Four Provisions of our State Constitution which apply to creation of a Public Bank
After the the reckless gambling of private banks led to the financial crisis of 2008, bills were introduced to create a public bank in Washington State. These bills gained momentum due to the “credit freeze” private banks inflicted on small businesses – harming our local economy – and also due to the massive tax payer billion dollar bailouts that have been given to big Wall Street banks – which has led the public to demand that public funds be deposited in a public bank and used for public purposes. However, there are four sections of our Washington State Constitution which appear to limit our State’s ability to create a public bank. http://www.leg.wa.gov/lawsandagencyrules/pages/constitution.aspx
Article VIII Section 5 of the Washington State Constitution states:
“The credit of the state shall not, in any manner be given or loaned to, or in aid of any individual, association, company or corporation.”
Article VIII Section 7 states:
“No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation”.
Article XII Section 9 states:
“The state shall not in any manner loan its credit, nor shall it subscribe to, or be interested in the stock of any company, association or corporation.”
Article 8 Section 1 (b) states in part:
(b) The aggregate debt contracted by the state shall not exceed that amount for which payments of principal and interest in any fiscal year would require the state to expend more than nine percent of the arithmetic mean of its general state revenues for the three immediately preceding fiscal years as certified by the treasurer.
(d) Debt shall be construed to mean borrowed money represented by bonds, notes, or other evidences of indebtedness which are secured by the full faith and credit of the state or are required to be repaid, directly or indirectly, from general state revenues and which are incurred by the state, . . . but shall not include obligations for the payment of current expenses of state government . . ..
Four Related Constitutional Questions
The drafters of our State Constitution were aware of the corrupting influence of private corporations and wanted to insure that the State would not be drawn into “gifts” to private corporations - and did not loan the credit of the State to a private individual, association, company or corporation. However, our Supreme Court has clarified that the State may enter into fair contracts with private corporations - as long as the State receives a fair benefit for the contract.
These Constitutional issues can be roughly divided into four questions:
- What would constitute a “gift” to a private corporation?
- What constitutes a “loan of credit” to a private corporation?
- What constitutes a debt in terms of the debt limit?
- What is required to overcome a presumption of Constitutionality?
Question 1: How to make sure a Public Bank is structured to avoid constituting a “gift” to a private corporation?
In 1996, our State Supreme Court wrote a very lengthy 45 page opinion defining more precisely what would constitute a gift to a private corporation (see CLEAN versus State of Washington, 1996, Wn.2d 782, 928 P.2d 1054). A Citizens Organization called CLEAN, Citizens for Leaders with Ethics and Accountability Now, challenged emergency legislation passed by the Legislature in special session to establish a method for financing the construction of a major league baseball stadium. CLEAN claimed the State was making a gift to a private corporation. Our Supreme Court upheld the legislation – deciding that it was NOT a violation of our State Constitution because the public received a substantial benefit from the legislation. The court stated:
The purpose of the provisions is “‘to prevent state funds from being used to benefit private interests where the public interest is not primarily served… The determination of whether a “public purpose” is served by the expenditure of tax dollars is primarily a legislative question… Public purpose is an evolving concept that necessarily changes to meet changing public attitudes… The purpose of CONSTITUTION Article VIII, Sections 5 and 7, which prohibit the State from giving gifts or making loans of money or credit to private persons, is to prevent public funds from being used to benefit private interests when the public interest is not primarily served… Neither section is violated by an expenditure of public funds if (1) the funds have been expended to carry out a fundamental governmental purpose or (2) the governmental entity making the expenditure did not have a donative intent to give a gift and the public has received adequate consideration for the expenditure. An important factor in analyzing the second part of the test is whether the government retains control over how the funds are spent.”
Conclusion: Because the stadium in question provided an “economic benefit” to the public, by providing jobs and economic development, the legislature could participate in financing the stadium – even though a private corporation would also benefit from the stadium. Therefore, if a Public State Bank bill includes a finding that a public state bank would provide an economic benefit to the citizens of our State, and create jobs, this would increase the likelihood that our Supreme Court would find it constitutional.
Question 2: What constitutes a “loan of credit” to a private corporation?
In 1984, our Supreme Court ruled in a dispute between the City of Marysville and the State: (See Marysville v. State, 1984 101 Wn.2d 50, 676 P.2d 989). Marysville had purchased a private golf course and objected to the fact that the golf course employees had to be provided pension benefits since they were now public employees. The City claimed it should not have to participate in a State sponsored pension plan (PERS or Public Employee Retirement System) for these employees. The City claimed that these funds were an impermissible “gift” to State employees and that these pension funds were partially invested in a loan of credit to private corporations via investment in the stock market. The Supreme Court again ruled in favor of the State legislature, referring to two prior cases involving Article 8, Sections 5 and 7 of our State Constitution ( IN RE MARRIAGE OF JOHNSON,96 Wn.2d 255, 634 P.2d 877 (1981) and STATEEX REL. GRAHAM v. OLYMPIA,80 Wn.2d 672, 676-77, 497 P.2d 924 (1972).
