Opinion ID: 2607531
Heading Depth: 1
Heading Rank: 4

Heading: The Meaning Of Debt As Used In Article XI, Section 7

Text: Dubbed the pay as you go provision by the members of the Constitutional Convention of 1857, Article XI, section 7, was adopted by the people in 1859. See Carey, The Oregon Constitution and Proceedings and Debates of the Constitutional Convention of 1857 (1926). The provision limits the power of the state to create debt in excess of $50,000, except in limited circumstances. A companion provision places a $5,000 limit on the power of counties to create debt. [5] The debates on the floor of the convention left little doubt as to the purpose of the debt limitation. The central concern was that future generations should not be saddled with the excessive undertakings of an imprudent legislature. [6] The debt limitation was therefore adopted to protect against burdensome and excessive taxation. McClain v. Regents of the University, 124 Or. 629, 634, 265 P. 412 (1928). [I]t was intended `to prevent exposing the sources of public revenue to potential hazard.' Long-term obligations create a fixed charge against future revenues and can impair the flexibility of planning and the ability of future legislatures to avoid a tax increase. Martin v. Oregon Building Authority, 276 Or. 135, 141, 554 P.2d 126 (1976) (footnotes omitted). On many occasions this court has been asked to determine whether a proposed fund-raising scheme violates the prohibitory clause of sections 7 and 10, or the like provision of a city charter. The central issue in each case was whether debt or liabilities had been created as that term is used in the state constitution or city charter. [7] One of the earliest decisions defining the term debt or liabilities is Salem Water Co. v. City of Salem, 5 Or. 29 (1873). Salem's city charter provided that the City Council shall not in any manner create any debt or liabilities which shall singly, or in the aggregate, exceed the sum of one thousand dollars. The city of Salem contracted with a private corporation to supply water to the city for a price of $30,600 to be paid over a period of 17 years, without any provision for raising and appropriating revenue to be applied to such liabilities as they became due. In holding that this obligation constituted a debt, this court stated: The words `any debt or liabilities,'    are general and may include any kind of debt or liability, either absolute or contingent, express or implied. A debt exists against the city whenever it agrees to pay money in return for services performed   . In a popular sense, debt includes all that is due to a party under any form of obligation or promise. 5 Or. at 32. Over the last century, as public bodies have devised various methods of avoiding constitutional or charter prohibitions, the definition of debt or liabilities has gained precision beyond that stated in Salem Water Co. This court has looked at not less than two basic characteristics in deciding whether action violates Article XI, section 7: (1) the fund from which payments on the obligation are made; and (2) the degree to which the public body is liable for repayment of the loan. If the revenues generated from a particular project being financed are pledged for repayment, rather than revenues from general taxation, no debt or indebtedness is thereby created. Carruthers v. Port of Astoria, 249 Or. 329, 438 P.2d 725 (1968); Butler v. City of Ashland et al., 113 Or. 174, 232 P. 655 (1925). Often referred to as the special fund cases, this line of decisions upholds the plan if the promise by the state is to make installment payments only from a special [revenue] fund. Such a promise does not create a debt or liabilities, within the meaning of Article XI, section 7, because general tax revenues have not been pledged. Walsh Const. Co. v. Smith, 272 Or. 398, 537 P.2d 542 (1975) (bonds issued under Housing Act to be paid only from rent revenues does not create debt); Morris v. City of Salem et al., 179 Or. 666, 174 P.2d 192 (1946) (use of only parking meter revenues to pay contract obligation does not create debt); McClain v. Regents of the University, supra (construction bonds payable only from dormitory rents does not constitute debt); Butler v. City of Ashland et al., supra (contract payments made only from water revenues does not create debt). [8] A second line of cases classifies debt based on the degree to which the public body is liable for the repayment of the obligation. Rorick v. Dalles City, 140 Or. 342, 12 P.2d 762 (1932), involved the issuance and sale of Columbia River bridge bonds by Dalles City. The authorizing statute contained a debt limitation provision similar to Article XI, section 7. Although principal on the bonds was payable only from the tolls and revenues of the bridge, the city was absolutely liable for the interest on future installments if the special fund was insufficient to meet the obligation. This court held that the city's contingent liability for accrued interest was a bonded indebtedness prohibited by the statute. 140 Or at 349-50, 12 P.2d 762. A different situation was presented in Moses v. Meier, 148 Or. 185, 35 P.2d 981 (1934). The Unemployment Relief Fund Act authorized the issuance of certificates to be charged against the revenues generated under the Liquor Control Act. The state had no legal obligation to replenish the fund in the event the revenues were exhausted. The certificate holders could not look beyond the special fund for repayment. On those facts, the court ruled that the state had no liability for repayment of the loans, and that the certificates did not create debt in violation of Article XI, section 7. See also McClain v. Regents of the University, supra (when depletion of special fund does not give rise to state liability, no debt is created). The inclusion of a clause permitting the legislature to compensate for any deficiencies in the obligation payments out of the general funds if it so chooses  called a moral make-up clause  does not change the result. In Walsh Const. Co. v. Smith, supra , the constitutionality of the Oregon Housing Act was challenged. The act authorized, but did not require, future legislatures to supplement the reserve account from which loan payments were drawn with general revenues when that account became depleted. [9] The court upheld the act because the moral make-up clause, at most, gave rise to a moral obligation, but in no event were future legislatures legally obligated to replenish the account. 272 Or. at 404, 537 P.2d 542. [10] The drafters of the constitution intended that the state pay as it goes. An unconditional promise to pay is invalid if payment is to be made, in whole or in part, from future appropriations out of the general tax fund. Over the years a variety of schemes have been devised to permit the State of Oregon or Oregon local governments to acquire assets with funds not then in being, so to speak. Some have been upheld. Some have not. But one rule of law has remained steadfast throughout: The term debt as used in Article XI, section 7, means an unconditional and legal obligation of the state to pay, when at the time the obligations initially are created there are insufficient unappropriated and not otherwise obligated funds in the state treasury to meet those obligations.