Wisconsin Supreme Court upholds cash grants for city development project

 

On June 6, 2018, the Supreme Court of Wisconsin issued a divided 5-2 opinion upholding the use of cash grants for a community development project called the Confluence Arts Center in the City of Eau Claire.  In addition, the Court rejected efforts to challenge the City’s determinations with respect to blighted areas for purposes of allowing Tax increment financing, or TIF, districts.

The Court’s ruling in Voters With Facts v. City of Eau Claire is significant because it blesses a widespread practice that municipalities in Wisconsin use to subsidize development projects.  We have been following Foxconn Technology Group’s planned $10 billion investment in Mount Pleasant, Wisconsin and the $4 billion government pact designed to entice the investment.   The Voters With Facts case had threatened to disrupt cash grants used for the Foxconn deal and others prior to the court’s ruling. 

CASH GRANTS

The plaintiffs in the case, Voters With Facts (sometimes referred to as Voters), described themselves as “an unincorporated association of grassroots citizen volunteers and Eau Claire taxpayers who question the propriety of the proposed developments.” The group consisted of 19 total plaintiffs, including four limited liability companies and 15 individuals.

Voters With Facts advanced two arguments with respect to the cash grants the City used for the Confluence Arts Center project. First, Voters argued the city’s use of cash grants to the developer of the Confluence Arts projects violated a provision of Wisconsin law – Wis. Stat. 66.1105(2)(f) – that prohibits government payments to developers for demolishing historic buildings. Voters With Facts alleged the city obligated itself to make $10,400,000 in cash payments to the developer and the developer demolished buildings listed on the National Register of Historic Places and within the meaning of historic buildings under Wisconsin law.

The Supreme Court dismissed the claim, however, finding Voters failed to sufficiently allege facts in their complaint showing the funds were or would be actually used to demolish the historic buildings. The court rejected Voters argument that money is fungible and, as such, payments to the developer for “project costs” were effectively used for all project costs including demolition of the historic buildings.

Next, Voters argued the cash grants violated the uniformity clause of the Wisconsin Constitution.   Article VIII, Section 1 of the Wisconsin Constitution provides, in pertinent part:  “The rule of taxation shall be uniform but the legislature may empower cities, villages or towns to collect and return taxes on real estate located therein by optional methods.”

Voters argued due to the cash grants the property tax is not levied uniformly because “the owner is paying the same formal rate as everyone else, but is getting paid a reimbursement that lowers its effective rate.”  But again, the Supreme Court held Voters failed to sufficiently allege facts to show the payments were used for a particular purpose, such as to pay property taxes, or the use of such funds to pay property tax was impermissible.

TAX INCREMENT FINANCING

Voters With Facts also challenged the findings of the Eau Claire City Common Council and an administrative review board with respect to tax increment financing districts. Generally speaking, TIF districts are a widely-used economic development incentive that allows municipalities to divert future tax revenue towards a development project. By their construction, development projects increase the value of real property subject to property taxation.  The TIF diverts the incremental tax revenue from increased property values towards a fund used to build improvements within the district rather than the municipality writ large. 

Wisconsin law requires TIFs to be used for one of four purposes and requires municipalities to make findings with respect to these purposes.  These purposes include the promotion of development to address blighted areas, urban redevelopment or conservation, industrial development, or the promotion of mixed-use development. 

The City of Eau Claire Common Council indeed determined “not less than 50 percent, by area, of the real property within the amended boundary area of the District is a ‘blighted area’ and is in need of ‘rehabilitation or conservation.” The local administrative review board charged with making another determination under state law also found the subsidized development would not occur but for the tax increment financing.  

Voters With Facts challenged these local determinations as to blight and whether or not the project actually induced the development. The Supreme Court rejected Voters’ claim and found that these findings were “non-justiciable” legislative determinations that were within the “sound discretion” of the local legislative body.  The court nonetheless remanded the case on this issue for lower courts to determine whether the findings were arbitrary and unreasonable.

TWO JUSTICES DISSENT

Justice Rebecca Bradley issued a strongly worded dissent that was joined by Justice Daniel Kelly.  They wrote “[t]he court’s decision forecloses taxpayers from ever seeking declaratory judgment when municipalities violate the TIF statutes.”  With respect to the court’s decision on cash grants, the dissenting justices argued “everyone knows” that money is fungible. As such, they argued Voters With Facts properly put the city on notice through their complaint that they were challenging the use of the funds as impermissibly applied to demolish historic buildings and pay property taxes. 

The dissenting justices further disputed the propriety of the city’s TIF findings as “legislative determinations” within the city’s “sound discretion.”  These findings, they argued, are facts that may be weighed and addressed by a competent fact-finder in the trial court. 

For now, the Voters With Facts returns to lower courts for fact-finding with respect to the city council’s findings.  The lower courts must determine whether the council’s findings as to blight in Eau Claire  and the TIF district incentivizing the Confluence Arts Center are arbitrary and unreasonable.