“There, we stated: We believe, therefore, that the prohibition was against loans as used in the ordinary and popular sense, between a lender and a borrower, where a question of the security of funds in such transactions would be involved . . .It was the risk of endangering public funds from the loaning of money in the ordinary and popular sense that the framers of our constitution interdicted . . .This holding was adopted by the majority in STATE HOUSING FIN. COMM'N v. O'BRIEN,100 Wn.2d 491, 671 P.2d 247 (1983). There the majority stated, at pages 494-95: "Recently, however, we have focused primarily on the risk that the state program posed to the public treasury or taxpayer. IN RE MARRIAGE OF JOHNSON,96 Wn.2d 255, 634 P.2d 877 (1981). . . . Certainly, the lending of credit clause was not intended to insulate taxpayers from all risk and debt accruing from the public decisions of their governing representatives. Risk flowing from public ventures legitimately undertaken is inherent in our form of government… The framers of our constitution were deeply concerned about the effects on the public purse of granting public subsidies to private commercial enterprises, primarily railroads. They were not concerned about the non- speculative transfer of money from one nonprofit government agency to another.” (emphasis added).
In a CONCURRING OPINION, Justice Rosellini stated:
“I concur in the result reached by the majority. However, I am opposed to the majority's needless and continuing attempts to limit the scope of protections guaranteed our citizenry by the constitutional prohibitions of gifts or loans of public money or credit. SEE STATE HOUSING FIN. COMM'N v. O'BRIEN, 100 Wn.2d 491, 500, 671 P.2d 247 (1983) (Rosellini, J., dissenting); IN RE MARRIAGE OF JOHNSON, 96 Wn.2d 255, 268, 634 P.2d 877 (1981) (Dore, J., concurring in part, dissenting in part).
The majority makes reference to JOHNSON and HOUSING FIN. as severely limiting the previous scope of our opinions on the subject. The majority indicates that the focus of inquiry is on the "risk of loss" posed to the public treasury or taxpayer and that only those activities which jeopardize state or municipal assets are prohibited. This approach to lending of credit cases also provides that there is no violation of the prohibitions so long as the loan or gift of credit serves a statutory objective to benefit a deserving class of the public.
The constitutional prohibition is intended to do more than merely protect the public treasury. An equally important thrust of the provision is to prohibit private individuals, associations, or corporations from deriving special privileges or advantages from the State or its municipalities. SEE PORT OF LONGVIEW v. TAXPAYERS, 85 Wn.2d 216, 533 P.2d 128 (1974).
I am opposed to the "risk of loss" analysis for the same reasons set forth in the dissent in HOUSING FIN. and will not further reiterate them here. The instant action simply does not call upon this court to apply the "risk of loss" approach. To analyze the present controversy correctly, this court need only determine that there is adequate consideration in exchange for the service credit and employer contributions to the retirement system. The existence of ample consideration negates the City's allegation that the scheme constitutes an unconstitutional gift or loan of the City's credit.”
CONCLUSION:
Some judges on our Supreme Court contend there should be a risk analysis to determine if State assets are placed at risk, recognizing that there is no such thing as no risk. Therefore, a State Public Bank should be structured in such a way as to minimize risk to State assets. However, others on our Supreme Court contend that the gift issue is not a problem as long as there is a significant public benefit of the State funded project. Clearly, there are many significant public benefits to creating a State Public Bank – including creating jobs and lowering the cost of capital projects for public investments such as schools and roads.
Question 3: What constitutes a debt in terms of the debt limit?
Our State Constitution has always had a Debt limit clause – intended to prevent any single legislature from creating too much debt for any future legislature. However, before 1972, this clause was so inflexible that the legislature repeatedly had to create “loopholes” to allow for essential State Public Works Construction projects such as schools, bridges and roads. In 1972, the voters approved a constitutional amendment to Article 8, Section 1 of our State Constitution in order to make the debt limit more flexible. The new debt limit was set at 9% of the average of the previous three fiscal years of State revenue. The amendment reduced the interest costs of future bonding and . . . restricted the legislature's ability to incur State debt without the approval of the voters. Significantly, this amendment revised Article 8, Section 1(g) prohibits the Treasurer from using State funds to pay debts of the Washington State building authority or any similar entity which undertakes to finance or provide a facility for use or occupancy by the State or any of its agencies. A savings of millions in interest costs on future bonds was achieved since future bonds have been backed by the full faith and credit of the State, thereby permitting lower interest rates. The constitutional definition of "debt" adopted by the voters in 1972 is found in Article 8, Section 1(d), which defines debt as "borrowed money represented by bonds, notes, or other evidences of indebtedness which are . . . required to be repaid, directly or indirectly, from general State revenues . . .."
In 1991, our Supreme Court further clarified the meaning of the term “debt” when they ruled in a dispute between the State Department of Ecology and the State Finance Committee. (See DEPT OF ECOLOGY v.STATEFINANCE COMM. 1991 116 Wn.2d 246, 804 P.2d 1241).
The Department of Ecology wanted to lease a building which they would eventually buy. The legislature passed a special law to permit this kind of lease without it affecting the State Debt Limit stating: Financing contracts entered into under the limitations set forth in this chapter shall not constitute a debt or the contracting of indebtedness under . . . any . . . law limiting debt of the state. It is the intent of the legislature that such contracts also shall not constitute a debt or the contracting of indebtedness under Article 8, Section 1of the State Constitution. . . . It is the intent of the legislature that [certificates of participation] also shall not constitute a debt or the contracting of indebtedness under Article 8, Section 1 of the State Constitution if payment of the certificates is conditioned upon payment by the State under the financing contract .
