Secretary of Transportation v. Mancuso

⁸³ Mubphy, C. J., delivered the opinion of the Court. The Secretary of the Maryland Department of Transportation (the Secretary) has appealed from a decree of the Circuit Court for Anne Arundel County which declared that the Department’s Consolidated Transportation Bonds, Series 1976 (the Bonds), whose last serial principal maturity under the Secretary’s resolution authorizing issuance of the Bonds was later than 15 years from the date of issue, constituted “debt” within the meaning of § 34 of Article III of the Constitution of Maryland. Since § 34 requires that any “debt” contracted by the General Assembly must be discharged within 15 years from the time it was incurred, the decree declared that the Secretary’s resolution authorizing issuance of the Bonds was illegal, and it enjoined him from seeking approval for their sale. Maryland Code (1957 Ed., 1967 Repl.

Vol., 1975 Cum. Supp.), Article 94A, §§ 1 to 11A, inclusive, authorizes issuance of the Bonds for the purpose of financing transportation facilities. Section 9 (a) levies and imposes an “annual tax” for the payment of the principal of and interest on the Bonds, consisting of existing excise taxes on motor vehicle fuel and certificates of title, and certain corporate taxes. A sinking fund is established by § 9 (b) into which the proceeds of these taxes are required to be deposited; § 9 (c) provides that the taxes imposed and the proceeds thereof are “irrevocably pledged to the payment of the principal of and interest on the bonds . . . and no portion of the tax .. . shall be repealed, diminished or applied to any other purpose until such bonds and the interest thereon shall have become due and fully paid, or until adequate and complete provision for such payment shall have been made.” Section 9 (d) provides that the Bonds do not constitute a debt or pledge of the State’s faith and credit, “but shall be payable as to both principal and interest solely from the proceeds of the tax and other revenues levied, imposed, pledged or made available for such purpose.” In the Secretary’s resolution authorizing issuance of the Bonds, the department covenanted that should the monies in ⁸⁴ the sinking fund be insufficient to meet debt service requirements, it would “make appropriate requests through the executive budget process and before the General Assembly for such amount as may be necessary to make up such deficiency....” In concluding that the Bonds, if issued with maturities in excess of 15 years, would violate the provisions of § 34 of Article III of the Maryland Constitution, the lower court held that “the imposition, levy and irrevocable pledge of tax revenues make these bonds ‘debt’ ... [in the constitutional sense contemplated by § 34] notwithstanding the statement in .. . [§ 9 (d)] of the Act that Consolidated Transportation Bonds ‘are not and shall not be deemed to constitute a debt or pledge of the faith and credit of the State ....’” Whether State bonds secured by a fund to which the State pursuant to statute has irrevocably pledged specific tax revenues constitutes a constitutional debt within the contemplation of § 34 is a question not heretofore considered by this Court.

The Secretary points to the origin and history of § 34 and contends that the “debt” with which that constitutional provision is concerned is only that which the State is unconditionally obligated to repay. He maintains that if the source of debt service payment is expressly limited and not backed by the State’s faith and credit, it is not a constitutional debt. The nature of the fund from which debt service on the Bonds is to be paid is not relevant, he claims, as long as it is specifically limited. The Secretary points out that the State has not promised to make payment on the Bonds from whatever source necessary, nor has it pledged its unlimited taxing power to the payment of the principal of and interest on the Bonds; rather it has pledged payment from a limited source only which includes specific, fixed rate taxes — the bondholders not being entitled to the proceeds from any increase in those taxes, and the State being under no legal obligation to increase the taxes, or to provide other funds, in the event that the pledged tax revenues prove insufficient to pay debt service.

From this the Secretary reasons that there is no difference between the Consolidated Transportation Bonds and State revenue bonds ⁸⁵ payable solely from non-tax revenues and not backed by the State’s faith and credit, which the courts have held not to constitute “debt” under § 34. Section 34 provides, in pertinent part: “No debt shall be hereafter contracted by the General Assembly unless such debt shall be authorized by a law providing for the collection of an annual tax or taxes sufficient to pay the interest on such debt as it falls due, and also to discharge the principal thereof within fifteen years from the time of contracting the same; and the taxes laid for this purpose shall not be repealed or applied to any other object until the said debt and interest thereon shall be fully discharged .... The credit of the State shall not in any manner be given, or loaned to, or in aid of any individual association or corporation . . ..” The wording of § 34 is virtually unchanged from its formulation in Article III, Section 22 of the Constitution of 1851. See Constitutional Convention Commission of Maryland, Constitutional Revision Study Documents 798-99 (1968).

The debates of the Constitutional Convention of 1850 abound with references to the difficulty of marketing State bonds due to the State’s poor credit condition at that time. This situation resulted from the State’s extension of long-term credit to railroad and canal companies from 1820 to 1840, generally by means of the State’s subscription to the securities of the companies. Payment of the subscriptions was often made by the transfer of long-term State bonds, issued upon the State’s faith and credit. The companies usually sold the bonds at substantial discounts, thus in effect raising capital by pledging the State’s credit.

Constitutional Convention Commission, Report 214-15 (1967). Examples of long-term extensions of credit include Ch. 175 of the Laws of 1832 ($500,000 to railroad companies, with interest of 4V2%, redeemable after 25 years); Ch. 241 of the Laws of 1834 ($3,000,000 to canal and railroad companies, with interest of 6%, redeemable after 35 years); ⁸⁶ Ch. 395 of the Laws of 1835 ($8,000,000 to fund various railroad and canal projects, with interest of 6%, redeemable after 50 years); Ch. 302 of the Laws of 1837 ($500,000 to a railroad, with interest of 3%, redeemable after 52 years); Ch. 416 of the Laws of 1838 ($1,000,000 to canal companies, redeemable after 26 years); Ch. 20 of the Laws of 1839 ($663,000 to a railroad, with 6% interest, redeemable after 50 years). By 1841 the State’s financial security was threatened by the failure of the foregoing investments (or general revenues) to produce funds sufficient to pay the State’s debt service requirements. Consequently the General Assembly imposed a series of taxes; their express purpose was to reduce the State debt.

Chapter 23 of the Laws of 1841 (March Extra Session) provided for the first permanent statewide valuation of all real and personal property, and for the annual levying of a State property tax. This was followed eleven months later by an income tax (Ch. 325 of Laws of 1841). However, these proved insufficient, and consequently various excise taxes were imposed (Chs. 184, 187, 237, 280 of Laws of 1844). By 1848 these measures enabled the State to resume payment of current interest on the State debt; the State had been in arrears since 1842.

See generally Hanna, A Financial History Of Maryland (1789-1848), 70-125 in 25 Johns Hopkins University Historical Studies (1907). See also Johns Hopkins Univ. v. Williams, 199 Md. 382 , 86 A. 2d 892 (1952); Bonsal v. Yellott, 100 Md. 481 , 60 A. 593 (1905). This history illustrates the fiscal concerns which resulted in the placement of the debt provision in the Constitution of 1851. It is a history replete with indiscriminate long-term financing, which resulted in the imposition of taxes whose express purpose was to ameliorate the prior abuses of the State’s credit.

It is thus clear that one of the purposes of the constitutional debt provision was to guard against future credit abuses by including within its purview any evidence of State indebtedness which is secured by its taxing power. We are not persuaded by the