Some have claimed that it is necessary to amend the Washington State Constitution in order to establish a public bank in our State. Other legal scholars have noted that there is nothing in our State Constitution to prohibit our State from creating a Public Bank and therefore it is NOT necessary to amend our Constitution to have a public bank similar to the one in North Dakota. In this analysis, we will address both sides of this debate – including a review of recent Supreme Court opinions clarifying the Constitutional issues at stake. These court opinions of our State Constitution make it clear that a Constitutional amendment is NOT needed – but ONLY provided that the bill authorizing a Public Bank is carefully written to be limited in scope and include the precise language required by our State Constitution.

 

Four Provisions of our State Constitution which apply to creation of a Public Bank

After the financial crisis of 2008, bills have been introduced into the legislature to create a public bank in Washington State. These bills have gained momentum due to the “credit freeze” private banks have inflicted on small businesses – harming our local economy – and also due to the massive tax payer billion dollar bailouts that have been given to big Wall Street banks – which has led the public to demand that public funds be deposited in a public bank and used for public purposes.

 

However, there are four sections of our State Constitution which appear to limit our State’s ability to create a public bank. http://www.leg.wa.gov/lawsandagencyrules/pages/constitution.aspx

 

Article VIII Section 5 of the Washington State Constitution states:

“The credit of the state shall not, in any manner be given or loaned to, or in aid of any individual, association, company or corporation.”

 

Article VIII Section 7 states:

“No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation”.

 

Article XII Section 9 states:

“The state shall not in any manner loan its credit, nor shall it subscribe to, or be interested in the stock of any company, association or corporation.”

 

Article 8 Section 1 (b) states:

(b) The aggregate debt contracted by the state shall not exceed that amount for which payments of principal and interest in any fiscal year would require the state to expend more than nine percent of the arithmetic mean of its general state revenues for the three immediately preceding fiscal years as certified by the treasurer.

(d) Debt shall be construed to mean borrowed money represented by bonds, notes, or other evidences of indebtedness which are secured by the full faith and credit of the state or are required to be repaid, directly or indirectly, from general state revenues and which are incurred by the state, . . . but shall not include obligations for the payment of current expenses of state government . . ..

 

Four Related Constitutional Questions

The drafters of our State Constitution were aware of the corrupting influence of private corporations and wanted to insure that the State would not be drawn into “gifts” to private corporations - and did not loan the credit of the State to a private individual, association, company or corporation. However, our Supreme Court has clarified that the State may enter into fair contracts with private corporations - as long as the State receives a fair benefit for the contract. These Constitutional issues can be roughly divided into four questions:

1.      What would constitute a “gift” to a private corporation?

2.      What constitutes a “loan of credit” to a private corporation?

3.      What constitutes a debt in terms of the debt limit?

4.      What is required to overcome a presumption of Constitutionality?

We will look at Supreme Court cases on each of these four sections of our State Constitution and these four related questions of Constitutional law using the search engine of legalwa.org.

 

Question 1: How to make sure a Public Bank is structured to avoid constituting a “gift” to a private corporation?

In 1996, our State Supreme Court wrote a very lengthy 45 page opinion defining more precisely what would constitute a gift to a private corporation (see CLEAN versus State of Washington, 1996, Wn.2d 782, 928 P.2d 1054). A Citizens Organization called CLEAN, Citizens for Leaders with Ethics and Accountability Now, challenged emergency legislation passed by the Legislature in special session to establish a method for financing the construction of a major league baseball stadium. CLEAN claimed the State was making a gift to a private corporation. Our Supreme Court upheld the legislation – deciding that it was NOT a violation of our State Constitution because the public received a substantial benefit from the legislation. The court stated:

 

The purpose of the provisions is “‘to prevent state funds from being used to benefit private interests where the public interest is not primarily served… The determination of whether a “public purpose” is served by the expenditure of tax dollars is primarily a legislative question… Public purpose is an evolving concept that necessarily changes to meet changing public attitudes… The purpose of CONSTITUTION Article VIII,  Sections 5 and 7, which prohibit the State from giving gifts or making loans of money or credit to private persons, is to prevent public funds from being used to benefit private interests when the public interest is not primarily served… Neither section is violated by an expenditure of public funds if (1) the funds have been expended to carry out a fundamental governmental purpose or (2) the governmental entity making the expenditure did not have a donative intent to give a gift and the public has received adequate consideration for the expenditure. An important factor in analyzing the second part of the test is whether the government retains control over how the funds are spent.”

