LANGTRY, Justice pro tem.
This case tests the validity of action of the Port of Astoria, a municipal corporation, to effect the sale of $142,000,000
The bonds will specify the same restrictions as those contained in the enabling act. They are in pertinent part:
Bache & Co., Inc., a New York Wall Street investment corporation, is associated with Northwest Aluminum Company, Inc. in this venture and has agreed to underwrite the bond issue when the bonds are found to be marketable. See note 1, supra. The obligation of Northwest Aluminum to pay rentals will be unconditional until the bonds are paid in full or adequate provisions are made for payment "notwithstanding that the project is never completed, is totally destroyed, or never produces alumina or aluminum."
The challenge to the proposed proceedings seeks a judgment holding that the action of the port, and the above statutes authorizing it, are in violation of §§ 7 and 9, Art. XI of the Oregon Constitution, and also that a public purpose is not involved. Such a proceeding is authorized under ORS ch. 27, which provides for the determination of such questions in controversy without action or suit. Judgment of the circuit court rejected the challenge in all respects and plaintiff has appealed therefrom.
Section 7, Art. XI of the Oregon Constitution forbids the state to lend its credit except in certain restricted ways.
Section 9, Art. XI of the 1859 Constitution provided:
In 1917, without changing the above language, a regularly adopted addition to § 9 authorized port districts, pursuant to
Since the start of the 20th Century, it has been settled that public funds cannot be expended for other than a public purpose. Hunter v. City of Roseburg, 80 Or. 588, 156 P. 267, 157 P. 1065 (1916); Churchill v. City of Grants Pass, 70 Or. 283, 141 P. 164 (1914); Note, 59 Colum.L.Rev. 618, 622-23 (1959); Note, 66 Harv.L.Rev. 898, 900-01 (1953).
If it be conceded that the language of the statutes, the bonds, the lease, and the procedural ordinances of the port accomplish the stated purpose of unconditionally limiting the repayment of the revenue bonds to the proceeds of the lease of the project they finance, it would appear Northwest Aluminum's purpose in this financing procedure is to obtain a low interest rate on borrowed money.
The interest income from municipal bonds is exempt from federal income taxation. Therefore, the holders of such bonds, not being required to pay income taxes on the interest they receive, buy the bonds even though they return a lesser interest rate than other investments.
This method of financing industrial plants frequently is used in other states; the motives being the same — an interest saving on financing money to the industry on the one hand, and an expansion of industry and economy of the area which lends its tax-saving advantage on the other. See Note, 47 Yale L.J. 1412 (1938). (This article in 1938 correctly forecast proliferation of the plan.); Armstrong, "Municipal Inducements" — The New Mexico Commercial and Industrial Project Revenue Bond Act, 48 Calif.L.Rev. 58 (1960); Note, 59 Colum.L. Rev. 618, 629 (1959); Comment, 48 Ia.L. Rev. 213 (1962); Notes and Comments, The "Public Purpose" of Municipal Financing for Industrial Development, 70 Yale L.J. 789 (1961).
In the 19th Century, to induce railroads and sometimes canal companies to build to or through them, many municipal corporations gave them tax money, credit or other valuable advantages. Economic disaster frequently followed when the railroad failed in its obligations. The obligations of the municipalities were general in character, and the general taxpayers were required to pay for the defaults. Restrictive provisions such as §§ 7 and 9, Art. XI of the Oregon Constitution were enacted to protect the public credit against such raids. They were placed in constitutions in order that pressures of the moment could not overwhelm legislatures, municipal governing boards and councils, and even local elections. Where restrictive provisions were not placed in constitutions, similar restrictions were enforced by the courts through the device of restricting use of public money or credit to public purposes. Notes, 59 Colum.L.Rev. and 66 Harv.L.Rev., supra.
It was probably inevitable, the way having been shown to revenue financing that kept inviolate the general taxation, that there would be an attempt to enlarge the concept of "public purpose" to include within this method financing of industries in order to induce them into area. Heavy federal income taxes, coupled with the exemption already noted for the income from municipal securities, supplied a substantial incentive for industry to try to finance by this method. State after state has authorized one or more classes of its municipalities to offer this financing method to private industries until now it appears that it is accepted as valid in at least 22 states.
Constitutional provisions like those of §§ 7 and 9, Art. XI, supra, have been construed, with few exceptions, as no obstacle. Newberry v. City of Andalusia et al., 257 Ala. 49, 57 So.2d 629 (1952); DeArmond v. Alaska State Development Corporation, 376 P.2d 717, 721 (Alaska 1962); Roan v. Connecticut Industrial Building Commission, 150 Conn. 333, 189 A.2d 399, 404 (1963); Green v. City of Mt. Pleasant, 256 Iowa 1184, 131 N.W.2d 5 (1964); Faulconer v. City of Danville, 313 Ky. 468, 232 S.W.2d 80 (1950); Hebert v. Police Jury of West Baton Rouge Parish, 200 So.2d 877 (La. 1967); City of Gaylord v. Beckett, 378 Mich. 273, 144 N.W.2d 460 (1966); Village of Deming v. Hosdreg Company, 62 N.M. 18, 303 P.2d 920 (1956); Holly v. City of Elizabethton, 193 Tenn. 46, 241 S.W.2d 1001 (1951); Industrial Development Authority of City of Chesapeake v. Suthers, 208 Va. 51, 155 S.E.2d 326 (1967). Many more cases could be cited which hold to the same effect.
