IN THE SUPREME COURT OF OHIO

STATE OF OHIO, ex rel. MIDDLE EARTH . Case No. 2008-0675 617 VINE STREET, LLC, et al., Original Action in Mandamus Relators,

V.

OHIO DEPARTMENT OF DEVELOPMENT, : et al.,

Respondents.

MOTION OF RESPONDENTS OHIO DEPARTMENT OF DEVELOPMENT AND DIRECTOR LEE FISHER FOR JUDGMENT ON THE PLEADINGS

Pursuant to S. Ct. Prac. R. X(5) and Civ. R. 12(C), Respondents Ohio Department of

Development and Lt. Govemor Lee Fisher, Director of the Ohio Department of Development, move for judgment on the pleadings. A supporting memorandum follows.

Respectfully submitted:

MARC DANN (0039425) Attorney General of Ohi

WILLIAM J. C^$LE* (0067778) *Counsel ofRecord MATTHEW J. LAMPKE (0067973) Assistant Attorneys General Executive Agencies Section 30 East Broad Street, 26th Floor Columbus, Ohio 43215 614-466-2980 866-354-4086 fax [email protected] ^ Counsel for Respondents Ohio Department of Development and MAY 0;,, '2ri;3 Lt. Governor Lee Fisher, Director of the Ohio Department of Development GLC'HK OF COURT SUPREME CUURT OF OHI® MEMORANDUM IN SUPPORT OF RESPONDENTS' MOTION FOR JUDGMENT ON THE PLEADINGS

1. INTRODUCTION

The Ohio Historic Preservation Tax Credit ("OHPTC") is a legislatively-created two=year program (the "Program") that supports efforts of building owners to rehabilitate historic properties by providing for a refundable tax credit. The Ohio Department of Development

("ODOD") administers the Program and is responsible for approving applications for tax credits after determining compliance with other eligibility criteria. Based on available fiscal estimates, the Office of Budget and Management ("OBM") budgeted a total of $120 million for the two- year Program. However, all fiscal projections seriously underestimated the cost of the Program to the State. Reacting to the severe burden that would be placed on the State's budget by extreme Program cost overruns, ODOD exercised its discretion to limit approvals to the first 37 qualified applications (for which the total estimated tax credits approximate the $120 million budgeted by OBM). In doing so, ODOD acted within the express authority granted by the

General Assembly to approve not more than 100 applications for tax credits in any application period.

Relators-five building owners whose applications were not processed or reviewed- have sued in mandamus to force ODOD to process and approve their applications despite being told that the Program has reached its budget limit. This Court must deny the writ because

Relators cannot show they have a clear legal right to the tax credit or that ODOD has a clear legal duty to perform the actions demanded. While the plain language of the OHPTC statute limits ODOD from approving more than 100 applications in an application period, it does not require that ODOD approve a minimum or mandatory number of applications. Further, granting the relief requested would impose substantial Program costs beyond the amount budgeted. As an executive agency, ODOD has the discretion-if not a constitutional duty-to operate within its means and to manage programs within their budget allocations.

Forcing ODOD to approve additional applications would substitute the budget decisions of the

Court for the budget decisions of the executive branch. Such judicial interference with ODOD's executive discretion is unwarranted and offends the constitutional separation of powers.

Accordingly, Relators' mandamus suit must be dismissed.

II. STATEMENT OF THE FACTS AND OF THE CASE

A. The OAPTC Program

The General Assembly enacted the Ohio Historic Preservation Tax Credit Program in

January 2007 as a two-year pilot program to support efforts by building owners to rehabilitate

historic properties. H.B. 119 (eff. Apr. 4, 2007). ODOD administers the Program with assistance

from the State Historic Preservation Officer ("SHPO") and the Department of Taxation

("Taxation"). The SHPO reviews Program applications to determine compliance with historic

building and rehabilitation requirements, and ODOD is responsible for approving applications

after determining compliance with other eligibility criteria, including a cost and benefit analysis

designed by ODOD and Taxation.

