So You Want to be a Government Lawyer | The South Carolina Volume Cap Allocation Act
The FYI on Personal Texts for Government Employees | South Carolina Economic Development Competiveness Act of 2010 Becomes Law | The Search for Recovery Act Funds May Come with a Cost | SEC Amends Municipal Disclosure Requirements
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FY2010-2011
SECTION OFFICERS

A. Cruickshanks IV (Sandy)
Chair
864-833-5011/Fax: (864) 833-1665
lawaciv@charter.net

Timothy C. Winslow
Chair-Elect
803-252-7255/Fax: (803) 252-0379
tim@scac.state.sc.us

W. Lawrence Brown
Vice-chair
803-593-6447/Fax: (803) 593-6565
lowlb@bellsouth.net

Nancy Shealy
Secretary
(803) 737-6937/Fax: (803) 737-7070
 nshealy@ic.sc.gov

Robert S. Croom
Section Delegate
803-252-7255/Fax: (803) 252-0379
robert@scac.state.sc.us

COUNCIL MEMBERS

Jeremy Cook (exp. 2011)
843-722-3366/Fax: (843) 722-2266
jcook@hsblawfirm.com

Geoffrey Penland (exp. 2011)
803-771-8939/Fax: (803) 771-0233
grpenlan@santeecooper.com

Nicole Ewing (exp. 2012)
   (843) 719-4011/Fax: (843) 719-4306
newing@berkeleycountysc.gov 

Joan Winters (exp. 2012)
(803) 581-8190/Fax: (803) 581-8243 
joanie@winterslawsc.com

Lawrence E. Flynn III (exp. 2013)
803-254-2200/Fax: (803) 354-4899
dcrowe@turnerpadget.com

Michael Kendree (exp. 2013)
(803) 684-3559/Fax: (803) 684-6682
michael.kendree@yorkcountygov.com

So You Want to be a Government Lawyer?
A. “Sandy” Cruickshanks IV
Clinton, SC

You have got to wonder why anyone wants to discuss government law in the middle of the hottest summer on record. When a lawyer says they work in the government law field, the reaction is either a blank stare coupled with the “that’s interesting” comment or a fire-in-the-eye look and the “so YOU are one of THEM” statements. Frankly, most folks do not have a clue what we do in the government law sector. Heck, I’ve been doing it for almost two decades and sometimes I’m not sure either.

I suppose the question is: “What does a local government lawyer really do?” Well, on the one hand we deal with the legislative directives promulgated by the General Assembly while on the other hand we attempt to mold local legislation into the practical aspects of local governing issues, without conflicting the state or other authorities. Home Rule still breathes life to some degree. Time and space do not permit a discussion on that topic at this point. Suffice it to say that it is somewhat akin to assembling a 1000 piece jigsaw puzzle that is missing some pieces, but you can read Title 4 in your spare time.

Local county or municipal lawyers find that they have to be as flexible as a gymnast, as knowledgeable as the Dahlia Lama and have a hide tough enough to cut down an oak tree with a pocketknife. You must deal with numerous elected officials as well as the multitude of department heads and employees that make the system work. If you sit down and think about what it takes for a local governing body to provide the services demanded by the public and/or mandated by the state or federal government, you will likely choose to sprint in the opposite direction. Or as most of us that practice in this field do, lower our heads and plow face first into the maze of laws, rules, regulations and opinions that effect every single thing that every local governmental entity in the state does on a daily basis. A typical week may lead the governmental lawyer through an alphabet soup of issues. It is not unusual for the following to occur: Just after you finish that first cup of coffee the phone is ringing. Checking your inbox shows that you have 40 e-mails from various departments within the governing organization. Before 1 p.m. you have bounced from a question with animal control, which has taken 21 puppies into custody from a dog owner who is being charged with abuse and neglect, to a call from administration to draft a proposed ordinance on noise abatement, to reviewing a food service contract for the detention center, to advising the coroner about an unidentified and unclaimed corpse. And the morning mail brought you several letters from inmates threatening lawsuits along with a few kind letters from some lawyers demanding compensation for their client when the ambulance bumped over the railroad tracks on the way to the hospital after EMS revived them from the heart attack. Then there is a quick check to see what pending legislation from the General Assembly is up for a vote. Don’t forget to call the clerk of court back as to what to do about a missing archived document.

No time for lunch since there have been four e-mails about FOIA requests that the employees forgot—and they need a response before the end of the day—plus the call from the building codes folks at the job site needing an opinion on a regulatory ordinance you drafted five years ago. Ok, you know you drafted it, but do they really expect you to recall the wording of paragraph 6.2 of the 38-page document without reading it? And don’t forget to return the fire director’s call. One of the rural boards has just voted to quit and wants to know what to do with the county fire trucks. A peek at the clock says it’s only 2:30, and you need to get to the drop-in at the retirement home by 6:30. As your multi-task skills are being stretched to the limits, the administrator calls to remind you that your presentation on the nuisance ordinance has been rescheduled … for tonight. You loosen the tie, call the retirement home to express your regrets, roll up your sleeves and slowly transform into full panic mode. What? HR is calling. Seems an employee was on some social network site and called the county attorney a cross-eyed buffoon. You quickly tell the HR folks that truth is an absolute defense and hang up. The sheriff is on line 3. An inmate at the county jail didn’t get his full time on the exercise yard due to the lightening storm and has filed a written grievance threatening to sue in federal court. Public works sends an urgent e-mail and needs a contract drafted for the new $4 million county building project by tomorrow morning. It’s 8:30 p.m. and you head home for a relaxing evening with the family but your cell phone is buzzing. A council member has a question. Ok, you get the point, right?

The laws that created governing bodies and their functions were never designed to be the answer to every problem, but rather a flexible and living guide to follow. It’s not a perfect system. It’s not a flawlessly smooth system. It is not a system that can solve every equation. It is not a system to be judged by wins and losses. In reality, isn’t it a combination of common sense, compliance, communications and commitment? I keep a clipping from an author whose name I have long forgotten, but it guides me and reorients me in my role as a governmental lawyer: If we are to be successful, remember that the future is not some place we are going, but rather some place we are creating. There are no clear paths to follow, but the activity of making new paths can change both the maker and the destination.

