Opinion ID: 1286488
Heading Depth: 2
Heading Rank: 1

Heading: Statutory Contracts between the State and Political Subdivisions of the State, under Article I, Section 21, of the Oregon Constitution.

Text: Local defendants first argue that the repeal of the tax exemption and the enactment of HB 3349 impair or breach a statutory contract or contracts between local defendants and the state. A statutory contract exists when the legislature enacts a statute that reveal[s] an underlying legislative intent to enact and protect contract rights. Hughes, 314 Or. at 19, 838 P.2d 1018 (emphasis in original). The Contracts Clause of Article I, section 21, of the Oregon Constitution, prevents the state from impairing contracts. See Eckles v. State of Oregon, 306 Or. 380, 387, 760 P.2d 846 (referring to the Contracts Clause in Article I, section 21, as forbidding laws impairing the obligation of contracts), appeal dismissed, 490 U.S. 1032, 109 S.Ct. 1928, 104 L.Ed.2d 400 (1988). That limitation applies to contracts between private parties, as well as to contracts between the state and a private party. Id. at 390, 760 P.2d 846. In response to local defendants' claim that they have an enforceable statutory contract with the state, the state and plaintiffs make two main arguments. First, they respond, as a matter of law, local defendants cannot enforce statutory contracts with the state. Second, they argue in the alternative that no statutory contract exists in the particular circumstances here. Because we agree with the first argument, we do not address the second. In Hughes, this court described the proper approach for determining whether a state law violates Article I, section 21, as follows: First, it must be determined whether a contract exists to which the person asserting an impairment is a party; and, second, it must be determined whether a law of this state has impaired an obligation of that contract.    In cases where the state is alleged to be a party to the contract, however, courts have developed a number of additional rules. In Eckles, this court detailed the nature and origins of those rules. Briefly, those rules are: (1) a state contract will not be inferred from legislation that does not unambiguously express an intention to create a contract; (2) the Contract Clause does not limit the state's power of eminent domain; and (3) the state may not contract away its `police power.' Those rules are not necessarily exhaustive of possible limitations on state contracts under Article I, section 21, but any further rules of this nature `must be found within the language or history of Article I, section 21, itself.' 314 Or. at 14, 838 P.2d 1018 (citations omitted; footnote omitted). In this case, the state and plaintiffs ask that we recognize another rule applicable to state contracts under Article I, section 21: that a statutory contract between the state and its political subdivisions as to matters of statewide public concern never can be enforced under Article I, section 21. This court has not decided that issue previously. In order to determine whether that rule exists and is applicable, we turn to the language and history of the Contracts Clause. Id. at 14, 838 P.2d 1018 (stating how court finds applicable rules). In Eckles, this court described the pertinent language and history of Oregon's constitutional Contracts Clause as follows: Unlike many of the provisions in Article I of the Oregon Constitution, the provision in section 21 against impairing the obligation of contracts has its ultimate source not in the early state and colonial constitutions but in the Constitution of the United States, Article I, section 10, clause 1, and the Northwest Ordinance of 1787.    We infer from the similarity of language and from the parallels drawn between the constitutional provisions by the predecessor of this court that the framers of the Oregon Constitution intended to incorporate the substance of the federal provision, as it was then interpreted by the Supreme Court of the United States, into the Oregon Constitution, though not necessarily every case decided under the federal provision. Subsequent Supreme Court of the United States decisions, of course, do not control the interpretation of section 21, although those decisions may shed light on the early history of the federal provision, and thereby on the Oregon provision. 306 Or. at 389-90, 760 P.2d 846 (citations omitted). In State of Maryland v. Baltimore & Ohio Railroad Co., 44 U.S. (3 How.) 534, 11 L.Ed. 714 (1845), the Supreme Court of the United States appeared to reject the argument that a political subdivision of the state could use the federal Contracts Clause to enforce a statutory contract between that subdivision and the state. In that case, a county in Maryland sued the state, alleging that a state statute impaired a contract between the state and the county. The state legislature had passed an act that provided that the state would pay a railroad company $3 million to build a railroad from Baltimore to the Ohio River. The railroad company could decide on the route that the railroad line would take. However, if the line did not pass through three named towns, two of which were in Washington County, the railroad would forfeit $1,000,000 to the state for the use of Washington county. 