Brief for Appellee — United States Trust Co. of NY v. New Jersey
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Supreme Court, U: 8.
FILED
SEP 10 1976
MICHAEL RODAK, JR..CLERK |
IN THE 7 - ed
Supreme Court of the Unitet States
Octosper Term, 1975
No. 75-1687
Unitep States Trust Company or New York, as Trustee
for The Port Authority of New York and New Jersey
Consolidated Bonds, Fortieth and Forty-First Series, on
its own behalf and on behalf of all holders of Consolidated
Bonds of The Port Authority of New York and New Jersey
and all others similarly situated,
Appellant,
v.
Tue State or New Jersey, Brenpan T. Byrne, Governor
of the State of New Jersey, and Wiiu1mMm F. Hywanp,
Attorney General of the State of New Jersey,
Appellees.
ON APPEAL FROM THE SUPREME COURT OF NEW JERSEY
BRIEF FOR APPELLEES
WuuumM F. Hyrtanp
Attorney General of the State of
New Jersey.
Attorney for Appellees.
By Special Counsel:
MicwHackEt I, Sovern
Murray J. LavLicut
Harotp 8S. H. Enear
435 West 116th Street,
New York, New York 10027.
Dated: September 11, 1976
Ore ene -~
INDEX
Counter-Statement of the Case .....
Introductory Statement
A. The Early Years: A Port Authority That Was
Not Self-Sustaining, the Arrangements That
Enabled It to Carry Deficits and the Failure of
Legislative Efforts to Have the Authority
Assume Responsibility for Passenger Railroads
Bb. The Port Authority Seeks Immunity From the
“Disease” of Commuter Railroads
1. The Metropolitan Rapid Transit Commis-
sion Study
2. The new bond provision—Section 7 certifica-
STINE deiisinteaticieniiithanatihiibinaciptniniamiiedmainiieimmesidisiinies
3. The New York commuter car episode ..........
4. Opposing New Jersey legislation in 1958 ....
C. Legislative History of the 1962 Covenant ..........
D. The 1962 Covenant
E. The Unimportance of the 1962 Covenant to
Bondholder Security .. om
1. Bondholders are fully protecte
a. The objective protections .......................-..
b. Appellant’s analysis of the objective pro-
ARE MELAS SE Ac ee a ae OO OO
ce. The subjective fears
2. The Authority’s consistently high credit
rating demonstrates the unimportance of
the covenant and repeal
3. The unimportance of the covenant and
repeal in the secondary market
PAGE
il
F. Legislative History of the Repeal of the 1962
Covenant ....
1. The energy crisis ...... cocnnsiociiauamnsaaaal
2. Health and environmental factors ................
3. The Port District’s public transportation
requirements
Summary of Argument
PEGE cccircciniititenn
I. The 1962 Covenant Is Subject to the Reasonable
Exercise of the States’ Never Abdicated Police
POWCE cecccnccessenssnmsemmemne
A. The History of Contract Clause Jurispru-
dence Shows That All Contracts, Especially
State’ Contracts, Are Subject to the State’s
Police Power
B. Bondholders Could Not Reasonably Have
Assumed That the 1962 Covenant Was
Immune From Action Pursuant to the Police
Power .....
C. Though Municipal Bonds Are Subject to the
Police Power, They are Readily Marketable
D. ithe 1974 Repeal Legislation Constituted an
Exercise of the States’ Police Power ..............
E. Repeal Constituted a Reasonable Exercise
of the States’ Police Power
1. The Blaisdell case ......
2. The Het POSS CRBD cece
3. Appellant’s claim that the price pur-
chasers were willing to pay for bonds was
affected by the covenant is unsupported
by the record and immaterial as a matter
of law
PAGE
45
46
50
53
62
77
81
4. Repeal deprived bondholders of an inter-
est of little or no value to further ends of
large importance 92
a. The bondholders’ interest - 92
b. The public ends 95
e. The insufficiency of other means ........ 96
II. Repeal of the 1962 Covenant Did Not Constitute
a l'aking of Property in Violation of the Fifth
and Fourteenth Amendments to the United
States Constitution . 101
11I. The 1962 Covenant Was Voidable Under the
Interstate Compact Clause ....... . 102
A. Federal Law Governs the Interpretation of
a Congressionally Approved Interstate Com-
I itil ceiansciceenesenaitanpsailtensnnsidincencesnassenseses 104
B. The 1962 Covenant Is Not Authorized by
The Port Authority Compact or Comprehen-
sive Plan Legislation ..........................-...-.sse0-«-+- 106
IV. The Covenant Became Inconsistent With Super-
AT 112
ce ccrnenradncacintiapengnationssenneagnennatace 119
Cases Cited:
Albigese v. City of Jersey City, 127 N.J. Super. 101
(Law Div.), aff’d, 129 N.J. Super. 567 (App. Div.
EE a eT 88, 93
American Toll Bridge Co. v. Railroad Comm’n, 307
a ian insaeeeneaeinmeeeeneremmtinnensemanceameasee 103
Barron v. Baltimore, 32 U.S. (7 Pet.) 243 (1833) ....... 66
Beaumont v. Faubus, 239 Ark. 801, 394 S.W.2d 478
ETE EEE eee TEE 93
Blanchette v. Connecticut Gen. Ins. Co., 419 U.S. 102
(1974) ... _ ieieiiieseniaeiiibites 55
iv
Bronson v. Kinzie, 42 U.S. (1 How.) 311 (1848) —...... 83
Bucsi v. Longworth Bldg. & Loan Ass’n, 119 N.J.L.
120 (KE. & A. 1937), appeal dismissed, 305 U.S. 665
SUUUUETEED sccalecsinstiilinnudshabinndaiacaiasstiiedeinieiianadaaiiecamamasientiielduaalanbaamaaaite 82
Burbank y. Lockheed Air Terminal, 411 U.S. 624
ETUDE | ‘ccinsuscntsinnnatesnisaninidindinaiiaiaiailmeadeimateeiaieimabimiaieaaiiaaddls 115
Buichers Union Co. vy. Crescent City Co., 111 U.S. 746
UDEIETEED xin cesiesntchbiadeeleiehh lenient al leak iaeail 69, 73, 82, 92
Calder v. Bull, 3 U.S. (3 Dall.) 386 (1798) ~.....0............ 66
California Teachers Ass’n v. Newport Mesa Unified
School District, 333 F. Supp. 486 (C. D. Cal. 1971) ..88, 93
Campbell v. Hussey, 368 U.S. 297 (1961) -...............-.-- 115
Chicago, B. & Q. R.R.v. Chicago, 166 U.S. 226 (1897). 101
Cloverleaf Butter Co. v. Patterson, 315 U.S. 148
EUDITIUE _ ‘comsssieassiiesiamatiesaeniinnetionapennnasetitinbiiatiddibclaesdatabhieladiiiede: 115
Courtesy Sandwich Shop, Inc. v. Port of New York
Authority, 12 N.Y.2d 379, 240 N.Y.S.2d 1, appeal
dismissed, 375 U.S. 78 (1973) -..............c.-ccec-es-ecenceeees 111, 112
DeCanas y. Bica, 424 U.S. , 86 S.Ct. 933 (1976) -..... 116
Delaware River Port Auth. vy. Tiemann, 531 F.2d 699
Ge Spel SEP. eainvenetinnicenenetceidiiisnnanadsiltdeaticasialahinnsiaiiaesis 53
DeV eau v. Braisted, 363 U.S. 144 (1960) 0. 118
East New York Savings Bank v. Hahn, 326 U.S. 230
ERIEETED - coceneseubevsnsninieniundteisiuciiaaditineiisiietanalinbasdelaaniiaaialatalaatnats 84
El Paso vy. Simmons, 379 U.S. 497 (1965) ....73, 79, 82, 84, 85-
88, 89, 91, 92, 93, 95, 102
Faitoute Iron & Steel Co. v. City of Asbury Park, 316
Rai TE IED eunsedenidesitulsicicecinneeisinicicahuacditions 72, 75, 74, 85, 92, 93
First Nat'l Bank v. Maine Turnpike Auth., 156 Me.
hs, See Gs ee ET ITED ceicivdiientinatenntenchancietnessenbnadeses 94
Fletcher v. Peck, 10 U.S. (6 Cranch) 87 (1810) -.......... 65
Florida Lime & Avocado Growers, Inc. v. Paul, 373
SEPIA. MIU CIPI sosscsssecenpetdeneitdineshasiesitbicnnmmnniaiibidbeaasiastiiigiied 115, 116
Flushing Nat’l Bank vy. Municipal Assistance Corp.,
A.D.2d =, 882 N. Y.S.2d 764 (1st Dep’t 1976) ........ 73
v
PAGE
Free v. Bland, 369 U.S. 663 (1962) ...................-s-cces-eeeees 114
Friends of the Earth v. Carey, 535 F.2d 165 (2d Cir.
TD antcveniann 51
Gelfert v. National City Bank, 313 U.S. 221 (1941) ......82, 83
Goldblatt v. Town of Hempstead, 369 U.S. 590
(1962) .......... easianauienntiniitaieinesneneteta 101
Ham v. Maine New Hampshire Interstate Bridge Auth.,
8 104
Henderson vy. Delaware River Joint Bridge Comm’n,
362 Pa. 475, 66 A.2d 843, cert. denied, 338 U.S. 850
SUITE icisinicexiiacnnesitenniiadancibaiasintniietenneeintiniteiaieaundumniiiiinieiate 104
Hicks v. Miranda, 422 U.S. 332 (1975) ............----.---0---+- 111
Hill v. Florida, 325 U.S. 538 (1945) -.0222..2.----eeeeeeeees 117, 118
Hines v. Davidowitz, 312 U.S. 52 (1941) -................ 115, 116
Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398
i aie ..65, 70, 71, 79, 81, 83,
84, 86, 93, 95, 102
— v. North Bergen Township, 113 N.J.L. 143
CER, GD Bis TER cerctceenscitincceensernscenesnteisiectnninaninhiinapniitiiniihanes 74, 75
Huddleston v. Nebraska Jewish Educ. — 186
N.W. 2d 904 (Neb. 1971) ..... 93
Illinois Central R.R. v. Illinois, 146 U.S. 387 (1892)... 103
Indiana ex rel. Anderson vy. Brand, 303 U.S. 95 (1938) 74
Jacksonville Port Auth. v. State, 661 So.2d 825 (Fla.
1964) 93
Katzenbach v. Morgan, 384 U.S. 641 (1966) ....000002.... 119
Kesler v. Department of Public Safety, 369 U.S. 153
(1962) 116, 117
Kheel v. Port of N.Y. Auth., 331 F. Supp. 118 (S.D.
N.Y. 1971), aff’d on other grounds, 457 F.2d 46 (2d
Cir.), cert. denied, 409 U.S. 983 (1972) 77
League to Save Lake Tahoe v. Tahoe Regional Plan-
ning Agency, 507 F.2d 517 (9th Cir. 1974) cert.
denied, 420 U.S. 974 (1975) 104
PAGE
Levine v. Long Island R.R., 38 A.D.2d 936, 331, N.Y.S.
2d 451 (2d Dep’t), aff’d, 30 N.Y.2d 906, 335 N.Y.S.
2d 565, cert. denied, 409 U.S. 1040 (1972) -.222.. 73
Long Sault Development Co. v. Call, 242 U.S. 272
EIT — capintonesteiedanmennntinesnesnampiniensiemasiaapennsiiine 103
Louisiana v. Pilsbury, 105 U.S. 278 (1881) .................... 72
Lynch v. United States, 292 U.S. 571 (1934) -............. 8+
Massachusetts Port Authority v. Txeasurer & Receiver
General, 352 Mass. 755, 227 N.E.2d 902 (1967) .......... 78
Michigan Transp. Co. v. Secretary of State, 41 Mich.
App. 654, 201 N.W.2d 83 (1972), leave to appeal
denied, 389 Mich. 767 (1973) -...........-.-.....-c.-csecseceereoreee 8S
Miller v. Schoene, 276 U.S. 277 (1928) 20.22... eeeneeenee 101
Mugler v. Kansas, 123 U.S. 623 (1887) .......................... 101
Municipal Investors Ass'n vy. City of Birmingham, 316
SEA SD CHIIIED .ceectniiesrnensnticisinneniinenrenimaciesitienmainsspamannnanie 103
New Bedford vy. New Bedford, Woods Hole, Martha's
Vinyard & Nantucket SS. Auth., 336 Mass. 651, 148
N.E.2d 687, appeal dismissed for want of substan-
tial federal question, 358 U.S. 53 (1958) -............ —
New Hampshire v. Maine, US. (1976) ........ 104
New Jersey Highway Auth. vy. Sills, 111 N.J. Super.
313 (Ch. Div. 1970), aff'd, 59 N.J. 432 (1971) ....79, 84, 85
New Jersey Sports & Exposition Auth. v. McCrane, 61
N.J. 1, appeal dismissed, 409 U.S. 943 (1972) -........ 73, 80
Newton v. Board of County Commissioners, 100 U.S.
Pe CD cccsnbicninisecnsnnstenencidpuncamienamemniananmintininminaiiniins 68
N.Y. Dep't of Social Services v. Dublino, 413 U.S. 405
STN cictinntesinesniontanlinniaianii ‘ 114
Opinion of the Justices, 334 Mass. 721, 136 N.E.2d 223
PITTED cncsevisiossvismbisdnahiedaitininiadithepeansiidieannasteintiigiaetnates 73, 75, 78
Opinion of the Justices, 313 N.E.2d 882 (Mass.
a dienpiopmiemiinentt Resnininne 78, 79, 93
Patterson vy. Carey, App. Div. 2d , 383 N.Y.S.2d
FF, Sk ___, RENEE TOUTE NO aa 79
~~
vii
PAGE
Pennsylvania v. Nelson, 350 U.S. 497 (1956) .......... 114, 115
Pennsylvania v. Wheeling & Belmont Bridge Co., 54
U.S. (13 How.) 518 (1851) ~... iaasiaunniaiieeies 104
Pennsylvania Hospital v. Philadelphia, 245 U.S. 20
(1917) ....... 68, 73
Perez v. Campbell, 402 U. | fo) =e 116, 117
Perry v. United States, 294 U.S. 330 (1934) 73, 74
Petty v. Tennessee-Missouri Bridge Comm’n, 359 U.S.
275 (1959) 104, 105, 106, 109
Proprietors of the Charles River Bridge v. Pro-
prietors of the Warren ae 36 U.S. (11 Pet.)
| nT EE 66, 74
Reitz v. Mealey, 314 U.S. 33 (1941) .. 117
Rhode Island vy. Massachusetts, 37 U. Ss. (12 Pet.) 464
ne 105
lice v. Sante Fe Elevator Corp., 331 U.S. 218 (1947) 115
Rogers Park Water Co. v. Fergus, 180 U.S. 624 (1991) 74
Ruano vy. Spellman, 81 Wash.2d 820, 505 P.2d 447
(1973) ..... 94
Stone v. Mississippi, 101 U.S. 84 (1880) 68, 69
Train vy. Natural Resources Defense Council, 421 US.
60 (1975) ..... 114
Treigle vy. Acme Homestead Ass’n, 297 U.S. 189 (1936) 84
Trustees of Dartmouth College v. Woodward, 17 U.S.
(4 Wheat.) 518 (1819) 65, 66
United States v. American went Express Co., 265
U.S. 425 (1924) eccccccsseeesees 1038
United States v. Little Lake Misere Land Co., 412 U.S.