The State Finance Committee refused to make the payments on the lease claiming that the arrangement violated the Debt Limit under Article 8, Section 1 of our State Constitution. By a narrow 5 to 4 majority, our State Supreme Court sided with the legislature and allowed the arrangement stating: For purposes of the constitutional debt limitation (Washington State Constitution, Article 8 Section 1), no debt is incurred by the State unless the State is obligated to make payments. State financing arrangements do not give rise to a "debt" for purposes of the constitutional debt limitation if the arrangement is not secured by the full faith and credit of the State and/or the Legislature is expressly not obligated to make the payments.
Use of a Non-appropriation Clause to avoid the Debt Limit
In ruling in favor of the State legislature, our Supreme Court noted:
Oregon, like Washington, has a constitutional debt limitation. The statute at issue in Kane authorized the Legislature to enter into long-term financing agreements similar to the DOE plan. That statute contained a non appropriation clause that limited the liability of the State. 308 Or. at 584-85. In upholding the financing scheme, the Oregon court first defined debt as:
an unconditional and legal obligation of the State to pay, when at the time the obligations initially are created there are insufficient un-appropriated and not otherwise obligated funds in the State treasury to meet those obligations.308 Or. at 583. The court then held that, because of the non appropriation clause, the financing scheme did not create debt.
The State’s promise of repayment is conditioned on the willingness of future legislative assemblies to appropriate the funds. The State does not promise that future legislatures will appropriate any funds. The lenders take the risk of nonpayment. A similar situation exists in the case before us, and we find the Oregon court's reasoning persuasive. DOE's financing plan does not require future Legislatures to appropriate funds. Instead, the plan gives future Legislatures the flexibility to continue the funding or not, depending upon budgetary needs. The plan places the appropriation decision where it belongs, in the hands of the collective wisdom of future legislators. Since the plan does not impose upon future Legislatures a requirement of continued funding, the plan does not create debt. (emphasis added).
The purpose of the original Article 8, Section 1 debt limitation was to protect the integrity of the State's economy. State ex rel. State Bldg. Fin. Auth. v. Yelle, 47 Wn.2d at 715. Constitutional debt limitations were enacted to protect future taxpayers from the kind of improvidence that led to State and local government bankruptcies in the 19th century. In 1972 the people amended Article 8, Section 1 to its present form. That amendment changed the method by which the debt ceiling is calculated, but the amendment did not change the purpose of the limitation. DOE's plan fulfills that purpose. The nonappropriation clause protects future taxpayers by giving their representatives the power to terminate the lease. The people have spoken through two vehicles, the constitutional amendment and the Legislature. It is not within this court's prerogative to set aside the will of the people.
The Minority Opinion argued against the legislature noting that “The majority contends that because in this case a trustee, rather than a specially created State authority, acts to accommodate the State by issuing the certificates evidencing indebtedness, and because the agreements include a nonappropriation clause, this plan is distinguishable from the state building authority. (However) the loan from the holders of the certificates is required to be paid from State revenues. Although the nonappropriation clause appears to allow the Legislature an escape hatch, that escape hatch is really an illusory one. The debt will be required to be repaid from general State revenues and is thus subject to the limits of Article 8, Section 1…
Conclusion:
Our Supreme Court has held that a trustee relationship does not constitute debt for purposes of the debt limit – even if the leasing funds will come out of the General Fund. Provided that a State Public Bank would be financed through a mechanism outside of the General Fund and would not require payments from the General Fund, our Supreme Court would likely hold that it was not subject to the Debt Limit. It should be noted that because North Dakota has a public bank, it has no debt at all. Thus, adopting a Public Bank in Washington State would allow us to lower the debt and the debt limit over time. It is however important to finance the State Bank in a manner which does not require General Funds.
The key aspect of financing a public bank is to not tie the hands of a future legislature with financial obligations or debt. Therefore, financing the bank can and should be done at the start either by a vote of the legislature – such as by passing Senate Bill 6093 which would provide a billion dollars per year in revenue for a public bank - or a vote of the people on a measure which includes a specific funding mechanism approved by the people.
Question 4: What is required to overcome a presumption of Constitutionality?
Note that in nearly all cases, including all of the cases discussed above, the majority of our Supreme Court is very reluctant to rule against our State legislature. As long as the legislature is acting in good faith and trying to pursue a public purpose, especially in trying to meet the needs of the public and promote the economy, our Supreme Court has deferred to their judgment.
Our Supreme Court has repeatedly stated: A statute is presumed to be constitutional. A party claiming that a statute is invalid has the burden of establishing beyond a reasonable doubt that it clearly conflicts with the constitution.
The Missouri Supreme Court noted that Statecourts should uphold legislative enactments "as embodying the will of the people unless they are plainly and palpably a violation of the fundamental law of the (State) constitution."Ams. United v. Rogers, 538 S.W.2d 711, 716 (Mo. 1976).
Conclusion
As long as a State Public Bank bill is carefully written to comply with the above Constitutional limitations, it is highly likely that it will be approved by our State Supreme Court.
Other Examples of the State Legislature Broad Constitutional Authority
The state often hires private individuals, companies or corporations and gives them money to do work. So the gift and credit prohibition stated in Article VIII, Section 7 does not apply to work like building highways or schools because it is work done in the public interest. The state also gives away billions of dollars per year in tax credits to wealthy corporations. The legislature has been allowed to do this because of some nebulous (and inaccurate) claim that these billions in tax breaks help create jobs – which is therefore in the public interest. Finally, State Pension funds, including funds from General Fund State Revenue, are currently invested primarily in volatile corporate stocks with Wall Street Private Bank Gamblers like Chase Bank and Bank of America. This also is supposedly being done in the public interest. Certainly, if all of these State funds can be invested in private banks for private risky purposes, they can be invested in a public bank for less risky public purposes.