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The South Carolina Volume Cap Allocation Act
Margaret C. McGee
Pope Zeigler, LLC, Columbia

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) to promote economic recovery and job creation. The Recovery Act creates several new borrowing opportunities for local governments, including Recovery Zone bonds, which target areas affected by recent employment declines known as “Recovery Zones.” There are two types of Recovery Zone bonds:  Recovery Zone Economic Development Bonds (RZED Bonds) and Recovery Zone Facility Bonds (RZF Bonds). The characteristics of each type are discussed below. Recovery Zone bonds must be issued prior to January 1, 2011.

Recovery Zone Economic Development Bonds. RZED Bonds are designed to lower a governmental issuer’s borrowing cost through the use of a federal subsidy paid to the issuer equal to 45 percent of the issuer’s interest cost. The benefit is that the borrowing costs using a RZED Bond will be lower than the borrowing costs associated with issuing a traditional tax-exempt bond. Proceeds of RZED Bonds may be used to finance most governmental projects in a Recovery Zone that are eligible to be financed with tax-exempt bond proceeds. RZED Bonds bear interest at a taxable rate but must otherwise be eligible to be issued as tax-exempt governmental obligations.

Recovery Zone Facility Bonds. RZF Bonds are tax-exempt private activity bonds with no rebate of interest paid. Unlike RZED Bonds, the goal of RZF Bonds is not to lower the borrowing cost to the governmental issuer but to broaden the type of private projects that may be financed on a tax-exempt basis. For example, RZF Bonds may be used for projects that would not otherwise qualify for tax-exempt financing because of private business use or ownership. RZF Bonds may be used to finance depreciable property first used in any business in a Recovery Zone except the rental of residential real property or the operation of certain non-favored facilities (including, among others, golf courses, massage parlors, gambling facilities and stores primarily selling alcohol for consumption off premises). Since RZF Bonds may finance depreciable property only, they may not be used to finance land.

Designation of Recovery Zone. Expenditures to be financed with the proceeds of either type of Recovery Zone bonds must occur within an area designated by the issuer as a “Recovery Zone.” The Recovery Act defines a Recovery Zone as any area designated by the issuer as having significant poverty, unemployment, rate of home foreclosures or general distress. An issuer may make designations of Recovery Zones in any reasonable manner as it shall determine in good faith in its discretion. This standard provides considerable flexibility in finding that an area may be designated as a Recovery Zone.

Recovery Zone allocations. For both types of Recovery Zone bonds, the U.S. Department of the Treasury (the “Treasury Department”) made volume cap allocations to each state based on the difference between the level of employment in the state in December 2007 and December 2008. The State of South Carolina received an allocation of $115,041,000 for RZED Bonds and $172,562,000 for RZF Bonds. South Carolina’s allocation was suballocated to South Carolina counties as well as to the cities of Columbia and Charleston. All but five South Carolina counties received a volume cap allocation, with York, Anderson, Sumter and Horry counties receiving the largest shares.

A county may designate a city or town within the county to use its volume cap allocation without going back to the state for reallocation as discussed below. However, a county cannot “transfer” its volume cap allocation to a governmental unit outside the boundaries of such county.

Proposed South Carolina Recovery Zone reallocation legislation. As noted above, any county or municipality that received a direct volume cap allocation may use the allocation itself or suballocate its allocation to other issuers located within its boundaries in any reasonable manner as determined in good faith. In addition, a county or municipality may waive any unused allocation to the state to be reallocated by the state to another eligible issuer outside such county or municipality’s boundaries. Treasury Notice 2009-50 provides that upon any waiver of volume cap by a county or municipality, a state shall be authorized to reallocate the waived volume cap in any reasonable manner as it shall determine in good faith in its discretion.

Currently, Recovery Zone bonds must be issued prior to January 1, 2011. Any allocation that is not used by then will be lost. Consequently, it is important that any allocation that is not going to be used by an eligible issuer be reallocated to another eligible issuer as quickly as possible.

On January 28, 2010, H. 4478 (the bill) was introduced in the S.C. House of Representatives and referred to the Committee on Ways and Means. On March 2, 2010, the Committee on Ways and Means reported favorably on the bill with amendments. On March 5, 2010, the bill was read for the third time and sent to the Senate. Section 10.A of the bill adds the South Carolina Volume Cap Allocation Act (the “Allocation Act”), which establishes a procedure for reallocating any waived volume cap allocation. The Allocation Act gives the S.C. Budget and Control Board (the “Board”) the authority to establish a method for determining when a county or municipality has waived all or part of its volume cap allocation.

The Allocation Act requires the Board to give written notice of volume cap allocations to counties and municipalities. Within 30 days of receipt of such notice, a county or municipality may waive its volume cap allocation by providing written notice of such waiver to the Board.

If a county or municipality chooses not to waive its volume cap allocation, it must send a notice of intent to use its volume cap allocation to the Board within a designated number of days. Such notice of intent must be accompanied by evidence satisfactory to the Board that the allocation will in fact be used. Such evidence may include a resolution designating a Recovery Zone, the form of the resolution or ordinance in substantially final form authorizing the issuance of bonds accompanied by a written opinion of legal counsel that the county or municipality has the legal ability to effect such issuance or borrowing, a written opinion of legal counsel that the Recovery Zone bonds to be issued will qualify as Recovery Zone bonds, a schedule for the closing of the issue which must not be later than any deadline set by the Board and such other documentation as the Board deems appropriate.

If the Board does not receive a notice of intent to use a volume cap allocation from a county or municipality within the designated number of days, the Board will deem that the county or municipality has waived its allocation. The Board is charged with reallocating any waived volume cap allocation to eligible issuers with the advice of an advisory committee which the Board may appoint.

Again, Recovery Zone bonds disappear on January 1, 2011, so reallocating volume cap allocations as quickly as possible to issuers who will actually issue Recovery Zone bonds benefits the entire state of South Carolina.

