Fiscal Insight #13

Public Subsidies, Private Gain
Stop Violating the Oregon Constitution
by Professor Dale F. Rubin

(1) You are an honest, law-abiding, tax-paying citizen who has never had an interest in professional sports. Your city council decides to incur debt and spend millions of dollars to persuade the wealthy owner of a professional sports team to locate in the city in which you live. You are informed that the price of the ticket to attend a game in which the team is involved is so high that you could never afford to go even if you wanted. Your children, who attend public schools, are not being properly educated because schools are not adequately funded.

(2) You are the owner of a small retail outlet and a believer in the free enterprise system where business people rely on their individual ingenuity to become successful. Your state legislature decides to incur debt and spend millions of taxpayer dollars to persuade the board of directors of a major corporation to construct a large retail franchise operation in your city, which puts you out of business.

By now you realize that the above examples are not really hypothetical. They are situations which are in fact occurring repeatedly throughout the country. How can such public expenditures be justified? If you ask a legislator or petition the court for an explanation, the answer will be the same: the expenditures are legal because they are expended for a "public purpose."

But this response is simply wrong. The Public Purpose Doctrine was not created to provide the legislators an excuse to spend taxpayer dollars on whatever project they choose. Furthermore, the Oregon Constitution contains clear and unambiguous clauses that explicitly prohibit the legislature and political subdivisions from giving any aid to private individuals or corporations, which of course includes professional sports teams and powerful corporate franchisors. In fact, the courts' misuse of the Public Purpose Doctrine has enabled public entities to spend public dollars on almost any private project in spite of the specific constitutional prohibition.

Article XI, Sections 7 and 9, of the Oregon Constitution prohibit the State and its political subdivisions from pledging its credit in aid of any public or private person, company or corporation, or making any donation or grant to such persons or entities:

Section 7. Credit of state not to be loaned-limitation upon power of contracting debts. The Legislative Assembly shall not lend the credit of the state...

Section 9. Limitations on powers of county or city to assist corporations. No county, city, town or other municipal corporation, by vote of its citizens, or otherwise, shall become a stockholder in any joint company, corporation or association, whatever, or raise money for, or loan its credit to, or in aid of, any such company, corporation or association.

Sections 7 and 9 are commonly referred to as "Lending of Credit" provisions. Similar provisions are contained in at least forty-five of the fifty state constitutions.

Lending of credit provisions and the public purpose doctrine were intended to limit the power of the legislature to spend tax dollars.

This is an extremely important point. The governing body does not have unfettered discretion to spend public monies. An examination of the history of the Oregon Constitutional Lending of Credit Provisions and the early court decisions amply support this assertion. The provisions were inserted in the original Constitution of Oregon in 1857 as a result of the disastrous experience that the state had endured in attempting to finance internal improvements, particularly railroad construction by private railroad companies. Witness the attitude of certain Oregon legislators in the Oregon Constitutional debates in 1857 concerning the power to incur debt and the attitude toward corporations in general:

Mr. Chadwick said we were peculiarly situated here. Towns spring up upon a temporary basis in some instances. Debts were incurred in the heyday of their prosperity by sojourners and irresponsible inhabitants, to be paid when the bubble has collapsed, by those who may come after them. We ought to take heed from California, and shut the door against this gigantic evil. Needy and healthy improvements could be prosecuted without this power to contract debt -- a power almost certain to be abused. He was not opposed to improvements, but wanted them to be on an honest and healthy basis.[1]

[Mr. Boise]...wished to see incorporated companies placed under disabilities. He referred at length to their history in Massachusetts and New England, and expressed the opinion that the people of those states would today possess more personal independence, and more physical, moral and intellectual greatness, had they never been cursed with their gigantic manufacturing establishments. They enslaved and impoverished the operatives, and governed, as with a rod of iron, the state. He believed it would be better for Oregon to do its manufacturing by individual enterprise.[2]

The Oregon Supreme Court also acknowledged the unsavory history of state involvement in internal improvements in Carruthers v. Port of Astoria[3] (1968), and stated:

In the 19th Century, to induce railroads and sometimes canal companies to build to or through them, many municipal corporations gave them tax money, credit or other valuable advantages. Economic disaster frequently followed when the railroad failed in its obligations. The obligations of the municipalities were general in character, and the general taxpayers were required to pay for the defaults. Restrictive provisions such as 7 and 9, Art. XI of the Oregon Constitution were enacted to protect the public credit against such raids. They were placed in constitutions in order that pressures of the moment could not overwhelm legislatures, municipal governing boards and councils, and even local elections. Where restrictive provisions were not placed in constitutions, similar restrictions were enforced by the courts through the device of restricting use of public money or credit to public purposes.[4] [Emphasis added]

The Carruthers case will be discussed in more detail later in this paper.

