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Anything goes: a history of New York's gift and loan clauses.

"[M]oney in the hands of an authority is not state money....

[T]he gift and loan clause does not apply to the authorities."

-Barbara D. Underwood, Solicitor General of the State of New York

"So anything goes?"

-Honorable Jonathan Lippman, Chief Judge of the State of New York

Oral Argument on Bordeleau v. State, New York Court of Appeals, Oct. 12, 2011 (1)

The New York constitution prohibits gifts or loans of money or credit from state and local governments to private enterprises. (2) Adopted between 1846 and 1874, (3) these clauses were a response to widespread corruption and mismanagement of public moneys on the part of the state legislature and municipalities. (4) The gift and loan restrictions, coupled with other constitutional amendments adopted during that period--such as a referendum requirement for state full faith and credit debt, (5) a maximum length of time debt could extend, (6) a "single work or object" requirement for debt, (7) and debt and tax limitations for municipalities (8)--combined to strictly limit the state and local governments in their taxing and spending powers.

Notwithstanding the unequivocal nature of New York's gift and loan clauses, (9) during the twentieth century these provisions have been amended numerous times, adding exception upon exception to the broad prohibitions. They have been circumvented or diluted in the name of meeting the growing demands being placed upon the modern state and its political subdivisions. (10) The tension between the restraints provided by these provisions and the public programs called for by advocates for a greater role for government in solving social problems has been resolved in favor of the latter. (11) Moreover, the use of public authorities and an interpretation of the clauses which substitutes public purpose for consideration as the critical element in public-private agreements, while affording extensive latitude to the government's determinations as to what constitutes such a public purpose, has resulted in a body of state constitutional law at some remove from the text of the state constitution. (12)

The recent case of Bordeleau v. State, (13) represents the latest word by the Court of Appeals concerning New York's ability to give or loan public money to private enterprises. This decision provides the legislature a substantial amount of flexibility in granting money to private enterprises and raises serious questions as to the continued viability and efficacy of the gift and loan clauses as a means of controlling the use of public moneys. (14)

Part I of this article will present a brief textual history of the gift and loan clauses--the conditions which gave rise to them, subsequent amendments, and calls for revision. Part II will examine the decisions of the New York Court of Appeals that have interpreted these clauses, and in particular will show ways in which the court has allowed state and local governments to circumvent them. Part III will analyze the Court of Appeals' own understanding of its role in gift and loan jurisprudence. The court's deference in this area will be juxtaposed with the expansive, activist role it has played when analyzing other provisions of the state constitution. Part IV will offer some reflections on the future of the gift and loan clauses. (15)

I. A BRIEF HISTORY OF THE TEXT OF THE GIFT AND LOAN CLAUSES

Among the differences between the Federal Constitution and state constitutions is the extent to which the latter address the topic of finance. In contrast to the Federal Constitution, which contains relatively limited mention of finance and debt, (16) all but four of the twenty articles in the New York Constitution bear directly on the topic. (17) Two of the longest articles in the constitution, articles VII and VIII, are entirely devoted to state and local finances, respectively. (18) In addition to the gift and loan clauses, each of these articles contains multiple, detailed sections governing the issuance and payment of debt. (19) The state budget and appropriations processes are detailed in the state finance article. (20) Public benefit corporations, also known as authorities, are addressed in article X of the constitution. (21) In addition to having an entire article devoted to the topic of taxation, (22) aspects of that power are treated in several other places. (23) The remaining provisions concerning finance are scattered throughout the constitution, (24) and in one instance adjacent to the people's right to assemble and petition the government. (25)

At the national level, finance is almost exclusively a matter of public policy. (26) Few constitutional provisions limit decision-makers. In their first incarnations, state constitutions, like their national counterpart, had few provisions concerning finance. (27) The first two constitutions of New York, adopted in 1777 and 1821, did not contain any restrictions on public aid to private enterprise. (28) On the contrary, grants and loans of state money and credit to private corporations were fairly common occurrences, justified by the general view that the state had an obligation to promote the prosperity of all its members. (29) New York's first foray into government stimulus to create jobs dates back to 1790, when the legislature incorporated the New York Manufacturing Society and authorized the state treasurer to use public funds to acquire one hundred shares of stock in the company. (30) That organization, according to the preamble to the act, had associated "for the laudable purposes of establishing manufacturies, and furnishing employment for the honest industrious poor" (31) and the organization sought incorporation "to enable them more extensively to carry into effect their patriotic intentions." (32)

The 1938 reports of the New York State Constitutional Convention Committee, commonly known as the Poletti Report, has divided pre-1846 gifts and loans to private enterprises into two periods: "moderate subsidizing" between 1790 and 1816 and "very extensive and highly speculative subsidizing" between 1816 and 1846. (33) This transformation resulted from an increase in the need for infrastructure projects, "such as roads, turnpikes, canals and railroads," and the realization that these enterprises were too great for private capital to support; (34) the state either had to undertake these large projects and their commensurate costs or provide assistance to private entities who would assume the projects. (35)

By the time of the 1846 constitutional convention, state aid had been authorized by statute to thirty-three corporations, including banks, companies providing transportation and infrastructure, health care facilities, and educational institutions. (36) Many of these companies received multiple grants and loans. (37) State debts created to aid projects like canals and railroads were expected to be self-supporting, and there was never an expectation that the state would have to actually answer for this debt. (38) A constant refrain offered by governors and legislators throughout the first half of the nineteenth century was the importance of such aid to the state's growth and prosperity. (39) In response to public criticism of private projects, Governor William Seward stated:
   [I]t is not only the right, but the bounden duty of the
   legislature to adopt measures for overcoming physical obstructions
   to trade and commerce in this state, and for furnishing to each
   region, as far as reasonably practicable, facilities of access to
   the great commercial emporium of the union, fortunately located
   within our own borders ... that the legislature may direct the
   construction of such works at the expense of the state, or
   authorize their construction by associations, and may aid them by
   loans of the credit of the state upon conditions of perfect
   indemnity...." (40)


Calls for the discontinuance of state assistance, even those made by officials such as Comptroller Azariah Flagg, (41) met with threatened responses of unemployment. (42) In his transmission to the legislature of a March 1842 letter from the president of the New York and Erie Railroad Company, a company that had been issued $3 million in state stock in 1836, (43) Governor Seward detailed the devastating effects that would occur if additional aid was withheld:
   [T]he laborers employed must be discharged; the interest on the
   three million state loan, which will accrue on the first of April
   next, will remain unpaid; the contingent debt will fall immediately
   upon the treasury; the capital invested in the enterprise by our
   fellow citizens will be lost; the New York and Erie railroad in its
   scarcely half-completed condition be exposed to auction at the suit
   of the state; and the just expectation of immeasurable benefits to
   result from the enterprise will be suddenly and hopelessly
   disappointed. (44)


Seward went further: "[t]he association can only be regarded by the people as an agent of the legislature...." (45)

