Wisconsin Legislature: Loans; Students; Wisconsin Higher Education Corporation; Wisconsin Higher Educational Aids Board;

72 Op. Att'y Gen. 135, 139-140 (1983)

A review of recent Contract Clause cases is instructive but not altogether dispositive on this point. In

United States Trust Co. v. New Jersey

, 431 U.S. 1 (1977), the United States Supreme Court considered the question of how to balance a state legislature's inherent powers against the restrictions placed on the legislative power under the Contract Clause. In that case, the States of New York and New Jersey joined in an interstate compact to create a port authority to operate a number of public transporation facilities. The states had enacted laws that limited the port authority's ability to subsidize rail passenger services from revenues and reserves generated from other port authority operations. That restriction was incorporated into covenants in resolutions covering bonds issued by the port authority to finance its activities. Those bonds were secured by a pledge of the general reserve fund.

72 Op. Att'y Gen. 135, 140 (1983)

In 1974, the two states repealed the restrictions on the use of money in the general reserve fund for subsidizing of rail passenger services. The bond trustee brought an action against the states on behalf of the bondholders. The trustee was concerned that rail passenger subsidies might draw down the reserve fund securing the bonds, thereby imperiling bondholder security and the marketability of the bonds.

72 Op. Att'y Gen. 135, 140 (1983)

The Supreme Court held that the states' repeal of the restrictions violated the Contract Clause. The Court noted that more than a technical impairment is required before it becomes necessary to resolve the police power-contract clause question. Thus, impairment is ultimately an issue of fact. The Court also recognized that its previous decisions had affirmed the power of the respective states to use their police power to regulate for the benefit of the public health and welfare even when the exercise of that power affected existing contractual obligations. The Court observed: "In short, the Contract Clause does not require a State to adhere to a contract that surrenders an essential attribute of its sovereignty."

Id.

at 23.

72 Op. Att'y Gen. 135, 140 (1983)

Nevertheless, in ruling for the bondholders, the Court said:

72 Op. Att'y Gen. 135, 140-141 (1983)

In deciding whether a State's contract was invalid

initio

under the reserved-powers doctrine, earlier decisions relied on distinctions among the various powers of the State. Thus, the police power and the power of eminent domain were among those that could not be "contracted away," but the State could bind itself in the future exercise of the taxing and spending powers. Such formalistic distinctions perhaps cannot be dispositive, but they contain an important element of truth. Whatever the propriety of a State's binding itself to a future course of conduct in other contexts, the power to enter into effective financial contracts cannot be questioned. Any financial obligation could be regarded in theory as a relinquishment of the State's spending power, since the money spent to repay debts is not available for other purposes. Similarly, the taxing power may have to be exercised if debts are to be repaid. Notwithstanding these effects, the Court has regularly held that the States are bound by their debt contracts.

72 Op. Att'y Gen. 135, 141 (1983)

The instant case involves a financial obligation and thus as a threshold matter may not be said automatically to fall within the reserved powers that cannot be contracted away.

72 Op. Att'y Gen. 135, 141 (1983)

Id.

at 23-24 (footnotes omitted).

72 Op. Att'y Gen. 135, 141 (1983)

Of course, there are some factual differences in the covenants involved in

United States Trust Co.

and those in the Wisconsin revenue obligation bonds. While in both instances the covenants are related to security of bondholders, the

United States Trust Co.

covenants were solely financial in nature. The Supreme Court commented on that distinction:

72 Op. Att'y Gen. 135, 141 (1983)

Not every security provision, however, is necessarily financial. For example, a revenue bond might be secured by the State's promise to continue operating the facility in question; yet such a promise surely could not validly be construed to bind the State never to close the facility for health or safety reasons. The security provision at issue here, however, is different: The States promised that revenues and reserves securing the bonds would not be depleted by the Port Authority's operation of deficit-producing passenger railroads beyond the levels of "permitted deficits."

Such a promise is purely financial and thus not necessarily a compromise of the State's reserved powers

72 Op. Att'y Gen. 135, 141 (1983)

Id.

at 25 (emphasis added).

72 Op. Att'y Gen. 135, 141-142 (1983)

In this instance the state has not agreed to pay the bonded indebtedness. The agreement that provides services to the Corporation is not purely financial in nature. Therefore, the extent to which the Legislature may control the Board's activities under that service agreement is a much closer one than presented in the

United States Trust Co.

decision. The line is difficult to draw and I cannot predict with any assurance when the line is crossed. It suffices to say at this point that the most prudent course is to recognize the independence of the Corporation and to take whatever steps are reasonably necessary to equip the Board with sufficient personnel and facilities to enable it to provide the Corporation with the services it requires.