 

Conclusion: Because the stadium in question provided an “economic benefit” to the public, by providing jobs and economic development, the legislature could participate in financing the stadium – even though a private corporation would also benefit from the stadium. Therefore, if a Public State Bank bill includes a finding that a public state bank would provide an economic benefit to the citizens of our State, and create jobs, this would increase the likelihood that our Supreme Court would find it constitutional.

 

Question 2: What constitutes a “loan of credit” to a private corporation?

In 1984, our Supreme Court ruled in a dispute between the City of Marysville and the State: (See Marysville v. State, 1984 101 Wn.2d 50, 676 P.2d 989). Marysville had purchased a private golf course and objected to the fact that the golf course employees had to be provided pension benefits since they were now public employees. The City claimed it should not have to participate in a State sponsored pension plan (PERS or Public Employee Retirement System) for these employees. The City claimed that these funds were an impermissible “gift” to State employees and that these pension funds were partially invested in a loan of credit to private corporations via investment in the stock market. The Supreme Court again ruled in favor of the State legislature, referring to two prior cases involving Article 8, Sections 5 and 7 of our State Constitution ( IN RE MARRIAGE OF JOHNSON, 96 Wn.2d 255, 634 P.2d 877 (1981) and  STATE EX REL. GRAHAM v. OLYMPIA, 80 Wn.2d 672, 676-77, 497 P.2d 924 (1972).

 

“There, we stated: We believe, therefore, that the prohibition was against loans as used in the ordinary and popular sense, between a lender and a borrower, where a question of the security of funds in such transactions would be involved . . .It was the risk of endangering public funds from the loaning of money in the ordinary and popular sense that the framers of our constitution interdicted . . .This holding was adopted by the majority in STATE HOUSING FIN. COMM'N v. O'BRIEN, 100 Wn.2d 491, 671 P.2d 247 (1983). There the majority stated, at pages 494-95: "Recently, however, we have focused primarily on the risk that the state program posed to the public treasury or taxpayer. IN RE MARRIAGE OF JOHNSON, 96 Wn.2d 255, 634 P.2d 877 (1981). . . . Certainly, the lending of credit clause was not intended to insulate taxpayers from all risk and debt accruing from the public decisions of their governing representatives. Risk flowing from public ventures legitimately undertaken is inherent in our form of government… The framers of our constitution were deeply concerned about the effects on the public purse of granting public subsidies to private commercial enterprises, primarily railroads. They were not concerned about the non- speculative transfer of money from one nonprofit government agency to another.” (emphasis added).

 

In a CONCURRING OPINION, Justice Rosellini stated:

 

“I concur in the result reached by the majority. However, I am opposed to the majority's needless and continuing attempts to limit the scope of protections guaranteed our citizenry by the constitutional prohibitions of gifts or loans of public money or credit. SEE STATE HOUSING FIN. COMM'N v. O'BRIEN, 100 Wn.2d 491, 500, 671 P.2d 247 (1983) (Rosellini, J., dissenting); IN RE MARRIAGE OF JOHNSON, 96 Wn.2d 255, 268, 634 P.2d 877 (1981) (Dore, J., concurring in part, dissenting in part).

 

The majority makes reference to JOHNSON and HOUSING FIN. as severely limiting the previous scope of our opinions on the subject. The majority indicates that the focus of inquiry is on the "risk of loss" posed to the public treasury or taxpayer and that only those activities which jeopardize state or municipal assets are prohibited. This approach to lending of credit cases also provides that there is no violation of the prohibitions so long as the loan or gift of credit serves a statutory objective to benefit a deserving class of the public.

