Case Name: The Washington State Housing Finance Commission, Petitioner, v. Robert S. O'Brien, et al., Respondents
Court: Washington Supreme Court
Jurisdiction: Washington
Decision Date: 1983-10-28
Citations: 100 Wash. 2d 491
Docket Number: No. 49739-7
Parties: The Washington State Housing Finance Commission, Petitioner, v. Robert S. O'Brien, et al, Respondents.
Judges: 
Reporter: Washington Reports
Volume: 100
Pages: 491–507

Head Matter:
[No. 49739-7.
En Banc.
October 28, 1983.]
The Washington State Housing Finance Commission, Petitioner, v. Robert S. O'Brien, et al, Respondents.
Preston, Thorgrimson, Ellis & Holman, by Larry M. Carter and Jay A. Reich, for petitioner.
Kenneth O. Eikenberry, Attorney General, and Philip H. Austin, Senior Deputy, for respondents.

Opinion:
Dimmick, J.
Does the authority granted by the Legislature to the Washington State Housing Finance Commission violate the Washington State Constitution which prohibits lending of the state's credit? We find that it does not.
The Legislature created the Commission after investigating the impact of Washington's severe economic recession on the state's housing needs. It found that the sustained high interest rate in the mortgage market precluded home buying for many low to middle income families. The ramifications from the stagnate housing market were numerous. Home construction was at record lows, and current housing supply was critically below the population's needs, for both home buyers and renters. Many persons unable to procure financing to buy homes were forced into the rental market. With rental housing in high demand, low income units became difficult to find. Increasingly, substandard housing became occupied.
Recognizing both the housing need and the downward spiral effect on the state's economy if the housing situation were not remedied, the Legislature established a home mortgage program. Laws of 1983, ch. 161. Program funds are to be generated from the Commission's issuance of nonrecourse tax-exempt revenue bonds pursuant to federal law. Using bond proceeds, the Commission is authorized to invest in, purchase, or make commitments to purchase home mortgages to provide "decent, safe, sanitary, and affordable housing for eligible persons". Laws of 1983, ch. 161, § 5, p. 697. Payments made on such loans will be remitted to the Commission's trustee bank by the lender. All payments, along with bond proceeds, are held in trust for the benefit of bondholders.
To commence the program, the Commission adopted two resolutions on August 3, 1983. The first authorized the issuance of revenue bonds for mortgage aid to first-time home buyers. The second resolution authorized revenue bonds to aid mortgagors of qualified multifamily residential housing. The chairman and secretary refused to sign the resolutions after being advised that they might be unconstitutional. The Commission thereupon brought this mandamus action to compel their signatures on both resolutions. We find the petition meritorious and grant the writ.
Although the course of decisions under the Washington Constitution's lending of credit prohibition has not been smooth, this court has firmly rejected, as violations of the clause, any legislative appropriation of tax revenues at the solicitation of private enterprise to aid or subsidize private commercial ventures. See, e.g., State Hwy. Comm'n v. Pacific Northwest Bell Tel. Co., 59 Wn.2d 216, 367 P.2d 605 (1961); Johns v. Wadsworth, 80 Wash. 352, 141 P. 892 (1914). At the time of our constitutional convention, fear of powerful corporate entities was uppermost in the minds of the convention members. The disastrous consequences to taxpayers as a result of corporate political clout were well known. Knapp, The Origin of the Constitution of the State of Washington, 4 Wash. Hist. Q. 227, 239-40 (1913). The concern of the constitutional convention was "protection of [the] weak from the strong within." Journal of the Washington State Constitutional Convention, 1889, at 682 (B. Rosenow ed. 1962). The constitutional framers believed that government was not instituted to confiscate private property through taxation tó enhance corporate profit. Journal. Nor did they consider it proper for the State to put taxpayers at undeterminable risk by pledging future tax revenues for private benefit. See Knapp, at 270-71.
In the past we did not distinguish whether tax revenues or the state's status was used to confer a benefit. See, e.g., Washington Health Care Facilities Auth. v. Ray, 93 Wn.2d 108, 605 P.2d 1260 (1980). 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). In doing so, we recognized that the constitutional convention did not intend to hinder state government from carrying out its essential function to secure the health and welfare of the state's citizens. In re Marriage of Johnson, 96 Wn.2d 255, 634 P.2d 877 (1981); Rauch v. Chapman, 16 Wash. 568, 48 P. 253 (1897). 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 difficulty underlying the lending of credit decisions is making the distinction between proper risk to the taxpayer from public decisionmaking, and improper risk to taxpayers due to abdication of public control over the state's assets or status to private commercial decisionmaking.
