Schulz v. State

Restrictions on State liability must be included in any cooperative agreements flowing from the Act:

"Each dedicated highway and bridge trust fund cooperative agreement or agreements pursuant to this section shall contain a clause that such agreement or agreements of the state thereunder are not a debt of the state and that such agreement or agreements shall be deemed executory only to the extent of the monies available to the state and no liability on account thereof shall be incurred by the state beyond the monies available for the purpose thereof’ (L 1993, ch 56, § 33, adding Highway Law § 10-e [5]; see also, L 1993, ch 56, §§ 16, 19, 34; Public Authorities Law § 385 [1] [dj; § 386 [2]; L 1991, ch 329, § 11 [d]).

Further, Thruway Authority bonds issued pursuant to the Act are payable only by legislative appropriations from the Highway Fund and no other source:

"Such obligations * * * shall be special obligations of the authority secured by and payable solely out of amounts appropriated by the legislature as authorized pursuant to section eight-nine-b of the state finance law without recourse against any other assets, revenues or funds of or other payments due to the authority” (Public Authorities Law § 385 [1] [c], added by L 1993, ch 56, § 34; see also, Public Authorities Law § 385 [1] [d]).

Finally, the Act specifies that the State may assume the obligations of the Authority or substitute State security for the obligations of the Authority only upon constitutional amendment (L 1993, ch 56, § 34, adding Public Authorities Law § 385 [10]).

The MTA

With regard to the MTA, the Act sets up a $9.56 billion capital funding program for the five-year period ending December 31, 1996. The existing — but not previously funded— Mass Transportation Trust Fund and the Metropolitan Mass

The Act does not require the MTA to issue bonds, but if it chooses to do so, it may use the Tax Fund for security and debt service. Any bonds issued by the MTA are subject to the same statutory provisos on State liability as the Thruway Authority bonds. Tax Fund money not used in connection with issuance of bonds can be applied to operating and capital costs of MTA subsidiaries (L 1993, ch 56, §§ 6, 7, 10; Public Authorities Law § 1269 [12]; § 1270-c; State Finance Law § 89-c).

Asserting voter standing, plaintiffs commenced this action on May 24, 1993, alleging that the Act misuses public authorities to circumvent constitutional limitations on contracting debt, including the prohibitions against contracting State debt without a public referendum (NY Const, art VII, § 11), the lending of credit to public corporations (NY Const, art VII, § 8), and assumption of liability of debt obligation of public corporations (NY Const, art X, § 5).

On cross motions for summary judgment, Supreme Court concluded that under Matter of Schulz v State of New York ( 81 NY2d 336 ), plaintiffs lacked standing to challenge the legislation as violative of any constitutional provision other than article VII, § 11 and, on the strength of Wein v City of New York ( 36 NY2d 610 [Wein I]), upheld the statute as constitutional. The Appellate Division affirmed those conclusions, as do we.

Because plaintiffs assert voter standing, Supreme Court correctly held that the only cognizable challenge to the Act is under article VII, § 11, the constitutional mandate that State contracts for debt be submitted for public referendum. Plaintiffs contend first that debt contracted by the public authorities is indistinguishable from debt contracted by the State and thus within the referendum requirement. Alternatively, they argue that the Act — by pledging appropriation of public revenues — compromises the legal independence of the public au

Before proceeding to an examination of each claim, we note that plaintiffs’ burden is a heavy one. It is true that when the main purpose of a statute is to effect " 'indirectly that which cannot be done directly, the act is to that extent void, because it violates the spirit of the fundamental law’ ” (Wein v State of New York, 39 NY2d 136 , 145 [Wein II], quoting People ex rel. Burby v Howland, 155 NY 270 , 280). It is also true, however, that enactments of the Legislature — a coequal branch of government — enjoy a strong presumption of constitutionality. In particular, we give deference to public funding programs essential to addressing the problems of modern life, unless such programs are "patently illegal” (see, Hotel Dorset Co. v Trust for Cultural Resources, 46 NY2d 358 , 369-370, quoting Comereski v City of Elmira, 308 NY 248 , 254).

