expense to support new or expanded industry locations.

- Community Development Block Grants have been provided in North Carolina for a number of years. This program provides low interest loans and grants for a number of purposes which can have the secondary effect of benefiting a private entity. Community Development Block Grants have been used in numerous industrial projects to assist in recruiting companies to North Carolina or to induce existing companies to do expansions in this State. The Community Development Block Grant program is a federally created and funded program, so all competitor states have the same capability as North Carolina. The implementing rules in many competitor states are more liberal than those in North Carolina.

- Industrial Revenue Bonds provide a source of low-cost financing for qualified projects to provide fixed assets such as land, building, new equipment, architect's and engineer's fees and financing costs. Every competitor state has an industrial revenue bond program and in many of these states, the program is significantly more favorable than what is offered in North Carolina.

- The Business Energy Improvement Program has existed in the Department of Commerce since 1991. This program provides low-interest loans to companies for energy conservation measures. Relatively few competitor states have a similar program, but the maximum loan amount in North Carolina of $500,000 limits its competitive impact.

- The Employment Security Commission in this State for many years has provided job applicant screening and testing services. The value of this initial screening and testing process depends upon each individual project, but there is substantial value in this program. Most competitor states do this.

- The Governor's Industrial Recruitment Competitive Fund was authorized and funded in 1993. Total funding to date has been $12,000,000. Since its inception, this fund has provided cash grants to fifty-five (55) industrial projects, adding 9,960 new jobs and increasing the tax base in our State by an estimated amount of $1,073,042. These funds can be used for projects such as to renovate a building, build a building or buy equipment. All funds appropriated by the last session of the General Assembly have been utilized to date and the Fund is inactive at this time.

As the above illustrates, North Carolina, at the State level, has invested in industrial projects through the years by way of a varied number of programs. Investments of local government funds in quality industrial recruitment or expansion projects have been a part of the economic development practice in this State for years. Some of the types of investments of local government funds which have been made are the following:
- North Carolina Gen. Stat. § 158-7.1 was first enacted in 1925. For many years what is now subparagraph (a) of this statute was the only provision of the statute. As shown in the Record of this case, utilization of the authority granted by N.C. Gen. Stat. § 158-7.1 has been an integral part in inducing a significant number of projects to locate in North Carolina,creating numerous new jobs and more tax base. This statute's provisions are further described below, beginning on page 19.

- Since the passage of N.C. Gen. Stat. § 158-12 in 1961, funds appropriated from local governments as provided for in that statute have been used in a number of ways which have been critical in many industrial recruitment and expansion development projects, and ways by which many private companies benefitted. - Local governments have utilized many other incentive mechanisms to induce new or expansion industrial projects to locate in our State, to create jobs and increase the tax base here for our citizens.
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(2) The Current Competitive Environment


The competitive need for increased flexibility for state and local incentives in recruiting industrial projects and encouraging existing industry expansions has increased in the last few years. Despite the authorizations found in N.C. Gen. Stat. § 158-7.1, North Carolina and its localities already have fewer incentives to offer businesses than most states and localities with which North Carolina competes, as well as fewer incentives than a number of international competitors. In the last year, since the filing of the case before the Court, local governments in North Carolina have been reluctant to use the authority of N.C. Gen. Stat. § 158-7.1. In this time North Carolina has lost the ability to compete for some important projects.

In addition to matching or beating most of our State's program, North Carolina's competitor states offer many other, very generous incentives at the local and state levels. Examples of these programs and projects include the following:
- South Carolina, Virginia and Georgia offer ad valorem tax abatements, providing industries locating or expanding in their states with huge savings. These states also offer corporate income tax credits for companies locating or expanding in these states, and companies can also receive a generous jobs tax credit in any county in those states.

-El Paso, Texas has a program called "The Check's in the Mail." This community sends checks for thousands of dollars to companies which are prospects considering location or expansion of facilities in that location. The checks are payable when the company makes the decision to locate or expand there.

