Opinion ID: 2570818
Heading Depth: 1
Heading Rank: 4

Heading: Debt creation under Article 9, Section 3 of the Nevada Constitution

Text: The primary issue presented in this petition is whether the lease-purchase agreement constitutes public debt and therefore falls within the ambit of Article 9, Section 3. Article 9, Section 3 of the Nevada Constitution states, in relevant part: State indebtedness: Limitations and exceptions. The state may contract public debts; but such debts shall never, in the aggregate, exclusive of interest, exceed the sum of two percent of the assessed valuation of the state ... except for the purpose of defraying extraordinary expenses, as hereinafter mentioned. A public debt for these purposes is created when an obligation binds future legislatures to successive appropriations. An agreement to expend monies from currently appropriated funds does not implicate Article 9, Section 3 of the Nevada Constitution. As the Oregon Supreme Court explained in Constitutionality of Chapter 280, Oregon Laws 1975, [9] constitutional debt limitations were enacted primarily as a response to heavy borrowing by many states prior to 1840. These states financed internal and banking improvements; and after the depression of 1837, many defaulted on their obligations. States entering the union after 1840 (including Nevada) invariably included debt limitations in their constitutions. Such control over debt creation precluded carelessly imposed tax liabilities. [10] There are two principle decisions of this court that are relevant to the current dispute; each is discussed in turn below. In State ex rel. Nevada Building Authority v. Hancock, [11] this court considered whether a statutory financing scheme that used legislative appropriations to pay rent on state buildings, where the rent was used to pay off bonds sold to finance the buildings' construction, constituted public debt. Specifically, the legislature created the Nevada Building Authority (the Authority) and directed it to build facilities for state use. The Authority then declared, by resolution, its intention to construct buildings and athletic facilities on the University of Nevada campuses. The Authority's resolution explained that bonds would be issued to pay for the construction, and that payment on these bonds would be made solely from the Authority's income, which would be derived from fees and rent for the use of the buildings and facilities. The state would pay these fees and rent since it would use the constructed facilities. Additionally, the resolution provided that the bonds would not constitute an obligation of the State of Nevada. [12] The Hancock court determined that this scheme created public debt in contravention of the Nevada Constitution. Additionally, the Hancock court determined that the Authority was, in effect, a state agency and was therefore not an entity separate from the state. [13] In concluding that the scheme violated the Nevada Constitution's debt limitation provision, the Hancock court rejected the recognized exceptions to the constitutional proscription. [14] Specifically, the court determined that realism demands that the indebtedness [for rent and fees] is immediately created for the aggregate amount required by the period of the pledge. Were the State to pledge its taxing power as security for the bonds payable in the future, such a pledge would fall squarely within art. 9, § 3. Surely, a pledge to make future appropriations for rent out of tax revenues must be similarly treated. A present debt is created by such a legislative pledge. To view the matter otherwise would exalt form over substance and impair the integrity of our constitutional government. ... [S]uccessive biennial appropriations for rent until the bonds issued ... are fully retired must be considered in the same light as a legislative pledge to make future appropriations for the same purpose. It is inconceivable that the legislature would default in either instance since the good faith of Nevada would not allow it. [15] We decline to extend the realism rationale of the Hancock decision, and it is expressly overruled by our holding today. Instead, we adopt the sound reasoning of a majority of our sister states which have concluded that lease-purchase agreements, such as the one at issue here, do not violate constitutional debt limitations. [16] Our decision today is entirely consistent with our more recent pronouncement in Business Computer Rentals v. State Treasurer. [17] In Business Computer Rentals, the State Treasurer leased a computer from a private corporation under the terms of a lease-purchase agreement. [18] The agreement required the State Treasurer to make periodic payments over the course of three years; and if all payments were made, the computer would become the property of the state. The agreement contained a nonappropriation clause providing that if the legislature failed to appropriate sufficient funds for the State Treasurer to continue making payments, the lease would terminate and Business Computer Rentals would repossess the computer. [19] Although the State Treasurer wanted to make the lease payments, he refused to do so because the Attorney General advised him that the agreement was contrary to the constitutional debt limitations contained in Article 9, Section 3 of the Nevada Constitution. [20] Business Computer Rentals petitioned for a writ of mandamus directing the State Treasurer to perform his obligations under the agreement, which this court ultimately granted. [21] This court concluded that future legislatures were not compelled by the agreement to appropriate money for the State Treasurer to make the lease payments because of the express nonappropriation clause in the agreement. The court ultimately concluded that because the agreement did not create a legal obligation that could bind future legislatures, but merely created a rent expense that was payable solely from currently-appropriated revenue, no public debt was created within the meaning of Article 9, Section 3 of the Nevada Constitution. [22] In analyzing whether the agreement at hand constitutes public debt under the Business Computer Rentals framework, it is necessary for this court to determine whether the legislature is compelled to appropriate money in the future. Here, the lease-purchase agreement contains an express nonappropriation clause and provides that in the event of nonappropriation, the lessor/seller can retake the office space. We thus conclude that the legislature is not obligated to continue appropriating funds to cover the payments. The legislature is not involved in the lease agreement; this is not a situation where the borrowing function and the paying function are in fact performed by the same body. Moreover, since the office space may be reclaimed if funds are not appropriated, no issue exists with respect to the state's debt under Business Computer Rentals. Additionally, under the agreement, the holders of the certificates of participation are unable to seek recourse against the state or its agencies in the event the legislature fails to appropriate necessary funds. It appears that the Attorney General's opinion with respect to this dispute turns primarily on a narrow reading of Business Computer Rentals that limits the holding to fungible equipment such as a computer. [23] The distinction is an artificial one rejected by the majority of courts. [24] As a general rule, lease-purchase agreements such as the one presented here will be upheld where the lease (1) contains a nonappropriation clause; (2) limits recourse to the leased property; and (3) does not create a long-term obligation binding on future legislatures. [25] Finally, as pointed out by EICON, the public interest is likely promoted if the agreement at issue does not constitute public debt. Governmental agencies often need flexibility in acquiring property, and lease-purchase agreements and financing arrangements provide this flexibility. [26]