Opinion ID: 1254414
Heading Depth: 1
Heading Rank: 4

Heading: applicability of bond procedures

Text: The opponents attack the Participants' Agreements for failing to comply with provisions in charters, statutes, and the constitution that impose procedural rules and substantive limits on incurring public debts. Some of these rules relate specifically to the issuance of bonds. If the PUDs or the cities themselves had issued revenue bonds, they would have had to obtain the approval of their respective voters, the PUDs by virtue of ORS 261.305(6), ORS 261.355 and ORS 261.375(1), the cities by virtue of charter provisions. Of course, the PUDs and cities did not issue bonds, WPPSS did. The opponents argue, however, that the obligations incurred in executing the Participants' Agreements were the equivalent of revenue bonds and therefore required voter approval. The argument is stated in several ways. The participants' payments to WPPSS retire a debt incurred by WPPSS on their behalf which they have the sole responsibility to repay; therefore the participants must treat this bonded obligation as their own. Construction of the projects by WPPSS on the strength of the participants' unconditional obligations to pay the costs was a scheme or artifice designed to circumvent voting requirements and other legal constraints. WPPSS, the opponents say, is only a conduit between the participants and the bondholders. These descriptions do not make entirely clear whether the argument is that the participants are the true debtors of the bondholders and the bonds issued by WPPSS are really their bonds, or rather that the Participants' Agreements, by pledging future power revenues to pay all costs incurred by WPPSS, themselves constitute bonds issued to WPPSS. The opponents do not claim that either statement is literally true. The participants did not incur direct debts to the holders of WPPSS bonds, though their unconditional promises to pay the total costs of WNP 4 and 5 were the only source from which WPPSS would pay those bonds. Likewise, the participants borrowed no money from WPPSS that they promised to return with interest; what they expected to get for their future payments was electric power, expressed as a share in the generating capability of the projects. But the opponents claim that in substance, if not in form, the transactions were the same as issues of revenue bonds by the PUDs and cities themselves. To support their claim that the court should look through the legal form to the economic substance of the transaction, the opponents rely on Martin v. Oregon Building Authority, 276 Or. 135, 554 P.2d 126 (1976). That case arose upon special statutory review of the constitutionality of an act creating a building authority as a means to buy or construct buildings with revenue bond financing for lease to state agencies, and the court invalidated the act as an attempt to create any debt or liability exceeding $50,000 in a manner forbidden by Article XI, section 7, of the constitution. To show how the court reached that conclusion, we review the case in some detail. The law at issue in Martin created the Oregon Building Authority as an independent public body politic and corporate for the purpose of developing necessary facilities for the state at an advantageous cost. The building authority's board of directors was composed of the State Treasurer, the Attorney General, and the Director of the Department of General Services. The building authority was empowered to finance the acquisition of buildings for lease or sale to state agencies by issuing notes and bonds which were to be payable solely from the building authority's revenues or other assets and expressly were not to be a debt or liability of the state. Revenues obtained from leasing or selling buildings to the state would be pledged as security for payment of the bonds and channeled through a trust fund administered by an independent trustee. At the time of the litigation, the board of directors had adopted resolutions for the issuance of bonds to finance seven projects, including the construction of new wings for the capitol. Each was to be leased to the state under leases which fixed the rent at the amount of debt service on the bonds plus the building authority's operating expenses. The court found that the state's obligation to pay rent was unconditional and supported by the state's full faith and credit. 276 Or. at 138-139, 554 P.2d 126. The rentals were assigned to the trustee or trustees for the benefit of the bondholders. Justice Holman's opinion for the court began by reviewing the origins of constitutional debt limitations in the 19th century in response to excessive government borrowing, primarily for transportation facilities, which often led to defaults. The opinion then stated: It is generally agreed that in imposing debt limitations, `the predominant purpose was the achievement of a high degree of control over debt creation in order to forestall irresponsibly imposed tax burdens   .' The Oregon cases have stated that our provision `was adopted by the people as a protection against burdensome and excessive taxation' and that it was intended `to prevent exposing the sources of public revenue to potential hazard.' Longterm 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. Debt restrictions force the elected representatives of the people to operate the government within its means and remove the temptation to undertake projects on an enjoy-now, pay-later basis. 