44 U.S. at 548. The railroad line was built, but the line did not pass through the specified towns. The state, at the instance of the commissioners of Washington county, brought an action to recover $1 million. After the action was filed, the legislature amended the act by repealing the part of it that required the railroad to return the money to the state for the use of Washington County. Washington County argued that that money was due to it, by statutory contract, and that the state had impaired or breached that statutory contract by amending the act. Id. at 549. The Supreme Court rejected the argument that the county was a party to the particular statutory contract with the state. See ibid. (even if the provisions upon this subject in the act    could be regarded as a contract with the railroad company, it would be difficult to maintain that the county was a party to the agreement or that it acquired any private or separate interest under it, distinct from that of the state). The Court also rejected the argument that the county could enter into a statutory contract with the state that could be enforced through the Contracts Clause. In reaching the latter conclusion, the Court stated: The several counties are nothing more than certain portions of territory into which the state is divided for the more convenient exercise of the powers of government. They form together one political body in which the sovereignty resides. And in passing the [act], the people of Washington county did not and could not act as a community having separate and distinct interests of their own, but as a portion of the sovereignty. Id. at 550. In other words, the Court reasoned, the legislature and the county could not have entered into a statutory contract enforceable under the Contracts Clause, because the county, as a public body, could acquire no private interest in the forfeiture and, therefore, had no interest that the Contracts Clause could protect. In East Hartford v. Hartford Bridge Co., 51 U.S. (10 How.) 511, 13 L.Ed. 518 (1850), the Supreme Court again addressed the nature of the relationship between a state and its political subdivisions. In that case, the Town of East Hartford, Connecticut, had been given a grant, by legislative enactment in 1783 and 1806, to operate a ferry across the Connecticut River. In 1808, the legislature incorporated the Hartford Bridge Company for the purpose of building a bridge over the Connecticut River. Part of the 1808 act provided that the incorporation of the Hartford Bridge Company would not affect East Hartford's rights to keep the ferry. Sometime before 1818, a bridge was built, but it became impassable. In 1818, the legislature passed an act that provided that, after the bridge was repaired, the ferries by law established would be discontinued and never be permitted to transport passengers across said river. In 1836, the legislature repealed that provision of the 1818 act. In 1841, the 1836 act was repealed. In 1842, the 1841 act was repealed, thus restoring to East Hartford the right to use and operate the ferry. 51 U.S. at 519-20. The Hartford Bridge Company sought an injunction against East Hartford to prevent it from operating the ferry, and the Connecticut courts granted such an injunction. East Hartford appealed, arguing that the city and the state had entered into a contract granting the city a permanent right to operate the ferry. East Hartford argued that subsequent legislation repealing that grant, as well as the court order enjoining the city from operating the ferry, impaired the city's contract in violation of the Contracts Clause. Id. at 532. The Supreme Court rejected that argument: [T]he parties to this grant did not by their charter stand in the attitude towards each other of making a contract by it, such as is contemplated in the Constitution, and as could not be modified by subsequent legislation. The legislature was acting here on the one part, and public municipal and political corporations on the other. They were acting, too, in relation to a public object, being virtually a highway across the river, over another highway up and down the river. From this standing and relation of these parties, and from the subject-matter of their action, we think that the doings of the legislature as to this ferry must be considered rather as public laws than as contracts. They related to public interests. They changed as those interests demanded. The grantees, likewise, the towns being mere organizations for public purposes, were liable to have their public powers, rights, and duties modified or abolished at any moment by the legislature.      Hence, generally, the doings between them and the legislature are in the nature of legislation rather than compact, and subject to all the legislative conditions just named, and therefore to be considered as not violated by subsequent legislative changes. It is hardly possible to conceive the grounds on which a different result could be vindicated, without destroying all legislative sovereignty, and checking most legislative improvements and amendments, as well as supervision over its subordinate public bodies. Thus, to go a little into details, one of the highest attributes and duties of a legislature is to regulate public matters with all public bodies, no less than the community, from time to time, in the manner which the public welfare may appear to demand. It can neither devolve these duties permanently on other public bodies, nor permanently suspend or abandon them itself, without being usually regarded as unfaithful, and, indeed, attempting what is wholly beyond its constitutional competency. It is bound, also, to continue to regulate such public matters and bodies, as much as to organize them at first. Where not restrained by some constitutional provision, this power is inherent in its nature, design, and attitude; and the community possess as deep and permanent an interest in such power remaining in and being exercised by the legislature, when the public progress and welfare demand it, as individuals or corporations can, in any instance, possess in restraining it.      