Opinion ID: 1254414
Heading Depth: 1
Heading Rank: 6

Heading: prohibition of stockholding or loaning credit

Text: The preceding sections have discussed bonding procedures and debt limitations that could be satisfied, if necessary, by putting the intended commitment to the WPPSS projects to a vote of the respective participants' voters. Beyond those issues, the opponents also invoke constitutional limitations which could not be so satisfied but would prevent the cities and districts from entering into these transactions altogether. Article XI, section 9 of the Oregon Constitution provides: 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.... [14] The opponents contend that the participants became stockholders in WPPSS and in WNP 4 and 5, that they raised money for WPPSS and the projects, that they loaned their credit to WPPSS as the security for its bonds, and that, however characterized, the effect of the financing scheme was to create the kind of risks that the constitutional provision was designed to prevent. The proponents respond that WPPSS has no stock, that the constitutional clause only applies to funds invested in or raised for private enterprises, and that, again, it applies only to the use of general tax revenues. Each side relies on passages from past opinions discussing the scope of Article XI, section 9. The proponents quote statements that the clause is directed at using public funds in aid of private corporations, as said in Carruthers v. Port of Astoria, supra, 249 Or. at 340, 438 P.2d 725 and Johnson v. School District No. 1, 128 Or. 9, 12, 270 Or. 764, 273 P. 386 (1929). See also Sprague v. Straub, 252 Or. 507, 511-518, 451 P.2d 49 (1969) (discussing parallel prohibition of Article XI, section 6). The opponents quote from the same opinions statements that the targets of the section were speculation ( Johnson ) and a potential hazard to public revenues, Carruthers v. Port of Astoria, supra, 249 Or. at 329, 438 P.2d 725. These statements, of course, are not inconsistent. No doubt those who drafted the prohibitions had in mind the practice of aiding private enterprise, and the quoted statements were made in that context; the cases did not have to consider speculative investments in securities of enterprises that might not be private. The opponents make a good textual argument for the position that the word corporation, as used in Article XI, was not confined to today's business corporation but included public as well as private corporate entities, and that the phrase any joint company, corporation or association, whatever in section nine encompasses an entity such as WPPSS. [15] We also may assume for this argument that the term stockholder does not allow evasion by substituting another word to describe a financial investment in such an entity that is neither repayable as a debt nor part ownership of identifiable property. The hypothesis distinguishes the transactions sustained in Churchill v. Grants Pass, 70 Or. 283, 141 P. 164 (1914) (agreement to build a railroad for lease or sale to private company), and Security Co. v. Baker, 39 Or. 396, 65 P. 369 (1901) (common ownership of real property with private company). Even on these assumptions, the Participants' Agreement did not make the participants stockholders in WPPSS, a statutory entity composed of Washington cities and public utility districts. Nor are we persuaded that the 88 participants themselves formed an association in which they held stock within the meaning of Article XI, section 9. Equally unconvincing is the argument that the participants raised money for WPPSS; if anything, WPPSS, by selling its revenue bonds, raised money intended to benefit the participants. Of the several prohibitions combined in Article XI, section 9, of the Oregon Constitution, the opponents' most plausible claim is that WPPSS was able to sell its bonds only on the strength of the participants' loan of credit in the form of their unconditional promises to pay the bills. Past opinions discussing these constitutional provisions include some cases in which the government became a co-owner of property or borrowed funds to aid a private enterprise in a desired economic development. See Miles v. City of Eugene, 252 Or. 528, 451 P.2d 59 (1969) (joint construction of power plant); Carruthers v. Port of Astoria, supra (municipal financing of aluminum reduction plant for long-term lease to specified private company); Hunter v. Roseburg, 80 Or. 588, 156 P. 267, 157 P. 1065 (1916) (municipal bonds for joint railroad project with railroad company and lumber company). These more properly illustrate raising money than lending credit. By forbidding the state to lend and local governments to loan their credit, as well as to hold stock in or raise money for a corporation, Article XI covers transactions in which government does not itself raise and transfer funds but places its credit behind the corporation's ability to borrow money or obtain goods on credit. The obvious example is an outright