The Program, governed by R.C. 149.311 and Ohio Adm.Code 122:19-1, allows an owner

of a qualifying historic building to apply for a refundable tax credit. R.C. 149.311(B). The

historic preservation tax credit is equal to 25% of the owner's qualified rehabilitation

expenditures incurred in the rehabilitation of a historic building. R.C. 5725.151(B), 5733.47(B),

5747.76(B). The credits can be claimed against the owner's Ohio dealer-in-intangible, corporate

franchise, or personal income tax liability. Id. As a refundable credit, the building owner is also

2 entitled to claim a refund from the State for any amount of the credit in excess of the building owner's tax liability.

Applying for the historic preservation tax credit is a multi-step process. First, the building owner must submit its application to the SHPO. R.C. 149.311(B); Ohio Adm.Code

122:19-1-02(A)-(D). The SHI'O is required by statute to accept applications in the order they are filed. R.C. 149.311(C). Within 7 days, the SHPO sends the application to ODOD for review.

Id. ODOD generally considers applications in the order they are received, Ohio Adm.Code

122:19-1-03(C), though it may exercise discretion to ensure that a mixture of high- and low-cost historic preservation projects receive tax credit. Ohio Adm.Code 122:19-1-03(E).' Within 45 days of receipt, the SHPO and ODOD shall determine whether an application is complete. Ohio

Adm.Code 122:19-1-03(D). Applications must meet the requirements in R.C. 149.311(B)(1)-

(5); 149.311(C); and Ohio Adm.Code 122:19-1-02. Only completed applications are reviewed by ODOD. Ohio Adm.Code 122:19-1-03(E). If ODOD determines the application is complete,

it then conducts a cost and benefit analysis of the rehabilitation project to determine whether rehabilitation of the building will result in a net revenue gain in state and local taxes once the building is used. R.C. 149.311(D); Ohio Adm.Code 122:19-1-03(B). ODOD may not approve more than 100 applications in an application period (i.e., each year of the two-year program

period). R.C. 149.311(D).

B. Based on available fiscal estimates, OBM budgeted $120 million for the Program.

When the General Assembly created the OHPTC Program, the Legislative Service

Commission ("LSC") prepared a fiscal analysis estimating the total cost of the Program would be

' In order to comply with the statutory requirement to ensure a mix including low-value projects, ODOD will complete review of four applications that meet the budget threshold for low-value projects. See Answer Ex. A.

3 between $42 million and $94 million for all projects approved over a two-year period. Answer

Ex. A. Taxation estimated the total Program could cost $150 million. Id. Guided by these estimates, OBM allowed in its revenue forecasts for a total of $120 million in tax credits attributable to the Program. Id.

C. To keep the Program from going over-budget ODOD approved only the first 37 qualified applications.

Beginning in July 2007, Relators and other applicants applied to ODOD for an OHPTC tax credit. Complaint ¶¶ 4-8, 35, 43-97. Although a total of 115 applications were submitted to

SHPO, tcl. ¶ 36, some applications were deficient and had to be corrected and re-submitted. As a result, the actual number of historic building projects to be considered for approval of tax credits was less than 100. Answer Ex. B.

The application totals for the first Program year alone reflect total Program costs that greatly exceed the estimates of LSC, Taxation, and OBM. During the same time that ODOD has processed Program applications, ODOD has been keenly aware of the general economic conditions in the State and the nation and the impact of the economy on the State's budget. On

January 31, 2008, Governor Strickland ordered State executive agencies to immediately reduce expenditures and implement spending control strategies to address anticipated budget shortfalls.

See Exec. Ord. 2008-01 S.

To keep the Program from going over-budget, ODOD approved only the first 37 qualified applications. Complaint ¶39; Answer Exs. A, B. The State's estimated tax credit obligation for these 37 projects will be $123,836,473.00. Answer Ex. A. Review of fifty-five other applications (including those submitted by Relators) was not completed for budgetary reasons.

4 Answer Exs. A, B.Z Combined, these 55 applications seek an estimated $90,967,788.00 in tax credits. Answer Ex. A. If all 55 applications were approved, the total cost of the Program to the

State (based on applicants' estimates of qualified rehabilitation expenditures) would be

$214,804,261.00, which is $94,804,261.00 more than the amount budgeted for the program. Id.

On March 13, 2008, ODOD announced that no other OHPTC applications would be approved for the remainder of the program. Complaint ¶¶ 37, 40; Answer Ex. A. Relators filed this mandamus suit to compel ODOD to process, review, and approve their applications for tax credits.

