Was 1993 N.C. House Bill 1109 (authorizing counties and cities to extend water/sewer to private industry, pay for site preparation for private industrial facilities, and statewide extend land-acquisition-and-conveyance powers for industrial recruitment) constitutional under the NC public-purpose and adequate-consideration clauses, and would a local-bill version of the same content raise an equal-protection problem?

Plain-English summary

1993 N.C. House Bill 1109 had three main pieces: (1) authorize counties and cities to spend public money to extend water and sewer lines to privately owned industrial properties; (2) authorize them to spend public money on site preparation for privately owned industrial facilities; and (3) extend statewide an existing authorization (previously limited to specific cities and counties under certain circumstances) to acquire and develop property for potential industrial or commercial uses and convey it to a private business for fair market value. The sponsors also asked whether a local-bill version limited to one city or county would raise constitutional problems.

Chief Deputy Attorney General Andrew A. Vanore, Jr. and Chief Counsel John R. McArthur worked through three NC constitutional issues.

1. The water/sewer extension. No serious constitutional problem. Existing G.S. 158-7.1(b)(5) already authorized counties and cities to extend utility services to industrial facilities, whether the utility was publicly or privately owned. Water and sewer are statutory "public enterprises" under G.S. 153A-275 (counties) and G.S. 160A-312 (municipalities). NC case law from Fulghum v. Selma, 283 N.C. 100 (1953), and Spring Hope v. Bissette, 53 N.C. App. 210 (1981), confirmed authority to serve private industry, subject to two principal limits: service on an equal basis to customers of essentially the same character and service, and rates tied to the system's operating, capital, and depreciation costs.

2. The site preparation and statewide acquisition/conveyance provisions. Harder. Two constitutional provisions matter. Article V, § 2(1) requires taxation (and, per Foster, the related appropriation power) to be "exercised in a just and equitable manner, for public purposes only." Article I, § 32 (via Redevelopment Commission v. Security National Bank) requires fair consideration for any sale of city property.

The public-purpose doctrine is open-ended. Mitchell v. Financing Authority, 273 N.C. 137 (1968), held the Industrial Development Financing Act unconstitutional on the ground that "the financing of private enterprise with public funds contravenes the fundamental concept of North Carolina's Constitution." Stanley v. Department of Conservation and Development, 284 N.C. 15 (1973), reinforced the holding: "Aid to a private concern by the use of public money . . . is not justified by the incidental advantage to the public which results from the promotion and prosperity of private enterprises."

The constitutional landscape shifted after Mitchell and Stanley. The voters added Article V, § 9 to authorize industrial development revenue bond financing. The General Assembly enacted economic development statutes including N.C.G.S. § 158-7.1 (incentive expenditures, with cap and prospective-tax-revenue calculations). The 1991 amendments to § 158-7.1 had not been challenged. The AG concluded "reasonable and responsible arguments" supported the constitutionality of HB 1109's site-preparation and acquisition provisions, even though the courts had not yet specifically validated this kind of assistance as a public purpose.

3. Adequate consideration. The bill required the locality to receive fair market value for any property conveyed. That satisfied Article I, § 32 on its face. The ability to count prospective tax revenues over the next ten years in setting consideration (an existing feature of § 158-7.1(d2)(1)) also gave another argument that the locality's transaction served a public purpose.

4. Local-bill version. A local bill limited to one city or county would not raise an equal-protection problem under Article I, § 19 if the selection was "rationally related to the economic objectives of the statute." The AG cited State v. Stanley, 79 N.C. App. 379 (1986), and other equal-protection authority. The presumption of constitutionality applies to economic legislation. The legislature should be able to articulate why the chosen jurisdiction matched the economic objectives.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The NC Supreme Court has issued additional public-purpose cases since 1993, most notably Maready v. City of Winston-Salem, 342 N.C. 708 (1996), which upheld targeted economic development incentives under G.S. 158-7.1 and substantially relaxed the Mitchell/Stanley doctrine. The current legal landscape for local economic development incentives in NC is much more permissive than this 1993 opinion's cautious framing suggests. Anyone analyzing a current incentive program should start with Maready and current G.S. 158-7.1.