BD CIID ceciccinteicersncishisemnnttnticndiniintenencemnintioninnannintetnemnne 63
Veia vy. Sixth Ward Bldg. & Loan Ass'n of Newark,
310 U.S. 32 (1940) ..... - 83, 84, 93, 102
Village of Euclid v. Ambler Realty Co., 272 U.S. 365
RI ddiiiceanniepieiliteitemtialiais Maar Saeed ae raat 101
Virginia v. Tennessee, 148 U. S. 503 (1893) iinpenanseaiiniiahin 104
PAGE
Von Hoffman v. City of Quincy, 71 U.S. (4 Wall.) 535
COUP ccvesccnicinsinisnssinscistnenviiiteniiiaiesnensiniestnbniitisshlimanaissetutcuasinasitapas 72
W. B. Worthen Co. v. Kavanaugh, 295 U.S. 56 (1935) = 85
Wedding v. Meyler, 192 U.S. 573 (1904) -.0.002202... 104
West River Bridge Co. v. Dix, 47 U.S. (6 How.) 507
ae satannsinnaininniinitianitbiasdiaeingaerindeiedddall 67. 68
Wolff v. City of New Orleans, 103 U.S. 358 (1880) ..... 72
Constitution Cited:
US. Comat. 086. 5 9D ncccccccsccsonsncnsessnsesessveessnenseconsuonsonse 105
8 ES Ree 102, 103
Federal Statutes Cited:
Bridge Act of 1906, 34 Stat. 84 22.0... ‘3
Federal Aid Highway Act of 1973 -......0022.222-2202...-. 113
ey I Or I eiiitiecidnitassicntnhitiihictinhineeanideantannasinidl 112, 116
National Mass Transportation Assistance Act of
SOUT. svseiaseinisidden ddaiapiteaiamed aaailipiciealaddiabenbeiiapeabiantiidiaiiiabeiamsaenii 48, 113
Ordinance for the Northwest Territory, 44 Stat. 1851
PORE STII sscciersicciiinsidnieiehiaieinithiabiieiesacacilasi statin ates 65
Port Authority Compact, Pub. Res. 17, 67th Cong.,
Ist Sess., 42 Stat. 174 (1921) 2,3, 95, 103, 104, 105, 106,
107, 108, 109, 110, 111, 112
Port Authority of New York Comprehensive Plan .... 3, 109
Regional Rail Organization Act of 1973 (Jan. 2,
1974) 48,113
Urban Mass Transportation Assistance Act of 1970 113, 116
15 U.S.C. §§ 751 et seq. (Emergency Petroleum Allo-
ITE Te eT seentenetedinninbahaieiintititaiintniens 46, 116
15 U.S.C. §§ 791 et seq. (Energy Supply and Envi-
ronmental Coordination Act of 1974) 00000... 48
PAGE
42 U.S.C. §§ 1857 et seq. (Clean Air Act Amendments
>, 50, 95, 116
49 U.S.C. §§ 1601 et seq. (1964) (Urban Mass Trans-
portation Act) iis 112, 113, 116, 117, 118
State Statutes Cited:
Ch. 25, Laws of New Jersey (1974) -.......2....2...-.220-0--0--- 1,2
Ch. 151, Laws of New Jersey (1921) ................---......--. 2
Ch. 208, Laws of New Jersey (1972) .............-.------------ 59
Ch. 245, Laws of New Jersey (1971) .............--.-----------. 57
Ch. 277, Laws of New Jersey (1927) -......202.2..2..22..----.-- 5
Ch. 154, Laws of New York (1921) , ~ 8
Ch. 318, Laws of New York (1973) -.....2..2.2222222.2..-----00+- 59
Ch. 993, Laws of New York (1974) ~...00..0220.20.0.2.2---0--- 2
New Jersey Emergency Energy Fair Practices Act of
2 caida taiaisabtadiadlidcia Ail iiea ical Sol eh coats 47
iB TeM, TRE GB BOG. cccrcccensnseccesenscssesscesansneensersncenscsnssounees 2
eas TINIE scnectuharcvenicecisiisenioteuienitnenienncnbindesasnaindsea inanainsans 3
I a eaiiennienaniaiiel 57
eee 57
is TaN ‘snicisisciespninniseisiesbissibindeupiaiepunnaiiatanbinneeans 17
N.J.S.A. 32:1-35.51 et seq. me siniicaiaibailpmaaasi 59
Ns: SEED -escechcsccesssncimculiiiinesiseteanidgsimaniaamcdaatpen 18, 29
I ea cian eoeniianalies 99
Ss: CTIIIIIIT -sccrisntncsesnnsinentesnicnnsthncninrtinesiaiiiaieminialimainaniin 6
N.Y. Unconsol. Laws §§ 6401 et seq. -.............-------+-+-+---+- 3
Regulations Cited:
49 C.F.R. § 148(i) (1) . 53
38 Fed. Reg. 9645, 9657 (1973) ...............--c-ecccceec-eeeeseeees 46
I I I I as ecnnssiniieeeaieriacadteelanitinle 46
Se is, I: UIE UTED tcsenscctteeicnetentacistninnmmntommesinoniatee 51, 52
x
PAGE
Other Authorities Cited:
E. W. Bard, The Port of New York Authority
CHIE . vicheecissineensnestsitinenstaaehiiineiiniaaimadiaiiaudnaienin 3, 5, 6, 7, 107
OR Sth Gr OD erritititcerniencnccistrniesticctrcnnceiit 107 |
Farley Committee Report of 1963 (N.J. Senate) ......8, 26, 75
II M. Farrand, Records of the Federal Constitution
ETENETD weikditsittsiopeiiositchisadiailiniesatilialapaiiasiatemddiiiniebasitbats oncatidaaaaieal 65
Hale, The Supreme Court and the Contract Clause,
2 Oe ee 102
New Jersey Assembly Bill No. 16 (1958) (not
RE I TOC STK oe Soa CONNER Te 9, 13, 14, 16
New Jersey 1959 Joint Assembly Committee Report
Oh HE Bs TU deechinclttnteiciisadarseitsiiatetone 16, 41
New Jersey Joint Legislative Committee Report of
ERE a eal 7 ERASE EO ey LOD 46
6 Seton Hall L. Rev. 48 (1974) 2.2.2... ccccccccccscseceeeeee 78
Wright, The Contract Clause and the Constitution
SED ernevutesunlsiniaindilacksiiasnaniiuabitelidiamabdaacn dead 65
IN THE
Supreme Court of the United States
Octrosper TERM, 1975
No. 75-1687
A a
Unrrep States Trust Company or New York, as Trustee
for The Port Authority of New York and New Jersey
Consolidated Bonds, Fortieth and Forty-First Series, on
its own behalf and on behalf of all holders of Consolidated
Bonds of The Port Authority of New York and New Jersey
and all others similarly situated,
Appellant,
v.
Tue State or New Jersey, Brennan T. Byrne, Governor
of the State of New Jersey, and Wriiiiam F. Hy.anp,
Attorney General of the State of New Jersey,
Appellees.
ON APPEAL FROM THE SUPREME COURT OF NEW JERSEY
BRIEF FOR APPELLEES
COUNTER-STATEMENT OF THE CASE
Introductory Statement
This is an appeal from a judgment of the Supreme Court
of New Jersey, unanimously affirming a judgment of the
Superior Court oi New Jersey (Hon. George B. Gelman,
J.S.C.), upholding the constitutionality of Chapter 25 of
2
the Laws of New Jersey, 1974.! The challenged 1974 sta-
tute, together with concurrent and identical New York
legislation, Chapter 993 of the Laws of New York, 1974,
repealed 1962 bi-State legislation purporting to limit by
covenant the application of the revenues and reserves of
the Port Authority of New York and New Jersey for pas-
senger railroad purposes.
The trial court found that, “the claim that bondholder
security has been materiaily impaired or destroyed by the
repeal is simply not supported by the record.” A 127.
The trial court further held that repeal constituted a rea-
sonable exercise of the State’s police power. Judgment was
entered accordingly, dismissing appe!lant’s complaint and
declaring Chapter 25 valid and constitutional. On direct
appeal, the Supreme Court of New Jersey unanimously
affirmed, “substantially for the reasons set forth in the
opinion of Judge Gelman.” A 135.
Appellees respectfully submit that the judgments below
were correct and shoul? be affirmed.
A. The Early Years: A Port Authority That Was
Not Self-Sustaining, the Arrangements That
Enabled It to Carry Deficits and the Failure
of Legislative Efforts to Have the Authority
Assume Responsibility for Passenger Railroads
The Port Authority Compact was enacted by New Jersey
and New York and consented to by Congress in 1921. Ch.
151, Laws of N.J., 1921, N.J.S. A. 32:1-1 et seqg.; Ch. 154,
1. The statute appears at pages 5-6 of Appendix B to the Juris-
dictional Statement.
2. “A” refers tothe Appendix. “A.B.” refers to the brief for appel-
lant. “Stip.” refers to the Stipulation among counsel dated December
20, 1974, the entire text of which is contained in Volume IV of the
Joint Appendix (cited as “Ja”) submitted to the Supreme Court of
New Jersey.
3
Laws of N.Y, 1921, McKinney’s Unconsol. Laws $6401 et
seq.; Pub. Res. 17, 67th Cong., 1st Sess., 42 Stat. 174 (1921).
Declaring that “a better coordination of the terminal, trans-
portation and other facilities in, about and through the
port of New York, will result in great economies, benefit-
ing the Nation, as well as the States of New York and New
Jersey,” the Compact created the Port of New York
Authority to pursue those elusive goals.’
The Compact granted the Port Authority enumerated
powers “and such other and additional powers as shall be
conferred upon it by the legislature of either State con-
curred in by the legislature of the other, or by Act or Acts
of Congress.” Compact Art. III; see also Art. VII. Among
the powers enumerated is “full power and authority to pur-
chase, construct, lease and/or operate any terminal or
transportation facility within the [Port] district.” Com-
pact Art. VI. “Transportation facility” is in turn defined
to include “railroads ... for use for the transportation or
carriage of persons or property.” Compact Art. XXII.
In 1922, the States, again with the consent of Congress,
adopted a Comprehensive Plan mainly concerned with rail-
road freight operations and facilities. A 69. But the Com-
prehensive Plan was never implemented, in part because
of the Port Authority’s refusal in 1922 to help solve the
problems of railroad passenger traffic. See E. W. Barn,
Tur Port or New York Avutnority 65-66, 128-130 (1942)
(hereinafter cited as Barp).
New Jersey quickly recognized that the Comprehensive
Plan was not sufficiently comprehensive: it enacted a law
in 1922 finding that the Comprehensive Plan “does not
include the problem of passenger traffic in the territory
covered by [the] port development plan” even though the
3. The name of the Authority was changed to the Port Authority
of New York and New Jersey on July 1, 1972. N.J.S.A. 32:1-4.
4
“problem of passenger traffic should be considered in co-op-
eration with the port development commission.” A 569.4
The Port Authority also recognized that freight and
passenger service were not two problems but inseparable
parts of a single problem. Its 1924 Annual Report
observed :
“There is barely room during the rush hours for
the trains carrying freight because of the commuter
service, while passengers and freight must both nec-
essarily move during these hours.” A 156.
The point was repeated in the Port Authority’s 1928
Annual Report:
“The Commissioners of the Port Authority have
found in their studies that no adequate or effective
interstate transportation development can take place
without taking full account of transportation of
passengers as well as of freight throughout the Port
Distriet.” A 151, 575.
The Legislatures of both States agreed. In 1927, the
New Jersey Legislature, stating that it was acting “under
and pursuant to the provisions of the [Port Authority]
compact,” directed the Port Authority “to make such plans
for the development of said district supplementary to or
amendatory of the comprehensive plan heretofore adopted
by the Legislatures of the two States .. . as will provide
adequate interstate and suburban transportation facilities
for passengers. ...” A 57.5 This legislation, which became
4. The legislation established a study commission that worked
with the Port Authority in establishing a new agency, of which the
Authority was a member, to coordinate solutions to the problems of
commuter transportation. A 576.
5. In light of this early history, appellant obviously errs at the
very outset of its discussion of “Port Authority Involvement in
Mass Transit,” A.B. 8, when it says: “As early as 1922, the legis-
latures recognized that the Port Authority was not the appropriate
agency to develop a solution to the problems of railroad
traffic.” Id. . i ad
tetoen,
—_
atid, wees
5
Chapter 277 of the Laws of New Jersey, 1927, was signed
by Governor Moore and approved the following year by the
New York Legislature, but was vetoed by Governor Alfred
E. Smith. A 572-574. As the trial court found, Governor
Smith’s veto ended the Port Authority’s active involvement
in any solution of commuter transit problems for the next
30 years. A 80.
The Port Authority took a new tack and began its con-
struction program by building four bridges for motor
vehicles. A 71. These bridges, which still account for much
of the Port Authority’s financial strength, see A 737, were
made possible by advances from the States to pay 25 per-
cent of the costs of construction. The advances took the
form of loans subordinated to the bonds the Authority sold
to the public. A 71. A separate series of bonds was issued
for each bridge and the bondholders’ security was limited
to the revenue from that bridge. A 71. In their early years,
however, the bridges did not meet revenue expectations and
the Authority was not only not self-supporting, but faced
default on its bonds. A 70 n. 8, 72, 820.
The Legislatures’ response to the Port Authority’s pre-
dicament was two-fold. First, they transferred the control,
operation and revenues of the highly successful Holland
Tunnel to the Authority: its annual surpluses after debt
service were large enough to cover the bridge deficits.
BARD at 238; A 70 n. 8. Second, the States enacted stat-
utes creating the General Reserve Fund, in which surplus
revenues from all Authority facilities are pooled to create a
bondholders reserve fund in an amount equal to 10 percent
6. Appellant says, A.B. 8, that Governor Smith vetoed the bi-State
legislation “on the ground that the Port Authority was never intended
to become involved in rail mass transit.” The veto message, A 572-
574, contains no such statement and bases the veto on Governor
Smith’s unwillingness to divert the Authority from the solution of
the freight distribution problem. The Port Authority Commissioners
responded that the feared diversion of efforts would not take place,
A 151 n. 9, demonstrating that they too understood this to be the
basis of the veto.
6
of the par value of the Authority’s outstanding bonds. <A 72.
The General Reserve Fund, which contained $173,487,000
when the 1962 covenant was repealed, A 817, is irrevocably
pledged as security for the Port Authority’s bonds. <A 72,
791-795.’ ae
The General Solicitor cf the Port Authority, Daniel B.
Goldberg, characterized the General Reserve Fund as “the
absolute foundation of the Port Authority’s whole financial
structure.” A 821. In addition to offering an attractive
inducement and security to investors, the General Reserve
Fund, by eliminating the prior separation between facilities, —
permitted the Authority “to meet the requirements of any
financially weak facility which had not yet reached its
stride or which for any other reason could not at a particu-
lar point of time carry its own load.”
Appellant claims, A.B. 5-6, that “The superior court out-
lined the basic financing principles which have guided the
Port Authority for over fifty years” and included among
these principles the requirement that “the specific projects
undertaken by the Authority should be self-supporting, i.e.,
the revenues of each should be sufficient to cover its operat-
ing expenses and debt service requirements. .. .”
7. The creation of the General Reserve Fund made the Port
Authority’s fiscal strength possible. It also made it possible for the
Authority to insulate surplus revenues from public control.
The General Reserve Fund statutes, enacted in 1931, provided
that any surplus revenues not needed to maintain the Fund in its pre-
scribed statutory amount, 10 percent of the par value of the Autho-
rity’s outstanding bonds, “shall be used for such purposes as ma
hereafter be directed by” the States. N.J.S.A. 32:1-142. In 1935,
however, the Authority adopted a bond resolution providing that only
50 percent of its surplus revenues could be used for “any purpose
permitted by law.” Barp at 256; A 827.
The General Reserve Fund reached the prescribed level in 1946.
A 826. In 1947, the Authority announced that as a matter of policy
it would attempt to retain in all of its reserve funds an amount equal
to at least the next two years’ debt service on its bonds. A 829-831.
Finally, in 1952 the Authority adopted its Consolidated Bond
Resolution and Series Resolutions. These resolutions prohibited the
Authority from using any of its reserve funds unless such use was
“to or for the benefit of” bondholders.
— -
7
Appellant is wrong. In 1924, the Port Authority’s
Annual Report said that “it should not be expected to be
self-supporting.” A 159. By 1931, it faced default on its
bonds because its individual facilities were not self-
supporting. After the 1931 pooling legislation, there
was no requirement that individual facilities be self-
supporting so long as the Authority as a whole was in the
black. Though the szif-supporting facility concept may
have “initially emerged,” as the trial court actually said,
A.B. 6, A 71, the concept had no practical significance
because it was not attained prior to 1931 and was unneces-
sary after 1931. As Dr. Bard wrote in 1942:
“The 1931 legislation changed the formula from
simply self-sustaining to self-sustaining as a group.
The device of grouping facilities and pooling reven-
ues shifted the basis of credit from a judgment as
to the capacity of a new project to be self-sustaining
to a judgment as to the future of existing revenues
affected as they might be by the new project.” Barp
at 325.
See also id. at 265 (the General Reserve Fund “had the
effect of eliminating the individual facility as a basis for
credit, and shifted that basis to the group as a whole”).
Appellant’s claim that the Port Authority has always
been guided by the principle that each facility must be self-
supporting is also refuted by the Consolidated Bond
Resolution. The trial court found that with the adoption
of that resolution in 1952, the self-supporting facility con-
cept “ceased to have the significance previously attached
to it.” A 74. He further found: “While some facilities may
not yield sufficient revenues to pay operating expenses
and/or debt service requirements, what is of paramount
concern to bondholders under the CBR is whether the total
revenues of the Authority are sufficient to satisfy all of its
obligations to bondholders.” Jd. Indeed, the independent
8
auditors retained by the Farley Committee in 1960 speci-
fically reported that “few of [the Authority’s] facilities
would have financially feasible without the ability to pool
revenues of all facilities.” A650.
B. The Port Authority Seeks Immunity From the
“Disease’”’ of Commuter Railroads*®
1. The Metropolitan Rapid Transit Com-
mission study
The years following the creation of the General Reserve
Fund were filled with studies and reports decrying the
deteriorating condition of rail mass transit. See A 80-81;
Stip., pp. 83-97. In 1954, the States established the
Metropolitan Rapid Transit Commission to study the
problem. Stip., p. 99. In 1955, the MRTC issued an
interim report observing that, since 1930, billions of public
dollars had been spent on the development of tax-exempt or
subsidized vehicular highways and bridges, but no public
funds had been spent on rail mass transit between New
York and New Jersey. The report concluded that the
proposal of the Port Authority and the Triborough Bridge
and Tunnel Authority to spend $577,000,000 on new and
expanded vehicular bridges “raises the fundamental ques-
tion of public policy whether any further crossings of the
Hudson River should be constructed until it is determined
whether future crossings should be designed to encourage
rail or vehicular traffic.” Stip., pp. 100-101.
By this time, the Port Authority had come to a marked
preference for rubber over rail, see, e.g., Stip., Exhibit VII
at Volume VI of the Joint Appendix below, pp. 121A-138A.
Accordingly, when the MRTC ran out of funds to continue
its work, the Authority agreed to finance a comprehensive
study of the interstate rail problems on the basis of a
8. The characterization is that of Daniel B. Goldberg, General
Solicitor of the Port Authority. A 839.
9
“Memorandum of Understanding” between the Authority
and the MRTC stating that the Authority was able to
undertake facilities “only if competent estimates indicate
that in the long run ihey will be self-liquidating in and of
themselves” and that the maintenance and improvement of.
metropolitan rail transit systems “could not be economi-
eally self-supporting.” Stip., p. 102. See also A 161-162.
In other words, using the false premise that the Authority
could only undertake projects that were in and of them-
selves self-supporting, the Authority agreed to finance the
MRTC study of the problem on condition that it would not
be part of the solution. In 1958, the MRTC issued its
report commenting at length upon the “constant and relent-
less deterioration of suburban rail service,” which it
characterized as a “looming crisis.” A 82. True to the
Memorandum of Understanding, the MRTC said that im-
proved rail mass transit “financing would not be available
from any of the existing public authorities.” Jd.