The Panic of 1837 revealed the consequences of this intertwining of state finance and private enterprise. The state had to redeem almost $3.7 million of the nearly $4.4 million of stock issued to railroads prior to 1842. (48) Even when the state did have security for its debts, such security was sometimes later found to have little or no value. (47) The first mortgage lien on the New York and Erie Railroad Company's assets securing the $3 million loan described above covered only the track and roadbed, and not the much more valuable rolling stock, stations, or yards. (48) In the words of Comptroller Flagg in 1843:
   Experience is teaching the inhabitants of this state a severe
   lesson in relation to the policy of loaning the credit of the
   people to railroad corporations. These loans were solicited under
   the plausible pretense of developing the resources of the state,
   and conferring benefits on the people. But in most cases instead of
   conferring benefits these measures have inflicted lasting evils on
   all who labor and pay taxes. (49)


Rather than repudiate its debts as did other states during that period, (50) New York made efforts to correct its financial affairs. In 1842, the legislature passed an act that placed a moratorium on expenditures for all public works, with certain exceptions, and imposed direct real and personal property taxes. (51) A concurrent resolution that would have required a referendum by state voters before debt could be incurred was included as part of a proposed constitutional amendment that received the approval of one legislative session in 1844, (52) but was not reapproved in 1845. (53)

A. Convention of 1846

By 1846, New York had accumulated a total debt of just over $25 million, of which more than $5 million was the direct result of the state's policy of loaning state credit to corporations. (54) In addition to this debt, other factors such as undue influence and corruption in the granting of corporate charters, a belief that government aid constituted a form of public discrimination, and the perception that the state had net received adequate benefits for its investments led to calls for reform. (55) There were increasing demands to constitutionalize the restrictions found in the 1842 statute and the 1844 resolution. (56) It was against this backdrop that the constitutional convention of 1846 was held. (57)

The convention added two provisions to the constitution, which, as modified and extended, continue to govern the creation of state debt and the use of state moneys. (58) One provided that, "The credit of the state shall net, in any manner, be given or loaned to, or in aid of, any individual, association, or corporation." (59) Because there was general agreement on the need for such a prohibition, the provision invited little debate. (60) One delegate, Mr. Swackhamer, moved to include money and property among the things that the state could net give or loan, but this amendment was withdrawn because "if the state had money to lend, it should be allowed to lend it--if property, to sell it." (61) Another amendment that would have prohibited gifts of public money or property except as a reward for military service was proposed, but was net pressed forward. (62) The section was adopted unanimously. (63) Charles Lincoln saw this provision as a repudiation of the idea that the state should take an active role in supporting economic development, at least in the form of extending the state's credit. (64)

The second provision added by the 1846 convention prohibited the state from contracting debt except by a law approved by a referendum on a single distinct work or object submitted to voters at a general election when no other law or constitutional amendment was to be voted on; mandated a direct annual tax to pay the debt; and required the debt to be discharged within eighteen years. (65) The requirements imposed by this section, especially the referendum requirement, occasioned spirited debate. (66) The referendum represented a middle position between those delegates who thought all debt should be prohibited and those who believed that requiring popular approval to incur debt represented the demise of republican government. (67) Two exceptions were created to these rules: the legislature could contract debt to "repel invasion, suppress insurrection, or defend the State in war," (68) and could incur indebtedness to meet casual expenses, but only in an amount not exceeding $1 million. (69)

The 1846 convention did not adopt prohibitions against loans of credit by local governments, but local debt was an issue of concern at the convention. (70) The convention's Select Committee on Municipal Corporations, while not recommending a gift and loan clause for municipalities, proposed both that debt could only be incurred by cities and villages upon authorization of the legislature and approval of the municipality's voters and only upon satisfaction of conditions similar to those required to incur state debt (for example, single object or work limitation and requirement that tax be assessed to raise money to pay the debt). (71) Concerned more with the financial position of the state than the municipalities, convention delegates did not adopt any of the committee's proposals. Instead, a provision was added imposing upon the legislature the duty "to provide for the organization of cities and incorporated villages, and to restrict their power of taxation, assessment, borrowing money, contracting debts, and loaning their credit, so as to prevent abuses in assessments and in contracting debt by such municipal corporations." (72)

The voters approved the constitution, (73) but the lack of a prohibition on gifts and loans of credit by local governments would prove to be a significant omission. (74)

B. Constitutional Developments Between 1846 and 1874

The immediate impact of the changes implemented by the 1846 constitution was to limit the ability of the state to support further "internal improvements," (75) but the gift and loan clause proved an ineffective barrier to assistance to private enterprises. (76) Between 1846 and 1874, the legislature resorted to two separate means to aid corporations while not running afoul of the constitution. First, the legislature began to freely grant public funds to railroads and private corporations, both profit and nonprofit. (77) It was estimated by one delegate to the 1867 constitutional convention that $750,000 of state moneys had been given to the Albany and Susquehanna Railroad. (78) A provision debated, but not adopted at that convention, would have also prohibited the state from giving or loaning the money or property of the state in aid of any individual, association, or corporation. (79) Second, even though the 1846 constitution directed the legislature to "restrict" municipal debts and loans of credit to prevent abuses, (80) this provision was interpreted as authorizing the state to allow localities to lend their credit. (81) With loans of state credit off limits, communities along proposed railroad routes and at terminals aided in financing railroad projects either by direct grants or by exchanges of municipal bonds for railroad stock. (82)

Although the legislature in 1853 enacted a law that restricted the amount of debt that municipalities could incur and prohibited gifts and loans of credit to private corporations, (83) local governments got around that restriction by prevailing upon the legislature to pass special bills authorizing loans of credit to railroads. (84) These enabling statutes were challenged on the ground, among others, that the state could not authorize local governments to do what it was constitutionally prohibited from doing. (85) In Bank of Rome v. Village of Rome, the Court of Appeals rejected this challenge. (86) The court found that nothing in the local finance provision of the constitution, which was "ill-suited in its terms to be judicially applied," (87) acted to limit the legislature's discretion to act towards municipalities. (88) The questions of what abuses existed, and what remedy should be fashioned to correct such abuses, were questions to be answered by the legislature and were not subject to review by the courts. (89) The court in Bank of Rome made it clear that the remedy for "injudicious" or unsound legislation was not a judicial one. (90) This deference to legislative judgments in areas involving the finance provisions of the constitution would become the hallmark of the Court of Appeals' approach to the requirements of the state constitution regarding the use of public moneys.