Common questions

Q: Why was the water/sewer piece easy and the site-prep piece hard?
A: Water and sewer service to industry had been authorized for decades. Spring Hope v. Bissette and Fulghum v. Selma had blessed it, subject to standard utility-rate principles. Site preparation for private industrial facilities was a more direct subsidy: the locality pays to grade, drain, or improve a parcel that a private company will then own and use. That had a closer relationship to Mitchell's prohibited "financing of private enterprise with public funds," and required the AG to defend its constitutionality more carefully.

Q: What is the public-purpose doctrine?
A: Two NC constitutional provisions limit the General Assembly's spending and taxing power to "public purposes." Article V, § 2(1) covers taxation. Article V, § 2(7) covers appropriation. Foster extended the public-purpose principle to spending generally. The NC Supreme Court has refused to give a fixed definition; it has said the concept "expands with the population, economy, scientific knowledge, and changing conditions." But it has also drawn a hard line at direct subsidies to private business that have only "incidental" public benefit.

Q: What changed after Mitchell and Stanley?
A: Constitutional and statutory work. Article V, § 9 was added to authorize industrial development revenue bond financing. The General Assembly enacted G.S. 158-7.1 with progressively broader authorization for local incentives. By 1993, the doctrinal climate had warmed enough that the AG could say HB 1109 had "reasonable and responsible arguments" supporting it, even without a clear case validating the specific authority.

Q: What does "fair market value" mean for the adequate-consideration test?
A: The locality must receive the property's appraised market value, not a give-away price. HB 1109 specifically required fair market value. The (d2)(1) sweetener was that the value calculation could take into account ten years of prospective tax revenues, recognizing that economic-development sales differ from ordinary surplus-property sales.

Q: What is the equal-protection rule for a local bill?
A: NC Constitution Article I, § 19 (and the Fourteenth Amendment) require that legislative classifications be "rationally related to a legitimate state objective" in the area of economics and social welfare. A local bill that picks one county is constitutional if there is a rational reason that this county fits the economic objectives. The bar is low ("minimum (undefined and undefinable) level of rationality" in Glusman v. Trustees) but is not zero ("arbitrary discrimination" or "invidious" classifications fail).

Q: Did HB 1109 pass?
A: This opinion was issued during the legislative process. The constitutional analysis here was input to the legislature's decision whether and how to enact the bill. The AG was clear that the recent companion incentive statutes had not been judicially tested and that legal risk remained.

Background and statutory framework

By 1993, NC had been moving for over a decade toward expanded local authority for economic development. G.S. § 158-7.1 was a key tool. The statute authorized counties and cities to undertake economic development projects, with several specific powers added incrementally over time. The 1991 amendments to § 158-7.1 added a cap of one-half of one percent (0.5%) of city or county property tax value on appropriations and expenditures.

The constitutional doctrine traced back to Mitchell and Stanley. Mitchell invalidated the Industrial Development Financing Act, which let a State authority issue bonds backed by lease payments from private industrial tenants. The Court held that financing private enterprise with public funds was not a public purpose. Stanley reinforced the holding in a similar case five years later.

After Mitchell and Stanley, the voters added Article V, § 9 to specifically authorize industrial development revenue bond financing, which carved out a narrow exception to the Mitchell doctrine. The General Assembly then enacted § 158-7.1 as a broader incentive framework. The legal community had been waiting for a test case on whether the post-Mitchell incentive statutes survived public-purpose scrutiny.

In 1996, three years after this opinion, the NC Supreme Court decided Maready v. City of Winston-Salem, 342 N.C. 708 (1996), and upheld § 158-7.1 incentives generally as serving a public purpose. Maready effectively replaced the 1993 doctrinal uncertainty with a more permissive framework.