It cannot be overly emphasized that the conditions which gave rise to the insertion of the lending of credit of provisions in the Oregon Constitution were not peculiar to Oregon. Excessive state and municipal debt resulting from public involvement in railroad construction was a nationwide scandal. Thus, various other state supreme courts asserted similar rationales for the insertion of lending of credit provisions in their respective state constitutions.

Down South, for example, in Bailey v. City of Tampa[5] (1926), the Florida Supreme Court stated:

The reason for this [the 1875 lending of credit amendment] was that during the years immediately preceding its adoption, the state and many of its counties, cities, and towns had by legislative enactment become stockholders or bondholders in, and had in other ways loaned their credit to, and had become interested in the organization and operation of, railroads, banks, and other commercial institutions. Many of these institutions were poorly managed, and either failed or became heavily involved, and, as a result, the state, counties, and cities interested in them became responsible for their debts and other obligations. These obligations fell ultimately on the taxpayers. Hence the amendment, the essence of which was to restrict the activities and functions of the state, county, and municipality to that of government, and forbid their engaging directly or indirectly in commercial enterprises for profit.[6] [Emphasis added]

The Maryland Supreme Court, as late as 1976, spoke to the issue in Secretary of Transportation v. Mancuso[7] (1976) when it stated:

The debates of the Constitution Convention of 1850 abound with references to the difficulty of marketing State bonds due to the State's poor credit condition at that time. This situation resulted from the State's extension of long-term credit to railroad and canal companies from 1820 to 1840, generally by means of the State's subscription to the securities of the companies. By 1841 The State's financial security was threatened by the failure of the foregoing investments (or general revenues) to produce funds sufficient to pay the State's debt service requirements.

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It is thus clear that one of the purposes of the constitutional debt provision was to guard against future credit abuses by including within its purview any evidence of State indebtedness which is secured by its taxing power.[8] [Emphasis added]

The situation in Washington state was no different. In the case of Rauch v. Chapman[9] (1897), the court opined:

A recurrence to the history of the times will show that many of the counties and municipalities had become largely indebted, beyond their capacity to pay for public improvements of various kinds. In many of these states for a considerable period of time, the counties and municipalities aided railway building, and many of them became bankrupt by reasons of the obligations and liabilities incurred in such aid of various other public improvements which were deemed advantageous in the rapid development of the territory included within the county. Hence another limitation upon the power of counties and other municipalities to incur indebtedness is found in these recent constitutions, which found expression in that of our state in Section 7 of Article 8 [the Washington lending of credit provision].[10] [Emphasis added.]

Various cases from around the country have been quoted here to impress upon the reader the gravity of the conditions which formed the basis for the lending of credit provisions. Massive debt, corruption, waste and unsavory political practices had a severe impact nationally. Can anyone seriously argue that similar conditions do not exist today?

It is important to emphasize some of the wording of the Oregon Lending of Credit Provisions:

Section 7: "The Legislative Assembly shall not lend the credit of the state...."

Section 9: "No county, city ... shall raise money for, or loan its credit to...."

The language in these provisions is absolute: no means no. Oregon courts have long recognized that constitutional provisions should be given the meaning the drafters intended. In Wormington et al. v. Pierce[11] (1892), which involved an attempt by the county of Umatilla to issue warrants in excess of the debt amount specified by the Oregon Constitution, the court stated:

These citations [referring in part to the lending of credit provisions] are sufficient to show the spirit which pervades the constitution, and to indicate the earness[sic] solicitude of its framers to guard the people whose fundamental law it is against the burdens of corporate debts and 'entangling alliances' with corporations. But in giving effect to that provision [the debt ceiling provision] of the constitution under consideration we need not resort to extrinsic matters, nor even to other portions of the instrument. Its language is plain and mandatory. Words, when found in a constitution, as well as in a statute, are to be understood in their ordinary signification. That which is plainly expressed admits of no construction.[12]

Considering the history which gave rise to the insertion of the lending of credit provisions and the plain language of the provisions, can there be any other interpretation but that of a virtually absolute prohibition of public aid to private corporations?

Unfortunately, the answer to the aforementioned question is fraught with ambiguity. While Oregon courts have referred to the lending of credit provisions and prohibited the expenditure of public funds, such courts, seemingly smitten by judicial schizophrenia, have created exceptions to the constitutional provisions and allowed such expenditures in the same or similar situations. An examination of the cases that applied the language of the lending of credit provisions and prohibited aid to private corporations stands in stark contrast to the facile reasoning employed by other courts to justify such aid.

