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In the Matter of the Bond Issuance of Greater Wenatchee Regional Events Center Public Facilities District

October 25, 2012

IN THE MATTER OF THE BOND ISSUANCE OF GREATER WENATCHEE REGIONAL EVENTS CENTER PUBLIC FACILITIES DISTRICT.


The opinion of the court was delivered by: Wiggins, J.

En Banc

Our state constitution limits municipal indebtedness to protect taxpayers from legislative and voter improvidence. We must decide whether the city of Wenatchee (City) would exceed its debt limit by entering into a "contingent loan agreement" (CLA) with appellant Greater Wenatchee Regional Events Center Public Facilities District (District) to help the District finance a regional events center. The District argues that the CLA is not subject to the City's debt limit because it creates a "contingent" liability, triggered only if the District is unable to make payments on the District's bonds. We reject this argument because the City is unconditionally obligated to service the District's debt if the District cannot and because the risk of loss falls upon the City and its taxpayers. We conclude that this case implicates the very concerns that prompted our framers to enact limits on municipal debt in the first place. We hold that because the City's obligation under the CLA is essentially a guaranty, it would create indebtedness within the meaning of our constitution. Accordingly, we affirm the trial court.

The City could enter into the CLA if approved by a vote of the people, but not without a popular vote. Total municipal debt incurred without a public vote is limited to one and one-half percent of the total assessed value of all taxable property within the City, while debt approved by 60 percent of the voters can be 5 percent of the total assessed value. Const. art. VIII, § 6. Our decision accordingly places the approval of the CLA in the hands of the voters.

FACTS

The Greater Wenatchee Regional Events Center Public Facilities District is a municipal corporation organized under chapter 35.57 RCW. The District was formed in June 2006 by an interlocal agreement among the City, Chelan and Douglas counties, the cities of East Wenatchee, Cashmere, Chelan, Rock Island, Entiat, and the town of Waterville. The purpose of the District is to finance, construct, and operate the Greater Wenatchee Regional Events Center (Regional Center), a 167,531 square foot facility that hosts concerts, trade shows, family shows, sporting events, rodeos, and other gatherings. Construction of the Regional Center began in September 2006 and was completed in November 2008.

The interlocal agreement creating the District provided mechanisms for financing the Regional Center, giving the District authority to impose various taxes. Further, in September 2006, the District and the City agreed to make CLAs in the future requiring the City to loan money to the District as needed to meet the District's debt service obligations.

The District planned to finance the Regional Center using bonds, and in November 2008, issued short-term bond anticipation notes (2008 Notes) worth $41,770,000 to purchase the Regional Center. The 2008 Notes were intended as a temporary funding mechanism because of an unfavorable bond market in 2008. Payments on the notes were interest only and came due on December 1, 2011. The City entered into a CLA with the District, obligating the City to loan money to the District to make interest payments on the 2008 notes in the event the District could not. The 2008 CLA is not at issue in this case, and no one contends it would violate the City's debt limit.

In 2011, in anticipation of the 2008 Notes maturing, the District took steps to issue long-term bonds to retire the 2008 Notes. To support the issuance of these bonds, the District proposed another CLA to the City. It is this 2011 CLA that is at issue in this appeal.

The proposed 2011 CLA requires the City to loan money to the District if and when the District cannot make its semiannual debt service payments. The 2011 CLA also includes several other important provisions: that the District will repay all such loans, with interest, from the District tax and facility revenues; that the City's commitment to make loans is absolute and unconditional; that all debts of the District are the District's alone; that holders of the District's bonds will have no recourse against the City, its assets, or its tax revenues; and that the City has no obligation to impose new taxes or enter into its own debt obligations to fund the loans to the District. The agreement also grants third-party beneficiary status to bondholders (in theory allowing them to compel the City to make loans) and contains no limitations on the amount of money the City could be required to loan the District (this represents a change from earlier agreements, which limited the City's loan obligation to its debt capacity).