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The FYI on Personal Texts for Government Employees
Melissa Maddox-Barnes
The Housing Authority of the City of Charleston

Ever wonder what the Supreme Court of the United States’ opinion is about text messaging? Well wonder no more, at least as it relates to government employers. On June 17, 2010, the Supreme Court rendered an unanimous decision on the ubiquitous topic of text messaging in City of Ontario, California, et al. v. Quon, et al., No. 08-1332, slip op., 130 S.Ct. 2619 (2010), http://www.supremecourt.gov/opinions /09pdf/08-1332.pdf . In this appeal, heard on writ of certiorari, the Court reversed and remanded the Ninth Circuit’s decision and held that the respondents’ [Jeff Quon and others, hereinafter Quon] privacy rights under the Fourth Amendment’s protection against “unreasonable search and seizure” were not violated when the government employer, the City of Ontario [hereinafter City], retrieved personal, non-work related texts from government-issued pagers used by Quon. Quon gives us the opportunity to view the Court’s perspective on texting as it attempts to tackle communications in today’s brave new digital world. The opinion also offers valuable insight into the types of electronic communication policy issues agencies should address in order to protect themselves and their employees.

Facts/procedural background
The City contracted with Arch Wireless to acquire pagers with text messaging capabilities for its police department. The City issued the pagers to its SWAT team police officers, of which Sergeant Jeff Quon was a member. The pagers were issued for the purpose of mobilization and emergency response. Prior to distributing the pagers, the City had an established computer policy in place, which was signed by Quon and the other officers, that explicitly stated that there was no confidentiality or privacy in Internet and e-mail communications. The policy also stated that the City maintained the right to monitor and log texts without notice. The policy did not specifically include text messaging as an electronic communication, but in a subsequent staff meeting, employees were informed that texts would be viewed in the same light as e-mails. Quon’s supervisor, a lieutenant, informed Quon of his excessive number of texts and of the possibility that Quon would be personally charged for the texts. The supervisor also stated that the texts could be audited, but that it was not likely to occur as long as the overage charges were paid.

For several months, Quon and the other officers exceeded the monthly character limit. Quon and the other officers did reimburse the City for overage charges. The police officer responsible for the pager contract with Arch Wireless eventually became weary of the administrative burden of collecting the fees from the officers. As a result, the City sent a request to Arch Wireless to retrieve the messages to determine whether the character limit was too low and also whether the City should continue requiring the officers to pay overage charges. Upon retrieval and review of the transcripts, the City discovered that many of the texts were not work-related and were in fact sexually explicit in nature. The matter was referred to internal affairs, and Quon and other officers were disciplined.

Quon and others filed suit in the U.S. District Court against the City and Arch Wireless, alleging that the City violated their privacy rights under the Fourth Amendment by retrieving and reviewing the text messages and also that Arch Wireless violated the federal Stored Communications Act (SCA), 18 U.S.C. § 2701, by handing over the texts to the City. Quon v. Arch Wireless Operating Co., Inc., 445 F.Supp.2d 1116, C.D.Cal. (2006). The District Court granted summary judgment for Arch Wireless on the SCA claim but as to the City held that although Quon had a reasonable expectation of privacy in the content of the text messages, no constitutional violation occurred under the Fourth Amendment in the manner in which the search was conducted. The City’s authorized search and retrieval of the text messages served a legitimate business purpose in trying to determine if the cost of the excess texts should be passed on to the employee.

Quon appealed; the Ninth Circuit affirmed in part and reversed in part and held that Quon had a reasonable expectation of privacy, but that the search was not reasonable as other less intrusive methods were available. Quon v. Arch Wireless Operating Co., Inc., 529 F.3d 892 (2008). The Ninth Circuit also held that Arch Wireless did violate the SCA by forwarding the text transcripts on to the City and denied petition for rehearing en banc. Quon v. Arch Wireless Operating Co., Inc., 554 F.3d 769 (2009).

The City and Arch Wireless petitioned for certiorari to the U.S. Supreme Court. As to the City, the Supreme Court reversed and remanded the Ninth Circuit’s decision and held that the search was reasonable; Quon and the other officer’s privacy rights were not violated under the Fourth Amendment. The Court, however denied Arch Wireless’ petition for certiorari and left the SCA issues for another day. U.S. Mobility Wireless, Inc. v.Quon, 130 U.S. Ct. 1011 (2009).

Analysis
In considering how the constitutional protections under the Fourth Amendment apply to government employees, the Court referred to the plurality opinion of O’Connor v. Ortega, 480 U.S. 709, 711 (1987), which recognized that the Court must take under consideration “the operating realities of the workplace” and apply “the standard of reasonableness under all the circumstances” when reviewing the validity of activities surrounding government employer intrusion into employee’s privacy. The Court established that Fourth Amendment protections do exist for government employees; however, the employee’s reasonable expectations for privacy have to be weighed against the “operational realities” of the functions and responsibilities of those agencies.

The question here was whether it was reasonable for SWAT team members, given the requirements of their position, to truly expect that their texts, sent via government-owned pager, not be subject to review for work-related purposes. Along the same vein, if the numbers of text messages exceeded the authorized limit, was it reasonable for a government employer to review the content of those e-mails to determine if the overage was necessary and in furtherance of performing the police officer’s duties, indicating the need for a possible adjustment in the service plan and if not necessary, whether the employer should continue to pass the cost on to the employee?

Referring back to O’Connor and related cases, the court maintained the established standard that individuals who work for the government “[d]o not lose their Fourth Amendment rights merely because they work for the government instead of a private employer,” O’Connor, 480 U.S. at 717, and assumed arguendo that Quon and the officers did have a reasonable expectation of privacy in their text messages. The focus thereafter turned upon whether the search itself was reasonable. The Court stated the same principles that apply to employee physical office searches apply to searches into employee electronic communications. Here, the officers signed an electronic communications policy prior to being assigned the pagers. The policy clearly stated that there was no confidentiality and that employees should have no expectation of privacy in the content of the communications. Quon argued that the employees were allowed for several months to exceed usage limits and were led to believe by their supervisor that the only penalty they may face was reimbursing the City for the usage. The Court disagreed with the significance of that rationale and stated that the search served a “legitimate work-related purpose” and was reasonable for the proper administration of a police department.

In Quon, the reasonableness standard transcended into the realm of texting as the “reasonable texting person” emerged to provide the Court adequate rationale for the conclusions reached. The Court gave cautious consideration to the emerging legal implications of today’s technological world in its holding, stating, “[r]apid changes in the dynamics of communication and information transmission are evident not just in technology itself but in what society accepts as proper behavior. At present, it is uncertain how workplace norms, and the law’s treatment of them, will evolve.” Quon, 130 S.Ct. 2619. But despite the Court’s timid stance on technological issues overall, the opinion does seem to convey that despite the uncertainties in today’s legal cyber world, any “reasonable” government employee texter would have believed that texts sent on government-issued pagers could be subject to review.

