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.”