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FORMER N.C. JUSTICE CHALLENGES DELL INCENTIVES
03/09/05
David Rice and Victoria Cherrie
A former N.C. Supreme Court justice says that local incentives for Dell Inc. to come to Winston-Salem could cost more than the $37.2 million previously advertised and violate more than one provision of the state constitution.

Robert Orr, the former justice who now heads the N.C. Institute for Constitutional Law, reviewed a draft of an agreement on local incentives for Dell that city officials released last week. He said that he is preparing to sue over the incentives, challenging their constitutionality.

"It is just mind-boggling," Orr said. "My general observation is that it could potentially cost the taxpayers of Winston-Salem and Forsyth County more than the original $37.2 million that was announced. And the benefits being given to Dell appear to be unprecedented."

Local officials disagree, saying that they took extra time wording the contract to head off any potential legal challenges.

Dell agreed in December to build a 500,000-square-foot computer assembly plant, invest at least $100 million and bring at least 1,700 jobs in exchange for the local incentives and at least $242 million in further incentives from the N.C. General Assembly.

"I see a myriad of issues, both constitutionally and also from a public-policy standpoint," Orr said of local incentives.

He outlined a possible new line of attack on industrial incentives, saying that the state and local governments might be violating the constitution by contracting away the power of taxation as they enter contracts with Dell and other companies for multiyear tax breaks.

Orr criticized several provisions in the proposed contract:

• Winston-Salem Business Inc. agrees in the proposal to give Dell 200 acres - 119 acres as the primary site for the plant and 81 acres as expansion property. The property is valued at $7 million, and Dell has the right to sell or transfer any part of the 81 acres to its suppliers if the city agrees.

"Having been given 81 acres, they could turn around and sell it to some company coming in to make cardboard boxes and make a profit," Orr said. "How much money can they make off that that arguably should go to the city and county?"

• In addition to $7 million worth of state road work, the city must make any improvements, including interchanges, that are required by an independent traffic study after the state installs signals, turn lanes and interchange improvements from Interstate 40 to the site.

"Who knows what that will cost?" Orr said. "It looks like if this independent traffic analysis says it's needed, you've got to do it."

• The city and county are agreeing to pay a combined $17.2 million in tax abatements to Dell over 15 years based on the $100 million investment and creation of at least 1,700 jobs. But the company can count jobs at its plant that are filled by its "strategic partners" or suppliers.

• The city agrees to establish police patrols that provide "a frequent around-the-clock police presence," the draft contract says.

"This sounds like the city will add police patrols for this particular site," Orr said. "You either add law enforcement ... or draw law enforcement from other areas to comply with this."

• Permit fees: The city and county agree to waive or reimburse all development, construction or tap fees, which city officials estimate would cost about $55,000.

Orr said that $55,000 "would pay for two teacher assistants. When you add in the road costs, the police protection, the waiver of fees, there are all of these smaller costs to the citizens of Winston-Salem and Forsyth County."

Local officials and lawyers negotiating the Dell deal have spent about three months scrutinizing and changing the wording of the contract in anticipation of a lawsuit.

"We believe everything we've done is constitutional. We've taken a lot of time to make sure everything in the contract is in line with every aspect of state statutes," Mayor Allen Joines said.

In fact, the city is going above what's required by law by agreeing to have a second public hearing and vote on its share of the local incentives, he said.

The changes in the draft contract from the initial agreement approved by the Winston-Salem City Council in December do not alter the $8.4 million in property tax abatements being offered by the city nor the $8.8 million from the county. The changes would allow Dell to collect its tax-abatement payments more quickly, depending upon how much the company invests.

"We probably were authorized to make changes without doing that, but wanted to take the extra step," Joines said.

Ron Seeber, the city attorney, said that several of Orr's points don't appear to involve the legality of the Dell deal, but rather whether it's a "good deal."

For example, the city would not be adding police patrols or drawing from other areas of the city for the Dell assembly plant to give the company extra protection, said Lee Garrity, the assistant city manager for public safety. Protection would be provided based on need at the Alliance Science and Technology Park, the same way it is at other business parks in the city, he said.