The 1867 convention addressed the controversy caused by the local bonding acts. A report issued by the convention's Committee on Counties, Towns and Villages contained a section that would have put an end to the practice allowed in Bank of Rome. (91) The provision would have prohibited any local government from giving any of its property or money, or loaning its credit, to or in aid of any individual, association, or corporation. (92) This amendment was debated extensively, and alternative proposals such as allowing the issuance of debt upon the approval of the taxpayers were discussed. (93) A provision was agreed upon that provided:
   The legislature shall not pass any law authorizing any county,
   town, city, village, municipal corporation or other
   territorial division to give or appropriate any money or property,
   or to lend its credit to or in aid of any private person, company
   or corporation, or take or be interested in any stock of any
   company or corporation, except as in this Constitution is otherwise
   provided. (94)


The victory for reform advocates was short lived, however, as the convention changed course and rejected the provision. (95)

In sum, New York's first attempts to prohibit certain uses of state money failed to produce the desired results. In the words of the 1967 Temporary State Commission on the Constitutional Convention: "The state resorted to direct grants and loans of money to private corporations. The localities lent railroads their credit and made direct grants of money and property to private corporations." (96) All of the work that had been done by the 1846 convention to address and control the "besetting sin" (97) of incurring debt had not reduced the amount of bonded debt in the state; it simply resulted in a change in creditors from the state to its municipalities. (98) By 1872, local governments of the state had undertaken indebtedness of over $214 million, an amount in excess of ten percent of the assessed valuation of real and personal property within the state. (99) Of this amount, approximately $27 million was issued in aid of railroads. (100) Some towns had contracted indebtedness of up to fifty percent of their taxable property. (101) Although the 1867 convention failed to close these loopholes, reform would not be long in coming. (102)

C. The 1872 Constitutional Commission

In response to the defeat of the constitution proposed by the 1867 convention and questions about whether the legislature would have the time and energy to undertake the task of revision, in 1872 Governor John T. Hoffman recommended creation of a thirty-two member constitutional commission for the purpose of proposing amendments to the constitution. (103) The legislature agreed, and enacted a statute forming this commission. (104) Unique in New York history, the commission, as an extra-constitutional device, lacked the authority to submit its proposals directly to the voters; its proposals would need to be passed by two consecutively elected legislatures prior to submission, as with any amendment first introduced in the legislature. (105) The commission recommended a comprehensive set of reforms affecting a number of areas, including state and local finance. (106) It proposed a new section to the constitution prohibiting the state from giving or loaning its money or credit (but not its property) "to or in aid of any association, corporation or private undertaking." (107) The more restrictive provision was motivated in large part by the increasing amount of moneys being given to sectarian charitable institutions without any governmental control or accountability. (108) The commission struggled to strike a balance between institutions receiving aid primarily for charitable purposes and those who were using the funds mainly for religious teachings. (109) It rejected a proposal that would have added "property" to the list of items that the state was not allowed to loan or give, as well as a proposition that would have limited the prohibition to sectarian institutions. (110) The commission acknowledged the breadth of the prohibition in its final report:
   [T]he amendment ... cuts off all gifts of money and all
   loaning of the credit of the state to all other associations,
   corporations, etc., but they are all subject to the same
   objection, and appropriations to them of the money of the
   state are liable to the same abuses. They must all stand or
   fall together. (111)


The commission did, however, include exceptions to allow the legislature to provide "for the education and support of the blind, the deaf and dumb, and ... juvenile delinquents." (112) Further excepted from this prohibition was any fund or property held "by the state for educational purposes." (113) The section proposed by the commission was adopted by the legislature without amendment and approved by the voters. (114) The inclusion of specific exceptions reflects recognition by commission members that the gift and loan clauses could not be unqualified because a blanket prohibition was inconsistent with pursuit of the legitimate and appropriate purposes of the state. (115)

The commission also addressed the issue of municipal finance. In 1869, the legislature had enacted the Town Bonding Act, (116) which authorized municipalities to lend their credit to railroads. (117) In his 1872 message to the legislature, Governor Hoffman had recommended the immediate repeal of the act, stating, "aid has already been given to railroads, upon the credit of municipalities, to quite as great an extent as is wise, and, in some instances, to the oppression of taxpaying communities." (118) In addition to permitting municipalities to incur significant amounts of bonded debt, this law led to flagrant abuses, such as the siphoning off of money through graft and corruption. (119) The activities of the Tweed Ring during the 1870s, whereby large amounts of money were concealed from the public while being funneled to finance the ring's activities and compensate supporters, epitomized these abuses. (120) The commission adopted a section that was subsequently approved by the voters:
   No county, city, town or village shall hereafter give any
   money or property, or loan its money or credit to or in aid of
   any individual, association or corporation, or become directly
   or indirectly the owner of stock in, or bonds of, any
   association or corporation; nor shall any such county, city,
   town or village be allowed to incur any indebtedness except
   for county, city, town or village purposes. This section shall
   not prevent such county, city, town or village from making
   such provision for the aid or support of its poor as may be
   authorized by law. (121)


This section departed from the original report issued by the commission's Committee on Local Indebtedness. The section proposed by that committee would have allowed municipalities to loan their money or credit so long as the total amount of indebtedness would not have exceeded ten percent of the value of the taxable property of the municipality. (122) As with the state gift and loan clause, the local clause was not absolute: an exception to the local prohibition was added to allow for the aid and support of the poor. (123)

D. Constitutional Developments from 1875-1938

The 1894 constitution retained the gift and loan clauses, (124) but added a new section providing additional public policy exceptions to the restrictions:
   Nothing in this Constitution contained shall prevent the
   Legislature from making such provision for the education
   and support of the blind, the deaf and dumb, and juvenile
   delinquents, as to it may seem proper; or prevent any county,
   city, town or village from providing for the care, support,
   maintenance and secular education, of inmates, of orphan
   asylums, homes for dependent children or correctional
   institutions, whether under public or private control.
   Payments by counties, cities, towns and villages to
   charitable, eleemosynary, correctional and reformatory
   institutions, wholly or partly under private control, for care,
   support and maintenance, may be authorized, but shall hot
   be required by the Legislature. No such payments shall be
   made for any inmate of such institutions who is not received
   and retained therein pursuant to rules established by the
   state board of charities. Such rules shall be subject to the
   control of the Legislature by general laws. (125)


Other amendments were adopted between 1895 and 1938, which also allowed the money or credit of the state to be given or loaned. (126) A 1923 amendment allowed the legislature to create debt in an amount not exceeding $45 million to pay bonuses to veterans of World War I, (127) effectively reversing the results of People v. Westchester County National Bank, (128) which held that bonuses to veterans, despite promoting a public purpose, violated the state gift and loan clause. (129) Another amendment, adopted in 1925, allowed the state to incur debt to provide aid to railroad companies, counties, and cities for the removal of railroad grade crossings. (130) These amendments were consistent with the general practice of that time of easing the restrictions originally imposed by the 1846 constitution. (131)

What impact did these constitutional changes have? The New York State Constitutional Convention Committee of 1938 claimed that the referendum requirement "seriously interfered with the state's ability to carry on internal improvements," (132) and that the constitutional prohibitions "have been said to act as brakes upon progressive social enterprise" (133) and "complicate extensions of governmental activities for which there is growing public demand." (134) On the other hand, the same committee concluded: "[b]y the end of the nineteenth century the State of New York was practically out of debt." (135)

The referendum requirement was not meant to be a barrier to all debt, but only debt not approved by the people. From the adoption of the provision to 1938, the state was able to obtain voter approval for numerous bond issues. (136) Despite this success, increasing demands for public improvements during the early decades of the twentieth century led to a 1925 amendment authorizing "the [annual] issuance ... of $10,000,000 of bonds over a period of ten consecutive years for the financing of any public improvements deemed advisable by the Legislature." (137) Between 1896 and 1937, the state had accumulated aggregate debt of $800 million, none of which had run afoul of the constitutional requirements, including the gift and loan clauses. (138) The goal of eliminating the government's role as a creditor had been achieved. The committee's report on State and Local Government in New York concluded that with the exception of the 1925 amendment providing aid for railroad grade crossing elimination, "there ha[d] been no extension of governmental credit, state or local, to private corporations." (139)