III. STANDARD OF REVIEW

S. Ct. Prac. R. X(5) permits the respondent in an original action to file a motion for judgment on the pleadings at the same time an answer is filed. Dismissal is required when it appears beyond doubt, after presuming the truth of all material factual allegations and making all reasonable inferences in the relator's favor, that the relator is not entitled to the requested extraordinary relief. State ex rel. Dist. 1199, Health Care & Soc. Serv. Union, SEIU, AFL-CIO v. Lawrence Cty. Gen. Hosp., 83 Ohio St.3d 351, 352, 1998-Ohio-49. The Court may only consider the allegations in the pleadings and any material incorporated by reference or attached as exhibits to the pleadings. Civ. R. 10(C); Peterson v. Teodosio (1973), 34 Ohio St.2d 161, 165;

Curtis v. Ohio Adult Parole Auth. (10th Dist.), 2006-Ohio-15 ¶ 24.

IV. ARGUMENT

As a public official, the ODOD Director is presumed to have performed his duties legally and properly. Cedar Bay Constr., Inc. v. Fremont (1990), 50 Ohio St.3d 19,21. Therefore, to be entitled to a writ of mandamus, Relators must show (1) a clear legal right to the relief sought, (2)

2 Two other OHPTC applications (Nos. 20 & 30) were reviewed and denied by ODOD because they failed the cost and benefit analysis. Answer Ex. B.

5 Respondents have a clear legal duty to provide the requested relief, and (3) lack of an adequate remedy in the ordinary course of law. See State ex rel. MetroHealth Med. Ctr. v. Sutula, 110

Ohio St.3d 201, 2006-Ohio-4249 ¶ 8. ODOD does not dispute that Relators have no adequate remedy at law to challenge its decision. See Ohio Adm.Code 122:19-1-03(F) (providing that all

ODOD decisions and determinations concerning the OHPTC are final and non-appealable).

For the reasons below, Relators cannot establish that they have a clear legal right to have their OHPTC applications approved by ODOD, or that ODOD has a clear legal duty to so perform. Therefore, Respondents are entitled to judgment on the pleadings because Relators cannot, as a matter of law, prevail on their mandamus complaint.

A. The plain language of the OHPTC statute gives ODOD the discretion to approve fewer than 100 tax-credit applications in an application period.

ODOD's decision to review and approve less than the total tax credit applications submitted for Fiscal Year 2008 (the first application period) is consistent with the plain language of the OHPTC statute. R.C. 149.311(D) provides, in part, that "[t]he [ODOD] director shall not approve more than one hundred applications in an application period." (Emphasis added.)

Further, R.C. 149.3 11 (13)(2) requires ODOD to adopt rules that establish, inter alia, criteria for reviewing and approving applications "within the limitation on the number of applications that may be approved in an application period under [R.C. 149.311(D)] ...." (Emphasis added.)

It is a well-settled principle of statutory construction that the words used in a statute are given their plain and ordinary meaning unless otherwise indicated. Ohio Assn. of Pub. School

Emp. v. Twin Valley Local School Dist. Bd of Edn. (1983), 6 Ohio St.3d 178, 181. Courts are not free to ignore plain and unambiguous statutory language under the guise of interpretation,

6 State v. Krutz (1986), 28 Ohio St.3d 36, 37, or to add or delete words. State v. Hughes, 86 Ohio

St.3d 424, 427, 1999-Ohio-118.

The plain language of the above statutory provisions gives ODOD discretion to approve fewer than 100 applications in an application period. The statute limits the number of applications that may be approved but does not establish a minimum or mandatory number of approvals. R.C. 149.311(B)(2) supports this construction by its reference to applications that

"may be approved" by ODOD "within the limitation on the number of applications." The use of the word "may" in a statute denotes permission and discretion, unless the contrary is clearly indicated. See State ex rel. Niles v. Bernard (1978), 53 Ohio St.2d 31, 34 (per curiam); State ex rel. Dworkin v. Ct. of Common Pleas of Cuyahoga Cty. (1936), 131 Ohio St. 23, 25-26, and cases cited therein. Mandamus may not be used to control the exercise of discretion. State ex rel. Bd. ofCry. Commrs. of Athens Cty. v. Bcl. of Dirs. of Gallia, Jackson, Meigs, Vinton Jt. Solid

