REGISTERED STATE WARRANTS
Outstanding warrants are not the measure of the state debt within the constitution. The state treasurer has no responsibility to limit the number of warrants endorsed "not paid for want of funds." Loans may be made from one fund to another by the treasurer with the consent of the Finance Committee but the amount shall not exceed 75% of the taxes levied which may include excise taxes levied under the revenue act of 1935 as determined by the revenue estimate in the last governor's budget. The treasurer may not permit overdrafts against funds and any borrowing must be accomplished by the actual transfer of money between funds.
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January 19, 1950
Honorable Tom Martin
Olympia, Washington Cite as: AGO 49-51 No. 199
Receipt is acknowledged of your letter in which you propound the following questions:
1. Is the state in debt according to Article VIII, Section 1, of the State Constitution, when one fund is overdrawn and there is cash on hand to the credit of other funds?
If the answer is yes,
(a) Do the provisions of Article VIII, Section 1, of the State Constitution, create a responsibility upon the state treasurer to limit warrants endorsed "not paid for want of funds according to 5516 Rem. Rev. Stat."?
2. Can the state treasurer make a loan from one fund to another under 5507 Rem. Rev. Stat. based upon taxes levied under the Revenue Act of 1935 as amended.
[[Orig. Op. Page 2]]
(a) If yes, upon what basis will 75% of levied and uncollected taxes be computed?
(b) Does 5507 Rem. Rev. Stat. require the loan from a specific lending fund be actually transferred to the borrowing fund? Or can the state treasurer, under 5507 Rem. Rev. Stat. honor warrants that create an overdraft in the borrowing funds without revealing in the cash balances from which fund the loan is made?
3. Can the state treasurer under any circumstances exercise discretion in permitting temporary overdrafts?
Our conclusions on the questions propounded may be summarized as follows:
1. The state is not in debt under Article VIII, Section 1, of the State Constitution, when one fund is overdrawn and there is cash on hand to the credit of other funds.
2. The provisions of Article VIII, Section 1, of the State Constitution, do not create a responsibility upon the state treasurer to limit warrants endorsed "not paid for want of funds" according to section 5516 of Remington's Revised Statutes.
3. The state treasurer may, with the consent of the State Finance Committee, make a loan from one fund to another under section 5507 of Remington's Revised Statutes based upon taxes levied under the Revenue Act of 1935, as amended.
4. The 75% of taxes levied and uncollected will be computed upon the basis of the estimated revenues shown in the Governor's Budget compiled at the beginning of the current biennium.
5. When a loan is made pursuant to section 5507 of Remington's Revised Statutes an actual transfer must be made to the borrowing fund and it is not permissible for the treasurer to honor warrants that create an overdraft in the borrowing fund without revealing the cash balances from which fund the loan was made.
6. The state treasurer may not permit temporary overdrafts.
[[Orig. Op. Page 3]]
The issuance of warrants which could not be paid upon presentation for want of funds has occurred many times in the history of the state. In 1895 outstanding warrants totaled $1,500,000.00. State ex rel. Jones v. McGraw, 12 Wash. 541. In 1940 unpaid warrants totaled nearly $6,000.000.00. It has never been held by the courts of this state that the constitutional debt limit is violated when unpaid warrants exceed $400,000.00. McQuillan on Municipal Corporations (2nd Ed.) Vol. 6, page 81, in speaking of a warrant says:
"It is little more than a certificate of indebtedness and is not intended to constitute a new debt or evidence a new debt; and is generally held not to create of itself indebtedness as that term is used in debt limit provisions."
Article VIII, Section 1, of the State Constitution, provides:
"The state may, to meet casual deficits or failure in revenues or for expenses not provided for, contract debts, but such debts, direct and contingent, singly or in the aggregate, shall not at any time exceed four hundred thousand dollars ($400,000), and the moneys arising from the loans creating such debts shall be applied to the purpose for which they were obtained, or to repay the debts so contracted, and to no other purpose whatever."
It could be argued that this provision of the constitution is applicable only to debts created by the borrowing of money. Indeed, the last clause of the sentence clearly contemplates the receipt of money by the state and it is possible that, if the matter were ever brought to issue, it might be determined that this section of the constitution applies only when money is borrowed and not when the state incurs obligations in the course of carrying out its ordinary governmental functions. In this connection the difference in wording should be noted between the section above quoted and section 6 relating to municipal corporations. In the latter section the language is:
"No city, town, school district or other municipal corporation shallfor any purpose become indebted in any manner * * *" (Emphasis supplied)
[[Orig. Op. Page 4]]
The cases applying the debt limit to all kinds of obligations of municipal corporations are not necessarily applicable to the state debt limit with its different language. However, if we assume that section 1, Article VII of the Constitution is applicable to obligations of the state incurred not only for money borrowed but also for the ordinary expenses of government it does not follow that warrants issued to evidence such obligations are the measure of the state's indebtedness for the purpose of determining whether the debt limit has been reached.
