## Facts

- New York and New Jersey, acting through the Port Authority of New York and New Jersey, issued consolidated bonds secured by pledged revenues and reserves.
- In 1962, both states enacted a statutory covenant limiting the Port Authority’s ability to use pledged bond revenues and reserves to subsidize rail passenger transportation.
- In 1974, New Jersey and New York enacted parallel statutes retroactively repealing the 1962 covenant, allowing the Port Authority to use previously pledged funds to support rail passenger transportation and related mass-transit initiatives.
- United States Trust Company of New York served as trustee for, and holder of, Port Authority bonds and alleged the repeal eliminated a key security provision that induced investment.
- The New Jersey Superior Court dismissed the trustee’s declaratory-judgment action, reasoning the repeal was a reasonable exercise of the state’s police power and not barred by the Contract Clause.
- The New Jersey Supreme Court affirmed, and the trustee appealed to the U.S. Supreme Court.

## Issues

1. Whether the retroactive repeal of the 1962 statutory covenant impaired the states’ contractual obligations to Port Authority bondholders in violation of the Contract Clause.
2. What level of scrutiny applies when a state impairs its own contractual and financial obligations.
3. Whether the repeal was reasonable and necessary to serve an important public purpose, given the states’ asserted goals related to mass transit.

## Decision

- The Supreme Court reversed.
- The Court held that the Contract Clause barred the retroactive repeal of the 1962 covenant.
- The Court found the repeal substantially impaired the bondholders’ contract rights by eliminating an important security provision.
- The Court accepted that improving mass transit could be an important public purpose but concluded total repeal was neither necessary nor reasonable because less drastic alternatives existed and the asserted changed circumstances did not justify abrogation.
- The Court applied more demanding review because the legislation impaired the states’ own financial obligations, reducing deference to legislative judgment where the state’s self-interest as debtor is implicated.

## Legal Principles

- A state law impairing the state’s own contractual obligations is unconstitutional unless the impairment is both reasonable and necessary to serve an important public purpose.
- Total elimination of a material security term in a public-bond contract constitutes a substantial impairment, even if the contract is not completely destroyed.
- When the state is a contracting party, courts apply closer scrutiny than in cases involving impairment of private contracts, because the state’s dual role as sovereign and debtor creates a risk of self-interested legislation.
- An impairment is less likely to be “necessary” when the government could accomplish its objectives through less drastic modifications or alternative measures.
- Foreseeable policy or economic developments provide weaker justification for repudiating a previously adopted financial covenant protecting creditors.

## Conclusion

The Court held that New Jersey and New York violated the Contract Clause by retroactively repealing a statutory covenant protecting Port Authority bondholders, because the repeal substantially impaired the states’ own financial commitments and was not shown to be a reasonable and necessary means of achieving the asserted public transportation goals.


United States Tr. Co. v. New Jersey, 431 U.S. 1 (1977)