Opinion Information Sheet
| Docket Number: | 86552-3 |
| Title of Case: | In re Bond Issuance of Greater Wenatchee Reg'l Events Ctr. |
| File Date: | 10/25/2012 |
| Oral Argument Date: | 01/10/2012 |
| Appeal from Chelan County Superior Court | |
| Docket No: | 11-2-00737-0 |
| Judgment or order under review | |
| Date filed: | 09/08/2011 |
| Judge signing: | Honorable John E Bridges |
| Barbara A. Madsen | Signed Dissent | |
| Charles W. Johnson | Signed Lead Opinion | |
| Tom Chambers | Signed Dissent | result only |
| Susan Owens | Signed Dissent | |
| Mary E. Fairhurst | Dissent Author | |
| James M. Johnson | Signed Lead Opinion | |
| Debra L. Stephens | Signed Lead Opinion | result only |
| Charles K. Wiggins | Lead Opinion Author | |
| Steven C. González | Signed Lead Opinion |
Counsel for Appellant(s) | |
| Donald Stewart Cohen | |
| Gordon Thomas Honeywell ET AL | |
| 600 University St Ste 2100 | |
| Seattle, WA, 98101-4185 | |
| Eric Christensen | |
| Gordon Thomas Honeywell | |
| 600 University St Ste 2100 | |
| Seattle, WA, 98101-4161 | |
| Peter Allen Fraley | |
| Attorney at Law | |
| Po Box 1606 | |
| Wenatchee, WA, 98807-1606 | |
Counsel for Respondent(s) | |
| Paul Arley Harrel | |
| Williams Kastner & Gibbs PLLC | |
| 601 Union St Ste 4100 | |
| Seattle, WA, 98101-2380 | |
| Michael White | |
| Williams Kastner | |
| 601 Union St Ste 4100 | |
| Seattle, WA, 98101-1368 | |
| Thomas Francis O'connell | |
| Attorney at Law | |
| Po Box 2136 | |
| Wenatchee, WA, 98807-2136 | |
Amicus Curiae on behalf of Washington State Treasurer | |
| Paul J. Lawrence | |
| Pacifica Law Group LLP | |
| 1191 2nd Ave Ste 2100 | |
| Seattle, WA, 98101-2945 | |
| Kymberly Kathryn Evanson | |
| Pacifica Law Group LLP | |
| 1191 2nd Ave Ste 2100 | |
| Seattle, WA, 98101-2945 | |
| Jay Allen Reich | |
| Attorney at Law | |
| 1191 2nd Ave Ste 2100 | |
| Seattle, WA, 98101-2945 | |
Amicus Curiae on behalf of City of Vancouver Washington | |
| Theodore Henry Gathe | |
| Attorney at Law | |
| City Of Vancouver | |
| Po Box 1995 | |
| Vancouver, WA, 98668-1995 | |
| Brent David Boger | |
| Assistant Vancouver City Attorney | |
| Po Box 1995 | |
| Vancouver, WA, 98668-1995 | |
IN THE SUPREME COURT OF THE STATE OF WASHINGTON
In the Matter of the )
)
BOND ISSUANCE OF GREATER ) No. 86552-3
WENATCHEE REGIONAL )
EVENTS CENTER PUBLIC ) En Banc
FACILITIES DISTRICT. )
) Filed October 25, 2012
WIGGINS, J.?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
No. 86552-3
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
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No. 86552-3
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
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No. 86552-3
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.1 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
nonvoted debt limit.2 Finally, the court held that the amount of indebtedness
1 Chapter 7.25 RCW provides a procedure for obtaining declaratory judgments for
the validity of local bond issues.
2 Article VIII, section 6 differentiates between ?voted? indebtedness taken on with the
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No. 86552-3
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 . . . .[3]
assent of three-fifths of the voting populace and ?nonvoted? indebtedness taken on
without voter assent. Voted debt has a higher limit?five percent compared with one
and one-half percent for nonvoted debt. None of the indebtedness in this case is
voted.
3 RCW 39.36.020(1) and (2)(a)(ii) contain a debt limit that is identical in substance to
the constitutional limitation. See Dep?t of Ecology v. State Fin. Comm., 116 Wn.2d
246, 253 n.7, 804 P.2d 1241 (1991).
