ERIC FORRER v. STATE OF ALASKA and LUCINDA MAHONEY, Commissioner of the Alaska Department of Revenue in her official capacity
Supreme Court No. S-17377
THE SUPREME COURT OF THE STATE OF ALASKA
September 4, 2020
No. 7480
Superior Court No. 1JU-18-00699 CI
Notice: This opinion is subject to correction before publication in the PACIFIC REPORTER. Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone (907) 264-0608, fax (907) 264-0878, email corrections@akcourts.us.
OPINION
Appeal from the Superior Court of the State of Alaska, First Judicial District, Sitka, M. Jude Pate, Judge.
Appearances: Joseph W. Geldhof, Law Office of Joseph W. Geldhof, Juneau, for Appellant. Laura Fox, William E. Milks, and Mary Hunter Gramling, Assistant Attorneys General, Anchorage, and Kevin G. Clarkson, Attorney General, Juneau, for Appellees.
Before: Bolger, Chief Justice, Winfree, Stowers, Maassen, and
STOWERS, Justice.
I. INTRODUCTION
The issues we consider today are not new. The disastrous consequences of runaway state debt weighed heavily on the minds of the Alaska Constitutional Convention‘s Delegates as they pooled their collective knowledge and expertise to ensure that the 49th State would not suffer financial missteps of generations past.1 As Delegate Barrie M. White aptly explained:
[I]ncurring debt is different from most any other type of legislation in that it not only goes directly to the pocketbook of the people concerned, but all the people of the State, but also to the pocketbook of future generations and that is why . . . so many states, so many local political subdivisions, always require debt to be approved by the people.2
Having experienced the Great Depression firsthand,3 the Delegates desired fiscal responsibility and public accountability; these principles reverberate throughout article IX of the Alaska Constitution. The clearest expression of this collective intent is contained in section 8: “No state debt shall be contracted unless authorized by law for capital improvements or . . . housing loans for veterans, and ratified by a majority of the qualified voters of the State who vote on the question.”4 Through this provision, the Delegates
Anticipating a shortfall of revenue from previously enacted tax incentives, the 30th Alaska State Legislature attempted to offset future fiscal unpredictability by authorizing a discounted buyback of tax credits financed by bonds without pledging the “full faith and credit” of the State. Without a vote of the people, the legislature created a public corporation capable of borrowing up to $1 billion through the issuance of subject-to-appropriation bonds to purchase outstanding oil and gas exploration tax credits, with bondholders to be reimbursed solely at the discretion of future legislatures through appropriations to the new public corporation. A taxpayer brought suit, alleging inter alia that the legislature violated the Alaska Constitution‘s state debt limitation. The superior court granted the State‘s motion to dismiss, ruling that the legislation did not create “debt” for purposes of the constitutional limitation. We reverse and hold that this financing scheme — even if unforeseeable in the mid-twentieth century — is the kind of constitutional “debt” that the framers sought to prohibit under
II. FACTS AND PROCEEDINGS
A. History Of Constitutional Debt Limits
Unlike the federal constitution, many state constitutions contain limitations or prohibitions on the debt that state and local governments may incur.6 The origins of state constitutional debt provisions can be found in the early nineteenth century.7 Following the War of 1812, states sought to improve infrastructure for protection and to encourage westward expansion.8 State constitutions adopted between 1830 and 1850 thus “encourage[d] internal improvements within the state,” such as the construction of turnpikes, canals, and railroads.9 Toward that end, many states sold bonds pledging their full faith and credit then loaned the proceeds to private corporations to carry out various construction projects.10
But states began incurring debt “almost without limit,” growing their collective debt from $13 million in 1830 to $100 million in 1838.11 The bubble eventually burst when it became clear that many corporations could not repay their loans to states and could not generate the projected revenue from their projects.12 When the nation was besieged by an economic crisis referred to as the Panic of 1837, some states repudiated their debts or defaulted on interest payments as a result.13
Before 1840 no state constitution contained a restriction on incurring state debt.14 After the Panic of 1837 many states revised their
B. Proceedings Of The Alaska Constitutional Convention
More than a century after the Panic of 1837,20 the framers of our constitution sought to preserve the role of the people as a check against the incurrence of unnecessary debt, rather than impose a strict debt limit.21 The Delegates received extensive materials in advance of the convention, including copies of every state constitution22 and a collection of reports drafted on behalf of the Alaska Statehood Committee.23 The report on state finance in particular recognized that strict debt limitations “reflect a fear that the state may borrow itself into insolvency” and “are common in state constitutions.”24 The report viewed the efficacy of such debt limits as “questionable,” despite their widespread proliferation, based on the assumption that “[t]he era of heavy borrowing for economic development . . . is long past.”25 The report concluded by noting that a democratically elected legislature and market pressures “seem to make constitutional debt restrictions . . . unnecessary,” and thus suggested only a constitutional requirement that the legislature specify the sources for financing
The Committee did consider for a time allowing the legislature to provide for a debt up to a certain limit, but that was decided against, so at the present time the only debt of the state now which can be allowed is a debt to be paid out of anticipated revenues, that is from year to year, except a debt which must be approved by the people on referendum. In other words, the people are the ones that put the limit on any public debt, any large amount.29
The Committee rejected other forms of debt restrictions30 and specifically rebuffed a suggestion to adopt a strict percentage-based debt ceiling.31 The Committee reasoned that any amount “would perhaps be either inadequate, too high or too low, and would not offer any protection either way.”32 After “a good deal of consideration,” the Committee decided that rather than “leaving it entirely to the legislature” or setting a strict debt limit, it would adopt a reasonable middle ground — “that a referendum be called for and . . . the approval by the qualified voters be obtained.”33 Delegate White summarized this rationale best in the continuation of his statement we quoted at the outset:
[A] bond proposal to the people via referendum is the greatest way that you can take as a minimum requirement to insure that the credit of the state will not be impaired. . . .