The City passed a resolution approving the 2011 CLA conditioned on the City's obtaining a judicial declaration that it has the right and authority to do so.*fn1 Accordingly, the City filed a complaint in Chelan County Superior Court seeking a declaratory judgment whether execution of the 2011 CLA would cause the City to exceed its debt limits. The District intervened, and the court appointed a taxpayer representative to represent the taxpayer's interests.

The superior court granted summary judgment to the City, ruling that the 2011 CLA is "indebtedness" within the meaning of article VIII, section 6 of our constitution and therefore subject to constitutional and statutory debt limits. The court also ruled that the agreement would cause the City to exceed its non-voted debt limit.*fn2

Finally, the court held that the amount of indebtedness incurred by the City equaled the entire amount that could possibly be loaned to the District to meet all of its debt service obligations, including both principal and interest over the life of the bonds. Without the 2011 CLA to support the issuance of new long-term bonds, the District was unable to refinance the 2008 Notes before they became due and defaulted on the notes on December 1, 2011. We granted the District's request for direct review.

ANALYSIS

I. The municipal debt limit under article VIII of our constitution

A. The text and purpose of article VIII, section 6

Article VIII, section 6 of our state's constitution forbids municipalities from becoming "indebted in any manner" beyond one and a half percent of taxable property within their boundaries:

No county, city, town, school district, or other municipal corporation shall for any purpose become indebted in any manner to an amount exceeding one and one-half per centum of the taxable property in such county, city, town, school district, or other municipal corporation, without the assent of three-fifths of the voters therein voting at an election to be held for that purpose, nor in cases requiring such assent shall the total indebtedness at any time exceed five per centum on the value of the taxable property therein . . . .*fn3

This provision complements article VIII, section 1, which limits state debt.*fn4

Our framers enacted debt limitations to remedy a particular historical evil. In the 19th century, state governments financed or guaranteed an increasing number of private and public capital and infrastructure projects, most notably railroads. See Robert S. Amdursky & Clayton P. Gillette, Municipal Debt Finance Law: Theory and Practice § 4.1.1, at 162 (1992). Many of these projects failed, leaving taxpayers liable to pay for them while receiving little or nothing in return. Id. In response, states around the country enacted debt limitations preventing legislative bodies from saddling current and future taxpayers with an unmanageable tax burden to support unsuccessful railroads and other unwise ventures. Id.; see also Dep't of Ecology v. State Fin. Comm., 116 Wn.2d 246, 257, 804 P.2d 1241 (1991) ("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.").

At Washington's constitutional convention, our framers were appropriately concerned with the effects unlimited indebtedness would have on future prosperity, see The Journal of the Washington State Constitutional Convention 1889, at 667 (Beverly Paulik Rosenow ed., 1962), and enacted debt limits to cure these ills by building an "impassible barrier" around the public treasury. State ex rel. Jones v. McGraw, 12 Wash. 541, 543, 41 P. 893 (1895); State ex rel. Potter v. King County, 45 Wash. 519, 528, 88 P. 935 (1907) (debt limits "are intended for the protection of minorities, for the protection of posterity, and to protect majorities against their own improvidence . . . ").

The role of our judiciary in this scheme is self-evident: We must enforce the constitution. Potter, 45 Wash. at 528 (stating that enforcing debt limits is the "duty of the courts"). Constitutional debt limits are premised on the belief that political accountability does not sufficiently check runaway debt. See Amdursky & Gillette, supra, § 4.1.1, at 160-61. Thus, we must not assume legislative bodies will police themselves; instead, it is our duty to ensure that public entities do not make promises that they have no constitutional authority to honor.

