New York Law Review

Tag: Municipal Finance

  • Local Government Assistance Corp. v. Sales Tax Asset Receivable Corp., 3 N.Y.3d 524 (2004): Upholding State’s Power to Refinance Municipal Debt

    Local Government Assistance Corp. v. Sales Tax Asset Receivable Corp., 3 N.Y.3d 524 (2004)

    A state law providing for multi-year payments subject to annual legislative appropriations does not create a debt requiring voter approval under the state constitution, and the state can direct funds to a public benefit corporation without violating constitutional debt limitations.

    Summary

    This case involves a constitutional challenge to New York’s Municipal Assistance Corporation (MAC) Refinancing Act. The Act aimed to assist New York City in retiring long-term debt by having the Local Government Assistance Corporation (LGAC) make annual payments to the City. LGAC argued the Act violated the state constitution by creating a multi-year debt obligation without voter approval, unlawfully contracting debt for the City, and impairing LGAC bondholder rights. The New York Court of Appeals held that the Act was constitutional because the payments were subject to annual legislative appropriations, the City did not incur unlawful debt, and the Act did not impair bondholder contracts. The court emphasized deference to legislative financial programs unless patently illegal, reaffirming the state’s power to manage municipal finances.

    Facts

    In the 1970s, New York City faced a severe fiscal crisis. The State Legislature created MAC to issue long-term bonds and refinance the City’s short-term debt, funded by diverting state sales tax revenue. By 2003, the City faced another crisis with $2.5 billion remaining on the MAC debt. The Legislature enacted the MAC Refinancing Act, allowing the City to receive the diverted sales tax revenue while the State made 30 annual payments of $170 million to the City. The City assigned these payments to Sales Tax Asset Receivable Corporation (STARC), a newly created entity, to issue bonds and retire the MAC debt.

    Procedural History

    LGAC filed a declaratory action in Supreme Court, Albany County, challenging the Act’s constitutionality and seeking a preliminary injunction. The Supreme Court denied the injunction and declared the Act constitutional. The Appellate Division modified, finding an amendment to Public Authorities Law § 3240(5) unconstitutional but severable. LGAC appealed, and STARC cross-appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the MAC Refinancing Act violates the New York State Constitution, article VII, § 11, by creating a multi-year debt obligation without voter approval?

    2. Whether the Act violates the New York State Constitution, article VIII, § 2, by allowing the City to contract debt without pledging its faith and credit?

    3. Whether the Act violates the United States Constitution, article I, § 10, by impairing the contractual rights of LGAC’s bondholders?

    Holding

    1. No, because the Act provides for multi-year payments subject to annual legislative appropriations, which does not constitute a debt requiring voter approval.

    2. No, because the City does not incur any legal obligation to STARC or its bondholders; therefore, no debt is created.

    3. No, because the Act does not alter the priority of LGAC bondholders’ contractual rights to funds, and STARC acknowledges the superiority of LGAC bondholder claims.

    Court’s Reasoning

    The Court of Appeals emphasized the presumption of constitutionality for legislative enactments, especially in public finance. Regarding the debt obligation, the court stated that statutes providing for multiyear payments contingent on annual appropriations do not create debt requiring voter approval. The court construed the amendment to Public Authorities Law § 3240(5) narrowly, finding it intended only to ensure timely payments to the City, not to bypass the appropriation requirement. The court highlighted that Public Authorities Law § 3238-a requires payments from the Tax Fund, accessible only through legislative appropriation. As for municipal debt, the court relied on Wein v. City of New York, stating that a city incurs debt only if legally obligated to fund a public benefit corporation’s debt service. The court found that the City had no such obligation to STARC or its bondholders; both STARC’s certificate of incorporation and the assignment agreement disclaimed City liability. “It is the intention of the City and [STARC], and they do agree, that the Fiscal 2004 Bonds shall not be a debt of the City and the City will not have any obligation or liability thereon.” Finally, the court addressed contract impairment, noting implied repeal of a statute is disfavored. It found no legislative intent to undermine Public Authorities Law § 3241(1), which protected LGAC bondholders’ rights. The court harmonized the statutes, holding that LGAC must make payments to the City but not at the expense of bondholder priority. The court also pointed to STARC’s concession, stating “The payments LGAC is required by the [MAC Refinancing Act] to make to [STARC] from the Tax Fund will be subordinate to the payments LGAC is required to make pursuant to its bond resolutions.”

  • New York Telephone Co. v. Nassau County, 1 N.Y.3d 485 (2004): Municipality’s Financial Hardship as Grounds for Denying Tax Refunds

    New York Telephone Co. v. Nassau County, 1 N.Y.3d 485 (2004)

    A court may deny tax refunds to a prevailing party if the municipality demonstrates that paying the refunds would cause significant financial hardship, but such a determination requires a hearing and submission of proof regarding the financial impact.