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No. 86552-3
This provision complements article VIII, section 1, which limits state debt.4
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
4 Article VIII, section 1 forbids the State from contracting debt in an amount for which
payments of principal and interest in any fiscal year would equal more than nine
percent of a three-year average of state revenues. Article VIII, section 1 also defines
?debt? for purposes of the state debt limit:
(d) In computing the amount required for payment of principal
and interest on outstanding debt under this section, 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 . . . .
The dissent goes astray from the very beginning, dissent at 3-5, equating the term
?become indebted in any manner? in article VIII, section 6 limitation on municipalities
with the definition of ?debt? under article VIII, section 1(d). Section 1(d) applies to the
state, not municipalities, and by its terms applies only for the purpose of computing
the total amount of the debt, which is not the issue here.
6
No. 86552-3
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
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No. 86552-3
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,?5 the concept of ?borrowed money,?6
the ?contingency? exception,7 and the concept of ?full faith and credit,?8 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
5 See State ex rel. Wash. State Fin. Comm. v. Martin, 62 Wn.2d 645, 653-54, 384
P.2d 833 (1963).
6 See State ex rel. Troy v. Yelle, 36 Wn.2d 192, 195, 217 P.2d 337 (1950).
7 See Comfort v. City of Tacoma, 142 Wash. 249, 255-57, 252 P. 929 (1927).
8 See Dep?t of Ecology v. State Fin. Comm., 116 Wn.2d 246, 254, 258, 804 P.2d
1241 (1991).
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No. 86552-3
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.9 See Amdursky & Gillette, supra, § 4.1.2, at 164-70
9
No. 86552-3
(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
9 The dissent wrongly suggests that risk of loss is an ?entirely new legal concept.?
Dissent at 1. The principle is recognized both in our case law and by scholars and is
consistent with nearly all of our public debt cases dating back to early statehood. It
has developed haphazardly, but organically, as courts have resolved individual
cases on their merits. Recognizing this pattern, we should state it forthrightly and
rely on it?not only as a matter of honest jurisprudence but also to give clear
guidance to municipal officers, the public, and lower courts. This will help prevent
future invalid bond issuances by promoting understanding and encouraging public
scrutiny.
10
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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 which of these lines of authority is correct.
In most states, it is widely accepted that so-called ?contingent liabilities?
are not debt. See 15 Eugene McQuillin, The Law of Municipal Corporations
§ 41:22, at 480-81 (3d rev. ed. 2005). As Professor McQuillin explains, one
example of a contingent liability is a contract to pay for goods that is contingent
on the goods actually being furnished. Id. For example, in City of Walla Walla
v. Walla Walla Water Co., the United States Supreme Court found that there
was a contingent liability, not debt, where the city of Walla Walla contracted to
pay for waterworks contingent on the waterworks being built and water being
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No. 86552-3
available. 172 U.S. 1, 19 S. Ct. 77, 43 L. Ed. 341 (1898).
In this ?pay-as-you-go? situation, it makes sense to find that there is no
debt. Taxpayers are simply not at risk of being saddled with debt while
receiving little or nothing in return, since payment hinges on consideration
received. And indeed, most other jurisdictions that apply the contingency
doctrine do so in similar pay-as-you-go scenarios.1 We agree that this kind of
contingent liability is not debt.
But we took the contingency doctrine one step beyond the pay-as-you-
go situation in Comfort v. City of Tacoma, 142 Wash. 249, 255-56, 252 P. 929
(1927). The city of Tacoma created a special local improvement guaranty fund
to secure repayment of local improvement bonds. The primary sources of
funding were the local improvement taxes secured by the bonds and interest
on any bond sale proceeds not yet expended for the improvement. If the fund
was insufficient to make scheduled bond repayments, the fund issued warrants
to the bondholders. But the warrants were limited to five percent of the
outstanding bond obligations secured by the fund. Id. at 255. In other words,
the city did not guarantee individual bonds, but instead made payments to the
1 See Taxpayers for Improving Pub. Safety v. Schwarzenegger, 172 Cal. App. 4th
749, 762-63, 91 Cal. Rptr. 3d 370 (2009) (holding that the contingency exception
applies where a ?governmental entity agrees to pay sums in succeeding periods in
exchange for property, goods, or services to be provided during those periods?);
Knowlton v. Ripley County Mem?l Hosp., 743 S.W.2d 132, 136-37 (Mo. App. 1988)
(holding that contingency exception applies to employment contract contingent on
services performed, just like payment of a hydrant rental, maintenance of a public
market, and payment for water as delivered).