[T]he basic question here is whether or not you want the people of the state to pass on an incurrence of debt or whether you want to leave it to the legislature.34
One proposed amendment would have nevertheless permitted a two-thirds vote of the legislature to contract debt without a public referendum.35 Delegates in opposition argued that “the people should be allowed to vote on whether or not the state shall become indebted.”36 Delegate White, who also served as Committee Secretary, reiterated that “[i]t is the opinion of the majority of the Committee that such debt should be approved by the voters.”37 Delegates in favor of giving the legislature more control suggested “that two-thirds of each house will more adequately protect the credit of the state” than a public referendum,38 while some noted that similar provisions had seen success in other state constitutions.39 Others pointed to the revenue bond exception, reasoning that a strict public referendum requirement would “force the state” to rely on establishing separate corporations and selling revenue bonds, which would in turn “force a much higher interest rate on the taxpayers of Alaska.”40 Those
Of course, the framers also recognized that an appropriate amount of flexibility would be necessary for the State to meet unforeseen financial situations in the future.43 Section 11 provides that flexibility by permitting the State to issue “revenue bonds . . . when the only security is the revenues of the enterprise or corporation” and eliminating any restrictions on “refunding indebtedness of the State.”44 And because those exceptions might not sufficiently alleviate section 8‘s debt prohibition, section 10 allows the State to “borrow money to meet appropriations” without restriction, under the sole caveat that “all debt so contracted shall be paid before the end of the next fiscal year.”45 Debate surrounding the anti-dedication provisions in section 7 likewise echoed the Delegates’ desire to limit debt by preserving legislative discretion to freely allocate appropriations from the general fund.46 In providing a select and limited handful of pathways to incur and manage “state debt,” the framers sought to balance competing ideals of fiscal restraint and flexibility.47
Belying the depth of debate on article IX, section 8, the framers refrained from attaching a technical definition to the term “debt.”48 Instead, section 8 was intended to apply broadly to the contracting of all “ordinary debt.”49 The Delegates entertained varying views on what this restriction encompassed50: some referred to section 8 as limiting the ability to “borrow money,”51 others as placing
C. The 2003 And 2006 Oil And Gas Exploration Tax Credits
The saga of the transferrable oil and gas exploration tax credits begins with the decline of oil and gas production in Cook Inlet. Facing a maturing oil field and shrinking revenues,58 the legislature in 2003 sought to prolong the life of existing operations in the region by reducing the amount of royalties owed,59 which in turn would help preserve Alaskans’ jobs in the oil and gas industry.60 Aside from rescuing the Cook Inlet oil fields, the legislature also created new, transferrable exploration tax credits61 to encourage production in marginal fields, thereby spurring job growth and future revenue.62 The transferability of these credits was intended
Three years later a new form of transferrable tax credit was introduced.64 The 2006 oil and gas exploration tax credits were passed alongside a new production tax,65 which restructured the prior oil and gas royalties regime to shift away from a gross tax on production to a tax on net revenues.66 Governor Frank Murkowski‘s transmittal letter explained that the overhaul was necessary for “encouraging investment in the state” and that it would “provide fiscal certainty for future generations of Alaskans.”67 The legislature heard testimony that the new tax credits would stimulate reinvestment in the State and have an immense impact on the economics of oil and gas exploratory operations.68 These transferrable tax credits could then be used by the recipient to reduce its production taxes in any given year,69 or they could be sold to another producer who could then use the transferred credits to reduce its own tax liability.70 The recipient could likewise request the Department of Revenue to purchase its tax credits, subject to availability of annual legislatively appropriated funds.71 The legislature subsequently created an oil and gas tax credit fund (Fund) to facilitate discretionary purchase of both 2003 and 2006 tax credits,72 once again reliant on appropriations from the legislature.73 At no time was the State under any obligation to purchase tax credits.