    Summary

    New York Telephone Company (NYNEX) and several water companies sued Nassau County, arguing that the County improperly assessed taxes on their properties in non-countywide special districts. The Supreme Court agreed and ordered refunds. The Appellate Division, however, precluded the payment of refunds, citing the County’s financial situation. The New York Court of Appeals reversed, holding that while financial hardship can be a basis for denying refunds, the County needed to demonstrate the actual financial impact through a hearing and submission of evidence. The case was remitted to the Supreme Court for further proceedings to determine the amount of the refund due and assess any financial hardship to the County.

    Facts

    NYNEX and the New York Water Service Corporation and Long Island Water Corporation (collectively, the Water Companies) owned property in Nassau County. Nassau County, a “special assessing unit,” imposed special ad valorem levies on non-countywide special districts, including properties owned by NYNEX and the Water Companies. NYNEX and the Water Companies challenged the method the County used to assess real property in these non-countywide special districts, claiming it violated the Real Property Tax Law (RPTL). They sought a declaration that the assessment method was illegal, an injunction against the County’s assessment practices, and a tax overpayment refund.

    Procedural History

    NYNEX commenced actions for the 1997 and 1998 tax years. The Water Companies initiated CPLR article 78 proceedings for the 1997-2000 tax years. The Supreme Court consolidated the cases and ruled in favor of NYNEX and the Water Companies, enjoining the County from assessing real property in non-countywide special districts under RPTL article 18 and referring the issue of damages to trial. The Appellate Division modified the Supreme Court’s order, precluding the payment of refunds based on the potential financial impact on the County. The Court of Appeals granted the utilities’ motions for leave to appeal.

    Issue(s)

    Whether the Appellate Division erred in denying tax refunds to the utilities based on the County’s alleged financial hardship, without a hearing or evidence demonstrating the actual financial impact of such refunds.

    Holding

    Yes, because the County failed to demonstrate the actual financial impact through a hearing and submission of evidence, the Appellate Division erred in denying tax refunds to the utilities.

    Court’s Reasoning

    The Court of Appeals acknowledged that in certain circumstances, it has refused to grant relief to a prevailing party based on the effect it would have on the municipality. The Court cited cases like Foss v. City of Rochester, where retroactive tax refunds were denied due to the government’s reliance on the revenues and the undue burden a refund would create. Similarly, in Matter of Hellerstein v. Assessor of Town of Islip, refunds were denied to avoid financial chaos. However, the Court emphasized that such a determination requires evidence of financial hardship. The Court noted that the Supreme Court declined to hear evidence of hardship, so there was no basis to determine the financial impact on the County. The Court stated that “the amount of refund to which the utilities are entitled— including any financial impact on the County of requiring payment—must be determined at a hearing, upon submission of proof.” The Court distinguished this case from situations where the financial impact was already demonstrably clear. The Appellate Division’s reliance on potential financial impact without supporting evidence was therefore deemed an abuse of discretion. The Court remitted the case for a hearing to determine the amount of the refund and the extent of any financial hardship the County would suffer, essentially requiring a balancing of the equities before denying a legally entitled refund.

  • Farber v. City of Utica, 97 N.Y.2d 476 (2002): Clarifying ‘Amounts Received’ Under General Municipal Law § 207-a

    Farber v. City of Utica, 97 N.Y.2d 476 (2002)

    Under General Municipal Law § 207-a, a municipality’s obligation to a disabled firefighter is reduced by the total amount of disability pension benefits received, including supplemental allowances from the state retirement system, as these supplements are considered part of the ‘amounts received’ under the statute.

    Summary

    The case concerns the calculation of disability payments to a retired firefighter under General Municipal Law § 207-a. The City of Utica sought to reduce its payments to Arthur Farber, a disabled firefighter, by the amount of a supplemental retirement allowance Farber received from the state. The Court of Appeals held that the City could indeed reduce its payments, because the supplemental allowance constituted part of the total “amounts received” by Farber under his disability pension, as contemplated by § 207-a. The decision emphasizes the legislative intent to alleviate the financial burden on municipalities regarding disability payments to firefighters.

    Facts

    Arthur Farber, a City of Utica firefighter, was permanently disabled in the line of duty in 1973 and involuntarily retired in 1980. He received a disability pension from the New York State Retirement System under Retirement and Social Security Law § 363-c. He also received payments from the City of Utica under General Municipal Law § 207-a, representing the difference between his state pension and the salary of active firefighters. Farber also received a supplemental allowance from the state under Retirement and Social Security Law § 378. Upon learning of this supplemental allowance, the City reduced its § 207-a payments to Farber by the amount of the allowance and sought to recoup alleged overpayments.