Nevertheless, during the 1958 session of the New Jersey
Legislature, a bill was introduced (Assembly Bill No. 16)
that would have required the Port Authority to take over,
improve and operate interstate rail mass transit between
New Jersey and New York. A 82-83. The Authority
responded with a new bond provision to make sure that
it would not be “open to this kind of a financial raid,” A 838,
and it marshalled a powerful political offensive. Each is
discussed in detail below.
2. The new bond provision—Section 7
tificati
When the New Jersey Assembly began considering
Assembly Bill No. 16, the Port Authority began including
a new safeguard in its contracts with bondholders. Since
1958, Section 7 of the resolution that authorizes each series
of bonds (hereinafter “the Series Resolutions”) has pro-
hibited the issuance of any bonds secured by the General
10
Reserve Fund for any facility not previously financed by
bonds secured by the General Reserve Fund (such as a rail
mass transit facility), unless the Port Authority first certi-
fies that the issuance of those bonds would not materially
impair the sound credit standing of the Authority, the
investment status of Consolidated Bonds or the ability of
the Authority to fulfill its commitments, including its under-
takings to the holders of Consolidated Bonds. <A 78, 811-
812. In 1961, Mr. Goldberg explained that the Section 7
certification was adopted to make it absolutely clear that
“deficit-ridden railroads” could not be brought into the Gen-
eral Reserve Fund family. <A 839-80.°
3. The New York commuter car episode
Since the Port Authority’s resistance to efforts to involve
it in commuter car financing appears to have served as a
model for the Hudson and Manhattan struggle, and since
appellant claims at A.B. 14, 73 that, in preference to repeal,
the States should adopt this method of financing rail mass
transit improvements, it deserves far closer examination
than is provided in the anticipatory footnote 8 at A.B. 10.
In February 1959, Robert W. Purcell, a transportation
adviser to Governor Rockefeller, raised the possibility of
the Port Authority’s issuing bonds to finance passenger
equipment purchases for the Long Island and New York
Central Roalroads. The idea called for the Authority to be
reimbursed in full, including interest costs, via rental pay-
ments to be made by the railroads. A 313-314. As origi-
nally proposed hy Mr. Purcell, the States would not have
guaranteed payment of the bonds.
R. M. Schmidt, a vice president of Blyth & Co. and head
of its municipal finance department, A 307, advised Mr.
Purcell that his idea seemed “ingenious and something
worthwhile exploring.” A 313.
9. Each Series Resolution declares that it “shall constitut .
tract with” bondholders. Stip., Ex. II, Section 2, at 72, in Valens V
of the Joint Appendix below.
11
Two days later, Port Authority Executive Director
Austin Tobin began to organize “bondholder concern” in
opposition to the plan. Mr. Schmidt described the Port
Authority pressures in detail:
“the Authority on Friday, February 27th, called our
office and asked us to meet with them at the First Na-
tional City Bank on Monday, March Ist. George
LeVind and Fred Miller attended that meeting. Also,
the managers of the syndicates that usually bid for
their bonds at public sale, namely Harriman Ripley
& Co. (our joint account partners) and Halsey,
Stuart, Glore Forgan and Drexel who are joint man-
agers of the competing syndicate. They presented a
strong story disapproving the plan and the adverse
effect on their credit and market for their bonds, also
submitted a suggested letter for the managers to sign.
LeVind, Miller and Hawes discussed their request
and also talked with me at home. We all agreed not
to sign the letter or send any letter.
“Following this, Gene Mintkeski (Port of N. Y.
Auth.) called me at home and talked with me for
about 15 minutes. He apparently was very much dis-
turbed over the fact that we would not sign such a
letter and that I had told Mr. Purcell I thought his
idea was ingenious, worth studying and exploring. I
stated that at no time did I give approval or dis-
approval to Mr. Purcell’s idea. We felt very strongly
that we should have in greater detail Mr. Purcell’s
plan and at least give him. an equal chance to pre-
sent an answer to the position that the Port of New
York Authority is taking.
“On Tuesday, March 3rd, at 1 P.M. Joe Ripley of
Harriman Ripley telephoned and asked me to go
over there for lunch to discuss this Port o. New
York Authority problem. He had with him Elwood
Smith, Stu Silloway and Berry. He stated the lunch-
eon was prompted by Mr. Cullman coming to see him
and considerably upset because he had heard that I
had given approval to Mr. Purcell’s plan and wanted
to know whether or not I had.
12
“The foregoing memorandum answers that. I told
him specifically I had not given my approval but in
response to a call to us I gave Mr. Purcell the courte-
ous consideration that he was entitled to and re-
viewed the whole story as written above. They had
no criticism of my action. In fact, Joe Ripley thought
he would have acted in the same manner I had if he
had had a call from a representative of Governor
Rockefeller.
“T reported all this to Messrs. Hawes and Miller
and also in compliance with a request from Mr.
Cullman (which was arranged by Mr. Ripley) I then
called Austin Tobin. The conversation was very un-
pleasant. He, in fact, requested—if not demanded—
that we write a letter disapproving the Purcell plan
which I told him we would not do and I took excep-
tion that they quoted me out of context in their letter
of March 2, which he denied. The conversation was
very acrimonious and I would say that Mr. Tobin
was rude, officious and impertinent and I ended by
telling him so.
R. M. Schmidt”
A 313-315.
Mr. Cullman was Honorary Chairman and a Commis-
sioner of the Port Authority at the time and he seconded
Mr. Tobin’s efforts with vigor. See, for example, A 316, a
March 5, 1959 message from Mr. Cullman to Mr. Ripley:
“Governor Rockefeller was informed that issuing
equipment trust to the railroads would not hurt Port
Authority credit, and that all the investment bankers
were unanimous that that was so. And, therefore,
Mr. Cullman feels that it is very important that Mr.
Ripley send him the letter he requested.”
Mr. Ripley sent the requested letter and Mr. Tobin re-
ported to Mr. Ripley by letter dated March 17, 1959:
13
“the proposal for Port Authority participation on
the basis of what was called ‘equipment trust financ-
ing’ or, for that matter, suggestions for any financial
assistance by the Port Authority in the field of com-
muter rapid transit were dropped. We were then
able to come to this combination of state advances
and bonds guaranteed by the state, with the Port
Authority simply carrying out the administrative
and managerial work of the state’s participation.”
A 333-334.
Testifying about the matter in 1960, Mr. Tobin acknowl-
edged that the Port Authority had “appealed” to the
investment bankers to oppose the Purcell plan. A 303. He
added: “So that such meetings as you describe were held,
and would be held again in similar circumstances.” A 304;
emphasis added.
Mr. Tobin did call such a meeting in July 1960, to
“appeal to the investment bankers” for assistance against
a House Judiciary Subcommittee investigation of the Port
Authority. He characterized the Subcommittee’s investiga-
tion of his agency “a grievious threat to State and munici-
pal financing.” A 340-342. And once again the concern of
the investment community was expressed. A 343-344.
4. Opposing New Jersey legislation in 1958
Mr. Tobin had in fact turned out the troops even before
the Purcell episode. As mentioned above, at the 1958 ses-
sion of the New Jersey Legislature, Assembly Bill No. 16
had been introduced: it would have required the Port
Authority to assume responsibility for commuter rail-
roads between New Jersey and New York. A 82-83. The
Port Authority expressed a view strongly opposing the
legislation and, as the trial court found, “To reinforce this
view the Authority solicited and included in its statement
similar expressions of opinion from members of the invest-
14
ment banking community.” A 83. Having solicited oppos-
ing statements, the Port Authority duly reported that its
opposition “is supported by views expressed by other re-
sponsible persons in the investment and banking fleld, who
as a practical matter, are the controlling influence upon the
receptivity of bondholders to Port Authority investment.”
A 589,
The “other responsible persons in the investment and
banking field” were the same small group to whom Mr.
Tobin appealed for help against Mr. Purcell, In facet, the
Port Authority statement mentions only two by name—F. B.
Rockwell of Halsey, Stuart and Company and Reginald M,
Schmidt of Blyth and Company, A 589-590, Mr, Sehmidt
was obviously concerned about the specific proposal con-
tained in Assembly Bill No. 16, A 590, but was not cate-
orically opposed to Port Authority involyvment in mass
transit, Indeed, he would later charge Mr, Tobin with quot-
ing him out of context, A 315, quoted at page 12, supra.
Mr. Rockwell, on the other hand, parroted the Port Autho-
rity’s categorical position, The Authority opposed Assem-
bly No, 16 “or any other legislation which would attempt to
involve the Port Authority in any way in responsibility for
rapid transit.” A 586; emphasis added, Mr, Rockwell of
Halsey, Stuart did likewise:
“Tn our opinion any assumption of responsibilily
on your part for rail rapid transit in the New York
area would, on almost any conceivable terms, he
harmful to the present investment standing of the
Port bonds and would adversely affect the ability of
the Port Authority to finance in the future on terms
as favorable as hitherto. In our opinion, it is most
essential for the preservation of The Port of New
York Authority to be completely free of any respon-
sibility whatsoever for rail rapid transit in this
area.” A 589.590; emphasis added,
15
C. Legislative History of the 1962 Covenant
Until 1962, the leadership of the Port Authority had reso-
lutely, and successfully, opposed meaningful Port Authority
participation in the carriage of persons by rail. General
Solicitor Goldberg called it “a disease,” A 839, and the
Authority's Executive Director, Austin Tobin, was a vigor-
ous practitioner of preventive medicine, On any proposal
having to do with mass transit, Mr. Tobin would go to his
underwriters and ask them to express concern for the Port
Authority's credit, whether they felt it or not. He would
then report to the Legislature, or the Governor, that they
must bow to these “responsible investment banking leaders,
For all practical purposes they are the controlling influ.
ences of our credit.” A $92,
And so it was with the covenant. It was unquestionably
the Port Authority’s idea, See, eg., A 95-96, 183, 841,
These unambiguous record references plainly show that
there is no basis for appellant's repeated and wholly un-
supported characterization, A.B, 27-28, 77, of the covenant
as something “for which they [bondhoiders) had bar.
gained.” And the Authority imposed it on the Farley Com-
mittee on the usual ground—the Authority could not sell
bonds without it. See, for example, the extraordinary
claim of Authority Commissioner Kellogg:
“Applied to the H&M proposal, I would like to
make it clear that the question of whether or not we
ean borrow the $83,500,000 which is required, is not
simply a question of whether or not we would have
to pay a higher rate of interest on these funds, We
ean only submit to you the unanimous view of the
Commissioners of the Port Authority that there is
no possibility whatsoever of borrowing the money
at all without a statutory assurance to investors that
any future Port Authority responsibilites in the field
of commuter rail transport over and above the
present and existing interstate Hudson and Manhat-
16
tan railroad system will not involve a pledge of the
Port Authority’s General Reserve Mund.” A 87, 682-
633,
Even appellant’s chief witness in this proceeding never
claimed that the Authority could not sell bonds without the
covenant, Mr, Thompson opined only that, “All other
things remaining equal and the authorization for the PATH
takeover and the World Trade Center without the covenant
would have resulted in my opinion in a less favorable mar.
ket for the Port Authority bonds and a higher interest for
the Port Authority bonds.” A 859, “All other things re-
maining equal” would, of course, include Mr, Tobin’s say-
ing that without the covenant the Port Authority's eredit
would be ruined, and this element of the hypothesis was
expressly called to Mr, Thompson’s attention, A 858,
Similarly, appellant’s sole investor witness testified, “T can’t
eny for certain we would not have purchased” Port Author
itv bonds without the covenant, A 1105,
It is also worth noting that the Commissioners who were
unanimously of the view “that there is no possibility what.
soover of borrowing the money at all” without the covenant
were the same Commissioners who, two years earlier, had
heen unanimously opposed to any legislation “whieh would
attempt to involve the Port Authority in any way in re-
sponsibility for rapid transit.” A 586, Yet, in the inter
vening two years, the lack of any foundation for the Com-
missioners’ earlier claims had become apparent to all,
A 1959 Joint Assembly Committee report on Assembly Bill
No, 16 had eoneluded that the Authority should assume
some rail mass transit deficits. A 83-84, 593.597.!° See
10, Appellant erroneously characterizes this report as concluding
that the Authority “should only become involved in self-supporting
facilities, (A 593-597)." A.B. 10m. 7, In fact, the legislative report
tiiderstood and referred to the pooling concept and said that the
Authority “no doubt could undertake an activity which would involve
a deficit-even a permanent one.” A 594,
17
also A 162, And in April 1960, the New Jersey Highway
Department issued a report that concluded, A 608:
“The Port of New York Authority should not, in
our opinion, be handed New Jersey's rail problem,
nor should it become responsible for the New York
subway system or for rail transportation for Weat-
chester or Long Island, We are certain however,
that the interstate aspects of the rail movement of
persons and goods such as purchase and tease of
new Hudson and Manhattan commuter cars and the
purchase of the existing interstate railroad ferry
boats, do come within their obligations, The fore-
going fully recognizes the importance of maintaining
the Port of New York Authority’s commitments and
eredit requirements,”
The Port Authority beat a strategic retreat: it would
take over the erumbling but vital Hudson & Manhattan
Railroad on condition that the Legislatures give it the 1962
covenant.'' Unable to claim any longer that any involve-
ment whatsoever of the Port Authority in rail mass transit
would destroy its credit, unable to claim even that aequisi-
tion of the Hudson and Manhattan would impair bond.
holder security, the Port Authority claimed that any future
involvement whatsoever would make its bonds unsalable.
And the Legislatures, anxious for progress on the Hudson
and Manhattan, accepted Mr, Tobin’s terms, see A 612, 642,
after Senator Farley expressed his opinion that “one Legis-
lature cannot bind a subsequent Legislature involving
policy.” A 87-90, 635-639,
11. The 1962 legislation contains detailed findings about the im-
ortance of rail mass transit, the plight of the Hudson & Manhattan
ailroad and the need for its acquisition by the Port Authority, but
none about the need for the 1962 covenant, See N.J.S.A. 32:1-35,50,
Yet appellant complains about the absence of s c legislative find-
ings supporting repeal of the covenant. See A.B, 26, 56.
18
D. The 1962 Covenant
The 1962 covenant was a part of the bi-State legislation
authorizing the Port Authority to acquire, construct and
operate the Hudson & Manhattan Railroad and the World
Trade Center, A 90-91, 672-673, In revelant part, the
statute says, N.J.S.A, 32:1-35.55, A 92:
“The 2 States covenant and agree with each other
and with the holders of any affected bonds, as here-
inafter defined, that so long as any of such bonds
remain outstanding and unpaid and the holders
thereof shall not have given their consent as pro-
vided in their contract with the port authority, ...
(b) neither the States nor the port authority nor any
subsidiary corporation incorporated for any of the
purposes of this act will apply any of the rentals,
tolls, fares, fees, charges, revenues or reserves,
which have been or shall be pledged in whole or in
part as security for such bonds, for any railroad
purposes whatsoever other than permitted purposes
hereinafter set forth.”
“Permitted purposes” were defined by the statute to
include: (i) the Hudson Tubes as it existed on the effective
date of the legislation, (ii) railroad freight facilities, (iii)
railroad tracks and related facilities on vehicular bridges
owned by the Port Authority, and (iv) a passenger railroad
facility, if the Port Authority first certified either that the
facility is “self-supporting” or, if not, that at the end of
the preceding calendar year the General Reserve Fund con-
tained the prescribed statutory amount and that all of the
Authority’s passenger railroads, including the Hudson &
Manhattan, will not produce deficits in excess of “permitted
deficits.”
With respect to permitted purpose (iv), a passenger rail-
road facility would be deemed to be “self-supporting” if the
19
“amount estimated by the port authority for the ensuing
10 years to be the average annual net income (computed
without deduction of debt service) derived from or inei-
dental to such facility equals or exceeds the amount eati-
mated by the port authority for such 10 years to be the
average annual debt service upon bonds for purposes in
connection with such proposed facility.”
Though the covenant is not explicit on the point, both
States, the Port Authority and its bond counsel have all
agreed that State subsidies may be included in the compu-
tation of “average annual net income... derived from or
incidental to such facility.” Stip., p. 239 and Ex. VITT in
Volume VI of the Joint Appendix below, Thus, a passenger
railroad would be self-supporting if, “for the ensuing 10
years,” the Port Authority's estimate of net operating
revenues and State support equalled its estimate of debt
service “upon bonds for purposes in connection with such
proposed facility.”
“Permitted deficits,” the alternative method to satisfy-
ing permitted purpose (iv) for a new passenger railroad,
were defined to mean that the annual estimated deficit
(after including estimated debt service) ot both the Hudson
Tubes and any additional non-“self-supporting” passenger
railroad facility could not exceed one-tenth of the General
Reserve Fund (or one percent of the Authority's total
honded debt), Here too State subsidies are at least theoret-
ically possible, though on more difficult terms than under
the “self-supporting” rubric, The parties stipulated, A
692, and the trial court found, A 94n, 26, that the annual
deficits of the Hudson Tubes exceed the “permitted deficits”
and the covenant therefore prohibits the Authority from
issuing bonds secured by its reserve funds for any new
deficit passenger rail facility.
20
E. The Unimportance of the 1962 Covenant to
Bondholder Security
In reality, and as Dr, Bard found back in 1942 and the
Assembly Committees reported in 1959, bondholders needed
assurance that the Port Authority would not be so bur.
dened with deficits that its profitable facilities might have
difficulty carrying them.” But the provisions of the Con-
solidated Bond Resolution and the Series Resolutions fully
protected them against that possibility, as will appear
presently, The covenant was necessary to protect not the
bondholders’ security but Mr. Tobin's conception of the
Port Authority as a master builder of bridges, tunnels, air-
ports and, ultimately, the $1 billion World Trade Center,
Years later, in explaining why bondholders had nothing to
fear if the covenant were eliminated, Moody's would make
the point: “demands for mass transportation would prob-
ably obstruct further Authority expansion into other fields.