Despite the legislature‘s good intentions, oil prices plummeted in the latter half of 2014,74 and Alaska began to face serious budgetary constraints.75 The purchase of the combined 2003 and 2006 oil and gas exploration tax credits soon became “unsustainable,” and responding to “challenging fiscal times,” Governor Bill Walker signed a partial veto to reduce the legislature‘s annual appropriation to the Fund.76 The legislature phased out the tax credits in 2016,77 effectively terminating the program in 2017.78 However, the tax credits that had already been issued remained in circulation, with an estimated $800 million in outstanding requests for purchase and another $200 million expected.79 Governor Walker proposed his solution in House
D. HB 331 Rationale, Main Provisions, And Legislative History
In his transmittal letter, Governor Walker described HB 331 as “the next vital step in resolving the State‘s oil and gas tax credit obligation.”81 In the wake of falling oil prices and the State‘s reluctance to purchase outstanding tax credits, small producers faced many difficulties borrowing money to complete various projects.82 Legislators heard firsthand accounts from participants in the oil and gas industry on how the tax credit program was essential for encouraging small producers to invest in Alaska,83 and how uncertainty surrounding discretionary State purchase of those tax credits had already resulted in stalled projects and the loss of hundreds of jobs.84 Rather than wait several years for a full payment, those small producers preferred to take a discount in exchange for certainty.85 Financiers likewise testified how the tax credits had been monetized to secure loans for various exploratory projects and that some small producers had already defaulted on their loans and were unable to access additional equity due to uncertainty about future tax credit purchases.87 Some legislators framed the goal of HB 331 as to “salvage” small producers “on the edge” that have “put Alaskans to work,” but who still “owe their creditors many millions of dollars” and are now “barely hanging on.”88 At the same time, because HB 331 created a process that would purchase those tax credits at a discount, other legislators reasoned that the bonds would be “revenue-neutral,” with the discount paying for interest on the proposed bonds.89
HB 331 attempts to accomplish both the governor‘s and the legislature‘s policy goals by creating a public corporation to issue and sell bonds, using those proceeds to purchase tax credits at a discount, and then repaying bondholders via a predictable schedule of future legislative appropriations.90 First, the bill establishes the Alaska Tax Credit Certificate Bond Corporation (Corporation) within the Department of Revenue.91 The Corporation‘s board of directors consists of three commissioners from the Executive Department: the Commissioner of Commerce, Community, and Economic Development; the Commissioner of Administration; and the Commissioner of Revenue.92 Although the Corporation has the power to contract for services related to bond sales,93 it has no employees.
Finally, HB 331 makes all bond repayments “subject to appropriation,”103 and the legislature is not explicitly required to deposit money in the reserve fund.104 Certain bondholders can bring an enforcement action in state court to compel payment of their bonds,105 although HB 331 limits lawsuits on the constitutionality or validity of the bill or of any bonds to be filed within 45 days after the Corporation adopts a bond resolution.106 Perhaps in apprehension of just such a constitutional challenge, HB 331 contains several disclaimers:
legislature and ratification by qualified voters of the state is not required underThe bonds do not constitute a general obligation of the state and are not state debt within the meaning of
art. IX, sec. 8, Constitution of the State of Alaska . Authorization by the
Aside from differences in policy preferences among legislators the questionable constitutionality of the bonding arrangement in HB 331 generated its fair share of controversy. At the outset, the Legislative Affairs Agency provided a memorandum doubting whether HB 331 could qualify under any constitutional exception for incurring debt.108 The memorandum cited a Georgia case109 interpreting similar constitutional debt restrictions for the proposition that “a public corporation may not be used for the purpose
Legislators in favor of the bill tried to pigeonhole HB 331 into one of the established exceptions for article IX, section 8. Despite the discretionary nature of the existing program for tax credit purchases, the most common refrain was that HB 331 was “refunding indebtedness” under section 11.117 The floor debates were replete with such statements: “This bill goes a long way towards fulfilling our promise and redeeming that unpaid debt.”118 “It‘s far better that we do this and finance our debt than pay it all back at once.”119 “Obviously, we‘re not really incurring new debt, . . .we‘re changing the nature of existing debt.”120 “[T]his is not new debt.”121 “I don‘t believe we‘re taking on a debt. We‘re already in debt here.”122 “The bond package before us is really a mechanism to refinance the current debt at a discounted rate . . . .”123
Some legislators also likened HB 331 to revenue bonds,124 noting “that if we owe $100
HB 331 passed the House on May 3,128 passed the Senate on May 11,129 and Governor Walker signed it into law on June 20, 2018.130
E. Proceedings
Eric Forrer brought suit against the State and the Commissioner of the Department of Revenue, in his official capacity,131 on May 14, 2018 — only three days after HB 331 passed the Senate. Forrer‘s original complaint primarily sought declaratory and injunctive relief on the grounds that the bonding scheme in HB 331 violated multiple sections of article IX of the Alaska Constitution. The State did not answer Forrer‘s complaint but instead moved to dismiss for failure to state a claim.132 The State supported its motion to dismiss with a 40-page memorandum and appended “a thick volume of legislative history for HB 331.” The superior court ruled that the “inclusion of statutory history in support of a motion to dismiss . . . does not convert [it] into a motion for summary judgment.”133 The case was amenable to resolution without further briefing, in the superior court‘s reasoning, because the controversy turned entirely on “questions of law.” The superior court rejected the State‘s arguments that the article IX, section 11 exceptions for revenue bonds or refunding indebtedness applied to HB 331. Nonetheless, the superior court granted the State‘s motion to dismiss on the grounds that HB 331 did not “create a legally enforceable debt” under the framework announced in Carr-Gottstein Properties v. State upholding a lease-purchase agreement against an article IX, section 8 challenge.134 Forrer appeals.
