Washington State Constitutional Limitations on Gifting of Funds to Private Enterprise: a Need for Reform

CitationVol. 20 No. 01
Publication year1996

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 20, No. 1FALL 1996

Washington State Constitutional Limitations on Gifting of Funds to Private Enterprise: A Need for Reform

David D. Martin(fn*)

I. Introduction

In the nineteenth century, economies of the eastern United States grew at a rapid rate as a result of railroad linkages between markets and producers.(fn1) Infrastructure, particularly railroads, was essential to economic development and was sought after with abandon. State governments were prompted to provide public credit and subsidies to private railroads to attract growth in undeveloped areas. However, economic growth could not always be sustained: Because railroad lines were sometimes abandoned, the solvency of financing governments was dangerously impaired due to the liabilities and obligations that had been incurred. In some cases, financing governments were driven to near bankruptcy.(fn2) This financial instability spawned a political reaction that restricted the financial activities of local and state governments.(fn3) Often, state constitutions were amended to prohibit the granting of public financial aid to private enterprise.(fn4)

Washington was not immune from this political reaction and included in its constitution Article VIII, sections 5(fn5) and 7(fn6). These sections prohibit the state and its political subdivisions from loaning state money or credit, and prevent the gifting of public money or property, to any private entity, unless necessary to support the poor and infirm. Nevertheless, a century later, many still view government mobilization of capital for private enterprise as a key component in community development and job preservation.(fn7) States and municipalities have adopted programs that authorize incentives and subsidies to selected industries as a means of inducing private corporations to operate within their borders.(fn8) Competition among individual states for private industry has again led to speculative financing policies and burdensome results for taxpayers.(fn9)

In Washington, the courts traditionally interpreted Article VIII, sections 5 and 7, as prohibiting all state and local funding of private enterprise, and allowed only a few specific exceptions.(fn10) Over the last thirty years, however, the Washington State Supreme Court has broadened these formerly narrow exceptions to the point that few transactions are found unconstitutional. The court currently reviews a challenged gift transaction by asking whether the government expenditures carry out a fundamental governmental purpose, or whether they were made under the government's proprietary authority-as if it were a private entity.(fn11) If the governmental expenditures carry out a fundamental governmental purpose, no unconstitutional gifting occurs and the review ends. But if the court finds that expenditures are pursuant to the government's proprietary authority, the court examines a transaction for donative intent by the government and for consideration. If donative intent is found, the adequacy of the consideration exchanged is closely scrutinized.(fn12) If no donative intent is found, then the adequacy of consideration is not closely scrutinized, but is merely assessed under contract law for legal sufficiency.(fn13) The Washington State Supreme Court has never found donative intent and, thus, has never scrutinized the adequacy of the consideration exchanged. The result is that only the most unbalanced of transactions are prohibited.

This Comment argues that the donative intent analysis shields government proprietary transactions from proper review by seeking only prima facie evidence of consideration. The framers' intent was to protect the public purse from involvement in speculative private financing; they did not intend Article VIII, sections 5 and 7, to be a paper tiger.(fn14) The current standard compromises meaningful review for the sake of judicial efficiency and deference to the legislature.(fn15) The Washington State Supreme Court should closely examine the consideration exchanged in order to comply with the framers' intent. Additionally, public policy, state economic interests, and case law all urge close judicial scrutiny. This Comment recommends that Washington adopt a new standard, similar to the standard used in at least two other states,(fn16) that reviews the transaction by engaging in an individualized balancing test to ensure that the consideration exchanged is reasonable. Without a new standard, concerned members of the public are effectively precluded from raising legal challenges to a wide range of transactions conducted by various government and administrative agencies, and the special purpose of the prohibitions in protecting public funds is subverted.

This Comment is divided into four parts. First, it traces the historical emergence of the current standard of constitutional analysis under Article VIII, sections 5 and 7. Second, the Comment discusses the court's constitutional analysis and its relation to the historical intent of the framers, and proposes a new standard of review. Third, the proposed and current standards are applied to two instances of modern public financial assistance to private enterprise: legislative financing of a thoroughbred racetrack, and a state agency's subsidy of intrastate freight rail. Finally, this Comment concludes that the proposed standard should be adopted.

II. The History of Washington State's Gift Prohibition

The current approach to examining public financial assistance to private enterprise is best analyzed by reference to its historical development. Since the Washington Constitution was ratified, Article VIII, sections 5 and 7, has been interpreted in a dichotomous manner. The courts, historically, either adhered to strict constitutional construction, or to an evolving standard of analysis by exception. Although the two methods are seemingly at odds, the Washington State Supreme Court has consistently applied this dichotomous approach. Such an approach has created a standard that is extremely accommodating to the needs of private enterprise. This section will trace the components of each constitutional prohibition and the court's various exceptions to those prohibitions in an effort to explain the reasons for, and the problems with, the current standard.(fn17) The history of the court's interpretation of each prohibition to be examined in this Comment can be loosely grouped into four sections: the inception of constitutional restrictions, the period of inconsistency, the period of confusion, and the period of clarity.

A. Washington State Constitutional Convention: The Framers' Intent

In 1889, Article VIII, sections 5 and 7, was adopted at the Washington constitutional convention.(fn18) In adopting sections 5 and 7, those attending the convention were primarily concerned with the "protection of [the] weak from the strong within," and the protection of taxpayers and the public purse from the consequence of corporate political clout.(fn19) The prohibitions contained the broadest language available from the models submitted to the convention.(fn20) The language was even understood to bar private entities from participating in quasi-public concerns such as transportation and energy utilities.(fn21) With such strong language, two distinct policies underlay the prohibitions: "The first is a fear of the unfortunate, vicious or disastrous results that might occur if public assets were used to subsidize private parties. The second is a fear of government's entanglement with private enterprise to the detriment of both the private recipient and the public donor."(fn22) The framers' intent and broad language formed the basic analytic framework from which Washington courts have analyzed cases ever since, although it was only a few decades before the court began to create exceptions within this framework.

B. Period of Inconsistency: Gifting of Public Funds

In the first half of the twentieth century, Washington courts analyzed public gifts under a literal reading of the constitutional prohibitions. However, the standard that began as specific in application gradually became inconsistent as courts began to incorporate various exceptions into the prohibitions.

Initially, a gift was denned as an act that would decrease the state's general fund and gratuitously benefit the recipients.(fn23) In 1914, in Rands v. Clarke County,(fn24) where one county constructed a bridge in conjunction with a county in an adjoining state, the court defined a gift broadly as money to, or in aid of, private enterprise. However, the court distinguished among types of private enterprises in both gifting of funds and lending of credit, holding those enterprises "whose functions are wholly public" are exempt.(fn25) This distinction marked the beginning of a course of opinions that strictly interpreted the language of the provisions, but provided exemptions for certain judicially defined public functions.(fn26) Soon after, in Johns v. Wads-worth,(fn27) the court prohibited county money from being used to assist a private corporation in promoting an agricultural fair. The court applied the same logic as in Rands, stating the gift provision "directly and unequivocally prohibits all gifts of money, property, or credit to, or in aid of, any corporation. . . ,"(fn28) The court found no public purpose because the appropriation...

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