Court of Appeal Upholds Prison Bonds

Article XVI, Section 1 forbids the state from issuing any debt totaling more than $300,000 without a two-thirds vote of the Legislature and a majority vote of the people. Over time, however, this provision has become encrusted with exceptions, to the point where it no longer provides a realistic limitation on the power of the State to borrow. The latest case in this series is Taxpayers for Improving Public Safety v. Schwarzenegger (here), which upheld the State's ability to issue up to $7.4 billion of bonds to fund a massive prison construction program. Although in general Article XVI, Section 1 forbids the State from issuing debt that must be repaid by the general fund without the required votes of the Legislature and the electorate, the scheme upheld in this case as a practical matter required general fund financing. Here's how it worked. The "Public Works Board" would sell bonds to pay for prison construction. The bonds would not be repaid directly from the State's general fund. Instead, the bond payments would be made from rental payments made by the Department of Corrections and Rehabilitation (CDCR) for the use and/or availability of the prisons financed by the Board. And where would CDCR get the money to pay the rent? From prison inmates? From the lottery? No, from the general fund. So why didn't this financing scheme violate Article XVI, Section 1?

The answer is that, under the cases construing this constitutional provision, an "exception to the constitutional debt limits has been recognized where the governmental entity enters into a contingent obligation. 'A sum payable upon a contingency is not a debt, nor does it become a debt until the contingency happens.' (Doland v. Clark (1904) 143 Cal. 176, 181.) This contingency exception has been applied to uphold multiyear contracts, such as leases, where the governmental entity agrees to pay sums in succeeding periods in exchange for property, goods, or services to be provided during those periods. (Pension Obligation, supra, 152 Cal.App.4th at p. 1398.) Each periodic payment is viewed as a contemporaneous payment for the property, goods, or services received rather than an installment payment on a long-term debt." So when the State provided that CDCR would pay rent for the prisons based on their availability, issuance of the debt funded by these "rental payments" became exempt from the constitutional debt limit. especially where the bondholders could not lookdirectly to the general fund for repayment.

Is there a method to this madness? Here's the Court's attempt to manufacture a rationale: "As described earlier, the underlying purpose of [the constitutional debt] limits is to force governments to live within their means by prohibiting them from financing current expenses with future revenue. Thus, if the state were to borrow $1 billion dollars today to pay for current expenses, such as welfare benefits or employee salaries, and pay off the loan over the next several years, that would be burdening the taxpayers of tomorrow with the expenses of today. However, when a government constructs a facility that will be used for many years, it has created an asset that will benefit both current and future taxpayers. It is therefore appropriate that future taxpayers help pay for that benefit as it is used up. If, as plaintiffs suggest, the construction of a prison today should be paid for by the taxpayers of today, it is the taxpayers of tomorrow who would reap a windfall.

"In this instance, the Act provides a scheme by which large capital expenditures for prison facilities may be paid for as those facilities are used. This is consistent with the pay-as-you-go principle underlying the constitutional debt limits. Therefore, the trial court properly sustained the demurrers to plaintiffs’ complaint. "

Regrettably, the court's decision is well-founded in existing law. It also has a venerable and plausible raison d'etre. But it does do a great bit of violence to the constitutional language. Yet there seems little chance that the California Supreme Court will grant review. In this era of budget crises. the State needs the revenue, and prison construction programs are politically an easy sell.