Forrer argues on appeal that the superior court erred by granting the State‘s motion to dismiss without accepting all of his allegations as true and without converting it into a motion for summary judgment.135 Forrer also renews his constitutional arguments against HB 331 in respect to article IX, section 7,136
III. STANDARD OF REVIEW
We review de novo the grant of a motion to dismiss under
Issues of constitutional interpretation are also reviewed de novo.143 We have explained that when we interpret the constitution, we first “look to the plain meaning and purpose of the provision and the intent of the framers.”144 “Legislative history and the historical context” assist in our task of defining constitutional terms as understood by the framers.145 While we have also said that we consider “precedent, reason, and policy,”146 policy judgments do not inform our decision-making when the text of the Alaska Constitution and the framers’ intent as evidenced through the proceedings of the Constitutional Convention are sufficiently clear.147
IV. DISCUSSION
A. The Superior Court Did Not Err When It Declined To Convert The State‘s Motion To Dismiss Into A Motion For Summary Judgment.
In the superior court proceedings, Forrer argued that the State, by attaching a number of legislative history materials to its motion to dismiss, automatically converted the motion into one for summary judgment. The superior court ruled otherwise, noting that “statutory history is legal material to be analyzed; it is not evidence of facts.”148 The court also disregarded a number of Forrer‘s allegations as “unwarranted factual inferences and conclusions of law,” then proceeded to dismiss Forrer‘s suit under
The superior court correctly concluded that the State‘s motion to dismiss was proper despite the State‘s submission of statutory history materials not in the pleadings.
In contrast, issues of constitutional and statutory interpretation are decidedly questions of law,153 for which resort to drafting history to clarify the meaning of language is common practice.154 This is true even in the limited scope of
Forrer also faults the superior court‘s treatment of his factual allegations. In ruling on the State‘s motion to dismiss, the superior court excluded Forrer‘s submitted affidavits from consideration and expressly rejected several of Forrer‘s legal conclusions that were “style[d] [as] assertions of fact.” We have previously explained that “even on a motion to dismiss, a court is not obliged to accept as true ‘unwarranted factual inferences and conclusions of law.‘”159 The “facts” alleged by Forrer in this instance fall under the latter category.160 And as illustrated above, the superior court was right to exclude materials outside the pleadings — e.g., affidavits — for purposes of a motion to dismiss.161 Furthermore, factual assertions such as those Forrer alleges make little difference as a legal matter when considering the constitutionality of a statute on its face. Instead, this is an example of a case that presents no material factual dispute and can be resolved purely through the exercise of legal reasoning. It was proper here for the superior court to disregard Forrer‘s alleged “facts” and rule on the motion to dismiss without converting it into a motion for summary judgment.
