NATIONAL ASSOCIATION OF BOND LAWYERS
Voice from the Past
Chapter 9
A 1962 statutory covenant between the States of New Jersey
and New York limited the
ability of the Port Authority of New York and New Jersey to
subsidize rail passenger
transportation from revenues and reserves pledged as security for
certain bonds issued and to be
issued by the Port Authority. After several issues of bonds were
sold and delivered, a 1974 New
Jersey statute, with a like New York statute, retroactively
repealed that covenant. This set the
background for the April 21, 1977 decision of the United States
Supreme Court in United States
Trust Co. v. New Jersey, 431 U.S. 1 (1977).
While this case was pending, an institutional investor had
asked me to look at the
pleadings and briefs in this case to determine whether the case
was argued forcefully enough by
the appellant United States Trust Co. or whether that investor
should try to intervene or file a
brief Amicus Curiae. After doing so, I advised the investor that
appellant's counsel presented the
case well and thoroughly and I doubted that any filings on behalf
of the investor would be useful.
In this connection I became familiar with the holdings of the
Supreme Court in impairment-of-obligation cases under Article I,
Section 10 of the U. S. Constitution.
Previously the Court had held, "it is not every
modification of a contractual promise
that impairs the obligation of contract under federal law," and
that the State "has the sovereign
right . . . to protect the . . . general welfare of the people
and we must respect the wide discretion
on the part of the legislature in determining what is and what is
not necessary."
In the fall of 1976, while the U.S. Trust case was pending
before the Supreme Court, I
was acting, with Bill Eason and Bernard Parks, as bond counsel
for an issue of bonds of
Metropolitan Atlanta Rapid Transit Authority payable from a
special sales tax in Fulton and
DeKalb Counties, Georgia. Nick Capozzoli of Mudge Rose was
acting as underwriters' counsel.
The question arose about what the official statement could say
about the right of the State to
change the sales tax. For example, could the State reduce or
eliminate the tax on food?
We knew that, regardless of the outcome of that case, there
would be some things the
State could do and some things it could not do. I don't recall
whether it got down to wondering
about reducing the tax on the sale of onions and increasing it on
potatoes, but this illustrates the
futility of predicting anything the legislature might do and then
making a prediction about its
constitutionality. Finally we hit on a solution, or at least a
way to deal with the question instead
of solving it. The official statement would simply say that the
security of the bonds is protected
by the impairment-of-obligation clause of the Constitution
without specifying in detail the extent
of such protection.
The underwriters decided to hold an information meeting in
New York before the sale of
the bonds, and asked various officials of the Authority,
including its general counsel and the four
of us, to attend the meeting and answer any questions that the
potential underwriters and
investors might have. We wondered what we could say if asked
about the particulars of the
protection given by that clause, and the only conclusion we
reached was that whoever fielded the
question would have to wing it. We hoped that no one would ask.
Then came the meeting. Early to the podium was the
Authority's general counsel who
talked about the creation of the Authority and various other
matters that did not get close to the
bonds themselves. Then one member of the audience asked him
about the extent to which the
State could change the sales tax. Without batting an eye, the
general counsel said that the sales
tax was part of the contract with the bondholders and the State
could not change it at all under
the U.S. Constitution.
Nick, Bill, Bernard, and I all glanced at each other and
gulped and shrugged. No one in
the audience challenged the general counsel's assertion. When it
was our turn no one asked any
of the bond counsel or underwriters' counsel about this question.
We were home free.
We felt even freer when the Supreme Court, the following
April, concluded that the repeal
of the 1962 covenant amounted to an abuse of the discretion of
the State legislatures, partly
because the results deemed to be for the public good by breaching
the contract could be obtained
in other ways. The majority opinion declared:
"The Contract Clause is not an absolute bar to subsequent
modification of a State's
own financial obligations. As with laws impairing the
obligations of private
contracts, an impairment may be constitutional if it is
reasonable and necessary to
serve an important public purpose. In applying this
standard, however, complete
deference to a legislative assessment of reasonableness and
necessity is not
appropriate because the State's self-interest is at stake. A
governmental entity can
always find a use for extra money, especially when taxes do
not have to be raised.
If a State could reduce its financial obligations whenever
it wanted to spend the
money for what it regarded as an important public purpose,
the Contract Clause
would provide no protection at all."
Manly W. Mumford