With respect to those cases that have prohibited such aid, the case of Hunter v. City of Roseburg[13] (1916) is a good starting point. This case involved the constitutionality of an act passed by the electorate of the City of Roseburg to authorize the issuance of bonds in the amount of $300,000 for the purpose of constructing a railway, the primary beneficiary of which would be a lumber company. There is no question that the town would have benefitted from the railway. Nevertheless, the Oregon Supreme Court, exhibiting cogent and compelling logic, determined that the act was unconstitutional:

...can it be said that the city is not attempting to raise money for, or loan its credit to, or in aid of, the corporation? Viewed from any standpoint indicated by the contract it is a plain violation of our organic law.

Heeding the language of the Hunter case, the Court in Hauke v. Ten Brook[14] (1927) invalidated a city charter amendment which empowered the City of Astoria to release any liens or assessments imposed on the Astoria Box and Paper Company in an effort to assist the company in rebuilding its fire-ravaged waterfront. The Court stated:

We are not unmindful of the heavy burdens which the great calamity of fire has inflicted upon the citizens of Astoria and sympathize with them in every lawful effort to rehabilitate their community, but there are well defined limitations beyond which the city cannot go and therefore beyond which this court cannot go to aid them, and to do so would bind this court by a precedent which, while it might work a temporary benefit to that community, would in the end be detrimental to the best interests of the people as a whole. We hold the charter amendment wholly void and of no effect.[15] [Emphasis added].

In Barde v. Funk[16] (1933), the Oregon Supreme Court faced the question of whether the City of Portland could issue bonds the proceeds of which would be used as security to redeem scrip which had been previously issued by "public-spirited citizens" engaged in relief efforts during the depression. The purpose of the plan was to give some relief to the unemployed during the depression. The Court held that the use of bond revenues to redeem scrip violated Art. XI Section 9:

As we understood the oral argument of plaintiffs [city of Portland], the issuance of the scrip in suit is not deemed to be the authorized act of the officials of the county or the city, but only the act of public-spirited citizens who seek to use the city officers as agents merely in carrying out the enterprise. This renders the obligations incurred by the issuance and circulation of such scrip mere private debts; and certainly there is no authority in the charter or elsewhere for pledging the credit of the city of Portland for the payment of private indebtedness.[17]

The Barde case is significant in yet another respect. The court also spoke to the duty of the court to follow the wording of the constitution irrespective of whether the decision has unpleasant effects. While acknowledging that its decision would have a deleterious effect on the unemployed, the Court stated:

This court is composed of men, each of whom has felt the biting effect of the general depression, and each of whom sympathizes with, and to the extent of his ability contributes to, the relief of the unemployed.... We sympathize with the unemployed, but our sympathy cannot alter the course of our sworn duty to declare the law as it is and not as the distressing circumstances attendant upon the case at bar cause us to wish it to be. We are unable to construe the charter provision in suit as conferring any authority upon the city to pledge the bonds in the manner sought by the suit herein or at all.[18]

Finally, the Oregon Attorney General's Office has applied the lending of credit provisions in a literal context. In response to an agency inquiry whether contributions to the Space Age Industrial Park Development Association, a private corporation, were in accordance with the constitutional lending of credit provisions, the Attorney General stated:

The most that can be said here is that clearly the section of the constitution in question was meant to prevent each of the possibilities suggested by the cases cited, [to prevent speculation and/or the investment of public funds in private enterprise].

In fact, Article XI [section] 9, was intended to prevent the union of public and private capital in any enterprise whatever.[19] [Emphasis added.]

In spite of the country's pathetic history involving the commingling of public and private funds, in spite of the considerable constitutional legislative intent indicating unflinching support for the insertion of lending of credit provisions, and in spite of the fact that early Oregon courts weighed in heavily against aid to private corporations, modern court decisions have created such broad exceptions to the lending of credit provisions that such provisions currently are virtually meaningless.

Revenue Bond Exception

Thus, in Carruthers v. Port of Astoria[20] (1968), which involved the issuance by the port authority of self-liquidating revenue bonds to finance the building of wharves and a plant to be leased to a private corporation, the court declared that the bond issue did not constitute a lending of credit in violation of Art XI Section 9. Since the bonds were to be repaid from revenue derived from the "rentals and other moneys derived from the lease of the project" and not through an issue of general obligation bonds, the public credit was not at risk and therefore there was no constitutional violation.[21]

Many other state courts have taken the same position. But the logic of the minority of courts that have held such transactions to be covered by the constitutional prohibition appears irrefutable.

