DEBT LIMITATIONS

TREASURER ‑- COUNTIES ‑- CITIES ‑- PUBLIC FUNDS ‑- DELEGATION OF POWERS ‑- INVESTMENTS ‑- LETTER OF CREDIT ‑- LINE OF CREDIT ‑- DEBT LIMITATIONS 

1.         When RCW 39.59.020(4) authorizes municipal treasurers to invest in " . . . any investments authorized by law for the treasurer of the state of Washington ..." and the state treasurer is authorized by law to invest in commercial paper by RCW 43.84.080(7) but only to the extent consistent with the policy of the State Investment Board, the legal limitations on the state and on municipal treasurers are confined to formally adopted policies of the State Investment Board, and neither the state nor municipal treasurers are bound by State Investment Board policies which are informal or unwritten.

 2.         A municipal treasurer may not lawfully delegate authority to redeem warrants to a banking institution or other party outside the treasurer's office.

 3.         A municipal treasurer may lawfully secure a line of credit for warrant redemption with a bank, to the extent permitted by RCW 39.58.170.

 4.         A municipal treasurer may in certain circumstances secure a letter of credit from a bank for warrant redemption purposes, but only to guarantee payment of warrants the treasurer is statutorily authorized to pay.

 5.         A letter or line of credit is a contingent liability and does not constitute a borrowing by a municipal corporation for purposes of applying constitutional or statutory debt or borrowing limitations; the borrowing occurs if the letter of line of credit is actually drawn down.

                                                              - - - - - - - - - - - - -

                                                                November 1, 1988 

Honorable Robert V. Graham
State Auditor
Legislative Building, AS-21
Olympia, Washington 98504 

Cite as:  AGO 1988 No. 26                                                                                                                

              [[Orig. Op. Page 2]]

 Dear Mr. Graham:

             By letter previously acknowledged you have requested our opinion on the following questions, 1/

              which we have renumbered and slightly rephrased:

             1.         If section 2(4) of chapter 281, Laws of 1988 (RCW 39.59.020(4)) authorizes municipal treasurers to invest in "[a]ny investments authorized by law for the treasurer of the state of Washington ...", and when the State Treasurer is authorized to invest in commercial paper by RCW 43.84.080(7) but only to the extent consistent with the policy of the State Investment Board, and when the State Investment Board by unwritten policy excludes investments by the State Treasurer in commercial paper, are municipal treasurers authorized to invest in commercial paper?

             2.         May a municipal treasurer lawfully delegate authority to redeem warrants to a banking institution or other party outside the treasurer's office?

             3.         May a municipal corporation lawfully secure a line of credit or a letter of credit for warrant redemption with either an in-state or an out-of-state bank?

             4.         Would a line of credit or a letter of credit of the type referred to in question 3 constitute a borrowing by the municipal corporation and be subject to limitations on indebtedness and any other constitutional or statutory restraints on borrowing by the municipal corporation in question?

             We answer your first question in the affirmative, you second and forth questions in the negative, and your third question in the qualified affirmative for the reasons stated in the following analysis.

                                                                      ANALYSIS

 Question 1 ‑- Investment Authority

             1.         If section 2(4) of chapter 281, Laws of 1988 (RCW 39.59.020(4)) authorizes municipal treasurers to invest in "[a]ny investments authorized by law for  [[Orig. Op. Page 3]] the treasurer of the state of Washington  . . .", and when the State Treasurer is authorized to invest in commercial paper by RCW 43.84.080(7) but only to the extent consistent with the policy of the State Investment Board, and when the State Investment Board by unwritten policy excludes investments by the State Treasurer in commercial paper, are municipal treasurers authorized to invest in commercial paper?

             Your first question asks whether municipal treasurers may invest in commercial paper.  As you noted in your question, the 1988 Legislature enacted chapter 39.59 RCW, relating to the investment of public funds.  Laws of 1988, ch. 281, §§1-3.  RCW 39.59.020 provides in part:

             In addition to any other investment authority granted by law and notwithstanding any provision of law to the contrary, the state of Washington and local governments in the state of Washington are authorized to invest their funds and money in their custody or possession, eligible for investment, in:

                          . . .