E. The Constitutional Convention of 1938

The 1938 convention signaled a greater recognition of the role of government in providing for the social and economic welfare of the citizens of New York. In areas such as housing and social welfare, the convention constitutionalized and expanded policies previously enacted by the legislature. (140) The convention adopted provisions which gave both state and local governments sufficient authority to meet the housing needs of New Yorkers, (141) and also made it a mandatory obligation of the state to provide "aid, care and support" to the state's needy. (142)

1. Changes to the State Gift and Loan Clause

The expanded role of the state in social areas previously left to private or charitable concerns and the gift and loan clauses were on a collision course. To avoid that collision, numerous exceptions to the prohibitions were added to the constitution. Concerning the state, exceptions were added: for the "care and support of the needy;" for "health and welfares services for all children;" for protection against unemployment, illness and old age; for the "education and support of the ... physically handicapped;" for "aid, care, and support of neglected and dependent children and of the needy sick" under certain conditions. (143) In addition, a provision was included in the newly adopted housing article which allowed the state to loan money to private corporations in order to provide low-income housing and slum clearance. (144)

Notwithstanding the general relaxation of the prohibition against state assistance, the 1938 convention tightened the state gift and loan clause in one respect: an amendment was passed which prohibited the state from giving or lending its credit to public corporations. (145) Since 1846, the constitution had proscribed gifts or loans of credit to "corporations," and the Committee on State Finances and Revenues expressed the view that this change would clarify what was already believed: that the prohibition against gifts and loans of credit would include assistance to municipal as well as private corporations. (146) This amendment added public corporations to the list of entities to which the state was not allowed to give or lend its credit. (147) The state remained free, however, to give or loan money to public corporations. (148)

2. Changes to the Local Gift and Loan Clause

The convention amended the local finance article to provide additional flexibility for local governments to take a more active role in addressing social and economic problems. With regard to municipalities, an exception to the gift and loan prohibition was added for the health and welfare of all children, counties were given the authority to incur debt to advance unpaid tax revenue to a town or a school district, and the existing exception for aid to the poor was changed to "aid, care and support of the needy." (149) The newly enacted housing article allowed cities, towns, and villages to undertake low-rent housing and slum clearance projects, and allowed them to obligate themselves for the repayment of loans made by the state to public corporations functioning in these areas. (150) This increased flexibility was accompanied by further restriction in certain areas. The convention adopted an amendment including "private undertaking[s]" among those to whom money, property, and credit could not be given or loaned. (151) The convention also made school districts subject to the gift and loan prohibitions but did not extend to them the benefit of the exceptions. (152) As with the state provision, the convention adopted an amendment specifying that gifts or loans of credit to or in aid of "public or private corporation[s]" were prohibited. (153) The voters approved all of the amendments adopted by the convention that pertained to state and local finance. (154)

The work of the 1938 convention reflected a growing tension between the belief that government should take a more active role in addressing social and economic problems and the continuing concern about the use of the credit of the state and localities in ways that might threaten their financial solvency. (155) This tension was palpable in all of the convention debates involving financial matters. (156) The convention repeated the pattern of earlier revisions concerning the gift and loan clauses, namely, ad hoc restrictions on the newly devised practices of state and local government designed to circumvent the provisions and the addition of a number of exceptions to the restrictions--an implicit recognition that the "evasion[s]" were, at least in part, attempts to address legitimate social and economic problems. (157) The tension between these two objectives--ensuring the fiscal integrity of the state and meeting the challenges of a dynamic and diverse society--persists to this day.

F. Constitutional Amendments to Gift and Loan Clauses, 1938 to Present

In the approximately seventy-five years since the 1938 convention, the state and local gift and loan clauses have been amended numerous times, most often to add new exceptions. In addition, new sections permitting the state government to guarantee certain obligations have been added to the constitution. (158) The net result of these changes has been to make easier the giving and loaning of state money and credit. (159)

1. Changes to the State Gift and Loan Clause

A 1947 amendment approved the undertaking of $400 million in debt for bonus payments to living veterans of World War II and the next-of-kin of deceased veterans. (160) An amendment in 1951 permitted the legislature to increase the "pensions of members of retirement systems of the state or its subdivisions." (161) Voters in 1951 approved an amendment which allowed the state to guarantee $500 million of bonds issued by the New York State Thruway Authority, (162) and a 1961 amendment allowed the legislature to make the state liable for up to $100 million of obligations of the Port of New York Authority issued for various purposes. (163)

A 1961 amendment added an entirely new subsection to the state gift and loan prohibition, authorizing the legislature to loan state money to a public corporation (later named the Job Development Authority) engaged in making secured loans to nonprofit corporations under specified conditions to finance industrial development so as to provide improved employment opportunities. (164) A companion portion of the amendment added a new section (section 7) to the corporations article (article X), which allowed the state to guarantee up to $50 million worth of bonds issued by this authority. (165)

A 1966 amendment added language allowing the legislature to provide "for the education and support of ... the mentally ill, the emotionally disturbed, the mentally retarded," and also allowed the legislature to "increase ... the amount of pension benefits of any widow or widower of a retired member of a retirement system of the state or of a subdivision of the state." (166) An amendment approved in 1969 allowed the state, municipalities, and other public corporations "to lend [their] money or credit to or in aid of any corporation or association" for the purposes of hospital construction. (167)

There were limits to what the voters would allow by way of loosening the prohibition. (168) Perhaps the most prominent example of this was the 1971 rejection of the community development amendment. (169) This amendment would have repealed the housing article and replaced it with a new community development article, which would have allowed the state and local governments to grant or lend money to private entities, and to guarantee loans made by such entities, for "community development purposes." (170) These purposes included, among others: "adequate, safe and sanitary housing;" "urban and community renewal;" "economic prosperity and adequate employment opportunities;" and "health, mental health and environmental health." (171) The amendment was far reaching; the inclusion of "economic prosperity and adequate employment opportunities" (172) would likely have permitted gifts and loans similar to those given to the railroads and other corporations during the nineteenth century, which resulted in the adoption of the gift and loan clauses. (173)

2. Changes to the Local Gift and Loan Clause

The gift and loan clause contained in the local finance article has also been the subject of piecemeal revision. The voters approved two amendments in 1959, adding further exemptions to the general prohibition against gifts and loans of local money. The first "authorized two or more municipal corporations" to engage in joint municipal undertakings and to contract joint or several indebtedness for such undertakings. (174) The second authorized counties, cities, and towns "to increase the pension benefits payable to retired members of a police department or fire department or to [their] widows, dependent children or dependent parents." (175) A 1963 amendment granted villages the authority previously granted counties, cities, and towns in 1959 to increase pension benefits. (176) In 1965 another exception was adopted, allowing New York City to increase "pension benefits payable to widows, dependent children or dependent parents of members or retired members" of the city's street cleaning department. (177)

3. Suggestions for Systemic Reform of Gift and Loan Clauses

Beginning in the 1950s, there have been numerous suggestions for substantial revision of the state and municipal prohibitions against gifts and loans of money and credit. Upon Governor Nelson Rockefeller's recommendation, the 1959 legislature created the Temporary State Commission on the Revision and Simplification of the Constitution to provide "a comprehensive study of the constitution with a view [of] proposing revision and simplification." (178) In its first report, issued in December 1959, the commission noted that the New York Constitution was not a constitution in a "constitutional sense," but was primarily a legislative document. (179) The commission concluded that lawmaking by referendum was "an unsuitable method of dealing with a plethora of problems and propositions." (180)

In 1961 the commission issued its final report, containing six principles that were to govern and form the nucleus of a local finance article:

1. A pledge of the faith and credit of the localities for the payment of principal and interest on local debt.

2. Assurance to holders of local obligations that principal and interest will be paid on schedule.

3. Mandatory retirement of debt within the useful life of the object financed and debt repayment spread in a prudent manner.

