Limits on Borrowing and Donations in the Louisiana Constitution of 1975

• Author: Lee Hargrave
• Position: Wex S. Malone Professor Emeritus, Louisiana State University

Wex S. Malone Professor Emeritus, Louisiana State University. Coordinator of Legal Research, Louisiana Constitutional Convention of 1973.

I Introduction

Louisiana's first constitution, adopted upon statehood in 1812, did not address borrowing of funds or management of state property. As in many other states, Louisiana's constitutional limits on borrowing and curbs on subsidies to private interests resulted from the Panic of 1837 and the depression that followed. New York had set the pattern for state use of its credit to finance internal improvements with the construction of the Erie Canal in 1817. Its success led to substantial state borrowing to finance canals, then railroads and other projects, fueled in large part by foreign capital.1 States were soon overextended, and nine states defaulted on bonds from 1841-42.² State constitutions attempted to stop the resulting financial chaos and to limit issuance of bonds by states, and then later, by local governments. These prohibitions have continued in various forms in many states. Few have attained their objectives of financial stability. A leading commentator concludes,

Since 1900, however, states have developed means of borrowing for public improvements that escape constitutional bans. Courts in constitutionally restricted states have ruled that constitutional prohibitions do not apply to debts created through specific types of debt instruments. This development has been so complete that most states are now able to borrow funds in any amount for nearly any purpose.³

It is ironic that over the past few decades, courts have tended to construe limits on government action more broadly in the area of individual rights, "while at the same time reading the bars against government's allocation of public financial resources in aid of private businesses more and more narrowly."⁴

In Louisiana, the limitations on borrowing and on subsidies appeared in the state's second constitution, adopted in 1845. Adoption of the these and other anti-business limitations was also influenced by Anglo-Saxon Jacksonian Democrats melting into the existing conservative Creole-French society. As historian Roger W. Shugg put it, "The Panic of 1837 bred in them a lasting distrust of the ways of finance; it left a heavy state debt and ruined many banks. So they limited the legislative right to borrow money, prohibited public loans to internal improvement companies, banned the charter of banks, and restricted the life of all corporations to twenty-five years."⁵

The state had engaged in substantial borrowing during the 1830s. "Most of the available capital went into a new kind of government loan-the internal improvement projects guaranteed by the credit of the individual states."⁶ As Charles Gayarre put it, "At the beginning of the year 1839 the State owed to the Banks $75,000; at the beginning of 1841 the debt amounted to $850,000; and it was generally believed at the time, on the authority of persons who had made the calculation, that the members of the Legislature, in their private capacity, owed to those institutions about one million dollars."7 In addition, the state had issued bonds to subscribe to the capital stock of several banks. In 1824, it chartered the Bank of Louisiana, investing $2 million to obtain half of its stock.8 The debt of the state's banks in 1838 was $22,950,000.⁹ By 1842, Louisiana had issued $24,450,000 of bonds on behalf of banks.¹⁰ In 1843, the state defaulted on $1.273 million in state bonds.¹¹ When the price of cotton fell, repayment of foreign capital was difficult. Bank "depositors and note holders alike rushed for their specie, and the banks were forced to suspend."¹² During the debates on the 1845 Constitution, Judah P. Benjamin stated that only five banks in the state survived the depression of 1837.¹³ The response in the 1845 Constitution was draconian; among its provisions were:

(1) The state shall not subscribe to the stock of any corporation or joint stock company.¹⁴

(2) The legislature shall not pledge the faith of the State for the payment of any bonds, bills, or other contracts or obligations for the benefit or use of any person or persons, corporation, or body-politic whatever.¹⁵

(3) Aggregate state debt shall not exceed $100,000.¹⁶

(4) No corporate body shall be hereafter created, renewed, or extended with banking or discounting privileges.¹⁷