Implications
Although the decision in Quon was limited to government employees, the implications are far reaching for private employers. All employers should review their current electronic communications policies to ensure that they are inclusive of all current methods of electronic and Internet communication methods. These policies should be broad enough in scope to reflect a balance between Fourth Amendment privacy rights/First Amendment freedom of speech rights of employees and employer’s proprietary rights and right to protect its reputation and legitimate business purposes. To assist in that effort, below are sample topics that should be covered in your policies.

  • Confidentiality and privacy rights of employees/clients
  • Effective use of disclaimers, emphasizing employee use of first person voice only and not as a representative of the agency
  • Copyright/trademark/logo usage restrictions
  • Identification of agency’s proprietary information and equipment
  • Limitations of personal Internet usage on agency equipment
  • Designation of persons for media correspondence
  • Promotion of respect among employees and reminders that prohibitions against discriminatory activity apply to the Internet (hostile work environment, sexual harassment, protected classes, etc.)
  • Reminders that code of conduct and state ethics rules still apply to Internet activity
  • Reinforce agency work hours, productivity and performance expectations
  • Freedom of Information Act, local Sunshine and Open-Records Acts
  • Insurance coverage to include cyber liability
  • Reminders that all applicable federal, state and local laws for civil and criminal activity apply to the Internet and social media

Once your policies are established, be sure to have every employee sign the policies, and afterwards provide ongoing training explaining the policies. Promote consistency to ensure that supervisors are correctly enforcing the policy to curtail debates regarding your official policy (written) vs. informal policy (your actual practices). The goal is to help employees think as much about the content of their texts as possible before they let their thumbs do the talking. Through Quon, at least for now, government employers have some sort of security that as long as investigations and workplace searches are conducted in accordance with policy and in a reasonable fashion, Fourth Amendment violations are unlikely to be found.

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South Carolina Economic Development Competitiveness Act Of 2010 Becomes Law
George B. Wolfe
Nelson Mullins, Columbia
Published in Nelson Mullins newsletter on June 24, 2010

On June 23, the South Carolina Economic Development Competitiveness Act of 2010 (H. 4478, R. 351) (the “Act”) became law. To view the Act, please click here. The Act contains a number of useful changes to existing law that will support economic development in South Carolina. Among the areas in which the Act makes the most significant changes are the following:

  • Endowed chairs program—allows certain large private sector investments to serve as basis for endowed chairs if certified by Secretary of Commerce.
  • State Ports Tax Credit—provides for credit against employee withholding taxes.
  • Stimulus Act Bonds—provides a process for the reallocation of South Carolina bond capacity under the 2009 federal Stimulus Act in order to maximize the use of that capacity.
  • Fee-in-lieu of taxes—extends benefit period by 10 years and allows modification of method for valuing real property.
  • Special Source Revenue Credit/Bond—allows expenditures on machinery and equipment to serve as basis for credit/bond.
  • Investment Tax Credit—extends credit to entire state.
  • Jobs Tax Credit—removes special exceptions for the categorization of counties so that counties will be categorized based solely on objective economic criteria.

A summary of the changes made by the Act is provided below.

FEE-IN-LIEU OF TAXES (FILOT) (Sections 2-6 and 8-12 of the Act)
There are three separate FILOT statutes that provide mostly comparable benefits—the “Big Fee” Statute (which requires a $45 million minimum investment, transfer of project title to a county and a bond issuance), the “Small Fee” Statute (which requires a $2.5 million minimum investment and transfer of project title to a county) and the “Simple Fee” Statute (which requires a $2.5 million minimum investment). The Act amends all three of these statutes, as described below.

Minimum Multi-Company Investment. The Act reduces the multi-company FILOT minimum total investment under the Small Fee and Simple Fee Statutes from $10 million to $5 million for manufacturing, research and development, corporate office, and distribution facilities. This makes it easier for companies coming together to invest in a single project to avoid the otherwise applicable $2.5 million minimum investment by each company.

Term. The Act increases by 10 years—from 20 years to 30 years—the term of theFILOT “benefit period” for “regular” fees.The Act also increases by 10 years—from 30 to 40 years—the term of theFILOT benefit period for “enhanced fees,” at least under the Big Fee andSmall Fee Statutes.Parties can amend existing FILOT agreements to provide for this 10-year increase.When taken together with the 10-year extension available under present law,the Act provides for a possible total benefit period of up to 40 years (forregular fees) and 50 years (for enhanced fees).

Real Property Valuation. Present law requires the value of real property to be set at its original income tax cost basis for the duration of the FILOT agreement. The Act allows a county and a company to agree to value real property subject to a fee at its fair market value as determined by periodic reappraisal, just as if such property were subject to regular property taxes. Parties can amend existing FILOT agreements to provide for this change, which may be helpful to projects with buildings that have declined or will decline in value.

Property Placed in Service Prior to FILOT Agreement. The Act provides that property placed in service pursuant to an inducement agreement or inducement resolution prior to execution of the FILOT agreement is eligible for a FILOT agreement even if such property has been subject to property taxes before the execution of the FILOT agreement. This is a technical change from present law that removes a trap for the unwary.

Nuclear Facilities. The Act lengthens certain FILOT time periods in recognition of the fact that nuclear facilities take longer to permit and construct than other projects. For qualifying nuclear projects involving an investment of at least $1 billion, the Act provides (i) up to 15 years after an inducement resolution or inducement agreement before a fee agreement must be entered into, and (ii) a 10-year investment period.

SPECIAL SOURCE REVENUE CREDIT/BOND (Section 7 of the Act)
Present law authorizes counties to provide a Special Source Revenue Credit (SSRC) or Special Source Revenue Bond (SSRB) to the extent that the property owner incurs expenditures for infrastructure or improved or unimproved real estate used for manufacturing or commercial purposes.

The Act adds machinery and equipment as qualifying expenditures for SSRC/SSRB purposes. However, the Act also provides that if a company removes machinery and equipment that serves as the basis for an SSRC or SSRB before the end of the FILOT agreement, the company must pay the otherwise applicable FILOT payment on such property for the two years following its removal.

