A lawsuit by five environmental groups which are challenging the Iron Range Resources Board’s decision to provide a $4 million loan to PolyMet Mining could do more than derail a source of funding for the company’s planned copper-nickel mine.

At issue in the case is whether state agencies can legally provide funding for any project before environmental review is completed. That could include state dollars for a wide range of projects, including many that are routinely funded by state bonding dollars, or taconite production taxes in the case of the Iron Range Resources.

Take Tower’s harbor project, which has received both federal and state funding, most of it provided well before completion of the project’s environmental review process. In fact, it was funding from the state’s taconite production tax that helped fund the completion of the city’s environmental review.

“This could very well have far-reaching implications,” said Rep. David Dill, DFL-Crane Lake.

It could well be a case where state statutes and state rules don’t see eye to eye. According to state environmental laws, state agencies cannot issue permits for development projects before the completion of environmental review. That’s a well-established principle that has been in effect in Minnesota, and nationally, since the 1970s.

But according to state rules, the definition of a “permit” not only includes a “lease, license, certificate, or other entitlement for use or permission to act that may be granted or issued by a governmental unit,” but also “the commitment to issue or the issuance of a discretionary contract, grant, subsidy, loan, or other form of financial assistance, by a governmental unit.”

According to Marc Fink, the Duluth-based attorney who filed the action, it’s that second clause in the state rule that prompted the lawsuit.

Indeed, Fink, who is representing the Center for Biological Diversity in the case, had warned Iron Range Resources officials in advance of their approval of the loan that doing so would conflict with state law.

IRR officials discounted that threat at the time, but the case could well bring the issue to a head. Dill said it could significantly hamper the ability of the IRR and other state agencies to engage in a wide range of economic development efforts.

“This is about more than mining,” said Dill. “This could be a very dangerous precedent if they prevail, with implications across the board.”

Rep. Tom Rukavina, DFL-Pike, agreed. “A lot of things would never get done if this issue isn’t resolved,” he said.

For now, IRR officials are hoping the issue can be avoided. IRR Commissioner Tony Sertich, who was served the lawsuit on his first day in his new job, noted that the loan has yet to be fully approved, which makes the lawsuit premature. “Absolutely it’s premature,” said Sertich.

But Sertich acknowledged that there may be a conflict between state law and rules. “Certainly the way the law and the rules stand today are restrictive,” he said. “At a minimum they are confusing and may need to be looked at.” But Sertich said that’s a job best left to the Legislature. He said he wants to focus his agency’s resources on job creation.

The loan in question was supposed to assist PolyMet Mining in the purchase of lands in northeastern Minnesota that it could use in a proposed land exchange with the US Forest Service. Much of the land that PolyMet hopes to mine is owned by the Forest Service and PolyMet is hoping to acquire the land as part of its mining plan.

IRR officials are now weighing whether the agency could simply acquire the property itself, and wait until the lawsuit is settled, or environmental review is completed, before transferring the property to PolyMet.

As part of the loan agreement, PolyMet agrees to repay the funds with five percent interest. It also agrees to issue warrants to the IRR allowing the agency to purchase up to $400,000 shares of PolyMet stock at $2.50 a share.