Can a Georgia city pledge its full faith and credit (its taxing power) to secure a loan from the Georgia Environmental Facilities Authority for water or sewer projects without holding a voter referendum?

Plain-English summary

The City of Atlanta applied to the Georgia Environmental Facilities Authority (GEFA) for several loans to improve its sewer system. GEFA, as a condition of those loans, required the City to pledge its full faith and credit (its taxing power) as security. The City raised three concerns: (1) is that pledge constitutional debt that requires a voter referendum, (2) does GEFA actually have authority to require that pledge, and (3) is the City effectively backstopping other governments' obligations because the sewer system serves multiple jurisdictions?

AG Thurbert Baker rejected all three concerns.

No referendum required. Georgia's Constitution generally requires voter approval before a local government incurs debt (Art. IX, § V, ¶ I(a)). But the intergovernmental contracts clause (Art. IX, § III, ¶ I(a)) carves out a specific category: "a mutual undertaking by a local government entity to borrow and an undertaking by the state or a state authority to lend funds . . . for water or sewerage facilities or systems . . . pursuant to law shall be a provision for services and an activity within the meaning of this Paragraph." By approving this constitutional language, Georgia voters categorized GEFA loans as a service rather than debt. The Georgia Supreme Court confirmed in Youngblood v. State (1990) and Nations v. Downtown Dev. Auth. (1986) that pledging tax revenues under an intergovernmental contract does not require a referendum.

GEFA has authority to require the pledge. O.C.G.A. § 50-23-6(b)(6) authorizes GEFA to require local governments to take "other actions as may be deemed necessary . . . to secure the payment of the principal of and interest on such . . . notes[] or other obligations and to provide for the remedies of the authority in the event of any default." GEFA's standard practice of requiring a full-faith-and-credit pledge falls within that broad grant.

The City is securing only its own obligation. True, a government cannot constitutionally pledge its credit to back another government's debt. But under Thompson v. Municipal Elec. Auth. of Ga. (1976), a government can enter intergovernmental contracts and pledge its credit and tax power to meet its own contractual obligations under that contract. Atlanta's pledge to GEFA secures Atlanta's promise to repay the loan, not the obligations of any other government that might use the sewer system. The AG suggested Atlanta might consider asking the other jurisdictions sharing the system to pledge their own credit to Atlanta as security for their separate contractual obligations to Atlanta.

Currency note

This opinion was issued in 2004. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The intergovernmental contracts clause has remained a stable feature of Georgia constitutional law and continues to support state-authority lending without referendum, but the GEFA statute has been amended and renumbered several times. Anyone structuring a current GEFA financing should verify the present statutory authority and the current standard loan documentation.

Common questions

Q: What was the legal status of GEFA at the time of this opinion?
A: GEFA was a state authority created to provide low-cost financing to local governments for environmental infrastructure (water, sewer, solid waste). It functioned essentially as a state revolving-loan fund, often funded with both state appropriations and federal Clean Water Act capitalization grants.

Q: Why is a full-faith-and-credit pledge stronger than a revenue pledge?
A: A revenue pledge limits the lender to specified revenue streams (often the sewer system's own user fees). A full-faith-and-credit pledge means the local government commits its general taxing power to make payment, and the pledge ranks higher in payment priority than ordinary obligations.

Q: Did this opinion bind GEFA or just answer Atlanta's question?
A: AG opinions are persuasive but not binding. As a practical matter, opinions to the executive director of an authority guide how that authority operates and how its lawyers structure transactions; bond counsel commonly relies on the AG opinion when issuing legal opinions to investors.

Q: What's the difference between this and a general-obligation bond?
A: A general-obligation bond pledged the local government's full faith and credit and was treated as constitutional debt requiring a referendum. A GEFA loan also involved a full-faith-and-credit pledge but, because of the intergovernmental contracts clause, it was treated as a service obligation, not debt. That distinction is the whole point of routing the financing through GEFA rather than the bond market.

Q: Could the city pledge its credit to backstop another city or county?
A: No. The opinion was clear that a government cannot pledge its full faith and credit to secure another government's debt. Each government has to stand behind its own obligation. The workaround is to have each user-government enter its own intergovernmental contract pledging credit for its own share.

Q: What was Atlanta's broader sewer-financing context?
A: At the time of the opinion in 2004, Atlanta was under a federal consent decree (the 1998 First Amended Consent Decree and related orders) requiring billions of dollars of sewer overhaul. GEFA loans were one of the cheaper sources of financing. The constitutional referendum-exemption framework was load-bearing for keeping Atlanta's compliance program affordable.

Background and statutory framework

The Georgia Constitution generally requires voter approval before a local government incurs debt: Art. IX, § V, ¶ I(a) provides that "[t]he debt incurred by any county, municipality, or other political subdivision of this state . . . shall never exceed seven percent of the assessed value of all taxable property . . . [and] no such county, municipality, or other political subdivision shall incur any new debt without the assent of a majority of the qualified voters." This is the rule that makes general-obligation bond elections necessary.

The intergovernmental contracts clause is the major exception. Art. IX, § III, ¶ I(a) authorizes intergovernmental contracts for the provision of services. By constitutional amendment, the General Assembly carved out a specific provision that GEFA-style water/sewer/solid-waste loans are themselves treated as a "service" between the borrowing government and the lending state authority. This constitutional treatment is what allows the transaction to escape the debt-and-referendum framework.