Bondholder protection would remain adequate, ,. .” A 750-
751,
Similarly, in a report isened just two weeks after the
trial court's decision sustaining repeal, Barr Brothers,
from whom appellant selected one of its four witnesses,
stated unequivocally: “Whether or not the Port Authority
ever gets involved in Mass Transit, we feel it continues to
he one of the finest revenue credits in the country, amply
protected by the basic bond resolution... .” A 423. In eum,
the trial court correctly concluded that:
“The claim that bondholder security has been
materially impaired or destroyed hy the repeal is
simply not supported by the record.” A 27,
Nothing in appellant’s brief detracts in the slightest from
the validity of this fundamental conclusion that, in and of
itself, requires affirmance of the judgment below.
12, Mr, Murphy of Barr Brothers, appellant's witness, likewise
emphasized the importance of the “bottom line.” A 991,
21
1. Bondholders are fully protected
a. The objective protections. General Solicitor Gold-
berg’s compendious view of the effect of the many bond-
holder protections is helpful. Speaking to the Executive
Staff of the Authority in October 1961, before the enactment
of the covenant, Mr. Goldberg emphasized that Port
Authority revenues could not be used to “subsidize the
private railroads to the extent of their commuter operating
deficits.” A 839. Mr. Zarin, the Port Authority’s Chief of
the Finance Division of the Law Department, A 1004, con-
curred in that view at trial. A 1047-1050. In other words,
the covenant was redundant in so far as it purported to
prevent the Port Authority from giving its revenues to
others for the benefit of railroads, and appellant does not
contend otherwise.
Mr. Goldberg continued:
“However there still was a fear in the financial
community that the Port Authority might somehow
take into its General Reserve Fund family a group
of deficit-ridden railroads and then, by having gotten
the disease into our own financial body, be in a posi-
tion legally to apply our monies to their operating
and debt service deficits. The fear was that in some
such way we might actually dilute our earning and
reserve position to a point where we would no longer
have the financial capacity to meet the requirements
of the existing bonds and of any other bonds we
might have to put out for our self-supporting
projects.
“We in the Law Department have always held the
firm opinion that the Port Authority lacks the power
so to dilute the security of its bondholders, and we
have advised the Commissioners to that effect. .. .”
A 839.
Notwithstanding this legal opinion, Mr. Goldberg said,
the Authority added the certification requirement to Sec-
tion 7 of its Series Resolutions to make it absolutely clear
that its bondholders’ security could not be impaired by the
acquisition of “deficit-ridden railroads.” A 839-840. It will
22
be recalled that Section 7, see pages 9-10, supra, places the
Port Authority under a contractual duty not to issue Con-
solidated Bonds for an additional facility unless it can
certify compliance with three conditions: that the issuance
of the bonds will not “materiaily impair the sound credit
standing of the Authority”; that issuance will not materi-
ally impair “the investment status of Consolidated Bonds”;
and that issuance will not materially impair “the ability of
the Authority to fulfill its commitments, whether statutory
or contractual or reasonably incidental thereto, including
its undertakings to the holders of Consolidated Bonds.” All
three conditions must be met. A 1053.
Thus, before the covenant was enacted, the Port Author-
ity could not give its revenues or reserves to others to sub-
sidize mass transit and it could not itself undertake any
mass transit projects that might endanger the bondholders’
security. Mr. Goldberg was unequivocal on the point; the
trial court agreed, A 127-128; and the complex web of bond-
holder protections that existed in 1961 fully supports their
conclusion.
The main strands in that web are the General Reserve
Fund, the Consolidated Bond Resolution of 1952, and the
Series Resolutions. They combine to dedicate all revenues
and reserves of the Port Authority for the benefit of bond-
holders. Hence Mr. Goldberg’s undisputed conclusion that
the Authority cannot give its resources away.’ The Au-
13. The General Reserve Fund may only be used for “purposes in
connection with bonds secured by a pledge of the General Reserve
Fund....” A 287. The Consolidated Bond Resolution pledges the
net revenues from each facility financed by the issuance of Consoli-
dated Bonds to the payment of debt service on all Consolidated Bonds.
A 789-791. It creates the Consolidated Bond Reserve Fund, which
it likewise pledges as security for Consolidated Bonds. A 795-797.
The first paragraph of Section 7 of the Series Resolution, A 810-811,
prevents the application of any part of this fund for the payment of
operating deficits of a facility acquired without the issuance of Con-
solidated Bonds. See also A 1050. In 1962, there was nothing in the
Consolidated Bond Reserve Fund. It began to grow in the years im-
mediately preceding repeal, increasing from $7.1 million in 1972 to
$21.9 million in 1973 and $46.8 million in 1974. A 500, 518. Total
Port Authority reserves exceeded one-quarter of a billion dollars at
the end of 1974. Id.
23
thority can apply its revenues or reserves to pay the defi-
cits of a railroad only if it first issues bonds secured by the
General Reserve Fund to finance that reilroad. And the
Authority can only do that if it meets the requirements of
the Section 7 certification.
Even then, the Authority still could not issue a Consoli-
dated Bond without also meeting the 1.3 test of the Con-
solidated Bond Resolution. A 75-76, 784-788. In 1961, Mr.
Goldberg described the purpose and operation of the 1.3
this way:
“And so he [the bondholder] must be sure that the
Port Authority is not able to dilute the net revenue
potential of the facilities to a point where the money
that is going to come in—this gross revenue box that
we start off with at the head of each column in the
revenue flow chart—is going to get too small for the
O&M and the debt service that it has to cover. He
wants to be sure that we don’t balloon the amount
of our bonds up so big and get our debt service up
so big and, in the ease of a facility which wouldn’t
be carrying itself, like a Hudson & Manhattan Rail-
road, even get its operation and maintenance expen-
ses up so big, that there wouldn’t be enough overall
to meet the debt service on his bonds and on the new
bonds that might be put out in connection with new
facilities.
“Now the mechanism by which this insurance was
given was the 1.3 earnings test. All this test is is a
requirement that the Port Authority will not issue
new Consolidated Bonds unless it can show, at each
point of time it proposes to issue new consolidated
bonds, that certain earnings equal 130 per cent of, or
1.3 times certain debt service on certain bonds. For
the most part, the earnings that are used in this
equation are historical earnings. They are the best
twelve months out of the previous thirty-six months
and in practice these have always been the last year,
which has always been our best year. In certain lim-
ited instances we can augment these historical earn-
ings with some estimates, but for the most part you
24
can think of the earnings that we have to use in this
test as historical earnings.
“On the other side of the equation is the debt
service—that is the interest, the amortization on the
bonds, the annual maturities,’ the sinking fund re-
quirements—which we must cover 1.3 times out of
these earnings. This debt service is the requirement
for that year in the future when our scheduled debt
service will be at a maximum. In other words, we
must take our peak demand year in the future for
combined debt service on already-issued bonds and
the proposed new bonds. We know our scheduled
sinking fund and principal maturities; we know our
scheduled interest requirements. We look up the
schedule to figure out in which year in the future our
scheduled debt service will be the heaviest, and then
we compare this with our historical earnings, and if
we can’t show that the maximum future year’s debt
service requirements have been met historically in
one of the past three years 1.3 times, we can’t issue a
Consolidated Bond.” A 833-834.
When a deficit facility is acquired or built its losses are
counted in determining whether the revenues from all of
the Authority’s facilities equal or exceed 1.3 times maxi-
mum future debt service. A 76. Similarly, debt service
attributable to the new facility must be taken into account.
In other words, the deficit must be subtracted from the
revenue side of the equation and the new debt service must
be added to the debt service side of the equation. As a
result, no deficit facility can be brought into the Consoli-
dated Bond “family” unless there is a healthy margin of
net revenues from all Port Authority facilities in excess of
actual debt service.
Other bondholder protections to be found in the Con-
solidated Bond Resolution but not in appellant’s brief
25
include the Authority’s obligation under Section 12(f),
A 799:
“To establish and collect flight fees, wharfage,
dockage, rents, tolls and other charges in connection
with facilities the net revenues of which are pledged
as security for Consolidated Bonds, to the end that
at least sufficient net revenues may be produced
therefrom at all times to provide for the debt serv-
ice upon all Consolidated Bonds.”
To paraphrase Section 12(f) of the Consolidated Bond
Resolution, the Authority is contractually obliged to run
in the black. To take over or build a facility that would
impose deficits so large that increases in tolls and charges
could not carry them would violate Section 12(f) as well
as the various provisions discussed above."
The 1962 covenant added nothing to these protections.
As the foregoing discussion makes clear, the Port
Authority is contractually obliged to maintain reserves
for the protection of bondholders, to have a healthy
margin of revenues over debt service before issuing
bonds and to refrain from issuing bonds to build or acquire
a new facility if to do so will materially impair the Author-
ity’s credit standing, the investment status of its bonds or
its ability to fulfill its commitments. These provisions make
it impossible for the Authority to take over a passenger
railroad that would jeopardize the security of bondholders.
To be sure, the covenant did constitute a significant im-
pediment to Port Authority involvement in rail mass
transit, but, viewed objectively, it added to the impediments
_ 14. Other bondholder protections found in the Series Resolutions
include provision for sinking fund payments and schedules of man-
datory periodic retirement of bonds. Stip., Ex. II, pp. 74-75 in Vol-
ume V of the Joint Appendix below.
26
posed by the pre-existing protections only by blocking rail
mass transit that does not threaten bondholder security.“
b. Appellant’s analysis of the objective protections.
Appellant attacks the importance of the 1.3 test by suggest-
ing, first, that the test would not apply if the Authority
issued bonds other than Consolidated Bonds, A.B. 30 & n.18,
and, second, that the test does not consider prospective
operating deficits of a new facility, A.B. 30-31 and 33 n.20.
Both arguments are untenable.
If the non-Consolidated Bonds are secured by a pledge
of the General Reserve Fund,'* and are issued to acquire a
new facility, the Section 7 certification would still have to
be made. Moreover, no non-Consolidated Bond secured by
15. The 1962 Legislature was not advised of this conclusion to
which Mr. Goldberg’s analysis the year before inexorably led. See
A 838-840. No Authority spokesman attempted to explain the objec-
tive importance of the covenant, i.e., what it added to existing safe-
guards, On the contrary, the Authority simply stated, A 86, that it
would not certify the H & M Railroad under Section 7 unless the
covenant was enacted and claimed, A 87, that it could sell no bonds
without the covenant.
The Farley Committee’s 1963 report concluded accordingly:
“This Committee was convinced that the credit problem
which had been pointed out by the Port of New York Author-
ity was a valid and real one and that the Port Authority could
not assume responsibility for the complete burden of the
deficit-ridden commuter railroad problem in the area of north-
ern New Jersey and New York. If the Port Authority were
to receive such unrestricted responsibility, there is no question
but that its sound credit position would be seriously impaired,
if not destroyed ....” A 655; emphasis added.
The Farley Committee was not advised of the many existing pro-
tections against assumption of “the complete burden” or “unrestricted
responsibility” for commuter rail deficits. Thus, the Farley Commit-
tee supported the covenant, unaware that the risks the covenant was
supposed to avoid were already blocked.
16. If the non-Consolidated Bonds are not secured by a pledge of
the General Reserve Fund, none of the revenues or reserves of the
Authority’s present facilities could be used to pay those bonds or to
support the facility financed by them. Such bonds would have no
effect on current bondholders.
27
a pledge of the General Reserve Fund has been offered
since the Authority began issuing Consolidated Bonds in
1952 and, as appellant says, A.B. 30 n.18, the Authority
has stated its intention to issue only Consolidated Bonds.
Finally, Sections 4 and 5 of the Consolidated Bond Resolu-
tion pledge the net revenues of all of the Authority’s facili-
ties to the payment of debt service upon Consolidated
Bonds. A 789-791. As a result, no revenues from the
Authority’s existing facilities would be available for pay-
ment of debt service on non-Consolidated Bonds until the
debt service on Consolidated Bonds was paid. Conse-
quently, non-Consolidated Bonds would be marketable only
if purchasers were confident that the Port Authority would
continue to generate revenues well above all operating ex-
penses and debt service—.e., something akin to the 1.3 test.
These points were recognized by Mr. Goldberg in 1961:
“[Tjhe things the States direct the Port Authority |
to do these days are not capable of immediate self-
support. So we are practically restricted to Consoli-
dated Bonds and the 1.3 test.” <A 834.
Appellant’s suggestions, A.B. 30-31 and 33 n.20, that the
1.3 test may not protect against operating deficits of a new
facility fail to mention that the trial court specifically held
that “the estimated average annual deficits of a new facility
must be charged against historical revenues in determining
whether the 1.3 test has been met.” A 76; emphasis in
original.'’ But even if appellant were right and the Port
Authority Commissioners could somehow escape counting
the deficits of a new facility at the time they begin to build
17. Judge Gelman’s analysis was clearly correct, for as Vice Chair-
man Kellogg told the Farley Committee, the 1.3 test precludes the
issuance of Consolidated Bonds “for any facility unless it can be
demonstrated that, including the new facility, net revenues will be
sufficient to cover by at least 1.3 times the maximum interest and
principal payments due in any future year.” A 87.
28
it, after it goes into operation its deficits will be counted
in future applications of the 1.3 test. As Mr, Goldberg put
it,
“At the point where we can only show barely 1.3 or a
whisker under 1.8, we can’t put out Consolidated
Bonds. The 1.8 status is not prosperity to us; it is
practically the point of enforced stagnation, It is
the point at which our ability to finance any future
projects, even any capital improvements to existing
facilities, ceases, For the Port Authority to continue
as a healthy, vigorous organization, doing the job it
was set up to do and which it has done so well in the
past, we must keep our coverage up as high as we
can.” A 836,
Since the building of a facility that would generate defi-
cits large enough to cause future difficulty with the 1.3 test
would bring the Port Authority to “the point of enforced
stagnation,” end its “ability to finance any future pi vjects,”
and endanger the Port Authority “as a healthy, vigorous
organization,” the building of such a facility would obvi-
ously run afoul of the Section 7 certification requirements.
The Authority could not, consistent with its contractual
commitment to bondholders, certify that the issuance of
bonds for such a facility would not “materially impair the
sound credit standing of the Authority or the investment
status of Consolidated Bonds or the ability of the Authority
to fulfill its commitments,”
18. In its reply to our motion to dismiss, appellant claimed in its
footnote at page 3 that according to the Port Authority's financial
expert, Mr, Zarin, “only the 1962 covenant would prevent a Port
Authority takeover of the Second Avenue subway line.” But Mr,
Zarin’s testimony on this point was limited to the 1,3 test, which he
believed would not apply, and “absent all other protections which
exist, which we are not talking about,” such as Section 7, A 1030-
1031. And appellant neglected to advise the Court of the trial court's
holding that the 1.3 test would itself apply to such a proposal, With
good reason, appellant does not repeat this argument in its brief on
the merits,
Appellant next attacks the Section 7 certification itself,
A.B, 31-35, though in quoting Mr. Goldberg at page 33, it
omits his immediately following statement that the certifi-
cation requirement “has helped to allay the fears of the
financial community,” A 840, fears related directly to
deficit rail mass transit, A 839-840, Appellant says first that
the certification requirement could be avoided by manip-
ulative legislative definition, arguing that this was attempted
in 1971 and that, “It was the Covenant, therefore, which
protected the bondholders, not Section 7.” A.B, 33. In fact,
it was bond counsel who “protected” the bondholders,
A 692, and nothing in appellant’s argument suggests that
bond counsel could not, in the future, “protect” the bond-
holders by opining that, legislative definitions notwith-
standing, a Section 7 “additional facility” is an “additional
facility.” See A 100,
Following a brief complaint that Section 7 blocks only a
“material impairment” and not “any impairment” and its
incomplete quotation from Mr, Goldberg, appellant contin-
ues its attack on the Section 7 certification by claiming that
“Unlike the Seetion 7 certification, the 1962 covenant re-
quires certification of an ascertainable amount... .” A.B,
34. Appellant is incorrect. According to the statute,
it is enough to certify simply “that said other railroad facil-
ity is self-supporting.”"’ And Mr. Zarin, though ques-
tioned at length on this precise point by appellant's counsel,
specifically declined to testify that the 1962 covenant re-
quires the certification of an amount when a facility is certi-
fied as “self-supporting.” A 1082-1083,
Appellant goes on to argue that a covenant certifica-
tion “requires considerably more precise a calculation” be-
cause it would be for “a single proposed facility,” whereas
a Section 7 certification would be for many facilities, A.B,
34. The fallacy is tempting, but a fallacy nonetheless: if
19. See N.J.S.A, 32:1-35,.55, subdivision (iv) under “Permitted
purposes,”
30
the calculations for the many-facility certification are off,
it Must be because ealeulations for one or more individual
facilities are off, and it is just as likely that the railroad
calculations are wrong. Indeed, in many contexts, projec-
tions for a group of enterprises are regarded as more
dependable than projections for a single enterprise.” At
best, the benefit claimed by appellant is marginal, uncertain
and contrary to the pooling concept that has been the basis
of the Authority’s financial success since the General
Reserve Fund statutes of 1931 and the Consolidated Bond
Resolution of 1952. See A 736, The trial court was clearly
right in giving this argument “little weight.” A.B, 34,
Appellant continues to argue that the covenant’s use of
“self-supporting” is more precise than Section 7's use of
“materially impair” by quoting at length from Mr, Thomp-
son’s testimony, including his statement:
“Now, self supporting, Your Honor-—although it
sounds as though it ean be a qualitative phrase is
not, at least not in our business.” A.B, 35,
Mr. Thompson also testified that “self supporting means
that the revenues shall be estimated to be at least as much
as the operating expenses plus the debt service which is a
mathematical requirement... .” A.B. 35; emphasis added,
Mr. Thompson's belief that “self-supporting” is a precise
phrase has been emphatically rejected by the Farley Com-
mittee, by the Port Authority, and by its independent
; |
20, The Port Authority may well provide such a context in view
of the necessarily arbitrary way that it allocates its substantial general
and administrative expenses and debt service among its facilities, See
Stip., Ex. TV at Volume VI of the Joint Appendix below, Appellant
admits that the Authority's single facility estimates for the Hudson &
Manhattan were way off, A.B, 14, 15, 67, The record shows that the
Authority's estimates for the construction of the World Trade Center
were off by about $700 million, Compare A 182 with A 486, Yet
the Authority as a whole has had great financial success-—Darr
Brothers calling it “one of the finest revenue credits in the country”
even after the trial court’s decision sustaining repeal, A 422-423,
81
auditors. Because the concept is “arbitrary” and “not based
on actual fact,” the Authority’s accounting procedures do
not use it. A 650-651, 660, 735a2-736. As Peat, Marwick,
Mitchell & Co, put it,
“The Authority’s financial structure is based on a
single enterprise, pooling of revenues concept. In-
dividual facilities are not financed independent of
the rest of the Authority. The facilities contribute
their revenues for debt service according to their
earning power without regard to the amount of
bonds which were issued for their construction. For
these reasons any presentation of net revenues after
debt service for individual facilities is not based on
actual fact, As pointed out by the Authority in sub-
mitting its report, such a presentation can only be
hased on arbitrary assumptions,” A 651,
Thus, the ground on which appellant claims the covenant to
be a greater bondholder protection than Section 7 litera!ly
does not exist.