4. A restriction of borrowing to a locality's own purposes, with a proviso facilitating debt incurrence for common or cooperative purposes.

5. A restriction on the gift or loan of money, property or credit.

6. A restriction on the creation of new overlapping jurisdictions with the power to incur debt and levy taxes ... on real estate. (181)

Despite these efforts, nothing came of these recommendations. (182) In 1965 voters approved a call for a constitutional convention. (183) A Temporary State Commission on the Constitutional Convention was established to provide delegates with information concerning the state of the constitution. (184) The State Finance report issued by the commission offered delegates two alternatives with respect to the gift and loan clauses: removal or retention with the possibility of recasting the exceptions as "positive mandates." (185)

In April of 1967, a Special Committee on the Constitutional Convention of the Association of the Bar of the City of New York issued a series of reports offering recommendations for constitutional revision. (186) The Special Committee recommended removal of the gift and loan clauses and reliance on the legislature for the construction of sound public finance. (187) The New York City Mayor's Task Force on the Constitutional Convention recommended that the gift and loan clause for local governments be modified to allow aid (including in the form of gifts and loans of money and credit) to individuals and public and private corporations and associations "in furtherance of a public purpose." (188)

The 1967 convention proposed substantial revisions to the finance provisions, (189) including the following replacement for the state and local gift and loan clauses:

[section] 18. a. Neither the state nor any local government nor any other public corporation shall (1) grant or lend its moneys to or guarantee the obligations of any person, association or private corporation, except that such money may be granted in any year or periodically by contract, or loaned, for public purposes, but the proceeds of indebtedness contracted therefor shall be used only for loans for capital construction, as defined in section eleven of this article, or (2) guarantee the obligations of any other local government or other public corporation. (190)

The new section would have continued the prohibitions against loans of credit by the state and local governments, and would have added public corporations (for example, public authorities) to the list of entities unable to loan their credit. (191) The section would have allowed grants and loans of money for public purposes, but state or municipal debt incurred to make such loans would only have been able to be used for capital construction. (192) The proposed constitution was overwhelmingly defeated by the voters. (193)

Calls for comprehensive reform in these areas persisted. In 1979, the Association of the Bar of the City of New York's Committee on Municipal Affairs issued a report recommending the following amendment: "[l]ocal government[] can give or loan their money, property or credit only when authorized by the legislature for a public purpose." (194) In 1997, the Association issued a report in anticipation of the constitutionally mandated 1997 vote on whether to hold a constitutional convention. (195) Though sympathetic with earlier Association recommendations, the 1997 report concluded that "[s]ubstantial constitutional revision [was] needed in this area," but to accomplish this revision "an interdisciplinary task force comprised of professionals with experience and knowledge in the subject areas ... should be charged with formulating a comprehensive proposal for constitutional and legislative change." (196) Despite these calls for reform, as of 2012 there has been no entity tasked with reviewing and revising these provisions.

II. THE APPROACH TAKEN BY THE COURT OF APPEALS TO THE GIFT AND LOAN CLAUSES

In addition to the gradual but continual weakening of the gift and loan clauses by constitutional amendments, the New York courts have handed down a number of decisions, culminating in Bordeleau v. State, (197) which have allowed the legislature and local governments to avoid the effect of the prohibitions. (198) These decisions have: 1) narrowly defined concepts such as what constitutes a loan and what constitutes funds of the state for purposes of the prohibitions; (199) 2) allowed otherwise barred claims against a governmental entity to be heard and determined on the basis of a moral obligation; (200) 3) permitted public benefit corporations, commonly referred to as authorities, to engage in acts that the state could not otherwise do; (201) and 4) afforded the state and municipalities deference in their determinations of both what is a public purpose for which money can be spent and whether a public-private agreement confers a public, as opposed to private, benefit. (202)

A. Limited Definitions of Terms Such as Loan and State Funds

Courts interpreting the gift and loan clauses have defined both the terms "loan" and "funds" in a manner that limits the extent of the prohibitions. The Court of Appeals has held that a municipality's sale of a parcel of land to a private entity with no money down, and the amount to be paid over the course of fifteen years secured by a purchase money mortgage, did not constitute a loan. (203) The court, reversing an appellate division decision invalidating the arrangement, held that a contract providing for the payment of interest upon a deferred payment constituted consideration for the sale and was not the type of transaction contemplated by the local gift and loan clause. (204)

Courts have also held that funds not representing either taxes or fees received from the citizens are not subject to the gift and loan prohibitions. (205) Funds received from a federal financing bank and guaranteed by the United States Department of Housing and Urban Development, (206) penalties and fines collected from certain offenses, (207) gifts that do not involve an expense to the state, (208) and funds raised from a special class by an assessment for a special purpose (209) all may be lent or given without running afoul of the constitution.

B. Allowance of Moral Obligation Claims as Not Violating Gift and Loan Clauses

Since the mid-nineteenth century, New York courts have held that the gift and loan prohibitions do not prevent the use of public moneys to remedy injustices in situations where, despite the lack of a legal obligation, some higher obligation of honor, fairness, or broad public responsibility exists. (210) When the legislature enacts a statute allowing payment under these circumstances, no gift or loan has occurred. (211)

The doctrine of moral obligation first arose in Town of Guilford v. Board of Supervisors of Chenango County. (212) In Town of Guilford, the Court of Appeals upheld a statute requiring a town's board of supervisors to levy an assessment to reimburse the town's former highway commissioners an amount they had been compelled to pay for costs in an unsuccessful legal action brought at the direction of the town's voters. (213) The court held that, in the absence of express constitutional restrictions, the legislature "can make appropriations of money whenever the public well-being requires or will be promoted by it; and it is the judge of what is for the public good." (214) Because "the legislature ha[d] the right to appropriate the public moneys for local or private purposes, and to impose a tax upon the property of the whole state, or any portion of the state," (215) the judiciary had no power to review these decisions. (216) Town of Guilford gave legal status to what later became known as "moral obligation" when it stated:
   The legislature is not confined in its appropriation of the
   public moneys or of the sums to be raised by taxation in
   favor of individuals, to cases in which a legal demand exists
   against the state. It can thus recognize claims founded in
   equity and justice, in the largest sense of these terms, or in
   gratitude or charity. (217)