A Former Supreme Court Justice states that a Public Bank is Constitutional
Former Washington State Supreme Court Justice, Phil Talmadge, agrees that a Public Bank is permitted by our State Constitution, stating: I do not believe that a constitutional amendment is necessary to establish such a bank. Gene Lux regularly introduced such a bill as did I in the Senate. We did not offer the bill as one requiring a constitutional amendment. I am aware of nothing in the constitution that bars the state from creating a bank. There is no lending of credit problem (a constitutional provision) where the state gets a full return on its asset. The state has been in the business for many years of issuing bonds for housing assistance and taking deposits for guaranteed tuition programs, for just a couple of examples. Those are “lending” programs that have earmarks of bank-like activities.
Legal Scholar Hugh Spitzer weighs in to the debate
Some have claimed that an article by University of Washington Legal Scholar, Hugh Spitzer, argued that a State Public Bank would be unconstitutional. See University of Puget Sound Law Review Volume 8, Issue 195. pages 213 to 218. http://lawpublications.seattleu.edu/cgi/viewcontent.cgi?article=1193&context=sulr
However, what this article really argued was that the “risk analysis” used by our Supreme Court in several cases involving Article 8, Sections 5 and 7, was unnecessary. Instead, the article argues that a much simpler finding that the State received a substantial benefit would address the Constitutional concerns.
“The government action conferring tax-exempt status on the bonds should be analyzed as a possible gift of something of value, which would be barred by Article 8, Section 5 or 7, were there not adequate consideration (to the public) in return.”
The article also proposed another simple remedy to the Constitutional question:
“An alternate and equally defensible rationale that the court could have applied in O’Brien is simply that the provision of housing is a “recognized public government function” and that government loans to aid in the provision of housing for citizens are not fundamentally different from day care centers, vaccinations, fare-free bus zones, crime victim compensation, or public support for electoral campaigns, all of which the court in City of Seattle v. State suggested were permissible (100 Wash. 2d 232, 241-42, 668 P.2d 1266, 1271 (1983). “
It therefore appears that far from arguing against a State Public Bank, Hugh Spitzer was providing additional reasons in support of the legislature’s ability to enact public works projects.
Conclusion
Overcoming the current partial credit freeze for small business, creating jobs in our state by doing so, financing student loans and economic development are all in the public interest. That is what a state bank modeled after the Bank of North Dakota could do. The State would also receive a benefit in increase State revenue as private interests would have to pay interest on the loan the state public bank made as well as paying back the principle. A state bank will be very prudent in its loan practices and will have to follow current banking law. That is the case with the Bank of North Dakota. On this fact alone, it could be argued that the public would be primary beneficiary of the state bank.
Finally, if the Public Bank bill was written primarily to lower the cost of and help build hundreds of urgently needed public schools, recognizing that these public schools are urgently needed and that without the establishment of a public bank, our state would not have the financial means to build these schools, then we could argue that not only is a public bank constitutional, but it is REQUIRED by our state constitution. This is because our State Constitution wisely and clearly states that providing a uniform system of public schools is the PARAMOUNT DUTY of our state legislature. This also makes providing public schools as the PARAMOUNT DUTY of our Courts and of our State Constitution. Our Supreme Court will not rule a public bank as unconstitutional if that would mean that one million children would be deprived of their affirmative constitutional right to an education is safe and reliable school buildings.
Previously, we have explained that our State is facing a $50 billion school construction crisis. We need to replace one thousand unsafe and unhealthy crumbling schools as soon as possible. There is no other option on the table to achieve this goal other than the creation of a State public bank. As long as the bill is carefully written to address the concerns of our Supreme Court, the court will rule in its favor. After all, even Supreme Court justices have grandchildren that require an education in a safe and healthy school building.
If someone has some other specific proposal for financing and building $50 billion in public schools without the creation of a public bank, let them present that solution now. It is no longer acceptable to throw darts at the creation of a public bank when those darts are placing the health and safety of one million school children at risk.
Reply to the 2012 Spitzer Memo… Our State Constitution clearly specifies that we all have a PARAMOUNT DUTY to build and operate safe public schools!
I wrote and distributed the above article on the constitutionality of a public bank in November 2011. Since then, on January 25, 2012, Hugh Spitzer, the attorney for the State Treasurer’s Office, wrote a Memorandum to the State Treasurer outlining potential legal problems with the wording of House Bill 2434/Senate Bill 6310 – bills introduced in the 2012 legislature in January 2012 to create a public bank, also called an Investment Trust, for Washington State. Also in January 2012, the Washington State Supreme Court ruled that the Washington State legislature had failed to comply with their PARAMOUNT DUTY to fully fund our public schools. Given that establishing a Public Bank would allow us to address our PARAMOUNT DUTY by building hundreds of urgently needed schools, as well as create tens of thousands of jobs in our State AND save local tax payers billions of dollars in interest payments on State projects – precious tax dollars which are currently going to Wall Street banks, I have written the following response to the concerns raised by Mr.Spitzer. While it will ultimately be up to our Supreme Court to rule on the constitutionality of a public bank and while that ruling will depend on the exact language of the public bank bill, Mr. Spitzer does raise some good questions that deserve a considered reply. In fact, I have proposed a revision of the public bank bill for the 2016 legislative session intended to address some of the concerns raised by Mr. Spitzer.