    Procedural History

    Farber initiated a CPLR article 78 proceeding to compel the City to recalculate its § 207-a obligation. The City counterclaimed for reimbursement of overpayments. The Supreme Court granted Farber’s petition and denied the City’s counterclaim. The Appellate Division affirmed. The Court of Appeals reversed, dismissing Farber’s petition and reinstating the City’s counterclaim.

    Issue(s)

    Whether the phrase “amounts received” in General Municipal Law § 207-a(2) includes supplemental entitlements received pursuant to Retirement and Social Security Law § 378, thus allowing a municipality to reduce its payments to a disabled firefighter by the amount of the supplemental allowance.

    Holding

    Yes, because the supplemental allowance derives from Farber’s Retirement and Social Security Law § 363-c disability pension and is therefore part of the total “amounts received” for purposes of General Municipal Law § 207-a.

    Court’s Reasoning

    The Court reasoned that the Legislature intended Retirement and Social Security Law § 378 to provide a cost-of-living adjustment to state retirement system pensioners. Since municipalities are already responsible for paying an active firefighter’s salary, including all salary increases, this pay adjustment eliminates the need for a distinct supplemental allowance. The Court emphasized that the 1977 amendment to General Municipal Law § 207-a aimed to alleviate the financial burden on municipalities. The Court quoted Mashnouk v. Miles, 55 N.Y.2d 80, 87 (1982): “the primary aim of the new statute was to shift a large portion of the financial burden generated by disabled fire fighters from the municipal payrolls to the appropriate retirement system or pension fund.” Permitting the City to deduct the supplemental allowance prevents a disabled firefighter’s benefits from exceeding an active firefighter’s salary, which would be contrary to the legislative intent. The supplemental allowances are not independent pensions but are contingent upon and computed based on the base pension amount. Therefore, the supplemental allowance should reduce the City’s obligation under General Municipal Law § 207-a.

  • Riley v. County of Monroe, 43 N.Y.2d 144 (1977): County Authority to Finance Limited Access Landfills

    Riley v. County of Monroe, 43 N.Y.2d 144 (1977)

    A county may use general county revenues to finance a limited access landfill serving only a portion of the county, provided such action is authorized by statute and does not violate equal protection guarantees.

    Summary

    This case addresses whether Monroe County could use county-wide tax revenues to finance a landfill exclusively for the residents of the northeast quadrant of the county. The Town of Greece argued that this arrangement constituted an illegal waste of public funds and a denial of equal protection because the county refused to fund its town landfill. The New York Court of Appeals held that Section 226-b of the County Law authorized the county’s action and that the limited access landfill did not violate equal protection, as the county was developing a county-wide waste disposal plan and faced a near-crisis in the northeast sector. The court affirmed the dismissal of the plaintiffs’ complaint.

    Facts

    The County of Monroe used county-wide real property tax revenues to construct and operate a sanitary landfill. This landfill was exclusively for the use of residents in the northeast quadrant of the county. The Town of Greece operated its own landfill, but the county refused to use county funds to finance its operations. The town argued that the county’s action was discriminatory and an illegal waste of public funds.

    Procedural History

    The plaintiffs commenced an action challenging the county’s use of funds. Special Term denied the defendants’ motion to dismiss and denied the plaintiffs’ motion for summary judgment. The Appellate Division modified the order by granting the respondents’ motion for summary judgment and dismissing the complaint. The plaintiffs appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the use of county funds to build and operate a sanitary landfill for the exclusive use of residents in one quadrant of the county constitutes an improper and illegal waste of public funds under Section 51 of the General Municipal Law.

    2. Whether the county’s use of county funds to support a limited access landfill, while refusing to use county funds to finance the operations of the Town of Greece’s landfill, is a denial of equal protection under the New York State and United States Constitutions.

    Holding

    1. No, because Section 226-b of the County Law authorizes the county to appropriate and expend funds for solid waste disposal, and the county’s actions were thus authorized by statute and not subject to attack under Section 51 of the General Municipal Law.

    2. No, because the county’s actions had a rational basis, as the county was developing a county-wide waste disposal plan and faced a near-crisis situation in the northeast sector of the county.