In State ex rel. Beck v. City of York[22] (1957), which was cited in Carruthers, the Nebraska Supreme Court was called upon to decide the constitutionality of a proposed municipal revenue bond issue, the proceeds of which would be used to construct and leaseback to a private firm various industrial buildings. The Court held the scheme unconstitutional and in the process made several pronouncements that are particularly applicable to revenue bonds:

It is true that the revenue bonds are not a general liability of the city and they are not subject to payment through the exercise of the taxing power. But they do cause burdens upon the city with reference to their issuance and payment. The city and its officers are charged with the duty of fixing and collecting the rentals from which the revenue bonds are to be paid.... The city is the payer of the bonds and it is primarily liable for their payment. The bonds become obligations of the city. The fact that the means of payment is limited does not make it any less so.

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If evidences of indebtedness by interested private persons are inadequate and revenue bonds of the city are sufficient, either the credit of the city has been extended or their purchasers are victims of a base delusion. It seems clear to us that the revenue bonds are issued by the city in its own name to give them a marketability and value which they would not otherwise possess. If their issuance by the city is an inducement to industry, some benefits must be conferred, or it would be no inducement at all.[23] [Emphasis added.]

Even more poignant is the language of the United States Supreme Court in Macallen Co. v. Commonwealth of Massachusetts[24] (1929):

...[W]hat cannot be done directly because of a constitutional restriction cannot be accomplished indirectly by legislation which accomplishes the same result.... Constitutional provisions, whether operating by way of grant or limitation, are to be enforced according to their letter and spirit, and cannot be evaded by legislation which, though not in terms trespassing on the letter, yet in substance and effect destroy the grant or limitation.[25]

Clearly the issuance of revenue bonds is an attempt to skirt around the lending of credit provisions. Furthermore, as the Beck case stated above, the language of the constitutional provisions is aimed at prohibiting the public entity from using its status as a public body from conferring a benefit on a private corporation. The issuance of revenue bonds by the public entity is the kind of benefit that the constitution prohibits.

The Public Purpose Doctrine

The public purpose doctrine was initially pronounced in 1853 in the case of Sharpless v.Mayor of Pennsylvania.[26] This case involved a taxpayer lawsuit against the City of Philadelphia to prohibit the city from issuing bonds, the proceeds of which would be used to purchase railroad stock. The taxpayer was concerned that the incurring of debt by the public entity for the purpose of investing in private enterprise was not a public purpose. The court allowed the money to be used to purchase the stock but only because the court deemed the railroad to be performing a public function, namely the construction of an internal improvement which the public entity traditionally performed: "A Railroad is a public highway for the public benefit, and the right of a corporation to exact a uniform, reasonable, stipulated toll from those who pass over it, does not make its main use a private one".[27] The court was emphatic, however, that public aid to private corporations not performing traditionally public sector projects was not for a public purpose:

But the right of eminent domain cannot be used for private purposes; and therefore if a railroad, canal, or turnpike, when made by a corporation, is a mere private enterprise, like the building of a tavern, store, mill, or blacksmith's shop [the use of eminent domain is unconstitutional].[28]

Three subsequent cases, The People ex rel, The Detroit and Howell Railroad Co. v. The Township Board of Salem[29] (1870) (the opinion of which was written by the legendary Michiganjurist Thomas Cooley), Bay City v. The State Treasurer[30] (1871) (also a Justice Cooley opinion) and Loan Association v. Topeka[31] (decided in 1874 by the United States Supreme Court) placed a much more restrictive interpretation on the Public Purpose Doctrine than did the Sharpless case.

In The People v. Salem, which involved a plan to issue bonds to aid in the construction of a railway to be owned by a private corporation, Justice Cooley stated:

It was at one time in this State deemed true policy that the government should supply railroad facilities to the traveling and commercial public, and while that policy prevailed, the right of taxation for the purpose was unquestionable. Our policy in that respect has changed: railroads are no longer public works but private property, individuals and not the State own and control them for their own profit; the public may reap many and large benefits from them, and indeed are expected to do so, but only incidentally, and only as they might reap similar benefits from other modes of investing private capital. It is no longer politic that the State should supply the means of locomotion by rail to the people, and this species of work is therefore remitted to the care of private enterprise, and cannot be aided by the public funds, any more than any other private undertaking which in like manner falls outside the line of distinction indicated.[32] [Emphasis added]