In the years since Town of Guilford, the concept of moral obligation has been refined. Subsequent courts have held that a moral obligation may not be founded purely on gratitude or charity. In People v. Westchester County National Bank of Peekskill, (218) the Court of Appeals addressed the validity of an act authorizing the state to issue $45 million in bonds, the proceeds of which would be paid into the state treasury and used to pay a bonus of $10 per month of active service to military veterans who had served during World War I or, if deceased, to their relatives. (219) The court acknowledged that the bonuses would be permissible if they were issued in response to a "moral obligation," but concluded that such a moral obligation did not exist. (220) The court grouped its moral obligation precedents into two categories: cases in which the state had received a direct (albeit legally unenforceable) benefit from a claimant and cases in which a claimant had been injured under circumstances in which fairness dictated that the state should respond. (221) The court noted that in all of the cases, "more than a mere gratuity was involved." (222) The court counseled deference to the legislature while preserving the letter and spirit of the constitution:
   We are not forgetful of the fact that, if there is any
   reasonable ground for the legislative decision that a moral
   obligation exists, the courts may not intervene. If there is
   such a ground, the legislature must determine whether the
   claim shall be recognized. But the prohibitions of the
   Constitution may not be evaded by the assertion that such
   an obligation exists, when in fact it does not. Arbitrary
   action may not convert a wrong into a right. (223)


Because the payment of bonuses to the soldiers and sailors was purely gratuitous, the act violated the state gift of credit prohibition. (224)

In Williamsburgh Savings Bank of Brooklyn v. State, (225) however, the court held that the state could honor as a moral obligation a claim by holders of debt issued by, inter alia, the New York State Water Supply Commission, even though language in both the bonds and the authorizing statute made clear that the state was not obligated for the debt. (226) The court defined the respective roles of the legislature and the judiciary in determining whether a moral obligation exists:
   The rule that it rests solely with the state through its
   legislature to determine whether it will recognize a claim
   even though founded upon equity and justice, and allow it to
   be developed into a legal demand, and that the exercise of
   this choice cannot be delegated to any one else, quite
   necessarily leads to the other rule that the exercise of this
   discretionary power by the state is seldom subject to review
   by the courts. Except under the most extreme circumstances,
   the courts are not allowed to set up their judgment against
   that of the state, and say that the decision of the latter that
   it will give recognition to such a claim ought to have been
   different. Practically the sole power of the courts in this
   respect is to determine whether all of the facts established in
   a given case and presumably within the knowledge of the
   legislature do establish such a foundation of equity and
   justice that the legislature within the rules established by
   the courts was authorized, if it saw fit so to do, to recognize
   the justice of the claim. (227)


The facts of the case established a foundation of equity and justice sufficient for the legislature to allow recognition of the claims. (228) Because the state had "started on its disastrous course the improvement plan which ha[d] become the source of so much trouble," (229) it was too heavily involved in the transaction to permit it to deny liability. (230) The state had allowed one of its agencies acting under the state's authority "to gather into its treasury moneys of its citizens," (231) and therefore was not required to "stand unresponsive when asked to relieve those whom indirectly at least it has brought into an unhappy predicament, by retiring obligations which in essence and equity are its own." (232)

Claims based solely on a moral obligation have been allowed by the legislature and upheld by the courts in situations where a claimant has provided services or property to the state, (233) paid money to the state for property with a title defect, (234) or sustained an injury for which the state should bear the recovery, (235) as well as when the state has assumed the responsibility and expense for a project that could have otherwise been charged to a private party. (236) However, a statute acknowledging a moral obligation does not automatically guarantee approval by the state courts; some statutes enacted on the basis of a moral obligation have been invalidated, (237) often times because the purported obligation either was not rendered at the request of the state or the claimed injury was not the result of a wrong attributable to the state. (238)

The latest pronouncement by the Court of Appeals on this issue came in Ruotolo v. State, (239) a 1994 decision in which the Court of Appeals held that the revival of a dismissed claim seeking relief from the state for injuries to police officers injured or killed in the line of duty was not an unconstitutional gift or loan of state property. (240) The court reaffirmed the continued validity of moral obligation as an exception to the gift and credit clauses:
   The New York Constitution specifically forbids the gift or loan of
   property to a specific individual (N.Y. Const., art. VII, [section]
   8 ["The money of the state shall not be given or loaned to or in
   aid of any ... private undertaking ... or in aid of any
   individual"]). When the legislature demonstrates that an enactment
   challenged under this provision was both in response to a moral
   obligation of the State and does not undermine previously vested
   rights, the courts will not interfere with the exertion. We have
   said that the legislature may use public moneys to remedy an
   injustice in cases even when no legal obligation to pay existed, as
   long as some higher obligation of honor, fairness or broad public
   responsibility is identified. Stated differently, it must
   affirmatively appear that not to act would condone a travesty of
   justice. With respect to claims previously litigated even to a
   final judgment on the merits, a "moral obligation" has been found
   sufficient to revive a State claim and may, by analogy, be used to
   overturn a final judgment in the State's favor. (241)


Acknowledgment of moral obligation is not solely the province of the state. Municipalities may also make payments based upon a moral obligation without running afoul of the local gift and loan clause. (242)

C. Use of Public Authorities to Avoid Gift and Loan Clauses

By the 1920s, the state began to use public benefit corporations, also known as public authorities, to finance public projects. (243) These authorities did not have their origin as vehicles to circumvent provisions of the state constitution such as debt limits and gift and loan clauses. (244) Initial impetus for these devices came from the need for more flexibility and freedom from the restraints imposed on traditional government entities, the need to insulate tasks from the vagaries of the political process, and the need to overcome the restraints imposed by "political boundaries ... frozen in time" and unresponsive to economic and demographic shifts. (245) In fact, the first public authorities in the state performed valuable functions, such as creating parks and public recreation spaces, expanding transportation infrastructure throughout the state, and generating electric power. (246) These authorities were largely self-sufficient, and raised their money through tolls, fees, and rents instead of through taxation. (247) It was recognized early on that these public benefit corporations would separate their administrative and fiscal functions from those of the state, (248) and that the state would be protected from liability for their acts. (249)

In 1935, the Court of Appeals, in Robertson v. Zimmermann, held that the bonded indebtedness of a sewer authority, the bonds of which were paid solely with revenues generated by the authority with no liability on the part of the city, was debt that did not have to be included as part of the city's debt limit. (250) The decision encouraged the creation of similar authorities, and by 1938 there were thirty-three authorities operating within the state. (251) Robertson was the first of many cases to hold that authorities are not subject to the constitutional limitations imposed upon state and local governments. (252)

Extensive discussion took place at the 1938 Constitutional Convention over the unregulated growth of public authorities and the future role that they would play in New York State. While some delegates viewed authorities as entities originally formed for a legitimate purpose but which had "degenerated into ... debt evading device[s]," (253) others shared Alfred E. Smith's view that limiting them would "paralyze the one method we have discovered of getting work done expeditiously and without over taxing our people." (254)

After considerable debate, the 1938 Convention adopted a new section dealing with public authorities. This section includes a provision that neither the state nor any locality could assume any liability for the indebtedness of a public authority. (255) This provision was intended to overrule Williamsburgh Savings Bank, which held that the state could assume a moral obligation to pay the debts of a commission that had been structured similarly to a public authority. (256) Convention delegates wanted to make it clear to potential creditors of an authority that any debt issued by the authority was not supported by the full faith and credit of the state or the municipality. (257) This provision appears to preclude the legislature from authorizing claims against the state for public authority debt based upon a moral obligation.

