Wisconsin Legislature: Destination-63

74 Op. Att'y Gen. 169, 179 (1985)

Other precedents exist for legislative regulation of particular state-created corporations. Just as board membership of public purpose corporations would be regulated by the proposed legislation, the members of the boards of the Wisconsin University Building Corporation and the Wisconsin Public Broadcasting Foundation are limited by statute.

Bareis

, 257 Wis. at 501; sec. 39.12(4), Stats. In

State ex rel. Warren v. Reuter

, 44 Wis. 2d 201, 216, 170 N.W.2d 790 (1969), the court found not only a right, but a duty to regulate private corporations receiving public funds:

74 Op. Att'y Gen. 169, 179 (1985)

The question of reasonable regulations for control and accountability to secure the public interest is one of degree and depends upon the purposes, the agency and the surrounding circumstances. Only such control and accountability as is reasonably necessary under the circumstances to attain the public purpose is required. Budgeting and auditing are, of course, basic and necessary controls; additional types of control vary with the demands or requirements of the circumstances. What would be sufficient control for daily operations may not serve for capital improvements and vice versa. What controls may be necessary for an agency to be formed may not be necessary for an agency which has been operating for many years and has established an acceptable policy and is under regulations and control of other governmental bodies. Likewise, controls which are sufficient today for this appropriation may not be sufficient tomorrow under different circumstances.

74 Op. Att'y Gen. 169, 179 (1985)

I understand that WHEC receives no public funds except as consideration for services rendered. Nevertheless, as guidelines for the permissible scope of government regulation of private entities performing public purposes, the above-quoted language is instructive.¯

Within reasonable limits, I believe that WHEC and entities like WHEC are subject to legislative oversight in the public interest.

74 Op. Att'y Gen. 169, 180 (1985)

In addition to the state's general interest in promoting public well-being by regulating governmentally-created corporations, the state has a particular relationship with WHEC by virtue of the language of section 39.33 and WHEC's relationship with HEAB and the student loan revenue obligation bond program.

74 Op. Att'y Gen. 169, 180 (1985)

Under section 39.33(1), HEAB was authorized to organize and "maintain" a guarantee corporation. Thus, the state has the responsibility to see that WHEC remains in existence. It is reasonable to conclude that the duty to maintain WHEC carries with it a right, if not a duty, to regulate its affairs that would not necessarily exist with respect to just any corporation.

74 Op. Att'y Gen. 169, 180 (1985)

Another particular aspect of the state's relationship with WHEC provides a reasonable basis for the proposed legislation. The state has issued $215,000,000 of Student Loan Revenue Obligation Bonds to finance its operations as a lender under the guaranteed student loan program. All loans made with bond proceeds have been guaranteed by WHEC. The board and WHEC are parties to the Corporation Reserve Agreement, setting out certain rights and obligations by both parties to secure the integrity of the bonds and the program itself. As long as any bonds are outstanding, the state has a special interest in the operations of WHEC.

74 Op. Att'y Gen. 169, 180 (1985)

Finally, throughout its history, WHEC has in other ways played a unique role in the performance of the state's duties under the guaranteed student loan program,¯

justifying more precise legislative oversight than might otherwise be the case. HEAB has statutory authority to furnish administrative services to WHEC. Sec. 39.33, Stats. By contract, the state has obligated itself to do so. This obligation is a covenant with bondholders. Thus, by virtue of its responsibilities to bondholders, the state is intimately concerned in the operations of WHEC.

74 Op. Att'y Gen. 169, 180-181 (1985)

In recent months WHEC's relationship with the state has become even more intimate. I understand that, by contract, WHEC now provides administrative services to HEAB, including the servicing of loans made by private lenders. By assuming the responsibility of administering the lender servicing program--one of HEAB's major statutory responsibilities, section 39.33(10)¯

-- WHEC has subjected itself to a reasonable degree of legislative control. It is my further understanding that 174 of 193 HEAB employes now work for WHEC under contract with HEAB. This unusual state of affairs is further evidence of WHEC's special status.