Citations

• N.C.G.S. § 158-7.1 (county and city economic development powers)
• N.C.G.S. § 158-7.1(b)(5) (utility extension to industrial facilities)
• N.C.G.S. § 158-7.1(d2)(1) (consideration may include prospective tax revenues)
• N.C.G.S. § 158-7.1(f) (cap on appropriations and expenditures)
• N.C.G.S. § 153A-275 (county public enterprises; water and sewer)
• N.C.G.S. § 160A-312 (municipal public enterprises; water and sewer)
• N.C. Const. art. I, § 19 (equal protection)
• N.C. Const. art. I, § 32 (no exclusive emoluments; adequate consideration)
• N.C. Const. art. V, § 2(1) (taxation for public purposes only)
• N.C. Const. art. V, § 2(7) (legislative appropriation for public purposes)
• N.C. Const. art. V, § 9 (industrial development revenue bond financing)
• Mitchell v. Financing Authority, 273 N.C. 137 (1968)
• Stanley v. Department of Conservation and Development, 284 N.C. 15 (1973)
• Foster v. North Carolina Medical Care Commission, 283 N.C. 110 (1973)
• Fulghum v. Selma, 283 N.C. 100 (1953)
• Spring Hope v. Bissette, 53 N.C. App. 210 (1981), aff'd, 305 N.C. 248 (1982)
• Redevelopment Commission v. Security National Bank, 252 N.C. 595 (1960)
• Hughey v. Cloninger, 297 N.C. 86 (1979)
• In Re Denial of Approval to Issue Housing Bonds, 307 N.C. 52 (1982)
• Martin v. Housing Corporation, 277 N.C. 29 (1970)
• State v. Stanley, 79 N.C. App. 379 (1986)
• Glusman v. Trustees, 281 N.C. 629 (1972)

Source

• Landing page: https://ncdoj.gov/opinions/house-bill-1109/

Original opinion text

The text reproduced from the NCDOJ landing page begins mid-sentence with a description of the bill's three provisions. The salutation, addressee, opening question, and complete framing of the bill are not in the rendered HTML on the landing page.

[…] 1) authorizes counties and cities to spend public money to extend water and sewer lines to privately owned industrial properties and facilities; 2) authorizes counties and cities to spend public money for site preparation for privately owned industrial facilities; and, 3) extends to all cities and counties existing authorization given to some governmental units under certain circumstances to acquire and develop property for potential industrial and commercial uses and convey the property to a private business for fair market value. You have also asked our advice whether a local bill containing the same substantive provisions found in House Bill 1109 but limited to one city or county would raise constitutional problems.

I. Under long standing common law principles concerning public utilities, the proposal described in subsection (1) above for provision of water and sewer to private industry does not appear to raise any serious constitutional questions.

Existing N.C.G.S. §158-7.1(b)(5) provides that "[a] county or city may extend or may provide for or assist in the extension of utility services to an industrial facility, whether the utility is publicly or privately owned." In the municipal and county context, the term, "utility" commonly refers to "public enterprises." Under current law, cities and counties have authority to operate water and sewer systems as "public enterprises." N.C.G.S. §§153A-275, 160A-312. This authority has traditionally been interpreted to authorize provision of water and sewer service to private industry. The principal limitations are (a) that service be provided on an equal basis to customers of essentially the same character and service; and (b) that rates must be related to the system's operating and capital cost and depreciation. Fulghum v. Selma, 283 N.C. 100, 76 S.E.2d 368 (1953); Spring Hope v. Bissette, 53 N.C. App. 210, 280 S.E. 2d 490 (1981), aff'd, N.C. 248, 287 S.E.2d 851 (1982).

II. There are two state constitutional provisions that are relevant to the proposals described in (2) and (3) above. First, Article V, Sec. 2(1) provides that "[t]he power of taxation shall be exercised in a just and equitable manner, for public purposes only …." This limitation applies to the power to appropriate money as well as the power to tax. Foster v. North Carolina Medical Care Comm'n, 283 N.C. 110, 195 S.E.2d 517 (1973). Second, Article I, Section 32 requires that a city receive fair consideration for the sale of property. Redevelopment Commission v. Security National Bank, 252 N.C. 595, 114 S.E.2d 688 (1960). The "public purpose" and "adequate consideration" requirements are discussed below.

Public Purpose. Our courts have time and time again discussed the "public purpose" concept and made clear that a fixed definition to determine its meaning cannot be formulated.

