2017] DEBT LIMITS’ END 1241
lending market,2 but it does not directly limit market participants’ freedom
to procure debt.3 If Jane desires to assume a debt, she need only find a willing
lender. The same is true if Jane Corp. entertains such a desire: as a
corporation, Jane Corp. might be subject to reporting obligations,4 but the
law will not challenge Jane Corp.’s ability to proceed.5 The market, not the
law, determines who shall qualify for a loan.6 This basic truism of American
law is abrogated, however, in one exceptional case. The law may assume an
indifferent posture towards Jane or Jane Corp.’s credit desires, but when the
City of Jane fancies a loan, the law aggressively intercedes. In all states but one,
arduous constraints will be placed along the City of Jane’s path toward credit.7
The City might be flat-out prohibited from borrowing funds beyond a certain
amount; it might be required to attain resident approval for the move—
perhaps by a supermajority—in a referendum; it might even be subjected to
both these restrictions concurrently.8 The law thus treats local governments
strikingly differently from individuals or corporations, by placing on their
debt—and only on their debt—limits.
These limits’ unique nature is further accentuated by yet another key
contrast contained within the current law. The law not only treats city debt
obligations differently from individual or corporate debt obligations; it also
separates city debt obligations from other city obligations. Hence, if, for
example, the City of Jane desires a new football stadium, it will be, as noted,
constrained in its ability to issue debt to fund construction.9 At the same time,
it will not be constrained in its ability to fund construction through a budget
allocation;10 to grant tax subsidies to the privately-owned football team
constructing the stadium;11 to lease to the team, for a fraction of its value, the
2. For example, secured loans are regulated. U.C.C. § 9-109 (AM. LAW INST. & UNIF. LAW
COMM’N 2015). States’ usury laws limit interest rates. E.g., CAL. CONST. art. XV, § 1.
3. Inevitably, however, the regulation of loans and lending practices leads to the pricing
out of certain borrowers from the market, and thus indirectly limits the freedom to procure debt.
4. The Securities and Exchange Commission monitors publicly-traded corporations. See
15 U.S.C. § 78d (2012).
5. Douglas G. Baird & Robert K. Rasmussen, Private Debt and the Missing Lever of Corporate
Governance, 154 U. PA. L. REV. 1209, 1216–17 (2006). Commercial banks are an exception: they
are subject to capital requirements enforcing assets to liabilities ratios. 12 C.F.R. § 324.1 (2016).
Banks’ unique treatment is revisited infra note 136 and accompanying text.
6. The law may do the opposit e: e.g., it prohibits lenders from denying mortgages because
of applicants’ race. 42 U.S.C. § 3605 (2012).
7. See infra notes 76–88 and accompanying text.
8. See infra notes 76–88 and accompanying text.
9. See infra Part II.B.
1 0. Government funds can only be spent for a “public purpose” and thus seemingly cannot aid
private endeavors. However, courts rendered the requirement inconsequential by deferring to
legislatures’ determination respecting aid’s public purpose. Richard Briffault, Foreword, The Disfavored
Constitution: State Fiscal Limits and State Constitutional Law, 34 RUTGERS L.J. 907, 914 (2003).
11. For example, as part of the stadium plan Inglewood approved for the NF L’s St. Louis
Rams—as they were relocating to Los Angeles—public support was provided through $100