August 16, 1982 Number 1

August 16, 1982 Number 1. Robert Q. Crane Treasurer and Receiver General Commonwealth of Massachusetts State House Boston, Massachusetts 02133 Dear Treasurer Crane: You have asked my opinion whether Commonwealth bonds and notes may be issued under chapter 212 of the Acts of 1975, an Act Creating a Government Land Bank (hereafter, "the Act"), without violation of Article 62, §1, of the Amend- ments to the Massachusetts Constitution. Your request is prompted by your duties as state treasurer to issue and sell bonds of the Commonwealth (pursuant to sec- tion 8A of the Act), the proceeds of which are used to finance land acquisition and other activities of the Land Bank. For the reasons and with the restrictions stated below, I answer your question in the affirmative. The Land Bank was created by the Legislature in 1975 to aid private enterprise or public agencies in the conversion and redevelopment of lands formerly used for military activities for industrial, commercial, and residential uses in order to prevent blight, economic dislocation and unemployment, or to aid private enter- prise in the construction of low and moderate-income housing upon such lands to alleviate the housing shortage. St. 1975, c. 212, §1. The Act was later amended to include in its purposes the development and redevelopment of surplus state or federal government property and decadent, substandard or blighted open areas. St. 1979, c. 762, §2. That the purposes of the Land Bank are valid public pur- poses is unquestionable. See Opinion of the Justices, 373 Mass. 904, 907 (1977). The statute establishes the Land Bank as a public instrumentality, a body cor- porate and politic, in the Executive Office of Administration and Finance, but not under its administrative supervision or control. St. 1975, c. 212, §2. It is governed by a board of nine directors, eight appointed by the governor. Id. It may adopt rules and regulations as it deems desirable for the exercise of its powers and dis- charge of its duties. St. 1975, c. 212, §6. The Land Bank is authorized to contract and to enter into agreements and transactions with governmental agencies or pri- vate persons in connection with its power and duties under the Act. St. 1975, c. 212, §4(d) and (e). Primarily, the Land Bank may take possession of or acquire lands, and dispose of those lands to a public or private entity for redevelopment. Such redevelopment must be in accordance with plans approved by the Land Bank, after public hearing, and in accordance with specific findings that ensure the redevelopment plan is consistent with the public purposes of the Act. St. 1975, c. 212, §6. The Land Bank may also establish by regulation additional require- ments for redevelopment plans. Id. The land acquisition activities of the Land Bank are financed in part by the sale of bonds of the Commonwealth. St. 1975, c. 212, §8A. This financing by bond proceeds, in connection with a provision of the Act which allows for the bank to 78 P.D. 12 resell land in exchange for a purchase money mortgage,' gives rise to your con- cern that a specific transaction, i.e. , one involving land acquired with funds from bond proceeds and sold to a private party in exchange for a mortgage, ^ might violate article 62, §1, of the Massachusetts Constitution. Article 62, §1, of the Amendments to the Massachusetts Constitution, known as the "credit clause," provides: The credit of the Commonwealth shall not in any manner be given or loaned to or in aid of any individual, or of any private association, or of any corporation which is privately owned and managed. Article 62 was adopted in 1918 following the Constitutional Convention of 1917-1918. Convention debates indicate that the purpose of section 1 was to pre- vent the loan of the Commonwealth's credit to enterprises not under public owner- ship or control, 3 Debates in the Massachusetts Constitutional Convention, 1917-1918, at 1220, 1223, 1234, as well as to force state assistance to public service enterprises to be on a "pay as you go basis," not involving any absolute or con- tingent debt obligation on the part of the Commonwealth. Opinion ofthe Justices, 337 Mass. 800, 808 (1958). See also Pinsky, State Constitutional Limitations on Public Industrial Financing, 1 1 1 U. Pa. Law Rev. 265, 317 (1967) (credit clauses intended to protect taxpayers from heavy future taxes levied to pay for "recklessly incurred past debt"). From time to time, the question has arisen whether a particular transaction con- stitutes a lending of credit barred by Article 62. Historically, the lending of the Commonwealth's credit occurred in the form of a guaranty of another's obliga- tions. See, e.g.. Opinions of the Justices, 322 Mass. 745, 751 (1948) (housing authority obligations); 261 Mass. 523, 541-545, and 261 Mass. 556, 564, 602-604 (1927) (Boston Elevated Railway Company bonds or obligations). More recently, the