Public Hearings (or Not?) for Economic Development Expenditures

The town’s economic development director (ED Director) has proposed two economic development expenditures for town council to consider. The first is a cash incentive to induce a manufacturing company, currently based outside the state, to locate its operations within the town. The company has promised (1) to increase the tax base by building a new facility in the town and (2) to create a significant number of jobs. In return, the town will pay an annual cash grant to the company for five years. The second expenditure is an advertisement buy—designed to spread the word about the town’s favorable business climate—in trade magazines and other periodicals devoted to certain key industries. The ED Director has asserted that no public hearing is required for either of these expenditures. His reasoning is that a public hearing is required only for certain enumerated activities in G.S. 158-7.1 (the primary statutory authority for local government economic development activities), and the two expenditures for which he is seeking approval—a cash incentive and an advertisement buy—aren’t among the listed activities requiring a public hearing. The town attorney, however, has advised the town to hold a public hearing for both of the expenditures. Who is right?

Before jumping into the analysis, it is helpful to review the basics of a North Carolina local government’s authority to engage in economic development. G.S. 158-7.1 has a catch-all clause, subsection (a), that appears to authorize almost any economic development expenditure by a local government. There are no procedural requirements—no notice requirements or public hearing—associated with the catch-all clause. Given that the catch-all authorizes just about any expenditure related to economic development, it is not much of a stretch to conclude that both of the town’s proposed expenditures—the cash incentive and the advertisement buy—could be authorized under the catch-all. However, G.S. 158-7.1 contains another subsection, subsection (b), that contains separate authorization for an enumerated list of economic development expenditures. The listing “is not intended to limit … the grant of authority set out in subsection (a).” Generally speaking, the enumerated expenditures of subsection (b) pertain to the acquisition, improvement, and conveyance of real property—e.g., developing an industrial park; site preparation for industrial facilities; purchasing land and constructing buildings for commercial use; and leasing or selling land or buildings. Prior to approval of those listed expenditures, notice and a public hearing is required pursuant to subsection (c) of G.S. 158-7.1. The key determinant for holding a public hearing, accordingly, is whether an expenditure is authorized pursuant to the catch-all of subsection (a) alone, or is one of the enumerated activities listed in subsection (b). Cash Incentive Let’s take the cash incentive first. It is just a cash payment. It does not require the town to engage directly in any of the real estate development activities, such as buying and improving land, listed in subsection (b). Instead, the town is paying the company to engage in subsection (b) activities (Professor David Lawrence refers to this as the “economic equivalent” of engaging in those activities directly on page 107 of his book on economic development law). The city will know exactly how the company intends to spend the cash incentive, because G.S. 158-7.2 requires the city to approve expenditures of funds "turned over to any agency or organization other than the county or city for expenditure." In the typical incentive transaction, a local government will require companies to purchase land and build facilities (to increase the tax base and employ workers) as a condition of any incentive. These are classic subsection (b) activities and therefore trigger statutory approval procedures as if the local government were engaging in the subsection (b) activities directly. And there is another reason to hold a hearing. The North Carolina Supreme Court, in its seminal economic development case, Maready v. Winston Salem, 342 N.C. 708 (1996), apparently assumed that paying a company to engage in subsection (b) activities was the same as engaging in those activities directly. In Maready, the court reviewed 24 cash incentives offered to private companies by the City of Winston-Salem and Forsyth County. All of the incentives were paid in cash, so the local governments did not engage directly in any of the real estate development activities of subsection (b). Nonetheless, the Maready trial court (quoted approvingly by the supreme court) specifically found that incentives “made pursuant to the provisions of N.C.G.S. 158-7.1(b) through (f) were approved … following publication of a notice of a public hearing … as provided in said statute.” That is an important finding in light of the fact that all of the incentives took the form of cash payments. Clearly the use of cash did not place the incentives outside the purview of subsection (b). Arguably the Maready court cut through the form of these transactions to get at their substance—it recognized that cash subsidies for activities enumerated in subsection (b) were essentially equivalent to engaging in the activities directly. It must therefore be concluded that cash incentives paid to induce companies to engage in subsection (b) activities—even if the local government does not engage in those activities directly—trigger the public hearing requirement. A related question must be addressed. The local governments in Maready paid cash incentives to companies for specific, named activities—for example, one cash incentive payment was made for construction of “site improvements,” which is an enumerated activity of subsection (b).  However, it is more common today, as exemplified in our scenario above, for cash incentives to be paid to companies in exchange for a general promise to create jobs and increase the tax base by making a capital investment, without further specifying how funds are to be spent. The difference is irrelevant. It should be obvious that today’s cash incentives—paid to induce job creation and increase the tax base—subsidize subsection (b) activities whether or not the enumerated activities are specifically named. Practically every conceivable manner in which a company can increase the tax base—purchasing property and constructing facilities and other improvements on that property—involves subsection (b) activities and therefore triggers the public hearing and other procedures. To hold otherwise—to suggest that a local government can avoid the procedural requirements of G.S. 158-7.1 by cleverly omitting any reference to the activities that must occur in pursuit of increasing the tax base—would strain logic and elevate form over substance. Even if one could be certain that an incentive was not inducing any subsection (b) activity—such as, for argument’s sake, the creation of jobs related to the purchase of machinery alone with no associated improvements to real property—it is still advisable to hold a public hearing prior to approving the incentive. As explained in earlier blog posts (here and here), and on pages 97 - 98 of Professor Lawrence’s book on economic development law, the Maready court lauded the “strict procedural requirements” of G.S. 158-7.1 when it concluded that payment of incentives is permitted by the North Carolina Constitution. Public hearings were explicitly mentioned as a component of the typical approval process for the incentives at issue in the case. In later incentive cases, the North Carolina Court of Appeals has felt bound to uphold incentives that are “parallel” to the incentives approved in Maready. The approval procedures are an important aspect of the Maready incentives. To obtain the beneficial presumption of being parallel to the incentives approved in Maready, local governments should hold a public hearing, properly noticed, prior to approval of any incentive. Indeed, even if the General Assembly were to remove the public hearing requirement from the statute entirely, it would still be necessary to hold the public hearing and follow other related “strict procedural requirements” simply to remain safely within the bounds of Maready’s constitutional public purpose analysis. Advertisement Buy Now let’s turn to the second expenditure proposed by the ED Director: the advertisement buy. An advertisement buy does not even remotely touch on the enumerated real estate activities of subsection (b). The advertisement buy must therefore be authorized solely by the catch-all of subsection (a), so the statute imposes no public hearing requirement. Further, the beneficial presumption of being parallel to Maready is less important (and arguably not relevant) when evaluating a general economic development expenditure, such as an advertisement buy, as compared to an incentive. Maready’s approving reference to “strict procedural requirements” was made in the context of incentive payments and inducements to private industry; the central holding pertained to “the expenditure of public moneys for economic development incentive programs.” The case therefore appears to have less relevance to general economic development expenditures. Accordingly, it is reasonable to conclude that non-incentive general expenditures that fall outside of the enumerated activities listed in subsection (b) require no public hearing. In summary, it looks like the ED Director’s conclusion that a public hearing is unnecessary is wrong with respect to the cash incentive and probably correct on the advertisement buy. This is not to suggest that the town attorney’s conservative approach of holding a public hearing for every expenditure under G.S. 158-7.1 is necessarily a wrong choice—it should simply be recognized as a cautious approach intended to take seriously Maready’s emphasison the strict procedural requirements of G.S. 158-7.1.