B. HB 331 Contracts “State Debt” Prohibited By Article IX, Section 8.
1. Subject-to-appropriation bonds are contrary to the plain text of the Alaska Constitution and the framers’ intent.
Our first step when presented with a question of constitutional law not squarely addressed by precedent is to consult the plain text of the Alaska Constitution as clarified through its drafting history.162 Article IX, section 8 provides:
No state debt shall be contracted unless authorized by law for capital improvements or unless authorized by law for housing loans for veterans, and ratified by a majority of the qualified voters of the State who vote on the question. The State may, as provided by law and without ratification, contract debt for the purpose of repelling invasion, suppressing insurrection, defending the State in war, meeting natural disasters, or redeeming indebtedness outstanding at the time this constitution becomes effective.163
We do not interpret constitutional provisions in a vacuum — the document is meant to be read as a whole with each section in harmony with the others.164 Terms and phrases chosen by the framers are given their ordinary meaning as they were understood at the time,165 and usage of those terms is presumed to be consistent throughout.166 Although
[t]he word “debt,” appearing in a constitution or statute fixing a debt limit for municipalities, does not have a fixed legal signification but is used in different statutes and constitutions in senses varying from a very restricted to a very general signification. Its meaning, therefore, in any particular statute or constitution is to be determined by construction.169
The Alaska Constitution does not define the term “debt” as used in article IX, unlike some other state constitutions that explicitly limit the term to those obligations backed by the state‘s “full faith, credit and taxing powers.”170 But the text of section 8 identifies two primary characteristics of “debt“: (1) the debt must be “contracted,” implying a volitional act, potentially involving a contract or other promise of repayment; and (2) it must be for a specific “purpose,” only a handful of which are permissible.171 Whether the State‘s “full faith and credit” is pledged is not an express consideration.172
Section 10 sheds further light on the contours of section 8: “The State and its political subdivisions may borrow money to meet appropriations for any fiscal year in anticipation of the collection of the revenues for that year, but all debt so contracted shall be paid before the end of the next fiscal year.”173 Section 10 provides the sole means for the legislature to borrow funds for any purpose — not just those enumerated in section 8 — but with the strict caveat of repayment within a year.
Section 11 adds one final parameter to the constitutional meaning of “debt“:
The restrictions on contracting debt do not apply to debt incurred through the issuance of revenue bonds by a public enterprise or public corporation of the State or a political subdivision, when the only security is the revenues of the enterprise or corporation. The restrictions do not apply to indebtedness to be paid from special assessments on the benefited property, nor do they apply to refunding indebtedness of the State or its political subdivisions.174
Again, the act of “contracting debt” explicitly includes “the issuance of . . . bonds,” aside from the narrow exception of “revenue bonds.”175 Section 11 also exempts “refunding indebtedness” previously contracted under section 8.176 Where section 10 provides a
The debt provisions in article IX thus form a cohesive whole, with sections 10 and 11 providing narrow exceptions to the blanket restriction in section 8.177 This interpretation comports with how Delegates discussed these provisions,178 as well as their broader understanding of “debt” as “borrow[ed] money,”179 usually in the context of issuing bonds.180 In Village of Chefornak v. Hooper Bay Construction Co., we likewise held that article IX, section 9‘s restrictions on local debts “are applicable only where a political subdivision has endeavored to borrow money, via the issuance of bonds or other paper indebtedness.”181 We noted at the time “that every previous Alaska case involving section 9 . . . [or its] parallel constitutional provision applicable to state debts has concerned bonding issues.”182 We concluded that “a judgment entered upon a settlement stipulation” did not fall under the article IX restrictions against contracted debt.183 Carr-Gottstein Properties v. State likewise interpreted ” ‘debt’ as a term of art used to describe an ‘obligation’ involving borrowed money” in upholding a lease-purchase agreement where there was no “promise to pay . . . rents accruing in the future.”184 As we explain below, HB 331 also fails to satisfy the Carr-Gottstein three-prong test for constitutionally permissible “debt.”
