Opinion ID: 2234380
Heading Depth: 1
Heading Rank: 7

Heading: Municipal Debt

Text: LGAC further contends that the Act violates New York State Constitution, article VIII, § 2, because it permits the City to assign to STARC its right to receive LGAC's annual payment of $170 million. LGAC argues that the City's assignment of this right to STARC, in exchange for the proceeds on the bonds that STARC would issue, constitutes a debt of the City, on which the City has not pledged its faith and credit. We disagree. The State Constitution prohibits the City from contracting any indebtedness unless it pledges its faith and credit for the payment of the principal and interest on the debt (NY Const, art VIII, § 2). The purpose of this provision is obviousto ensure that the municipalities honor their legal financial obligations to their creditors ( see generally Flushing Natl. Bank v Municipal Assistance Corp., 40 NY2d 731 [1976]). Debt has a well-settled meaning within the contemplation of the State Constitution. A debt can arise only where the municipality has incurred a legal obligation to fund the public benefit corporation's debt service to its bondholders should the corporation default on its obligation ( see Wein v City of New York, 36 NY2d at 617-618; Schulz v State of New York, 84 NY2d 231, 247-249 [1994]). Thus, the City's assignment to STARC of payments that the City would otherwise receive from LGAC can be considered a debt of the City only if the City could be held liable to STARC or its bondholders in the event that LGAC failed to make the payments to STARC. Like Supreme Court and the Appellate Division, we conclude that our decision in Wein is dispositive of this issue. In Wein, pursuant to the New York City Stabilization Reserve Corporation Act, the Mayor of the City of New York was authorized to certify $520 million over the course of two succeeding fiscal years to the Stabilization Reserve Corporation (SRC). SRC would then sell $520 million of its own bonds and notes, the proceeds of which would be paid into the City's general fund. Under the applicable statute, the bonds and notes were the sole obligations of the SRC, and neither the State nor the City would be liable for payment on the debt service. The bonds were financed out of SRC's capital reserve fund. To assure proper maintenance of the fund, the City was to make a yearly appropriation to the fund. If the City failed to make the appropriation, the State Comptroller would pay SRC the amount certified out of revenue that would otherwise have been payable to the City ( see Wein v City of New York, 36 NY2d at 614-615). In rejecting plaintiff taxpayer's article VIII, § 2 challenge to the New York City Stabilization Reserve Corporation Act, we noted that the terms of the statute precluded the City from becoming indebted to SRC or its bondholders. We held that article VIII, § 2 did not apply because the City could not be held liable to the bondholders even if the City failed to make the payments, thereby causing SRC to default ( id. at 617-618). In this case, as in Wein, the City has no legal obligation either to STARC or to its bondholders should LGAC fail to make its payments to STARC. Although the Act does not specifically state that the City incurs no obligation with respect to STARC's bondholders, it does not impose such an obligation. And significantly, the City's avoidance of this debt obligation is abundantly clear in the record. According to STARC's certificate of incorporation, no member of the City Group will guarantee debts of the Corporation. Moreover, the assignment agreement between the City and STARC states:  City Not Liable on Bonds. It is the intention of the City and [STARC], and they do agree, that the Fiscal 2004 Bonds shall not be a debt of the City and the City will not have any obligation or liability thereon. The preliminary offering circular on STARC's Series A bonds states: None of the payments to LGAC, to [STARC] by LGAC or to the Bondholders by [STARC] constitutes a debt of the State or the City, and neither the faith and credit nor the taxing power of the State or the City is pledged to the payment of amounts to LGAC, to [STARC] by LGAC or to the payment of the Series 2004A Bonds. Finally, the preliminary offering circular on STARC's Series B bonds states: Payments to the Series 2004B Bondholders by [STARC] do not constitute a debt of the State or the City, and neither the faith and credit nor the taxing power of the State or the City is pledged to the payment of the Series 2004B Bonds. The terms of the assignment between the City and STARC cannot be clearer on this pointthe City has no obligation to STARC with regard to LGAC's payments and has no liability to STARC's bondholders in the event that STARC defaults. Therefore, the City has not incurred any enforceable debt with respect to the assignment and article VIII, § 2 of the State Constitution does not apply. We further reject LGAC's contention that the assignment of the City's right to receive the payments in exchange for bond revenues violates a purported ban on revenue financing. According to LGAC, [t]he purposes of the prohibition are to prevent local governments from evading constitutional debt limitations and committing