On page C21 of the Wednesday, February 9 issue of the Wall Street Journal, the following paragraph is found: "A $253 million issue of Washington State general-obligation bonds found healthy buying interest in the municipal market."

Such bonds carry the full faith and credit statement of the State of Washington, which means that tax revenues to pay the interest and redeem the principal have been promised to the purchasers. This is clearly an increase in taxes unless the State agency that sold 'em also stated that the funds obligated would be derived by reducing expenditures on other, enumerated budgets. Presumably, the public record somewhere contains those enumerations.

My question is this: who has standing to challenge the sale of those bonds? I don't, as I haven't been harmed, nor can I see any path to future harm to me. Yet I-695 insists that a state-wide vote be taken before such tax actions can be imposed. Is this a huge hole in I-695? Can the State simply ignore I-695 because the standing problem can't be solved?

-- C. James (clinton_james@yahoo.com), February 09, 2000

Answers

Well not being able to read the whole story does limit my understanding of just what we're talking about here, but my guess is that this absolutely does not violate 695 in any way.

Yes, Washington State (like any person or entity that buys things on credit) has promised to pay off the bonds and any interest. But that in NO WAY means that it will AUTOMATICALLY require an increase in taxes.

The state constitution and budget writers KNOW that when they issue bonds, they will have to pay them off in the future, which is why the constitution prohibits the amount of debt service payments from being more than 9% of the total budget, and the legislature has a stricter 7% limit. What that does is in a way keep legislators from making a whole bunch of appropriations and use credit (forcing future generations to either cut services or raise taxes to pay for it) to pay the bill (what the Federal government did BIG time in the 80's).

To keep a long story from going longer, in a nutshell, the selling of bonds DOES NOT necessarily require the raising of taxes in the future. With the debt limit, the state essentially can't issue more bonds until it pays off the ones it already has. Since it pays those off, adding new ones makes it revenue neutral. Besides, even without the debt limit, the 601 spending limit and the 695 voting requirement would require either the state to reduce other spending to pay for additional debt payments, or require a vote of the people to raise taxes.

695 is not being violated in this case.

-- Patrick (patrick1142@yahoo.com), February 09, 2000.

Barrowing by the state that is necessary to conduct the public business, has been affected by I-695 because the ligislature IS restricted in how it can fund repayment of the bonds and bond buyers should be more reluctant to buy these bonds. This is one of the reasons 695 is being challenged in court. Current buyers know the situation, and choose to buy or not. Prior buyers made the decision based on the constitutional and legislative authority the state and local governments had to barrow and levy taxes, and the debt is a contract. The initiative changes the terms of that contract. It is a state debt, and state voters are restricted in their authority to change the terms of that state debt because they are a party to the contract.

If state barrowing were really a violation of 695, it is another example of why it is bad law, and (at least partly) unconstitutional.

-- dbvz (dbvz@wa.freei.net), February 11, 2000.

d-

"The initiative changes the terms of that contract. It is a state debt, and state voters are restricted in their authority to change the terms of that state debt because they are a party to the contract. "

I think this is a fallacious argument. By this rationale, a tax decrease, any tax decrease, could only be implemented by constitutional amendment, since any decrease in taxing authority could in theory have a detrimental effect to the tax worthiness of the state. If this were held to be true, even the legislature would be unable to decrease taxes, except by constitutional amendment.

If the voters were to pass an initiative that attempted to repeal repayment of bonds, basically voiding a legal contract, you might have a point. But they passed an initiative that took away the MVET which constituted a relatively small (we can argue numbers interminably) percentage of state revenues. Since it did not require cutbacks that would even come close to causing default, this argument is so much of a stretch it's almost a lie.

If you wish to imply that the decreased revenue flow might cause higher interest to be required to compensate future bond buyers, and that this might be an added expense for future bond sales, I have no problem with that argument, although I think the effect is likely to be modest as long as we have a healthy surplus.

But that's a future argument. To argue that this constitutes breech of contract, just looks silly. And in the (IMHO) unlikely event that the courts interpreted it that way, I think that would enrage the electorate, to no one's benefit.

You don't seriously think this is a valid argument, do you? I always thought you were more reasonable than that.

the craigster

-- (craigcar@crosswinds.net), February 11, 2000.

Sorry-Make that BREACH of contract

-- (craigcar@crosswinds.net), February 11, 2000.

