AGO 1978 No. 13.

• Case Date: May 01, 1978
• Court: Washington

Washington Attorney General Opinions 1978. AGO 1978 No. 13. May 1, 1978[Orig. Op. Page 1]PRIVATECITIES AND TOWNS -- DISTRICTS -- PUBLIC UTILITY DISTRICTS -- CONSERVATION -- CONTRACTS -- SALES OF CONSERVATION MATERIALS TO PUBLIC UTILITY CONSUMERS(1) The provisions of Article VIII, § 7 of the Washington Constitution prohibit a city or public utility district from assisting its utility customers, generally, in the purchase of such conservation materials as insulation or storm windows fromPRIVATEsuppliers by providing to the seller a guarantee of payment of part or all of the agreed upon purchase price for the conservation materials involved.(2) The same provisions of Article VIII, § 7 of the Washington Constitution, however, do not prohibit a city or public utility district from itself purchasing and then later selling such conservation materials to its customers, generally, by means of installment contracts under which payment of the purchase price, plus a service charge, would be made by the purchasers on a periodic basis over a specified period of time.Honorable R. Ted Bottiger State Senator, 2nd District 8849 Pacific Avenue Tacoma, Washington 98444Cite as : AGO 1978 No. 13Dear Sir: By letter previously acknowledged you have requested our opinion on two questions which we paraphrase as follows: (1) Do the provisions of Article VIII, § 7 of the Washington Constitution prohibit a city or public utility district from assisting its utility customers, generally, in the purchase of such conservation materials as [Orig. Op. Page 2] insulation or storm windows from PRIVATE suppliers by providing to the seller a guarantee of payment of part or all of the agreed upon purchase price for the conservation materials involved? (2) Do the provisions of Article VIII, § 7 of the Washington Constitution prohibit a city or public utility district from itself purchasing and then later selling such conservation materials to its customers, generally, by means of installment contracts under which payment of the purchase price, plus a service charge, would be made by the purchasers on a periodic basis over a specified period of time: (a) Where legal title to the materials involved is retained by the seller as security until the full purchase price is paid? (b) Where legal title to the materials is not retained but a security interest in those materials and/or in the real property where they are being installed is obtained by the seller? (c) Where neither of the above types of security interest is retained or obtained by the seller? We answer question (1) in the affirmative and question (2) in the negative as qualified in our analysis. ANALYSIS Article VIII, § 7 of the Washington Constitution reads as follows: "No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation." [Orig. Op. Page 3] As will readily be seen, this provision of our constitution actually contains the following four separate prohibitions which are here relevant: (1) A prohibition against gifts of money; (2) A prohibition against gifts of property; (3) A prohibition against loans of money; and (4) A prohibition against the lending of municipal credit.(fn1) Two exceptions to these prohibitions also should be preliminarily noted, one express and the other the product of judicial interpretation. The express exception, of course, covers aid to persons in need; i.e., the poor and infirm. See, State v. Guaranty Trust Co., 20 Wn.2d 588, 148 P.2d 323 (1944) and Morgan v. Dept. of Social Security, 14 Wn.2d 156, 127 P.2d 686 (1942). And the further exception resulting from court decisions relates to gifts or loans to other governmental agencies - in other words, strictly intergovernmental transactions. See Rands v. Clarke County, 79 Wash. 152, 139 Pac. 1090 (1914); cf., Anderson v. O'Brien, 84 Wn.2d 64, 524 P.2d 390 (1974). For the purposes of this opinion, however, neither of these two exceptions will be deemed to be applicable since both of your questions speak of assistance to utility customers, generally, rather than to some particular class of customers. It should also be observed at the outset that the same four prohibitions (and two exceptions) are likewise applicable to the state itself--but by reason of a somewhat differently worded constitutional provision; i.e., Article VIII, § 5 which reads as follows: "The credit of the state shall not, in any manner be given or loaned to, or in aid of, any individual, association, company or corporation." [Orig. Op. Page 4] What has happened, over the years, is that this