Program Admin. Services v. Authority

• Decision Date: 20 August 2007
• Docket Number: No. 136 MAP 2005.,136 MAP 2005.
• Citation: 928 A.2d 1013
• Court: Pennsylvania Supreme Court
• Parties: PROGRAM ADMINISTRATION SERVICES, INC., f/k/a R.D. Fowler & Assoc., Inc., Appellee v. DAUPHIN COUNTY GENERAL AUTHORITY, Appellant.

928 A.2d 1013

PROGRAM ADMINISTRATION SERVICES, INC., f/k/a R.D. Fowler & Assoc., Inc., Appellee v. DAUPHIN COUNTY GENERAL AUTHORITY, Appellant.

No. 136 MAP 2005.

Supreme Court of Pennsylvania.

Re-Submitted May 18, 2006.

Decided August 20, 2007.

Guy Paul Beneventano, Nauman, Smith, Shissler & Hall, LLP, Debra P. Foutlas and David E. Lehman, McNees, Wallace & Nurick, LLC, Harrisburg, for Dauphin County General Authority.

Thomas W. Scott, Killian & Gephart, LLP, Harrisburg, for Program Admin. Services, Inc.

CAPPY, C.J., CASTILLE, SAYLOR, EAKIN, BAER, BALDWIN, and FITZGERALD, JJ.

OPINION

Justice SAYLOR¹.

This appeal by allowance involves the issue of whether the board of directors of the Dauphin County General Authority may terminate, without cause, contracts executed by its predecessor board relating to the administration of certain school-related financing activities.

Appellant, the Dauphin County General Authority (the "Authority"), is a corporate agency of the Commonwealth created by Dauphin County pursuant to the Municipality Authorities Act.² The act authorizes the creation of municipality authorities for a wide range of purposes, one of which is to secure long term financing for public projects or uses, including public schools, by issuing revenue bonds for a term not exceeding forty years. Included among its powers under the act, the Authority may "make agreements with the purchasers or holders of the bonds or with others in connection with any bonds, whether issued or to be issued, as the authority shall deem advisable." 53 Pa.C.S. § 5607(d)(12).

Pursuant to these powers, in 1986 the Authority launched a program to provide financial assistance to Pennsylvania school districts seeking to borrow money to finance new capital improvements or refinance existing debt. This program, known as "School Pool I," was funded by $200 million in proceeds from the public sale of 40-year tax-exempt bonds set to mature in 2026. The governing agreement for this project made Dauphin Deposit Bank (later Allfirst Bank) the trustee of the funds, and Appellee, Program Administration Services, Inc., the program administrator. The Authority began a similar program in 1997, known as "School Pool II," with $250 million from the public sale of tax-exempt 35-five year bonds set to mature in 2032. A similar agreement made Commerce Bank the trustee and, again, made Appellee the program administrator.³

Under both of these arrangements (the "Program Administration Agreements"), the bonds were purchased by private investors and the proceeds were used to create a "pool" of money that was available for the Authority to lend to qualifying school districts. The Authority lends money from these pools to school districts for dedicated purposes such as construction or reconstruction of school facilities, or debt refinancing. As school districts repay the principal and interest on their loans, interest is paid to the bondholders and principal is returned to the pool, from which it is available to be re-loaned. The Authority thus provides "conduit" financing, as it is positioned between school-district borrowers and the private-investor lenders. As program administrator, Appellee is responsible, inter alia, to market the programs to prospective school districts, assist school districts with their applications, calculate note payments, bill the school districts, and assist the Authority in securing investment of funds with the trustee banks. The Program Administration Agreements provide that they shall continue in force until one of the following three conditions occurs: (1) no portion of the bonds remains outstanding and unpaid; (2) continuing failure of Appellee to perform in any material respect; or (3) mutual consent of the parties to terminate.

In November 2000, under a newly-appointed board of directors, the Authority notified Appellee that it intended to terminate the contracts without cause. Appellee initiated a declaratory judgment action in the trial court seeking a judicial determination that the contracts may not be terminated outside the terms specified by the agreements. The trial court ultimately entered a declaratory judgment in favor of the Authority, however, concluding that any agreements entered into by the parties or their predecessors were unenforceable as against the current Dauphin County General Authority. See Program Admin. Services, Inc. v. Dauphin County Gen. Auth., No. 2992 S 2001 (C.P. Dauphin 2003).