In Bay City v. The State Treasurer[33] (1871), which also involved bond aid to railroads, the Court struck down a scheme as not being for a public purpose in that the plan involved the payment of public monies to a private corporation. Justice Cooley's reason for denying the aid seems prophetic:

. . . these provisions in our constitution do preclude the state from loaning the public credit to private corporations, and from imposing taxation upon its citizens or any portion thereof in aid of the construction of railroads. So the people supposed when the constitution was adopted. Constitutions do not change with the varying tides of public opinion and desire; and it cannot be permissible to the courts that in order to aid evasions and circumventions, they shall subject these instruments ... to a literal and technical construction, as if they were great public enemies standing in the way of progress, and the duty of every good citizen was to get around their provisions whenever convenient. They must construe them as the people did in their adoption. . . .[34]

Finally, the ruling of the United State Supreme Court in Loan Association v. Topeka[35] (1874) should remove all doubt that public monies expended to aid private enterprise are not for a public purpose and are therefore unconstitutional. The Topeka case involved an effort by the City of Topeka to issue bonds payable to a private corporation to encourage the corporation to locate in the city. The Supreme Court, in deciding that the issuance of the bonds was not for a public purpose stated:

But in the case before us, in which the towns are authorized to contribute aid by way of taxation to any class of manufacturers, there is no difficulty in holding that this is not such a public purpose as we have been considering. If it be said that a benefit results to the local public of a town by establishing manufacturers, the same may be said of any other business or pursuit which employs capital or labor.... No line can be drawn in favor of the manufacturer which would not open the coffers of the public treasury to the importunities of two-thirds of the business men of the city or town.[36] [Emphasis added.]

Obviously, these landmark cases were decidedly against public aid to private corporations. As Professor Ellis Waldron stated in his work, "The Public Purpose Doctrine of Taxation":

The proposition that private interests might not enjoy public largesse was a major corollary implicit in the commonly accepted argument that railroads might benefit from public funds because they further public purposes. [37]

Equally as obvious is the willingness of these courts to play an active role in the determination of what is a public purpose.

How have modern Oregon courts applied the Public Purpose Doctrine? The answer is that the courts, by equating public purpose with public benefit have so broadened the scope of the doctrine as to render it ineffective as a tool to limit the power of the public entity to spend tax dollars. In Jarvill v. City of Eugene[38] (1980), the city established a downtown development district and granted free parking to the public and advertising for downtown businesses. In response to the contention that the city was using public tax money for private purposes the Court stated:

We agree with the circuit court that the City has shown that there would be a general benefit to the economy of the City as a result of the economic improvement of the City's central business district. Thus the City's program of free parking and District advertising serves a legitimate public purpose.[39] [Emphasis added].

But is this the message that is to be gleaned from the Sharpless, Salem and Topeka cases? Were not these cases very specific in prohibiting aid to private corporations? And did not Topeka expressly prohibit the equating of public purpose with public benefit? If the Oregon judiciary would give proper respect to the considerable and well-thought-out-case precedent, the Public Purpose Doctrine would still have some teeth in it and properly serve its purpose of imposing a limitation on the power of the governing body to spend tax dollars.

Finally, the total responsibility for the subsidies extended by public entities to private corporations does not rest solely with irresponsible court rulings. A large share of the burden should be borne by those public officials who enact the legislation authorizing the corporate give-a-ways. But as former Senator Sam Ervin said:

Every Congressman is bound by his oath to support the Constitution, and to determine to the best of his ability whether proposed legislation is constitutional when he casts his vote in respect to it."[40]

The same can be said of state and local public officials with respect to the Oregon constitutional lending of credit provisions.

Furthermore, in response to legislative protestations that public officials only do what the courts allow, heed the words of Andrew Jackson, spoken over 150 years ago:

If the opinion of the Supreme Court covered the whole ground of this act [referring to the act to recharter the U.S. Bank], it ought not to control the coordinate authorities of this Government. The Congress, the Executive, and the Court must each for itself be guided by its own opinion of the Constitution. Each public officer who takes an oath to support the Constitution swears that he will support it as he understands it, and not as it is understood by others. It is as much the duty of the House of Representatives, of the Senate, and of the President to decide upon the constitutionality of any bill or resolution which may be presented to them for passage or approval as it is of the supreme court judges when it may be brought before them for judicial decision. The opinion of the judges has no more authority over Congress than the opinion of Congress has over the judges, and on that point the President is independent of both. The authority of the Supreme Court must not therefore, be permitted to control the Congress or the Executive when acting in their legislative capacities, but to have only such influence as the force of their reasoning may deserve.[41][Emphasis added.]

Conclusion