Friday, May 16, 2008

ODOD: Forcing tax credit approvals would 'offend constitutional separation of powers'

The Ohio Department of Development (ODOD) and a group of developers continue to trade arguments in front of the Ohio Supreme Court over the failed Ohio Historic Preservation Tax Credit (OHPTC) program, raising questions about the program's statutory language and the state's separation of powers.

Earlier this month, ODOD filed a motion for judgement on the pleadings, stating that the five developers who filed the writ of mandamus - including local developers The American Can Building, LLC and Middle Earth 617 Vine Street, LLC - had no clear legal right to the tax credit and, therefore, the writ must be denied.

On March 13, ODOD announced that the initial $120 million in funding for the OHPTC program had been exhausted and the two-year pilot program would be closed, after only 37 of the 115 submitted applications were approved.

The writ of mandamus was filed to compel ODOD to approve the remainder of the qualified applicants in the queue.

"While the plain language of the OHPTC statute limits ODOD from approving more than 100 applications in an application period, it does not require that ODOD approve a minimum or mandatory number of applications," William Cole, ODOD's counsel of record, said in a memorandum accompanying the motion.

In a response on behalf of the developers, McCarthy says that this is untrue.

"The Program requires ODOD to approve 100 applications in each application period if there are 100 qualified applications," he said. "ODOD’s argument requires one to isolate the two small sections from the rest of the statutory scheme that makes up the program. The repeated use of the word 'shall' throughout the statute and the regulations, clearly created a duty on ODOD to approve the first 100 submitted, qualified applications."

$120M budget

On March 13, ODOD announced that the initial $120 million in funding for the OHPTC program had been exhausted and the two-year pilot program would be closed.

Cole said that all fiscal projections seriously underestimated the cost of the program to the state.

"Reacting to the severe burden that would be placed on the State's budget by extreme program cost overruns, ODOD exercised its discretion to limit approvals to the first 37 qualified applications," Cole said. "In doing so, ODOD acted within the express authority granted by the General Assembly to approve not more than 100 applications for tax credits in any application period."

"ODOD cannot point to any such restrictions either in the statutes that created the program or in the state budget adopted by the General Assembly and approved by the Governor," McCarthy says.

McCarthy maintains that a revenue forecast is not a statutory budget, and is not enforceable.

"The budget that ODOD repeatedly refers to was created by the Office of Budget and Management (OBM) as part of its revenue forecast," he says. "There is absolutely nothing in the statutes that established OBM as a super legislature or grants it a veto power to void the enactment of the General Assembly, which was also signed by the Governor."

Cole's memo places some of the blame on the economic conditions in the state and in the nation.

"On January 31, 2008, Governor Strickland ordered state executive agencies to immediately reduce expenditures and implement spending control strategies to address anticipated budget shortfalls," Cole said.

McCarthy says that ODOD is not taking into account the financial situations of the 55 applicants whose applications were never processed.

"They each had to own their respective buildings knowing that without the historic tax credits they could not afford to rehabilitate the building," he said.

Cole and ODOD do not dispute the developers' lack of a legal remedy in the case.

"Instead, they argue that the lack of program funding is of no concern, insisting ODOD must proceed with their applications because there are no explicit financial or economic controls provided in the OHPTC statute," Cole said.

He calls that argument "unavailing".

"As a state executive agency, ODOD must operate within its means," Cole said. "Article VIII of the Ohio Constitution limit's the state's deficit spending."

Cole said that there is no assurance that funds will be generated to cover the state's costs of the tax credits, and that approving the applications might cause other programs to be cut or eliminated.

"To compel such a fruitless exercise under the circumstances of the state's current budget would be an unnecessary and inappropriate use of the state's limited resources," Cole said.

"ODOD’s claim to be stuck with a strict budget for the program not only defies the plain language of the statute but also the realities of how the program actually functions," McCarthy said.

McCarthy says that the program was designed with built in protections - credits would not be disbursed until the projects were completed, and would only be awarded to projects that result in a net revenue gain on the state and local level.

"In the interim, the state treasury and local governments where projects take place, that 'but for' the Program would not happen, benefit from the sales tax and income taxes paid during the construction of the project," he said.

The OHPTC is equal to 25 percent of qualified renovation and rehabilitation expenditures, refundable when the project is complete and generating tax revenue back to the state.

Separation of powers

Cole says that having all of the developers' applications approved would impose substantial costs on an executive agency that is constitutionally bound to operate within its means.

"Forcing ODOD to approve additional applications would substitute the budget decisions of the Court for the budget decisions of the executive branch," he said. "Such judicial interference with ODOD's executive discretion is unwarranted and offends the constitutional separation of powers."

McCarthy says that the developers agree that separation of powers is a legitimate concern, but not as argued by ODOD.

"ODOD argues that the separation of powers doctrine requires the Court to essentially stay out of this case," McCarthy said. "However, as the Court is well aware, the Ohio Constitution gives the Court original jurisdiction to hear and decide mandamus cases. If anything in this case offends the separation of powers doctrine, it is ODOD’s refusal to comply with the statutory duties imposed on it by the General Assembly in the adoption of the statues and ODOD’s attempt to usurp the General Assembly’s budget making powers."

McCarthy says that mandamus is the only proper remedy.

"By failing to carry out its duties under the program, ODOD is not complying with the separation of powers under the Ohio Constitution," McCarthy said. "Accordingly, because ODOD is violating its consitutional duties, mandamus is appropriate to compel ODOD to carry out its duties in the program."

"The separation-of-powers doctrine is implicitly embedded in the Ohio Constitution, and counsels against interference from one branch of government with the constitutional authority of another branch of government," Cole said. "This is especially true with respect to budget and funding decisions."

Therefore, mandamus is not a proper remedy, he says.

"Mandamus should not be used to compel an executive agency to run a discretionary program over budget," Cole said.

Previous reading on BC:
Working group makes recommendations on state tax credit program (4/28/08)
Ohio developers file writ with Supreme Court over tax credit program (4/11/08)
Cincinnati, SW Ohio projects may receive historic tax credits after all (4/3/08)
SW Ohio largely bypassed by failed tax credit program (3/18/08)



Mark Miller said...

Once you get into the government money game it changes your point of view, and you begin to think like them. Government sees all money as belonging to them, and think it's their business to decide how much to let people keep.

Taxpayers who believe in the notion of individual liberty, however, see money as belonging to the person who earned it. The decision about much of it to give government properly occurs at the ballot box or by people we elect to represent us.

I raise this distinction because the applicants clearly are of the first mindset. And it has blinded them to their strongest legal arguement.

This program was structured as a tax credit, not a grant. Under a grant the government writes a check transferring public money to a private concern to accomplish a public purpose. A tax credit lets the private concern apply private funds to public purpose instead of paying them to the government.

The key to this whole mess is that the money to do the work never belonged to the State in the first place and never would. That's why the Legislature quite properly placed a limit on the number of projects instead of limiting the dollars involved. The State is not within its rights to allocate monies that don't belong to them. Press that argument, and ODOD doesn't have a leg to stand on.

Chris S said...

This is a GREAT write up. Cheers!

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