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No. 86552-3
fund, subject to the five percent limitation. We held that this was only a contingent
liability and therefore not debt, citing City of Walla Walla.11 Comfort, 142
Wash. at 255-56. But we continued, stating in dicta, ?If A is indebted to B and
C promises that, if A does not pay B, then he (C) will, no one would contend
that C had an outstanding debt.? Id. This dictum overlooks the fact that unlike
the hypothetical C?s unlimited obligation, Tacoma?s obligation was capped at
five percent of the outstanding debt.
Comfort?s expansive interpretation of contingent debt is flatly
contradicted by another line of authority, the ?guaranty? cases.12 In State
Capitol Commission v. State Board of Finance, we held that a state guaranty
of bonds was debt. 74 Wash. 15, 26-27, 132 P. 861 (1913). The State
guaranteed bonds issued by the State Capitol Commission to finance the
construction of buildings on our state capitol grounds. The bonds were to be
repaid from the sale of valuable land set aside for that purpose, so it was highly
unlikely there would ever be a shortfall requiring the State to pay.
Nevertheless, we held that the guaranty was debt because it violated ?the spirit
and the letter? of our constitutional debt limits, rejecting the idea that whether a
liability is debt depends on how likely it is to come due. Id. at 27. Years later,
11 We later confirmed the result in Comfort in Kelly v. City of Sunnyside, 168 Wash.
95, 11 P.2d 230 (1932).
12 The dissent does not acknowledge these conflicting lines of authority. But where
cases conflict, the responsibility of the court is to harmonize them or overrule one
line or the other, not to simply ignore the conflict.
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in Martin, we reaffirmed this proposition, stating that a ?mere guaranty of the
principal and interest? of bonds is debt, citing State Capitol Commission.
Martin, 62 Wn.2d at 654-55. Thus, State Capitol Commission and Martin say
a guaranty of bonds is debt, while Comfort, in dicta, says it is not.
The risk of loss principle discussed above resolves this conflict of
authority. 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. We hold that the guaranty cases are correct, and the dicta in
Comfort misstates the law.13 If a municipality could guarantee debt with no
debt limit consequences, even a small town could back an almost limitless
number of third-party projects by pledging its credit in the event of default. In
fact, we noted in Comfort that the legislature established the five percent cap in
part to remedy the ?the lack of necessary restrictions to prevent pyramiding
assessments . . . .? 142 Wash. at 251. Some of those guaranties would
eventually come due, requiring the municipality to resort to taxes to pay for
failed projects, the very evil against which our debt limits protect. These
13 Nor does it make sense, as amici suggest, to decide whether a liability counts as
debt based on how likely it is to occur. This creates two major problems: first, it is
difficult to imagine how a court would make that factual finding. Second, it would
potentially make debt a moving target, hinging a liability?s status as debt on changing
facts. It is far more sensible to look at what kind of contingency is at issue; i.e.,
whether it is similar to the pay-as-you-go fact pattern in City of Walla Walla where the
contingency is receipt of consideration, not some outside event or market condition.
See 172 U.S. at 19-20.
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No. 86552-3
guaranties would transparently evade our constitutional debt limits and would
frustrate not only the risk of loss concept, but also the very purpose of having
debt limits in the first place. To ignore this would be to abdicate our solemn
responsibility under the constitution.
When a municipality makes an absolute guaranty of another entity?s
debt, the resulting obligation is indebtedness within the meaning of article VIII,
section 6, and cannot properly be called a contingent liability. Comfort may
well have been correctly decided on its facts, but State Capitol Commission
correctly sets forth the law of our state.
The dissent relies heavily on Comfort, arguing that the CLA ?merely
creates a contingent liability.? Dissent at 9-10. The dissent overlooks that
unlike Comfort, the City?s liability to the District is not capped at five percent of
the outstanding amount of the bonds. Equally importantly, the dissent entirely
ignores the guaranty cases, such as State Capitol Commission, which clearly
say that a guaranty of future bond payments is a debt within the constitutional
limits.14
II. The 2011 CLA would create ?indebtedness? if executed
We turn now to the main subject of this appeal: whether the 2011 CLA
between the City and the District would create indebtedness triggering the
City?s debt limit under article VIII, section 6. In examining the 2011 CLA, we
must look beyond the labels used by the parties and analyze the substance of
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No. 86552-3
the agreement.