MANUFACTURER’S WAREHOUSE PROPERTY TAX (Section 13 of the Act)
The Act provides a six percent assessment ratio for real property owned by or leased to a manufacturer and used primarily, rather than exclusively as under present law, for warehousing and wholesale distribution. Such warehouse or wholesale distribution real property must not be physically attached to a manufacturing plant unless the warehousing and wholesale distribution area is separated from the manufacturing plant by a permanent wall.

RURAL INFRASTRUCTURE FUND (Section 14 of the Act)
The Act adds the following to the list of eligible expenditures for which the Coordinating Council may provide financial assistance to local governments for infrastructure and other economic development activities in the less prosperous areas of the state:

  • Site preparation;
  • Acquiring or improving real property; and
  • Relocation expenses (but only for employees to whom a company is paying gross wages at least two times the lower of state or county per capita income).

SOUTH CAROLINA VOLUME CAP ALLOCATION ACT (Section 15 of the Act)
The Act creates the “South Carolina Volume Cap Allocation Act,” which provides a process, through the State Budget and Control Board, for the reallocation of county and large municipality volume caps for bonds to be issued under the American Recovery and Reinvestment Act of 2009.

Among the bonds impacted are recovery zone facility bonds, recovery zone economic development bonds and qualified energy conservation bonds. The objective is to maximize the issuance of such bonds for projects within South Carolina before the authorization to issue them terminates at the end of 2010 (unless extended by Congress).

JOBS TAX CREDITS (JTC) (Section 16 of the Act)
The Act’s changes to the JTC statute include the following:

  • Adds “agribusiness operations” to the list of facilities qualifying for JTCs.
  • Reduces the county tiers from five to four, and identifies those tiers by number from IV to I—rather than words; determines tiers based solely upon the original criteria of unemployment rate and per capita income; and removes all special exceptions (the removal of special exceptions automatically removes one of the existing five tiers).
  • Provides for the following amounts of credit for each county tier:
    Tier IV -- $8,000
    Tier III – $4,250
    Tier II – $2,750
    Tier I -- $1,500
  • By way of comparison, the following are the county tiers/credit amounts under present law (before the Act):
    Distressed -- $8,000
    Least Developed -- $4,500 (this is the tier that is removed by the Act)
    Under Developed -- $3,500
    Moderately Developed -- $2,500
    Developed -- $1,500

STATE PORTS TAX CREDIT (Section 17 of the Act)
Present law provides for a credit in an amount determined by the Coordinating Council against state income taxes for a company that uses port facilities in this state and which increases its port cargo at such facilities by at least five percent in a single year over its base year port cargo volume. There is a total annual cap of $8 million on the credit. The changes made by the Act include the following:

  • Up to $4 million out of the $8 million annual cap may be provided as a credit against employee withholding taxes.
  • Up to $1 million of the $8 million annual cap may be provided to a new warehouse or distribution facility committing to a minimum $40 million investment and the creation of 100 jobs, without regard to the base year cargo provisions.

The Coordinating Council continues to be authorized to determine the amount of the credit, as under present law.

UTILITY TAX CREDIT (Section 18 of the Act)
The Act adds to the list of qualifying projects eligible for this credit incubator buildings whose ownership is retained by a county, political subdivision or agency of the State.

JOB DEVELOPMENT CREDITS (JDC) (Section 19 of the Act)
The Act’s changes to the JDC statute include the following:

  • The Act conforms the county tier structure for JDC purposes to the above-described Jobs Tax Credit changes:
    Tier IV – 100% JDC
    Tier III – 85% JDC
    Tier II – 70% JDC
    Tier I – 55% JDC
  • The Act adds the following expenditures as “qualifying expenditures” for JDC purposes: operating leases with terms of at least five years; and employee relocation expenses, but only where such employees are being paid at least two times the lower of the state or county per capita income.

INVESTMENT TAX CREDIT (Sections 20-21 of the Act)
The original investment tax credit statute, passed in 1995, was intended to help offset the impacts of the job losses at Charleston Naval Base and Savannah River. That statute provided a credit against income tax with respect to qualifying manufacturing property where such property is first used in a qualifying area, which included 27 of the state’s 46 counties. The credit equaled one to five percent of the cost of such property, depending upon the depreciable life of the property in question.

The Act expands the qualifying area to all 46 counties, so that the credit now applies throughout the state. To minimize the fiscal impact of this geographic expansion, the Act also cuts the amount of the credit in half, so that the credit now ranges from 0.5% to 2.5%.

BIODIESEL RESEARCH AND DEVELOPMENT TAX CREDIT (Section 22 of the Act)
The Act amends the state income tax credit for qualified research and development expenditures to include expenditures relating to waste grease-derived biodiesel.

RENEWABLE ENERGY FACILITY CREDIT (Section 23 of the Act)
The Act provides an income tax credit equal to 10 percent of the cost of a company’s qualifying investments in plant and equipment for renewable energy operations. To qualify a company must do each of the following:

  • Manufacture renewable energy systems and components in South Carolina for solar, wind, geothermal or other renewable energy uses;
  • Invest at least $500 million in a new renewable energy facility in South Carolina; and
  • Create at least 1.5 jobs for every $500,000 of capital investment and pay 125 percent of state average annual median wage for such jobs.

The credit is for a five-year period from 2010 through 2015. A taxpayer’s total credit under this section cannot exceed $500,000 annually, or $5 million total.

RENEWABLE ENERGY MANUFACTURING ACT (Sections 24-28 of the Act)
The Act amends the “South Carolina Life Sciences Act” to make it the “South Carolina Life Sciences Act and Renewable Energy Manufacturing Act.” As part of this amendment, the Act does the following:

  • “Renewable energy manufacturing facility” is defined as a business which manufactures (i) qualifying machinery and equipment for use by solar and wind turbine energy producers or (ii) qualifying batteries for certain alternative energy motor vehicles.
  • The South Carolina Energy Office is authorized to determine whether a facility qualifies as a renewable energy manufacturing facility.
  • Qualifying renewable energy manufacturing facilities involving investments of $100 million and 200 new jobs with an annual average cash compensation of at least 150 percent of the lower of state or county per capita income are entitled to the following benefits:
    –The manufacturing machinery and equipment used at such a facility is entitled for property tax purposes to a 20 percent annual depreciation rate rather than the 11 percent rate that would otherwise apply to such machinery and equipment.
    –Any taxpayer establishing such a facility may enter into an income apportionment contract with SCDOR, with a term not to exceed 15 years.
    –The Coordinating Council may allow up to 95 percent of Job Development Credits to be provided with respect to the employees of such facility, even if such Job Development Credits would otherwise be subject to a lower limit (55, 70 or 85 percent) based on the tier for the county in which the jobs are located.