Supreme Judicial Court has considered whether the loan of proceeds of Com- monwealth bonds constitutes a lending of credit. In Opinion of the Justices , 359 Mass. 769 (1971), the Court found that: The two steps of (a) borrowing by the State and (b) lending of the borrowed cash to a private borrower, would have essentially the same effect as a State guaranty of a loan to the ultimate borrower. Such a guaranty would be a violation of art. 62. Opinion of the Justices, 359 Mass. at 773. That opinion involved chapter 746 of the Acts of 1970, which authorized the Department of Commerce and Development to make loans to private businesses from funds derived from the sale of Commonwealth bonds for construction of water pollution waste treatment facilities. The Court held that the issuance of Common- wealth bonds and the use of bonds proceeds for such loans violated the credit clause. Section 6 of c 212 of the Acts of 1975, as amended through St. 1977. c. 732. provides, in pertinent part: Any disposition of lands, or any interest therein, by the bank may be made in such manner whether by sale, lease or otherwise, by parcels which are the same as or different from those by which they were acquired or taken possession of by the bank, and for such price, rental or other consideration payable over such term, which may extend beyond the expiration date of this act, and bearing interest as to deferred payments and secured in such manner, by mortgage or otherwise, all as the bank may determine to be desirable consistent with any applicable provisions of any applicable redevelopment plan. Your opinion request relates solely to the question whether bonds may be issued without violation of the credit clause Accordingly, this opinion is confined to that matter and does not address the statutory authority of the Land Bank to enter into particular types of transaction. P.D. 12 79 The Court noted that the loan, although made for a public purpose, was to private persons and was likely to benefit them and their property substantially.^ In 1977 the Court had occasion to apply the two-step analysis to find a lending of credit, but concluded that there was no violation of the credit clause because the "ultimate borrower" was not an individual, a private assocation or a privately- owned and managed corporation. Opinion of the Justices, 373 Mass. 904, 910 (1977). The opinion involved the Community Development Finance Corporation (hereafter, "CDFC") created by G.L. c. 40F. Under chapter 40F, the state treas- urer would sell Commonwealth bonds and use the proceeds to purchase all of the common stock of CDFC. CDFC in turn would lend the proceeds to community development corporations to invest in development projects which met detailed standards set forth in the statute. G.L. c. 40F, §4. Analyzing the "substance of the entire statute," Opinion ofthe Justices, 373 Mass. at 909, the fact ofCDFC s loan of the borrowed funds to community development corporations had, again, the same effect as a state guaranty of a loan to the ultimate borrower, the commu- nity development corporation, and therefore constituted a lending of credit. Id. at 909-910. Whether the transaction was constitutionally permissible depended upon whether a community development corporation is a "private association" or "a corporation which is privately owned and managed." Id. at 910. The Court concluded that a community development corporation was not a pri- vate borrower. Without articulating the precise composition of a community development corporation,'' the Court reached its conclusion based upon the fol- lowing key considerations: (1) that CDFC would be publicly owned and managed for a public purpose; and (2) the CDFC proceeds could be used only for specific approved projects of public benefit and public purpose; and (3) the community development corporations which would use the pro- ceeds had to meet certain criteria designed to insure the public nature and purpose of the use of the funds. The Court concluded: We think that a community development corporation which expends funds in accordance with the conditions and limitations of G.L. c. 40F, §4, is not a private borrower and that, therefore, the statutory pattern of G.L. c. 40F does not involve an unconstitutional lending of the credit of the Commonwealth. Id. at 910. Obviously critical to the Court's conclusion was the existence of sufficient stan- dards or "conditions and limitations" which ensure that the bond proceeds were used for public purposes only and that any benefit to a private person or entity is " 'indirect and incidental and not the purpose of the statute.' " Id., citing Allydonn Realty Corp. v. Holyoke Housing Authority, 304 Mass. 288 (1939). The Court noted further that the statute provided only meager and general standards to guide the Department of Commerce and Development in making loans, leaving much to departmental discretion. Opinion ofthe Justices. 