Page 12

Bulletin

Public Finance Lee Birchall Risk-Reward: Using Public Funds For Economic Development Amendment No. 772 to the Alabama Constitution, 1 ratified in 2004, reversed a century-long state constitutional prohibition on the ability of certain local governments to lend their credit to or grant public funds in aid of, among others, private corporations.2 This well established prohibition, along with the state constitutional debt limit provisions3 prohibiting counties and municipalities from incurring indebtedness in amounts greater than five percent and twenty percent, respectively, of their assessed values, served to prevent local leaders from risking public funds and protect citizens from excessive taxation.4 These prohibitions were well conceived; many states adopted them in the late Nineteenth Century in response to local government bankruptcies resulting from competition to build railroads in order to attract business.5 Amendment No. 772, therefore, which permits certain counties and municipalities to lend their credit to or grant public funds and things of value in aid of, among others, private corporations by issuing debt in an amount up to fifty percent of its assessed value,6 represents a significant departure from historical precedent but gives local governments an effective tool for economic development. To date, the majority of Amendment No. 772 economic development projects in Alabama have supported retail businesses and shopping centers. The University of Alabama’s Center for Business and Economic Research (CBER), at its 25th annual Economic Outlook Conference held earlier this year, identified retail, among others, as an industry that will drive a portion of the 18,500 net new jobs projected to be created in Alabama in 2013.7 It is likely that, as economic growth increases, Amendment No. 772 permits certain counties and municipalities to issue debt in an amount up to 50% of ... assessed value,6 representing a significant departure from historical precedent... private developers will again pursue local governments for new Amendment No. 772 economic development and retail projects. This article will outline certain issues and negotiation points of which local government officials must be aware in order to protect themselves when considering these transactions. First, local governments must determine whether they can utilize Amendment No. 772. Amendment No. 772 states on its face that it only applies to local governments which do not already have a local economic development constitutional amendment.8 However, local governments with existing local economic development constitutional amendments that would otherwise disqualify them have validated their use of Amendment No. 772 in state circuit court by arguing that their otherwise disqualifying amendments are sufficiently dissimilar from Amendment No. 772 to justify its use. There are no reported appellate decisions on Amendment No. 772, consequently validation is a matter of discretion for the local government and bond counsel. Second, local governments must also positively identify the developer. Developers usually form single purpose entities for these projects. As is their intent, these shells have no assets and leave parties with which they contract no credit recourse against them. Therefore, local governments must confirm that they are contracting with the actual developer and not an asset-less shell. If the developer insists on using a single purpose entity, local governments should consider obtaining guaranties from the appropriate related company and/or the individual principals. Another solution is to require the related company to acquire a letter of credit to secure the obligations of the single purpose entity. Third, the local government must conduct a statutorily required public hearing.9 The purpose of this hearing is to publicly identify the corporate ben- 12 Birmingham Bar Association


Bulletin
To see the actual publication please follow the link above