Comparing Mr. Spitzer’s current position to his past position on this subject
Some have claimed that Mr. Spitzer is biased in that his law firm benefits financially from the current system of selling bonds to private banks. It is certainly true that Mr. Spitzer’s law firm does benefit financially from the current system and might lose significant legal fees should the Investment Trust become law. However, because we ultimately want an Investment Trust which is approved by the Supreme Court, we should still address the legal issues he has raised.
Others have claimed that Mr. Spitzer is an attorney and that, like any good attorney. he can argue either side of any issue. His January 25, 2012 Memorandum does seem to contradict some of his past legal writings. For example, see University of Puget Sound Law Review Volume 8, Issue 195. pages 213 to 218. http://lawpublications.seattleu.edu/cgi/viewcontent.cgi?article=1193&context=sulr
In this article, Mr. Spitzer argued that the “risk analysis” used by our Supreme Court in several cases involving Article 8, Sections 5 and 7, was unnecessary. The article argues that a much simpler finding by the Supreme Court that the State received a substantial benefit would address the Constitutional concerns: “The government action conferring tax-exempt status on the bonds should be analyzed as a possible gift of something of value, which would be barred by Article 8, Section 5 or 7, were there not adequate consideration (to the public) in return.”
Mr. Spitzer’s article proposed a simple remedy to the Constitutional question:
“An alternate and equally defensible rationale that the court could have applied in O’Brien is simply that the provision of housing is a “recognized public government function” and that government loans to aid in the provision of housing for citizens are not fundamentally different from day care centers, vaccinations, fare-free bus zones, crime victim compensation, or public support for electoral campaigns, all of which the court in City of Seattle v. State suggested were permissible (100 Wash. 2d 232, 241-42, 668 P.2d 1266, 1271 (1983). “
It therefore appears that far from arguing against an Investment Trust, Mr. Spitzer has in the past provided additional reasons in support of the legislature’s ability to use public credit to enact public works projects.
Nevertheless, in his Memo on page 1, Mr. Spitzer expresses concerns about three sets of issues:
ISSUE #1: Potential violations of the Article VIII, Section 4 and Article VII, Section 6 requirements that all payments of state moneys be paid into the State Treasury, and then appropriated by legislative action.
ISSUE #2: Article VIII, Sections 5 & 7, Article XII, Section 9 Issues involving the State Constitution’s prohibitions on loans of state money, lending of the state’s credit for private purposes, and investments of public funds in private securities.
ISSUE #3: The requirement of Article II, Section 37, and amendments to statutes be accomplished by setting forth each amended section in full and clearly showing the changes.
In our article, from November 2011, we addressed and quoted virtually everything the Supreme Court has had to say on the second issue (Article VIII, Sections 5 & 7, Article XII, Section 9). So we will only review those opinions as they apply to Mr. Spitzer’s concerns. However, his first and third points are relatively new issues. We will therefore go into more details addressing those arguments.
Preliminary Constitutional Question: Does the PARAMOUNT DUTY section of our State Constitution have priority over other sections of the State Constitution?
In January 2012, the Washington State Supreme Court ruled that the legislature has for many years violated the Washington State Constitutional requirement to adequately fund our public schools. One of the many areas when the legislature has failed to meet its Constitutional Paramount Duty is in School Construction and Repair. In the 1980’s, the legislature paid 67% of the actual cost of school construction and repair. Today, the legislature pays less than 15% of the actual cost of school construction and repair – unfairly and unconstitutionally transferring this huge burden on to the backs of homeowners in growing school districts. As a consequence, in 2011, over 90% of all school bonds, amounting to over one billion dollars in urgently school construction, went down to defeat. Washington State now has one of the largest school construction backlogs in the nation.
One of the primary purposes of a Public Bank would be to meet this Paramount Duty of the State to adequately fund the construction of public schools by lowering the interest rate and thereby lowering the tax burden on school construction. One wonders about the logic behind the Treasurer’s insistence in following one section of the State Constitution when doing so reduces the ability of the legislature to comply with the Paramount Duty of the legislature to fund school operation and construction.
In general, our Supreme Court has tried to give effect to all sections of the State Constitution. However, the Court has also given the legislature the benefit of the doubt in interpreting the Constitution in recognition of the difficult of meeting the Paramount Duty to fully fund schools. An extremely narrow interpretation, as advocated by Mr. Spitzer below, may make it impossible for the legislature to ever meet its Constitutional Duty to fund schools. This is why our Supreme Court has given the legislature the broad latitude to craft solutions which meet the current circumstance. In the present case, private bank monopolies subject State projects including schools to unreasonably high interest rates. The only option the State has to break this monopoly and lower the interest rate on school construction projects is to create our own Public Bank.
For the record, class sizes in Washington State and the un-housed student rate are among the highest in the nation. Some school districts in Washington State, such as the Snoqualmie Valley School District, receive less than 3% in State Matching funds and have an un-housed student rate which is 4 times greater than the national average. By comparison, North Dakota, thanks to the revenue from its public Bank of North Dakota, has some of the lowest class sizes and lowest un-housed student rates in the nation.
Also for the record, the North Dakota State Constitution was written at the same time and using nearly the same wording as the Washington State Constitution. Their public bank has gone far beyond the proposed functions of the Washington Public Bank – and both the Supreme Court of North Dakota and the United States Supreme Court have rejected nearly all of the concerns raised by Mr. Spitzer. Nevertheless, we will review Mr. Spitzer’s objections below.