Under the risk of loss approach, 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 obligation to make loans is
absolute, so the City would have to come up with money either from the
general fund or increased taxes, potentially endangering basic city services
(e.g., police, fire, and sewer). On the other hand, the bondholders carry no risk
of loss. Assuming the City fulfills its obligation, all debt service payments will
be timely made. There can be no doubt that, under the risk of loss approach,
the City?s obligation under the 2011 CLA constitutes debt for purposes of
article VIII, section 6. This conclusion is confirmed by the case law.
A. The 2011 CLA is a guaranty of the District?s bonds
In substance, the 2011 CLA is a guaranty, pledging the City?s taxing
power to service the District?s debt. The essence of the 2011 CLA is that if the
14 The dissent misplaces its reliance on Twichell v. City of Seattle, 106 Wash. 32,
179 P. 127 (1919), dissent at 9, in which the City pledged the revenue of its street
car system to fund repayment of a bond issue. Bonds paid exclusively from the
operational revenue of a utility such as a street car system do not come within the
debt limit because they do not require repayment from general revenues. Nor does
the dissent gain any support from citing a case presenting the identical issue as
Comfort, establishing a guaranty fund with a five per cent cap. Dissent at 9 (citing
Kelly v. City of Sunnyside, 168 Wash. 95, 11 P.2d 230 (1932)). Finally, the dissent
is unsupported by its citation to State ex rel. Washington Toll Bridge Authority v.
Yelle, 56 Wn.2d 86, 95, 351 P.2d 493 (1960), dissent at 12, which turned on
statutory interpretation, not the constitutional debt limit.
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No. 86552-3
District is unable to make debt service payments, the City will provide money
for those payments. The City nominally makes ?loans,? but this is just a label.
In fact, the whole point of the CLA is to make the bonds more marketable by
pledging the City?s full faith and credit to ensure timely repayment. This is no
different from the situation in State Capitol Commission.
We can also look to the common law of guaranty contracts, which
defines a guaranty as an
?undertaking or promise on the part of one person which is
collateral to a primary or principal obligation on the part of
another, and which binds the obligor to performance in the event
of nonperformance by such other, the latter being bound to
perform primarily.?
Robey v. Walton Lumber Co., 17 Wn.2d 242, 255, 135 P.2d 95 (1945)
(quoting Am. Jur. § 2, at 873-74). At common law, a guaranty can be either
absolute or conditional. An absolute guaranty is ??an unconditional undertaking
on the part of the guarantor that the debtor will pay the debt or perform the
obligation.?? Id. at 255-56 (quoting 24 Am. Jur. § 16 at 885). In contrast, a
conditional guaranty involves a ??condition to liability on the part of the
guarantor,?? which is the ??happening of some contingent event other than the
default of the principal debtor or the performance of some act on the part of the
obligee.?? Id. at 256 (quoting 24 Am. Jur. § 16, at 885).
Under this test, the 2011 CLA is unquestionably an absolute guaranty.
The 2011 CLA obligates the City to perform (by making loans) in the event of
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No. 86552-3
nonperformance by the District. In substance, the City takes over the District?s
obligation to meet immediate debt service payments if the District cannot.
Moreover, the only contingency on which the City?s obligation depends is
default or nonperformance by the District. Under this test or any other, the
2011 CLA is a guaranty of the District?s debt.
D. The District?s attempts to characterize the obligation otherwise are
unpersuasive
The District argues that this is not like a guaranty?and that it is not debt
at all?because the City is only obligated to loan money to the District, not to
actually make the District?s payments. We flatly rejected this logic a century
ago in State ex rel. State Capitol Commission v. Lister, 91 Wash. 9, 156 P.
858 (1916), and we reject it again now. In Lister, we held that loans were no
different from payments for debt limit purposes. Id. at 16-17. The state made
loans from a fund to the State Capitol Commission to pay interest on
construction bonds. The loans were virtually certain to be repaid because the
Commission had set aside land for sale, the proceeds of which would repay
the loans. Nevertheless, we held that there was debt, rejecting the notion that
labeling an obligation as a ?loan? changes its character. Id. Years later, we
reaffirmed this proposition in Martin, stating that ?even a loan of the interest
from general taxes, with a guaranty of repayment? is debt. Martin, 62 Wn.2d at
657. Here, there is not even a guaranty of repayment. In fact, from the record,
it appears possible that the City?s ?loans? might never be repaid. The District?s
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argument ignores the reality of the situation. An obligation to make a loan can
constitute debt, particularly where it appears unlikely it will be repaid.