Craig wrote, "You don't seriously think this is a valid argument, do you? I always thought you were more reasonable than that."

Yes, I do. The "full faith and credit" committment of the state and local governments has been impaired by the actions of one party to a financial contract - the State of Washington. Your comment that reductions in taxes could only be done by constitutional amendment if this were true is, in your words, just silly. If the legislature were to reduce taxes, but retains the authority to increase taxes again if needed, they have not impaired the ability of the state and local governments to pay their debts.

You could better argue that the state voters retain the authority to reinstate taxes again, if needed, so a similar situation results from the Initiative. The problem with that is that the state constitution grants the authority to tax to the Legislature, and the Legislature delegated that authority to local governments in state law (most of which were NOT changed by I-695 explicitly in the language of the initiative as required by the constitution); and it is that legislative process of taxation that was the basis for the bond sale contracts. The addition of a public vote to approve needed taxes is an additional step that has reduced the strength of the financial support behind the bonds.

The fact that you seem to agree that future bond buyers will likely want a higher interest rate for the higher risk of bonds issued by Washington governments simply proved the point. Prior bond buyers don't get that higher interest rate for the higher risk created by the other party (Washington) to the debt contract.

You may remember that Washington is the state where one of the biggest government bond defaults in history occured. We don't need the bond market reminded of that, and concerned it will happen again. The constitutional prohibition against impairing contracts (including debt obligations) is intended to prevent that.

This is still bad law, and some of its provisions are likely to be declared unconstitutional. As for public reaction to that, I would hope they realize that the courts will do what they are required to do; which is to require the individuals, the Legislature, and the state voters, to play by the rules in the constitution. If the state wants to change the rules, we have a process for doing that. I-695 did not follow that process, so it is still subject to the constitutional rules.

-- dbvz (dbvz@wa.freei.net), February 12, 2000.

to dbvz: In a worst case scenario (which is highly hypothetical), the courts could probably impose a tax to cover any existing bond obligations prior to I-695. In other words, I-695 does not supercede any existing contracts entered into prior to the passage of I-695.

However, now that I-695 has been passed, no protection would be offered to any new contracts. And the rules of "caveat emptor" would apply. Of course, if the state of Washington ever reneged on any debt incurred after I-695, then no one would ever loan the state money again, until I-695 was repealed. Which, by the way, can be done by a two-thirds vote of the legislature.

So, really, your argument that I-695 is unconstitutional is a weak one. Because, down the road, if necessary, 2/3 of the legislature can opt to make I-695 disappear.

-- Matthew M. Warren (mattinsky@msn.com), February 13, 2000.

Matthew:

Weak? You wrote, "In a worst case scenario (which is highly hypothetical), the courts could probably impose a tax to cover any existing bond obligations prior to I-695. In other words, I-695 does not supercede any existing contracts entered into prior to the passage of I-695." Courts don't impose taxes. They don't craft solutions to make unconstitutional law conform to constitutional requirements. That is not their job. They determine what laws, or portions of laws (or initiatives) are unconstitutional, and return the issue to the legislative branch to solve.

You also wrote, "However, now that I-695 has been passed, no protection would be offered to any new contracts. And the rules of "caveat emptor" would apply." Not really. The rules of the constitution still apply, which is why this is going to be declared unconstitutional. The constitution grants the authority to levy taxes, and the initiative process can't change that. This bond problem is just an example of why the constitutional rules need to prevail.

You wrote, "Of course, if the state of Washington ever reneged on any debt incurred after I-695, then no one would ever loan the state money again, until I-695 was repealed. Which, by the way, can be done by a two-thirds vote of the legislature. So, really, your argument that I-695 is unconstitutional is a weak one. Because, down the road, if necessary, 2/3 of the legislature can opt to make I-695 disappear." They won't have to. I believe the court will make at least section 2 disappear. The repeal option will make a nice arguement for the court to consider, when evaluating the contitutional issues; but consider what you are saying. In order to make the initiative conform to the constitution, the Legislature needs to repeal it whenever it impairs the ability of the state, or any local government, to meet its debt obligations. ANY local government. The probability of a financial problem in a small city in Benton County producing a timely response from 2/3 of the Legislature, is zero. The court will find that is insufficient.

-- dbvz (dbvz@wa.freei.net), February 13, 2000.