1. Union Free School District

The year after the 1938 convention, the Court of Appeals decided a case, Union Free School District No. 3 v. Town of Rye, which involved the application of the municipal gift and loan clause to a conduit-financing device. (258) The Town of Rye had been mandated by statute to borrow money to pay uncollected school taxes, without any repayment obligation on the part of the school district. (259) The Court of Appeals rejected the argument that such borrowing constituted a gift or loan of the town's credit to or in aid of the school district because the town was not borrowing for the school district's purposes. (260) As the legislature had made it a town function or purpose to pay the money for the schools, the town was borrowing for its own purposes. (261) In Union Free School District, the court came close to allowing the state to define as a function of one municipality the provision of its credit to that of another municipality, thus reducing the significance of the local gift and loan clause. (262) Union Free School District provided an important precedent for later extensions of and variations on this arrangement.

2. Comereski

The Gift and Loan provisions were next examined in Comereski v. City of Elmira. (263) In Comereski, the Elmira Parking Authority was authorized to sell bonds and to construct and operate parking lots in the city. (264) The city was authorized to contract with the Authority to pay any yearly deficits incurred by the Authority up to $25,000, with revenues to be generated from parking meters on the city's streets. (265) A divided Court of Appeals sustained the arrangement against a gift and loan challenge. (266) The court, relying on Union Free School District, ruled that the city had not contracted its credit in aid of a public corporation; instead, it had contracted to make a gift to the corporation of $25,000 a year. (267) The court majority based its decision on pragmatic necessity: "[t]he problems of a modern city can never be solved unless arrangements like these ... are upheld...." (266) The court, in language that has been oft-repeated, counseled a less than exacting review of these types of arrangements, opining that "[w]e should not strain ourselves to find illegality in such programs." (269)

Judge Fuld was unconvinced by the majority. Noting that the arrangement required the city to guarantee payment of the authority's bonds to a specified amount for a specified amount of city revenues, (270) he points out the implications of the court's reasoning:
   It is quite evident that the contract provided, not for any gift
   or loan of money or property on hand, but rather for a gift or
   loan of the city's credit, for an obligation and purpose not its
   own. The city's promise is, in essence, to make good, for an
   unspecified and indeterminate period and out of funds not in
   existence, an indebtedness incurred by the Authority. The
   circumstance that that promise is conditional in nature does
   not alter the fact that the contract calls upon the city to
   answer for the default of another. The vice of the
   arrangement is that it mortgages, for the use of others,
   future general funds of the city which it would otherwise
   have available for its own purposes, and opens the door to
   wholesale evasions of the applicable constitutional debt and
   taxing limitations. It was just this sort of situation at which
   the constitutional provision was directed. (271)


None of the four opinions written by the members of the court (272)

refer to the provision of article X, section 5 inserted by the 1938 Convention, which provides that no political subdivision of the state "shall at any time be liable for the payment of any obligations issued by such a public corporation heretofore or hereafter created." (273)

3. Wein I

Twenty years after Comereski was decided, the Court of Appeals issued its next significant decision concerning the interplay between public authorities and the gift and loan clauses. During the 1970s, an unprecedented fiscal crisis left New York City unable to pay its normal operating expenses or to meet its outstanding debt obligations. (274) In response, the legislature enacted several statutes utilizing authorities to provide necessary assistance to the cash-strapped city.

In 1974, the legislature enacted the New York City Stabilization Reserve Corporation Act, (275) which created a public authority known as the Stabilization Reserve Corporation ("SRC"). (276) The SRC was authorized to sell $520 million of its own bonds and notes, the proceeds of which were to be paid over to the city comptroller for deposit into the city's general fund. (277) The act provided that any bonds or notes issued by the SRC were obligations solely of that entity; specifically, the act stated that:
   The notes, bonds or other obligations of the corporation shall
   not be a debt of either the state or the city, and neither the
   state nor the city shall be liable thereon, nor shall they be
   payable out of any funds other than those of the corporation;
   and such notes and bonds shall contain on the face thereof a
   statement to such effect. (278)


Principal and interest payments on notes issued by the SRC would be made out of bond proceeds, and principal and interest payments on the bonds would be paid from a capital reserve fund which would be replenished annually for the purposes of paying the debt service on outstanding bonds during that current fiscal year. (279) The city was required to pay to the SRC for deposit in the capital reserve fund the amount necessary to meet the capital reserve fund requirement, provided that the city must have first appropriated funds for such purpose or that funds were otherwise made available to the city. (280) In the event the city failed to make a necessary appropriation, then the State Comptroller would pay to the SRC the amount necessary to meet the capital reserve fund requirement from amounts due to the city from the state. (281)

This financing scheme was challenged on numerous constitutional grounds, including that it required the city to invalidly give or loan its credit in aid of a public or private corporation. (282) In Wein v. City of New York (Wein I), (283) the Court of Appeals, relying on Comereski, rejected this challenge. (284) Just as the city in Comereski was not pledging its credit, but instead contracting to make a constitutionally permissible gift to a public corporation, the SRC act required the city of New York to make a gift of funds to the SRC; it in no way bound the city to the debt obligations of the authority and could not be deemed a loan of the city's credit. (285) As the court noted, "[i]f such payments [from the city to the SRC] are not made and the SRC goes under because it is unable to collect from the other sources named, the city cannot be liable to the bondholders under the provisions of the SRC Act." (286) Moreover, the appropriation of funds by the city for the capital reserve fund and the diversion of funds from the state for that purpose represented at most gifts to a public corporation, which are allowed by the local gift and loan clause. (287)

In addition to relying on Comereski, the court also appropriated its language:
   Where, as here, the statutory scheme stays within the letter
   of the Constitution (and carefully so, I believe) then we
   should heed Judge Desmond's statement in Comereski that
   "We should not strain ourselves to find illegality in such
   programs. The problems of a modern city can never be
   solved unless arrangements like these, used in other States,
   too, are upheld, unless they are patently illegal. Surely such
   devices, no longer novel, are not more suspect now than they
   were twenty years ago when, in Robertson v Zimmermann,
   we rejected a charge that this was a mere evasion of
   constitutional debt limitations, etc. Our answer was this,
   'Since the city cannot itself meet the requirements of the
   situation, the only alternative is for the state, in the exercise
   of its police power, to provide a method of constructing the
   improvements and of financing their cost.'" (288)


