Opinion ID: 1166800
Heading Depth: 1
Heading Rank: 10

Heading: Cash Basis and Full Faith and Credit

Text: Relator next contends that certain provisions of the Development Agreement violate the Cash Basis Law, K.S.A. 10-1101 et seq., and the full faith and credit provisions of K.S.A. 1997 Supp. 12-1774(b)(1), as amended by L. 1998, ch. 17, § 3(b)(1), by requiring certain sales tax revenues to be used to repay the STAR bonds, by obligating the Unified Government to issue full faith and credit bonds, and by committing future Unified Governments to make annual appropriations to repay both the STAR and TIF bonds. In general, the cash basis law prohibits municipalities from creating indebtedness in excess of funds actually on hand in the treasury of the municipality. K.S.A. 10-1113. Contracts entered into by municipalities in violation of the Cash Basis Law are void. K.S.A. 10-1119. L. 1998, ch. 17, § 3(b)(1) prohibits a city from issuing full faith and credit tax increment bonds to finance the undertaking of a redevelopment project that will create a major tourism area of the state as specified in L. 1998, ch. 17, § 3(a)(1)(D). Full faith and credit bonds bind the municipality's future governing bodies to take all actions necessary, such as the levying of taxes, to ensure repayment of the bonds. In this case, the amendment to K.S.A. 1997 Supp. 12-1774(b)(1), prohibits the Unified Government from issuing full faith and credit tax increment financing bonds to finance the undertaking of the auto race track redevelopment project. Paragraph 2 of the Agreement contains the following language: Unified Government agrees that the City/County portion of the sales tax revenue shall be available for payment of Debt Service on the Phase I and Phase II STAR Bonds. STAR bonds are special obligation bonds, repayment of which will come from the collection of state sales tax revenue generated from within all or a portion of a redevelopment area. Phase I and Phase II refer to different phases of construction of the auto race track facility. Phase I includes a 75,000-seat capacity race track. Phase II includes an expansion of the race track to a 150,000spectator facility. Relator argues Paragraph 2 violates the Cash Basis Law in that it commits the Unified Government to retire the STAR bonds when such indebtedness neither satisfies the requirements of K.S.A. 10-1113 nor fits within any exception contained within K.S.A. 10-1116. While K.S.A. 10-1113 does generally prohibit municipalities from creating indebtedness in excess of funds actually on hand, this proscription is prefaced with the phrase [u]nless otherwise provided by this act. Therefore, the Cash Basis Law clearly allows the creation of indebtedness in excess of funds on hand when specifically authorized by the Cash Basis Law. The exceptions to the general proscription of K.S.A. 10-1113 are set out in K.S.A. 10-1116. K.S.A. 10-1116(a)(2) states: (a) The limits of indebtedness prescribed under the provisions of article 11 of chapter 10 of Kansas Statutes Annotated may be exceeded when: ... (2) provision has been made for payment by the issuance of bonds or temporary notes as provided by law. L. 1998, ch. 17, § 3(a)(1) expressly authorizes [a]ny city ... to issue special obligation bonds ... to finance the undertaking of any redevelopment project. It further provides that the special obligation bonds may be payable from a pledge of a portion or all of the revenue received by the city from transient guest, sales and use taxes ... collected from taxpayers doing business within the redevelopment district. Because Paragraph 2 only commits the Unified Government to make the city/county portion of the sales tax revenues generated from within the Redevelopment District available for payment of debt service on the special obligation STAR bonds, the provision falls squarely within the K.S.A. 10-1116(a)(2) exception, and relator's claimed violation of the Cash Basis Law is without merit. Relator also argues Paragraph 2 violates L. 1998, ch. 17, § 3(b)(1) because it commits future governments to estimate and commit sales tax revenues to retire the bonds and because the nonrecourse provision ensures that despite any provision contained in the bond documents, the Unified Government will be obligated and future governments will be compelled to commit future sales tax revenues to pay off the bonds. Therefore, relator asserts, the bonds which will be issued will be the equivalent of full