ONE AREA OF POSSIBLE AGREEMENT: THE STUDENT LOAN SECTION
Spitzer Concerns on Article VIII, Section 5 & 7 (Guarantee of Private Deposits and Use of Trust Assets to Make Student Loans) (Spitzer Memo, page 2)
On pages 2 and 3 of his Memorandum, Spitzer lays out several concerns about the Student Loan section of the 2012 Investment Trust bill. Because I have already provided a detailed summary of past Supreme Court opinions regarding Article VIII, Section 5 & 7, I will not repeat that analysis here. Instead, I encourage you to read those Supreme Court rulings for yourself. This analysis is posted on our website WashingtonPublicBankCoalition.org.
As was stated in that analysis, and by past Supreme Court justices, whether the Student Loan section would or would not be seen as a violation of the Constitution depends entirely on how the program is carried out. I personally share Mr. Spitzer’s concerns about this section of the 2012 bill. But it is not at all clear which way the Supreme Court would rule on this issue. It is possible that the Supreme Court may conclude that Student Loans can be issued under the “poor and infirmed” exception to the lending of credit prohibition. It is also possible that the Court would agree with the analysis of Mr. Spitzer regarding the student loan section. Thus, while there is a clearly worded severability clause in Section 31 at the end of the 2012 Investment Trust bill, the Student Loan section has been removed from our proposed 2012 bill and we will attempt to address the student loan problem with a different bill and a different funding mechanism so as not to jeopardize our goal to build one thousand urgently needed public schools.
However, it should also be noted that the Bank of North Dakota does have a very successful student loan program with much lower default rates than either the Federal Student Loan program or Private Bank Student Loan programs. It does this by including some unique provisions that are not part of either the Federal or Private student loan programs. If the low income families of North Dakota can have the benefit of low interest student loans from their State Public Bank, then the low income families in Washington State should be given a similar benefit.
Spitzer concerns about Article XII Section 9 (Prohibited Investment in or Custodial Responsibility for Private Securities) (Spitzer memo, page 3)
On page 3, Mr. Spitzer raises a valid concern and the section in question in the 2012 bill has been removed from the 2016 Public Bank bill as it is not essential to our paramount purpose of using a public bank to facilitate the construction of public schools.
Spitzer concerns on Article II, Section 37 (Setting Forth Each Statute to be Amended in Full (Spitzer memo, page 3)
It was not the intention of 2012 House Bill 2434 to amend or change any statutes other than the ones specified in the bill. None of the examples given by Mr. Spitzer require changing because it was not the intent of the bill to change them. Our greatly simplified 2016 bill should address this concern.
This concludes the areas where we would agree that Mr. Spitzer raised valid points and have therefore changed the Public Bank bill for 2016 to address them. The remaining pages describe areas where we respectfully disagree with Mr. Spitzer – for the reasons set forth below.
Spitzer concerns on Article VIII, Section 4 (Appropriation of State Funds)
Going back to page 2 of the Spitzer memo, Spitzer states: Article VIII, Section 4 prohibits funds from being paid out of the State Treasury except in pursuance of an appropriation. Because Section 6(7) of SB 6310 contemplates that the Trust will retain earnings sufficient to maintain operations, it appears to violate this constitutional provision. To the extent that the Trust requires funds for operations, under Article VIII, Section 4, those funds must be periodically appropriated by the Legislature.
Here is what Article VIII, Section 4 actually states:
ARTICLE VIII STATE, COUNTY, AND MUNICIPAL INDEBTEDNESS
SECTION 4 MONEYS DISBURSED ONLY BY APPROPRIATIONS. No moneys shall ever be paid out of the treasury of this state, or any of its funds, or any of the funds under its management, except in pursuance of an appropriation by law; nor unless such payment be made within one calendar month after the end of the next ensuing fiscal biennium, and every such law making a new appropriation, or continuing or reviving an appropriation, shall distinctly specify the sum appropriated, and the object to which it is to be applied, and it shall not be sufficient for such law to refer to any other law to fix such sum. [AMENDMENT 11, 1921 p 80 Section 1. Approved November, 1922.]
The intention of Article VIII, Section 4 was to regulate funds inside the State Treasury. There are already many State agencies which generate their own revenue streams which do not require that those streams go back into the General Fund. The issue is whether the revenue generated by the Washington Public Bank can be viewed as a separate revenue stream. Since this is clearly the case with both the Washington Public Bank and the Bank of North Dakota, these internally generated funds are not State funds paid out of the Treasury.
Since the funds in question will be generated by the Washington Public Bank and will never go in the Treasury, except as defined in the bill, and are never under the control of the Treasurer, there is no need for an annual appropriation once the Public Bank becomes self-sufficient in the same manner that the Bank of North Dakota is self-sufficient. In short, the funds in question are not from the Treasury or dependent on any appropriation from the General Fund. In fact, one purpose of providing an initial investment of one billion dollars per year for the Washington Public Bank is to eliminate the chance of any further funds being needed from the State legislature. It is within the right of any future state legislature to end these funds at any point that the legislature feels that further capitalization of the public bank is no longer needed as the public bank will every quickly become self supporting and even start returning funds to the state legislature.
Spitzer concerns on Article VII, Section 6 (Taxes Levied and Collected for State Purposes to be Paid into the Treasury (Spitzer memo, page 4)
On page 4 of his memo, Spitzer states: Art. VII, Section 6 of the State Constitution provides: “All taxes levied and collected for state purposes shall be paid in money only into the state treasury.”