The "risk of loss" approach requires us to evaluate whether the state program "has safeguards absent in the schemes of the nineteenth century." In re Marriage of Johnson, supra at 268. The safeguards must ensure that "[t]he public controls both the use of the State conferred 'asset' and the extent of its liability." In re Marriage of Johnson, supra at 268. The State must also retain the means to effectuate the project's public objective. Because these safeguards are central to the lending of credit clause, we now extend the same inquiry to state projects financed by nonrecourse revenue bonds.
We are satisfied that the Commission's authority meets these criteria. The primary purpose of the Commission's program is not to enhance the private sector's profit at the taxpayer's expense, but rather to make decent housing available statewide. In determining legislative motive, we give great weight to the statutory declaration of purpose. Public Empl. Relations Comm'n v. Kennewick, 99 Wn.2d 832, 664 P.2d 1240 (1983). While a legislative declaration does not conclusively establish its legitimacy, we accept the declaration unless it is shown to be arbitrary or unreasonable. The facts in the present controversy indicate that the legislative purpose, to rectify state housing deficiencies, is eminently reasonable.
The Legislature had before it studies and testimony on the state's economy and the housing market. From these they reasonably concluded that a public problem existed requiring state action. Uncontroverted testimony indicated that a significant portion of the state's population was inadequately housed. Further, it was apparent that the private sector had been unable to correct the housing scarcity resulting from continuing high interest rates and escalating construction costs.
The adequacy of private housing and the health of the state's economy have traditionally been concerns of state government. See, e.g., Housing Auth. v. Seattle, 56 Wn.2d 10, 351 P.2d 117 (1960). The range of remedies available to meet these state problems must necessarily be wide. We leave the wisdom of a chosen remedy in the legislative arena. Obviously, if the program is successful, the private sector will benefit through increased housing starts, and increased activity in the housing and mortgage markets. Mortgage lenders will be entitled to an origination fee established by the Commission even though the Commission subsequently purchases the mortgage. Additionally, participating lenders will be compensated for servicing the mortgages (collecting mortgage payments, insurance premiums and property taxes, and making appropriate remittances to the Commission's trustee bank). Although we are inclined to view these fees as compensation rather than profit, the profit, if any, to actually be realized is speculative and subject to marketplace vagaries.
Our discussion of legislative motive does not imply that a finding of public purpose validates an otherwise impermissible lending of credit. State ex rel. O'Connell v. Port of Seattle, 65 Wn.2d 801, 399 P.2d 623 (1965). See In re Marriage of Johnson, supra at 266. Gratuitous state aid to private enterprise or private persons although for a laudable public purpose is prohibited by our constitution. But state aid to a circumscribed class of the public, in furtherance of legitimate state objectives, may ^provide the necessary "consideration" for the aid. See Public Empl. Relations Comm'n v. Kennewick, supra at 837-38. We review the legislative purpose to confirm that the statutory objective is to benefit a deserving class of the public.
Nor should we be understood as taking upon ourselves the business of determining who belongs in the benefited class. In early cases upholding aid to the "poor and infirm," we deferred to the legislative determination of what constituted need. State v. Guaranty Trust Co., 20 Wn.2d 588, 148 P. 323 (1944). Our only task is to assess the reasonableness of that determination.
The Legislature found that persons at certain income levels could not afford adequate housing. The resulting high demand for rental units forced many low income persons into substandard housing. The Legislature's criteria for mortgage loan eligibility ensure that these persons' needs are met. The Commission's eligibility standards must consider at least the following: income; family size; cost, condition and energy efficiency of available residential housing; availability of decent, safe, and sanitary housing; age or infirmity of recipients. Laws of 1983, ch. 161, § 5(2), p. 697. These guidelines establish a reasonable nexus between the recognized need and the persons to be benefited.
Accordingly, we conclude that the purpose of the mortgage loan program is to benefit a class of citizens reasonably determined to require public aid to meet their housing needs, and not to benefit a specific private enterprise. Because such a purpose is well within the legitimate purview of state government, it does not conflict with the lending of credit prohibition.
