Multi-Year Contracts: When and How Are They Authorized?

Municipalities are set up to handle business one year at a time. They are governed by annual budgets and elect officials annually in towns and biennially in cities. So it’s not surprising that there is a good deal of uncertainty when it comes to authorizing contracts that will oblige a municipality to expend money for more than one year going forward. The most common examples are extended equipment leases and multi-year collective bargaining agreements (CBAs). For leases, typically the issue is whether or not the agreement constitutes long-term debt under RSA Chapter 33. For CBAs, the problem is adequate disclosure of the financial terms of the agreement, the “cost items" under RSA 273-A. The term for such disclosure is “Sanbornizing" the agreement, after the leading case, Appeal of the Sanborn Regional School Board, 133 N.H. 513 (1990). Sanbornizing has a new dimension with the enactment in 2008 of RSA 273-A:12, VII, which provides that every new CBA shall now automatically be deemed to remain in effect following its expiration while the parties negotiate a new agreement. The term for such a provision is “evergreen clause."

Q. Hold on! What’s an “evergreen clause," and how do you “Sanbornize" one?

A. In the Sanborn case the Supreme Court upheld the validity of multi-year collective bargaining agreements under RSA Chapter 273-A, which comprehensively governs the public employee collective bargaining process. The statute provides that once an agreement is reached between the employer board and union, the “cost items" of the agreement, defined as “any benefit acquired through collective bargaining whose implementation requires an appropriation by the legislative body of the public employer with whom negotiations are being conducted," must be submitted to the legislative body for approval. Although multi-year agreements are authorized by RSA 273-A, the Court in Sanborn held that the school district was not bound to fund the second and third-year terms of the CBA because the voters at district meeting who were supposed to ratify the cost items had not been adequately informed of the financial terms by the language of the warrant article or by other means. In Appeal of Alton School District, 140 N.H. 303, 309 (1995), a section of the CBA provided that a pay plan with periodic step increases based on experience would continue in effect after expiration of the agreement (an “evergreen clause"). The Supreme Court held that the provision was unenforceable against the school district because, under Sanborn, the cost of the evergreen clause had not been adequately disclosed to the voters. Under the new statute, such pay plans would typically continue to operate automatically after expiration for all CBAs, and it would seem that the cost of the built-in “evergreen clause" would need to be disclosed to the voters. For information on warrant articles to approve the cost items of CBAs, see the Department of Revenue Administration (DRA) Suggested Warrant Articles 2009 for Towns & Village Districts, pp. 18-19. Consult your municipal attorney on the important and complex issue of what is adequate “Sanbornizing" of the cost items of your CBA.

Q. The other category was equipment leases. Explain the issue there.

A. RSA 33:3 authorizes municipalities to issue notes and bonds to finance, among other things, “the purchase of departmental equipment of a lasting character." Issuance of debt requires a two thirds vote, by ballot, of the legislative body (three-fifths in SB 2 municipalities). RSA 33:8. Multi-year lease-purchase agreements for equipment are regarded as long-term debt (like a bond, they require a stream of payments to pay principal and interest over time) and thus also require a 2/3 (or 3/5) ballot vote. However, lease-purchase agreements with so-called “escape" or “nonappropriation" clauses, which terminate the agreement automatically if the requisite annual appropriation is not made, are not long-term debt and thus may be approved by majority vote. RSA 33:7-e. See DRA Suggested Warrant Articles, pp. 15-16.

Q. I understand multi-year contracts for CBAs and long-term debt obligations. They are authorized by specific statutes. But I’ve never been clear on whether a town has the basic power to make a multi-year contract for expenditures. I often hear and read how one town meeting does not have the power to bind the next town meeting.

A. The statement that action by one town meeting cannot bind a successor town meeting is true when it comes to procedural matters. A town meeting is free to ignore the rules of procedure adopted at a previous meeting, even though they may have been followed for many years. Exeter v. Kenick, 104 N.H. 168, 171 (1968). It is also generally true for substantive matters of legislation and policy. A town meeting is free to reconsider or rescind an earlier vote, provided “no rights of third parties have attached." Frost v. Hoar, 85 N.H. 442 (1932). A contract, of course, does create rights in a third party. In Blood v. Manchester Electric Light Co., 68 N.H. 340 (1895), the New Hampshire Supreme Court held that towns and cities are authorized to make multi-year contracts (in that case a ten-year street lighting contract) under the basic statutory power to “make any contracts which may be necessary and convenient for the transaction of the public business of the town," quoting what is now RSA 31:3. The Court rejected the argument that a multi-year contract “would impermissibly disable the town from performing its legislative functions to their full extent for the time being." In making a contract a municipality acts in its business or proprietary capacity, not its legislative capacity.