The constitutional prohibition is intended to do more than merely protect the public treasury. An equally important thrust of the provision is to prohibit private individuals, associations, or corporations from deriving special privileges or advantages from the State or its municipalities. SEE PORT OF LONGVIEW v. TAXPAYERS, 85 Wn.2d 216, 533 P.2d 128 (1974).

 

I am opposed to the "risk of loss" analysis for the same reasons set forth in the dissent in HOUSING FIN. and will not further reiterate them here. The instant action simply does not call upon this court to apply the "risk of loss" approach. To analyze the present controversy correctly, this court need only determine that there is adequate consideration in exchange for the service credit and employer contributions to the retirement system. The existence of ample consideration negates the City's allegation that the scheme constitutes an unconstitutional gift or loan of the City's credit.”

 

CONCLUSION:

Some on our Supreme Court contend there should be a risk analysis to determine if State assets are placed at risk, recognizing that there is no such thing as no risk. Therefore, a State Public Bank should be structured in such a way as to minimize risk to State assets. However, others on our Supreme Court contend that the gift issue is not a problem as long as there is a significant public benefit of the State funded project. Clearly, there are many significant public benefits to creating a State Public Bank – including creating jobs and lowering the cost of capital projects for public investments such as schools and roads.

 

Question 3: What constitutes a debt in terms of the debt limit?

Our State Constitution has always had a Debt limit clause – intended to prevent any single legislature from creating too much debt for any future legislature. However, before 1972, this clause was so inflexible that the legislature repeatedly had to create “loopholes” to allow for essential State Public Works Construction projects such as schools, bridges and roads. In 1972, the voters approved a constitutional amendment to Article 8, Section 1 of our State Constitution in order to make the debt limit more flexible. The new debt limit was set at 9% of the average of the previous three fiscal years of State revenue. The amendment reduced the interest costs of future bonding and . . . restricted the legislature's ability to incur State debt without the approval of the voters. Significantly, revised Article 8, Section 1(g) prohibits the Treasurer from using State funds to pay debts of the Washington State building authority or any similar entity which undertakes to finance or provide a facility for use or occupancy by the State or any of its agencies. A savings of millions in interest costs on future bonds was achieved since future bonds have been backed by the full faith and credit of the State, thereby permitting lower interest rates. The constitutional definition of "debt" adopted by the voters in 1972 is found in Article 8, Section 1(d), which defines debt as "borrowed money represented by bonds, notes, or other evidences of indebtedness which are . . . required to be repaid, directly or indirectly, from general State revenues . . .."

 

In 1991, our Supreme Court further clarified the meaning of the term “debt” when they ruled in a dispute between the State Department of Ecology and the State Finance Committee. (See DEPT OF ECOLOGY v. STATE FINANCE COMM.  1991 116 Wn.2d 246, 804 P.2d 1241).  

 

The Department of Ecology wanted to lease a building which they would eventually buy. The legislature passed a special law to permit this kind of lease without it affecting the State Debt Limit stating:

Financing contracts entered into under the limitations set forth in this chapter shall not constitute a debt or the contracting of indebtedness under . . . any . . . law limiting debt of the state. It is the intent of the legislature that such contracts also shall not constitute a debt or the contracting of indebtedness under Article 8, Section 1of the State Constitution. . . . It is the intent of the legislature that [certificates of participation] also shall not constitute a debt or the contracting of indebtedness under Article 8, Section 1 of the State Constitution if payment of the certificates is conditioned upon payment by the State under the financing contract .

 

The State Finance Committee refused to make the payments on the lease claiming that the arrangement violated the Debt Limit under Article 8, Section 1 of our State Constitution. By a narrow 5 to 4 majority, our State Supreme Court sided with the legislature and allowed the arrangement stating:

For purposes of the constitutional debt limitation (Washington State Constitution, Article 8 Section 1), no debt is incurred by the State unless the State is obligated to make payments. State financing arrangements do not give rise to a "debt" for purposes of the constitutional debt limitation if the arrangement is not secured by the full faith and credit of the State and/or  the Legislature is expressly not obligated to make the payments.

