Opinion ID: 1708846
Heading Depth: 1
Heading Rank: 1

Heading: Pledge of Future Tax Revenues.

Text: The first constitutional challenge to the IRFA legislation urged by plaintiff and intervenors involves the application of article VII section 5 of the Iowa Constitution. That clause is a debt limitation provision which provides, in part: Except the debts herein before specified in this article, no debt shall be hereafter contracted by, or on behalf of this State, unless such debt shall be authorized by some law for some single work or object, to be distinctly specified therein; and such law shall impose and provide for the collection of a direct annual tax, sufficient to pay the interest on such debt, as it falls due, and also to pay and discharge the principal of such debt, within twenty years from the time of the contracting thereof; but no such law shall take effect until at a general election it shall have been submitted to the people, and have received a majority of all the votes cast for and against it at such election.... It is the contention of plaintiff and intervenors that Iowa Code sections 307B.9, .11, and .23 are violative of article VII, section 5 to the extent that these statutes permit future revenues from the diesel fuel tax, the wheel car tax, and delinquent railroad property taxes to be pledged to the payment of bonds issued by IRFA. They seek a declaratory judgment that this legislative scheme is invalid and request injunctive relief against the issuance of IRFA bonds secured by these tax revenues. The identical claim was made in the district court. That court concluded that under such holdings as John R. Grubb, Inc. v. Iowa Housing Finance Authority, 255 N.W.2d 89, 97-98 (Iowa 1977), obligations issued by autonomous public authorities which are not payable from the state general fund are not debts of the state within the meaning of article VII, section 5. IRFA relies on the decision in Grubb to sustain the district court's holding on appeal and also on our decisions in State Board of Regents v. Lindquist, 188 N.W.2d 320, 322-23 (Iowa 1971); Farrell v. State Board of Regents, 179 N.W.2d 533, 542-45 (Iowa 1970); and Brack v. Mossman, 170 N.W.2d 416, 422-23 (Iowa 1969). Plaintiff and intervenors urge that Grubb and the other cited decisions are distinguishable from the present case because they do not involve a pledge of future tax revenues. While the cases are distinguishable in this respect, we conclude that the distinction is not significant in deciding the issue now before the court. The significance of Grubb lies in the fact that it is the most recent authoritative interpretation of what constitutes a debt contracted by the state or on behalf of the state for purposes of applying the limitations contained in article VII, section 5. Grubb upheld the validity of legislation establishing the Iowa Housing Finance Authority against a challenge based on article VII, section 5. The basis for the challenge in that case was the fact that the alleged debt had been undertaken without holding a referendum of the type prescribed in article VII, section 5. The issue in the present case involves an alleged improper pledge of tax revenues in violation of the same constitutional provision. In order for either type of challenge to be upheld, however, it is necessary that the alleged debt qualify as a debt of the state under article VII, section 5. The term debt ... contracted by, or on behalf of this state cannot have one meaning where the challenge is based upon failure to hold a referendum and another meaning where the challenge is based upon an improper pledge of tax revenues. The court in Grubb stated: We hold a debt, in the context of the above ... constitutional provision, arises only where the state itself is under a legally enforceable obligation.... [T]he ... Authority is a public instrumentality and agency of the State. ... But it is a corporate entity, separate and distinct from the state.... . . . . [The statute] requires the bonds to ... state on their face that they are payable both as to principal and interest solely out of the assets of the authority and do not constitute an indebtedness of this state or any political subdivision of this state other than the authority within the meaning of any constitutional or statutory debt limit. Grubb, 255 N.W.2d at 97. The statutory provisions held by this court in Grubb to be determinative of the issue of whether the obligations were debts contracted by the state or on behalf of the state are strikingly similar to the statutory provisions which are challenged in the present action. In both instances, the obligations are undertaken by an autonomous public authority. The bonds may not pledge the state's credit and the general fund of the state may not be used to pay either the interest or principal thereof. The IRFA bonding scheme differs from that approved in Grubb only in the method in which the state contributes to the special fund which may be pledged to secure the bonds. Under the bonding device approved in Grubb, the state's contribution to the special housing authority bond fund was authorized through appropriations. Under the IRFA legislation, the contribution is made by crediting revenues received from the diesel fuel tax, wheel car tax, and delinquent railroad property taxes directly to the special IRFA fund. We do not view the earmarking of the three designated taxes for the special IRFA fund as a commitment of the state's credit or taxing power to guarantee payment of the IRFA bonds. Section 307B.12 provides: These [IRFA bond] obligations... are special obligations of the authority payable solely and only from the sources and special funds provided in this chapter. Bonds issued under the chapter may only be secured by pledged receipts as defined therein. Section 307B.4(14) defines pledged receipts as: [T]he revenues and receipts received or to be received by the authority from the lease, operation or sale or disposition of railway facilities; from loan or other agreements relating to financial assistance; from grants, gifts or payments on guarantees made to the authority by any person; from accrued interest received from the sale of obligations; from income from the investment of special funds of the authority, including the special railroad facility fund; from the revenues and receipts deposited in the special railroad facility fund; and from any other moneys which are available for the payment of bond service charges. It is significant that under this definition operating revenues which may be pledged include revenues received or to be received. Other types of revenues, including the tax revenues at issue may only be pledged if they are deposited in the special railroad facility fund. We interpret the latter limitation as prohibiting the pledge of future receipts from the diesel fuel tax, wheel car tax, or delinquent railroad property taxes. Only those taxes actually credited to the special fund may be pledged as security for those obligations. Tax receipts credited to the fund after the issuance of the bonds may be embraced in the pledge, but the legislature remains free to amend or repeal sections 307.29, 307B.23, 324A.9 and 435.9 at any time so as to insulate revenues not yet credited to the special fund from any responsibility for payment of IRFA obligations. We see no significant difference in a constitutional sense between the legislative option to discontinue the earmarking of tax receipts and the optional appropriations approved in Grubb. We hold that use made of the three earmarked taxes does not create a debt contracted by the state or on behalf of the state for purposes of article VII, section 5 of our state constitution. See and compare Arizona State Highway Commission v. Nelson, 105 Ariz. 76, 459 P.2d 509 (1969) (bonds payable only out of special tax revenue fund and not out of state general fund are not debt of state). Richards v. City of Muscatine, 237 N.W.2d 48 (Iowa 1975) cited by plaintiff and intervenors involved a constitutional debt limitation applicable only to municipal corporations. State ex rel. Fletcher v. Executive Council, 207 Iowa 923, 223 N.W. 737 (1929) is also distinguishable. It involved general obligation bonds issued directly by the state following approval of the bonding scheme by a referendum. The issue in that case concerned the method by which the bonds were to be retired. Because the bonds issued in the Executive Council case, unlike the IRFA bonds in the present case, were general obligations of the state, the court held that article VII, section 5 required that they be retired only by a direct annual tax. Neither Richards nor Executive Council supports appellants' contentions in the present case. The district court did not err in rejecting the contentions of plaintiff and intervenors based on article VII, section 5 of the Iowa Constitution.