prohibition--although it is expressed only in terms of the lending of credit--has been read and applied by the court to cover gifts or loans of money or property as well. See, e.g., Hwy. Com. v. Pac. NW Bell Tel. Co., 59 Wn.2d 216, 367 P.2d 605 (1961); Anderson v. O'Brien, supra; Morgan v. Dept. of Social Security, supra; and State v. Guaranty Trust Co., supra. As a consequence, however, while the line between the four prohibitions has generally been fairly well delineated in those cases which have involved municipal transactions under Article VIII, § 7, it has, on occasion, been somewhat blurred in comparable cases relating to state expenditures. Compare, for example, Highway Comm. v. Pac. N.W. Bell Tel. Co., supra, with Gruen v. State Tax Commission, 35 Wn.2d 1, 211 P.2d 651 (1949). Nevertheless, the line does exist and we will take care to heed it in dealing with your two specific questions: Question (1): We will deal first with your question relating to the offering of guarantees of payment in connection with the purchase of conservation materials because, in our judgment, the answer to that question is quite clear. Even in the limited sense in which the term "loan of credit" has been defined by the state supreme court in Gruen v. State Tax Commission, supra, and State ex rel. O'Connell v. PUD, 2 Wn.App. 366, 469 P.2d 922 (1970),(fn2) it seems apparent that the legal relationship thus contemplated would involve an unconstitutional lending of municipal credit. In Gruen, the Washington court followed the lead of Grout v. Kendall, 195 Iowa 467, 192 N.W. 529 (1923), in which the Iowa court had earlier interpreted a similarly worded provision of its state constitution as having ". . . withheld from the constituted authorities of the state all power or function of suretyship. It forbade the incurring of obligations by the indirect method of secondary liability. This is the field and the full scope of this section. It does not purport to deal with the creation of a primary indebtedness for any purpose whatever. . . ."(fn3) (Emphasis theirs) [Orig. Op. Page 5] And in State ex rel. O'Connell v. PUD, supra, a division of our state court of appeals likewise reiterated the same view that the constitutional prohibition against the lending of credit bars a guaranty or surety type of relationship. Clearly, therefore, that particular prohibition covers the scheme contemplated by your first question for such, obviously, is exactly what would there be involved.(fn4) Accordingly, as above indicated, your first question must necessarily be answered in the affirmative; i.e., the provisions of Article VIII, § 7, supra, do prohibit a city or public utility district from assisting its utility customers in the purchase of such conservation materials as insulation or storm windows from PRIVATE suppliers by providing to the seller a guaranty of payment of part of all or the agreed upon purchase price for the materials involved. [Orig. Op. Page 6] Question (2): When we turn, on the other hand, to the alternative approach contemplated by your second question a different situation is presented. Because the conservation materials would be purchased from the city or public utility district a valuable consideration would be present so as clearly to obviate the possibility of an unconstitutional gift. And because the role of the municipality would be that of vendor rather than guarantor or surety, the legal relationship involved would not fall within the definition of a "loan of credit" which was adopted by our state supreme court in Gruen, supra, and by the court of appeals in O'Connell v. PUD, supra.(fn5) The issue, accordingly, becomes that of whether a retail installment sale of goods or materials by a municipality in our state would nevertheless still run afoul of the constitution--either as a loan of money (which, as we have seen, is also prohibited) or as a different kind of loan of credit. Before we address ourselves directly to that issue, however, there is a threshold question which must be resolved, also involving Article VIII, § 7, supra, because of the recent decision of the Washington court in Lassila v. City of Wenatchee, 89 Wn.2d 804, P.2d (1978). In essence, the factual situation in Lassila was as follows: The City of Wenatchee, acting through its city commissioners, decided to create a community center to be located near the Columbia River and adjacent to the city's central business district. Accordingly, it commenced negotiations for the purchase of several tracts of land (then in PRIVATE ownership) for this purpose and, on March 31 and...