EDITORIAL BOARD

A buried provision of the recent budget passed by both houses of the Legislature, and vetoed by the governor, provides authority for the state to modify any contract to which it is a party. Although one may suspect that it is intended to unilaterally abrogate labor agreements, it does not contain that limitation. The language reads in full:

Sec. 313. (NEW) (Effective from passage) (a) The state may, in any public or special act, modify a contract to which it is a party (1) if any impairment to the contract is not substantial, or (2) (A) if any impairment to the contract is substantial, the public or special act serves a legitimate public purpose such as remedying a general social or economic problem, and (B) if such purpose is demonstrated, the means chosen to accomplish such purpose are reasonable and necessary.

(b) Any such impairment of a contract as described in subsection (a) of this section may be considered reasonable and necessary if (1) the state considered such impairment along with other policy alternatives, (2) the state reasonably determined that it could not serve its purposes equally well with an evident and more moderate course of action, and (3) the state’s action is not unreasonable in light of the surrounding circumstances.

This provision may be seen as an attempt to rewrite the test currently in place with respect to the limitations on a state’s ability to abrogate contracts into which it has entered. Should this language survive, the ultimate test will of course be in its specific application.

U.S. Trust v. New Jersey, 431 U.S. 1 (1977), appears to be the leading case on the Contracts Clause. In that case, New York and New Jersey approved a compact in 1962 which provided that as the Port Authority of New York and New Jersey was purchasing the failing Hudson & Manhattan passenger railroad system, it imposed a limitation on the ability of the authority to subsidize passenger rail with the revenues derived from its bridge and tunnel tolls. The compact constituted a contract by and with the two states and bondholders. This contract provided marketability of the bonds to purchase the Hudson & Manhattan Railroad, and build the World Trade Center.

With the onset of the energy crisis of the early 1970s, New York and New Jersey determined that motivating users of the private automobile to use public transportation was an important policy to advance. Therefore, they impaired the 1962 compact in order to increase bridge and tunnel tolls and use the money to improve public transportation.

The court found this impairment of contract both unreasonable and unnecessary in violation of the Contract Clause. It was found that basing the reason for the impairment on the heightened need for public transportation, energy consumption and environmental protection was unreasonable, because those concerns were known in 1962 when the compact was entered into. The court, through Justice Harry Blackmun, also observed there were other means to address these policy concerns.

Chief Justice Warren Burger, concurring in the opinion, summarized the holding as such, that a “state must demonstrate that the impairment was essential to the achievement of an important state purpose. Furthermore, the state must show that it did not know and could not have known the impact of the contract on that state interest at the time that the contract was made.”

Entering into financial obligations such as construction contracts or union contracts certainly seem to provide foreseeable obligations to pay in the future.

The court also observed: “A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a state could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.”

Regardless of that decision, we have a new court. Before this provision becomes law, should it do so, conservative counsel might urge those clients providing services or goods to the state to run, not walk, to the Comptrollers Office and get paid for all monies due.