Plaintiffs have not satisfied their burden of proving unconstitutionality beyond a reasonable doubt.

Ill

In considering plaintiffs’ first contention — that the debt of the Authorities is debt of the State — we begin analysis with a history of the referendum requirement and the origin of public authorities.

The State Constitution of 1777, our first, provided that the legislative power of this State is to be vested in the Senate and Assembly (art II). The unlimited grant of legislative authority — when exercised in the arena of borrowing and spending — led to abuses and prompted a movement for reform of State borrowing practices (see, Matter of Schulz v State of New York, 81 NY2d 336 , 346; People v Westchester County Natl. Bank, 231 NY 465 , 471-473). Of particular concern, and the impetus for change, was the lending of public credit to private, "irresponsible” corporations. Following the onset of economic depression in 1837, private railroad corporations defaulted on obligations that had been assumed on the strength of liberally granted State credit. The State assumed

The precursor to the referendum requirement of article VII, § 11, proposed in 1841 by Assembly Member Arphaxed Loomis of Herkimer County, was adopted under the Constitution of 1846 (former art VII, § 12) as part of a sweeping reform of public borrowing practices, in an effort to protect the State from the uncertain and possibly disastrous consequences of incurring future liabilities — "liabilities easy for a current generation to project but a burden on future generations” (Wein II, 39 NY2d, at 144, supra). Known as "the people’s resolution,” the amendment reserved to voters the power to determine, by referendum, whether a proposed law creating debt would take effect (2 Lincoln, op. cit, at 73-83). In its present form, the Constitution provides:

"Except the debts specified in sections 9 and 10 of this article, no debt shall be hereafter contracted by or in behalf of the state, unless such debt shall be authorized by law, for some single work or purpose, to be distinctly specified therein. No such law shall take effect until it shall, at a general election, have been submitted to the people, and have received a majority of all the votes cast for it and against it at such election nor shall it be submitted to be voted on within three months after its passage nor at any general election when any other law or any bill shall be submitted to be voted for or against.

"The legislature may, at any time after the approval of such law by the people, if no debt shall have been contracted in pursuance thereof, repeal the same; and may at any time, by law, forbid the contracting of any further debt or liability under such law” (art VII, § 11).

Long-term State obligations are the concern of article VII, §11 (Wein v Levitt, 42 NY2d 300 , 304 [Wein III]). By article VII, §9, the State may validly contract short-term debt in authentic anticipation of the receipt of taxes and revenues, for the purposes and within the amounts of appropriations previously made, if repaid within one year (NY Const, art VII, § 9;

Shortly after the turn of the century, the Legislature devised a new vehicle for funding public works projects that appeared to insulate the State from the burden of long-term debt: legislative creation of legally separate public benefit corporations, known as public authorities, to discharge particular functions. The first such entity was the Port of New York Authority, created in 1921 (see, Collins v Manhattan & Bronx Surface Tr. Operating Auth., 62 NY2d 361 , 367). In theory, a public authority would be self-supporting, able to meet debt obligations through revenues obtained from its own valuable assets, such as fares and user fees. Such public benefit corporations would separate their administrative and fiscal functions from those of the State (1929 Opns Atty Gen 223, 224), to " 'protect the State from liability and enable public projects to be carried on free from restrictions otherwise applicable’ ” (Matter of Plumbing, Heating, Piping & Air Conditioning Contrs. Assn. v New York State Thruway Auth., 5 NY2d 420 , 423, citing 1951 Opns Atty Gen 130, 132).

We rejected an early challenge to the effectiveness of language disclaiming the State’s liability for public authority debts, where bonds were secured solely by the revenues of the issuing authority (see, Robertson v Zimmermann, 268 NY 52 , 62). Although public authority debt was not legally binding on the State, we nevertheless recognized in Williamsburgh Sav. Bank v State of New York ( 243 NY 231 ) that the State might choose to honor a liability as a moral obligation. We stated, however, that whether to recognize a moral obligation is within the discretion of the State:

"[I]t 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 * * * the exercise of this choice cannot be delegated to any one else[.] * * * 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” ( 243 NY, at 244-245 , supra [emphasis added]).

