TROY, N.Y. - A New York State Supreme Court judge on Friday extended a restraining order placed on the state's multibillion transportation bonding program and said he will soon decide the merits of a case challenging the state's use of appropriated debt to finance its capital needs.
Judge Edward O. Spain of the state Supreme Court in Rensselaer County said a temporary restraining order imposed in May on the transportation bonding program will continue until he can decide the outcome of a lawsuit filed by taxpayer activist Robert L. Schulz.
Schulz, a retired engineer from Glens Falls, N.Y., is challenging the constitutionality of the state's four-year transportation financing plan, which calls for the sale by the state Thruway Authority and the state Metropolitan Transportation Authority of about $6 billion of non-voter-approved appropriated debt. The bonds would finance bridge, highway, and mass transportation needs across the state.
Schulz is suing the state, the Thruway Authority, and the MTA because he says the bonding program is state debt and therefore needs voter approval under New York's constitution. New York says the bonds are technically not debt of the state.
Bond lawyers say the case could well decide the legality of the state's use of appropriated debt - debt sold by state authorities on the state's behalf and requiring annual appropriations for debt service. New York has about $17 billion outstanding in these bonds and about $5 billion outstanding of voter-approved general obligation bonds.
During the proceeding, Spain acknowledged the importance of the case and said he would conclude hearing oral arguments from Schulz and lawyers representing the state and the authorities. The judge is expected to make his decision in two to three weeks.
Both Schulz and the state's lawyers say the case will likely go before the state's highest court, the Court of Appeals.
Ruling on a previous lawsuit brought by Schulz, the Court of Appeals recently said that taxpayers have the legal right to sue the state over its borrowing practices. However, lawyers representing the state and the authorities said the Court of Appeals did not rule on the merits of Schulz's argument in the earlier case. which also challenged the constitutionality of state-appropriated bonding programs.
During the hearings, Schulz used the same argument he has advanced in more than a dozen lawsuits challenging the state's borrowing practices: that appropriated bonds finance state projects and therefore must be approved by voters to be legal. Quoting a June 11 article in The Bond Buyer, Schulz added that the state is developing a contingency plan if it cannot sell the proposed transportation debt and said a victory declaring the bonds illegal would not eliminate all state capital spending.
Arthur L. Liman, a prominent litigator representing the Thruway Authority, underscored the importance of the transportation bonding initiative in maintaining the state's infrastructure.
Liman, a partner at Paul, Weiss, Rifkind, Wharton & Garrison in New York City, also said that the use of appropriated debt for such purposes is legal and has been upheld by the courts on numerous occasions, including the Wein decisions of the 1970s.
He said that bondholders take a calculated risk every time they purchase appropriated debt because the state Legislature is not legally obliged to appropriate state money to pay principal and interest on the securities. As a result, the bonds are not debt of the state and do not need voter approval, he said.
"The law is clear," Liman said. "The state is not bound to pay one cent to the Thruway Authority for this debt."