 

Use of a Non-appropriation Clause to avoid the Debt Limit

In ruling in favor of the State legislature, our Supreme Court noted:

Oregon, like Washington, has a constitutional debt limitation. The statute at issue in Kane authorized the Legislature to enter into long-term financing agreements similar to the DOE plan. That statute contained a nonappropriation clause that limited the liability of the State. 308 Or. at 584-85. In upholding the financing scheme, the Oregon court first defined debt as:

an unconditional and legal obligation of the State to pay, when at the time the obligations initially are created there are insufficient un-appropriated and not otherwise obligated funds in the State treasury to meet those obligations.308 Or. at 583. The court then held that, because of the nonappropriation clause, the financing scheme did not create debt.

 

The State’s promise of repayment is conditioned on the willingness of future legislative assemblies to appropriate the funds. The State does not promise that future legislatures will appropriate any funds. The lenders take the risk of nonpayment. A similar situation exists in the case before us, and we find the Oregon court's reasoning persuasive. DOE's financing plan does not require future Legislatures to appropriate funds. Instead, the plan gives future Legislatures the flexibility to continue the funding or not, depending upon budgetary needs. The plan places the appropriation decision where it belongs, in the hands of the collective wisdom of future legislators. Since the plan does not impose upon future Legislatures a requirement of continued funding, the plan does not create debt. (emphasis added).

 

The purpose of the original Article 8, Section 1 debt limitation was to protect the integrity of the State's economy. State ex rel. State Bldg. Fin. Auth. v. Yelle, 47 Wn.2d at 715. Constitutional debt limitations were enacted to protect future taxpayers from the kind of improvidence that led to State and local government bankruptcies in the 19th century. In 1972 the people amended Article 8, Section 1 to its present form. That amendment changed the method by which the debt ceiling is calculated, but the amendment did not change the purpose of the limitation. DOE's plan fulfills that purpose. The nonappropriation clause protects future taxpayers by giving their representatives the power to terminate the lease. The people have spoken through two vehicles, the constitutional amendment and the Legislature. It is not within this court's prerogative to set aside the will of the people.

 

The Minority Opinion argued against the legislature noting that “The majority contends that because in this case a trustee, rather than a specially created State authority, acts to accommodate the State by issuing the certificates evidencing indebtedness, and because the agreements include a nonappropriation clause, this plan is distinguishable from the state building authority. (However) the loan from the holders of the certificates is required to be paid from State revenues. Although the nonappropriation clause appears to allow the Legislature an escape hatch, that escape hatch is really an illusory one. The debt will be required to be repaid from general State revenues and is thus subject to the limits of Article 8, Section 1…

 

Conclusion:

Our Supreme Court has held that a trustee relationship does not constitute debt for purposes of the debt limit – even if the leasing funds will come out of the General Fund. Provided that a State Public Bank would be financed through a mechanism outside of the General Fund and would not require payments from the General Fund, our Supreme Court would likely hold that it was not subject to the Debt Limit. It should be noted that because North Dakota has a public bank, it has no debt at all. Thus, adopting a Public Bank in Washington State would allow us to lower the debt and the debt limit over time. It is however important to finance the State Bank in a manner which does not require General Funds. We will cover Constitutionally acceptable financing options in a future report.

 

Question 4: What is required to overcome a presumption of Constitutionality?

Note that in nearly all cases, including all of the cases discussed above, the majority of our Supreme Court is very reluctant to rule against our State legislature. As long as the legislature is acting in good faith and trying to pursue a public purpose, especially in trying to meet the needs of the public and promote the economy, our Supreme Court has deferred to their judgment. Our Supreme Court has repeatedly stated:

 

A statute is presumed to be constitutional. A party claiming that a statute is invalid has the burden of establishing beyond a reasonable doubt that it clearly conflicts with the constitution.

 

The Missouri Supreme Court noted that State courts should recognize and enforce legislative enactments "as embodying the will of the people unless they are plainly and palpably a violation of the fundamental law of the (State) constitution." Ams. United v. Rogers, 538 S.W.2d 711, 716 (Mo. 1976).