                         (4)Any investments authorized by law for the treasurer of the state of Washington or any local government of the state of Washington other than a metropolitan municipal corporation but, except as provided in chapter 39.58 RCW, such investments shall not include certificates of deposit of banks or bank branches not located in the state of Washington.

 (Emphasis added.)

             RCW 43.84.080 provides in part:

                         [T]he state treasurer may invest or reinvest such portion of [excess state funds] as the state treasurer deems expedient in the following defined securities or classes of investments:

                          . . .

              [[Orig. Op. Page 4]]

                         (7) Commercial paper:  Provided, That the treasurer shall adhere to the investment policies and proceduresadopted by the state investment board.

 (Emphasis added.)2/

             Thus, with regard to commercial paper, the State Treasurer is legally obligated to adhere to investment policies and procedures "adopted" by the State Investment Board.  The investment authority of municipal treasurers cannot exceed the investment authority of the State Treasurer.  Therefore, with regard to commercial paper, municipal treasurers also must adhere to investment policies and procedures "adopted" by the State Investment Board.

             You state in your question that the State Investment Board has an "unwritten policy" excluding investments by the State Treasurer in commercial paper.3/

              We must determine, therefore, whether an "unwritten policy" excluding investments by the State Treasurer in commercial paper has been "adopted" by the State Investment Board within the meaning of RCW 43.84.080.  To do this, it is necessary to determine how the State Investment Board "adopts" investment policies and procedures.

             We look first to chapter 43.33A RCW, the principal statutes that relate specifically to the State Investment Board.  RCW 43.33A.110 requires that the Board establish investment policies and procedures.  Chapter 43.33A RCW contains the further requirements that the Board meet at least quarterly (RCW 43.33A.040(2)), that it not conduct business without a quorum present and not take action without the affirmative vote of a majority of its voting members (RCW 43.33A.040(1)), and that it keep a full and complete public record of its proceedings (RCW 43.33A.090).  We also note that under RCW 43.84.150, the State Investment Board is required to make investments in accordance with "investment policy duly established and published by the state investment board."

             The State Investment Board also is subject to chapter 42.30 RCW, the Open Public Meetings Act of 1971.  See RCW 42.30.020(1)(a) (act applies to any state board).  Under that  [[Orig. Op. Page 5]] act, all meetings at which official business of the Board is transacted must be open and public.  RCW 42.30.020(3), (4), 030 [42.30.030].  Proper notice also must be given of all such meetings.  RCW 42.30.060.

             Based on the foregoing statutes, it seems clear to us that before an investment policy can be considered to have been "adopted" by the State Investment Board, it must, at a minimum, have received an affirmative vote of the members of the Board, preceded by proper notice, attended by a majority of the members of the Board, with the proceedings of the meeting fully and completely recorded and available for public inspection.  The policy probably also needs to have been published.

             We do not know from your question whether the Board's "unwritten policy" against investments in commercial paper is literally not written down or whether the process used to arrive at that policy suffers additional defects of informality.  In either case, we do not believe that such an "unwritten policy" against investments in commercial paper could be considered to have been "adopted" within the meaning of [RCW] 43.84.080(7).

            If the State Investment Board's assumed policy against investments in commercial paper has not been "adopted", then the State Treasurer is not legally prohibited from investing in commercial paper.4/

             Because under RCW 39.59.020(4) a municipal treasurer's authority is limited only by the legal restrictions placed on the State Treasurer, a municipal treasurer is not prohibited from investing in commercial paper.5/

             Questions 2-4 ‑- Municipal Warrants

                                                                      Background

            Your second, third, and fourth questions relate to municipal warrants and to the permissible scope of the relationship between a municipal treasurer and a banking institution with respect to the cashing of municipal warrants.  Before addressing your  [[Orig. Op. Page 6]] specific questions, we will provide some background on municipal warrants and their redemption, and on the role of both municipal treasurers and banks in the warrant redemption process.