SET-ASIDE FUNDS (Section 29 of the Act)
The Act adds the following to the list of eligible expenditures for which the Coordinating Council may make grants from the Council’s “set-aside” fund to which $18 million is annually appropriated:

  • Improving real property;
  • Pollution control equipment; and
  • Relocation expenses (but only for employees to whom a company is paying gross wages at least two times the lower of state or county per capita income).

ENDOWED CHAIRS (Section 30-31 of the Act)
The Act provides that 25 percent of the appropriations for Endowed Chairs shall be awarded by the Endowed Chairs review board pursuant to recommendations by the Secretary of Commerce.

The Secretary of Commerce may request that the review board award an endowment of up to $2 million for each “significant capital investment” committed by a “qualified project or industry.” Upon a decision by the review board to make an allocation for such endowment, the qualified project or industry sector will have 36 months from the date of allocation to make such investment. Once the significant capital investment has been made, the Secretary of Commerce shall certify to the review board and the review board shall make awards for one or more endowed professors who will directly support the industry in which the significant capital investment is made.

“Qualified projects or industries” are those that make a significant capital investment in South Carolina after January 1, 2010, in certain specified activities or in other activities as determined by the Secretary of Commerce.

“Significant capital investment” means a private investment of at least $100 million in a single project or at least $500 million in an industry sector.

Importantly, the otherwise applicable requirement for non-state matching funds does not apply to Endowed Chairs funded pursuant to this process.

This provision will allow a portion of the Endowed Chairs funds to more closely track the direction of the South Carolina economy as evidenced by significant private investments. This provision also adds an incentive that the state can use in recruiting significant investments in economic sectors that the state wants to promote.

WORKFORCE AGENCY MEMBERSHIP ON COORDINATING COUNCIL (Section 32 of the Act)
The Act replaces the chairman of the South Carolina Employment Security Commission with the Executive Director of the newly created Department of Employment and Workforce as a member of the South Carolina Coordinating Council for Economic Development.

FINANCING WATERWAY IMPROVEMENTS (Section 33 of the Act)
The Act authorizes the creation of municipal improvement districts to widen and dredge the waterways of the State by issuing bonds payable from assessments in that district. In certain instances, such bonds may be secured in whole or in part by the full faith, credit and taxing power of the municipality.

EXTENSION OF REDEVELOPMENT AUTHORITY FUNDING (Section 34 of the Act)
The Act extends for two years (from 2015 to 2017) the redevelopment fees that may be provided to certain redevelopment authorities created in response to the closure or realignment of a military installation such as Charleston Naval Base. These fees are equal to five percent of state employee withholding taxes paid to employees of the federal government located at such bases.

TAX REVENUES FOR TOURISM (Sections 35 and 36 of the Act)
The Act increases from 20 to 50 percent the amount of local accommodations and hospitality tax revenues that cities and counties without a high concentration of tourist activity may spend on certain tourism-related activities.

REPEAL OF ACT 150 OF 2010 (Section 37 of the Act)
The Act repeals Act 150 of 2010. Act 150 provided a tax credit equal to one-half of income taxes paid by S-corporations with a capital investment of $500 million and at least 400 jobs. The amount of the credit was to be paid to the Coordinating Council by use for a city or council for public infrastructure relating to the qualifying project.

REPEAL OF OUTDATED BASE CLOSURE PROVISIONS (Section 38 of the Act)
The Act repeals certain outdated statutory provisions related to the closure of the Charleston Naval Base.

EFFECTIVE DATES (Section 39 of, and elsewhere in, the Act)
The Act takes effect on January 1, 2011, subject to a number of exceptions, as described below.

The Act provides that the following sections take effect upon approval of the Act by the Governor:

  • Section 6 (all of the Big Fee changes)
  • Section 8 (Small Fee—certain nuclear facility changes; 10-year increase in benefit period)
  • Section 9 (Small Fee—certain nuclear facility changes)
  • Section 15 (Volume cap reallocation)
  • Section 25-28 (Renewable Energy Manufacturing Act)
  • Section 37 (repeal of Act 150 of 2010)
  • Section 38 (repeal of certain outdated Code sections)

Some sections have their own effective date provisions, including the following:

  • Section 2 (Small Fee). $5 million minimum for Small Fee multi-company deals. Effective for new agreements entered into after 2010, but existing agreements may be amended to incorporate such $5 million minimum.
  • Section 3 (Small Fee). 10-year increase in benefit period. Effective for new agreements entered into after 2010, but existing agreements may be amended to incorporate such 10-year increase.
  • Section 4 (Small Fee). Real property valuation. Effective for countywide reassessments after 2010.
  • Section 6 (Big Fee). All Big Fee Changes. Effective upon approval by the Governor, except for the 10-year increase in the benefit period, which is effective for new agreements entered into after 2010; however, existing agreements may be amended to incorporate such 10-year increase. Changes in real property valuation are effective for countywide reassessments after 2010.
  • Section 8 (Simple Fee). Certain nuclear facility changes. 10-year increase in benefit period. Effective upon approval of Governor, except for the 10-year increase in the benefit period, which is effective for new agreements entered into after 2010; however, existing agreements may be amended to incorporate such 10-year increase.
  • Section 10 (Simple Fee). Real property valuation. Effective for countywide reassessments after 2010.

