Municipal Finance
Dave Hollenbeck
Fall 2009
Valparaiso University School of Law
Unit 1
Introduction: Federal Government vs. State & Local Government
Federal Government
State Government
1. Has the power to appropriate $ and borrow $
1. Has the power to borrow $
2. Allowed to have a budget deficit
2. Must balance the budget annually
3. In the eyes of the U.S. Constitution not seen as the Sovereign power.
3. In the eyes of the U.S. Constitution seen as being the Sovereign power
4. Liberally construed the powers given up by the States to the Federal Government
4. Narrowly construed the powers given up by the States to the Local Government
A. Dillion’s Rule: Local government cannot proceed on any matter unless authorized to do as such by the state legislature.
B. The state legislature sets specific deadlines at which point local governments must make decisions and balance the budget
C. Referendum is a good way to kill a bill in state and local government
D. State and Local Government are both funned by sales and income taxes
1. Property Tax is a “dumb” way to generate money
E. State and local finance is subject to legal constraints, and in turn, has been shaped by state and local efforts to avoid those constraints, many of which grow out of the state constitutions.
F. State constitutions contain many detailed provisions concerning the power of state and local governments to spend and lend money, to levy taxes, and to borrow.
Chapter VI: State & Local Finance
A. Public Purpose Requirements
1. Rise and Fall of The Public Purpose Doctrine:
a. Historical Perspective – The Rise:
i. Late 1700’s Napoleon was trying to conquer Eastern Europe, he had everything to accomplish this but $$.
ii. Napoleon wants to sell the new land in the Americas to finance his War
iii. 1800 Thomas Jefferson elected President
1. $11,250,000 for the Louisiana Purchase from Napoleon (1801)
iv. Thomas Jefferson commissions Louis and Clark to explore the land in the Louisiana Purchase (1802)
v. 1804 Louis and Clark come back and Jefferson wants to open up the country to the new land.
vi. New York investors built a cannel to start the process of moving people west.
1. Eire Cannel (Hudson River in Albany to Buffalo on the Great Lakes)
vii. Investors needed money but US doesn’t have any, they go to France, England, and Germany to get investors to build the cannel.
viii.European Investors would invest so long as someone would guarantee their investment
1. N.Y. investors go to the State of N.Y. and ask them to guarantee the Europeans’ investment in the Erie Cannel.
ix. 1825 Erie Cannel opens.
1. Has incredible returns in the first year
b. Historical Perspective: The Fall
i. 1825 John Stevens invents the steam engine for trains.
1. The railroad industry is invented
ii. 1837 The U.S. experiences its 1st American Depression
iii. 1833 Erie Cannel was Bankrupt
1. N.Y. had to pay on the bonds they guaranteed
2. MI, IN, OH, NY all went into incredible debt when the Cannel business went bankrupt.
iv. NY Changes the NY Constitution and creates the Public Purpose Doctrine.
1. Public Purpose Doctrine rep. rebellion by state citizens to prevent the state from making bad investments.
v. October 1929, The Great Depression
1. FDR implements his New Deal Plan
2. Federal Government not constrained by the same constitutional language found in State Constitutions and the Public Purpose Doctrine
vi. Southern States are the first to being to broaden the definition of Public Purpose
vii. For the most part the change of Public Purpose Doctrine has been a judicial movement not a legislative movement
1. Driven by the conscious decision of state and local government to get into the business of economic development
2. Public Purpose Doctrine:
a. “The power of taxation shall be exercised in a just and equitable manner, for public purpose only”
b. Lasted till the Great Depression in 1929
i. 27% unemployment
ii. State and l
urses
e. Construction of Parks & Playgrounds
f. Purchase of Electric Generators
6. Utah Technology Finance Corp. v. Wilkinson, 723 P.2d 406 (Utah 1986).
a. FACTS: The Utah Technology and Innovation Act allows the Utah Technology Finance Corporation to take all actions necessary to assist small developing technology businesses through loads & funding because develop was necessary to insure progress & the welfare of citizens, economic growth and employment. Guaranteed loans in the small business and bought stock (taking ownership interest) in the small business.
b. ROL: The Act does not violate the Utah Constitution by allowing UTFC to make loans. The Act doesn’t make UTFC a surety of debt, UTFC cannot become a debtor, and the lending of state money doesn’t constitute the lending of state credit. The principle of law that public funds cannot be expended for private purposes is not violated by the Act.
i. Public purpose changes over time. The stimulation of economic and employment opportunities is a legitimate public purpose as it is closely related to industrial development.
c. Notes and Questions
i. Public Purpose: The judicial Role
1. Courts defer to the state legislature to establish what public purpose means and which activities constitute a public purpose.
ii. Lending of Credit
1. There are 2 interpretations of state “lending of credit”:
a. (Majority Courts) Find lending of credit when state serves as a surety or guarantee a loan made by another lender to a borrower.
i. Under this definition, a state does not lend credit when it provides direct financial assistance to a private party even when the state had to borrow money to provide that assistance.
(Minority Courts