In Williamsburgh> the State had indicated its intent to allow enforcement of a moral obligation, permitting judicial determination of a claim (id.; see also, Board of Supervisors v State of New York, 153 NY 279 , 293 [unenforceable moral obligation paid by the State]).

To prevent the State from assuming public authority debt as a moral obligation — and to overrule constitutionally the effect of Williamsburgh — the 1938 Constitution (our present Constitution) explicitly empowered public authorities to issue bonds and incur debt but prevented the State from assuming that liability:

"Neither the state nor any political subdivision thereof shall at any time be liable for the payment of any obligations issued by such a public corporation heretofore or hereafter created, nor may the legislature accept, authorize acceptance of or impose such liability upon the state or any political subdivision thereof; but the state or a political subdivision thereof may, if authorized by the legislature, acquire the properties of any such corporation and pay the indebtedness thereof’ (NY Const, art X, § 5; see, 3 Revised Record of 1938 Constitutional Convention of State of NY, at 2259-2283; Galie, New York State Constitution, at 226-228).

To limit proliferation of public authorities, the new Constitution specified that only the Legislature, through special act, could create them (see, City of Rye v Metropolitan Transp. Auth., 24 NY2d 627 ).

Those who spoke in opposition to allowing public authorities expansive discretion in performing formerly State functions were in the minority. Debate at the Constitutional Convention included discussion of whether the State would be liable in the event an authority were unable to meet its obligations, and the language of the amendment was tailored to make clear that it would not. The Chair of the Committee on the Legislature and its Powers, George Fearon, supported the new provision, stating, " T believe that when people buy [authority] bonds they should know definitely and certainly that the credit of the State of New York and that the credit of the municipality is not behind those bonds. There should not be any question about it’ ” (Quirk and Wein, A Short Constitu

The bonds authorized by the Act were not labelled "moral obligation bonds” by the Legislature, and entirely apart from nomenclature the Act does not create such an obligation. The Act requires a statement on the face of the bonds that they are not a debt of the State and are payable only out of the Authorities’ funds. Moreover, the Act disavows existence of a moral obligation on the part of the State to appropriate revenues in the future. These disclaimers — particularly when read in light of the constitutional prohibition against State assumption of authority debt (NY Const, art X, § 5) — are sufficient to remove any reasonable expectation on the part of bondholders that the State will guarantee return in the event of default on the part of the Authority or that the bonds place them in privity with the State (see, Matter of Mullane v McKenzie, 269 NY 369 , 376, rearg denied 270 NY 563 , supra [no moral obligation arises where State acting in accordance with its legal rights]).

Plaintiffs’ heavy reliance on Williamsburgh ( 243 NY 231 , supra) as establishing the possibility that the State could be held liable on a moral obligation is unavailing. First — unlike the Act — the statute at issue in Williamsburgh expressly recognized the possibility of a moral obligation. Second, article X, § 5 was adopted after Williamsburgh precisely to overrule constitutionally the possibility of the State assuming a moral obligation as to debt of a public authority.

Most critically, a moral obligation cannot be judicially imposed upon the State in the absence of its consent to be so bound (see, Williamsburgh, 243 NY, at 247 , supra). Even where a moral obligation exists, that circumstance creates no enforceable right on behalf of the aggrieved party. Rather,

In short, a moral obligation does not create "debt,” since it creates no enforceable right on the part of the one to whom the obligation is owed. Moreover, the Act could not make plainer that the State recognizes no moral obligation on its part to continue appropriations. Plaintiffs’ claim that the Act creates a moral obligation to pay which falls within the constitutional definition of "debt” therefore also must fail.

