Judicial compulsion and the public fisc - a historical overview.

• Author: Cuccinelli, Kenneth T., II
• Position: Age of Austerity

INTRODUCTION

On September 13, 2011, the Providence Rhode Island Superior Court denied the State's motion for summary judgment on a claim, brought by a number of public employee unions, asserting that the statutory pension system "establishes a contractual relationship between the State of Rhode Island and participating employees" sufficient to trigger the Contract Clause and the Takings Clause of the state constitution when benefits to vested employees are statutorily reduced. (1) Undoubtedly this case can be regarded as early thunder from a not-so-distant storm. (2) The likelihood of litigation arising from alteration of pension benefits has generated interest at both the federal and state levels. (3) In times of fiscal contraction, social welfare benefits might be altered in ways that engender litigation. (4) Guarantees of quality education in state constitutions have produced many suits affecting the public fisc. (5) Historically, the most dramatic fiscal-forensic disputes arose from the repudiation of public-bonded indebtedness. (6)

In Part I, we review the law bearing on actions implicating the public fisc until 1960. In Part II, we give an overview of the law since 1960. In the Conclusion, we discuss why judicial recognition of vested rights in mere legislative provisions might be unwise both for the broader public interest and for the beneficiaries of such legislation regarded as a class.

1. JUDICIAL COERCION AND THE FISC TO 1960

   1. Law of Nations on Sovereign Immunity

      According to the customary law of nations at the time of the Founding, a true sovereign could not be sued in its own courts, nor in those of another sovereign, without its consent. (7) For sovereign (as opposed to commercial) debt, that same principle continues to find recognition under the Foreign Sovereign Immunities Act. (8) Under the law of nations, "the non-payment of the debts of a State, due to the citizens of another State, as to the latter State, is a wrong of a political character, the proper subject of negotiation and treaty, and even a casus belli." (9) Indeed, because default of obligations was a valid casus belli under international law, the United States sometimes found itself acting as an international debt collector to keep European countries from acting militarily in the New World. (10)

   2. The Immunity of the British Crown by the End of the Eighteenth Century

      By 1786, British courts recognized that there was no generally effective judicial remedy against the Crown. (11) Of course, "[i]t bears remembering that the common law had nothing akin to modern public-law litigation, which holds the government accountable for broad constitutional violations." (12) With respect to contract, "Blackstone argued that contract actions against the King succeeded not as a matter of legal right but only because 'no wise prince will ever refuse to stand to a lawful contract.'" (13) Nor, according to Blackstone and Locke, was there liability in tort. (14)

      As a consequence, "nearly all of the cases in which the Crown was amenable to suit involved 'real actions'--the branch of common law that dealt with rights in real property." (15) There were special reasons to permit these real action suits: Before the abolition of the last incidents of feudal tenure in 1660, the Crown had an interest in these real actions, "for otherwise it might be impossible to determine proper feudal relationships." (16) So many limitations were placed on the suits, however, that they essentially amounted to suits by consent. (17) Also, the "more generally useful remedy" in real actions--the petition of right (18)--in fact required consent. (19)

      Although the monstrans de droit (20) did not technically require consent, it was subject to tacit consent because the Crown could always abate it through the writ of rege inconsulto. (21) In the course of the seventeenth and eighteenth centuries, Parliament acquired complete control over state finances through the appropriation power. (22) It also put the Crown on a legally, or at least practically, inalienable allowance. (23) These developments led Lord Mansfield to conclude that money judgments against the king could have no practical benefit. (24) Although he recognized that the House of Lords had ruled in 1700 in the Bankers' Case that suit could be brought to enforce annuities backed by the king's private revenue, Mansfield also observed that the ruling had done the bankers no good. (25) The only satisfaction they ever received was by way of parliamentary appropriation. (26)