The Georgia Supreme Court built out the doctrine in Nations v. Downtown Development Authority (1986) (intergovernmental contract pledging tax revenues to a development authority is not constitutional debt) and Youngblood v. State (1990) (same; no referendum required). And Thompson v. Municipal Electric Authority of Georgia (1976) addressed the related question of whether participants in MEAG could pledge their credit on behalf of the project, holding that they could pledge their own credit for their own obligations under the MEAG contract, but could not pledge to back other participants' obligations.

GEFA's authority to require the pledge sits in O.C.G.A. § 50-23-6(b)(6), which is a broad delegation to require borrowers to "take such . . . other actions as may be deemed necessary" to secure the loan and to provide remedies on default.

Citations and references

Constitutional:
- Ga. Const. Art. IX, § III, ¶ I(a) (intergovernmental contracts; GEFA-style loans treated as services)
- Ga. Const. 1983, Art. IX, § V, ¶ I(a) (debt limit and referendum requirement)

Statutes:
- O.C.G.A. § 50-23-6(b)(6) (GEFA security-and-remedies authority)

Cases:
- Youngblood v. State, 259 Ga. 864 (1990) (no referendum needed for pledge under intergovernmental contracts clause)
- Nations v. Downtown Dev. Auth., 256 Ga. 158 (1986) (intergovernmental contract pledging tax revenues is not debt)
- Thompson v. Municipal Elec. Auth. of Ga., 238 Ga. 19 (1976) (governments may pledge credit for their own obligations but not for those of other governments)

Prior AG opinions cited: 1988 Op. Att'y Gen. 88-26; 1990 Op. Att'y Gen. U90-7; 1994 Op. Att'y Gen. 94-6.

Source

• Landing page: https://law.georgia.gov/opinions/2004-8
• Original PDF: not linked from landing page

Original opinion text

The City of Atlanta ("City") has applied to the Georgia Environmental Facilities Authority ("GEFA") for several loans the proceeds of which are to be used to improve the City's sewer system. In that context, the City has expressed concern regarding the constitutionality of GEFA's requirement that local governments pledge the full faith and credit of their taxing power as security for loans made by GEFA and the necessity for local governments to hold a referendum prior to making the pledge. The Attorney General has previously opined that, pursuant to the intergovernmental contract clause of the Georgia Constitution, GEFA loans to a local government are not constitutionally recognized debt. 1994 Op. Att'y Gen. 94-6; 1990 Op. Att'y Gen. U90-7; 1988 Op. Att'y Gen. 88-26. The intergovernmental contracts clause states that a mutual undertaking by a local government entity to borrow and an undertaking by the state or a state authority to lend funds from and to one another for water or sewerage facilities or systems or for regional or multijurisdictional solid waste recycling or solid waste facilities or systems pursuant to law shall be a provision for services and an activity within the meaning of this Paragraph. Ga. Const., Art. IX, § III, I(a). By approving this provision of the Georgia Constitution, the electorate designated loans made for environmental facilities as services. Thus, such loans are not subject to the constitutional requirements generally applicable to local government municipal debt. If GEFA loans were constitutionally recognized debt, local governments could not "incur [such] debt without the assent of a majority of the qualified voters." Ga. Const. 1983, Art. IX, § V, I(a). However, I find no support for the proposition that a referendum be held for a loan otherwise exempted from the referendum requirement simply because GEFA requires the recipient to pledge its full faith and credit as security for the loan. To the contrary, the Georgia Supreme Court has held that "[a]n intergovernmental contract pursuant to the intergovernmental contracts clause of the Georgia Constitution pledging tax revenues . . . does not require a local referendum." Youngblood v. State, 259 Ga. 864 (1990), citing Nations v. Downtown Dev. Auth., 256 Ga. 158 (1986). There also seems to be some concern regarding GEFA's authority to require local governments to pledge their full faith and credit as security for GEFA loans. The Georgia General Assembly has authorized GEFA to require local governments, as a condition of any loan, to take "other actions as may be deemed necessary . . . to secure the payment of the principal of and interest on such . . . notes[] or other obligations and to provide for the remedies of the authority in the event of any default by such local government in such payment." O.C.G.A. § 50 23 6(b)(6). Pursuant to that Code section, GEFA consistently requires its loan recipients to pledge their full faith and credit as security for GEFA loans. Finally, the City expressed concern that the proposed intergovernmental arrangement by and between GEFA and the City in essence required the City to pledge its full faith and credit for the benefit of other governments. GEFA could not require and the City could not pledge its full faith and credit as security for the obligations of other governments. However, the Georgia Supreme Court has previously considered an intergovernmental arrangement similar to the one currently being negotiated between GEFA and the City and found that, although a governmental entity cannot pledge its full faith and credit to secure the obligations of another governmental entity, under the intergovernmental contracts clause a governmental entity could enter into contracts with other governmental entities, pledge its full faith and credit, and levy taxes to meet its own contractual obligations. Thompson v. Municipal Elec. Auth. of Ga., 238 Ga. 19, 21 (1976); see generally 1988 Op. Att'y Gen. 88-26. The City's pledge to GEFA will be security for the City's contractual obligations. The City may want to consider requiring those governments that will be utilizing the sewer system via an interjurisdictional agreement to pledge their full faith and credit to the City as security for those governments' contractual obligations. Therefore, it is my official opinion that the Georgia Environmental Facilities Authority is statutorily empowered to make the administrative and policy determinations requiring the City of Atlanta to pledge its full faith and credit as security for a loan from the Authority, there are no constitutional prohibitions upon the City of Atlanta pledging its full faith and credit as security for such a loan, and a referendum is not required prior to the City making the pledge. Prepared by: DENISE E. WHITING-PACK Senior Assistant Attorney General