NATIONAL ASSOCIATION OF BOND LAWYERS

Voice from the Past
Chapter 9

A 1962 statutory covenant between the States of New Jersey and New York limited the ability of the Port Authority of New York and New Jersey to subsidize rail passenger transportation from revenues and reserves pledged as security for certain bonds issued and to be issued by the Port Authority. After several issues of bonds were sold and delivered, a 1974 New Jersey statute, with a like New York statute, retroactively repealed that covenant. This set the background for the April 21, 1977 decision of the United States Supreme Court in United States Trust Co. v. New Jersey, 431 U.S. 1 (1977).

While this case was pending, an institutional investor had asked me to look at the pleadings and briefs in this case to determine whether the case was argued forcefully enough by the appellant United States Trust Co. or whether that investor should try to intervene or file a brief Amicus Curiae. After doing so, I advised the investor that appellant's counsel presented the case well and thoroughly and I doubted that any filings on behalf of the investor would be useful. In this connection I became familiar with the holdings of the Supreme Court in impairment-of-obligation cases under Article I, Section 10 of the U. S. Constitution.

Previously the Court had held, "it is not every modification of a contractual promise that impairs the obligation of contract under federal law," and that the State "has the sovereign right . . . to protect the . . . general welfare of the people and we must respect the wide discretion on the part of the legislature in determining what is and what is not necessary."

In the fall of 1976, while the U.S. Trust case was pending before the Supreme Court, I was acting, with Bill Eason and Bernard Parks, as bond counsel for an issue of bonds of Metropolitan Atlanta Rapid Transit Authority payable from a special sales tax in Fulton and DeKalb Counties, Georgia. Nick Capozzoli of Mudge Rose was acting as underwriters' counsel. The question arose about what the official statement could say about the right of the State to change the sales tax. For example, could the State reduce or eliminate the tax on food?

We knew that, regardless of the outcome of that case, there would be some things the State could do and some things it could not do. I don't recall whether it got down to wondering about reducing the tax on the sale of onions and increasing it on potatoes, but this illustrates the futility of predicting anything the legislature might do and then making a prediction about its constitutionality. Finally we hit on a solution, or at least a way to deal with the question instead of solving it. The official statement would simply say that the security of the bonds is protected by the impairment-of-obligation clause of the Constitution without specifying in detail the extent of such protection.

The underwriters decided to hold an information meeting in New York before the sale of the bonds, and asked various officials of the Authority, including its general counsel and the four of us, to attend the meeting and answer any questions that the potential underwriters and investors might have. We wondered what we could say if asked about the particulars of the protection given by that clause, and the only conclusion we reached was that whoever fielded the question would have to wing it. We hoped that no one would ask.

Then came the meeting. Early to the podium was the Authority's general counsel who talked about the creation of the Authority and various other matters that did not get close to the bonds themselves. Then one member of the audience asked him about the extent to which the State could change the sales tax. Without batting an eye, the general counsel said that the sales tax was part of the contract with the bondholders and the State could not change it at all under the U.S. Constitution.

Nick, Bill, Bernard, and I all glanced at each other and gulped and shrugged. No one in the audience challenged the general counsel's assertion. When it was our turn no one asked any of the bond counsel or underwriters' counsel about this question. We were home free.

We felt even freer when the Supreme Court, the following April, concluded that the repeal of the 1962 covenant amounted to an abuse of the discretion of the State legislatures, partly because the results deemed to be for the public good by breaching the contract could be obtained in other ways. The majority opinion declared:
"The Contract Clause is not an absolute bar to subsequent modification of a State's own financial obligations. As with laws impairing the obligations of private contracts, an impairment may be constitutional if it is reasonable and necessary to serve an important public purpose. In applying this standard, however, complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the State's self-interest is at stake. A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a State could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all."


Manly W. Mumford