-In October, 1995, Wal-Mart chose to put a $53 million distribution facility in South Carolina rather than Union County, North Carolina. South Carolina offered job tax credits of $2,500 per year for five years totalling $5,000,000 over that time, an additional tax credit of $200,000 per year and a free 120 acre site. The location in South Carolina is only four (4) miles from the proposed Union County site.

-Virginia recently won the approval for Toshiba and to build a $1.2 billion computer chip plant in that state, which will employ 1,200 people initially growing to a full employment of 4,000. Virginia's incentive package totalled $48.2 million, which was predominately in the form of performance-based manufacturing grants and tax credits. North Carolina had been competitive for this project, until the company focused on incentives.

-An $80 million circuit-board laminants plant to be owned by a German company, Isola Werke, which would employ 200 people, chose a South Carolina site, and not a competitive North Carolina site, when Winnboro, South Carolina, allowed the company a fifteen-year moratorium on ad valorem taxes.

By citing the above examples, it is not NCEDA's contention that North Carolina should attempt to match these offers dollar for dollar. Our State, however, is barely competitive in these types of projects. Without the ability to make use of the flexibility offered by N.C. Gen. Stat. § 158-7.1, North Carolina is out of the race.

In summary, competitor states can beat North Carolina "hands down" when incentives are an important criteria for an industrial recruitment or expansion project, which in today's environment includes most projects. The superior infrastructure and many other favorable elements of North Carolina's business environment will only go so far. In many projects, the final business decision comes down to the level of incentive support.

Our State level incentives are modest, with most competitor states having much more generous programs.The flexibility for recovering from this competitive disadvantage in North Carolina has for years been at the level of local government incentives, primarily under the authority of N.C. Gen. Stat. § 158-7.1.

The flexibility to take specialized measures to close the gap on levels of incentive support, so that North Carolina remains minimally competitive, should continue to be at the local level. State-level programs tend to be more rigid than the flexible authority allowed local governments pursuant to N.C. Gen. Stat. § 158-7.1.

More importantly, in the closing stages of a recruitment project, when it appears in the best professional judgment of a seasoned recruiter, and the collective judgment of local business and public leaders, that some additional measure is necessary to win the project, who is better able to judge what will serve the public good than locally elected officials? This process works. Within the strict constraints of N.C. Gen. Stat. § 158.7.1, it should be local elected officials who determine, under the particular facts at hand at any time, whether meeting the public needs in their community for better jobs and increased tax base is sufficient in a specific case for the community to offer additional, conservative incentives -- and if so, how much.

Our State's major cities do not have the same priorities as our rural, poorer, lesser developed areas.

The public officials in those areas think of the public purpose of economic development differently than do officials in the more prosperous areas. It is worthwhile to note the significant representation in Appendix A of organizations related to economic development in our rural areas. How can Alleghany County compete with a Virginia county, similar in almost all material respects, for a Bristol Compressors facility, if only the Virginia county can offer economic incentives?

Appendix B is the minutes of the public hearing in the Bristol Compressors/Alleghany County project, which is cited by affidavits in the trial record in this case. Note the unanimous level of support. For the citizens in Alleghany County, the public purpose of creating jobs and expanding its services through an expanded tax base is not a legal concept, but a matter of eating better, having a nicer home, bringing a child back home who had to leave as an adult to find a job, having a better school, better living standards, etc. Certainly the citizens and elected officials of Alleghany County thought they were involved in the proper business of government. They were right, and this Court should uphold their judgment.
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(3) What the statute provides


N.C. Gen. Stat. 158-7.1 was originally enacted in 1925. Consequently the concept of local governments supporting business location and expansions by incentives has been accepted and utilized for quite some time. The statute originally consisted only of what is now subsection (a). Since its enactment the numerous other provision which are in N.C. Gen. Stat. 158-7.1 were added, actually restricting local governments discretion.

N.C. Gen. Stat. 158-7.1 does not allow local governments to go to excess in providing investments into business recruitment and expansion projects. Although some flexibility is allowed on what a community might do to assist a prospect, the statute is extraordinarily specific about the process and guidelines for such incentives.