Appellant’s only other attempt to demonstrate the object-
ive importance of the covenant is its assertion that it would
have prevented the Port Authority’s financial participation
in the Paru-Plainfield project, which, says appellant, A.B,
35-36, is “presently estimated to require a diversion of
pledged revenues and reserves of at least $128.4 million.
(R-Ja 255-1).” The argument is confusing because based
on a plan that was rejected by the federal Urban Mass
Transportation Administration and not on the plan cur-
rently before that agency for approval. See A 527-528, pp.
60-62, infra, But even assuming that the now rejected plan
can be considered as the type of plan that bondholders can
expect, it is clear that they will not be hurt. Appellant's
argument gives no weight to the fact that the actual source
of the Port Authority’s participation is the more than $40
million in annual revenues that the Authority has already
begun to collect as a result of the toll increase instituted in
May 1975 for the specific purpose of financing mass trans-
portation projects. See A405-407, 419-421, 5038, 528." In
three or four years, the Port Authority will have earned the
entire $128.4 million even though it will have spent far less.
Significantly, appellant does not suggest that the toll in-
crease would be justified or appropriate if, contrary to the
Port Authority’s public announcements, cited above, the in-
creased revenues were not applied to financing mass trans-
portation,
21, Extraordinary as it may seem, appellant attempts to show that
the $40 million does not exist, A.B, 38 For example, it invents
something it calls “surplus reserves in excess of mandated bonded
debt service” and asserts that its creature grew by only $296,000 in
1975, In support of its analysis, appellant invites the Court's atten-
tion generally to the 39-page fo78 Annual Report of the Port Author-
ity, citing three cases for the proposition that the Court may em oy
= notice to that end, No page or chart of the Report itself is
cited,
The relevant portions of the Port Authority's 1975 Report are
set forth in the Appendix, A 503-518. They show that in 975, the
Authority's gross operating revenues rose from $410.4 million to
$458.4 million, a gain of $48 million, A 511, 515; that net revenues
available for debt service and reserves after payment of operating
expenses rose from $181.4 million to $200.9 million, a gain of more
than $19 million, A 515; that the General Reserve Fund increased
from $173.4 million to $176.4 million, a in of $3 million, A 518;
that the Consolidated Bond Reserve Fund grew trom $46.8 million
to $62.4 million, a gain of more than $15 million, id.; that the
Authority's total assets grew from $3,186 billion after depreciation
to $3,249 billion after depreciation, a gain of approximately $63 mil-
lion, A 513; since total liabilities rose by less than $7 million, net
assets grew by $56 million, id, It is worth remembering too that 1976
will be the first fudl year in which the toll increases have been in effect.
Appellant emphasizes that operating expenses also rose by over
$37 million, “more than consuming any new revenues resulting from
the toll increases,” A.B, 38, Very little of that increase in expenses,
however, is attributable to bridges and tunnels, Since appellant does
admit that the Authority’s net operating revenues and reserves did in
fact increase, it appears to have charged all increases in costs at all
of the Port Authority's facilities against the toll rises, instead of
following the accepted procedure of ¢ ring each facility's operating
expenses against its operating revenues, his bit of creative account-
ing is no more supportable than the rest of appellant's analysis.
83
©. The subjective fears. Appellant's case rests not on
what the covenant objectively added to bondholder protec-
tion, but on misinformation and unfounded fears.
Appellant offered only one witness to testify about the
circumstances surrounding the enactment of the 1962 cove-
nant—John F, Thompson, Vice President of W. H. Morton
and Company. A 844, Mr, Thompson testified that in 1961,
[M]y reaction to the Port Authority getting into that
[the Hudson and Manhattan] or other mass transit was one
of concern because the Port Authority has always gone into
projects which it could reasonably ascertain that they would
become self-supporting, at least within a period of a few
years of development and this seemed to be a different tack
for the Port Authority to start on.” A855. Mr. Thom
amplified on cross-examination, A 959-960: | ie
“A. The facilities aequired or
tructed up t
then had all been expected eventually 4 sae.
supporting. H & M was not, —
2 i go at what point in the future?
il a z : - a reasonable time, within three, four,
Q. Were those expe
maint. xpectations fulfilled, to your
A. I am not sure that my facility know
the Port operation is sufficient to mid you tel ost
accurate answer. I have understood that one or two
facilities from time to time have not done as well as
wy on the whole the reverse is true. .
. So your assumption that the Port Authority’
moving from what had been almost entirely, witb toe
or two exceptions, profitable enterprises to mass
transit was a major factor in your concern about the
acquisition of the Hudson and Manhattan?
A. Yes, it was a factor of concern.”
Mr. Thompson was thorough!
y misinformed. As of De-
cember 31, 1960, the Staten Island Bridges had been in
deficit for 22 years, the Port Authority Building for 21, and
34
Newark Airport for 13. Of all Port Authority facilities,
only the piers and Port Newark had run at a deficit for as
few as 3 or 4 years. Everything else had been in deficit for
at least 7 years and most had been in the red for 10 years
or longer. A 691,” |
Mr. Thompson testified next that “if one step were made
into mass transit, the question arose in the minds of most
participants in the investment community, what comes
next, what other projects in mass transit will next be under-
taken.” A 855-856, On cross-examination, however, he was
unable to answer whether most investors knew that the
covenant did not prevent the Port Authority from operat-
ing bus lines at a deficit. A 961,
Mr. Thompson also testified that he had never considered
the fact that the covenant leaves the Port Authority
exposed to massive deficits ten years after certification of
a passenger railroad under the covenant. A 943-944. He
did not believe bondholders needed covenant protection
against that risk: he was content to rely on the good faith
of the States, A 945, the unwillingness of the Port
Authority to go along, A 947, and the resistance of the bond
market, A 946,
The point is important. The protection actually afforded
by the covenant is far more modest than Mr. Thompson and
the other witnesses understood, It could be satisfied by
simple agreement between the Governors and the Port
Authority Commissioners that a facility would be self-
supporting. Even though a railroad were expected to run
22. And see A77n. 15: “For the calendar year 1973, of the 22
facilities operated by the Authority, 14 were operated at a deficit.
See A 397, .
That appellant's chief witness was so totally misinformed about t le
deficits of individual facilities further demonstrates that appellant is
wrong in urging, A.B, 5-8, the importance of the concept that each
facility be self-supporting by itself. If that concept had any impor-
tance, Mr. Thompson would have known about the long deficit his-
tory endured by each of the Authority's major facilities,
35
at a deficit, that agreement would satisfy the covenant’s
definition of “self-supporting” if it were backed up by the
agreement of the States to pay the deficits for ten years
and no longer. The covenant’s definition of “self-support-
ing” would also be satisfied if the States agreed to continue
their payments for more than ten years but at the same
level paid during the first ten years, leaving the long-term
growth in the deficit for the Port Authority to absorb.
As Mr. Thompson acknowledged, it was not the covenant
that protected-against these hazards, but other bondholder
protections. He noted the unwillingness of the States to
inflict actual damage on bondholders, the parallel concern
of the Port Authority and the pressure of the bond market,
three formidable safeguards. The Section 7 certification,
among others, is germane too.
Mr. Thompson also believed the covenant’s definition
of “self-supporting” to be a “mathematical requirement,”
A.B. 35, though he admitted that it was based on “esti-
mated” revenues, A.B. 35, and though the Farley Com-
mittee, independent auditors and the Port Authority all
recognized it could “not be based on actual fact” but only
“arbitrary assumption.” A 651.
Not only was Mr. Thompson misinformed about or
ignorant of the actual meaning of the covenant and the
Authority’s history of successfully carrying deficit facili-
ties; he was also unaware that other bondholder protec-
tions fully protected against his fears. Thus, he believed
that the covenant was necessary to prevent “the possibility
of massive deficit operations getting into the Port struc-
ture” and “that if the Port Authority were given a white
elephant that all of the revenues of the Port operation,
operating revenue, would be pooled in order to support
that before debt service would be paid.” A 949. The wit-
ness repeated the point at A 942, and concluded cross-
examination on this question by testifying that, “I believe
36
that this is one situation that might arise that makes the
covenant important.” <A 956.
Mr. Thompson obviously did not understand that his
opinion was ill-founded and that even without the covenant
“massive deficit operations” could not get “into the Port
structure,” for the reasons explained by Mr. Goldberg
before the enactment of the covenant, A 838-840. Nor did
Mr. Thompson understand that, as Mr. Zarin testified,
A 1050, Section 7 of the Series Resolutions prohibits the
use of the reserve fund to pay the operating deficit of a
facility acquired without the issuance of Consolidated
Bonds, i.e., a “white elephant.”
No wonder Mr. Thompson considered the 1962 covenant
“an important and significant part of what I presumed we
were buying for our clients.” A.B. 23, A 873. He was
misinformed about the precision of the “self-supporting”
concept, the facilities history of the Authority and its
abilitv to undertake many deficit operations, and the many
other protections against any deficit operation that would
threaten bondholder security.”
Mr. Thompson was the only witness offered to testify
about the circumstances surounding the enactment of the
covenant as well as the only witness offered by appellant
who purported to have any detailed knowledge of the work-
ings of the covenant or its relationship to other bondholder
protections. It follows that the record is barren of evidence
that anyone informed about the rights of bondholders in
the 1961-62 period regarded the covenant as important to
23. As Amicus S.1.A. says at page 13, Mr. Thompson was also the
witness who testified “that if the Governor of New Jersey had recom-
mended repeal of the covenant before the sale of $300,000,000 of
bonds of the New Jersey Sports and Exposition Authority instead
of one weck after the sale, the bonds would not have been saleable.
...” This was not only Mr. Thompson’s personal opinion; he heard
no professional investment person who disagreed with this. —
14. The sale of the Sports and Exposition Authority bonds was he
on January 18, 1974. As appellant’s brief correctly notes, Governor
Byrne proposed repeal as early as June 1973. A.B. 27, n.16.
37
bondholders. The evidence that Mr. Tobin sought the
covenant to further his views of the Port Authority’s mis-
sion is corroborated by the objective unimportance of the
covenant. See A 108-109.
2. The Authority’s consistently high credit
rating demonstrates the unimportance of
the covenant and repeal
The trial court found that the “limited role of the cov-
enant on the Authority’s credit standing is also reflected in
the ratings assigned to Port Authority bonds by the prin-
cipal ratings services, Moody’s and Standard and Poor’s.”
A 110. The Moody’s and Standard and Poor’s ratings for
Port Authority bonds have been and are “A,” meaning that
“they are of investment quality and no default in payment
of principal or interest is anticipated.” A 110, 849.25 The
bonds had that rating before the covenant was enacted,
after it was enacted, after it was prospectively repealed,
after the repeal at issue in this lawsuit, A 110, 750-763,
and after the decisions below, A 481-500, 1123-1131.
24. No officer or employee of appellant testified, nor did appel-
lant offer any of its purchase or sale records to show that the covenant
had any bearing on its transactions in Port Authority bonds.
In an attempt to make up for the missing evidence, appellant
refers, at A.B. 12 n.9, to the deposition of its Executive Vice Presi-
dent even though that deposition was not admitted into evidence. The
trial court’s ruling excluding it, A 1121-1122, was clearly proper
and has not been appealed to this Court.
Had appellant’s Executive Vice President testified, he would have
been exposed to cross-examination about his approval of an April
1974 internal memorandum stating: “Efforts to repeal the 1962
covenant by legislative action should not be viewed with alarm.”
E454.
25. Thus, this is emphatically not a case in which the obligor
“unilaterally” decides that default is improbable. Compare A.B. 67.
Appellant has never alleged or offered any evidence to show that
the Authority’s bonds are in any danger of default whatsoever and
the Barr Brothers report issued after the trial corrt’s decision sus-
taining repeal concludes that the Authority’s bonds offer “secure
value for the investor,” A 423.
38
In arriving at its “A” rating, Moody’s has always given
full weight to the prospect of deeper Port Authority
involvement in passenger railroads. As early as February
1972, it recognized the relevance to the Port Authority of
the increase in Triborough vehicular tolls to support rail
mass transit. A 258-259. Its June 1973 report referred
specifically to the enactment of bi-State legislation pur-
suant to which “the Authority will contribute to the capital
cost of passenger rail projects.” The report, rating the
40th series “A,” continues: “In addition, this new legisla-
tion amends 1962 statutes which served as the basis for a
statutory covenant limiting the Authority’s ability to par-
ticipate in deficit passenger railroad projects. These def-
icit limitations will not apply to the holders of bonds here-
after issued by the Authority, including these bonds.” A
264-265.
The Moody’s report for October 5, 1973, A 750-751, rates
the 41st series “A,” while noting “the clouded future sur-
rounding ... the role, if any, which Port Authority will
play in a regional mass transportation system.” The two-
paragraph summary on the front page of the report also
notes that a “suit now in the Supreme Court of New York
State seeks to permit unlimited application of surplus Au-
thority funds to deficit passenger railroads. If the suit is
successful, demands for mass transportation would probably
obstruct further Authority expansion into other fields.
Bondholder protection would remain adequate, because
debt service constitutes a first lien on net revenues.” A
750-751; emphasis added. Thus, even on the express
assumption that the covenant would be struck down,
Moody’s adhered to its high rating of Port Authority
bonds.
Within two weeks after the trial court’s decision sustain-
ing repeal of the covenant, leading investment advisers
agreed with the opinion that repeal was not material. Thus,
39
Barr Brothers & Co., one of the three largest dealers in
Port Authority bonds, A 978, issued a report specifically
referring to the trial court’s decision, summarizing the
other bondholder protections and the great financial
strength of the Port Authority, and concluding:
“Whether or not the Port Authority ever gets in-
volved in Mass Transit, we feel it continues to be
one of the finest revenue credits in the country amply
protected by the basic bond resolution, excellent man-
agement and some highly profitable and monopolistic
facilities that can more than carry a reasonable
a of Mass pa particularly with the re-
cent toll increases on the Huds 31 idi
additional revenues.” A 499.493 —
This report is from a firm that is a member of the class
represented by appellant and from which it selected one of
its three expert witnesses.
In June 1975, the month after the trial court’s decision
Standard & Poor’s and Moody’s each confirmed the —_-
tinuation of the Port Authority’s “A” rating. Standard &
Poor’s, while expressing a concern about the effect of future
Port Authority involvment in mass transit, says: “Despite
this concern, we are continuing our ‘A’ rating on the Port
Authority’s Consolidated Bonds and are also rating the new
Consolidated Notes ‘A’ based upon the Authority’s strong
operating, financial and management record and the pros-
pect for a continuation of this outstanding record.” A 482:
original all in emphasis. Moody’s, also referring to the trial
court’s opinion, continues its “A” rating on Port Authority
obligations because “earnings of the present facilities are
good, reserves for debt service continue strong, and recent
toll increases have further strengthened its financial posi-
tion at this time.” A 484-485.
In July 1976, the Port Authority issued its 42nd series of
Consolidated Bonds. Standard & Poor’s simply continued
its “A” rating without writing a new report. A 1124,
40
Moody’s continued its “A” rating in a report stating that
while the decisions in this case “are a matter of deep con-
cern to bondholders generally,” in so far as the Port Au-
thority is concerned, “earnings of the present facilities
are good and reserves for debt service continue strong.”
A 1126.
That the Port Authority’s high credit rating accurately
reflects the objective unimportance of the covenant is fur-
ther demonstrated by S-36, an 8-page single-spaced publica-
tion of Blyth & Co. on the 36th series issued in November
1970. A 279-292. Blyth & Co. advises the reader that the
series is intended to finance “capital expenditures in con-
nection with the Authority’s airports, docks, wharves, mass
commuting facilities .... A 280; emphasis added. The
Section 7 certification requirement is set forth, the 1.5 test
is duly noted, Sections 4 and 5 of the Consolidated Bond
Resolution are paraphrased, the Consolidated Bond Reserve
Fund is described, the General Reserve Fund and its 10
percent requirement are discussed at length, various coven-
ants are summarized, including the Authority’s promise to
set charges high enough to cover debt service, but not a
word is said about the 1962 covenant.
S-36 is not unusual in regarding the covenant as too un-
important to mention. See, for example, S-22 (J. B. Hanauer
& Co.), S-42 (Bankers Trust) and 8-35 (Blyth & Co.), all
in Volume II of the Joint Appendix below.