We further find that the Legislature has enacted safeguards that retain public control over the extent of risk to the taxpayers and effectuation of the program's public purpose. In reviewing the statutory safeguards, our function is not to weigh the economic risk but only to ascertain that risk to the State remains within public control and is not abdicated to the private sector. The controls imposed on the mortgage loan program are impressive. The most significant risk to taxpayers from publicly financed projects is loss of tax revenues or pledging of future revenues. Under the mortgage loan program, however, there is no risk of this kind. Program funds must be derived entirely from the investment market, not from state appropriations. Laws of 1983, ch. 161, § 8(7), p. 700. The funds never enter the state treasury but are held in a special trust account. § 17, p. 704. The bonds, although issued in the Commission's name, must contain a recital that they are not state obligations. § 3, p. 695. Any. obligation arising from the sale of bonds or the program is an obligation only of the Commission's special fund. § 3, p. 695; § 28, p. 710. State Health Care Facilities Auth. v. Spellman, 96 Wn.2d 68, 633 P.2d 866 (1981); State Health Care Facilities Auth. v. Ray, 93 Wn.2d 108, 605 P.2d 1260 (1980).
Whether bond default would impact the state's credit rating is open to question. See 50 Wash. L. Rev. 440, 464-67 (1975). At least two factors minimize any potential risk to the state's credit rating. Unlike the situation in Chemical Bank v. Washington Pub. Power Supply Sys., 99 Wn.2d 772, 666 P.2d 329 (1983), a constitutional challenge has been brought prior to bond sales. In further contrast, the bonds are secured in case of default by property with relatively high marketability. Interestingly, a market evidently exists for these bonds despite the recent default on nuclear power plant bonds.
Other risks to taxpayers are kept within the public control. The authority to issue bonds is limited in amount and expires in 1986. Laws of 1983, ch. 161, § 5(a), p. 697. The Commission's plan for raising and using program proceeds is subject to public hearing. § 7, p. 698. The Commission has authority to set standards and guidelines for private lenders to follow in disbursement of program funds. § 8(1), p. 699.
These controls also assure that the public objectives of the program will be met. Legislative intent in this regard is underscored by the requirement that program proceeds are to be made available to mortgagors in a fair and equitable manner. § 12, p. 702. The Commission's program must meet other specific objectives, including the housing needs of low-income and moderate-income persons, the elderly and handicapped. § 7, p. 698.
The Legislature's carefully conceived safeguards convince us that the State is not impermissibly abdicating its responsibility over the use of state status or the extent of state liability to the private sector. Finding that the state housing finance program is consistent with the State's legitimate function and that the risk to the state's taxpayers and effectuation of the public purpose remain under public control, we hold that the Commission's authority under Laws of 1983, ch. 161 does not violate Const, art. 8, § 5.
We therefore grant the writ of mandamus and order the chairman and secretary to sign the Commission's resolutions.
Williams, C.J., and Utter, Dolliver, and Pearson, JJ., concur.
Section 103(a)(1) of the Internal Revenue Code provides tax-exempt status for certain government bonds. Bonds issued for residential housing programs are tax exempt only if they meet the specific criteria of I.R.C. sections 103A and 103(b)(4)(A).
Const. art. 8, § 5 provides:
"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."
Section 1 of the housing financing act provides in part:
"It is declared to be the public policy of the state and a recognized governmental function to assist in making affordable and decent housing available throughout the state and by so doing to contribute to the general welfare. Decent housing for the people of our state is a most important public concern. Interest rates and construction costs have made it impossible for many Washington citizens to purchase their own homes. Older people, disabled persons, and low and moderate income families often cannot afford to rent decent housing. There exists throughout the state a serious shortage of safe, sanitary and energy efficient housing available at prices within the financial means of our citizens. General economic development within the state is also impeded by a lack of affordable housing. The staté's economy, which is dependent on the timber, wood products, and construction industries, has been damaged by inadequate investment in housing construction and rehabilitation. The result has been high unemployment and economic hardship affecting the prosperity of all the people of the state, particularly those in the wood products industry." Laws of 1983, ch. 161, § 1, p. 693-94.
The objectives the Commission must consider include:
"(1) The use of funds for single-family and multifamily housing;
"(2) The use of funds for new construction, rehabilitation, including refinancing of existing debt, and home purchases;
"(3) The housing needs of low-income and moderate-income persons and families, and of elderly or mentally or physically handicapped persons;
"(4) The use of funds in coordination with federal, state, and local housing programs for low-income persons;
" (5) The use of funds in urban, rural, suburban, and special areas of the state;
"(6) The use of financing assistance to stabilize and upgrade declining urban neighborhoods;
"(7) The use of financing assistance for economically depressed areas, areas of minority concentration, reservations, and in mortgage-deficient areas;
"(8) The geographical distribution of bond proceeds so that the benefits of the housing programs provided under this chapter will be available to address demand on a fair basis through the state;
" (9) The use of financing assistance for implementation of cost-effective energy efficiency measures in dwellings." Laws of 1983, ch. 161, § 7, p. 698.