74 Op. Att'y Gen. 169, 181 (1985)

The legislative history reveals that there is concern that WHEC is considering making major expenditures, for a building and a computer, out of its insurance reserve fund. Report from the Legislative Fiscal Bureau to the Joint Finance Committee, May 10, 1985. The state is justified in legislating to preserve the integrity of insurance reserves. The insurance code (which would apply to public purpose corporations, being insurers) is replete with regulations to protect consumers of insurance. WHEC's reserve fund is of special concern to the state because WHEC's operations are part and parcel of a special government program.

74 Op. Att'y Gen. 169, 181 (1985)

In summary, the proposed legislation imposes reasonable controls over the operations of public purpose corporations, including WHEC. The legislation does not violate article IV, sections 31 and 32 of the Wisconsin Constitution.¯

74 Op. Att'y Gen. 169, 182 (1985)

Your letter also asks whether the proposed legislation affects the state's covenants under the student loan revenue obligation bond program (the "Program"). In my opinion, it does not.

74 Op. Att'y Gen. 169, 182 (1985)

In the State Building Commission resolution creating the Program (the "Resolution"), the state covenanted with bondholders that as long as any bonds issued to finance the Program are outstanding and unpaid, the state will not limit or alter its powers to fulfill the terms of any agreements with bondholders or in any way impair the rights and remedies of bondholders. A similar pledge is contained in section 18.61(1) with respect to revenue obligation programs generally. The Resolution also contains a covenant that the state will maintain and enforce a contract between the state and WHEC known as the Corporation Reserve Agreement and take no action in connection therewith which in any manner will adversely affect the rights of bondholders. Among other provisions, the Corporation Reserve Agreement obligates the state to provide administrative services to WHEC as long as any bonds are outstanding.

74 Op. Att'y Gen. 169, 182 (1985)

These covenants are protected against impairment by the contract clauses of the state and federal constitutions. Wis. Const. art. 1, sec. 12. U.S. Const. art. 1, sec. 10.

See United States Trust Co. v. New Jersey

, 431 U.S. 1 (1977). WHEC's contractual obligations,

e.g.

, lender servicing agreements, employment contracts, etc., are similarly protected.

74 Op. Att'y Gen. 169, 182-183 (1985)

In 72 Op Att'y Gen. at 142, I cautioned that any "attempt to abrogate [WHEC's obligation to collect delinquent student loans] or otherwise transfer [WHEC's] obligations to the state would more than likely be a violation of the Contract Clause." I also stated that state assumption of WHEC's guarantee function would amount to giving the state's credit in aid of private individuals in violation of Wisconsin Constitution article VIII, section 3. If the proposed legislation were interpreted to have the effect of transforming WHEC into a state agency, the state's covenant not to impair the rights of bondholders would be breached. A state guarantee of student loan payments would be unconstitutional and, thus, void. The bondholders would be left without an essential component of the Program's security. The proposed legislation does not, however, transform WHEC into a state agency.

74 Op. Att'y Gen. 169, 183 (1985)

The supreme court has repeatedly held that dummy corporations are not state agencies.

E.g., Thomson v. Giessel

265 Wis. at 196;

Thomson v. Giessel

, 267 Wis. at 340;

Bareis

, 257 Wis. at 501;

Nusbaum

, 59 Wis. 2d at 424. There is historical precedent for regulations of governmentally-created entities like that proposed by AB 85. The Wisconsin Federal Surplus Property Development Corporation had to report to the state Department of Resource Development.

Herro

, 42 Wis. 2d at 95. State turnpike corporations had to seek route approval from the Legislature and the Governor.

Thomson v. Giessel

, 265 Wis. at 198. The members and officers of the Wisconsin University Building Corporation had to be "persons who [held] certain offices in the administrative structure of the university."

Bareis

, 257 Wis. at 501. The membership of the board of the corporation organized by the Educational Communications Board is statutorily restricted and the corporation must submit to an examination of its records by the Educational Communications Board, the Department of Administration, the Legislative Fiscal Bureau and the Legislative Audit Bureau, among others. Sec. 39.12(3) and (4), Stats. Similar restrictions are part of the laws governing Wisconsin Housing and Economic Development Authority and the Bradley Center Sports and Entertainment Corporation.