3. The unimportance of the covenant and
repeal in the secondary market
Between 1952 and 1962, the Port Authority sold 19 series
of bonds, worth hundreds of millions of dollars, without the
covenant. A 108. Throughout this period, various public
officials and agencies were calling for greater Port Author-
ity participation in rapid transit. A 576-671. While appel-
lant claims without record support that these efforts were
all “illusory,” A.B. 30, that claim is belied by the Authority’s
41
need to extract the “Memorandum of Understanding” from
the MRTC, amend Section 7 in 1958 to add the certification
requirement and constantly drum up “bondholder concern”;
the claim is also inconsistent with the 1959 New Jersey
Assembly report that appellant simply mischaracterizes.
See p. 16 and n.10, supra.
On March 25, 1961, legislation requiring the Port Author-
ity to take over the Hudson & Manhattan Railroad and
containing no covenant was passed by the New York Legis-
lature. A 90. Governor Rockefeller signed the legislation
on April 6, 1961. The secondary market for Port bonds was
unaffected. A 381-384.
In early January 1962, if appellant’s protestations are to
be believed, investor concern should have been at its height.
At its previous session, the New York Legislature had
adopted legislation requiring the Authority to take over the
H & M; the Port Authority had announced in September
1961 that it might agree to do so if certain assurances could
be obtained, A 622, but the Authority had yet to receive
those assurances. Dun and Bradstreet, taking note of all
this, nonetheless rated the Port Authority’s prospects as
“Superior,” A 171, and the Nineteenth series was sold on
January 4, 1962 without difficulty at an interest rate of 314
percent. A 108.
Between 1962 and May 1973, the Port Authority issued
20 series of Consolidated Bonds at interest rates ranging
from 314 percent to 65g percent. A110. Though the Port
Authority was now operating a passenger railroad with
substantial deficits and the covenant might or might not
endure,” bondholder enthusiasm for Port bonds continued
unabated.
In 1973, New Jersey and New York enacted legislation
repealing the covenant with respect to bonds issued after
26. Appellant’s chief witness, Mr. Thompson, testified that he was
aware at all relevant times that under certain circumstances a State
may constitutionally abrogate its contracts and that other pledges
had been repudiated. A 950-951, 952.
4°
May 10, 1973. A 102-108. In June 1973, the Port Author-
ity issued its 40th series of Consolidated Bonds:at an in-
terest rate of 6 percent. Though the covenant didnot apply,
appellant exercised its discretion to buy $2,570,000 of 40th
series bonds for its fiduciary accounts, A 1120,
In October 1973, as New Jersey’s gubernatorial race was
nearing its end, the Port Authority issued $100 million of
its 41st series of Consolidated Bonds. Though the covenant
did not apply to these bonds and candidate Byrne had, as
appellant claims, called for greater participation by the
Authority in mass transportation, the bonds were sold at
an interest rate of 544 percent. A 110-111. In light of these
undisputed facts, the trial court properly concluded:
“[T]t is clear that the interest rates which the Au-
thority has had to pay on non-affeeted bonds [the
40th and 41st series} were not materially affected by
the absence of direct covenant protection.” A 111,
At the trial, appellant attempted to show that the repeal
of the covenant adversely affected the secondary market for
Port Authority bonds. After a careful evaluation of the
live testimony and comprehensive documentary evidence
submitted to him, the trial court concluded:
“The bottom line of plaintiff's proofs on this issue
is simply that the evidence fails to demonstrate that
the secondary market price of Authority bonds was
alversely affected by the repeal of the covenant, ex-
cept for a short-term fall-off in price the effect of
which has now been dissipated insofar as it can be
related to the enactment of the repeal.” A 112-113,
While appellant attacks this finding at length, A.B. 88 to
47, it simply cannot overcome the fact that at the time of
trial the prices for bonds of the Port Authority of New
York and New Jersey and of the Massachusetts Port Au-
thority (an agency selected for comparison by appellant,
A 209-215) bore exactly the same relationship to each other
43
that they did when appellant’s charts began (July 1973)
and immediately prior to the repeal of the covenant, A 111-
112, 210-211, 243, 1119. Even as of August 4, 1976, the
spread between Mass. Ports and New York Ports was the
same as it had been in July 1973, April 1974 and February
1975. A 1181,
Appellant’s statement, A.B, 41, that the “sharp rise” in
Port Authority bond prices “in January 1975” was “caused
by purchases to cover short sales in the preceding month”
demonstrates, if anything, that the prices were artif‘cially
low at the end of 1974, when appellant’s charts as submitted
during Mr, Thompson’s testimony end, see A 210-211, 213-
214, Appellant’s further characterization of the relation-
ship between the bond prices of New York Ports and Mass.
Ports as a “short term technical situation,” A.B, 43, is,
respectfully, ridiculous since the relationship has remained
the same in the 18 months since trial, A 1131,”
Appellant also would have the Court believe that “the
quoted bid prices for the Port Authority bonds since the
repeal are artificially high, because, as noted above, an
attempted sale of any block of Port Authority bonds, which
could have been sold at the quoted price prior to repeal,
would now force the quoted prices substantially lower.”
27. Appellant complains, A.B. 44, that the trial court ignored
evidence cauiee to eaees Turnpike and Indiana Toll Road Tends,
the only issues selected for comparison by Mr. Murphy, A 988, from
“roughly two hundred issues” in which he maintains an active
market, A 975, But the evidence cited in the text demonstrates that
the bonds of the Port Authority of New York and New Jersey
behaved no differently vis-a-vis the Kansas and Indiana bonds than
did the bonds of the Massachusetts Port Authority, See also A 989-
991 (toll road agencies, unlike the Port Authority, do not have one-
third of their assets invested in a real estate market that was severely
depressed in 1974, nor do they have major investments in airports
that were hit hard by the sharp drop in air traffic in 1974), More-
over, the two toll road bonds selected by Mr. 7 went up
sharply in price in mid-1974, accounting for the entire increase in
the spread between the toll road bonds and the New York-New
Jersey and Massachusetts Port bonds, while the rest of the bond
market was declining. A 992-993,
44
A.B, 41. The disproof of this pudding occurred in July
and August 1976 when the Authority issued its $100,000,000
42nd series. Though Mr. Thompson had testified that his
calculations showed that a new issue of Port Authority
bonds “would immediately drop the secondary market for
all other Port issues ... by some 6 to 10 points,” A 940, in
the month following issuance of the 42nd series, the prices
of all three New York Port bonds quoted in The New York
Times increased, A 1131, and the new bonds, offered
through a syndicate including many of the nation’s largest
investment houses, quickly sold out at a premium, A 1124.
Appellant further complains, A.B, 40, that the trial court
“ignored the expert testimony with respect to the ‘thinness’
of the market,” though it admits two pages later, A.B, 42,
that the trial court “referred to the testimony as to the
thinness of the market.” In fact, appellant’s evidence on
this point was contradictory and internally inconsistent.
Appellant’s witnesses, having been sequestered, testified
that: (1) after repeal, people could not buy Port bonds be-
cause nobody would sell; (2) after repeal, people could not
sell their Port bonds because nobody would buy; and (3)
there was a rush of selling. Thus, Mr. Thompson testified
that “all of the professional investors T know” decided to
hold on to their Ports. “As a consequence the flow of bonds
into the market is much less than it normally would be.”
A 879. Mr. Fitzgerald testified that immediately after
repeal, “there was a reasonable amount of selling, but . . .
to have had the selling, you would have to have people who
are willing to stand up and buy bonds as well , . .,” A 1100,
and after repeal investors would no longer buy Port bonds,
A 1092-1093, And Mr. Murphy testified that, “the size of
the market T would say immediately after the repeal was
quite active, I would say that there was substantial selling
of Port Authority bonds. As time went on, it became
increasingly heavier, particularly at the end of the year,
because a number of institutions and fiduciaries availed
45
themselves of the opportunity of selling Port bonds to
establish tax losses.” A 984, Presumably they were sell-
ing to somebody,
In the face of this conflicting testimony, appellant’s fail-
ure to offer any records documenting the volume of pur-
chases and sales of Port Authority bonds, and the evidence
showing no adverse effect on market prices, the trial court
properly found that repeal of the covenant had no signifi-
cant adverse effect on the secondary market for Port
Authority bonds, A 112-113,"
F. Legislative History of the Repeal of the 1962 Covenant
Appellant objects to the above heading in the trial court’s
opinion, A 98, as “misleading because there is, in fact, no
legislative history attendant upon the repeal of the 1962
Covenant.” A.B, 26-27 n.16, Tn fact, as the record demon-
strates, the years immediately preceding repeal saw
repeated and extensive legislative consideration of the vital
question of the Port Authority’s role in rail mass transit.
Relevant legislation was enacted in both States in 1971, in
New York in 1972, in both States in 1973 and again in 1974.
A 629, 703-707. The introducer’s statement annexed to
New Jersey’s repeal of the covenant refers specifically to
the 1972 legislation. A 103, 773. Similarly, during the
1974 legislative debate on New York’s repeal, explicit ref-
erence was made to the efforts over the prior four years to
increase the Port Authority's participation in rail mass
28. Though much of the testimony of appellant's experts about
the market for Port bonds was conflicting and contradictory, there
was no disagreement about one proposition, In response to requests
for advice about whether to buy Port bonds, Mr, Thompson testified:
“With regard to purchase, I simply for the most part agreed with
them that it wasn't a very wise thing to in effect buy into a lawsuit.”
A 882. If anything has happened to the market for Port Authority
bonds, even though the prices do not reflect it and appellant's ex-
perts disagree over what it is, investor reluctance to buy into a liw-
suit offers a classical explanation,
46
transit, A 769, 771-772. This four-year effort was also
cited in the October 1975 report of a Joint New Jersey
Legislative Committee investigating the Port Authority.
A 164,
1. The energy crisis
In early 1974, while repeal of the 1962 covenant was
before the Legislatures of New Jersey and New York, both
States and, indeed, the entire nation, were in the throes of
a paralyzing energy crisis.’ On November 27, 1973, Con-
gress had enacted the Emergency Petroleum Allocation
Act of 1973, 15 U.S.C, sections 751 et seq., directing the
President to promulgate regulations for the mandatory
allocation and pricing of crude oil and refined petroleum
products, 15 U.S.C, section 753(a). In enacting this sta-
tute, Congress specifically found that the hardships caused
by the oil shortage:
“jeopardize the normal flow of commerce and con-
stitute a national energy crisis which is a threat to
the public health, safety, and welfare.” 15 U.S.C.
section 751(e),
On January 14, 1974, the Federal Energy Office promul.-
gated its Mandatory Petroleum Allocation and Pricing
Regulations for monthly allocations of gasoline. The Janu-
ary and February 1974 allocations to New Jersey and New
York were totally inadequate to meet the demand for gaso-
29. Appellant claims that the repeal was proposed b . i
date Byrne “in June, 1973, well bitees the ome cre” AnD
n. 16, In fact, as early as April 18, 1973, there were Presidential
Proclamations establishing the National Energy Office and attempt-
ing to reduce oil imports, see 38 Fed, Reg. pp. 9645, 9657; by June
1973, Governor Love of Colorado had been appointed to head the
eg a — and the President had released a ner state-
on the nation’s energy resource problem, We
June 30, 1973, pp, 1, 20; 38 Fed. R “ wii Pen yew
In any event, the evil existing at the time the Legislature acted
is obviously the controlling factor, and appellant concedes that the
nation was afflicted by a grave energy crisis in 1974, A.B, 56,
47
line in those States. The result was chaos, as most service
stations closed and the few that remained open were
besieged by long lines of motorists, A 552-553, Local law
enforcement, first aid and fire fighting personnel were
inadequately supplied, while ordinary citizens immobilized
by the lack of gasoline and suitable public transportation
alternatives could not go to work, shop for necessary food
supplies or obtain medical service, Jd,
The legislation repealing the 1962 covenant was intro-
duced on February 15, 1974, A 434, 763 n., at the very
height of the energy crisis, Eleven days earlier, the New
Jersey Legislature had enacted the Emergency Energy
Fair Practices Act of 1974, which found “that an energy
shortage now exists and may continue for the foreseeable
future’; ten days earlier, Governor Byrne, in his first
Executive Order, had proclaimed that an energy emergency
existed, A 551-552."
Though there is no shortage of gasoline in the State of
New Jersey at the moment, there was a desperate shortage
immediately before the Legislatures acted and that short-
age could recur at any time. Moreover, the enduring effects
and implications of the energy crisis are very much with
us now, as Congress and the President continue to wrestle
30. Appellant's contention that there was no cope expressed
relationship between the repeal of the 1962 covenant and the energy
crisis, A.B, 56, 66, is disingenuous, As shown by the articles appear-
ing at A 425-438, on February 12, 1974, New my Department of
Transportation officials appeared before the I.C.C. to protest the
Port Authority’s request, in the middle of the energy crisis, for
a 66% increase in the PATH fare, One or more issioners
of the Authority thereupon threatened to withdraw Port Authority
support for new rail mass transit projects that the Authority and the
States had been hoping could satisfy the covenant, New Jersey's bill
to repeal the 1962 covenant was introduced within two days of this
threat.
The relationship between repeal and the energy crisis was also
expressly noted in the New York legislative debate. See pp. 49-50,
infra. And, of course, the relationship between legislation permitting
increased support for mass transit and the energy crisis was obvious
to everyone concerned,
48
with measures to reduce our dependence on foreign oil.
On February 21, 1974, President Nixon discussed the long-
range and “no less difficult” problem the nation would face
when the oil embargo ended and observed: “It is now
widely recognized that the development of better mass
transit systems may be one of the key solutions to both our
eneryy and environmental problems.” A 106, 555-556.
Congress has repeatedly agreed. For example, the
Regional Rail Reorganization Act of 1973, enacted on
January 2, 1974, contains specific findings that “rail service
and rai) transportation offer economic and environmental
advantages with respect to... energy efficiency and con-
servation... to such extent that the preservation and
maintenance of adequate and efficient rail service is in the
national interest,” and that “railroads are one of the most
energy-efficient modes of transportation for the movement
of passengers and freight.” A 107, 547-549. See also the
Energy Supply and Environmental Coordination Act of
1974, 15 U.S.C, sections 791 et seq.; and the National Mass
Transportation Assistance Act of 1974, A 99 n, 29, 719-723.
During the debate on the last of these statutes in late 1974,
Congressman Minish of New Jersey, one of its principal
sponsors, reminded Congress:
“With our present energy situation and the threat
of a renewed crisis in this area, the need for mass
transit aid has become ever more critical. Buses and
rail cars consume only a fraction of the energy that
a private automobile does, yet we cannot expect the
commuting public to reduce significantly its use of
private cars if we do not provide suitable alterna.
tive sources of transportation.” A 721,
See also the statements of Senator Williams of New Jersey
and Representative Abzug of New York at A 720-721, 722-
723.
The energy crisis, which was totally unexpected when the
covenant was enacted in 1962, made it essential that the
49
States invoke their police power to facilitate greater par-
ticipation by the Port Authority in the development of rail
mass transit. The Port Authority, absent the covenant, is
in a unique position to impose higher costs upon the cars
using its bridges and tunnels, thereby discouraging their
use, and to apply the increased revenues from the higher
tolls to improved and expanded rail mass transit. The
Port Authority was, after all, founded upon the under-
standing that great benefits would accrue from coordinated
transportation in the Port District.
The energy implications of this coordinated approach are
obvious and were recognized by appellant’s chief witness,
John Thompson, when he wrote to The New York Times on
May 1, 1974, the day after Governor Byrne signed New
Jersey’s repeal:
“A broad view of urban and energy problems sug-
gests that government should act to discourage auto
traffic into major cities in favor of the greater use
of mass transit. This would probably involve a siz-
able shift of funds from charges imposed on automo-
bile traffic to the support of mass transit; to do this
is an exercise of the state police power, and it should
be done in this instance by the two States themselves,
and applied to all automobile traffic entering Manhat-
tan.” A 245-246.°!
Just a few days earlier, Assembyman Koppell had told
the New York State Assembly during its debate on repeal
that:
“Tf anything indicates the necessity of increased
funds for mass transportation, it is the energy crisis
31. If, as appellant claims, A.B. 56, 66, the relationship between
and the energy crisis is mere coincidence and after- t,
it is curious that appellant’s chief witness made the connection publicly
and immediately and that he recognized the need for an exercise of
the States’ police power. Barron’s too observed immediately that the
covenant “has fallen victim to the energy crisis.” Ja90.
50
in which we are involved and which threatens
our whole society. I think this legislation is critical.
I think this legislation is certainly one of the most
important things that we can do today, and is un-
doubtedly one of the most important steps that we
ean take to improve mass transportation.” A771.°?
The 1962 covenant, enacted in an era of cheap and plenti-
ful oil, beeame a harmful anachronism in the very different
world of 1974. See A 769.
2. Health and environmental factors
The early seventies were also a time of unprecedented
efforts to alleviate the health hazards associated with air
pollution, efforts of a scope and magnitude unknown in
1962. The federal Clean Air Act Amendments of 1970, 42
U.S.C. sections 1857 et seq., provided major impetus. They
authorized the Administrator of the federal Environmental
Protection Agency to establish national air quality stand-
ards and to prescribe, upon the failure of a State to do so,
the steps necessary to achieve compliance with those stand-
ards. A 105.
The technical background with respect to the federal air
quality standards for carbon monoxide is summarized at
A 561-564; hydrocarbons are discussed at A 564-565.
Briefly, the National Air Pollution Control Administration
found that even low concentrations of carbon monoxide af-
fect the senses and produce undesirable cardiovascular
32. In the face of this statement, which is included in the Stipula-
tion and which we have repeatedly cited in the courts below, the first
footnote on page 7 of appellant’s reply to our motion to dismiss said:
“Not one legislator from either state, nor either Governor, publicly
expressed the most casual connection between retroactive repeal of the
1962 Covenant and any energy or environmental lem.” The
second numbered paragraph at A.B. 56 continues to imply strongly,
but erroneously, that no reference was made to the energy crisis dur-
ing the legislative debate on repeal.