A slide-rule definition to determine public purpose for all time cannot be formulated; the concept expands with the population, economy, scientific knowledge, and changing conditions. As people are brought closer together in congested areas, the public welfare requires governmental operation of facilities which were once considered exclusively private enterprise (citation omitted) and necessitates the expenditure of tax funds for purposes which, in an earlier day, were not classified as public. (Citation omitted). Often public and private interests are so co-mingled that it is difficult to determine which predominates. It is clear, however, that for a use to be public its benefits must be in common and not for particular persons, interests, or estates; the ultimate net gain or advantage must be the public's as contradistinguished from that of an individual or private entity. Mitchell v. Financing Authority, 273 N.C. 137, 144, 159 S.E. 2d 745, 750 (1968).

In determining whether or not particular legislation serves a public purpose, the legal principles to be applied upon such review are: First, the presumption is in favor of constitutionality of an act, State v. Furmage, 250 N.C. 616, 109 S.E. 2d 563 (1959), and all doubts must be resolved in favor of the act. Wells v. Housing Authority of Wilmington, 213 N.C. 744, 196 S.E. 2d 326 (1938). Further, the Constitution is a restriction of powers and those powers not surrendered are reserved to the people to be exercised through their representatives in the General Assembly. Therefore, so long as an act is not forbidden, the wisdom and expediency of the enactment is a legislative, not a judicial decision. McIntyre v. Clarkson, 254 N.C. 510, 119 S.E. 2d 888 (1961). Finally, the fact that public monies are paid to a private individual, corporation or entity does not affect the character of the expenditure, since the object of the expenditure and not to whom it is paid determines whether it is for a public purpose. Green v. Kitchin, 229 N.C. 450, 50 S.E. 2d 5435 (1948). So long as the "public purpose" doctrine is met, the General Assembly may appropriate public funds to private persons associations or corporations. Hughey v. Cloninger, 297 N.C. 86, 95, 253 S.E. 2d 898 (1979); Article V, Section 2(7), North Carolina Constitution.

The initial responsibility for determining what is and what is not a public purpose rests with the Legislature, and its findings with reference thereto are entitled to great weight. In Re Denial of Approval to Issue Housing Bonds, 307 N.C. 52, 296 S.E. 2d 281 (1982). However, a "legislative declaration which asserts in general terms that the statute under consideration is enacted for a public purpose, although entitled to great weight, is not conclusive. When the facts are determined, what is a public purpose is a question of law for the court." Martin v. Housing Corporation, 277 N.C. 29, 43, 175 S.E. 2d 665, 673 (1970).

It is clear, therefore, that although each and every appropriation made by the General Assembly is presumed to be constitutional and for a public purpose, that presumption can be rebutted by contrary evidence.

In Mitchell v. Financing Authority, supra, the North Carolina Supreme Court held that the Industrial Development Financing Act was unconstitutional. This Act authorized a newly created Industrial Development Financing Authority to issue bonds to finance capital projects for industrial development. The facilities would be owned by the State, but leased to private entities until rental payment retired the bonds. The stated purpose of the Act was to promote industry and the natural resources of the State, increase gainful employment and purchasing power, improve living conditions, advance the general economy, and otherwise contribute to the prosperity and welfare of the State. The Court in Mitchell held that "[t]he financing of private enterprise with public funds contravenes the fundamental concept of North Carolina's Constitution." Five years later, the Court reinforced the Mitchell holding in a similar case, Stanley v. Department of Conservation and Development, 284 N.C. 15, 199 S.E. 2d 641 (1985). In Stanley, the North Carolina Supreme Court stated the following:

An activity cannot be for a public purpose unless it is properly the 'business of government,' and it is not a function of government either to engage in private business itself or to aid particular business ventures. **** Aid to a private concern by the use of public money or by tax-exempt revenue-bond financing is not justified by the incidental advantage to the public which results from the promotion and prosperity of private enterprises. 284 N.C. at 33, 199 S.E. 2d at 647.

Since the Supreme Court holdings in Mitchell and Stanley, Article V, Sec. 9, has been added to the North Carolina Constitution to specifically authorize industrial development revenue bond financing. However, a reasonable argument can be made that the general holding of both Mitchell and Stanley – financing of private business is not a public purpose – continues to remain the law in North Carolina. Nonetheless, in recent years the North Carolina General Assembly has authorized local governments to undertake economic development activities that otherwise could be considered outside the narrow interpretation of public purpose given by the Court in both Mitchell and Stanley. See N.C.G.S. §158-7.1. The economic development projects contemplated under House Bill 1109 are similar to that authorized under existing statutes. As of this date, the constitutionality of these laws has not been challenged.