faith and credit bonds. In addition, relator argues the Agreement provides that in the event there is a surplus of tax revenue collected from the project, the Unified Government will be entitled to utilize the surplus sales tax revenue for its own purpose, but any surplus sales tax revenue will also result in a credit against the indebtedness that KISC is obligated to pay. The commitment to pledge sales tax revenues to repay the STAR bonds does not violate the full faith and credit provision of 12-1774(b)(1). That statute references the sources of funds that legally can be used to repay the principal and service the debt on special obligation bonds. These sources include funds from any private sources, contributions, or other financial assistance from the state or federal government, L. 1998, ch. 17, § 3(a)(1)(C), and from a pledge of a portion or all of the revenue received by the city from transient guest, sales, and use taxes, L. 1998, ch. 17, § 3(a)(1)(D). These are the only sources of funds that are contemplated to be used to pay debt service on the special obligation bonds that are proposed to finance the undertaking of this redevelopment project. Full faith and credit bonds will not be issued. Relator's claim regarding the crediting of surplus sales tax revenues against KISC's annual payment is without merit because KISC will not automatically receive any credit against its annual payments towards retirement of the TIF bonds from any surplus sales tax revenues. The language of the Agreement provides that if the KISC auto race track property would become subject to property tax during the period for which KISC is obligated to make annual payments towards retirement of the principal and interest on the TIF bonds (even though it is exempt from property taxes under L. 1998, ch. 17, § 2[k]), KISC would receive a credit against the annual payments it makes on the TIF bonds. The credit would be in an amount equal to all property taxes received by the Unified Government and all surplus sales tax revenue, which are applicable city/county sales taxes received by the Unified Government in excess of the debt service on the STAR bonds. The annual payment KISC is obligated to make under the Agreement is not to retire the principal and interest on the STAR bonds, but to retire principal and interest on the TIF bonds. Paragraph 2 provides that it is the STAR bonds, not the TIF bonds, which are nonrecourse to KISC. Relator also contends Paragraph 6 of the Agreement violates both the Cash Basis Law and L. 1998, ch. 17, § 3(b)(1). Paragraph 6 contains the following language: No General Obligation Bonds shall be issued to finance the Total Project, however, Unified Government agrees to pledge annual appropriation[s], if necessary, to obtain Bond insurance on the TIF Bonds and the STAR Bonds (Phase I and II). Relator argues that, through this provision, the Unified Government pledged its annual appropriations of revenue to insure repayment of the TIF and STAR bonds, thereby doing exactly what the legislature was trying to prevent when it passed the Cash Basis Law. The Unified Government and KISC have agreed only that future governing bodies of the Unified Government will consider appropriating funds in future years should a debt service shortfall occur with regard to the TIF or STAR bonds. If such a shortfall does occur, the then-current governing body would be requested to make its own independent legislative determination whether to appropriate the funds requested. Any appropriation for a debt service shortfall would be contingent on future legislative action by the Unified Government and, therefore, Paragraph 6 does not create indebtedness. See Edwards County Comm'rs v. Simmons, 159 Kan. 41, 151 P.2d 960 (1944); International Ass'n of Firefighters v. City of Lawrence, 14 Kan. App.2d 788, 798 P.2d 960 (1990), rev. denied 248 Kan. 996 (1991). Since no indebtedness arises from the provisions of Paragraph 6, there can be no violation of the Cash Basis Law. Relator claims that what is most offensive about Paragraph 6 is not the commitment to pledge future revenues, but the fact that the Unified Government delegated its budgeting decision to some outside entity, viz., a New York bond insurance company, in order to obtain bond insurance. Relator does not explain this assertion. We hold there is no merit to relator's contentions and there is no violation of the Cash Basis Law or full faith and credit provision of the amendments.