74 Op. Att'y Gen. 169, 183 (1985)

I have no fear that WHEC would be construed as a state agency in light of these historical precedents. If the closeness of WHEC's relationship to the state were a problem, WHEC was closest when the bonds were issued; until recently, WHEC's board was the HEAB board. For most of its existence, WHEC had no employes, but, rather, was a shell, with legal independence from the state but practical dependence upon the state for the performance of its functions. Even after the proposed legislation, WHEC will be more of a separate creature than at the time the bonds were issued. If separation from the state were important to bondholders, they may be benefitted, rather than injured, by WHEC's new relationship with the state.

74 Op. Att'y Gen. 169, 183-184 (1985)

Bondholders might benefit in other ways. The proposed legislation subjects WHEC to the ethics law, permits legislative audit, limits expenses of travel and employe compensation, opens WHEC's affairs up to public scrutiny and returns board membership to gubernatorial appointees. These could all be perceived as enhancing the security of bondholders, to the extent the integrity of the bonds is dependent upon the integrity of WHEC. The state has an obligation to do nothing to jeopardize the well-being of bondholders. The proposed legislation does not affront that obligation.

74 Op. Att'y Gen. 169, 184 (1985)

With respect to WHEC's contractual obligations, as opposed to the state's contractual obligations to bondholders, there are no apparent impairment problems either. On its face, the proposed legislation does not affect WHEC's ability to perform its contractual obligations to private lenders, employes or others. But "impairment is ultimately an issue of fact." 72 Op Att'y Gen. at 140. Whether or not any particular contract would be impaired cannot be determined at this time. On the basis of the facts known to me the proposed legislation does not violate either the state or federal contract clause.

74 Op. Att'y Gen. 169, 184 (1985)

III

74 Op. Att'y Gen. 169, 184 (1985)

Having concluded that the proposed legislation is constitutional and would not violate the state's duty to bondholders, I must still caution the state's lawmakers to tread carefully in this area. The wisdom of creating dummy corporations and of delegating to them the administration of important government programs, is for the Legislature and the Governor to determine. The supreme court has recognized the state's right to do so and right to regulate to a degree the entities so created. But there are limits to the state's control even where a private entity receives public money.

74 Op. Att'y Gen. 169, 184 (1985)

A private agency cannot and should not be controlled as two-fistedly as a governmental agency. If such need for control is present, it might be better to use a governmental agency. A private agency is selected to aid the government because it can perform the service as well or better than the government. We should not bog down private agencies with unnecessary governmental control.

74 Op. Att'y Gen. 169, 184 (1985)

Warren v. Reuter

, 44 Wis. 2d at 217. Similar thoughts were expressed regarding dummy corporations.

74 Op. Att'y Gen. 169, 184 (1985)

"If a person enters into a contract with a dummy corporation, which is both created and limited by the statutes, he is entitled to rely on the provisions of the statutes."

Herro

, 42 Wis. 2d at 118.

74 Op. Att'y Gen. 169, 185 (1985)

If we are going to recognize that... [dummy corporations] are separate and distinct from the state, then it must be determined that the property owned by the dummy corporation is not the state's property.... The legislature, as well as the public, must treat the dummy corporation as a distinct entity.

74 Op. Att'y Gen. 169, 185 (1985)

Herro

, 42 Wis. 2d at 116.

74 Op. Att'y Gen. 169, 185 (1985)

One might well question why the Legislature would allow HEAB, a state agency over which it has complete authority, to contract away its program responsibilities to WHEC, a private corporation over which it has less authority, and then try to regulate WHEC, rather than attempt to achieve the same results by regulating HEAB. Constitutionally, however, the Legislature, in this case at least, has the power to take either course, the proposed regulations being reasonably related to the purpose sought to be achieved and properly drawn to achieve that purpose.