guarantee made directly to a creditor to pay another's debt. Although the Participants' Agreements with WPPSS are not literally guarantees to the bondholders, the opponents argue that they are the functional equivalent and should be treated as such. Indisputably WPPSS undertook and was able to sell bonds and begin construction on the strength of the participants' commitments to pay the bills sent by WPPSS as they came due. The transactions were built around those commitments. That might be true of any private project undertaken to satisfy a specific governmental demand and financed on the basis of a long-term lease or contract, at a price tied to the supplier's costs. What makes these agreements into a loan of credit rather than a purchase contract, according to the opponents, is that the participants assumed the dry hole risk in section 6(c), supra n. 2, which committed them unconditionally to pay all that WPPSS would borrow and spend without assurance of receiving anything in return. Although this seems to state a plausible distinction between a cost-based purchase contract and a loan of credit, on examination it proves to be doubtful. The argument implies that the agreements would be valid as long as they were contingent upon the delivery of some electricity to the participants, at whatever cost. It is not obvious why the legal character of the transaction should differ if the power plants were completed at great cost but produced only a small fraction of the expected electricity rather than none. In either event WPPSS would have obtained the necessary funds upon the assurance of the participants' obligations to pay. But we need not decide whether an unconditional agreement to pay the costs of a speculative source of supply (project capability) would constitutionally differ from an agreement to buy an unspecified quantity of electric power priced at equally speculative costs, if the agreement involved a general obligation to pay from public funds. This court's past interpretation of Article XI, section 9, as of the other debt limitations, once again has confined the prohibition against loans of credit to those which expose the government's general credit, that is to say, its taxing power. Thus Miles v. City of Eugene, 252 Or. at 531, 451 P.2d 59, cited McClain, Moses, and Carruthers for the proposition that the loan of credit clause is not a restriction upon the obtaining of funds by a municipality by the sale of revenue bonds, as distinguished from general obligation bonds. The court explained Carruthers v. Port of Astoria, supra , as follows: In that case the Port proposed to raise funds by the sale of revenue bonds. With the funds the Port was going to build an aluminum reduction plant, lease it to a private company, and grant the private company an option to purchase the plant at the end of 25 years for a nominal balance. We held that this did not amount to raising money for a private business or loaning credit to, or in aid of, the private company. Likewise, the proposal in this case would not come within the constitutional prohibition against raising money or loaning credit. Money coming from revenue bonds and not from tax money does not fall within the prohibition. 252 Or. at 533-534, 451 P.2d 59. And the Miles opinion concluded, at 537, 451 P.2d 59: In this case and in Carruthers v. Port of Astoria, supra (249 Or. 329, 438 P.2d 725), the parties attacking the constitutionality of the proposals relied strongly upon Hunter v. Roseburg, 80 Or. 588, 156 P. 267, 157 P. 1065 (1916). That case is distinguishable because in that case the city was proposing to finance the construction of a railroad with general obligation bonds payable from general tax levies. It may well be that the ban on stockholding, raising money for, or lending credit to corporations aimed to bar favoritism, corruption or other misuse of political institutions to aid particular private enterprises as well as to protect public finances against speculation. Private use of government credit is not the issue in financial transactions among governmental entities like the cities, the districts, and WPPSS. And even if the aim to protect public finances should cover speculative commitments to enterprises whose private or public character may be doubtful, the foregoing cases have defined the protected funds to be only tax revenues. When government engages in public services or activities that generate revenues other than taxes, this court's past decisions have let government commit those revenues to financing its own projects or to support desired private projects, though of course it remains in the power of state and local lawmakers to provide otherwise. These judicial decisions often were obtained before the actual execution of financing schemes that the communities concerned deemed desirable, as in Miles and Carruthers, supra . The law there pronounced cannot be disregarded or overturned because a set of commitments made in reliance thereon has come to grief.