The law is well settled that a constitutional debt limit is not violated by incurring obligations within the limits of current appropriations in anticipation of the receipt of taxes levied and uncollected.
"* * * The general rule is that an obligation for which an appropriation is made at the time of its creation from funds already in existence, or prospective and subject to appropriation, is not within the operation of the limitation of indebtedness." 49 Am.Jur. 281.
This rule has been limited in its application generally to property taxes levied and cash assets. Raynor v. King County, 2 Wn. (2d) 199, 97 P. (2d) 696, 49 Am.Jur. 281. Nevertheless, it will be seen that every obligation undertaken by the state does not fall within the constitutional debt limit. If it were not so, and if the existence of outstanding warrants were considered the measure of indebtedness the state would always be operating in excess of the constitutional debt limit. There are outstanding at almost any given time warrants in excess of $400,000 which have been issued by the state auditor and have not yet been presented for payment to the state treasurer. It must be obvious that this "float" cannot be regarded as a violation of the constitution or it would be impossible for the state to function. Warrants themselves do not constitute an indebtedness.
"A city warrant is nothing more than a device for liquidating a municipal indebtedness, or a certificate of indebtedness, which is neither intended to nor does create any new debt. 2 Dillon, Mun. Corp. (5th Ed.) § 851, McQuillin, Municipal Corporations § 2241." Washington Oregon Corp. v. Chehalis, 76 Wash. 442, 451, 136 Pac. 681.
[[Orig. Op. Page 5]]
Warrants are not negotiable instruments. Our Supreme Court on several occasions has held that the warrants of public bodies lack the elements of negotiability. State ex rel. Ackerman v. Meath, 87 Wash. 659 , 152 Pac. 536; Harper & Son v. Pacific Power & Light Company, 143 Wash. 456, 255 Pac. 949. In the latter case the court described the office of a warrant saying:
"* * * It has been the constant and common practice in this state to anticipate funds of municipal corporations by drawing orders against them in advance of collections. Of course the treasurer must pay all orders when presented, if there be money in his hands for that purpose, but 'if there be no funds to pay such order when presented, he shall endorse thereon, "Not paid for want of funds," and the date of such endorsement, over his signature, which shall entitle such order thenceforth to draw legal interest.' Rem. Comp. Stat., § 4114 [P.C. § 1825]. Because such is the law, the situation is as though that provision of the statute had been written into the contract or the warrant. State ex rel. Polson v. Hardcastle, 68 Wash 548, 124 Pac. 110; Spokane & Eastern Trust Co. v. Young, 19 Wash. 122, 52 Pac. 1010;State ex rel. Theis v. Bowen, 11 Wash. 432, 39 Pac. 648."
The warrant itself is not a debt but is evidence of an obligation already created.
"In short, a warrant is a non-negotiable obligation of a municipal corporation given for an indebtedness created prior to its issuance." McQuillin, Municipal Corporations (2nd Ed.) Vol. 6, Page 79.
Since it lacks negotiability the instrument itself does not import consideration or extinguish defenses to payment which the maker may have. The Supreme Court of Iowa in the case ofHarrison County v. Ogden (Iowa) 145 N.W. 681, 686, aptly sets out the purport of a warrant.
"* * * A warrant does not constitute a new debt, or evidence of a new debt, but is only the prescribed means for drawing money from the municipal treasury to pay an existing debt, and county warrants are valid [[Orig. Op. Page 6]] instruments only when the board of supervisors had legal authority to issue them, or to contract the obligation upon which they are found, and are not binding when issued in violation of law, or in fulfillment of a contract that the board are prohibited from making. * * *"
The warrant does not constitute the debt but evidences a debt or an obligation already created and the warrant need not be paid unless the transaction that gave rise to the indebtedness validly requires the payment of money. If a contractual obligation is created by the original transaction the state cannot repudiate it. Under section 10, Article I, of the Federal Constitution, no state may pass any law impairing the obligation of contracts. However, with respect to any obligation not contractual, that is, not supported by a consideration, we know of no reason why the legislature could not stop payment on warrants outstanding. A debt is an obligation which one is bound to pay. Warrants drawn for purposes for which no consideration has been given, as for example, those for welfare grants, in our opinion, do not evidence debts in the constitutional sense since they do not rest upon a contractual basis.