The District also argues that the 2011 CLA does not create debt
because the City can meet its obligation through current-year tax revenues,
citing State ex rel. Troy v. Yelle, 36 Wn.2d 192, 217 P.2d 337 (1950). This
argument is a red herring. Under the District?s theory, no bonds would count as
debt as long as the municipality could meet its yearly debt service obligations
through current-year taxes. This cannot be, for it would exempt virtually all
existing public debt from constitutional limits. Rather, the current-year taxes
exception applies where the entire obligation can be discharged through
current-year taxes, as in the case of warrants covering current-year expenses
in Yelle. There is no chance of that happening here. This is not a short-term
obligation the City can discharge with present funds, but a long-term obligation
that will persist for years to come. The facts of Yelle bear this out. Yelle dealt
principally with ?general fund warrants,? a short-term financing mechanism to
pay for current-biennium appropriations when the state treasury contained
insufficient funds. 36 Wn.2d at 193. Current-biennium appropriations are a far
cry from the obligation at issue here, which is a long-term obligation that could
require yearly payments. Wittler is equally unhelpful; there, the alleged debt
was essentially an appropriation that was paid for through current-year taxes.
State ex rel. Wittler v. Yelle, 65 Wn.2d 660, 661-62, 399 P.2d 319 (1965).
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Long-term obligations are different. The ?current year expenses? exception
cannot be construed to cover long-term obligations like the City?s obligation
under the CLA.The dissent claims incorrectly that our application of the risk of
loss principle ?essentially converts the debts of the District into debts of the
City,? arguing that this is inconsistent with a footnote in one of our prior cases
stating that ?the debts of one municipal corporation are not to be considered
the debts of a separate municipal corporation.? Dissent at 8 (citing Pierce
County v. State, 159 Wn.2d 16, 43 n.14, 148 P.3d 1002 (2006)). The dissent
overlooks the dispositive difference between our prior footnote and this case:
in Pierce County, the counties never agreed to provide money to remedy any
shortfall if Sound Transit was unable to repay its bonds. Id. at 25 (?The Sound
Transit bonds are payable from and secured solely by the pledge of Sound
Transit's MVET and sales tax.?).
Our footnote in Pierce County, although inapplicable here, helps to
demonstrate why the City has incurred indebtedness within the meaning of our
constitution. Our Pierce County footnote responded to the argument that the
creation of Sound Transit unconstitutionally ?expanded the debt limit of the
counties.? Id. at 43 n.14. As noted above, the argument failed because the
counties did not undertake to assist Sound Transit in repaying the bonds. But if
a city were permitted to enter into CLAs with multiple municipal corporations,
the city?s potential liability could quickly exceed its debt limit, creating virtually
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No. 86552-3
unlimited liability. Our constitution?s framers never intended that cities would be
allowed such an evasion, endangering the fiscal health of the city at the risk of
its citizens.
Finally, the District argues that the CLA cannot be debt because it is not
?borrowed money.? In essence, the District argues that in order for there to be
debt, the City must actually be the issuer of bonds. This contradicts not only
our case law, but also the plain language of article VIII, section 6. Both State
Capitol Commission and Lister find state debt even where an entity other than
the state issues bonds. State Capitol Comm?n, 74 Wash. at 26-27; Lister, 91
Wash. at 17. Moreover, while the District?s argument might make some
logical sense under the state debt limit in article VIII, section 1, it makes none
when we are dealing with a municipality under article VIII, section 6. Our
municipal debt limit prohibits municipalities from becoming ?indebted in any
manner.?15 This language is broader than article VIII, section 1, and by its
terms encompasses more than the classic case of a municipality issuing its
own bonds to finance a public project.
E. The 2011 CLA is indebtedness
Having rejected the District?s arguments, we hold that the 2011 CLA, if
effective, would create debt. The arrangement is in substance a guaranty, and
15 In contrast, article VIII, section 1(a), (d) says that the state may ?contract debt? and
that ?under this section, debt shall be construed to mean borrowed money . . . .? By
its own terms, this definition applies to section 1 (?this section?), not to the article VIII,
section 6 limitation on municipal indebtedness.
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No. 86552-3
the risk of loss falls squarely on the City?s taxpayers: if the Regional Center
fails, they, not the District?s bondholders, wind up holding the bag. We affirm
the trial court.