On appeal, a divided, en banc panel of the Commonwealth Court reversed in a published decision. Program Admin. Services, Inc. v. Dauphin County Gen. Auth., 874 A.2d 722 (Pa.Cmwlth.2005) (en banc). The majority reasoned that the central question was whether the Program Administration Agreements involved a governmental function or a proprietary function, because contracts involving governmental services may be terminated by a successor governing body, without cause, irrespective of the termination date or other procedures for termination set forth in the contract. Id. at 725 (citing Lobolito, Inc. v. North Pocono Sch. Dist., 562 Pa. 380, 755 A.2d 1287 (2000)). The majority then stated that, in deciding whether the activity at issue was governmental or proprietary in nature, it should employ the test set forth in County of Butler v. Local 585, Service Employees Int'l Union, AFL-CIO, 158 Pa.Cmwlth. 519, 631 A.2d 1389 (1993). Under this test, a court considers whether the activity: 1) is one that government is not statutorily required to perform; 2) also may be carried on by private enterprise; or 3) is used as a means of raising revenue.

Applying this test to the present case, the majority held that the Authority's activity of lending money to school districts was proprietary in nature since the Authority was not statutorily required to perform the activity and it is one that is carried on by many private lenders. The majority explained that the "mere fact that the Authority lends money to a school district for school construction does not make the act of lending governmental in character any more than it would be if the loan was made by a private bank." Program Admin. Services, 874 A.2d at 728. Furthermore, the majority distinguished this Court's decision in Lobolito, on the basis that Lobolito involved the decision of whether to build a school building — a clear governmental function. In this case, however, the Authority is not involved in any decision to build schools, but only in financing such projects once the decision is made by another body. Likewise, the majority distinguished another Commonwealth Court case, State Street Bank & Trust Co. v. Commonwealth, 712 A.2d 811 (Pa.Cmwlth.1998), on the basis that the funds being lent in that case were assets of the state, whereas here they are assets of the bondholders, akin to the holdings of private depositors. Thus, the majority reasoned:

Although the School Pool programs unquestionably facilitate school construction projects and so serve a valuable public purpose, it is incontrovertible that financing of school construction does take place through private channels and would do so if the School Pool programs cease to exist.

Id. at 729.

Finally, the majority also agreed with Appellee's alternative argument that Section 5607(d)(12) represents a "statutory exception" to the general rule that current governing bodies may not bind successors with regard to governmental functions. Program Admin. Services, 874 A.2d at 729. Thus, by noting that, under Section 5607(d)(12) of the Municipality Authorities Act, administration agreements are statutorily permitted to be coextensive with the full maturity period of the bonds, the court deemed the Program Administration Agreements fully enforceable.

Judge Cohn Jubelirer authored a dissenting opinion, joined by Judge Pellegrini, in which she used the same test from County of Butler, but concluded that the conduit financing employed by the Authority is distinct from ordinary borrowing, since the funds were raised by the sale of bonds and the bondholders have no recourse against the Authority. Further, the ultimate borrowers are the school districts, the ultimate lenders are the bondholders, and unlike a private bank, the Authority earns no profit. She further noted that, in Lobolito, this court considered the "crux" of the agreement in resolving the governmental versus proprietary question, and Lobolito concluded that the "crux" of the agreement was the construction of a new school, and that the "services aspect of the agreement [i.e., that portion pertaining to water and sewage treatment] would be devoid of meaning without the school board's predicate promise to build the school." Program Admin. Services, 874 A.2d at 733 (Cohn Jubelirer, J., dissenting). Similarly, Judge Cohn Jubelirer opined that the "crux" of the Program Administration Agreements is the financing of new capital improvements for the public school system, which is ancillary to the capital improvement projects themselves; therefore, in her view, they involve governmental functions.

In a separate dissent joined by Judge Cohn Jubelirer, Judge Pellegrini expressed discomfort with the idea that a public entity such as the Authority could be locked into a 40-year contract with a private party notwithstanding changes in the Authority's governing board and the concomitant new policies that the successor boards may wish to implement. He noted, in this regard, that the purpose of the rule allowing government entities to be free from long-term contracts entered into by their predecessor boards is to avoid such "capture" by private interests at the potential expense of public interests as ultimately expressed by the electorate through the ballot box. See id. at 730-31 (Pellegrini, J., dissenting).

Both the trial court and the Commonwealth Court panel concentrated their analysis primarily on the distinction between contracts relating to governmental functions and...