RICHMOND -- Members of the Virginia Supreme Court yesterday showered pointed questions on state and county attorneys who asked the court to repudiate its controversial April decision invalidating lease- and appropriation-backed debt under the state constitution.
The oral arguments were presented at an unusual rehearing here of the ruling in Dykes v. Northern Virginia Transporatation District Commission, which the court approved 6 to 1 on April 19 and then withdrew on June 4.
The justices did not give a reason for the rehearing, but the decision to withdraw the April ruling appeared to be prompted by the widespread concern it caused in the bond market.
Chief Deputy Attorney General H. Lane Kneedler and other prominent officials and bond professionals pleaded for a reversal of the court's finding that a $330 million proposed appropriation-backed financing for a Fairfax County parkway illegally circumvented the constitution's requirement that voters approve all long-term debt offerings.
William Broaddus of McGuire, Woods, Battle & Boothe, a former Virginia attorney general arguing for the appellees, said financings backed only by a pledge to appropriate payment are "squarely rooted" in Virginia's 30-year tradition of issuing moral obligation debt and special revenue-backed bonds.
"Three decades ago, the General Assembly decided to pursue moral obligation debt," Mr. Kneedler said. "The invalidation of this long-standing and widespread practice could endanger many state and local projects."
Short of overturning the April decision, Mr. Kneedler urged the court to make it clear that its invalidation of lease- and appropriation-backed bonds is not retroactive and will not hurt an estimated $2.3 billion of such deals that are outstanding within the state.
But the arguments of the state's officialdom were countered forcefully by the taxpayer-litigant who brought the case before the Supreme Court, Marcia Dykes, and her attorney, James Falk Jr. At least two of the court's seven justices appeared to respond sympathetically to their case.
Mr. Falk, picking up on a theme in the court's April opinion, argued that the road financing could not be viewed as a revenue bond financing, which would be granted an exemption from the constitutional requirement under the state's special funds doctrine, because "the parkway will not generate a single cent of revenue."
Justice Henry Whiting, who wrote the April opinion, appeared to agree. He asked Mr. Broaddus, "Isn't this the first time we've been asked to extend the [special funds] doctrine to a project which is not revenue-generating?"
Ms. Dykes attacked the state's argument that appropriation-backed bonds are a kind of "moral obligation" that do not constitute debt requiring voter approval under the constitution. "If they get away with this kind of financing, then we won't have another vote on another bond issue again," she said.
Her statement was echoed by Justice Roscoe Stephenson. "If we approve this scheme, why would localities ever submit a bond referendum as required under the constitution?" he asked.
Justice Whiting pointed out, as he did in the April opinion, that lease financings have the "practical effect" of creating debt because if localities do not honor them, their credit ratings and access to the bond market would be "jeopardized."
But Mr. Kneedler cautioned the justices not to base their next decision on speculation about the bond market's reaction. "We don't really know, there is no evidence to say just what the reaction would be," he said.
One justice, Christian Compton, asked questions that appeared friendlier to the state's arguments, questioning, for example, whether the pledge of appropriations to pay the bonds constituted a legal obligation or full faith and credit pledge.
Chief Justice Henry Carrico, the only dissenter from the April opinion, was silent throughout the hearing.
The court is expected to hand down its next opinion in the case by the end of its current session in early November.
