Wein v. State

• Decision Date: 23 March 1976
• Citation: 347 N.E.2d 586,383 N.Y.S.2d 225,39 N.Y.2d 136
• Parties: , 347 N.E.2d 586 Leon E. WEIN, Appellant, v. STATE of New York et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 225

383 N.Y.S.2d 225

39 N.Y.2d 136, 347 N.E.2d 586

Leon E. WEIN, Appellant, v. STATE of New York et al., Respondents.

Court of Appeals of New York.

March 23, 1976.

Leon Edward Wein, pro se, and William J. Quirk, Brooklyn, for Leon E. Wein, appellant.

Louis J. Lefkowitz, Atty. Gen. (Shirley Adelson Siegel and Samuel A. Hirshowitz, New York City, of counsel), for Arthur Levitt, respondent.

Martin Kleinbard, Max Gitter and Dean B. Allison, New York City, for the Municipal Assistance Corp. for the City of New York, amicus curiae.

Haliburton Fales, 2d, Willis McDonald, IV, Marion Jay Epley, III, Thomas J. O'Sullivan, Robert L. Clare, III, New York City and John E. Osnato, Brooklyn, for Certain New York Financial Institutions, amicus curiae.

BREITEL, Chief Judge.

In a taxpayer's action Supreme Court, 84 Misc.2d 453, 375 N.Y.S.2d 509 summarily on motion declared constitutional sections 22 and 23 of the State Financial Emergency Act for the City of New York (L.1975, ch. 868, as amd. by L.1975, ch. 870). Plaintiff taxpayer appeals directly to this court urging the statute's unconstitutionality (N.Y.Const., art. VI, § 3, subd. b, par. (2); CPLR 5601, subd. (b), par. 2).

In a desperate fiscal crisis the Nation's largest city faces bankruptcy and the State lacks cash resources to tide the city over its immediate problems by outright grant of funds. The issue is whether appropriations, at an Extraordinary Session of the Legislature in mid-fiscal year, of $250 million to the City of New York and $500 million to the Municipal Assistance Corporation for the City of New York (MAC), to be funded by short-term State borrowing in the form of revenue or tax anticipation notes, constitute a gift or loan of the credit of the State to public corporations, in violation of constitutional limitations (N.Y.Const., art. VII, § 8, subd. 1).

There should be an affirmance. The Constitution does not prohibit the State for a public purpose from giving or lending its money to assist a municipal or other public corporation. Nor does the Constitution prohibit the State from short-term borrowing in advance of anticipated taxes and revenues to fund appropriations previously made. Indeed, short-term borrowing for this purpose is expressly and unconditionally authorized by the literal terms of section 9 of article VII. Hence, if the State chooses to use the proceeds of otherwise constitutionally valid short-term borrowing, payable out of anticipated revenues, in disbursement of an appropriation of money to assist for a public purpose a municipal or other public corporation, the State's 'credit' is not extended to the municipality or other public corporation in violation of constitutional limitations. The device is that the State gives cash in hand to the public corporation, albeit obtained by its own borrowing. Such borrowing is permitted in limited fashion by the Constitution, by short-term paper in advance of authentically anticipated revenues from taxes, Federal grants or long-term bonds authorized but not yet issued. The line is a narrow one, but one drawn by the Constitution.

On September 5, 1975, because of the desperate fiscal crisis in New York City, the Legislature convened in Extraordinary Session. On September 9, it passed, and the Governor approved, the New York State Financial Emergency Act for the City of New York, an intricate fiscal plan to meet the city's immediate financial paralysis (L.1975, ch. 868, as amd. by L.1975, ch. 870).

The Legislature declared 'that a financial emergency and an emergency period exists in the city of New York. The city is unable to obtain the funds needed by the city to continue to provide essential services to its inhabitants or to meet its obligations to the holders of outstanding securities' (§ 1). To meet the emergency, $250 million and $500 million were appropriated 'in the first instance' as advances to the city and to MAC, respectively (§§ 22, 23). The appropriations were purportedly made from the Local Assistance Fund, an account, and not an actual fund, into which appropriations and disbursements of State aid to local governments are charged and credited (State Finance Law, § 70, subd. 3, par. (a)). As a precondition to receiving the funds, the city and MAC were required to enter into repayment agreements with the State Budget Director, and to issue notes and bonds payable to the State in the principal amounts of the advances.