The statute requires public notice of, and a public hearing about, any proposed economic development. The local citizens can be heard. This in itself is a self-regulating control on the use of this authority.

Local governments are limited in the amount of money which can be committed under this statute, to only one-half of one percent of the assessed property value in its jurisdiction. See N.C. Gen. Stat. 158-7.1(f).

Very specific findings are required before a governing body can utilize its statutory authority to make an economic development expenditure. Any public funds expended must be repaid, by tax and other revenues attributable to the project, within ten years. Sec N.C. Gen. Stat. 158-7.1 (d2). Most local governments use shorter pay-back periods. The governing board must find that the project "will stimulate the local economy promotes business and result in the creation of a substantial number of jobs ... which pay at or above the median average wage in the county or city." See N.C. Gen. Stat. 158-7.1 (d2)(1). The company realizing a secondary benefit from the incentive must be contractually bound to generate the expected tax revenues. N.C. Gen. Stat. 158-7.1 (d2)(2).

In short, the statute provides flexibility to "close deals" on business recruitment and expansion projects. That flexibility is limited by good policy considerations required by the statute. To remain competitive in many industrial projects, local communities need the flexibility allowed by N.C. Gen. Stat. 158-7.1. In addition, N.C. Gen Stat. 158-7.1 embodies sound public policy principles which should underpin any state or local community incentive policy:
1. A strict return on investment analysis is required, assuring a net public gain.

2. The company benefitting secondarily is bound to perform up to expectations.

3. The use of public funds leaves something of tangible value in the community.

4. Existing industries can receive investments for expansions from local governments just as new industries can, assuring that our existing business citizens are treated equitably.
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(4) What is at stake in the case


Historically there has been no question that the use of the incentive programs, including all of those mentioned above, were necessary and in the furtherance of the legitimate public purpose of promoting growth in the number of high quality jobs for our citizens and our State's tax base. Should this Court rule broadly in declaring N.C. Gen. Stat. § 158-7.1 unconstitutional, it would be a departure from the State's long-standing policy, and would raise serious questions as to whether any of the State and local programs described above, which have been critical contributors to our State's envious economic growth, were constitutional. This would cause North Carolina to fall farther behind its competitor states and global competitors.

The increased use of local government authority under N.C. Gen. Stat. § 158-7.1 reflects a sharp movement among North Carolina's competitor states to take increasingly more aggressive incentive measures to recruit industry. North Carolina remains on the trailing end of the continuum of incentive activities in the country. It is simply a matter of the continuum having shifted. Current activity pursuant to N.C. Gen. Stat. § 158-7.1 remains an essential part of closing many industrial recruitment and existing industry expansion deals. The alternative is to see a loss in the economic vitality of North Carolina. This is the competitive reality.

If the Court were to find N.C. Gen. Stat. § 158-7.1 unconstitutional, such a determination would prohibit North Carolina's cities and counties from appropriating money even for the modest, limited purposes described in N.C. Gen. Stat. § 158-7.1, to encourage new industrial and commercial enterprises to locate in North Carolina and to encourage existing enterprises to remain and expand in North Carolina, regardless of the economic conditions of the local communities. Such a finding would dramatically change the face of North Carolina's overall economic development policy, with a serious adverse impact on the amount of business and industrial expansion and economic growth North Carolina will see over the coming years and a resultant reduction in lost job opportunities for North Carolina citizens and lost opportunities for tax base development for local and state governments. The reduction in growth of tax bases will have an adverse impact on the provision of essential government services, including education and law enforcement, public health and others. This will place upward pressure on local tax authorities to increase taxes, which are already at levels which make many rural areas uncompetitive for recruiting business and industry.

N.C. Gen. Stat. § 158-7.1 is currently an integral part of North Carolina's economic development policy. In adopting N.C. Gen. Stat. § 158-7.1, the North Carolina General Assembly correctly and legally made the public policy determination that North Carolina's cities and counties need the flexibility to address local economic needs through an assortment of tools to encourage the retention and expansion of existing business and industry, and to recruit new business and industry.


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