their revenues to long-term obligations that are not conditioned on future local legislative appropriations and that are therefore beyond any local legislative power to alter in response to changed needs and conditions. Although LGAC couches this argument in terms of article VIII, § 2 of the State Constitution, this concern about inhibiting future local administrations from determining the use of its revenues has nothing to do with a city's obligation to pledge its faith and credit to its debt obligations. Rather, it appears to be a separate policy consideration altogether. In any event, here there is no diversion of a preexisting revenue stream that the City otherwise would have received. Rather, the Legislature created an additional revenue stream of state funds through LGAC which enabled the City to receive revenues that had been diverted for payment of debt service on the MAC bonds. Moreover, the assignment here does not affect the ability of future local administrations to determine how the payments from LGAC ought to be expended. Pursuant to Public Authorities Law § 3238-a, upon the City's assignment of LGAC's payments to STARC, the amount becomes the property of [STARC] for all purposes, and upon the City's notice to LGAC and to the State Comptroller of the assignment, the payments must be made directly from LGAC to STARC. Thus, the assignment constitutes a transfer of the City's entire property interest in the revenue stream. It is not a perpetual spending of the City's revenue on STARC, but is rather a one-time assignment of a property right, and once it is made, the City has no interest in any of the LGAC payments. STARC thereby has full ownership of the entire revenue stream. Thus, there is no interference in the appropriation power of future local administrations. Simply stated, a city council cannot appropriate revenue that it does not own. Still, even if the City would otherwise have an interest in the LGAC payments, this Court has held that the diversion of municipal funds to a public benefit corporation does not necessarily run afoul of the State Constitution. As earlier noted, we upheld the financing program in the Wein case, in which the corporation's capital reserve fund was financed by city appropriation, and failing that appropriation, by the State's diversion of city revenues to the corporation ( see Wein v City of New York, 36 NY2d at 618). Indeed, we stated, The fact that the comptroller is permitted, under certain circumstances, to pay a portion thereof directly to a public benefit corporation on behalf of the city, does not create any illegality, and we hold and find that no lien is thereby created on that fund ( id. at 619). Also, in Comereski v City of Elmira (308 NY 248 [1955]), we recognized that it was constitutionally permissible for a municipality to provide in a contractual agreement with an authority that, on the one hand, the authority's bonds create no liability for the municipality, and on the other hand, permit or mandate that the municipality make some kind of direct assistance to the authority ( see id. at 254 [(A) city's nonliability on an authority's bonds and the same city's right or duty to assist the authority financially are part of the same conventional statutory pattern. We should not strain ourselves to find illegality in such programs]). As we emphasized in both Wein and Comereski, if the State were to funnel money to a public benefit corporation that would otherwise be paid to the municipality, the payment would constitute a permissible gift under article VIII, § 1 of the State Constitution ( see Wein v City of New York, 36 NY2d at 618; Comereski v City of Elmira, 308 NY at 252-253). We recognize that there are numerous programs providing for the payment of a public benefit corporation's debt service through the diversion of state aid paid on behalf of a municipality. The most obvious example of such a program, of course, is the diversion of the City's interest in the state sales tax to MAC itself in order to pay the debt at issue in this litigation. Another prominent example is the utilization of public authorities by several counties of the State, including New York, Westchester, Erie and Nassau, for the issuance of bonds to provide immediate revenue to the respective counties, with the financing of these bonds secured by the proceeds the counties are to receive under the national tobacco settlement (Kasprak, Securitization of Tobacco Settlement Funds, Report of Conn Gen Assembly Off of Legis Research [Sept. 20, 2002] ). As we stated in Wein, While the constitutional validity of these other enactments is not before us, we must assume that the legal and constitutional basis for the funneling of a municipality's State-aid moneys to these other public benefit corporations by the State Legislature, is founded on the similar right of a municipality to make gifts to a public benefit corporation pursuant to section 1 of article VIII of the Constitution and the other cited authorities. Upon a contrary holding it could be argued, successfully or otherwise, that their funding would be illegal. ( Id. at 619.) We therefore conclude that the MAC Refinancing Act does not violate New York State Constitution, article VIII, § 2.