74 Op. Att'y Gen. 169, 185 (1985)

BCL:ESM

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-63

Subsequent to your request, on July 15, 1985, Assembly Bill 85 was enacted into law as 1985 Wisconsin Act 29. The provisions in question were vetoed. Since the veto is subject to override, this opinion refers to the provisions in question as the "proposed legislation" or the "proposal." References are to the Engrossed Bill, dated June 14, 1985.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-64

Arguably, public purpose corporations are already subject to legislative audit, one of the proposed requirements, by operation of section 181.27(2), which allows the state, for good cause, to petition the circuit court for access to the books and records of any chapter 181 corporation.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-65

Proposed section 181.79 would be read as an exception to section 181.03 which prohibits the organization under chapter 181 of insurance corporations.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-66

Risch

involved a challenge to a legislative classification on equal protection grounds. There is no reason to believe that the principle stated would not apply to classifications challenged under article IV, sections 31 and 32 of the Wisconsin Constitution.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-67

To be eligible to participate in the federal program, private guarantors must be nonprofit.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-68

American authorities trace their ancestry to the Port of London Authority, which was so named because Lloyd George did not want to use such common names as "commission," "board" or "agency." Having observed that each section of the draft enabling act began "Authority is hereby given...," he suggested the name "Port of London Authority." Cohen,

They Builded Better Than They Knew

290 (1946).

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-69

The Bradley Center Sports and Entertainment Corporation is subject to state audit and has a board of directors appointed by the Governor--two of the regulations the proposed legislation would impose on public purpose corporations.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-70

This corporation is subject to state audit and board membership is regulated--two controls sought to be placed upon public purpose corporations. Sec. 39.12, Stats.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-71

On the local level, Milwaukee County organized the Milwaukee County Industrial Development Corporation.

State ex rel. Bowman v. Barczak

, 34 Wis. 2d 57, 148 N.W.2d 683 (1967).

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-72

This was prior to the 1871 constitutional amendment creating the prohibitions against specific legislation.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-73

WHEC receives other benefits from the state; it enjoys a virtual monopoly by dint of its creation by HEAB.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-74

WHEC's Articles of Incorporation state that the corporation's purposes are "primarily to aid governmental programs for promotion of higher education...."

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-75

This opinion is not the vehicle for judging the propriety of a state agency apparently contracting away the entire operation of a statutory program. Nevertheless, it is appropriate to question whether the Department of Administration's authority to "contract for services which can be performed more economically or efficiently by... contract," section 16.705(1), extends this far. It is also appropriate to raise whether loan servicing is within the scope of WHEC's authority under its Articles of Incorporation, which states as the corporation's purpose, "[t]o maintain, operate and administer a guaranteed student loan program...."

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Destination-76

What has been stated with respect to the constitutional prohibition against special or private legislation leads to the conclusion that the proposed legislation is also valid under due process and equal protection principles.

See

discussion of

State ex rel. Risch v. Trustees

at page 174 hereof.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

The State's authority to regulate public purpose corporations in the manner proposed derives from the police power.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

The [police] power is not limited to regulations designed to promote public health, public morals or public safety, or to the suppression of what is offensive, disorderly, or unsanitary, but extends to so dealing with conditions which exist as to bring out of them the greatest welfare of the people by promoting public convenience or personal prosperity.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Watchmaking Examining Bd. v. Husar

, 49 Wis. 2d 526, 531, 182 N.W.2d 257 (1971). The police power properly can be used "to promote the general prosperity of the state by the regulation of economic conditions."

Id.

at 530. In testing the constitutionality of the proposed legislation under the due process and equal protection clauses the question is whether it has "any reasonable basis."

Id.

at 530.

74 Op. Att'y Gen. 169, 169 (1985) - Footnote

Almost by definition, corporations performing public purposes are imbued with the public interest. WHEC was created to guarantee loans under the government's guaranteed student loan program. One could argue that the integrity of the program depends upon the responsible administration of the corporation. The proposed "public accountability" measures are all reasonably related to that end.
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