Q. Town budgeting is controlled comprehensively by RSA Chapter 32. What does that statute have to say about multi-year contracts?

A. The term is not used directly, but RSA 32:13, I provides that the statute is “not to be construed to imply that a local legislative body, through its actions on proposed appropriations, has the authority to nullify a previous contractual obligation of the municipality, when such obligation is not contingent upon such appropriations and is otherwise valid under the New Hampshire law of municipal contracts.…" The statute recognizes the distinction between contracts with “escape clauses," which are not binding unless an appropriation is made, and multi-year contractual obligations, which are legally binding whether or not appropriations are made for the required expenditures.

Q. So the power to make a multi-year contract has nothing to do with the power to make an appropriation?

A. Actually, they’re intertwined. In the recent case of Bedford Chapter-Citizens for a Sound Economy v. School Administrative Unit #25-Bedford School District, 151 N.H. 612 (2005), a proposed 20-year high school tuition agreement with the Manchester School District was presented for approval at a special school district meeting. The article did not call for a current appropriation of money. RSA 197:3 (very similar to RSA 31:5, applicable to towns) provides that “no school district at any special meeting shall raise or appropriate money … unless the ballots cast at such meeting shall be equal in number to at least one half of the number of voters of such district entitled to vote at the regular meeting next preceding such special meeting...." The issue was whether it was necessary for one-half of eligible voters to vote even though no actual appropriation of money was called for. The Court held that the article did involve a vote to raise or appropriate money within the meaning of RSA 197:3. The Court relied on the precedent of Childs v. Hillsboro Electric Light and Power Co., 70 N.H. 318 (1900) (another street lighting contract), which had decided the same issue under the predecessor statute to RSA 31:5. The Court quoted from Childs:

“To ‘raise’ money, as the word is ordinarily understood, is to collect or procure a supply of money for use, as, in the case of a municipal corporation, by taxation or perhaps loan. Money cannot be actually given or appropriated before it is raised. A promise to give or appropriate money may be made before the money is actually procured; but in such case the promise binds the promisor to have the money on hand when it comes due, and so, in a sense, the money is raised by the promise…. The town must seasonably raise or appropriate sufficient sums of money to pay for the lights in accordance with its promise. If it does not do so voluntarily, the law will step in and do it … [such as through] a compulsory assessment and collection of taxes." (emphasis added)70 N.H. at 324. (The reasoning applies to annual meetings as well. The Court in Childs equated the phrase “raise and appropriate" in RSA 197:3 and RSA 31:5 with the phrase “grant and vote" used in RSA 31:4 to describe the basic municipal power of appropriation.) The Bedford Chapter opinion then cited RSA Chapter 530 as support for the last sentence quoted above.

Q. What is RSA Chapter 530?

A. RSA Chapter 530 is an infrequently read statute that prescribes procedures for collecting a judgment for money damages against a municipality. It lays out a series of steps whereby selectmen are obliged to pay a judgment and empowered to assess a special tax if necessary. If the selectmen neglect to pay the judgment in a timely way, the sheriff is to collect by levying on the property, first, of the selectmen themselves and then, if necessary, of other inhabitants. RSA 530:8.

Q. Okay. Town meeting can approve multi-year contracts. But do the Bedford Chapter and Childs cases mean that the board of selectmen can’t enter a binding multi-year contract without town meeting approval?

A. That issue was presented to the Supreme Court in Foote v. Manchester School District et al., 152 N.H. 599 (2005), another phase in the struggle over Bedford tuition agreements with Manchester. The case involved the validity of a three-year tuition agreement made by the Bedford school board. But the Court did not need to decide the question because the school district voters ratified the agreement before the issue could be litigated. RSA Chapter 32 provides guidance on the issue. RSA 32:6 provides that appropriations can be made only by vote of the legislative body, and RSA 32:8 provides that neither the selectmen nor other official or employee “shall pay or agree to pay any money, or incur any liability involving the expenditure of money, for any purpose in excess of the amount appropriated by the legislative body for that purpose or for any purpose for which no appropriation has been made, except as provided in RSA 32:9-11" (which relate to payment of judgments, transfer of appropriations and emergency expenditures approved by DRA). Since approval of a multi-year contract is “in a sense" raising and appropriating funds under Childs and Bedford Chapter, it seems that the board of selectmen and other officials and employees are not, in the absence of an express statute, empowered to enter multi-year agreements for expenditures, without town meeting approval. It stands to reason that only the legislative body, which makes appropriations, can promise to make future appropriations.