III. The total amount of indebtedness would include the principal of the debt
plus any accrued interest
The parties dispute the amount of indebtedness the City would incur by
executing the 2011 CLA. Under our case law, the correct amount of debt is
equal to the total amount of bonds the City would guarantee. State Capitol
Comm?n, 74 Wash. at 24, 27. The trial court in this case followed this rule,
finding that the entire amount of principal on the District?s bonds would be City
debt. However, the trial court erred by including the total amount of interest
over the life of the bonds in its calculation. Only accrued interest is included in
a municipality?s debt limit, not interest still to be accrued. Lister, 91 Wash. at
15. This being said, if the principal debt, plus any other debt subject to the limit,
exceeds the constitutional debt limit, the interest issue may be moot. But in the
event that either party believes further proceedings on this issue are necessary
to resolve the case, the trial court can address those issues on remand
consistently with this opinion.
IV. The trial court did not commit prejudicial error in considering the City?s
declarations and the exhibits attached to them
Finally, the District raises several evidentiary objections to declarations
and exhibits brought before the trial court. A trial court?s ruling on an
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No. 86552-3
evidentiary issue is ?harmless unless it was reasonably probable that it
changed the outcome? of the case. Brundridge v. Fluor Fed. Servs., 164
Wn.2d 432, 452, 191 P.3d 879 (2008). Here, the trial court, confronted with
the District?s evidentiary objections, said that ?the case will not turn on that, of
course.? Verbatim Report of Proceedings at 51. The District?s attorney
agreed, at least in part, that ?it?s not something that I think this matter ought to
be turning on one way or another.? Id. After reviewing the record, we agree. If
the trial judge committed evidentiary error here, it was harmless.
V. The recent passage of Substitute S.B. 5984 does not moot this case
After we heard argument in this case, the legislature passed a law on
March 1, 2012, allowing the City to impose a sales tax to pay for the Regional
Center without holding an election. See Laws of 2012, ch. 4, § 6. That bill,
Substitute S.B. 5984, does not moot our decision in this case. A case is moot
if we can no longer provide effective relief. Westerman v. Cary, 125 Wn.2d
277, 286, 892 P.2d 1067 (1994) (citing Orwick v. City of Seattle, 103 Wn.2d
249, 253, 692 P.2d 793 (1984)). Here, our ability to provide effective relief is
not impacted by a slight modification to the City?s taxing authority. This is a
declaratory judgment action, asking whether it would violate the City?s debt limit
to enter into a CLA with the District. That question still urgently requires an
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No. 86552-3
answer, and we have received nothing suggesting the City does not still want
an answer to it. This case does not turn on whether the City can impose a tax
without putting it to a vote. In fact, the City?s capacity to generate revenue to
pay for an obligation is completely independent from whether that obligation
implicates the City?s debt limit. Municipal debt limits are calculated as a
percentage of taxable property within the municipality, and sales taxes simply
do not enter into the equation. See Const. art. VIII, § 6; RCW 39.36.020(1),
(2)(a)(ii).
Nor does it moot the case that the District recently passed a ballot
measure imposing a sales and use tax within its jurisdiction. See Michelle
McNiel, Sighs of Relief after Voters Overwhelmingly Approve Sales Tax
Increase for Town Toyota Center, Wenatchee World, Apr. 17, 2012. Again,
the question we must answer is whether entering into a CLA implicates the
City?s debt limit. Our ability to provide effective relief by answering this
question is not affected by a slight change in the District?s fiscal situation,
particularly where we have no evidence that this change will solve the District?s
financial woes or eliminate the need for long-term bonds. Our situation with
respect to this case remains the same: We have been called on to answer a
constitutional question, and that question still urgently requires an answer.
Moreover, on appeal we review the facts in the record before us. It is not our
role to supervise the specifics of the District?s finances, particularly where
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No. 86552-3
recent changes to those finances are not detailed in the record. This case is
not moot.
CONCLUSION
We have a duty under the constitution to enforce limitations on public
indebtedness. This case implicates the core concerns of article VIII, section 6.
We cannot sit idly by while municipalities creatively attempt to exceed their
proper debt limits, frustrating the principles enshrined in our constitution. We
affirm the trial court?s ruling and remand to the trial court for further
proceedings, if necessary, consistent with this opinion.
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AUTHOR:
Justice Charles K. Wiggins
WE CONCUR:
Justice James M. Johnson
Justice Charles W. Johnson Justice Debra L. Stephens, result
only
Justice Steven C. González
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