The extent of these constitutional curbs produced a counter reaction. New Orleans commercial and financial interests were dissatisfied with these limits on commerce and growth as the city's trade was shifting to Savannah and Charleston.¹⁸ The Whigs captured political power and called the Constitutional Convention of 1852. Roger W. Shugg typically overstates the point, "Under the efficient leadership of Judah P. Benjamin they proceeded first to grant the commercial interests everything they wanted and then to make changes in representation that might perpetuate the power of Whiggery."19 It was called a speculator's convention: "Limitation of the state's capacity to borrow money was wiped out; public subscriptions to internal improvement companies were authorized; and the General Assembly was empowered to charter conservative, specie-paying banks by special or general laws."²⁰

Foreshadowing future developments that led to longer and more detailed constitutional provisions, the changes in the 1852 Constitution were not simple ones. The drafters did not take the clear and easy approach of removing the old provisions in their entirety and returning to the language of the 1812 document. Exceptions and complications in existing provisions were adopted instead. The 1852 document provided:

(1) The state could not subscribe to the stock of a corporation EXCEPT to companies organized to make internal improvements up to 1/5 of the capital of the company.²¹

(2) The state could not make a loan to, nor pledge its faith for the benefit of any corporation or joint stock companies EXCEPT to aid companies making internal improvements up to 1/5 of the capital of the company²²

(3) Aggregate state debt could not exceed $100,000²³

(4) The state could charter banks, but could not subscribe to the stock of banking corporations.²⁴

State largesse to private interests immediately increased in the Whig-dominated legislative session of 1853. As Alden Powell's history states,

The State bought forty-eight thousand shares of stock in the New Orleans, Opelousas and Great Western Railroad Company, for which it paid one million, two hundred thousand dollars; spent one million, six hundred thousand dollars for sixty-four thousand shares of stock in the New Orleans, Jackson, and Great Northern Railroad Company; purchased thirty-two thousand shares in the Vicksburg, Shreveport, and Texas Railroad Company for eight hundred thousand dollars; and gave fifty thousand dollars for two thousand shares in the Grosse Tete and Baton Rouge Plank Road Company.²⁵

State aid to private interests increased further under the carpetbag government after adoption of the 1868 Constitution. Shugg's observations are typical, "Whether it was the creation of a new parish like Grant, for exploitation by carpetbaggers as notorious as the Twitchells, or the issue of railway, land, and improvement bonds, the telltale mark of fraud was upon each law."²⁶

In any event, the reaction to the excesses of Reconstruction followed and subsequent constitutions would continue some sort of limitation on the use of the state's credit and on subsidies to developers, as well as attempts to prohibit corrupt transfers of state property. Remnants of these provisions remain in the 1975 Constitution. The purpose of this essay is to look at the modern limitations in their historical context and to analyze their effectiveness. This review will show that the provisions have not been especially successful. They are more the political fodder of editorial writers and legislative auditors than workable legal standards that can be effectively applied by courts.

The 1975 Constitution did not contain the dollar limits on total bonds issued, but other current provisions can be traced back to the language of the 1845 and 1852 constitutions, particularly:

(1) Neither the state nor a political subdivision shall subscribe to or purchase the stock of a corporation or association or for any private enterprise.²⁷

(2) Except as otherwise provided by this constitution, the funds, credit, property, or things of value of the state or of any political subdivision shall not be loaned, pledged, or donated to or for any person, association, or corporation, public or private.²⁸ But exceptions are made for (1) social welfare programs; (2) employee pension and insurance programs; (3) bonds to meet public obligations as provided by law.

Behind these provisions are two basic policies. One is the protection of the state's fiscal stability-by avoiding investment in risky enterprises and avoiding issuance of bonds to finance speculative ventures that endanger the state's ability to fund current expenses and pay future debts. Another goal is prevention of corruption by insiders who would use state property and credit to benefit themselves, their friends and their supporters.

II Constitutional Convention Of 1973

The records of the Constitutional Convention of 1973 ("CC'73") do not...