Citation. 22 Ill.431 U.S. 1, 97 S. Ct. 1505, 52 L. Ed. 2d 92 (1977)
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New York and New Jersey repealed a 1962 covenant that was designed to protect bond holders.
Synopsis of Rule of Law.
New York and New Jersey violated the Contract Clause when they allowed the Port Authority to use funds to subsidize public transportation in violation of a previous statutory covenant to private bondholders.
Facts.
As part of an agreement with the state to allow the Port Authority’s proposed takeover of a financially troubled privately owned commuter train, the “Statutory Covenant” provided that the two states would covenant and agree with each other and with the holders of any affected bonds not to finance deficits of other future mass transit facilities with revenue pledged to pay bonds that were issued when it was formed in 1921. In 1974, both states retroactively repealed the 1962 covenant in order to permit greater use of bridge and tunnel tolls to subsidize mass transit. The trustee and holder of the Authority bonds sued saying the repeal of the 1962 covenant was prohibited by the Contract Clause.
Issue.
Did the repeal of the 1962 covenant between New Jersey and New York and bond holders constitute a violation of the Contract Clause?
Held.
Justice Blackmun. Yes.
The purpose of the Contract Clause was to limit the power of the states to modify their own contracts as well as to regulate those between private parties. The Clause does not prohibit the state from repealing or amending statutes generally or from enacting legislation with retroactive effects.
Neither party denies that the 1962 covenant constituted a contract between two states and holders of the bonds. The trial court recognized that repealing the covenant would authorize the Authority to assume greater deficits and that would permit a diminution of the pledged revenues and reserves. That would constitute an impairment of the state’s contract with the bondholders. The repeal impaired a contractual obligation.
That there was a technical impairment is a preliminary step in resolving whether that impairment is permitted under the United States Constitution. When a state impairs the obligation of its own contract the reserved powers doctrine has a different basis. The initial inquiry concerns the ability of the state to enter into an agreement that limits it s power to act in the future. One legislature cannot abridge the powers of succeeding legislatures. The state may repeal this contract if it is a surrender of an essential attribute of its sovereignty, namely for a legislature to change past acts. In 1812 a state could properly grant a permanent tax exemption and the Contract Clause prohibited any impairment of such an agreement. In 1880, the case stated that a state is without power to enter into binding contracts not to exercise their police power in the future.
A state is not free to impose a drastic impairment when an evident and more moderate course would serve its purposes equally well. They did not need a total repeal of the covenant. A less drastic modification would have permitted the contemplated plan. The state could have achieved their goal by not modifying the covenant by adopting alternative means to discourage automobile use and improve mass transit.
The covenant did not cause a substantially different impact in 1974 than it did when adopted in 1962. The covenant was to protect against the Port Authority from getting into greater involvement in deficit mass transit. Now they want to again surpass their deficit by repealing the covenant. The covenant was adopted to protect the pledged revenues and reserves against the Port Authority going into more debt.
Dissent.
Justice Brennan, White and Marshall dissenting.
This is a case where the contract is limiting the authority of the successor legislature to enact laws in furtherance of the health, safety and similar collective interests of the state. The Clause is not above the lawful exercise of the state’s police powers.
The “liberty of contract” as illustrated in Lochner is virtually indistinguishable from the Contract Clause and in those cases the Court has granted wide latitude to the valid exercise of the state’s police powers even if the results are severe violations of property rights.
States should not blithely proceed down the path of repudiating their obligations, financial or otherwise. Few jurisdictions would use their authority so foolishly as to hurt their credibility in the credit market.
Concurrence. Chief Justice Burger concurring. The Court does not hold that on the facts of this case any particular less drastic modification would pass constitutional muster.
Discussion.
A private contract can be modified by the legislature under its police power when necessary to serve a legitimate public interest and the regulation is reasonable and narrowly tailored to promote that interest.