Against this background the State argues that the Delegates’ silence on “subject-to-appropriation debt” evinces an intent to not prohibit new “forms of debt.” The State selectively cites passages from the Constitutional Convention debates to support its narrower understanding of “debt” as encompassing only “bonds pledging the ‘full faith and credit of the state.‘” As discussed above, we look to the Delegates’ debates and statements in interpreting the constitution.185 Undercutting the State‘s argument, there was only a single, passing mention of the phrase “full faith and credit” during the Constitutional Convention, and it appeared in the context of a debate concerning voter requirements for statewide bond elections:
The full faith and credit of the state is explained on every bond issue, and that is a debt service that applies to all taxpayers . . . , and I don‘t think that we want to compel a registration of all property within the state . . . just in order to have a tax roll so people can be qualified to vote as property owners in statewide elections. I think everybody should vote in a statewide
election.186
Delegates knew that other state constitutions defined “debt” to include full faith and credit,187 but omitted such language. As we mentioned before, the Delegates had a wide array of opinions on the meaning of “debt,” ranging from general obligation bonds to all borrowed money, or even any act that might impugn the State‘s credit.188 It should come as no surprise, therefore, that neither Chefornak nor Carr-Gottstein mentioned “full faith and credit” when discussing “debt” in the article IX context.189
In support of its narrow interpretation of “debt,” the State cites past decisions in which we considered dispositive whether the State‘s credit was pledged. But the State misconstrues our precedents. In DeArmond v. Alaska State Development Corp., we considered a constitutional challenge against one of the first Alaska corporations created to issue revenue bonds.190 Of primary concern was whether the legislature‘s start-up loan to the bond-issuing corporation and the corporation‘s use of expected bond proceeds was a use of “public funds” or “public credit” that was not “for a public purpose” as required by article IX, section 6.191 Because the corporation clearly served a public purpose, and because the challenged revenue bonds were “backed only by the resources and credit of the corporation,” we held that “[t]he credit of the state is not being pledged.”192 We said nothing of article IX, section 8. Walker v. Alaska State Mortgage Ass‘n also involved revenue bonds, but the challenge included a claim under article IX, section 8.193 The bulk of argument revolved around other constitutional provisions194 and we dismissed the section 8 challenge with very little discussion, noting only that “our holding in DeArmond is controlling here.”195
The State reads much into these two cases, but it overlooks the fact that both concerned revenue bonds with dedicated revenue streams — not “subject-to-appropriation” bonds — and our constitution contains a specific, limited exception for revenue bonds.196 DeArmond‘s statements on “credit,” accordingly, are concerned only with the “public purpose” clause of section 6, and Walker‘s statements on “debt” merely reflect
Instead, the argument the State would have us adopt to uphold HB 331 relies on logic the framers resoundingly rejected. Rather than strict application of the procedures mandated by article IX, section 8, the State contends that the “preservation of annual discretion in elected representatives is sufficient to effectuate the policies underlying debt limitations.” The State apparently forgets that the Delegates considered and rejected just such an amendment that would have permitted the legislature to create debt with a two-thirds vote.197 We struggle to comprehend why we should judicially create such a power now but checked only by a simple majority vote. The State also makes the argument that “modern financial markets provide their own separate check on imprudent borrowing, because interest rates reflect the affordability of debt for a borrower and the risk of nonpayment.” But our constitution already identifies who holds the final check against imprudent borrowing: the people.198 Delegates discussed similar interest rate arguments surrounding the aforementioned two-thirds debt amendment.199
Committee on Finance and Taxation Chair Leslie Nerland’s comments on this issue are instructive:
Allowing two methods by which a state or political subdivision may provide for bonded indebtedness cannot help but cause favoritism by the bond investment houses for one method or the other, and I think there is no doubt but that this would result eventually in the bonds of the state being classed into two different categories and there is not much question . . . which issue would take the lowest interest rate. . . . [P]utting these two methods implies that we are trying to seek out the most expedient way at the time that the bond issue was required . . . [which] would eventually result in two classifications on general obligations of the State of Alaska . . . .200
The framers adopted this reasoning,201 but the State now attempts to seek the opposite — sanctioning subject-to-appropriation bonds would create “two classifications” of bonded indebtedness under very different interest rates, solely for the sake of legislative expedience. Where the framers expressly considered and rejected the State’s line of logic, we cannot in good conscience adopt it a mere six decades after-the-fact.
We need not formulate a bright-line test to delineate “debt” from “non-debt” in this instance. The plain text of the constitution and the Delegates’ unambiguous rejection of the State’s arguments control our decision today. As the State points out, rejecting
Although we hold the constitution’s debt restriction unambiguously prohibits the bonding scheme here, we address the State’s other arguments below to reaffirm our conclusion.
2. The subject-to-appropriation bonds established by HB 331 do not satisfy our test from Carr-Gottstein.
Both Forrer and the State rely heavily on competing interpretations of the framework for “state debt” we announced in Carr-Gottstein Properties v. State.205 In Carr-Gottstein we affirmed in a three-sentence per curiam opinion a superior court ruling upholding the constitutionality of one particular lease-purchase agreement;206 we then attached two of the superior court’s orders as appendices.207 The controversy involved a contract for the Alaska Court System to lease a property from the Alaska Department of Natural Resources (DNR), with a purchase option upon conclusion of the lease.208 The building was owned by a private entity.209 DNR assigned its rights to a bank as trustee, which then sold certificates of participation as negotiable instruments entitling holders to a percentage share of the lease payments.210 Lease payments were to be made biannually from legislative appropriations,211 subject to “a non-appropriation clause and other terms which limit the recourse of the [certificate] holders to the leased property.”212 The State asserted that in the event of non-appropriation “it would not ‘forfeit’ its equity; instead, it would . . . receive the surplus proceeds of the sale or reletting of the property after paying the outstanding principal owed under the lease.”213
To determine whether the lease-purchase agreement was permissible under
The State essentially argues for a two-part test, combining Carr-Gottstein’s first and third prongs into a single question — whether repayment of borrowed money is “subject to appropriation” — and rephrasing the second prong as whether there is “recourse against the State on default.”220 In contrast, Forrer argues that the Carr-Gottstein test implicitly contained a fourth prong limiting its application to lease-purchase agreements.221 The State’s reformulation is not convincing. The Carr-Gottstein court would not have included a third prong if it did not think it was necessary. Nor is it immediately apparent to us why Carr-Gottstein’s reasoning cannot extend beyond lease-purchase agreements. But we decline the State’s invitation to eliminate any of the three prongs — it is abundantly clear that the Carr-Gottstein court did not find a non-appropriation clause alone sufficient to uphold the lease-purchase agreement involved as constitutional. We look to the sources cited and specific facts discussed in Carr-Gottstein for assistance as we address each prong in turn.