Waste Mgmt. Dist.,.75 Ohio St.3d 611, 614, 1996-Ohio-68. Therefore, Relators are not entitled to the relief they seek.3

Relators argue the OHPTC procedural provisions, several of which contain the word

"shall," foreclose ODOD from exercising any discretion whether to approve their tax credit applications. Even though the OHPTC statute prescribes a procedure for accepting and processing applications, the statute does not take the critical final step ofmandating approval of a minimum number of qualified applications. To the contrary, the statute allows discretion in the

' Relators' demand to compel ODOD to "approve" their OHPTC applications is also premature in light of the Program's multi-step application process. ODOD cannot approve an application for tax credit until it determines whether the building project will result in a n et revenue gain in state and local taxes. R.C. 149.311(D); Ohio Adm.Code 122:19-1-02, -03. Further, ODOD must determine whether the application meets the requirements in R.C. 149.311(B)(1)-(5) and 149.311(C), as well as Ohio Adm.Code 122:19-1-02 and -03(D)-(E). Until it makes those determinations, ODOD has no authority to approve Relators' applications.

7 number of applications approved up to a ceiling of 100. To the extent Relators would argue that their applications should be processed even if no approval were to follow, such an exercise would be futile and a waste of ODOD's limited administrative resources. Mandamus will not issue to compel a vain or futile act. State ex rel. Strothers v. Turner (1997), 79 Ohio St.3d 272,

274.

B. Forcing ODOD to proceed with Relators' applications when doing so would cause the Program to substantially exceed its budget deprives the executive of its discretion to manage Program costs and offends the constitutional separation of powers.

Despite claiming that ODOD's decision to limit the total tax credit is "arbitrary," Relators acknowledge ODOD's stated reason for not approving their applications - namely, because the total tax credit for the 37 approved projects approximates the Program's $120 million budget.

Complaint ¶ 39; see, also, Answer Ex. A. Relators do not allege or argue that the Program's allocated budget can accommodate awarding further tax credit. Instead, they argue the lack of program funding is of no concern, insisting ODOD must proceed with their applications because there are no explicit financial or economic controls provided in the OHPTC statute.

Relators' argument is unavailing. The budgetary considerations underlying ODOD's decision not to approve additional tax credit applications preclude mandamus relief. As a State executive agency, ODOD must operate within its means. Article VIII of the Ohio Constitution limits the State's deficit spending. Section 1 of Article VIII permits the State to incur "debts to supply casual deficits or failures in revenues, or to meet expenses not otherwise provided for; but the aggregate amount of such debts ... shall never exceed seven hundred and fifty thousand dollars. . . ." Section 3 of Article VIII provides that, except for debts specified in Sections 1 and

8 2,4 "no debt whatever shall hereafter be created by or on behalf of the state." Revenue forecasts and budgets are designed to adhere to this constitutional mandate.

As head of the State's executive branch, the Governor is statutorily authorized to supervise and control the State's budget. R.C. 126.05 authorizes him to order state executive agencies to operate within their means. See Exec. Ord. 2008-0 l S(requiring State executive agencies to immediately reduce expenditures and implement spending control strategies).

ODOD is a State executive agency, R.C. 121.02(N), whose Director is appointed by, and subject to removal at the pleasure of the Governor. R.C. 121.03(I). "It is beyond doubt that a director of an executive agency possesses executive power. A director may exercise some executive power at the discretion of the Governor. `. . . [A] responsibility delegated to an executive agency is essentially delegated to the govemor's subordinate."' State ex rel. AFSCME v. Taft (3d Dist.),

156 Ohio App.3d 37, 2004-Ohio-493 ¶ 36, quoting State ex rel. Ohio Roundtable v. Taft (10th

Dist.), 2003-Ohio-3340 ¶ 25. Executive budget and funding decisions are discretionary acts that will not be disturbed in mandamus except for an abuse of discretion. Id. ¶ 59, citing Bd ofEdn. v. Gilligan ( 10th Dist. 1973), 36 Ohio App.2d 15, affirmed on other grounds ( 1974), 38 Ohio

St.2d 107.