B. The "risk of loss" concept

In carrying out our constitutional duty under article VIII, we have created a wide vocabulary of principles, concepts, and exceptions. For example, we have articulated the "special fund doctrine,"*fn5 the concept of "borrowed money,"*fn6 the "contingency" exception,*fn7 and the concept of "full faith and credit,"*fn8 among many others. As discussed later in this opinion, some of these principles are contradictory, leading to opposite conclusions. But the apparent contradictions can be resolved because a close examination of these concepts reveals a discernible uniformity.

Nearly all of our public debt doctrines and decisions can be explained by determining who bears the risk of loss in the underlying obligation. Nearly every time we have determined that "debt" exists, the obligation in question places the risk of project failure on the taxpayer (independent of the consideration received) rather than the creditor or bondholder. We have found debt to exist where, if the project fails, the general fund is exposed and the taxpayers are saddled with the repayment burden. See, e.g., State ex rel. State Fin. Comm. v. Martin, 62 Wn.2d 645, 663-64, 384 P.2d 833 (1963). Conversely, where the risk of project failure lies not with the taxpayer but with the creditor or bondholder, we have found that there is no debt. See, e.g., Dep't of Ecology, 116 Wn.2d at 257-58.

The "special fund" cases demonstrate this principle well. In those cases, bonds are repaid from a special fund replenished with project revenues or other funding sources having some nexus to the project. For example, in Winston, the city of Spokane issued "obligations" to pay for a waterworks system, with the obligations to be repaid through a percentage of waterworks revenues. Winston v. City of Spokane, 12 Wash. 524, 525-26, 41 P. 888 (1895). No obligations were to be repaid from the general fund, so the investors bore the debt risk: if the project failed to produce enough revenue to service debt payments, the taxpayers were not liable for any shortfall. We held that this obligation did not create "indebtedness" within the meaning of article VIII, section 6. Winston, 12 Wash. at 527-28. On the other hand, in Martin, although similar facts existed (bonds were issued for the construction of public buildings), the bonds were to be repaid from an excise tax on the sale of cigarettes. 62 Wn.2d at 646-47. If the project failed, the bonds would be repaid through increased excise taxes, placing the risk of project failure on the taxpayers. We held that the arrangement created debt within the meaning of article VIII, section 1. Martin, 62 Wn.2d at 663-64.

Nearly every case stretching back to statehood is consistent with this "risk of loss" principle.*fn9 See Amdursky & Gillette, supra, § 4.1.2, at 164-70 (surveying Washington case law in detail and concluding that our debt limits are triggered where the risk of project failure falls on the taxpayers/general fund independent of the consideration received for the bonds).

In our most recent cases, we have begun explicitly relying on the risk of loss concept as a basis for our decisions. For example, in Department of Ecology, the Department of Ecology entered into a complex lease arrangement that required payment only so long as the legislature appropriated money. 116 Wn.2d at 258. We concluded there was no debt because "[t]he ultimate risk of loss is not on the State's future taxpayers. Instead, the risk of loss is on the [investors], who will have entered into the transaction with full knowledge that they alone bear that risk." Id. at 254-55.

The dissent misses the point of the risk of loss analysis, labeling it "a matter left to elected representatives . . .", and accusing the majority of "second-guessing." Dissent at 13, 15. The risk of loss analysis does not attempt to evaluate the likelihood or the amount of risk. To the contrary, the question is simply this: on whom does the risk of loss fall, the investors or the public? This is not a speculative inquiry because it is evident on the face of the operative documents. In this case, the risk of loss is on the City and its taxpayers. If the revenues of the District are inadequate to repay the bondholders, the City must make loans to the District to permit the payments to be made. The City, not the bondholders, is at risk.

The risk of loss concept can guide our decisions in this and future cases. Nevertheless, we are mindful of the fact that existing case law addresses many of the special problems that arise in the context of public debt, and we must turn to that case law first and foremost.

C. The contingency cases and the guaranty cases

This case sits at the intersection of two conflicting lines of case authority-the "contingency" cases and the "guaranty" cases. To resolve this case, we must decide ...


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