No provision was made in the particular statute for the source from which the State expected to obtain the funds to pay the appropriations. This is not unusual in appropriations made by the Legislature. On September 15, 1975, however, the State sold short-term revenue anticipation notes (RANs) in the amount of $250 million, for the purpose of crediting the proceeds to the Local Assistance 'Fund' and offsetting a portion of the MAC appropriation. (In October and November, 1975, after Special Term had declared the appropriations sections constitutional, an additional $500 million in short-term notes were sold to fund the remainder of the appropriations.) By general statute, sufficient revenues to pay the particular RANs are available by impounding of the revenues to be received by the State (State Finance Law, § 55; 1934 Opns.Atty.Gen. 190, 191).

Critical to understanding State finances is that the Constitution mandates a balanced budget (art. VII, § 2). At the annual regular session of the Legislature, usually not later than February 1, the Governor must present a balanced budget, namely, a plan of expenditures and revenues which balance, with permissible contingencies which do not merit consideration in the present context. Temporary borrowin discussed later, is permitted to anticipate planned committed revenues and, in certain limited situations, not now relevant, unanticipated needs. There is no express treatment in the Constitution governing appropriations made after the regular session and during the fical year at extraordinary sessions, but the implication is, and an essential one, that additional appropriations must be covered by matching revenues, or else the balanced budget of the regular session would be a device easily evaded at a later extraordinary session. A control on such evasion, however, and reinforcing the implication are the constitutional limitations on short-term borrowing.

There is flexibility in the Constitution, as there must be, because estimates of expenditures will never be fulfilled exactly and estimates of revenues will even less likely be fulfilled exactly. And this lack of capacity to prophesy expenditures and revenues in relatively ordinary times is minor when compared to changes of magnitude due to disasters, economic upheavals, was, the coming of peace after war, and the like. The Constitution is designed to permit survival, but it is also designed to prevent the repetition of fiscal abuse the evils of which history taught painfully to the people of this State.

The issues raised in this case involve the principles of the constitutional plan, manipulation of its provisions, and the likelihood of the very abuses the Constitution was intended to prevent. The issues are not easily resolved, and the answers are not categorical. If the city and the State had enormous aggregate temporary debt, without immediate provision for its liquidation or valid refunding in the aggregate, it would be demonstrative that either the constitutional plan is not exact enough to prevent what has happened or that the plan has been violated.

For the reasons to be stated it is concluded that there has been no constitutional violation, but it is also apparent that the State in avoiding violation has been driven to the brink of valid practice.

Plaintiff contends that the appropriations to the city and MAC, funded by short-term State borrowing, constitute a gift or loan of the credit of the State in violation of constitutional limitations. In short, he contends that the State has attempted to do indirectly what it may not do directly.

Section 8 of article VII of the Constitution provides: 'The money of the state shall not be given or loaned to or in aid of any private corporation or association, or private undertaking; nor shall the credit of the state be given or loaned to or in aid of any individual, or public or private corporation or association, or private undertaking'.

The prohibition against lending or giving the State's credit was prompted largely by the extensive and highly speculative subsidizing in the first half of the nineteenth century of private railroad and canal companies by the State's long-term debt obligations (see People v. Westchester County Nat. Bank, 231 N.Y. 465, 471--472, 132 N.E. 241, 243; Report of the Debates and Proceedings of the Convention for the Revision of the Constitution of the State of New York (1846), at pp. 884--894; New York State Constitutional Convention Comm., Problems Relating to Taxation and Finance (1938), vol. 10, ch. V; New York Temporary State Comm. on the Constitutional Convention, State Finance (1967), p. 108; Sowers, Financial History of New York State, pp. 82--85; Bidwell, Taxation in New York State, pp. 32--33; 2 Lincoln, Constitutional History of New York, pp. 91--101, 179--180; see, also, Johns Hopkins Univ. v. Williams, 199 Md. 382, 388--390, 86 A.2d 892). For example, to aid the construction of railroads, the State would issue or 'loan' to the railroad 'State stock', a form of long-term debt instrument backed by the State's full faith and credit. The public would then purchase the State stock from the railroad at auctio and the proceeds would be applied to the private corporation's capital improvements (e.g., L.1836, ch. 170, §§ 1, 4, 7).

It was not anticipated that the State would ever have to pay the debt to the purchasers of the State stock from its own tax-raised funds (see Problems Relating to Taxation and Finance (1938), Op. cit., at p. 109; Debates and Proceedings (1846), ...