June 18, 1993
Representative Joe Hackney Representative George Miller Co-Chairs, House Finance Committee
Re: House Bill 1109
Dear Representatives Hackney and Miller:
You request our advice on the constitutionality of House Bill 1109 which:
1) authorizes counties and cities to spend public money to extend water and sewer lines to privately owned industrial properties and facilities; 2) authorizes counties and cities to spend public money for site preparation for privately owned industrial facilities; and, 3) extends to all cities and counties existing authorization given to some governmental units under certain circumstances to acquire and develop property for potential industrial and commercial uses and convey the property to a private business for fair market value. You have also asked our advice whether a local bill containing the same substantive provisions found in House Bill 1109 but limited to one city or county would raise constitutional problems.
I. Under long standing common law principles concerning public utilities, the proposal described in subsection (1) above for provision of water and sewer to private industry does not appear to raise any serious constitutional questions.
Existing N.C.G.S. §158-7.1(b)(5) provides that "[a] county or city may extend or may provide for or assist in the extension of utility services to an industrial facility, whether the utility is publicly or privately owned." In the municipal and county context, the term, "utility" commonly refers to "public enterprises." Under current law, cities and counties have authority to operate water and sewer systems as "public enterprises." N.C.G.S. §§153A-275, 160A-312. This authority has traditionally been interpreted to authorize provision of water and sewer service to private industry. The principal limitations are (a) that service be provided on an equal basis to customers of essentially the same character and service; and )b) that rates must be related to the system’s operating and capital cost and depreciation. Fulghum v. Selma, 283 N.C. 100, 76 S.E.2d 368 (1953); Spring Hope v. Bissette, 53 N.C. App. 210, 280 S.E. 2d 490 (1981), aff’d, N.C. 248, 287 S.E.2d 851 (1982).
II. There are two state constitutional provisions that are relevant to the proposals described in (2) and (3) above. First, Article V, Sec. 2(1) provides that "[t]he power of taxation shall be exercised in a just and equitable manner, for public purposes only …." This limitation applies to the power to appropriate money as well as the power to tax. Foster v. North Carolina Medical Care Comm’n, 283 N.C. 110, 195 S.E.2d 517 (1973). Second, Article I, Section 32 requires that a city receive fair consideration for the sale of property. Redevelopment Commission v. Security National Bank, 252 N.C. 595, 114 S.E.2d 688 (1960). The "public purpose" and "adequate consideration" requirements are discussed below.”
Public Purpose Our courts have time and time again discussed the "public purpose" concept and made clear that a fixed definition to determine its meaning cannot be formulated.
A slide-rule definition to determine public purpose for all time cannot be formulated; the concept expands with the population, economy, scientific knowledge, and changing conditions. As people are brought closer together in congested areas, the public welfare requires governmental operation of facilities which were once considered exclusively private enterprise (citation omitted) and necessitates the expenditure of tax funds for purposes which, in an earlier day, were not classified as public. (Citation omitted). Often public and private interests are so co-mingled that it is difficult to determine which predominates. 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. Mitchell v. Financing Authority, 273 N.C. 137, 144, 159 S.E. 2d 745, 750 (1968).
In determining whether or not particular legislation serves a public purpose, the legal principles to be applied upon such review are: First, the presumption is in favor of constitutionality of an act, State v. Furmage, 250 N.C. 616, 109 S.E. 2d 563 (1959), and all doubts must be resolved in favor of the act. Wells v. Housing Authority of Wilmington, 213 N.C. 744, 196 S.E. 2d 326 (1938). Further, the Constitution is a restriction of powers and those powers not surrendered are reserved to the people to be exercised through their representatives in the General Assembly. Therefore, so long as an act is not forbidden, the wisdom and expediency of the enactment is a legislative, not a judicial decision. McIntyre v. Clarkson, 254 N.C. 510, 119 S.E. 2d 888 (1961). Finally, the fact that public monies are paid to a private individual, corporation or entity does not affect the character of the expenditure, since the object of the expenditure and not to whom it is paid determines whether it is for a public purpose. Green v. Kitchin, 229 N.C. 450, 50 S.E. 2d 5435 (1948). So long as the "public purpose" doctrine is met, the General Assembly may appropriate public funds to private persons associations or corporations. Hughey v. Cloninger, 297 N.C. 86, 95, 253 S.E. 2d 898 (1979); Article V, Section 2(7), North Carolina Constitution.
The initial responsibility for determining what is and what is not a public purpose rests with the Legislature, and its findings with reference thereto are entitled to great weight. In Re Denial of Approval to Issue Housing Bonds, 307 N.C. 52, 296 S.E. 2d 281 (1982). However, a "legislative declaration which asserts in general terms that the statute under consideration is enacted for a public purpose, although entitled to great weight, is not conclusive. When the facts are determined, what is a public purpose is a question of law for the court." Martin v. Housing Corporation, 277 N.C. 29, 43, 175 S.E. 2d 665, 673 (1970).
It is clear, therefore, that although each and every appropriation made by the General Assembly is presumed to be constitutional and for a public purpose, that presumption can be rebutted by contrary evidence.