SB 6310 contemplates that the Trust will be the depository for all state moneys.
The above sentence is an inaccurate interpretation of House Bill 2434. The bill specifically states that all taxes collected will initially go to the State Treasury. After that, only those portions of the funds which are not needed to pay the State’s bills are paid into the Investment Trust. SB 6310 does not contemplate that the Trust will be the depository for all state moneys. Nevertheless, to address this concern, the 2016 Public Bank bill does not even depend on these funds. Instead, a separate and independent source of start up capital has been provided for the creation of a public bank.
Spitzer continues: However, the Trust acts as more than a mere depository for state funds—it also manages and invests a portion of those funds. This latter responsibility creates a lack of clarity with regard to whether funds are held in the Trust in its capacity as a depository, or whether the funds are held by the Trust as a separate state entity for the purpose of management and investment.
Ironically, there is far more clarify in how the Public Bank funds will be invested than in the current regulations of how the Treasurer invests State funds. However, to address this concern, at least initially, the 2016 Public Bank bill provides a separate source of funding for our Public bank.
Spitzer continues: Because all taxes must be paid into the State Treasury, if general state revenues, including tax money, are paid into the Trust, there could be a potential violation of this constitutional provision.
The above concern would only be true if there was a co-mingling of funds between state revenues placed in the trust and interest from investments placed in the Trust. This is simply an accounting question. Our Supreme Court has repeatedly said it will not speculate about a “potential violation of the Constitution.” It will not step in unless there is an ACTUAL violation of the Constitution. Even then, it will only require that the violation be corrected. This would be easy to solve if it ever is an issue. But again, our funding provision is now different for the 2016 version of a public bank. This independent funding provision should address the concerns raised by Mr. Spitzer.
Spitzer continues: If the Trust is merely a depositary or bank, the legislation is not clear enough. And, if that is meant to be the case, then there could be constitutional issues raised with respect to Section 6(3) of SB 6310, which requires that all income earned by the Trust on state moneys be credited to the Trust. If the Trust is simply a depositary, then the income from the investment of state moneys needs to be paid back into the State Treasury (as required by Article VII, Section 6 of the State Constitution) and credited to the funds and accounts for which the Trust is serving as depositary—subject to further appropriation as discussed below.
Article VII Section 6 does not require that interest income on investments be paid back into the State Treasury. This section only requires that taxes be paid into the State Treasury. The interest on bonds are not taxes and therefore can remain in the Public Bank in the same manner that interest on bonds currently remains in the vaults of Wall Street Bankers.
On page 4 of his memo, Spitzer continues:
Distribution of Earnings among Funds and Accounts (43.79A and 43.84 RCW)
If the Trust is merely a depositary, Sec. 6(7) of the bill is drafted in such a way as to directly conflict with numerous other statutes that specifically allocate interest among the various funds and accounts by directing it to pay the costs of operating the Trust and then to the general fund. For example, 43.84 RCW already provides for the distribution of earnings among the various funds and accounts within the treasury, including the general fund. 43.79A RCW provides for the distribution of earnings among the Treasurer’s trust accounts. As a mere depositary, these funds and accounts would be moved into the Trust as is, and interest earnings would continue to be allocated in the same manner.
The trust is not merely a depository. Nor does it require any change in the distribution of current accounts. The only change in the 2012 bill compared to prior law is a transfer of the portion of the Treasurer’s billion dollar slush fund which is not needed for paying the State’s bills. However, to remove this concern, instead of using the State Treasurer's billion dollar slush fund as start up capital for a public bank, we will use a billion dollars from the removal of a tax break for the wealthy as specified in Senate Bill 6093.
On page 5 of his memo, Spitzer continues:
Trust as Depositary (Spitzer memo, page 5)
If the Trust were acting as a mere depositary, these statutes would remain in effect regardless of what institution acted as the depositary. Because Sec. 6 of SB 6310 contemplates the distribution of earnings to the general fund and to the Trust, it implies that funds invested by the Trust are being held outside of the state treasury both for the purpose of investment and deposit. If this is the case, there appear to be constitutional conflicts with regard to moneys deposited in funds and accounts created in the constitution, and statutory conflicts with regard to funds and accounts created by statute.
Mr. Spitzer claims that there is a Constitutional problem here but he fails to mention the precise section(s) of the Constitution he feels might be violated. Without this guidance, it is not possible to respond. However, as a general matter, the Trust does anticipate funds being held outside of the state treasury both for the purpose of investment and deposit – just as they are held in this manner by the Bank of North Dakota. Because both the North Dakota Supreme Court and the United States Supreme Court have accepted the Constitutionality of the Bank of North Dakota, it is likely that our own Supreme Court would do the same.
Spitzer continues: Section 6 of the bill provides that the Trust “shall serve as the depository for state moneys once the Trust has built sufficient capacity to accept and manage state moneys.” Because the state has already contracted for banking services, complying with this statute may create an impairment of contract issue under Article I, Section 23. This will likely be true regardless of whether the bill requires the movement of all state moneys, or only those state moneys not needed for the short or intermediate term liquidity needs of the state.
The 2012 version of our bill did not require the violation of any contract. Nevertheless, the 2016 version of the bill eliminates even the possibility of the violation of a contract between the state treasurer and Bank of America by providing a separate source of funding independent of the State Treasurer.