51
changes. A 561-562. With respect to hydrocarbons, it found
that their presence in the air causes irritation of the eyes,
upper respiratory tract and skin, visibility reduction and
vegetation and material damage. A 564. As for the source
of the pollutants, the studies are consistent. In the New
York Metropolitan area, an estimated 95.5 per cent of all
carbon monoxide emissions come from transportation. A
561.°° Motor vehicles are responsible for 49 per cent of
hydrocarbon emissions. A 564. Automobile exhaust emis-
sions are “the primary source of air pollution in the City of
New York.” A 104.
On November 13, 1973, after the State of New Jersey
failed to present an acceptable plan for achieving compli-
ance with the national air quality standards for hydrocar-
bons and carbon monoxide, the Administrator of the fed-
eral Environmental Protection Agency promulgated regu-
lations designed to achieve a 67 percent reduction in
hydrocarbon emissions and a 47 percent reduction in
carbon monoxide emissions in the northern part of New
Jersey. A 105; 38 Fed. Reg. 31388 et seq.** The federally
mandated plan for New Jersey includes the “application
of certain transportation control measures including a re-
quirement for a significant reduction in vehicle miles
traveled.” A 105; 38 Fed. Reg. 31389.
The Administrator stated that although the Environ-
mental Protection Agency attempted to avoid the imposi-
tion of “impractical” measures in 1977, the year by which
the State was to be in compliance, “a regulation has been
33. In Friends of the Earth v. Carey, 535 F.2d 165, 180 (2d Cir.
1976), the court observed that carbon monoxide air pollution in New
York City has “climbed to over five times the federal health stand-
ards.” The court ordered enforcement of a federal EPA plan calling
for, among other things, the i ition of tolls on the free vehicular
bridges into Manhattan. 535 F.2d at 171 n. 7, 180.
34. The parties stipulated that judicial notice could be taken of
these regulations, A 567, and they have not been reproduced in the
record. .
52
included to limit gasoline sales in 1977, but it will be used
only if the standards have not been attained by these other
measures.” 38 Fed. Reg. 31389.
As the trial court observed, A 105, the Administrator
emphasized the importance of the development of mass
transit to the improvement of New Jersey’s air quality:
“The development of large-scale mass transit
facilities and the expansion and modification of
existing mass transit facilities is essential to any
effort to reduce automotive pollution through reduc-
tions in vehicle use. ... Many improvements are
being planned in mass transit facilities in the State
that will make it possible for more people to use
mass transit instead of automobiles. . . .
“The Administrator actively supports the immedi-
ate and large-scale purchase of additional public
transportation facilities, including additional buses
and an expansion and improvement in the available
rail transit svstem. The Administrator also encour-
ages close examination of such measures as fare
reductions, State taxes to encourage VMT' [vehicle
miles traveled] reductions while raising revenue to
benefit mass transit, ... elimination of commuter dis-
counts on toll facilities in the affected Regions, and
possibly an increase in tolls during peak commuting
times to encourage carpools.” 38 Fed. Reg. 31389.
The 1962 covenant was at cross-purposes with the
Administrator’s position. By its terms, the covenant
impeded the “development of large-scale mass transit
facilities and the expansion and modification of existing
mass transit facilities,” which the Administrator called
“essential to any effort to reduce automotive pollution
through reductions in vehicle use.” And given the robust
health of the Port Authority’s revenues and reserves, the
Federal Highway Administrator would probably disap-
53
prove,*> and the Governors would never have approved, any
increased tolls on Port Authority bridges and tunnels, as
suggested by the Environmental Protection Administra-
tor, unless some of the new revenue were applied to sup-
port rail mass transit. Yet the covenant, as interpreted by
Mr. Tobin to the Legislatures in 1971, precluded the use of
increased vehicular tolls for rail mass transit. A 689.
3. The Port District’s public transportetion
requirements
The pivotal importance of adequate passenger rail trans-
portation to the welfare and economy of the State of New
Jersey has never been denied by appellant. See A.B. 66,
where appellant finally admits:
35. The tolls charged on the Authority’s bridges are subject to the
Bridge Act of 1906, 34 Stat. 84, 33 U.S.C. §491 et seq., which pro-
vides that the tolls charged “shall be reasonable and just.” The Fed-
eral Highway Administrator is authorized to prescribe such tolls. 32
Fed. Reg. 5607, 49 C.F.R. §148(i) (1). In the Delaware River Port
Authority case discussed at A 724-726, the Administrator said that
“a reasonable and just toll schedule would be one sufficient to sup-
port” all of the Authority’s activities, including a rail mass transit
line, A725, and referred to “the urgent need to structure toll rates
for crossings in major metropolitan areas to encourage use of mass
transit and carpools,” A 726. The Administrator’s order reducing
tolls was subsequently vacated by the Court of Appeals for insuffi-
cient findings with respect to whether the reduced tolls would permit
the Authority to sustain its “total activities.” Delaware River Port
Auth. v. Tiemann, 531 F.2d 699 (3d Cir. 1976). J
ich
In July 1974, the federal Department of Transprtation, whi
includes the Federal Highway Administration, concluded in a report
to Congress that:
“in some areas (New York, Philadelphia, San Francisco),
bridge toll revenues provide significant support for transit
capital and/or operating costs, thereby providing transit serv-
ice improvements which promote decreased dependence on
automobile travel. Therefore, it would appear to be in the Fed-
eral interest to permit the imposition of tolls which would
promote a more efficient utilization of the urban transportation
system. Such a policy would not be unjustly discriminatory but
more appropriately reflect the total costs of using the facility
in peak demand periods.” A 726-727.
54
“Tf it can be said in the case at bar that the ends
to be accomplished are improvement in mass transit,
decrease in air pollution and conservation of energy,
it must be granted that they are legitimate.”
Kven a brief review of the massive record demonstrates
that these were precisely the ends to be served by repeal.
Prior to 1962, public concern with rail mass transit in
the Port District produced little more than a stream of
studies and ‘reports. A 79-80, 605. While these reports
portrayed in graphic terms the continuing deterioration of
rail mass transit in the Port District—a condition to which
the vehicular facilities developed by the Port Authority
directly contributed, A 604, see Stip., pp. 96, 100, 108, 134-
135, 139, 140-141, 154; ix. VII, pp. 125A-126A, 130A-133A
—no significant steps were taken to improve the situation
until the early 1960’s. A 80. Thus, when the 1962 cove-
nant was enacted, no one knew what could actually, rather
than theoretically, be accomplished by coordinated support
of rail mass transit in the Port District.
Since 1962, the public attitude and policy has changed
dramatically from “Why Worry?” A 601. By September
1973, the State of New Jersey had committed more than
$350 million to its program, modestly begun in 1960, to
maintain and improve commuter rail services. Stip., pp.
15, 144.
In New York, it was found, contrary to the 1958 report of
the Metropolitan Rapid Transit Cominission, Stip., pp. 109-
110, upon which appellant relies at A.B. 8-9, that financial
support could be obtained from existing public authorities.
Tn addition to the Port Authority’s modernization and oper-
ation of the Hudson & Manhattan (now PATH), surplus
revenues of the Triborough Bridge and Tunnel Authority,
including additional surpluses created by the doubling of
tolls on vehicular bridges and tunnels, were applied to the
deficits of subways and passenger railroads. During the
59
seven years prior to the end of 1974, the Triborough turned
over approximately $305 million to the New York Metro-
politan Transportation Authority to help support rail mass
transit. A 732.
Despite this substantial infusion of funds in the years
since 1962, the plight of the commuter railroads within the
Port District remains critical, as the Court knows. See
Blanchette v. Connecticut Gen. Ins. Co., 419 U.S. 102, 108,
156, 159 (1974). Beginning in 1967, each of the four private
companies operating commuter rail services in New Jersey
has been involved in reorganization proceedings under the
federal bankruptcy laws. A 81 n.21. The express policy
of the State of New Jersey has been to impress upon the
federal courts supervising the reorganization proceedings
the necessity of continuing most of these rail services. A
546. The most recent comprehensive program of the New
Jersey Department of Transportation, published in Sep-
tember 1973, explained the reasons for this policy:
“Cessation of mass transportation services in these
urban areas would produce intolerable conditions on
the personal lives of the residents of the areas. The
State is now directed by the federal government to
reduce the levels of air pollution in these areas to a
significant degree within the next five years. It has
been determined that the existing basic rail and bus
systems will fail within the next few years unless a
major investment in capital facilities, equipment, and
operating subsidies is provided by the public.” A
546-547.
By 1970, it had become apparent that although it had re-
vitalized the Hudson & Manhattan, the Port Authority had
not kept pace either with its ability or with the need to
increase its participation in rail mass transportation. Thus,
in April 1970, Governors Cahill and Rockefeller announced
a joint program to expand the Authority’s role in rail mass
transit by having it build a rail link to Kennedy Airport and
56
extend PATH to Newark Airport and other parts of New
Jersey. A 99-100, 686.
In March 1971, legislative committees of both New York
and New Jersey held joint hearings on the relationship of
the Port Authority to mass transportation. The commit-
tees heard testimony, summarized at A 687-690, see further
Stip. pp. 223-233, and Stip., Ex. VII, from numerous wit-
nesses, including several recognized experts, to the follow-
ing effect: the Port Authority had substantial funds avail-
able in excess of required interest and principal payments;
the Port Authority’s revenues could be increased substan-
tially by doubling the tolls on its bridges and tunnels ;*° the
largest commercial bank in the Port District had released a
report calling for the imposition of higher and economically
more reasonable charges for the use of highways and river
crossings in order to transfer badly needed revenues to rail
mass transit; the covenant did not add to the security of
Port Authority bondholders and was simply a condition that
the Port Authority made to its assumption of responsibility
for the Hudson & Manhattan; passenger rail ridership
within the Port District had increased substantially as a
result of massive highway congestion, which was also ad-
versely affecting air quality and intelligent land planning
and use; and the Port Authority had “subverted” the ef-
forts of the Metropolitan Rapid Transit Commission as
part of its long-range effort to avoid rail mass transit in
favor of the lucrative development of vehicular facilities.
During the March 1971 joint legislative hearings, Mr.
Tobin stated that even if vehicular tolls were doubled, the
tens of millions in increased revenues “could not go under
the law [to] mass transit anyway ... we could use them for
other facilities supported by the General Reserve Fund, but
36. Executive Director Tobin predicted that doubling the Author-
ity’s vehicular tolls would raise “holy political hell,” A 688, a
prophecy borne out by the reactions to the 1975 toll increase dis-
cussed at A.B. 37-38. The fact remains that despite these reactions
the toll increase is in effect. A 528.
57
you could not, under the law and the constitution, use them
for mass transit facilities.” A 689. The obvious barrier
was the 1962 covenant.
In the light of this evidence, there was extensive discus-
sion during the 1971 joint legislative hearings concern-
ing possible repeal of the 1962 covenant. Assemblyman
Koppell of New York asked whether the covenant could be
repealed “not only for the future, but for the past” on the
basis of the legislative finding “that in the exercise of our
right to protect the people of the two states, we find that
this covenant stands in the way of the proper development
of mass transportation facilities, which is essential to the
people’s good and welfare.” <A 689.
The covenant was not repealed in 1971. Instead, after
the hearings, the Legislatures tried a different course. In
June 1971, they enacte | bi-State legislation authorizing the
Port Authority to extend passenger rail transportation to
Kennedy Airport and to Newark Airport and Cranford.
A 100, 692. In enacting these statutes, see Chapter 245 of
the Laws of New Jersey, 1971, N.J.S.A. 32:1-35.20 et seq.,
the Legislatures made detailed findings concerning the
importance of rail access to the airports. They declared
that, “Additional highway construction to serve these great
airports is not feasible and creates severe problems in
terms of increased air pollution . . .,” that rail access “must
be” provided if the Port Authority airports are “to con-
tinue to serve the economic well-being” of the area, and that
“such an undertaking is found and determined to be in the
public interest.”
The June 1971 legislation sought to avoid the limitations
of the covenant by characterizing the proposed rail links
“as constituting a part of each air terminal.” A 100,
N.J.S.A. 32:1-35.3. However, while this legislation was
pending, the Port Authority obtained opinion letters from
two New York firms, Hawkins, Delafield & Wood and Davis,
58
Polk & Wardwell, both of which concluded that the legisla-
tion would be “ineffective to remove the facilities of the
Project from the ambit of the Covenant.” A 100, 692.
In December 1971, the First Boston Corporation sub-
mitted a report to the Port Authority concerning the
financing of the airport rail links authorized by the June
1971 legislation. A 692-702. The report noted that “the
essential problem” confronting the airport rail links “is
created in the statutes and resolutions by which the Port
Authority is bound; and particularly the joint State cove-
nants of 1962, which in effect prohibit the Port Authority’s
involvement in additional passenger rail transportation
projects unless they are self-supporting.” A 692. The
study stated flatly that the 1962 covenant “precludes gen-
eral credit financing of any passenger transportation
project, no matter how desirable, for which projections
show an operating profit below debt service require-
ments.” Id.
In June 1972, the New York Legislature adopted, and
Governor Rockefeller signed, a bill repealing the 1962 cove-
nant. New Jersey did not adopt similar legislation at that
time. A 101-102.
In November 1972, Governors Cahill and Rockefeller
announced agreement on a major plan of rail mass trans-
portation development for the Port District. A 102, 705.
The Governors proposed the extension of PATH via
Newark Airport to Plainfield, direct rajl service from Ken-
nedy Airport to New York City and direct rail service to
Pennsylvania Station in New York City for riders of the
Erie Lackawanna Railroad.
Commenting on the environmental, energy and traffic
effects of the PATH-Plainfield project, the Port Authority
stated:
“Based on 1985 traffic estimates, the PATH exten-
sion to Plainfield will generate about 9 million auto-
59
mobile and bus miles in travel to and from Corridor
stations. By contrast, if rail service is abandoned
in the Corridor, an estimated 46.5 million auto and
bus miles would be required yearly on the roads lead-
ing to Newark and New York City. The saving of
37.5 million vehicle miles per year will result in less
highway congestion and less air pollution. In addi-
tion, it will be far more efficient in terms of the
utilization of scarce energy resources.” <A 715-716.
The plan was incorporated in bi-State legislation that
also repealed the covenant prospectively. A 102-103; Ch.
208 of the Laws of N.J., 1972, N.J.S.A. 32:1-35.51 et seq.;
Ch. 318 of the Laws of N.Y., 1973.
The estimated cost of the plan was $650 million, and it
was said that the Port Authority would invest between $250
and $300 million for these vital projects. A 102-103; see
also A 385. It was alse said that these projects would be
self-supporting, but if any deficits were to materialize, they
would be the Port Authority’s responsibility. The 1972 An-
nual Report of the Port Authority stated that the necessary
steps were being taken “so that construction might begin as
soon as possible in 1973 on one or more of the projects. The
program is expected to be completed by the end of 1977.”
A 386°387. Nevertheless, the covenant prevented the Port
Authority from proceeding to construction of these legisla-
tively authorized projects. The Port Authority could not
participate in the financing of a passenger rail project
unless that project’s estimated net revenues were them-
selves sufficient to carry its debt service. The condition
proved to be an insuperable obstacle.
As appellant states, A.B. 17 n. 14, in 1972 it was said that
the PATH-Plainfield part of the package might be financed
within the terms of the 1962 covenant through a federal
grant of $150 million, Port Authority participation of $50
million and an advance of up to $40 million by the State of
60
New Jersey, to be repaid by the Port Authority. But it
soon became apparent that this plan was not feasible.*’
The Authority’s application for federal funds, filed in April
1974 just before repeal of the covenant, was rejected by
the federal Urban Mass Transportation Administration
because it failed to include the necessary certification of
how the local financial share would be obtained. A 717.
See also A 393-394.
G. Post-repeal Plans for Financing Mass Transit
With the covenant repealed, the Port Authority could
plan and act to finance PATH-Plainfield sensibly and with-
out any impairment of bondholder security. On April 10,
1975, the Authority announced a proposed increase in its
basie bridge and tunnel tolls (which had remained constant
sinee 1927) to raise an estimated $40 million per year to be
used to help finance the PATH-Plainfield project, the Ken-
nedy rail link, the Erie Lackawanna direct access plan and
an expansion of the Port Authority Bus Terminal. See
A 405-407, 419-421, 528.
The “historic revision” of Port Authority bridge and
tunnel tolls, A 439, 503, expressly effected “to increase its
ability to finance vital mass transit improvements,” A 405,
went into effect on May 5, 1975. The trial court’s decision
sustaining the repeal of the covenant issued on May 14,
37. In December 1972, the Director of the Port Authority’s
Department of Rail Transportation told an Information Session of
the New Jersey Senate that PATH-Plainfield was “barely doable on
a self-sustaining basis,” even if the most optimistic assumptions were
made. A 708-709. By 1975, after a sharp increase in the estimated
cost of the project from $252 million to $347 million, A 398-399,
it was clear that $40 million from the State would not do the job.
New Jersey’s Transportation Commissioner said so and proposed
that the State assume responsibility for operating deficits. A 477.
This is the position appellant characterizes as a unilateral election to
renege. A.B. 18, 36.
61
1975. On May 23, 1975, the Port Authority submitted a re-
vised application to the Urban Mass Transportation Admin-
istration for $277.6 million in federal funds for the PATH-
Plainfield project, certifyiag that the 20 per cent local share
of the capital cost of the project, $69.4 million, would be
obtained from the proceeds of Port Authority bond sales
with the State agreeing to finance any operating deficit. A
527. The covenant would have blocked this plan because
the net revenues of the project are unlikely to equal debt
service. The difference between the two will be made up by
increased tolls on auto traffic. The speed with which the
Port Authority was able to act in April and May 1975 con-
trasts sharply with its inability to certify the financing of
the local share of the PATH-Plainfield project so long as
the 1962 covenant remained in effect. A 717.
qn December 1975, the Urban Mass Transportation Ad-
ministration initially rejected the PATH-Plainfield applica-
tion. A 527-528, 1132-1135. The State then submitted a
revised and more comprehensive financing plan, still pend-
ing before UMTA, pursuant to which the Port Authority’s
capital share of the PATH-Plainfield application was in-
creased to $120 million. A 1139. Appellant agrees that
this plan too would have bee» blocked by the covenant
A. B. 36. Since the Port Authority calculates that the ~
creased toll revenues can support debt service on $400 mil-
lion in new bonds, without any threat to bondholder
security, the Authority is also planning a $160 million
expansion of the Port Authority Bus Terminal and up to
$120 million for mass transportation improvements in New
York. A 528.