"The state does not create a debt within the meaning of the constitution by making a voluntary lawful gift to a number of its citizens; nor does a statute appropriating a stated sum annually as a mere gratuity, alterable both as to amount and manner of application at the pleasure of the legislature create a debt." 59 Corpus Juris 223. See alsoState v. Johnson (Wisc.) 176 N.W. 224.
The fact that such commitments may have been evidenced by warrants would not create an obligation that did not otherwise exist to pay them. In the case ofGruen v. Tax Commission, 135 Wash. Dec. 1, [[35 Wn.2d 1]]our Supreme Court said:
"A debt within the meaning and purview of the constitutional provision in question is that which in any event the state is bound to pay. * * *"
The state is bound to pay a warrant only if it is bound to pay the original obligation that gave rise to the issuance of the warrant. A debt, in the constitutional sense, is an obligation which the state has a contractual duty [[Orig. Op. Page 7]] to pay in any event. Warrants may or may not represent such obligations.
Warrants are to be distinguished from bonds which pledge the general credit of the state. Any pledge of the general credit is within the constitutional debt limit. Thus, in the case ofState ex rel. Jones v. McGraw, 12 Wash. 541, our Supreme Court held that a bond issue of over $400,000 for the funding of warrants, violated the constitutional debt limit, but warrants drawn on a particular fund did not constitute a pledge of the general state credit and were valid. Thus, in Allen v. Grimes, 9 Wash. 424, our Supreme Court held that warrants in the sum of one million dollars might be issued against the capitol building fund notwithstanding the constitutional debt limitation. The court there said:
"Under this condition of affairs, we see no valid objection to the auditor's issuing to the relator the warrant which he prays for, provided that it expresses upon its face the terms and conditions under which it is issued, viz., that it is drawn solely upon the state capitol building fund and payable only as that fund may be accumulated from the sale of lands."
In determining when the constitutional debt limit has been reached there may be offset against the contractual obligations which the state is, in any event, bound to pay, its property taxes levied and uncollected and its cash assets. Our Supreme Court has on numerous occasions held that under section 6, Article VIII of the Constitution, relating to the debt limits of municipalities, assets must be offset against obligations in computing the permissible debt. InState ex rel. Winston v. Rogers, 21 Wash. 206, our Supreme Court held the same reasoning to be applicable to the state. In the case ofRaynor v. King County, 2 Wn. (2d) 199, 97 P. (2d) 696, our Supreme Court summarizes the law on this subject saying:
"Since the decision in the case of State ex rel. Barton v. Hopkins, 14 Wash. 59, 44 Pac. 134, 550, we have held that certain cash assets may be deducted from the outstanding indebtedness for the purpose of determining whether or not a county or city has exceeded its one and one half per cent debt limit. In the case last above cited, and in the following cases: Seymour v. Ellensburg, 81 Wash. 365, 142 Pac. 875; Tabb v. Funk, 170 Wash. 545, 17 P. (2d) 18; andDearling v. Funk, [[Orig. Op. Page 8]] 177 Wash. 349, 32 P. (2d) 548, we not only limited the offset to cash assets, but limited the cash assets to cash on hand, marketable securities, taxes levied and uncollected, and interest on such taxes. In other words, the asset, to be used as an offset, must be cash or its equivalent."
The state has cash assets in various funds. Some are in the treasury and some are held outside the treasury. Some are created by the constitution as in the case of the Permanent School Fund, and others by statute as in the case of the Volunteer Firemen's Relief and Pension Fund. There are some funds which the state holds in trust and has a contractual obligation to apply only for a special purpose as in the case of the Unemployment Compensation Administration Fund. The fact that these funds may be indebted to each other does not create any state debt within the meaning of the constitutional debt limit. In the case ofState ex rel. Winston v. Rogers, 21 Wash. 206, our Supreme Court held that where Permanent School Fund money had been invested in general fund bonds no state debt was created. The court said:
"* * * The question for determination here is whether the state exceeds the debt limit in the issuance of the bond in question. Relator contends that the indebtedness of the state is increased by the issuance of the bond. It must be borne in mind that the permanent school fund is held in the state treasury in trust for the purposes created by the constitution, and that it is made the duty of the treasurer, upon the investment of this fund in the bond, to transfer at once from such fund to the state general fund the par value of the bond, and the amount so transferred to the general fund shall be used at once in the redemption of outstanding general fund warrants. Section 6 of the same article (8) of the constitution limits municipal indebtedness, and should receive the same construction as § 1 relative to state indebtedness. Section 6 has been the subject of construction in this court several times. InState ex rel. Barton v. Hopkins, 14 Wash. 59 (44 Pac. 134, 550), it was determined that taxes due and cash in the treasury must be subtracted from the outstanding indebtedness to determine the debt limitation of a county; [[Orig. Op. Page 9]] and again the same construction was affirmed inGraham v. Spokane, 19 Wash. 447 (53 Pac. 714), and was also approved inRands v. Clarke County, 15 Wash. 697 (46 Pac. 1119), andKelley v. Pierce County, 15 Wash. 697 (46 Pac. 253). In consonance with these decisions, it is not necessary to go further now than to state the proposition that when the bond in the sum of $5,000 is delivered to the state treasurer the sum of $5,000 is placed in the general fund of the state. Thus there is no increase of the indebtedness of the state, or of its liability, when this view is adopted."