The public character of all the parties to this grant, no less than its subject-matter, seems, therefore, to show, that nothing in the nature of a contract, with terms to be fulfilled or impaired like private stipulations, existed in this case so as to prevent subsequent interference with the matter by the legislature, as the public interests should appear to require. But in order to justify the plaintiff in what it set up below, there must not only have been a contract, or quasi contract, but a violation of its obligation. It will therefore be useful to follow out farther the nature and conditions of this supposed contract, in order to throw more light on both the questions whether this grant was such a contract as the Constitution contemplates, and whether it has been at all impaired. The authority of a legislature may probably supersede such a ferry as is public    by allowing a bridge over the same place, as has before been virtually held by this court. It could also alter or abolish wholly the public political corporation to which the grant was made, as this is yearly done in dividing towns and counties, and discontinuing old ones. It is therefore clear, that, whatever in the nature of a contract could be considered to exist in such a case, by a grant to a town of some public privilege, there must be implied in it a condition, that the power still remained or was reserved in the legislature to modify or discontinue the privilege in future, as the public interests from time to time appear to require.      The legislature, in making the discontinuance, did only what it supposed was advantageous to the public, by securing a better, quicker, and surer method of passing the river on the bridge; and it thus appears to have violated no condition or terms of any contract or quasi contract, if it had made any with the plaintiff. On the contrary, as before suggested, the legislature merely acted within its reserved rights, and only passed a new law on a public subject, and affecting only a public body. Id. at 533-37 (citations omitted; emphasis in original). Thus, in East Hartford, the Supreme Court explicitly stated that the federal Contracts Clause was inapplicable to claims by political subdivisions of the state that they had contract rights arising from state statutes and were protected, under the Contracts Clause, from later modifications of those statutes. Rather, for Contracts Clause purposes, the Court viewed political subdivisions of a state, created by the state, as subject to the will of the state in matters relating to a public object. Id. at 533. Baltimore Railroad and East Hartford establish the proposition that, before adoption of the Oregon Constitution, the United States Supreme Court had interpreted the federal Contracts Clause to be inapplicable to enforce alleged statutory contracts between a state and its subdivisions. As discussed above, 324 Or. at 112, 922 P.2d at 357, the framers of the Oregon Constitution intended to incorporate the substance of the federal provision, as theretofore interpreted by the United States Supreme Court, into the parallel provision of the Oregon Constitution. Eckles, 306 Or. at 389-90, 760 P.2d 846. A later decision by this court suggests specifically that the foregoing federal interpretation was incorporated into the Oregon Contracts Clause. In Miller v. Henry, 62 Or. 4, 5-6, 124 P. 197 (1912), a taxpayer sought to enjoin an Oregon law that precluded taxpayers from bringing certain actions against Union County officials. Those officials had deposited county funds in a bank that later failed; as a result of the bank's failure, the county received only 55 percent of the funds deposited. The taxpayer argued, in part, that the act violated Article I, § 21, which prohibits the passage of any law impairing the obligations of a contract. Id. at 7, 124 P. 197. This court rejected the argument: It is contended that the bond of the treasurer is a contract with the county, and that this act releases him from the obligation of the bond, and therefore impairs the obligation of the contract. We cannot assent to this view of the law. A county is a subdivision of the State, created by the legislature for administrative purposes, and except as limited by the constitution is subject at all times to legislative control.    