The foregoing package will actually enhance bondholder
security while freeing many millions of dollars for mass
transit. The toll rise has been generating over $40 million
in new revenue for more than a year. See A 528. Though
the Port Authority has begun work on the bus terminal ex-
pansion, several years will pass before the Authority will
| |
62
be spending anything like $40 million per year on debt serv-
ice for these projects. Since bridge toll hikes are subject
to federal approval and federal policy strongly supports the
application of revenues from interstate vehicular bridges
to rail mass transit, see pp. 52-53, supra, and since the Gov-
ernors would not otherwise have approved the toll increase,
the extra bond reserves provided by the immediate increase
in tolls could only have been obtained by linkage to a rail
project.
Thus, repeal permitted a coordinated transportation pro-
gram. The fare rise has an automobile-discouraging poten-
tial. The increased revenues support mass transit. Air
quality will he improved, energy conserved. And bond-
holders are not harmed.
SUMMARY OF ARGUMENT
In the courts below, eight judges reviewed appellant’s
claim that the States acted arbitrarily and capriciously in
repealing the 1962 covenant. Not one found merit in it.
As the Counter-Statement above shows, repeal permitted
the States to respond rationally to their critical need
for more mass transit, a need that was dramatically
emphasized in 1974 when gasoline shortages produced
economic chaos and vast disruptions of life in com-
munities without mass transit alternatives. Moreover,
the best scientific data available revealed that pollution
caused by automobiles in the densely populated New York-
New Jersey Metropolitan area has a corrosive effect on
human health. As appellant now recognizes, A.B. 66,
“These problems can only be atta eked by reducing vehicular
traffic partially through the improvement of mass transit.”
Legislation responsive to an existing public health men-
ace and to an unprecedented energy shortage that threat-
ened the economic foundation of the State comes before the
Court entitled to a maximum of respect. These are clearly
63
ees State interests, United States v. Little Lake
isere Co., 412 U.S. 580, 606 n.2
pe , n.2 (1973) Stewart, J.,
Since appellant now admits that those paramount inter-
ests can be advanced only “by reducing vehicular traffic
partially through the improvement of mass transit,” and.
since the covenant was a serious obstacle to precisely that
course, it follows that repeal of the covenant would have
veo constitutional even if it inflicted substantial harm on
renee Yet, as the Counter-Statement also shows,
e private loss in this case is trivial at most. The States’
repeal of the covenant in no way impairs the central
oe that principal and interest be paid when due.
or does repeal materially affect the security that supports
me = repayment ; indeed, appellant does not allege
ere is any likelihood that the bo i
cuanaes e bonds will not be
The immateriality of the covenant to bondholders’ eco-
nomic interesta is evidenced by every objective measure—
whether it he the test of the market place, analysis of the
ae Moo bondholder protections discussed above, or
e Po uthority’s huge reserves f ri
stan s fed by ever-growing
Faced with a record that fully supports these assertions
appellant chooses to deny here a proposition it conceded
helow : that State contracts are subject to legislative
action under the State’s police power.* In reversing
38. See, ¢.g., appellant’s reply brief i
1 £9. reply brief in the Supreme
pe 38: “Defendants’ dissertation on the 0 dg at a
a moo a om By by oy - Clause is superfluous since plaintiff
never tate may modi isi
contract under the color of the police rg TOG
ome (anstaste added); appellant’s trial brief 14-15: “in rare
stances a State's contract may be constitutionally abrogated by a
ee exercise of the State’s never abdicated police powers” and
ee Me sara say of the State’s action is then to be determined b
ncing the interests to be served against the harm done ‘
64
itself, appellant misstates the history of the contract
clause, misreads this Court’s relevant precedents and
advances arguments that are wrong in fact and untenable
in law.
The law is clear that all contracts are subject to State
police power. And the incontrovertible facts of this case
establish that New Jersey’s police power was reasonably
exercised.
The State also maintains that the covenant is voidable,
an alternative ground the courts below found it unneces-
sary to address.*? This Court’s precedents make it clear
that the modification of a voidable contract does not violate
the contract clause. The covenant was voidable because it
improperly amended the Port Authority Compact without
Congressional consent. Finally, the State contends that
the covenant was invalid when repealed because of its
inconsistency with supreme federal law in the transporta-
tion, environmental and energy fields. Acceptance of
either of the State’s alternative arguments requires affirm-
ance of the judgment below.
ARGUMENT
THE 1962 COVENANT IS SUBJECT TO THE REASON-
ABLE EXERCISE OF THE STATES’ NEVER ABDICATED
POLICE POWER.
Appellant’s theory that State contracts, unlike private
ones, are immune from legislative alteration pursuant to
the police power, A.B. 48-54, or subject to special rules
because the State benefits, A.B. 64, turns logic and constitu-
tional history upside down.
39. The argument was advanced at every stage of the proceedings
below, A28-29, 129, 143, but the lower courts preferred to rest their
decisions on the ground that repeal was a proper exercise of the
State’s police power.
65
A. The History of Contract Clause Jurisprudence
Shows That All Contracts, Especially State
Contracts, Are Subject to the State’s Police
Power.
The precise scope the contract clause was intended to
have by the Constitution’s framers is murky, if indeed a
group so disparate shared any common intent. As Chief
Justice Hughes noted in Home Building & Loan Ass'n v.
Blaisdell, 290 U.S. 398, 427 (1934), “[T]he debates in the
Constitutional Convention are of little aid.” Moreover,
unlike much of the Constitution’s language, the phrase
“impair the obligation of contract” has no common law
antecedents to give it shape.
In any event, it is clear that the focus of the contract
clause was private contracts, not public ones. As initially
proposed to the Convention by Rufus King of Massachu-
setts, the clause was limited to them.* He took his language
from the recently enacted Ordinance for the Northwest Ter-
ritory, which precluded laws “that shall, in any manner
whatsoever interfere with or affect private contracts, or
engagements without fraud previously formed.”*! The
broader language of the modern clause originated in the
Convention’s Committee on Style, and no debate informs us
as to the reasons for the change. However, as Wright notes
in THe Contract CLause AND THE ConsTITUTION 15-16
(1938), there is virtually no evidence that the clause was
understood by the framers to apply to public contracts.
Despite the drafters’ preoccupation with private con-
tracts, the clause was held applicable to government obliga-
tions. Fletcher v. Peck, 10 U.S. (6 Cranch) 87 (1810);
Trustees of Dartmouth College v. Woodward, 17 U.S. (4
(1911 4 M. Farrand, Records of the Federal Constitution 439
41. 44 Stat. 1851 (1926 Comp.).
66
Wheat.) 518 (1819). But contrary to appellant’s presenta-
tion, the Court has always been more receptive to alterations
of State contracts than private ones, because of the manifest
public necessity that each succeeding legislature be em-
powered to respond to changing public needs. In time, the
Marshall Court’s rigid view of the contract clause as a
barrier to nearly all retroactive legislation* had to yield to
the expanding responsibilities of government.
The seeds of later views were sown early. First, in Dart-
mouth College, Marshall recognized that the clause was
inapplicable to regulation by the States of their civil insti-
tutions ;** second, in that same case Marshall and Story both
noted that States could limit contract rights by express
reservation; third, the Court ruled in Proprietors of the
Charies River Bridge v. Proprietors of the Warren Bridge,
36 U.S. (11 Pet.) 420 (1837), that public grants were to be
strictly construed against the grantee.
Fourth, and finally, there developed the doctrine of State
police power—that the State must retain power to deal
with certain public exigencies. As noted, the States could
limit contract rights by express reservation, but even with-
out such a reservation all contracts contain implied condi-
tions intrinsic to the “obligation.” For example, government
must have continuing power to protect the morals and
publie health of its citizens. Such powers cannot be frozen
42. A view taken, it might be added, when no other basis for
federal intervention against unreasonable State legislation existed.
Barron v. Baltimore, 32 U.S. (7 Pet.) 243 (1833), held the Bill
of Rights inapplicable to the States; Calder v. Bull, 3 U.S. (3 Dall.)
386 (1798), held the ex post facto clause inapplicable to civil
legislation.
43. He observed, “That the framers of the constitution did not
intend to restrain the states in the regulation of their civil institutions,
adopted for internal government, and that the instrument they have
given us is not to be so construed, may be admitted.” 17 U.S.
(4 Wheat.) at 629. The Port Authority is, of course, a “civil institu-
tion” of the States of New York and New Jersey.
67
by contract, particularly not by contracts made by one
legislature that may be corrupt, misled or misinformed.“
People who contract either know or ought to know that
circumstances may eventuate during the life of a contract
that require its alteration by the State. When such cir-
cumstances occur, exercise of the sovereign’s power, while
it may disappoint expectations, does not impermissibly im-
pair any “obligation” of contract.
In West River Bridge Co. v. Dix, 47 U.S. (6 How.) 507,
032 (1848), upholding the condemnation by eminent domain
of a franchise granted for a term of years, the Court set
forth this theory of implied conditions:
“But into all contracts, whether made between
States and individuals or between individuals only,
there enter conditions which arise not out of the
literal terms of the contract itself; they are super-
induced by the pre-existing and higher authority of
the laws of nature, of nations, or of the community
to which the parties belong; they are always pre-
sumed, and must be presumed, to be known and rec-
ognized by all, are binding upon all, and need never,
therefore, be carried into express stipulation, for this
could add nothing to their force. Every contract is
made in subordination to them and must yield to
their control, as conditions inherent and paramount,
wherever a necessity for their execution shall oceur.”
There is, however, an important difference between im-
plied conditions in private law and the implied conditions
of sovereignty. Private parties can by the phrasing of
their bargains control the scope of implied conditions, but
one legislature, elected for a fixed term, has no power to
hargain away central elements of State sovereignty so as to
44. The wisdom underlying the doctrine is revealed by this case.
We do not question that in 1962 the Port Authority’s management
sincerely believed in its vision of the Authority’s role. It is equally
clear, however, that the Authority imposed on the Legislatures in
order to further that vision. See pp. 15-16, 20, 26 n.15, supra.
68
preclude their exercise by a future legislature. This is not
to say that one legislature can never bind the next, for
plainly it can to some extent despite the general presump-
tion against such a construction. The point is rather that
one legislature, holding the basic attributes of sovereignty
in temporary trust, cannot deny them to the future.
The point was given early expression in Newton v. Board
of County Commissioners, 100 U.S. 548 (1880). There an
1846 Ohio law purported to contract, for good considera-
tion, that a particular county seat would be located per-
manently in Canfield, Ohio. The law was held amenable to
repeal. Justice Swayne said that on many matters the
States were not competent to enter into binding contracts.
These matters:
“involve public interests and legislative Acts con-
cerning them are, necessarily, public laws. LKvery
succeeding Legislature possesses the same jurisdic-
tion and power with respect to- them as its prede-
cessors. The latter have the same power of repeal
and modification which the former had of enactment,
neither more nor less.” 100 U.S. at 559.
Soon after, the Court wrote in Stone v. Mississippi, 101
U.S. 814, 819 (1880), upholding the repeal of a lottery
franchise:
“The question is therefore, directly presented,
whether, in view of these facts, the Legislature of a
State can, by the charter of a lottery company, defeat
the will of the people, authoritatively expressed, in
relation to the further continuance of such business
in their midst. We think it cannot. No Legislature
can bargain away the public health or the public
morals. The People themselves cannot do it, much
45. In West River Bridge Co., supra, the contract did not ex-
pressly preclude subsequent use of the State eminent domain power.
In Pennsylvania Hospital v. Philadelphia, 245 U.S. 20 (1917), the
contract was express and the Court held it invalid.
69
less their servants. The supervision of both these
subjects of governmental power is continuing in its
nature, and they are to be dealt with as the special
exigencies of the moment may require. Government
is organized with a view to their preservation, aud
cannot devest itself of the power to provide for them.
For this purpose, the largest legislative discretion is
allowed, and the discretion cannot be parted with
any more than the power itself.”
The Court expressed the same principle, that on certain
matters one legislature cannot bind another, in approving
repeal of the New Orleans Butchers Monopoly in the sec-
ond Slaughterhouse Case, Butchers Union Co. v. Crescent
City Co., 111 U.S. 746, 750-751 (1884) :
“The denial of this power, in the present instance,
rests upon the ground that the power of the Legis-
lature intended to be suspended is one so indispen-
sable to the public welfare that it cannot be bargained
away by contract. It is that well known but unde-
fined power called the ‘police power’... .
“It cannot be permitted that, when the Constitu-
tion of a State, the fundamental law of the land, has
imposed upon its Legislature the duty of guarding,
by suitable laws, the health of its citizens, especially
in crowded cities, and the protection of their person
and property by suppressing and preventing crime,
that the power which enables it to perform this duty
ean be sold, bargained away, under any circum-
stances, as if it were a mere privilege which the leg-
islator could dispose of at his pleasure.”
The issue is: what are these basic police powers inherent
in sovereignty that cannot be bargained away? The early
cases tended to answer with categories of State activity,
e.g., eminent domain, government institutions, protection
of morals, protection of health, and regulation of key indus-
70
tries ;*° the later cases responded with an understanding
that powers of government cannot be thus pigeonholed.*’
46. The present case falls clearly within three of these, protection
of health, change in civil institutions of government and regulation
of key industries.
47. The trial court’s opinion concisely summarizes the main cases
before Blaisdell, A 119-120:
“During the span of more than a century between Ogden v.
Saunders [1827] and Blaisdell [1933] the court had held on
numerous occasions that the states retained the power to im-
pair contractual obligations—including those to which the state
was a party—in the exercise of their always reserved police
powers to act in the interest of the public health, safety and
general welfare. First in dictum, Boyd v. Alabama, 94 U.S.
645, 650, 24 L. Ed. 302 (1877), and then by direct application
of the doctrine, the court held that a lottery franchise granted
for a definite term of years could be repealed. Stone v.
Mississippi, 101 U.S. 814, 25 L. Ed. 1079 (1880); Douglas v.
Kentucky, 168 U.S. 488, 18 S. Ct. 199, 42 L. Ed. 553 (1897).
In Northwestern Fertilizing Co. v. Hyde Park, 97 U.S. 659,
24 L. Ed. 1036 (1878), it was held that a franchise to operate
a fertilizer factory at a given location could be negated by the
exercise of the police power to abate a nuisance. Similarly,
the power to control the use of the public streets may not be
bargained away, Atlantic Coast Line R. Co. v. Goldsboro, 232
U.S. 548, 34 S. Ct. 364, 58 L. Ed. 721 (1914) ; Denver & Rio
Grande R. Co. v. Denver, 250 U.S. 241, 39 S. Ct. 450, 63 L. Ed.
958 (1919), nor can the state contractually bind itself not to
exercise its power of eminent domain, West River Bridge Co.
v. Dix, 47 U.S. (6 How.) 507, 12 L. Ed. 535 (1848); Penn-
sylvania Hospital v. Philadelphia, 245 U.S. 20, 38 S. Ct. 35,
62 L. Ed. 124 (1917), or to change the location of its govern-
mental subdivisions, Newton v. Mahoning County, 100 U.S.
548, 25 L. Ed. 710 (1880). The broadest expression of this
view of the police power during this period is to be found in
Chicago & Alton R.R. v. Tranberger, 238 U.S. 67, 35 S. Ct.
678, 59 L. Ed. 1204 (1915), where Justice Pitney said:
‘It is established by repeated decisions of this court that
neither of these provisions of the Federal Constitution [the
Contract and Due Process Clauses] has the effect of over-
riding the power of the state to establish all regulations
reasonably necessary to secure the health, safety, or general
welfare of the community, that this power can neither be
abdicated nor bargained away and is inalienable even by
express grant; and that all contract and property rights are
held subject to its fair exercise***. And it is also settled
that the police power embraces regulations designed to pro-
mote the public convenience or the general welfare and
prosperity, as well as those in the interest of public health,
morals or safety.’ (238 U.S. at 76-77, 35 S. Ct. at 682)”
71
The State necessarily retains residual sovereign power to
meet the needs of the people. What counts is whether the
power is reasonably exercised.
The leading case in the transition is Home Building &
Loan Ass’n v. Blaisdell, 290 U.S. 398 (1934). At issue there
was the Minnesota Mortgage Moratorium Law, a statute
that stopped creditors from exercising their time-honored,
bargained-for rights to take possession of and sell the mort-
gaged property. Quite clearly, as the dissent asserted, the
legislation did just what the contract clause was originally
designed to prevent-—provide emergency debtor relief. Nor
could the law be thought a regulation of health or morals.
These categories were not stretched but abandoned. Find-
ing that the contract clause “is not an absolute one and is
not to be read with literal exactness like a mathematical
formula,” the Court wrote: |
“Not only are existing laws read into contracts in
order to fix obligations as between the parties, but
the reservation of essential attributes of sovereign
power is also read into contracts as a postulate of
the legal order.” 290 U.S. at 435.
In trying to limit Blaisdell, appellant emphasizes that
the Minnesota law relieved private parties, not the State,
of contractual duties. The difference was indeed note-
worthy: in the past, States had frequently been allowed to
repudiate their own promises; Blaisdell held that they
could also interfere with private contracts when private
distress rose to the level of public concern. Acceptable jus-
tification for legislation affecting contract rights was no
longer limi
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