The first prong is formalistic in nature and merely asks whether a subject-to-appropriation clause exists in the challenged contract or legislation.222 There is little dispute that
The second prong requires the challenged arrangement to “limit[] recourse to the leased property.”224 The Carr-Gottstein court reasoned that a corporation’s “independent nature” was not dispositive, but it placed substantial value on the fact that the lease-purchase agreement contained “other terms which limit the recourse of the [certificate] holders to the leased property.”225 The property in question was privately owned, although the title was held by DNR as lessor.226 Because the property was not a state asset, the State would not be liable in the event of non-appropriation, and any outstanding payments to certificate holders could be sought from the sale or reletting of the building.227 The State appears to believe that this factor is satisfied because HB 331 “limits recourse even further” by the fact that there is no property, only a nominally independent corporation.228 But that is not what the Carr-Gottstein test explicitly requires: recourse must be constrained to an identifiable asset that is not government-owned. Even proceeding under the assumption that the lack of a tangible res is not fatal to this analysis, HB 331 provides that bondholders’ sole recourse is to government assets, i.e., legislatively appropriated funds, held by the Corporation.229 Thus the State fails to meet the second prong of the Carr-Gottstein test.
The third prong finally asks whether there exists a long-term obligation.230 Relying on the student note cited by the Carr-Gottstein court, we consider whether the challenged arrangement “extend[s] beyond the current fiscal year,” and whether failing to appropriate subjects the lessee to suit where “government assets” can be seized.231 In Carr-Gottstein there was no long-term obligation on the legislature to make annual appropriations because the penalty for non-appropriation was termination of the lease agreement and reversion of the property to the lessor.232 But here, the Corporation’s sole function is to borrow money over several years to facilitate the purchase of existing oil and gas tax credits rather than permit those credits to be applied to future oil production taxes.233 HB 331’s very purpose, then, is to create a long-term obligation even though there was none previously. The Carr-Gottstein court’s reasoning on this prong is
3. The cases from other jurisdictions cited in support of permitting subject-to-appropriation bonds are unpersuasive.
In support of its narrower interpretation of our constitutional debt restriction, the State resorts to decisions of other jurisdictions for persuasive authority. The State relies heavily on a 32-case string citation of court decisions supporting the so-called majority view in Lonegan v. State (Lonegan II).235 But the vast majority of those cases concern revenue bonds, lease-purchase agreements, or the construction or maintenance of some sort of physical property, and none of them concern the type of solely appropriation-backed bonds contemplated by HB 331.236 Revenue bonds are permitted outright under
Lonegan II concerned a constitutional challenge to revenue bonds for education facilities.238 A narrow majority issued broad pronouncements on what constitutes debt for purposes of the New Jersey Constitution,239 but to rely on those statements is to ignore the unique factual scenario.240 Of equal concern in Lonegan II was that the legislature had already extensively relied on subject-to-appropriation
Fults v. City of Coralville involved revenue bonds for construction and urban renovation.246 The challenged urban renewal area was expected to “provide sufficient revenue to fund the project” by increasing the value of the property tax base,247 and the city issued subject-to-appropriation bonds to finance the construction of a hotel to achieve those ends.248 This arrangement was challenged by property owners alleging, inter alia, that the “bonds caused the city to exceed its constitutional debt limit.”249 In rejecting an “argument that the city [was] attempting to do indirectly what it may not do directly,” the court relied on a Utah case to claim that “[i]f the express terms of the city’s agreement do not offend the constitution, then the purpose alone will not render the agreement unconstitutional.”250 However, the reasoning of the Utah case cited for that point is not reassuring: “Of course the Act is intended to permit avoidance of the constitutional debt limitations. It is the very rigidity of those limitations that has led the courts to narrowly construe them and the legislature to actively assist local government in avoiding them.”251
The State additionally discusses In re Oklahoma Capitol Improvement Authority252 and the New York case Schulz v. State253 in its briefing,254 both of which involved bonds for transportation projects to be paid for via dedicated revenue streams from increased transportation taxes and fees.255 While these cases thus more closely resemble revenue bonds, this type of dedicated funding is explicitly prohibited under our constitution.256 We cannot help but note that constitutional lines between revenue bonds, lease-purchase agreements, and subject-to-appropriation bonds have been blurred in many jurisdictions due to incremental legislative experimentation and successive judicial application of stare decisis.257 Regardless, the
C. The Superior Court Correctly Concluded That HB 331 Did Not Qualify For Any Other Exceptions To “State Debt” In Article IX.