The legislature might in the first instance have directed that county funds be deposited in banks, and in such event, that the treasurer should not be liable for their loss or diminution. What the legislature can do in the first instance it can afterwards ratify. Its action does not involve a question of power, but of public policy, of which it must be the sole judge. Id. at 7-8, 124 P. 197. Although this court did not cite the United States Supreme Court's decisions in Baltimore Railroad and East Hartford in reaching its conclusion in Miller, it is apparent from the quoted passage that the court applied the same reasoning in Miller that the United States Supreme Court had applied in Baltimore Railroad and East Hartford. That is, for state Contracts Clause purposes, political subdivisions of the state are subject to the will of the state and, as to legislation relating to a public object, East Hartford, 51 U.S. at 533, directed at political subdivisions, those subdivisions are unable to rely on the protection provided by the state Contracts Clause. The foregoing principles apply equally to home rule jurisdictions. [13] In Kinney v. Astoria, 108 Or. 514, 217 P. 840 (1923), this court upheld the validity of a statute against a variety of state constitutional challenges. The statute in question appropriated funds in each of seven years, to help the City of Astoria to rebuild after a devastating fire. 108 Or. at 519-21, 217 P. 840. The amount of the annual appropriation was measured by the amount of state taxes collected from persons and upon property within the corporate limits of Astoria, not to exceed the amount appropriated in 1923. Id. at 522, 217 P. 840. The court began its analysis by noting that the state constitution limits power, whereas the federal constitution grants power, and that all questions of public policy are for the state legislature except as controlled by constitutional limitations. Id. at 523-24, 217 P. 840. In responding to the argument that the home rule amendment was evidence that the appropriation was for a private, not a public, purpose, the court stated: Pure municipal corporations, such as cities, are merely instrumentalities of the state established for the convenient administration of local government; they are state governmental agencies; they are auxiliaries of the state for the purpose of local self-government; they are mere political subdivisions of the state created by authority of the state for the purpose of exercising a part of its powers   . It is true that under the present form of our state Constitution cities and towns may adopt their own charters and the legislative assembly cannot by a special law enact, amend or repeal the charter of a particular town, but it is also true that the legislature may enact a general law affecting cities and towns and the electors of the state may in the exercise of the initiative by either general or special laws enact, amend or repeal municipal charters. However, conferring the power of the initiative upon cities and towns and prohibiting the legislative assembly from enacting special laws and reserving to the electors of the state the right to enact either special or general laws did not divorce cities and towns from control by the state nor change their character as governmental agencies of the state. Id. at 528-29, 217 P. 840 (citations omitted). The statutes on which local defendants rely to establish a statutory contract here pertain to a public object within the meaning of the cited Contracts Clause cases. Although the context was different, this court discussed the public object of PERS in La Grande/Astoria v. PERB, 281 Or. 137, 576 P.2d 1204, aff'd on reh'g, 284 Or. 173, 586 P.2d 765 (1978). In that case, the court held that a state law that required certain local government employees to be brought within PERS, unless the particular public employer provided them with equal or better retirement benefits, did not violate Article I, section 2. The court observed that the challenged law was a general law addressed primarily to substantive social, economic, or other regulatory objectives of the state. 281 Or. at 156, 576 P.2d 1204. More specifically, the challenged portions of HB 3349 do not address the powers of local governments. See id. at 156-57, 576 P.2d 1204 (The provisions for financial security for police officers and firemen and their dependents in the event of retirement, disability, or death address a social concern with the living standards of these classes of workers, not with local governments as such.). We conclude that Article I, section 21, of the Oregon Constitution, does not provide local defendants with protection from the state's alleged impairment of a claimed statutory contract. Similarly, Article I, section 21, of the Oregon Constitution, does not provide local defendants with a remedy for any breach of a claimed statutory contract. See Eckles, 306 Or. at 401, 760 P.2d 846 (noting that, when the state breaches its contracts pertaining to financial interests, Article I, section 21, protects contractual interests by obliging the state to compensate for its breach of those contracts). Local defendants' statutory contract argument, therefore, is not well taken. The trial court erred by holding that local defendants can enforce an alleged statutory contract with the state. Similarly, local defendants' third-party beneficiary arguments are not well taken, because those arguments depend on the existence of a statutory contract between the state and local defendants. Accordingly, the trial court erred when it held that plaintiffs were third-party beneficiaries of a contract between local defendants and the state and that plaintiffs have the right to enforce such a contract.