The Constitution and the executive authority of the Governor and his subordinates to manage the State's spending effectively require the State and its agencies, including ODOD, to operate within their means. Mandamus should not be used to compel an executive agency to run

a discretionary program over budget. See State ex rel. Johns v. Bd. of Cry. Commrs. of Richland

° Section 2, Article VIII of the Ohio Constitution allows the State to incur "debts to repel invasion, suppress insurrection, defend the state in war, or to redeem the present outstanding indebtedness of the state . . . ."

9 Cty. (1972), 29 Ohio St. 6, 8 (per curiam); State ex rel. Brown v. Bd. of Cty. Commrs. ofFranklin

Cty. (1970), 21 Ohio St.2d 62, syllabus.

Forcing ODOD to proceed on Relators' applications would impose on the State an obligation for which its resources have not been allocated. There is no assurance that funds will be generated by the projects to cover the State's costs of the tax credits. As a refundable credit, the State could be compelled to issue refunds in excess of taxes against which the credit might otherwise be offset. A mandate to allocate additional funds to the cover the cost of the historic preservation tax credits would necessarily require other program budgets to be reduced or eliminated - assuming such discretionary items elsewhere in the budget could be identified in amounts sufficient to cover the costs of the credits. As a practical matter, it is not possible for mandamus to achieve a complete and full remedy in this case without adverse consequences to other State programs. Mandamus will not issue where it will not provide a complete and full remedy, State ex rel. Phelps v. Gearheart (1922), 104 Ohio St. 422, syllabus ¶ 1, or where a remedy is impossible. Johns, 29 Ohio St. at S.

Further, Relators' mandamus suit offends the separation-of-powers doctrine because it seeks the Court to substitute its judgment for the budgetary decision made by the executive branch. The separation-of-powers doctrine is implicitly embedded in the Ohio Constitution,

South Euclid v. Jemison (1986), 28 Ohio St.3d 157, 159, and counsels against interference from one branch of government with the constitutional authority of another branch of government.

AFSCME, 2004-Ohio-493 ¶ 31; Gosney v. Bd. of Elections (7th Dist.), 1989 Ohio App. Lexis

1168 at *6 ("The judicial branch cannot interfere with the free exercise of a discretionary power of the executive branch."). This is especially true with respect to budget and funding decisions.

AFSCME, 2004-Ohio-493 ¶¶ 44-45; Hillis v. Dept. of Ecology (Wash. 1997), 131 Wash.2d 373,

10 388-90, 932 P.2d 139, 147-48; Dept. of Children & Families v. K.R. (Fla. App. 2007), 946 So.2d

106, 107. A decision which would force the OHPTC program to exceed its budget threatens to compromise funding of other programs at a time when the State's budget is particularly tight and the economic forecast is pessimistic. Therefore, the Court should decline Relators' invitation to interfere with ODOD's reasonable exercise of its discretion under the plain language of the statute to manage the OHPTC program within the available budget.

Finally, the OHPTC procedural provisions emphasized by Relators do not warrant a mandamus order in their favor. If ODOD could operate the Program without regard to budget limitations, then ODOD would comply with the procedures for review, approval, and administration of Relators' applications as provided by the statute and Program rules. But to compel such a fruitless exercise under the circumstances of the State's current budget would be an unnecessary and inappropriate use of the State's limited resources.

V. CONCLUSION

For these reasons, the mandamus complaint must be dismissed.

11 Respectfully submitted:

MARC DANN (0039425) Attorney General of Ohio

WILLIAM J. CQI,E* (6067778) *Counsel ofh cord MATTHEW J. LAMPKE (0067973) Assistant Attorneys General Executive Agencies Section 30 East Broad Street, 26th Floor Columbus, Ohio 43215 614-466-2980 866-354-4086 fax wcole®ag.state.oh.us Counsel for Respondents Ohio Department of Development and Lt. Governor Lee Fisher, Director of the Ohio Department of Development

CERTIFICATE OF SERVICE

I certify that a copy of the foregoing Motion of Respondents Ohio Department of

Development and Director Lee Fisher for Judgment on the Pleadings has been sent by regular mail on May 5, 2008 to Timothy M. Burke and Daniel J. McCarthy, MANLEY Bu>ttKE L.P.A., 225

W. Court St., Cincinnati, OH 45202-1098.