V

Plaintiffs point as well to the State’s need to protect our economy as binding future Legislatures to continue with annual appropriations to the Funds for the life of the bonds. They claim that, in reality, the bonds are backed by the State’s full faith and credit because the consequences of default would be ruinous, assuring that appropriations will be made. Indeed, plaintiffs document instances where State officials appear to have characterized the future appropriations as legal obligations of the State, despite the Act’s disclaimers. Thus, in plaintiffs’ view, the Act obligates the State to continue appropriations for the life of the bonds — some 30 years —creating long-term State "debt.”

We have previously held that a proposal to fund in a subsequent year, subject to legislative appropriation and explicit disclaimer, does not create legally binding debt (Levy v McClellan, 196 NY 178 , 195-196; see also, Public Util. Dist. No. 1 v Washington Pub. Power Supply Sys., 104 Wash 2d 353 , 370, 705 P2d 1195 , 1207 [WPPS bonds do not constitute legal or equitable pledge upon State]). In People ex rel. Hopkins v Board of Supervisors ( 52 NY 556 , 564, supra), we observed that while the Legislature might endeavor to incur future liabilities, to be appropriated on a year-to-year basis without submitting the spending plan to the people, "[n]o harm or loss has or can come from this practice.” Such spending plans are effectual only to the extent subsequent Legislatures indeed do "give effect to them by providing the means and directing their payment, but the discretion and responsibility is with them as if no former appropriations had been made. No duty

Our constitutional limitations, however, have consistently been construed as addressing legally binding debt. As in Wein I, where we upheld subsidies for debt service on bonds issued by the Stabilization Reserve Corporation contingent on annual appropriation, indebtedness is precluded by the very terms of chapter 56, as well as the prohibition of article X, § 5 against State assumption of authority debt ( 36 NY2d, at 617 ). We rejected in Wein I the suggestion that a gift of money to a public authority — upheld in Comereski ( 308 NY, at 253-254 )— violated the letter or spirit of the constitutional limitations on contracting debt (Wein I, 36 NY2d, at 616 , supra).

Next, in Wein II ( 39 NY2d 136 , supra), we upheld a plan giving aid to New York City and the Municipal Assistance Corporation that would be funded through borrowing pursuant to the short-term debt provision of article VII, § 9 as not violating the constitutional prohibition against giving or lending credit of the State. In Wein III ( 42 NY2d 300 , supra), a law promising to indemnify State officers from any claims arising from purchase of risky authority bonds was not "borrowing” of any kind, but rather "a contingent cost of doing State business payable routinely out of the general fund” ( 42 NY2d, at 305 ).

Apart from constituting a line of precedents upon which reliance has been placed in the financial marketplace, these cases established that a contractual obligation on the part of government to make future "gifts” to a special fund created to retire debt of an independent public authority is not offensive to article VII, § 8; article VIII, § 1; or article X, § 5 of the Constitution.

We define "debt” no differently for purposes of article VII, § 11. While the Legislature might make the appropriations to the Funds, to be used in turn to service the Authorities’ debt, it is not bound to do so. Should it fail to do so, and the Authority default, the State is not liable to the bondholders under the provisions of the Act. Because the State does not become indebted, the financing subject to appropriation does not constitute the lending of credit or assumption of the

Plaintiffs’ third argument therefore must fail as well.

I

n sum, neutral principles of law and consistent precedents of this Court, upon which decades of commercial transactions have been premised, lead us to uphold the validity of the particular legislation before us. If (as plaintiffs urge) modern ingenuity, even gimmickry, have in fact stretched the words of the Constitution beyond the point of prudence, that plea for reform in State borrowing practices and policy is appropriately directed to the public arena, where indeed it is now under serious consideration (see, NY Senate Bill S 4359, replacing Assembly Bill A 7586 [Apr. 4, 1993]; Joint Press Release of Governor and Comptroller [Mar. 15, 1994]; Opn of Atty Gen to Legislature re NY Senate Bill S 4359 [May 11, 1993]).

We have reviewed plaintiffs’ remaining claims, and conclude they lack merit.

Accordingly, the order of the Appellate Division should be affirmed, without costs.

Judges Simons, Titone, Bellacosa, Smith and Ciparick concur; Judge Levine taking no part.

Order affirmed, without costs.