             What is a warrant?  "A municipal warrant or order is an instrument generally in the form of a bill of exchange or order drawn by an officer of a municipality upon its treasurer, directing him to pay an amount of money specified to the person named, or his order, or bearer."  15 E. McQuillin,Municipal corporations § 42.01, at 498 (3d ed. rev. 1985).  In this state, a municipal warrant has been characterized as:  "nothing more than a device for liquidating an existing municipal indebtedness or certificate of indebtedness, which is neither intended to nor does create any new debt."  Washington-Oregon Corp. v. Chehalis, 76 Wash. 442, 451, 156 P. 834 (1913).

             A municipal warrant lacks the stable quality of a definite time of payment peculiar to a bond or note, and will be paid only when there is sufficient money to cash it in the particular fund on which it is drawn.  State ex rel. Wehe v. Pasco Reclamation Co., 90 Wash. 606, 609-10, 156 P. 834 (1916).  If there is insufficient money in the particular fund when it is presented, the warrant will bear interest until such time as there is sufficient money to cash it.  See, e.g., RCW 36.29.010(4), (5), (6), .040 [36.29.040].

             How are municipal warrants redeemed and what role does the local treasurer play in the redemption process?  Warrant redemption is essentially a two-step process.  First, the warrant is presented to the municipal treasurer.  Second, after presentment, the municipal treasurer pays the warrant if there are sufficient funds in the treasury or arranges to pay the warrant plus interest at a future date if there are insufficient funds.  See 15 E. McQuillin,supra, § 42.16, at 531.

             In this state, a local treasurer's duties and responsibilities with respect to warrant redemption are spelled out in considerable statutory detail.  For example, according to RCW 36.29.010, [t]he county treasurer:

                         (1) Shall receive all money due the county and disburse it on warrants issued and attested by the county auditor;

                          . . .

                         (3) Shall write on the face of all warrants when paid, the date of redemption, and his signature;

                         (4) Shall indorse on the face of all warrants presented for which there are not sufficient funds for  [[Orig. Op. Page 57]] payment, "not paid for want of funds" and the date of such indorsement over his signature;

                         (5) Shall give notice by publication in a legal newspaper published or circulated in the county when there are funds to redeem outstanding warrants or by posting at three public places in the county if there is no such newspaper;

                         (6) Shall pay interest at the legal rate upon all warrants from the date of the indorsement "not paid for want of funds" to the date of publishing or posting the notice of redemption;

                          . . . .

             Other statutes call for the county treasurer to redeem warrants in the order of their issuance (RCW 36.29.030); to enter on his warrant register account the amount of interest paid, when he redeems warrants on which interest is due (RCW 36.29.050); to make a call for the warrant to that amount in the order of their issue, when he has at least $500 belonging to any fund upon which warrants are outstanding (RCW 36.29.060); and to not knowingly fail to call for or pay warrants in accordance with RCW 36.29.060 (RCW 36.29.070).

             The principal statute governing city and town warrants is RCW 35.21.320, which provides,inter alia, that all city and town warrants shall draw interest "from and after their presentation to the treasurer", that "[t]he city or town treasurer shall pay all warrants in the order of their number and date of issue whenever there are sufficient funds in the treasury applicable to the payment", and that if $500 is accumulated in any fund having warrants outstanding against it, "the city or town treasurer shall publish a call for warrants to that amount".

             Finally, RCW 36.29.040 provides in part:

             All county, school, city and town warrants, and taxing district warrants when not otherwise provided for by law, shall be paid according to their number, date and issue, and when not paid upon presentation shall draw interest from the date of their presentation to the proper treasurers or from the date the warrants were originally issued, as determined by the proper treasurer.

             What role do banks play in the warrant redemption process?  Banks need not play any role in the process of redeeming warrants.  A warrant can be issued and paid by the local municipality without ever passing through a bank.  Over time,  [[Orig. Op. Page 8]] however, it has become very rare for any payee to present his warrant directly to the local treasurer for redemption.  Instead, nearly all local warrants are endorsed over to banks, which are willing to pay them and then, in turn, to present them for payment to the local treasurer.  In this age of computerized banking, it is even more typical for the warrants to pass through the banking system to a particular bank which previously has agreed to handle the local municipality's warrants, typically in connection with the local municipality's other banking business.