 

Conclusion

As long as a State Public Bank bill is carefully written to comply with the above Constitutional limitations, it is highly likely that it will be approved by our State Supreme Court.

 

Other Examples of the State Legislature Broad Constitutional Authority

The state often hires private individuals, companies or corporations and gives them money to do work. So the gift and credit prohibition stated in Article VIII, Section 7 does not apply to work like building highways or schools because it is work done in the public interest.

The state also gives away billions of dollars per year in tax credits to wealthy corporations. The legislature has been allowed to do this because of some nebulous (and inaccurate) claim that these billions in tax breaks help create jobs – which is therefore in the public interest.

Finally, State Pension funds, including funds from General Fund State Revenue, are currently invested primarily in volatile corporate stocks with Wall Street Private Bank Gamblers like Chase Bank and Bank of America. This also is supposedly being done in the public interest. Certainly, if all of these State funds can be invested in private banks for private risky purposes, they can be invested in a public bank for less risky public purposes.

 

A Former Supreme Court Justice states that a Public Bank is Constitutional

Former Washington State Supreme Court Justice and respected legal mind, Phil Talmadge, agrees that a Public Bank is permitted by our State Constitution, stating: 

 

 I do not believe that a constitutional amendment is necessary to establish such a bank.  Gene Lux regularly introduced such a bill as did I in the Senate.  We did not offer the bill as one requiring a constitutional amendment.  I am aware of nothing in the constitution that bars the state from creating a bank.  There is no lending of credit problem (a constitutional provision) where the state gets a full return on its asset.  The state has been in the business for many years of issuing bonds for housing assistance and taking deposits for guaranteed tuition programs, for just a couple of examples. Those are “lending” programs that have earmarks of bank-like activities.

 

Constitutional Scholar Hugh Spitzer weighs in to the debate

Some have claimed that an article by University of Washington Legal Scholar, Hugh Spitzer, argued that a State Public Bank would be unconstitutional. See University of Puget Sound Law Review Volume 8, Issue 195. pages 213 to 218. http://lawpublications.seattleu.edu/cgi/viewcontent.cgi?article=1193&context=sulr

However, what this article really argued was that the “risk analysis” used by our Supreme Court in several cases involving Article 8, Sections 5 and 7, was unwise and un-necessary. Instead, the article argues that a much simpler finding that the State received a substantial benefit would address the Constitutional concerns.

 

“The government action conferring tax-exempt status on the bonds should be analyzed as a possible gift of something of value, which would be barred by Article 8, Section 5 or 7, were there not adequate consideration (to the public) in return.”

 

The article also proposed another simple remedy to the Constitutional question:

 

“An alternate and equally defensible rationale that the court  could have applied in O’Brien is simply that the provision of housing is a “recognized public government function” and that government loans to aid in the provision of housing for citizens are not fundamentally different from day care centers, vaccinations, fare-free bus zones, crime victim compensation, or public support for electoral campaigns, all of which the court in City of Seattle v. State suggested were permissible (100 Wash. 2d 232, 241-42, 668 P.2d 1266, 1271 (1983). “

 

It therefore appears that far from arguing against a State Public Bank, Hugh Spitzer was providing additional reasons in support of the legislature’s ability to enact public works projects.

 

Conclusion

Overcoming the current partial credit freeze for small business, creating jobs in our state by doing so, financing student loans and economic development are all in the public interest. That is what a state bank modeled after the Bank of North Dakota could do.

The State would also receive a benefit in increase State revenue as private interests would have to pay interest on the loan the state public bank made as well as paying back the principle. A state bank will be very prudent in its loan practices and will have to follow current banking law. That is the case with the Bank of North Dakota. On this fact alone, it could be argued that the public would be primary beneficiary of the state bank.

Finally, the state bank is to be established “to promote agriculture, education, community development, economic development, commerce, and industry in Washington State”  (from Section 1 of HB 3162 – 2009-2010). The primary purpose of the state bank would not be making a profit and the loaning its credit to private interests. While these may occur, depending on how broadly the law is written, such outcomes would be incidental to its larger public purpose of lowering the cost of public projects and increasing jobs in our State.