276 Or. at 141, 554 P.2d 126 (footnotes omitted). The opinion observed that building authorities were a controversial device to skirt debt limitations, though they had been upheld in a majority of cases in other states. To sustain the Oregon Building Authority would depend on finding that neither the authority's bonds nor the state's leases were debts within the constitutional prohibition. The court noted that the bonds might escape the prohibition if the issuer were truly independent of the state, or if they were revenue bonds even if the issuer was considered a state agency. The revenue which was pledged to support these bonds, however, was future government rents payable from funds raised by taxation. As to independence from the state, the court thought the status of the building authority comparable to that of the university regents in McClain v. Regents of the University, 124 Or. 629, 265 P. 412 (1928), whose dormitory construction bonds had escaped the debt limitation only because they were revenue bonds. The building authority, the court noted, is managed and controlled by state officers, it must report periodically to the Governor and must obtain legislative approval for certain of its actions, and it is maintained largely by public funds. Its sole purpose is to implement the building policies of the state. The main difference from the university regents was the legislature's description of the authority as an independent body. 276 Or. at 144, 554 P.2d 126. The court concluded that when the transactions were viewed as a whole, the separate existence of the building authority must be disregarded. It reached this conclusion in essence because the building authority had no purpose other than to borrow money, because its income was assigned to trustees, because the state was its only possible tenant, because the authority had no other use for the structures it financed, and because the leases delegated responsibility for handling construction of the authority's projects to the state. 276 Or. at 144-145, 147, 554 P.2d 126. [5] The court therefore described the building authority as a gutless intermediary whose sole function was to insulate the actual relationship between the bondholders and the state from the constitutional debt limitation, and it summarized its holding to be that for constitutional purposes we are going to look through the dummy corporation and that the bonds are the debts of the state. 276 Or. at 145, 147, 554 P.2d 126. Although the issue presently under discussion is not debt limitation but voting requirements, the opponents of the Participants' Agreements argue that the similarities of the financing arrangements in this case to those in Martin equally require us to disregard the separate existence of WPPSS and to treat the bonds issued by WPPSS as the participants' bonds. The economic similarities are great. In both cases, unconditional commitments of governmental customers to pay for future services were used by bond issuers to finance facilities for the exclusive benefit of those customers; the amount of future payments was tied to the costs of financing the projects; and those payments were the only source of repayment for financing the acquisition, construction, and operation of the projects. In both cases, also, the transactions were designed to avoid borrowing by the governmental users by having a supplier rather than the user borrow the needed funds on the strength of longterm user agreements covering the entire cost of the projects. The differences between the Oregon Building Authority and WPPSS are equally obvious. The building authority was created by the state government solely as an instrumentality to finance its own need for buildings. It was directed by a board composed of the chief legal, financial and property management officials of the state government. Whatever the building authority act meant by the phrase independent public body politic and corporate, such a board could no more be a body politic divorced from state government than, for instance, the State Land Board composed of the Governor, Treasurer and Secretary of State. [6] WPPSS is not a creation of the Oregon participants in WNP 4 and 5, or of all the 88 participants in those projects; as stated above, it was organized under Washington law in 1957, as a statutory municipal corporation and joint operating agency of 19 Washington public utility districts and three Washington cities. WPPSS is not managed and controlled by officers of the government with which it contracted, as the Martin court observed of the building authority. Moreover, WPPSS did not, like the building authority, delegate to the user agencies the responsibility for construction of the projects it would finance for them. Again, it must be remembered that the present discussion does not concern the question whether the Oregon participants incurred debts, but whether the participants are the actual ÔÇö and unauthorized ÔÇö issuers of the bonds sold to finance WNP 4 and 5 because the separate existence and role of WPPSS should be disregarded like that of the building authority in Martin. On this question the economic similarity of the financing devices is not decisive. The commitment of an agency's long-term contract as security, even as the sole security, for financing a building, a power plant, or another source of supply dedicated to the agency's use does not turn WPPSS or any otherwise independent supplier into a dummy corporation of the contracting agency. WPPSS was used as the vehicle for building thermal generating projects for the participants precisely because it already had an independent existence and bonding capacity. The Martin decision does not support a holding that would disregard this independent existence of WPPSS as the issuer of its bonds.