             If the bank after clearing the warrants presents them to the municipal treasurer, either individually or in groups, and assuming presentment and sufficient funds, and the treasurer pays the bank, either directly out of the local treasury or by authorizing a transfer from municipal funds already on deposit at the bank, then the traditional redemption process is essentially preserved.  Your questions concern several suggested variations on this process.

             Question 2

             With this background in mind, we turn to your second question, which we repeat for ease of reference:

             May a municipal treasurer lawfully delegate authority to redeem warrants to a banking institution or other party outside the treasurer's office?

             The general rule in Washington is that officials may not delegate discretionary functions to others:

             [W]here the enabling legislation under which a municipal or quasi-municipal corporation derives its power confines legislative or discretionary functions in particular officials or boards, such functions may not be delegated to others.  Unless the enabling legislation provides otherwise, however, those in whom such functions repose may delegate to others the performance of duties of a purely ministerial or administrative nature.

 In re Puget Sound Pilots Ass'n, 63 Wn.2d 142, 146 n.3, 385 P.2d 711 (1963) (citations omitted).  Accord,Roehl v. Public Util. Dist. 1, 43 Wn.2d 214, 240-41, 261 P.2d 92 (1953);Storey v. Seattle, 124 Wash. 598, 601-05, 215 P. 514 (1923); 2 E. McQuillin,Municipal Corporations §§ 10.39-.42 (3d ed. rev. 1988); 56 Am. Jur. 2dMunicipal Corporations, §§196-98 (1971).

              [[Orig. Op. Page 9]]

             What acts are discretionary and what acts are ministerial?

             Discretionary acts of a municipality are sometimes referred to as "judicial acts," or as legislative acts.  A purely "ministerial duty" is one as to which nothing is left to discretion.  Official action is legislative or judicial where it is the result of judgment or discretion, and is ministerial when it is absolute, certain, and imperative, involving merely the execution of a set task, and when the law that imposes it prescribes and defines the time, manner, and occasion of the performance with such certainty that nothing remains for judgment or discretion.

 2 E. McQuillin, supra, § 10.32, at 1088 (footnotes omitted).

             For example, inPuget Sound Pilots Ass'n, supra, the court held that the Board of Pilotage Commissioners became an improperly constituted body without power to set rates for pilotage services when the Director of the Department of Labor and Industries, who was specifically designated by statute as a member and chairman of the board, authorized another person to act in his place, since the function of the board was of a judicial, rather than ministerial, nature.  63 Wn.2d at 144-46.

             On the other hand, inStorey v. Seattle, supra, the court held that it was not an unlawful delegation of legislative or judicial power for the City of Seattle to pass an ordinance appointing the King County Humane Society the City's official poundmaster.  Even though the ordinance authorized the Society to collect city taxes, the court held that the tax collection was a ministerial function.  124 Wash. at 601-05.

             As noted previously, the time and manner of the performance of a local treasurer's duty to redeem warrants are prescribed by statute with considerable certainty.  At first blush, these warrant redemption duties of the municipal treasurer appear to be largely ministerial.  We cannot say, however, that in actual practice the redemption process is quite so absolute and certain.

             Warrants are payable only from the funds on which they are drawn and they cannot be paid unless there is money in the particular fund provided for payment.  See, e.g.,State ex rel. Wehe, 90 Wash. at 609-10.  The treasurer therefore must inquire into the balance of the fund on which the warrant is drawn to determine whether sufficient funds exist to pay the warrant.  Although the determination of questions of fact generally are held to be ministerial rather than discretionary, 2 E. McQuillin, § 10.41, at 1131, determining the balance of a particular fund at a particular time may involve the exercise of a certain amount of judgment.