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The Search for Recovery Act Funds May Come With a Cost
Thomas O. Mason
Williams Mullen Clark & Dobbins, McLean, VA

In an effort to jumpstart the United States economy and improve our national infrastructure, the American Recovery and Reinvestment Act of 2009 (“Recovery Act”) was passed into law in February of 2009. The Recovery Act made $275 billion available for government contracts, grants and loans. It is only natural that the breadth and value of projects funded by the Recovery Act would pique the interest of government contractors and commercial contractors alike. As a consequence, companies that are new to contracting with the federal government may be lured by Recovery Act funds. However, the decision to enter into the world of federal procurement should not be taken lightly. It is a landscape fraught with unique requirements that can become traps for the unwary. Thus, before a company heeds the call of Recovery Act funds, that company should arm itself with the tools and information necessary to successfully perform a government contract without opening itself to unnecessary liability. A few recent changes to federal procurement law exemplify the unique requirements placed on a government contractor and the ever-evolving nature of those requirements. The following paragraphs summarize these recent changes and the government’s increasing emphasis on the oversight and transparency of government contractors.

The Federal Acquisition Regulations (FAR) codify the policies and procedures by which executive agencies contract for supplies and services in exchange for appropriated funds. The FAR will be applicable to most contracts issued by executive agencies using Recovery Act funds. Effective Dec. 12, 2008, the FAR was amended to impose mandatory disclosure requirements on contractors and subcontractors. The new regulations require contractors and subcontractors to disclose to the agency Office of the Inspector General (with a copy to the contracting officer) whenever the contractor has “credible evidence” of a violation of federal criminal law involving fraud, conflict of interest, bribery or gratuity violations, or a violation of the civil False Claims Act, in connection with the award, performance or closeout of a contract performed by the contractor or a subcontract awarded thereunder. FAR § 3.1002 & 52.203-13.

In addition, the regulations implement changes to the FAR’s rules concerning the suspension and debarment from federal contracting of irresponsible contractors. Specifically, a knowing failure to “timely disclose credible evidence” of certain violations of federal criminal law, the civil False Claims Act or significant overpayments on government contracts—until three years after final payment on any federal government contract awarded to the contractor—creates a new basis for suspension and debarment. FAR § 9.407–2.

These new regulations amend FAR 52.203-13, which currently requires contractors and subcontractors to maintain written codes of conduct and to establish business ethics and compliance programs and internal control systems. These requirements remain in effect under the new regulations, including a narrow exception for small businesses and commercial item contracts relieving such contractors from the requirement to establish business ethics and compliance programs, and internal control systems. However, the new regulations expand the framework for the business ethics awareness and compliance programs and internal control systems. With respect to the business ethics awareness and compliance program, the new regulations require the contractor to take reasonable steps to communicate the program periodically, through training and other means of dissemination. The new regulations require that this training be provided not only to the contractor’s employees and principals, but also to its agents and subcontractors. With respect to the internal control system, the new regulations build upon the prior framework to require the assignment of responsibility for the system at “a sufficiently high level and adequate resources” to ensure effectiveness of the compliance program and internal control system. The new regulations also require that the contractor’s internal control system encompass periodic reviews of company business practices, policies and procedures to include monitoring and auditing to detect criminal conduct, periodic evaluation of the effectiveness of the compliance program and internal control system and the periodic assessment of the risk of criminal conduct.

The new regulations are evidence of constant and increasing oversight of the contractors and subcontractors who do business with the government, as well as the mounting emphasis on transparency and ethics in government procurement. Further, the regulations require an internal infrastructure that contractors not currently doing business with the government may not have. With the government’s increased use of criminal proceedings and suspension and debarment to enforce contractual requirements, it is critical that contractors understand their obligations under these regulations and implement an effective business ethics awareness and compliance program and internal control system.

Even if a contractor implements an effective business ethics and compliance program and internal control system, however, what constitutes reportable evidence of a False Claims Act (FCA) violation under the mandatory disclosure rule has been further complicated by a recent district court opinion. In United States v. Science Applications Int’l Corp., No. 04-1543 (D.D.C. Sept. 14, 2009), the court affirmed a jury decision that held Science Applications International Corporation (SAIC) liable under the FCA for failing to disclose organizational conflicts of interest (OCI) that impacted its contracts with the Nuclear Regulatory Commission (NRC). The Federal Acquisition Regulation provides that an OCI exists when, because of activities or relationships with other persons or organizations, a person or organization is unable or potentially unable to render impartial assistance or advice to the government. FAR § 2.101. The FAR requires contracting officers to identify and evaluate potential OCIs as early in the acquisition process as possible. FAR § 9.504.

Specifically, the United States sued SAIC for breaching its no-OCI obligation under its NRC contracts by engaging in relationships with organizations that created an appearance of bias in the technical assistance and support provided to the NRC. The government also alleged that the contractor’s no-OCI certification and requests for payment under the contracts violated the FCA. The jury found that SAIC had violated the FCA by knowingly presenting false claims for payment or approval by the government and making, using or causing to be made false records or statements for approval of payments based upon the failure to provide information regarding potential OCIs affecting the contracts. The district court affirmed the application of the FCA to a contractor’s failure to provide information on potential OCIs pursuant to a contract clause. The two NRC contracts incorporated regulations that require the contractor to warrant that it had no OCI that, in part, would diminish its capacity to give impartial, technically sound, objective assistance and advice or would result in a biased work product. The regulations further required the contractor to disclose any OCIs discovered after entering the contract.

This opinion raised two issues for contractors doing business with the government. First, the decision reflects a contractor’s potential exposure to a FCA violation for failing to disclose the existence of an OCI pursuant to contract requirements. The mandatory disclosure rule also makes it clear that the contractor has an additional obligation to disclose an FCA violation as soon as it has “credible evidence.” 

Second, the decision reinforces the need for contractors to maintain current and complete information on company business interests. Applicable federal regulations provide that an
OCI may arise where the contract’s requirements conflict with a contractor’s business interests, affecting the ability of the contractor to perform the contract requirements impartially. The district court found in part that SAIC had failed to track its business interests sufficiently to prevent the occurrence of an OCI.

Identifying an OCI often involves a subjective analysis of varying interests and relationships held by the contractor and their impact upon the performance of contract requirements. This assessment becomes more difficult as the scope and variety of those interests and relationships grow, particularly for larger contractors that hold different business units or contracts within a single business unit.