It will be noted that in the case just cited the court found that the obligation to the constitutional Permanent School Fund was offset by the asset transferred to the General Fund. The principle is thus recognized that in determining total state assets no distinction is made as to funds. Thus, an indebtedness against the General Fund may be offset against any cash asset which the state has. It should be borne in mind that in speaking of the state's indebtedness we must consider the state in its sovereign capacity as related to its creditors. In its sovereign capacity it has the power to change its statutes and even to amend its constitution. Thus, the fact that presently certain funds are not available. To pay a certain obligation, either by reason of a constitutional or a statutory provision, would not prevent the consideration of such funds in determining whether the state's constitutional debt limit has been reached. The trust funds held by the state are either not state money, as in the case of the Employees Savings Fund,State ex rel. Retirement Board v. Yelle, 31 Wn. (2d) 87, 201 P. (2d) 172, or are offset by the liability with which they are impressed. Such factors must be considered in computing the state's assets.
The amount of outstanding warrants are not the measure of the state's indebtedness within section 1, Article VIII of the constitution. The state does not reach its debt limit until the sum of all of its contractual obligations exceeds by $400,000 all of its property taxes levied and uncollected and all of its cash assets. The answer to your first question is that the state is not in debt according to Article VIII, section 1, of the state constitution, when one fund is overdrawn and there is cash on hand to the credit of other funds.
The second question which you ask is:
"Do the provisions of Article VIII, section 1, of the state constitution create a responsibility upon the state treasurer to limit [[Orig. Op. Page 10]] warrants endorsed 'not paid for want of funds' according to 5516 Remington's Revised Statutes."
Section 5516 of Remington's Revised Statutes is taken from page 408 of the Laws of 1869. It reads:
"Upon the presentation of any state warrant or warrants to the state treasurer, it shall be his duty, if there be no funds in the state treasury, to indorse on said warrant or warrants, 'Not paid for want of funds,' with the day and date of such presentation, and said warrant or warrants shall from said date draw legal interest till paid."
It may be noted that the language of the section quoted reads "if there be no funds in the state treasury". This language would appear to indicate that endorsement should be made only when the treasury is completely exhausted. However, our Supreme Court in the case of State ex rel. Hellar v. Young, 21 Wash. 391, held that the holder of a warrant is entitled to have it so endorsed and registered when there is no money in the treasury applicable to the particular payment and he is not obligated to accept payment from other funds in the treasury not legally available for the payment of that particular warrant. The court said:
"* * * The treasurer cannot take the position that the state stands ready to pay its obligation to relator, because, as matter of law, he has no funds legally at his disposal with which to make such payment. The contrary notion confounds the state with the officer, and makes no distinction between acts of the latter that are made under constitutional and legal sanction and those claimed to be done under invalid, unconstitutional enactments. The respondent cannot be heard to urge that relator is bound to accept payment of his warrant in any funds the state may offer him; it is enough to know that, as matter of law, the state has no funds with which it can make such an offer."
[[Orig. Op. Page 11]]
Thus, you are required to endorse the warrant and register it upon presentation when there is no money in the fund against which it is drawn, notwithstanding that there may be money in the general state cash balance. This registration of warrants does not create a state debt. When you place the endorsement upon the warrant and register it you are performing a ministerial act which is an exact reflection of the truth. You are under no obligation to limit the warrants endorsed "Not paid for want of funds" by reason of Article VIII, section 1, of the state constitution.
Your next inquiry is:
"Can the state treasurer make a loan from one fund to another under 5507 Rem. Rev. Stat. based upon taxes levied under the Revenue Act of 1935 as amended?