    Court’s Reasoning

    The court reasoned that Section 226-b of the County Law grants broad authority to counties to address solid waste disposal. The court stated, “[t]his section, which was a legislative response to the growing problem of solid waste disposal, does not contain, nor is it confined by, the strictures, restrictions, and limitations imposed upon a project authorized only by article 5-A.” The court declined to read a limitation into the statute that it only authorizes county-wide facilities. Regarding the equal protection claim, the court applied the rational basis test, noting that legislative actions carry a strong presumption of validity. The court found that the county’s decision to construct a limited access landfill in the northeast sector was a rational response to a near-crisis situation, especially since the county was developing a county-wide plan. The court emphasized, “To require respondents not to construct any facilities until it can construct them all, would fly in the face of reason.” The court explicitly referenced the Governor’s Memorandum, McKinney’s Session Laws of NY, 1970, p 3123, stating that section 226-b was specifically intended to “provide for the collection and disposition of solid wastes as a county function”.

  • Wein v. State of New York, 39 N.Y.2d 136 (1976): State’s Authority to Borrow and Aid Municipalities During Fiscal Crisis

    39 N.Y.2d 136 (1976)

    The State constitutionally may give or lend its money (as distinguished from its credit) to assist a municipal or other public corporation for a public purpose, and may engage in short-term borrowing in advance of anticipated taxes and revenues to fund appropriations previously made, provided the short-term borrowing is genuinely in anticipation of committed taxes or other revenues.

    Summary

    In the midst of New York City’s severe financial crisis, a taxpayer challenged the constitutionality of state legislation that appropriated funds to the city and the Municipal Assistance Corporation (MAC), funded by short-term state borrowing. The Court of Appeals held that the appropriations, funded by short-term revenue anticipation notes (RANs), did not violate the state constitution’s prohibition against lending the state’s credit to public corporations. The court reasoned that the state was giving cash in hand, obtained through permissible short-term borrowing against anticipated revenues, and that these RANs were not demonstrably part of a prohibited “rollover” of debt.

    Facts

    New York City faced imminent bankruptcy due to a severe fiscal crisis. The State Legislature convened an extraordinary session and passed the New York State Financial Emergency Act for the City of New York. Sections 22 and 23 of the Act appropriated $250 million to the city and $500 million to MAC as advances. These appropriations were to be funded by short-term revenue anticipation notes (RANs). The city and MAC were required to enter into repayment agreements with the State Budget Director and issue notes and bonds payable to the state. The state then sold RANs to fund these appropriations. The plaintiff, a taxpayer, argued that these appropriations, funded by short-term state borrowing, constituted an unconstitutional gift or loan of the state’s credit.

    Procedural History

    The Supreme Court summarily declared the appropriations constitutional. The taxpayer appealed directly to the Court of Appeals, challenging the statute’s constitutionality under Article VI, Section 3(b)(2) of the New York Constitution and CPLR 5601(b)(2).

    Issue(s)

    Whether appropriations to New York City and MAC, 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 Article VII, Section 8(1) of the New York Constitution.

    Holding

    No, because the Constitution does not prohibit the State from giving or lending its money to assist a municipal or other public corporation for a public purpose. Nor does the Constitution prohibit the State from short-term borrowing in advance of anticipated taxes and revenues to fund appropriations previously made, provided the short-term borrowing is genuinely in anticipation of committed taxes or other revenues and not part of a scheme to evade constitutional limitations.

    Court’s Reasoning

    The Court emphasized that the State constitution mandates a balanced budget, implying that any appropriations made after the regular legislative session must be covered by matching revenues. The prohibition against lending the State’s credit was designed to protect the State from the uncertain consequences of incurring future contingent liabilities, especially in light of historical abuses where the State subsidized private companies and ultimately had to cover their debts. While the Constitution prohibits the State from lending its credit, it does not prohibit the State from giving or lending its money to assist a municipal or other public corporation for a public purpose. The Court stated, “[T]he use of short-term borrowing to finance an appropriation of money to a municipal or other public corporation does not violate the prohibition against giving or lending the State’s credit, provided the short-term borrowing is authentically in anticipation of actually committed taxes or other revenues.” The Court found that the RANs in this case were validly issued in authentic anticipation of revenues to be received within one year, noting that at the time of issuance, the State anticipated sufficient taxes and revenues to pay the obligations within one year. The Court cautioned that this device could become a violation if it leads to temporary refinancing in the nature of a “rollover,” emphasizing that the validity depends on the prospect that the RANs will be paid as contemplated. Judge Jasen dissented, arguing that the transactions were an ill-disguised effort to evade the limitations imposed by the Constitution and that the State was essentially laundering city and MAC notes, placing its credit behind them in violation of the Constitution. The dissent warned that the State’s actions might pre-empt the market for its own legitimate borrowing needs. The dissent stated that the legislature was adding “new and massive appropriations after the budget has been adopted and cover them with anticipation notes.”