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Unofficial Opinion 98-15

Unofficial Opinion 98-15

December 14, 1998
To: 

State Senator
District 46

Re: 

Under current precedent the Georgia Constitution does not permit direct grants to private persons solely to induce economic activity for the general welfare.

You requested my opinion whether the Georgia Constitution permits "the use of public funds for incentives to directly benefit private corporations to spur economic development." I take your question to refer to incentives such as direct payments to induce economic activity or the purchase or guarantee of a corporation's securities for such purpose. Indirect incentives are a stable part of Georgia's economic development programs, for example: educational programs such as "Quick Start," the employee training program of the Department of Technical and Adult Education, O.C.G.A. § 20-4-40; tax incentives such as those in the "Georgia Business Expansion and Support Act of 1994" ("BEST"), O.C.G.A. § 48-7-40 et seq.; and grants to local governments and local government authorities such as those under the "Regional Economic Business Assistance" ("REBA") program of the Department of Community Affairs, Rules and Regulations of the State of Georgia, Chapter 110-6-1, O.C.G.A. § 50-8-8.

As you surmised, the prohibition against governmental gratuities has been interpreted to preclude direct grant payments to private entities in order to induce economic development. It states, "Except as otherwise provided in the Constitution, (1) the General Assembly shall not have the power to grant any donation or gratuity or to forgive any debt or obligation owing to the public." Ga. Const., Art. III, Sec. VI, Para. VI(a). These words have their ordinary meanings. McCook v. Long, 193 Ga. 299 (1942). In regard to your question, two decisions of the Georgia Supreme Court and a decision of the United States Supreme Court provide guidance under current law. The most directly in point is Atlanta Chamber of Commerce v. McRae, 174 Ga. 590 (1932). In this case taxpayers successfully sued to prevent Fulton County from appropriating funds for grants to the Atlanta Chamber of Commerce and similar entities. The defendants had responded to the suit by saying

that the Chamber [and other grant recipients] render valuable services to the community as a whole, by bringing conventions and new industries to the city and county; . . . [O]n account of such services there is an increase in property values and increase of county taxes which exceeds the amounts of the appropriations by the county to support these institutions.

Id. at 591.

Relying in part on the gratuities prohibition, the Georgia Supreme Court held that the County lacked the power "to donate county funds . . . for the purposes indicated." Id. at 595.

A case by the United States Supreme Court is sometimes cited for the countervailing proposition that the state may make a direct grant if it will result in "great public benefit." Georgia v. Trustees of the Cincinnati S. Ry., 248 U.S. 26 (1918). However, the facts of the case do not reach that far. As stated in the report of the case, the State owned the Western & Atlantic Railroad from Atlanta to Chattanooga (as it still does today). In Chattanooga, for a stretch of five miles near the terminus of both lines, the W&A right-of-way ran parallel to the path of the Cincinnati Southern Railway, "a grand trunk line." The General Assembly perceived that the Cincinnati Southern would "be of great benefit to the State of Georgia, forming a most important feeder and, practically, an extension of the Western and Atlantic Railroad, . . . giving to our commerce the advantage of a direct and admirable connection with the railway system of the North and West." Id. at 27. Moreover, it would be of "advantage [to] both railroads to be able to locate their tracks and works close together, thus saving expense to one in construction, and to both in maintaining the road-bed and facilitating railroad operations; and giving to both railroads the advantage of a stronger and firmer road-bed through a route subject to overflow by floods in the Tennessee river." Id. To achieve these ends, the State granted an easement to the Cincinnati Southern. The suit arose when a competitor to the W&A gained control of the grantee. The State tried to break the easement, claiming in part that the grant violated the gratuities clause. In this context, the U.S. Supreme Court refused to find a gratuity.

The case has been cited favorably by the Georgia Supreme Court in other situations in which it approves a payment of public funds or a use of public property in return for an activity, which advances a public function or improves public property. McLucas v. State Bridge Bldg. Auth., 210 Ga. 1 (1953) (grant of state land to public authority for improvement); State Highway Dep't v. Bass, 197 Ga. 356 (1944) (worker's compensation benefit payments for state employees). Thus, in Bass the court placed Cincinnati Southern with other cases "where there has been . . . consideration for the legislative grant." Id. at 70, citing Georgia Penitentiary Co. v. Nelms, 65 Ga. 499 (1880); Trotzier v. McElroy, 182 Ga. 719 (1936); Aven v. Steiner Cancer Hospital, Inc., 189 Ga. 126 (1939). Such cases distinguish Atlanta Chamber of Commerce v. McRae as not involving consideration in aid of a governmental function. Smith v. Board of Commissioners, 244 Ga. 133 (1979) (approving use of fire station by private company retained by county to fight fires).

From the report of decision in Cincinnati Southern, it does not appear that the quid pro quo was tied down completely by contract. Rather it appears that to some extent that the resulting benefit was expected to flow logically or naturally from the situation. Prior official opinions accept the proposition that in some cases this is acceptable under the gratuities prohibition. See 1993 Op. Att'y Gen. U93-14 (free use of press office promotes public function of providing information about government), citing 1973 Op. Att'y Gen. 73-145 (state may donate litter bags to motorists to alleviate roadside maintenance); 1963-65 Op. Att'y Gen. p. 558 (state may give industrial prospects nominal mementos to preserve memory of promotional trip where "promotion" authorized by law). This concept was addressed recently by a divided Georgia Supreme Court, in a decision which may be viewed as both qualifying the principle and giving it substance.

In Garden Club Of Georgia, Inc. v. Shackelford, 266 Ga. 24 (1995), highway regulations permitted private sign owners to cut state plants to clear a view. The court acknowledged the argument that the signs provided information to the traveling public but refused to find that the General Assembly had made a legislative determination to make this function a governmental aim. It also found that the information was otherwise available to motorists and therefore held the program not to provide a concomitant, "substantial benefit" to the state as required by the gratuities clause. For the "substantial benefit" test, the court cited Smith v. Board of Commissioners, 244 Ga. 133 (1979). It is among the cases cited above where there is "consideration for the . . . grant" which advances a public function. One implication of the case is that the result could have been different if the court had agreed that the General Assembly clearly intended by statute to make informing motorists a public function.

Thus, the present import of the gratuities cases is that public funds must be spent on public functions defined by general law or in the improvement of public property. Compare 1998 Op. Att'y Gen. 98-10 with 1995 Op. Att'y Gen. 95-22.

With respect to guarantees of securities or "joint ventures," there is little case law, but the Georgia Constitution preserves historical prohibitions against state aid in the form of joint ownership or pledges of credit. Ga. Const., Art. VII, Sec. IV, Para. VIII; see generally 1989 Op. Att'y Gen. 89-16.

In conclusion, it is my unofficial opinion that under current precedent the Georgia Constitution does not permit direct grants to private persons solely to induce economic activity for the general welfare. However, a variety of other programs exist under current law and new programs may be considered.

Prepared by:

JOHN B. BALLARD, JR.
Senior Assistant Attorney General