State Supreme Court Issues Ruling on Municipal Debt

On October 25, the state supreme court issued a plurality decision in In re Bond Issuance of Greater Wenatchee Reg'l Events Ctr., holding that city of Wenatchee would exceed its debt limit if, without voter approval, it entered into a "contingent loan agreement" (CLA) with the Greater Wenatchee Regional Events Center Public Facilities District to help the district finance a regional events center. (As this was a plurality opinion, with one justice concurring in result only, it is of limited value as a judicial precedent; a plurality opinion produces only a decision on the result, not on the reasoning.)

The city had approved the CLA conditioned on obtaining a judicial declaration that execution of the CLA would not cause the city to exceed its debt limits. Under the CLA, the city would have been obligated to loan money to the district to make debt service payments on long-term bonds that would be issued to retire short-term bond anticipation notes that had been issued to finance the regional events center, in the event the district could not make those payments.

The plurality opinion is summarized in the opening paragraph:

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.

Because that CLA would have been approved only by the city council and not by the voters, it would exceed the constitutional limit on nonvoted debt of one and one-half percent of the total assessed value of all taxable property within the city. If put on the ballot and approved by 60 percent of the voters, the obligation under the CLA would be subject to, and not exceed, the constitutional debt limit on voted debt of five percent of the total assessed value.

The court applied a “risk of loss” approach to determining whether debt is created:

Even if the municipality’s liability is contingent upon the failure of payment by an intervening agency such as the District, such a contingent liability is subject to the debt limit if the ultimate risk of loss falls upon the municipality.

Applying this approach, the court plurality concluded:

the 2011 CLA is plainly debt because the City’s taxpayers bear the risk of project failure. If the Regional Center were to fail (i.e., shut down and cease producing revenues), the City would be required to make loans to service the District’s bonds with no foreseeable means for the loans ever to be repaid.

The court plurality then further concluded that “the 2011 CLA is a guaranty, pledging the City’s taxing power to service the District’s debt.”

The dissenting opinion (three justices plus one concurring in the result only) rejected this risk of loss approach as being inappropriate and argued that debt means only borrowed money. As such, the dissent contended:

the municipal debt limitation is not implicated because the City is under no obligation to borrow money. The CLA only commits the City to “lend money” to the District if required to meet the District’s debt service payments.

Local governments should consult with their legal counsel regarding the possible implications of this decision, if any, on their debt capacity.