Based on the foregoing discussion, it is our conclusion that even though the proposed assistance for industrial development itself has not been specifically recognized by the courts as a public purpose, there are reasonable and responsible arguments to support the constitutionality of the expenditures authorized in proposals (1) and (2) of House Bill 1109.

ADEQUATE CONSIDERATION

Proposal (3) described above extends to all cities and counties the existing authorization in N.C.G.S. §158-7.1 for local units of government to acquire interests in property, develop the property for potential industrial or commercial use so as to lure new businesses to the unit, and then convey an interest in the property to the business for a fair market value. In establishing the consideration to be received, cities and counties may take into account prospective tax revenues over the next 10 years where it is determined that the improvements to the property will "stimulate the local economy, promote business, and result in the creation of a substantial number of jobs in the county or city." N.C.G.S. §158-7.1(d2)(1). Appropriation and expenditures are limited to one-half of one percent (0.5%) of the city or county property tax value. N.C.G.S. §158-7.1(f). These provisions were first enacted for certain cities and counties in 1991.

The requirement in the bill that a locality receive fair market value for any interest in the property conveyed to private business would appear on its face to satisfy the constitutional requirement of adequate consideration. Tying the consideration to be received to the estimated tax revenues resulting from the conveyance over the next ten years may also provide an additional rational argument that the economic development expenditures made are for a public purpose.

III. Limiting the substantive provisions contained in House Bill 1109 to one city or county, would not raise a constitutional problem so long as the selection of the county or city is reasonably related to the economic objectives of the statute. North Carolina Constitution Art. I, Sec. 19 provides that "No person shall be denied the equal protection of the laws." Under established legal precedent interpreting this constitutional provision as discussed below, this provision is satisfied if the selection of the city or county is reasonably related to the objectives of the statute.

The Court of Appeals wrote recently, "In the area of economics and social welfare, a statute containing a legislative classification which is rationally related to a legitimate state objective does not violate the equal protection clause of the fourteenth amendment to the United States Constitution or Article I, Section 19 of the North Carolina Constitution." State v. Stanley, 79 N.C. App. 379, 381, 339 S.E.2d 668, 670 (1986). "Discrimination in a state statute must be based on differences that are reasonably related to the purposes of the statute." Association, Licensed Detectives v. Morgan, 17 N.C. App. 701, 705, 195 S.E. 2d 357, 359 (1973). The classification, in light of its purpose, need not be the very best, but it must attain a "minimum (undefined and undefinable) level of rationality." Glusman v. Trustees, 281 N.C. 629, 638, 190 S.E. 2d 213, 219 (1972).

"[The classification] does not allow arbitrary discrimination between that activity which is prohibited and that which is not." Association, Licensed Detectives v. Morgan, 17 N.C. App. 701, 706, 195 S.E. 2d 357, 360 (1973). Before labelling discrimination "arbitrary," however, the court must overcome a relatively high hurdle. The equal protection clause is offended not because the classification is "not made with mathematical nicety, or because in practice it results in some inequality," but because the discrimination is "invidious." Licensed Detectives, 17 N.C. App. 701, 705, 195 S.E. 2d 357, citing Morey v. Doud, 354 U.S. 457, 1 L. Ed. 2d 1485, 77 S. Ct. 1344 (1957).

In borderline equal protection cases, the legislative determination is entitled to great weight, State v. Greenwood, 280 N.C. 651, 658, 187 S.E.1d 8, 13 (1972), because a statute is presumed constitutional. State v. Warren, 252 N.C. 690, 696, 114 S.E.2d 660, 666. Yet if the court determines that the categorization is arbitrary or invidious, it will void the statute. To avoid such a determination, the legislature should be able to articulate how the selection of a single county or city "rationally relates" to the economic development objectives of the statute.

Should you require anything further, please advise.

Andrew A. Vanore, Jr.

Chief Deputy Attorney General

John R. McArthur

Chief Counsel