Spitzer continues: If it is contemplated that all moneys and accounts are to be moved to the Trust and that investment and management of state moneys will be bifurcated between the Trust and the Treasurer, there is no clear way to delineate who has custody or control of which dollars. More importantly, it appears that neither the Treasurer nor the Trust is tasked with management and record keeping for all state moneys.
The 2012 version of the Public Bank bill contained very clear guidance for which funds are under control of the Treasurer and which funds will eventually be under the control of the Investment Trust. Funds needed to pay the State’s bills, as defined by the Treasurer, will remain under the Treasurer’s control. Those funds not required by the Treasurer will eventually be made available for investment by the Investment Trust. Both the Treasurer and the Investment Trust will be required to comply with standard book-keeping practices. Nevertheless, to make sure that there is no book keeping problems, the 2016 version of the Public Bank bill establishes an independent source of funding for the public bank.
Spitzer continues: Trust as Investment Vehicle (Spitzer memo, page 5)
Under 43.85.070, the State Treasurer is authorized to deposit state moneys with any qualified public depositary with those state moneys still being deemed to be in the state treasury. However, unlike deposits with qualified public depositaries, at least some state moneys placed in the Trust, once deposited, will not be subject to the custody or control of the State Treasurer but rather will be subject to the control of the Trust. This deposit of state moneys would not be made for investment purposes by the State Treasurer, but instead would be deposited into the Trust for the Trust to make investments. As a practical matter, because the Treasurer would no longer have custody or control of the funds held by the Trust, there would be no way for the Treasurer to readily access those funds to meet the state’s obligations should there not be enough funds under the control of the Treasurer within this framework.
The excess funds in question which would be transferred to the Investment Trust are funds the Treasurer currently invests in contracts with maturities averaging four years in length. They have never been required by the State and are not accessible by the State even currently for emergency purposes. These funds can therefore hardly be called Emergency Funds. Nevertheless, to eliminate this even as a potential argument, the 2016 version of our Public Bank bill provides an independent source of revenue to capitalize the Public Bank.
On page 6, Spitzer continues: State Moneys and Public Funds
A significant technical concern with regard to SB 6310 is the issue of “state moneys” and “public funds.” SB 6310, Section 2 adopts the definition of state moneys set forth in RCW 43.85.200 for its definition of state moneys, but the legislation does not define public funds. Under RCW 43.85.200, the definition of state moneys is as follows: “All moneys or funds belonging to or in the custody of the state under the control of the State Treasurer shall be considered as state moneys or funds.” Under this definition, state moneys are both moneys belonging to the state, and moneys in the custody of the state under the control of the State Treasurer—in essence everything held in the funds and accounts of the Treasury and the Treasurer’s trust. However, Section 6(6) of the bill contemplates a review of state accounts that contain public funds “that are not state moneys” and make recommendations as to which accounts should be deposited in the Trust. Because all funds and accounts in the custody or control of the Treasurer already qualify as state moneys, this section is redundant.
The reason for the redundancy in the 2012 version of the bill was that there are some accounts which are not entirely clear what they are. There are a huge number of accounts managed by the State Treasurer. Thus, the need for a review if we are to access unused funds from the State Treasurer. Nevertheless, to eliminate this concern, the 2016 version of the bill utilizes a new source of revenue independent from the State Treasurer.
Spitzer continues: Investment Earnings (Spitzer memo, page 6)
Section 6 of SB 6310 attempts to distribute earnings inconsistently. Section 6(3) states: “All income earned by the trust on state moneys that are deposited in or invested with the trust must be credited to and become a part of the revenues and income of the trust.” Section 6(7) states that the “trust must return earnings, beyond those necessary for continued sound operation of the Trust as determined by the commission to the state general fund.” These two provisions seem to directly conflict with one another, or at the least are unclear.
The two provisions in the 2012 version of our Public Bank bill were not in conflict or unclear. Section 6(3) referred to all of the earnings becoming revenue and income of the trust. Section 6(7) then merely states that any of the earnings referred to in Section 6(3) which are not needed for the sound operation of the trust, as determined by the commission, shall be returned to the general fund. This is exactly the same process and the same language that is used by and for the Bank of North Dakota. It is a process that has worked well and without confusion in North Dakota for nearly 100 years. This language is therefore retained in the 2016 version of the Public Bank bill.
Conclusion
While Mr. Spitzer raised a few valid concerns, the majority of his objections were not valid and/or were based on pure speculation – assuming that the Public Bank Commission would take actions not at all called for in the bill. This is not how a successful constitutional challenge works. In general, laws written by the legislature are assumed to be constitutional. The burden is on the plaintiff to prove that the law is not constitution. In particular, the Washington Public Bank Commission must make an unconstitutional action before a challenge can even proceed. Even then, the court will limit its ruling to the specific action and section in question and hopefully provide guidance to the legislature regarding how to resolve the problem – if there ever even is one.
Given that this bill is written to provide a significant benefit to the people of the State of Washington, including building hundreds of schools, creating tens of thousands of jobs and saving tax payers billions of dollars, it is hard to imagine the Supreme Court tossing out the Public Bank and depriving the citizens of our State the same benefit now enjoyed by the citizens of the State of North Dakota.
The time has come to do the right thing and give the people of the State of Washington a financial institution which they can be proud of – and one that is working for them rather than against them. We are confident that if the people of the State of North Dakota can manage their public bank in an efficient and Constitutional manner for nearly one hundred years – without a single violation of their State Constitution, then so can the people of the State of Washington for the next one hundred years.
Respectfully submitted,
David Spring M.Ed.
WashingtonPublicBankCoalition.org