Section 5507 of Remington's Revised Statutes is section 1, chapter 15, Laws of 1915. That section reads:
"Whenever there shall be in any fund or funds in the state treasury insufficient moneys to meet the current expenditures properly payable from such funds and there shall be in any other fund or funds, moneys in excess of the amount required to meet the current expenditures therefrom, the state treasurer may, with the consent of the state board of finance, make temporary loans from the funds having excess moneys to those having insufficient moneys, of such sum or sums as may be necessary to meet the demands upon such funds: Provided, that this act shall not authorize the loan of any moneys from the permanent school fund, nor from any of the funds of the permanent irreducible educational, charitable, penal or reformatory institutions of the state, nor to exceed seventy-five per cent of the taxes levied and uncollected."
This section appears to be express authority for the treasurer with the consent of the State Finance Committee to borrow from one fund to meet the obligations of another. The complicating factor is the last clause of the proviso, "nor to exceed 75% of the taxes levied and uncollected." The statute is [[Orig. Op. Page 12]] not entirely clear as to whether the limitation refers to the borrowing fund or the lending fund but we believe that the more reasonable interpretation is that the limitation applies to the borrowing fund since under that view the taxes levied and uncollected might be regarded as the assurance that the loan will be repaid. At one time the state was supported almost entirely from taxes on property which were levied annually upon the basis of an assessment and were secured by liens attached to the property. This is no longer the case. At the present time the only property tax levied for state purposes is one of two mills for the support of institutions of higher learning. The general fund is supported principally from the proceeds of the Revenue Act of 1935, as amended (chapter 180, Laws of 1935, Remington's Revised Statutes Supplement 8370-1 et seq.) which provides for various types of excise taxes. Notwithstanding that chapter 180, Laws of 1935, as amended, deals with excises rather than property taxes, the legislature carefully used wording that would make the various statutes relative to taxes applicable to the excises imposed by the various titles of the Revenue Act. Thus, section 4 of title 2 (Rem. Rev. Stat. Supp. 8370-4) begins:
"From and after the first day of May, 1935, there is hereby levied and there shall be collected from every persona tax * * *" (Emphasis supplied)
The legislature throughout the act carefully used similar language in providing for each type of excise tax.
Since the legislature in the Revenue Act of 1935 refers to the excise taxes as "levied" it is our opinion that they may be considered as "taxes levied" within the meaning of section 5507 of Remington's Revised Statutes.
This brings us to your next question:
"Upon what basis will 75% of levied and uncollected taxes be computed?"
The state budget law, chapter 9, Laws of 1925 (Rem. Rev. Stat. 10927-1 et seq.) is the basis for the legislature's biennial revenue and appropriation program. Under that statute an estimate is compiled prior to the beginning of each biennium of the tax and non-tax revenues for the ensuing fiscal biennium. The Governor's Budget as finally compiled, including both estimates of revenue and expenditure, is issued as a public document. This estimate of revenues from the excise taxes is the basis upon which the legislature must work in making its appropriations, and in our opinion, is the basis for determining the amount of the taxes levied under the Revenue [[Orig. Op. Page 13]] Act of 1935.
You next inquire:
"Does 5507 Remington's Revised Statutes require the loan from a specific lending fund be actually transferred to the borrowing fund, or can the state treasurer, under 5507 Remington's Revised Statutes, honor warrants that create an overdraft in the borrowing fund without revealing in the cash balances from which fund the loan was made?"
There is no statutory authority for paying a warrant with any money other than that in the fund against which it is drawn. In fact, in the case ofState ex rel. Hellar v. Young, 21 Wash. 391, the Supreme Court expressly held that the treasurer was required to register a warrant when there was no money in the fund against which it was drawn instead of paying it out of other money in the hands of the treasurer. Section 5507 of Remington's Revised Statutes means exactly what it says. In order to take advantage of the provisions of section 5507 money must actually be transferred into one fund and transferred out of another fund. There is no statutory authority for overdrafts and, in our opinion, the treasurer may not legally permit them.
Your last question is:
"Can the state treasurer under any circumstances exercise discretion in permitting temporary overdrafts?"
What we have just said answers this question. The treasurer has no discretion to permit temporary overdrafts.
We have discussed our views as expressed herein with counsel for some of the banking institutions of the state and we find them to be cautious about advising their clients to accept registered warrants after those outstanding exceed $400,000. We agree with them that a court decision on the matters discussed here is most desirable. We are accordingly taking immediate steps to institute an action to bring about an authoritative determination.
Very truly yours,