              [[Orig. Op. Page 10]]

             For example, if a significant number of warrants have been drawn on a particular fund and a significant number have been redeemed, determining the fund balance at any given point in time may be difficult.  Like determining a checkbook balance, determining whether a fund has sufficient money to cover a warrant redemption may involve judgment decisions as to when to credit fund deposits and when to debit warrant redemptions.  We believe the need to make such decisions elevates the warrant redemption process above the merely ministerial.6/

             A treasurer also has a duty to refuse payment of warrants that have been illegally issued or that are based on false or fraudulent claims.  State ex rel. Olympia Nat'l Bank v. Lewis, 62 Wash. 266, 268, 113 P. 629 (1911).  Although we need not discuss the extent of a treasurer's duty to inquire into the legality of warrants, we think this duty again requires the exercise of sufficient judgment to take the warrant redemption process out of the purely ministerial, and therefore delegable, realm.

             In concluding that the function of redeeming warrants cannot be delegated, we also have considered the effect such a delegation would have on government control over the public treasury.  The warrant redemption process is not complete until the amount called for in the warrant is withdrawn from or charged against the fund upon which it was drawn.  Fidelity & Deposit Co. v. Cleburne, 296 F. 643, 648 (5th Cir. 1924).  Accordingly, to effectively delegate authority to redeem warrants, a municipal corporation also would have to delegate authority to withdraw the necessary funds, from the appropriate municipal fund, with which to pay the warrant.  Such a delegation of authority to redeem warrants would have the effect of placing public funds at the disposal of private parties.  The powers of a municipal corporation are strictly limited when the public treasury will be affected directly by the action in question.  State ex rel. Bain v. Clallam Cy. Bd. of Cy. Comm'rs, 77 Wn.2d 542, 548, 463 P.2d 617 (1970).  The fact that loss of public control over public funds would necessarily accompany a delegation of authority to a  [[Orig. Op. Page 11]] bank to redeem warrants further persuades us that such delegation would not be proper.7/

            Question 3

             We turn now to your third question, which we repeat for ease of reference:

             May a municipal corporation lawfully secure a line of credit or a letter of credit for warrant redemption with either an in-state or an out-of-state bank?

             RCW 39.58.170 expressly authorizes a municipal corporation to secure aline of credit for warrant redemption:

             Any municipal corporation is authorized to establish a line of credit with any qualified public depositary to be drawn upon for cashing its warrants, to delegate to a fiscal officer authority to determine the amount of credit extended, and to pay interest and other finance or service charges.

             The only restriction in the statute is that the line of credit be established with a "qualified public depositary".8/

             The authority of a municipal corporation to secure a letter of credit for warrant redemption is more difficult to determine.9/

              The difficulty is due, in part, to our  [[Orig. Op. Page 12]] uncertainty as to why a municipal treasurer would want to use a letter of credit in the warrant redemption process.  The most likely situation would involve a municipal corporation that had entered into an arrangement with a bank to cash that municipality's warrants.  After cashing the warrants, the bank would seek reimbursement by presenting them to the local treasurer.  The more warrants the bank cashed before presenting them to the treasurer, the greater the risk to the bank that the municipality would not have the funds to reimburse the bank.  A municipality in such a situation might, therefore, want to post a letter of credit in favor of the warrant-cashing bank to guarantee that the warrants would be redeemed when presented.

             Whether such letter of credit arrangement is permissible would depend, in our view, on whether the letter of credit guaranteed payment to the warrant-cashing bank of all warrants cashed or only those warrants that the treasurer was authorized by statute to pay.  A municipal corporation, being solely a creature of the state, cannot act in contravention of any constitutional provision or any legislative enactment.  Winkenwerder v. Yakima, 52 Wn.2d 617, 622, 328 P.2d 873 (1958);see alsoLutz v. Longview, 83 Wn.2d 566, 569-70, 520 P.2d 1374 (1974).  It is equally clear that a municipal corporation cannot by contract deprive itself of any of its legislative or governmental powers.  10 E. McQuillin,Municipal Corporations § 29.07, at 230 (3d ed. rev. 1981).  As previously noted, a local treasurer is restricted by statute from paying warrants for which there are not sufficient funds for payment.  See RCW 35.21.030, 36.29.010(4), .040 [36.29.040]; see alsoState ex. rel. Wehe v. Pasco Reclamation Co., 90 Wash. at 609-10.  Being restricted by statute, he cannot agree to do so by contract.  Thus, a municipality could not post a letter of credit that could be drawn upon by a warrant-cashing bank upon the failure of the municipality to pay a warrant that it was prohibited by statute from paying.