In the alternative, the State argues that HB 331 fits within one or both of the exceptions under
1. HB 331 is not “refunding indebtedness of the State” under article IX, section 11.
While Section 11’s exception was discussed only briefly during the Constitutional Convention, that brief description is instructive: “Section 11 . . . allows for refunding of debt by the calling of current bonds and issuing of new ones at lower interest rates without the referendum.”260 The Committee on Finance and Taxation’s commentary also suggests that the indebtedness to be refunded would already have been contracted pursuant to a
So understood, this provision would be unavailable for restructuring other obligations not incurred via
2. HB 331 does not establish “revenue bonds” for the purposes of article IX, section 11.
The State lastly claims that the subject-to-appropriation bonds authorized by HB 331 qualify as revenue bonds under
A resort to contemporaneous dictionaries reveals that the term “revenue bond” had a distinct meaning at the time of Alaska’s statehood. Webster’s New International Dictionary defined the term as “[a] bond issued by a public agency authorized to build or acquire a revenue-producing project and payable solely out of revenue derived from the project.”267 Ballentine’s Law Dictionary likewise described “revenue bond” as being “issued by a public body payable solely from a special fund arising from the revenues accruing from operation of an enterprise or project for the construction, operation, and maintenance of which the bond was issued.”268 Delegates to the Constitutional Convention reiterated this understanding of “revenue bond,” noting that the
Against this backdrop, the State points to the Alaska Statehood Committee’s report on state finance to argue that the framers understood revenue bonds simply as any means that “do not pledge the full faith and credit of the state.”273 But as we explained above, the framers rejected much of that report’s reasoning when they adopted the restrictions against contracting debt in
The State nonetheless insists that “[t]he precise nature of a public corporation’s ‘revenues’ . . . has no constitutional significance,” relying heavily on the Kentucky opinion Wilson v. Kentucky Transportation Cabinet277 for this proposition. But Wilson is unpersuasive, as the court expansively construed prior precedent to reach its outcome. Wilson involved a transportation bond, although the affected roads were admittedly “nonrevenue producing.”278 The court upheld the arrangement as a revenue bond by proclaiming that what matters is “the revenue produced by the payments from the biennial appropriations of the General Assembly and not the revenues which the tolls on the roads might produce.”279 The Wilson court cited two previous Kentucky cases also upholding transportation bonds — the first of which, Turnpike Authority of Kentucky v. Wall, involved revenue bonds backed by tolls and dedicated fuel taxes.280 Biennial lease payments thus consisted of “the difference between the amount of rent agreed upon in advance and the revenues actually produced by the project.”281 The Wall court noted that if the turnpike lease were not renewed, “the right to establish and collect the revenues of the project passes to the Authority, . . . [and] if the revenues should prove insufficient to service the bonds the Authority could increase the tolls.”282 In other words, the Wall court never considered the lease payments to have been a source of “revenue.”
In the other case cited by the Wilson court — Blythe v. Transportation Cabinet of Kentucky — the court disposed of constitutional claims against a financing scheme similar to that in Wall with very little discussion, assuming the facts were “identical to those presented” in Wall.283 The Blythe court never indicated what sources of revenue actually backed the challenged “revenue bonds” as none had been issued.284 The Wilson court then reached its conclusion on the observation that “[t]here were no tolls involved in Blythe, and in Wall, the tolls were never represented to be sufficient to pay the lease payments.”285 Wilson, therefore, construed Blythe as standing for the proposition that a dedicated revenue stream (toll roads) was not necessary — a proposition never stated in Blythe — paving the way to completely recast Wall as though it approved of legislative appropriations as an acceptable form of “revenue.”286 Regardless of Wilson’s questionable reasoning, one indelible difference makes Kentucky precedent unavailing here: revenue bonds are a creature of judicial creation in Kentucky,287 whereas we are limited by our constitution.
D. Severability
Having decided that the subject-to-appropriation bonds in HB 331 violate
Because HB 331 was specifically requested by Governor Walker, we consider his transmittal letter as a strong indication of what the bill was intended to accomplish.297
V. CONCLUSION
HB 331 violates the limitation placed on contracting debt under