Judge Jasen, joined by two other judges, dissented. He believed that the funding arrangement disavowed the liability of the city while committing the city's sources of revenue from the state to discharge the obligations of the SRC, amounting to an unconstitutional commitment of the city's credit. (289) For Jasen, the statute merely perpetuated the cycle of fiscal crisis: "[i]ndeed, judicial condonation of constitutional evasion only prolongs the agony of the cities by postponing to the indefinite future a sensible reappraisal, by those charged with the responsibility, of the need and the form of constitutional limits upon local finance." (290) He challenged the independence of the SRC from the city, citing numerous incidents of overlap between the funding and personnel of the municipality and the authority. (291) Jasen noted that the legislation, while ensuring that on its face that neither the city nor state were liable for the bonds issued by the SRC, set up mechanics by which both the city, and, if necessary, the state, would take action to enforce this moral obligation. (292) He believed that the arrangement allowing the SRC to service a part of its debt with city funds formed an indirect guarantee or grant of the city's credit. (293) He thought Comereski distinguishable because it did not involve "a mere financing device and conduit for evasion of [the local finance article]." (294) Not impervious to the argument that the limitations of the constitution were inconsistent with the financial realities imposed upon the twentieth-century city, Jasen believed those issues needed to be addressed through constitutional revision, not a more permissive reading of the existing provisions:
   Finally, I am aware that constitutional limits upon debt
   contracting and taxing powers have been questioned as
   anachronistic and alternatives have been offered. A
   reappraisal of the need and the form of such limitations may
   be in order so that government might be freed of its
   nineteenth century straitjacket and permitted to perform its
   twentieth century functions. Moreover, the SRC and other
   techniques for debt ceiling avoidance erode the principle of
   constitutional supremacy. And the limits, as they now
   stand, only provide incentive for further fragmentation of
   governmental function and retard reform of the hodge-podge
   organizational setup of political subdivisions and
   governmental finance in the state. Also, I would suggest
   that the present-day confusion and multiplicity of devices
   could have been, and possibly still may be, avoided by a
   strict constitutional interpretation voiding them and
   thrusting upon the legislature and the people the obligation
   to alter the Constitution or to provide current support for the
   projects and services presently furnished through these
   various questionable, illegal and costly schemes and
   devices. (295)


4. Wein II

Wein v. State (Wein II), (296) decided the year after Wein I, addressed whether a conduit financing arrangement violated the state gift and loan clause. (297) The New York State Financial Emergency Act for the City of New York (298) appropriated $250 million to the city and $500 million to the Municipal Assistance Corporation for the City of New York ("MAC"), a public benefit corporation created solely in response to the fiscal crisis. (299) The appropriations were made from the local assistance fund, an account from which appropriations and disbursements of state aid to local governments emanated. (300) The city and MAC issued notes and bonds payable to the state in amounts equivalent to the advances. (301) The act did not provide a source for the required appropriations, so the state sold short-term tax and revenue anticipation notes in order to fund them. (302)

The Court of Appeals rejected the argument that this arrangement was an unconstitutional gift or loan of credit. (303) Because the state constitution allowed the state to give or lend its money to a municipality or public authority for a public purpose, and also to undertake short-term borrowing in advance of anticipated taxes and revenues to fund appropriations previously made, the court found that the scheme did not constitute an extension of the state's "credit." (304) The plan allowed the state to give funds directly to a public corporation, even though the state obtained those funds by incurring debt. (305) The court noted that "[t]he line is a narrow one, but one drawn by the Constitution." (306)

Notwithstanding the constitutional requirement of a balanced budget, (307) the court acknowledged the existence of flexibility to account for the reality that expenditures and revenues will never exactly equal the estimates. (308) The court reasoned that "[t]he Constitution is designed to permit survival, but it is also designed to prevent the repetition of fiscal abuse the evils of which history taught painfully to the people of this State." (309) The court also concluded that even though there had been no constitutional violation, the state, in its efforts to avoid a violation, "ha[d] been driven to the brink of valid practice." (310)

In upholding the financing plan implemented by the statute, the court acknowledged the tension between the statutory maxim that a law is invalid when its main purpose "is to evade the Constitution by 'effecting indirectly that which cannot be done directly,"' (311) and the "exceedingly strong presumption" of constitutionality. (312) The court reiterated its language from several prior decisions: "[w]e should not strain ourselves to find illegality in such statutory financing programs." (313)

As in Wein I, Judge Jasen wrote a scathing dissent (314) describing the transactions contemplated by the act as "an ill-disguised effort to evade the limitations imposed by the people of this State, in their Constitution, on the power of State government to arrange its finances." (315) He referred to the point during the 1938 Constitutional Convention debates when delegates made it clear that if the prohibition on the extension of state credit had not been applied to public corporations, cities in difficulty or authorities unable to sell securities could rush to the state for assistance, thus dissipating the state's credit, which should be reserved solely for use by the state. (316) Although Judge Jasen conceded that the constitution did not prohibit direct loans or gifts to a municipality, in this case "the State had no money to give." (317) He viewed the plan as "merely laundering city and MAC notes and bonds, taking such notes and bonds in with its left hand, and selling its notes with its right." (318) Because the Financial Emergency Act relied upon the state's credit to funnel funds to the city when the city lacked the ability to borrow such funds on its own, Jasen believed that it violated the prohibition on the loan of state credit. (319)

Judge Jasen asserted that the constitutional provision at issue was designed to ensure that "legislative and executive leadership would not take the easy way out," (320) and warned that "the holding of our court today does nothing that will discourage or deter the legislature from developing and using ingenious methods to evade the constitutional limitations, secure in knowledge that our court will not strike them down." (321)

5. Schulz

In Schulz v. State, (322) taxpayers attacked the validity of a four-year, $20 billion program designed to aid various modes of transportation. (323) The operative statute authorized both the Thruway Authority and the Metropolitan Transportation Authority to issue state-supported debt. (324) The proceeds of the bonds issued by these authorities were to be used to fund improvements to state highways and bridges, as well as for mass transit. (325) Similar to the enabling legislation examined in the Wein cases, the statute in Schulz provided that the debt issued by the authorities was not debt of the state; the debt was to be considered a special obligation of each authority secured solely by appropriations from the state, and, in the case of the Thruway Authority bonds, payments would only be made by the authority if the legislature appropriated funds for those purposes. (326)

The plaintiffs in Schulz alleged that the legislation: 1) incurred indebtedness without a voter referendum in violation of article VII, section 11 of the state constitution; 2) loaned the state's credit to the authorities in violation of article VII, section 8; and 3) assumed the debt obligation of a public corporation in violation of article X, section 5. (327)

For reasons similar to those given in the Wein cases, the Court of Appeals held that the debt was not full faith and credit debt and therefore, not governed by the referendum requirement. (328) However, the court was never required to address the merits of the second and third allegations mentioned above, because Schulz lacked standing to pursue these claims. (329) A 1975 amendment to the State Finance Law, enacted in response to an earlier court decision, removed taxpayer standing to challenge a bond authorization on grounds other than the referendum requirement. (330) The effective removal of the right of a citizen taxpayer to challenge a state bond issuance as violating the state gift and loan clause diminishes the effectiveness of the provision by closing the courthouse door on those who would be most likely to bring such a challenge. However, given the court's precedents in this area, it is unlikely the Schulz court would have invalidated the financing arrangement on gift and loan grounds.
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Title Annotation:I. A Brief History of the Text of the Gift and Loan Clauses to II. The Approach Taken By the Court of Appeals to the Gift and Loan Clauses C. Use of Public Authorities to Avoid Gift and Loan Clauses 5. Schulz, p. 2005-2052; Chief Judge Lawrence H. Cooke Sixth Annual State Constitutional Commentary Symposium: The State of State Courts
Author:Galie, Peter J.; Bopst, Christopher
Publication:Albany Law Review
Date:Jun 22, 2012
Words:12093
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