             On the other hand, a municipality could post a letter of credit to guarantee payment of warrants for which there were sufficient funds for payment.  Obviously, however, if there were sufficient funds available for payment, there would be no need to guarantee payment by posting a letter of credit.  Given the foregoing limitations, we do not know why a municipal corporation would want to use a letter of credit.

              [[Orig. Op. Page 13]]

             Question 4

             We turn now to your fourth question, which we repeat for ease of reference:

             Would a line of credit or a letter of credit of the type referred to in question 3 constitute a borrowing by the municipal corporation and be subject to limitations on indebtedness and any other constitutional or statutory restraints on borrowing by the municipal corporation in question?

             Limitations upon municipal indebtedness are contained, inter alia, in article 8, section 6 of the state constitution, RCW 39.36.020 (limitation on indebtedness of taxing districts generally), RCW 36.67.010 (limitation on indebtedness of counties), and RCW 35.30.040 (limitation on indebtedness of cities).  Generally speaking, each of these provisions limits municipal corporations from becoming indebted in amounts exceeding certain percentages of the value of the taxable property in the particular taxing district.

             We do not believe either a line of credit or the type of letter of credit arrangement discussed in question 3 would constitute municipal borrowing subject to constitutional and statutory limitations on indebtedness.  The rule in Washington, as elsewhere, is that incurring a contingent future liability does not create an indebtedness.  Kelly v. Sunnyside, 168 Wash. 95, 96-97, 11 P.2d 230 (1932); Comfort v. Tacoma, 142 Wash. 249, 253-59, 252 P. 929 (1927);see also 15 E. McQuillin, § 41.23, at 423.

             InComfort, the court held that local improvement bonds guaranteed by the city of Tacoma were not debts of the city.  They were "only a contingent liability as far as the city is concerned, and in no sense a debt proper."  142 Wash. at 255.  The court reasoned as follows:

             If A is indebted to B and C promises that, if A does not pay B, then he (C) will, no one would contend that C had an outstanding debt.  He has but a contingent liability that may or may not ripen into a debt.  If A fails to pay, then, in that event, the contingent liability has ripened and the debt is absolute as to C.  But until that time arrives C owes B nothing.

 142 Wash. at 255-56.

             A line of credit does not create an obligation to repay until drawn.  Therefore, it is a contingent liability rather than a debt subject to limitation.  Similarly contingent is the  [[Orig. Op. Page 14]] liability of the procurer to the issuer of a letter of credit.  The issuing bank authorizes the beneficiary to draw on the letter in accordance with certain terms and conditions. If the letter is drawn upon, then the customer becomes obligated to reimburse the issuing bank.  The customer (the municipal corporation) would not pay the issuing bank, however, if the customer met its underlying obligations to the beneficiary (the warrant-cashing bank).  The municipal corporation's obligation to the issuing bank therefore would be a contingent liability, rather than a debt subject to limitation.10/

             To summarize, we answer your questions as follows:  (1) a municipal treasurer is authorized to invest in commercial paper; (2) a municipal treasurer may not delegate authority to redeem warrants to a bank; (3) a municipal corporation may secure a line of credit and, with significant limitations that would negate its utility, post a letter of credit in favor of a bank to facilitate the cashing of warrants by that bank; and (4) such a line of credit or letter of credit would not, until drawn, constitute borrowing subject to limitations on indebtedness.

             We trust that the foregoing will be of assistance to you.

 Very truly yours,
KENNETH O. EIKENBERRY
Attorney General 

MARK S. GREEN
Assistant Attorney General