A few state supreme courts have ruled that such constitutional provisions do prevent this financing. State v. Clay County Development Authority, 140 So.2d 576 (Fla. 1962); Village of Moyie Springs, Idaho v. Aurora Mfg. Co., 82 Idaho 337, 353 P.2d 767 (1960); State ex rel. Beck v. City of York, 164 Neb. 223, 82 N.W.2d 269 (1957).
There is a question whether Florida is firmly in this minority group. See State v. City of Tallahassee, 142 Fla. 476, 195 So. 402 (1940), and dissenting opinions in State v. Clay County, supra.
In 1957, the Nebraska Supreme Court firmly ruled the constitutional prohibition did prohibit. (Beck, supra.) But in 1960, the Nebraska Constitution was changed by popular vote, so that Nebraska has, by this different method, joined the majority. State ex rel. Meyer v. County of Lancaster, 173 Neb. 195, 113 N.W.2d 63 (1962). Idaho may be alone in unequivocally holding that the constitutional prohibition prohibits this method of financing.
As noted, supra, the revenue bond method of financing could not have been in the ken of the constitution writers in 1859. The only conclusion that can be drawn from history is that they were looking for a way, as they wrote §§ 7 and 9, Art. XI, to prevent exposing the sources of public revenue to potential hazard. This prohibition should be construed in the light of this intention.
There seems no way, under this proposal, if the applicable ordinance and the revenue bonds quote each of these restrictions, as this court holds they must in order not to run counter to § 9, Art. XI, by which the taxpayers or other property of the Port may be held generally accountable in taxes or otherwise in the event of default.
Appellant contends that if default occurs, even with the assurances given, there may be a way to get at the general taxpayer, and he cites Public Market Co. of Portland v. City of Portland, 171 Or. 522, 130 P.2d 624, 138 P.2d 916 (1943). To this could be added Morris v. City of Sheridan, 86 Or. 224, 167 P. 593 (1917). These cases held that where a project was to be financed from a special fund, if the city, through its officers, acted negligently in protecting the fund for the special creditor, or the city breached its
These, and any other such possibilities that might be found, we deem to be foreclosed in the event of default of these bonds by reason of the language quoted above from Northwest Aluminum's proposal dated August 31, 1967, all of which must be quoted in the authorizing ordinance and upon the face of the bonds. Prospective bond purchasers will be thus placed on notice that their payment recourse in any eventuality is to the financed facilities and their income, and Northwest Aluminum Company. If these requirements were not made, we could not hold, as we do, that there is no violation in this proposal of §§ 7 and 9, Art. XI of the Oregon Constitution.
We are not of the opinion that the 1917 amendment to § 9 should in any way alter the construction we above placed upon the whole section. It provided for the giving of public money, not the aid of revenue bond financing, for a specific limited purpose. Revenue bond financing appears no more to have been in mind in 1917 then it was in 1859 when the principal section was drafted.
Appellant argues that the purpose of the proposal is not public, as previously noted. In one sense, the argument may not be to a true issue, for this proposal, as seen, has no possibility of involving an expenditure of public funds. The constitutional prohibition, as herein construed, is to a giving of a public thing of value or a lending of credit in aid of a private corporation — a credit that has the possibility of general tax liability. However, it appears proper to consider whether a public purpose is served, because under this plan, no matter how it is construed, both the Legislature and the Port are aiding Northwest Aluminum in order to induce it to locate in Astoria. In earlier discussion it was noted that there are two general objections that can be raised against the validity of the plan. First is that it violates constitutional provisions; second is that it does not serve a public purpose. The latter rests upon the same fundamental reasoning that prompted the adoption of the constitutional prohibition. It is a part of the common law of the state and must be considered, as well as the language of the constitution.
Much has been written in the cases and law reviews already cited about public purpose. The cases generally hold that if there is a substantial public benefit, the plan is not defeated if a private purpose also is served. "The grounds for deciding such cases * * * are seldom articulated clearly. * * * [T]he relevant inquiry would seem to be whether the proposed project will augment the community's total value position." 70 Yale L.J., supra at 791 and 796.
"The only valid criterion would seem to be whether the expenditures are sufficiently beneficial to the community as a whole to justify governmental involvement; but such a judgment is more appropriate for legislative than judicial action. The judiciary should invalidate expenditures only where reasonable men could not differ as to their lack of social utility." Note, 66 Harv.L. Rev. 898 at 903 (1953).
Looked at in the light of these sensible tests, rather than some of the obscure tests found in the cases, we find there is a public purpose served by the implementation of the proposal. The action of the Port is predicated upon its finding of a
We have thoroughly reviewed all the bases of challenge raised by appellant, and, in the foregoing opinion, we have thoroughly considered all that we consider substantial.
The judgment of the trial court is affirmed. Costs to neither party.