In Mitchell v. Financing Authority, supra, the North Carolina Supreme Court held that the Industrial Development Financing Act was unconstitutional. This Act authorized a newly created Industrial Development Financing Authority to issue bonds to finance capital projects for industrial development. The facilities would be owned by the State, but leased to private entities until rental payment retired the bonds. The stated purpose of the Act was to promote industry and the natural resources of the State, increase gainful employment and purchasing power, improve living conditions, advance the general economy, and otherwise contribute to the prosperity and welfare of the State. The Court in Mitchell held that "[t]he financing of private enterprise with public funds contravenes the fundamental concept of North Carolina’s Constitution." Five years later, the Court reinforced the Mitchell holding in a similar case, Stanley v. department of Conservation and Development, 284 N.C. 15, 199 S.E. 2d 641 (1985). In Stanley, the North Carolina Supreme Court stated the following:
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. **** 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. 284 N.S. at 33, 199 S.E. 2d at 647.
Since the Supreme Court holdings in Mitchell and Stanley, ARticle V, Sec. 9, has been added to the North Carolina Constitution to specifically authorize industrial development revenue bond financing. However, a reasonable argument can be made that the general holding of both Mitchell and Stanley – financing of private business is not a public purpose – continues to remain the law in North Carolina. Nonetheless, in recent years the North Carolina General Assembly has authorized local governments toundertake economic development activities that otherwise could be considered outside the narrow interpretation of public purpose given by the Court in both Mitchell and Stanley. See N.C.G.S. §158-7.1. The economic development projects contemplated under House Bill 1109 are similar to that authorized under existing statutes. As of this date, the constitutionality of these laws has not been challenged.
Based on the foregoing discussion, it is our conclusion that even though the proposed assistance for industrial development itself has not been specifically recognized by the courts as a public purpose, there are reasonable and responsible arguments to support the constitutionality of the expenditures authorized in proposals (1) and (2) of House Bill 1109.
ADEQUATE CONSIDERATION
Proposal (3) described above extends to all cities and counties the existing authorization in
N.C.G.S. §158-7.1 for local units of government to acquire interests in property, develop the property for potential industrial or commercial use os as to lure new businesses to the unit, and then convey an interest in the property to the business for a fair market value. In establishing the consideration to be received, cities and counties may take into account prospective tax revenues over the next 10 years where it is determined that the improvements to the property will "stimulate the local economy, promote business, and result in the creation of a substantial number of jobs in the county or city." N.C.G.S. §158-7.1(d2)(1). Appropriation and expenditures are limited to one-half of one percent (0.5%) of the city or county property tax value. N.C.G.S. §158-7.1(f). These provisions were first enacted for certain cities and counties in 1991.
The requirement in the bill that a locality receive far market value for any interest in the property conveyed to private business would appear on its face to satisfy the constitutional requirement of adequate consideration. Tying the consideration to be received to the estimated tax revenues resulting from the conveyance over the next ten years may also provide an additional rational argument that the economic development expenditures made are for a public purpose.
III. Limiting the substantive provisions contained in House Bill 1109 to one city or county, would not raise a constitutional problem so long as the selection of the county or city is reasonably related to the economic objectives of the statute. North Carolina Constitution Art. I, Sec. 19 provides that "No person shall be denied the equal protection of the laws." Under established legal precedent interpreting this constitutional provision as discussed below, this provision is satisfied if the selection of the city or county is reasonably related to the objectives of the statute.
The Court of Appeals wrote recently, "In the area of economics and social welfare, a statute containing a legislative classification which is rationally related to a legitimate state objective does not violate the equal protection clause of the fourteenth amendment to the United States Constitution or Article I, Section 19 of the North Carolina Constitution." State v. Stanley, 79
N.C. App. 379, 381, 339 S.E.2d 668, 670 (1986). "Discrimination in a state statute must be based on differences that are reasonably related to the purposes of the statute." Association, Licensed Detectives v. Morgan, 17 N.C. App. 701, 705, 195 S.E. 2d 357, 359 (1973). The classification, in light of its purpose, need not be the very best, but it must attain a "minimum (undefined and undefinable) level of rationality." Glusman v. Trustees, 281 N.C. 629, 638, 190 S.E. 2d 213, 219 (1972).
"[The classification] does not allow arbitrary discrimination between that activity which is prohibited and that which is not." Association, Licensed Detectives v. Morgan, 17 N.C. App. 701, 706, 195 S.E. 2d 357, 360 (1973). Before labelling discrimination "arbitrary," however, the court must overcome a relatively high hurdle. The equal protection clause is offended not because the clasification is "not made with mathematical nicety, or because in practice it results in some inequality," but because the discrimination is "invidious." Licensed Detectives, 17 N.C. App. 701, 705, 195 S.E. 2d 357, citing Morey v. Doud, 354 U.S. 457, 1 L.Ed. 2d 1485, 77 S.Ct. 1344 (1957).
In borderline equal protection cases, the legislative determination is entitled to great weight, State
v. Greenwood, 280 N.C. 651, 658, 187 S.E.1d 8, 13 (1972), because a statute is presumed constitutional. State v. Warren, 252 N.C. 690, 696, 114 S.E.2d 660, 666. Yet if the court determines that the categorization is arbitrary or invidious, it will void the statute. To avoid such a determination, the legislature should be able to articulate how the selection of a single county or city "rationally relates" to the economic development objectives of the statute.
Should you require anything further, please advise.
Andrew A. Vanore, Jr.
Chief Deputy Attorney General
John R. McArthur
Chief Counsel