The court’s decision in SAIC shows that it is critical that contractors maintain current and complete information on business or financial relationships that are relevant to contract performance as a prerequisite to doing business with the federal government. The simplest approach to fulfill this obligation is to create an internal database or repository of all business or financial interests on a company-wide basis, including all affiliated entities and subsidiaries. Such interests include the company’s products or services, the company’s contracts to provide the products or services, and the identities of the company’s customers and competitors. The contractor should ensure that the database is updated periodically to reflect any changes to its interests. The contractor can use this database to compare the requirements of a specific contract against its current financial interests to determine whether performance of the contract requirement would create an OCI.

The mandatory disclosure rule and the OCI requirements at issue in SAIC are simply examples of the unique considerations of government contracting, but they are hardly an exhaustive list of those considerations. The move to a more transparent procurement system, coupled with an increasing willingness to use criminal proceedings, civil proceedings, and suspension and debarment as a means to enforce contracts, makes it more important than ever for a contractor to approach federal government contracts with educated caution. Although the funds provided by the Recovery Act of 2009 are intended to jumpstart the economy, acquiring those funds could prove hazardous to those contractors unfamiliar with the unique requirements of government contracts, like those contained in the FAR. The potential for increased infrastructure and oversight costs should also be an important factor for a commercial contractor considering a federal government contract.

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SEC Amends Municipal Disclosure Requirements
Eve Ross
McNair Law Firm, PA, Columbia

Under an amended Securities and Exchange Commission (SEC) rule, state and local governments that issue securities after December 1, 2010, will be expected to disclose the occurrence of more events related to a broader group of securities in a much shorter time frame than under the existing rule. Amendment to Municipal Securities Disclosure, 75 Fed. Reg. 33,100 (June 10, 2010) (to be codified at 17 C.F.R. pts. 240 and 241).

Background and significance
State and local governments issue municipal securities to finance schools, roads, water and sewer systems, hospitals, industrial development and much more. Municipal securities are exempt from the registration requirements of the Securities Act of 1933 and the reporting requirements of the Securities Exchange Act of 1934. However, SEC Rule 15c2-12 (the rule) prohibits any underwriter from buying or selling municipal securities unless that underwriter has reasonably determined that the issuer or borrower has agreed to disclose certain information, including annual financial statements, and give notice of events that may affect the trading price of the securities, such as ratings changes, redemptions, delinquencies and defaults.

The rule’s purpose is to provide transparency to the secondary market, in which investors buy and sell municipal securities after the underwriter’s initial purchase of those securities from the state or local government. While governments do typically enter into disclosure agreements with underwriters when securities are issued, not all governments follow through over the term of the securities, which may be years or decades, by regularly and promptly filing the information and event notices they promised to provide. There has been little enforcement of the rule against state or local governments because breaching a disclosure agreement is a breach of contract with the underwriter, not a direct violation of federal securities law by the state or local government.

The SEC is attempting to clarify and strengthen consequences for nondisclosure, to the extent it can do so without authority to regulate states and localities directly. In the agency interpretation accompanying the amended rule, the SEC asserts that it would be “very difficult” for an underwriter to reasonably determine that an issuer will comply with a proposed disclosure agreement when that issuer “has on multiple occasions during the previous five years failed to provide on a timely basis continuing disclosure documents … as required in a continuing disclosure agreement for a prior offering.” 75 Fed. Reg. at 33,124. Thus, the indirect sanction against state or local governments that do not file timely continuing disclosure documents is that underwriters will not work with them on subsequent securities issuances until disclosure is updated; otherwise, the underwriters would violate the rule.

Therefore, government entities that plan to issue securities, along with their counsel, should examine whether they have a history of compliant disclosure, and if not, then discuss how to get back on track. In addition, state and local governments should be aware that the recent changes to the rule will likely result in changes to their duties under future continuing disclosure agreements, compared to their duties under existing agreements. Whether a government is catching up on late disclosure or continuing to maintain exemplary compliance with the changing rule, there is likely to be an increase in the time and cost of preparing disclosure documents under the amended rule. The benefit is for investors in the secondary market: more up-to-date information relevant to their decisions to buy and sell municipal securities.

Brief description of changes
Disclosure of more events
The following events were not required to be disclosed under the old rule, but they must be disclosed under the amended rule: (1) tender offers; (2) bankruptcy, insolvency, receivership or similar events; (3) execution of a definitive agreement for the initiation, consummation or termination of a merger, consolidation, acquisition or sale of substantially all of the assets of the issuer or borrower, if material; and (4) appointment of a successor or additional trustee, or a trustee’s name change, if material.

Under the old rule, the following events had to be disclosed only if material, but the amended rule requires their disclosure regardless of materiality: (1) delinquencies in the payment of principal and interest; (2) unscheduled draws on debt service reserves or credit enhancements, reflecting financial difficulties; (3) substitution of credit or liquidity providers, or their failure to perform; (4) defeasances; and (5) rating changes.

Applicability to additional securities
Variable rate demand obligations (VRDOs) were not subject to the old rule. VRDOs are securities that bear interest at a rate that resets periodically, and holders of VRDOs have the option, at least as often as every nine months, to require the issuer or a specified third party to purchase the VRDOs at par value or more. It is unclear how many municipal VRDOs are being issued from year to year because until now, there has been no disclosure requirement for this market segment. The amended rule will apply to VRDOs issued on or after December 1, 2010.

More specific time frame
The old rule required the occurrence of events listed in the rule to be disclosed “in a timely manner,” without specifying a period within which an issuer or borrower had to comply. The result was that information about events was often stale by the time it was disclosed. The amended rule provides that notice must be given in a timely manner and not more than 10 business days after the event.

This brief treatment of some recent changes to the rule is not a complete catalog of continuing disclosure requirements under the rule. The final rule and interpretation are available at http://www.sec.gov/rules/final/2010/34-62184afr.pdf.

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Save the Date

Please make plans to attend the Bar Convention scheduled for January 20-23, 2011, at the Hilton Head Marriott Resort & Spa. The Government Law Section seminar is scheduled for Friday, January 21, from 8:30 to 11:45 a.m. For additional information, please visit www.scbar.org/convention.

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Articles Needed
If you are interested in submitting an article for the next issue of the Government Law Section newsletter,
please send to:

Tara Smith
SC Bar
P.O. Box 608
Columbia, SC 29202
tsmith@scbar.org

As always, your participation and comments are welcome.

For additional information on the Government Law Section, click here.

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