359 Mass. at 773. Under the Court's two-step analysis, because the borrower was private, the loan violated the credit clause. It is unclear whether this further concern that the staoite provided only "meager guidelines" and left much to departmental discretion suggests that sufficiently detailed standards m the statute might have avoided a credit clause violation in this issue. ^ Section 1 of chapter 40F dcnnes a community development corporation as a quasi-public non-profit corporation organized under the General Laws to carry out ccrtam public purposes, with certain .specified by-laws provisions as to, inwr iiliti. area of operation, membership, and election and make-up of the board of directors. G.L. c. 40F, §1. 80 PD. 12 Applying the foregoing analysis to the present circumstances. I conclude that the use of bond proceeds by the Land Bank to acquire land which is resold in exchange for a purchase money mortgage would constitute a lending of the Com- monwealth's credit to the purchaser of the land. Similarly, if that purchaser is a private person or association or a privately owned and managed corporation, there is almost certainly an unconstitutional lending of credit. It is my opinion, however, that the Land Bank can avoid a credit clause viola- tion by adhering closely to the CDFC model. "^ In order to do so, the Land Bank, when it resells land which it has acquired with bonds proceeds in exchange for a purchase money mortgage, must effect the transaction under the following restrictions: 1. The land must be resold only to a non-private or quasi-public agency which has the statutory authority to participate in the redevelopment project (hereafter referred to as the "participating agency").^ 2. The resale must be in accordance with a development plan which the Land Bank has approved only after making the following specific findings: (a) the project is within the scope of the enabling statute and may reasonably be expected to contribute to the redevelopment of the target areas and the economic development of the Commonwealth or will alleviate the shortage of safe, decent and sanitary housing available to persons of low and moderate income; (b) the project plans conform to all applicable environmen- tal, zoning, building, planning, or sanitation laws; (c) the project will be of public benefit for a public purpose; (d) there is a reasona- ble expectation that the project will be successful; (e) private indus- try has not provided sufficient capital required for the project or sufficient primary employment opportunities in the project's area; (f) the Land Bank has determined that its participation is necessary to the successful completion of the proposed subject because fund- ing for the project is unavailable in the traditional capital markets, or that credit has been offered on terms that would preclude the success of the project; (g) the participating agency meets certain standards set forth in ^1 above and appears able to manage its pro- posed project responsibilities; (h) the plan, or alternatively the mort- gage, provides for adequate reporting from the participating agency to the Land Bank. These findings, to the extent they go beyond find- ings already required by the Land Bank's enabling statute, could be established by regulations. St. 1975, c.212, §6. ' Like CDFC. the l.arul Bank isilo.iilv a puhlic inslrunicTiialitv . 'nianaocil puhlicl> Icii a public purpose," Opinion afllw JiiMiccs. 373 Mass. at') 10 * E.g.. a community development corporation or similar "quasi-public nonprofit corporation organized under the General Laws to carry out certain public purposes" with by-laws providing, inter alia, for public membership and directors. G.L. c. 40F, §1 (definition of community development corporation). P.D. 12 81 3. The resale must place conditions and limitations on the participat- ing agency which require that it will maintain sufficient control over the project to ensure that public benefit and public purposes of the redevelopment are maintained. G.L. c. 40F, §4(11).'' It is my opinion that these restrictions suffice to preclude the possibility of a credit clause violation. Opinion of the Justices, 373 Mass. at 910. Cf. Opinion of the Justices, 359 Mass. at 773. In summary, based upon the analysis of the Supreme Judicial Court of the CDFC model as applied to the Land Bank, I conclude that the resale of land acquired by the Land Bank with bond proceeds to a quasi-public agency in exchange for a pur- chase money mortgage, subject to the restrictions discussed above, would not con- stitute a lending of the Commonwealth's credit to any "individual, private association, or corporation which is privately owned and managed." It is there- fore my opinion that Commonwealth bonds and notes may be issued under the Act for such projects without violation of the credit clause. Very truly yours, FRANCIS X. BELLOTTI Attorney General