   3. State Sovereign Immunity and the Constitution

      There has never been any doubt that the States continued to enjoy law of nations sovereign immunity under the Articles of Confederation. (27) Anti-Federalists worried that this immunity might not survive ratification. (28) Other Founders, however, gave assurances that the States would retain their immunity under the new Constitution. Alexander Hamilton observed in Federalist No. 81 that "[i]t is inherent in the nature of sovereignty not to be amenable to the suit of an individual without its consent." (29) At the Virginia ratifying convention, James Madison argued that Article III would not operate against a state unless it "should condescend to be a party." (30) In this he was supported by John Marshall: "It is not rational to suppose that the sovereign power should be dragged before a court." (31)

      The Anti-Federalists were initially better at prognostication. In 1793, the Supreme Court "announce[d] the principle, that a State is not sovereign as to the debts she may contract." (32) At the next session of Congress, the Eleventh Amendment was adopted. (33) The Eleventh Amendment is the reason that citizens of a state cannot sue that state in federal court. (34) Although by its terms the Amendment bars only suits by certain individuals named in the Amendment, "the Eleventh Amendment does not define the scope of the States' sovereign immunity," and instead "is but one particular exemplification of that immunity." (35)

      There is, of course, the Ex Parte Young (36) exception to state sovereign immunity and to the Eleventh Amendment. This exception is limited to claims for prospective injunctive relief for purely federal rights (37) and is therefore protective of the state fisc. (38) Attempts to use the exception to enforce an executory contract have been explicitly rejected. (39) And although a state can sue another state over defaulted bonds, (40) a state may not evade the Eleventh Amendment by doing so on behalf of its citizens. (41)

      Ex Parte Young's exception also applies to suits to enforce rights under federal spending statutes. (42) But state involvement in such programs has always been voluntary, (43) and the expense and "affront to state sovereignty" (44) can be avoided by the state refusing to participate. (45)

   4. Suits Against a State in Its Own Courts

      At common law, a state may be exposed to a money judgment in tort in its own courts only upon a waiver of sovereign immunity. (46) The Federal Tort Claims Act, upon which state equivalents are based, was not enacted until 1946 and is "subject to 13 enumerated exceptions." (47) States that waive tort immunity are similarly free to limit their exposure. (48)

      It is unlikely that sovereign immunity ever barred contract actions against a state, (49) and even if it did, the act of contracting can be viewed as a waiver. (50) But a contract action against a state can be hedged with notice requirements, (51) and payment of a judgment depends upon a general or specific appropriation. (52) This also would be true of liability for self-executing constitutional provisions, such as the prohibition on uncompensated takings. (53)

      Subdivisions of a state are on a different footing. At the time of the Founding, English cities and towns were not units of government in the American sense but were instead corporations whose charters were subject to revocation through quo warranto. (54) The English common law rule that the property of the inhabitants of localities was available to satisfy judgments was accepted in New England. (55) A rule permitting a statutorily authorized court-ordered tax to satisfy a judgment mitigated this threat of direct levy on the property of inhabitants. (56) In 1960, however, it was highly unlikely that anyone would have thought that the judicial power to order a tax to satisfy a judgment in the absence of state authorization would run against a state itself. (57)

      In 1960, there was little concern that mandatory defined-benefit state pension plans created vested rights to benefits that could not be lawfully reduced because public pension plans were regarded as gratuities, not contracts. (58) As a consequence, "a pension granted by the public authorities [was] not a contractual obligation, but a gratuitous allowance, in the continuance of which the pensioner has no vested right." (59) This rule had an exception: "voluntary plans were deemed to create vested rights while compulsory participation meant no vested interest accrued." (60)

      In 1960, educational funding equality cases lay entirely in the future. (61) In contrast, bondholders had considerable historical data to evaluate. There have been three waves of state bond default in American history. In "the financial panic of 1837, four states-Mississippi, Arkansas, Florida, and Michigan--repudiated state debts owned largely by foreign investors." (62) In resulting court challenges, "the defaults were largely upheld either because a court determined that the loans had been contracted without the proper authority of the state, or because the Eleventh Amendment protected states from lawsuits brought in federal court." (63) Postwar repudiation by former confederate states of war debts was actually constitutionally mandated. (64) Following Reconstruction, "[e]ight southern states engaged in large-scale repudiation or scaling down of their Reconstruction-era debt." (65)

      Overall the...