Seeber questioned Orr's point about the city making improvements, including interchanges, which are required by an independent traffic study after the state installs signals, turn lanes and interchange improvements.

These are standard procedures to handle road improvements for any project, he said.

Seeber also explained in greater detail an issue that caused confusion in the draft contract agreement involving the city and county's contribution of $3.5 million each toward the project.

The city and county contributions will be given to Winston-Salem Business Inc., a private economic development agency. Winston-Salem Business will buy the land from the city and give it to Dell for free. The city will keep its $3.5 million and return $3.5 million to the county.

The wording in the contract that says the grants can be used for "any Project purpose" gets around provisions in the law that prohibit government entities from giving land to private companies if they do not qualify under certain criteria as is the case with the Dell deal, Seeber said.

The word "Project" was capitalized to meet the definition in the draft contract; it refers to the site where Dell will build its plant, and not the overall project.

Though Gov. Mike Easley and state legislators also approved at least $242 million in state incentives for Dell in a special session Nov. 4, Orr and his staff are drafting a lawsuit to challenge the company's local incentives, building on a case first waged by Winston-Salem lawyer William Maready in 1996.

"We think the issue of the local incentives and interpretation of the Maready decision is a straightforward legal issue that needs to be resolved. It's likely that a challenge to the local incentives will be the first attack," Orr said.

In the Maready case, the N.C. Supreme Court upheld cash grants from the city and county to new employers, saying that the creation of jobs meets the state constitution's requirement that tax dollars must be spent for a public purpose.

Orr dissented from that decision, and he was joined by I. Beverly Lake Jr., now the court's chief justice.

"While the current state of the law says that creating jobs is a public purpose, the question is, are there any limits? And in this particular case, haven't the jobs already been created in North Carolina because of Dell's previous announcement (on Nov. 9) that they were coming to North Carolina?" Orr said last week.

Part of the challenge could be based on the "exclusive-emoluments" clause in the state constitution, which dates to 1776 and says that no "exclusive or separate emoluments" can be paid by government "but in consideration of public services."

"Under the exclusive-emoluments provision, it would seem to me that all these special breaks given to Dell are the very type of governmental action that the constitutional provision was adopted to prohibit," Orr said.

"You don't have to pay construction fees. Everybody else is paying construction fees. You don't have to pay property taxes. Everybody else is paying property taxes," he said.

Orr also outlined a new potential challenge to incentives based on a state constitutional provision that says: "The power of taxation shall be exercised in a just and equitable manner, for public purposes only, and shall never be surrendered, suspended, or contracted away."

"Arguably, they're contracting away their taxing authority by giving away these future tax revenues," he said.

Eugene Boyce, a Raleigh lawyer who has won several high-profile lawsuits against the state, suggested the theory to Orr.

"The basic thing they're doing is making a contract, the material term of which is 'We will furnish a quid pro quo by agreeing not to tax you, to tax you less than the other fellow,'" Boyce said Monday. "It's a non-uniformly applied tax structure - and that's even a separate constitutional requirement in North Carolina."

But attorneys for the state made similar arguments in a 1998 case that Boyce won over taxation of state employee retirement benefits, and the Supreme Court pointed out that the state constitution also allows for tax exemptions.

"It is apparent that the granting of an exemption is not the same thing as relinquishing the 'power' of taxation," the court wrote. "It is clearl that the state may make contracts for exemptions without contracting away the 'power' of taxation as long as the contract is for a public purpose."

Orr said that his group is waiting for the local incentives contract to be signed before filing suit, though.

"We've been waiting in part at least to see what the agreement actually says," he said. "And we are still looking for the right combination of individuals and businesses who would be willing to participate in this public-interest lawsuit."

David Rice can be reached in Raleigh at (919) 833-9056 or at drice@wsjournal.com

Victoria Cherrie can be reached at 727-7283 or at vcherrie@wsjournal.com