Opinion ID: 1175625
Heading Depth: 1
Heading Rank: 4

Heading: The Extension of Public Credit and the Gift of Public Funds

Text: (2a) Respondent argues that the resolutions hereinabove described violate the constitutional prohibition against the lending of public credit and the gift of public funds. (Cal. Const., art. XVI, § 6.) In particular, he focuses on the provisions which authorize the Agency to make loans to private housing sponsors and mortgage lenders at below-market interest rates, to purchase loans from certain lenders, and to refinance already existing mortgages. He also objects to the creation of the supplementary bond security fund. Each of these features, he contends, involves the unconstitutional use of state funds for the benefit of private individuals. The Agency asserts that the housing program falls within the well recognized public purpose exception to the constitutional prohibition against the gift of public funds. (3) Under the public purpose doctrine, public credit may be extended and public funds disbursed if a direct and substantial public purpose is served and nonstate entities are benefited only as an incident to the public purpose. ( County of Alameda v. Janssen (1940) 16 Cal.2d 276, 281 [106 P.2d 11, 130 A.L.R. 1141]; Winkelman v. City of Tiburon (1973) 32 Cal. App.3d 834, 845 [108 Cal. Rptr. 415].) ... [T]he benefit to the state from an expenditure for a public purpose is in the nature of consideration and the funds expended are therefore not a gift even though private persons are benefited therefrom. ( County of Alameda v. Carleson (1971) 5 Cal.3d 730, 745-746 [97 Cal. Rptr. 385, 488 P.2d 953], citations omitted.) Respondent, while acknowledging the validity of this exception, contends that it is inapplicable because the programs in question primarily benefit certain private parties and only indirectly aid the public. The determination of whether a particular program serves a public purpose is generally vested in the Legislature. ( Id., at p. 746.) In the matter before us, the Legislature has determined that decent housing is an essential motivating force in helping people to fulfill themselves in a free society; that unsanitary, unsafe and overcrowded housing increases disease and crime; and that a healthy housing market, where the consumer has a choice of housing opportunities, is necessary to a healthy state economy (§ 41001). The Legislature has further found that there is a serious shortage of decent housing which persons and families of low or moderate income can afford; that private enterprise and investment will not and cannot meet this shortage without public assistance (§ 41003); and that it is for the benefit of the state as a whole to reduce the housing shortage (§ 41004). The foregoing legislative findings, while not binding on the courts, are given great weight and will be upheld unless they are found to be unreasonable and arbitrary. ( Mannheim v. Superior Court (1970) 3 Cal.3d 678, 691 [91 Cal. Rptr. 585, 478 P.2d 17]; The Housing Authority v. Dockweiler, supra, 14 Cal.2d 437, 449-450; Board of Supervisors v. Dolan (1975) 45 Cal. App.3d 237, 243 [119 Cal. Rptr. 347].) (2b) There is considerable case law supporting the Agency's contention that the Legislature acted reasonably in concluding that decent housing for the affected persons serves a public purpose. Sometime ago in The Housing Authority v. Dockweiler, supra, 14 Cal.2d 437, for example, we held that public housing projects for low-income families serve a public purpose. ( Id., at pp. 457-458.) Likewise, in Redevelopment Agency v. Hayes (1954) 122 Cal. App.2d 777 [266 P.2d 105], the right of a public agency to use the power of eminent domain for slum clearance was upheld where the property so acquired was to be resold to private persons after redevelopment. More recently in Winkelman v. City of Tiburon, supra, 32 Cal. App.3d 834, the court approved the sale of property by a municipality to a private nonprofit corporation for a mixed-income housing project in which no more than 30 percent of the units were to be rented to low-income families. In doing so, the court found not only that the sale was supported by adequate monetary consideration but also that a valid public purpose was served by encouraging the construction of moderate and low-income housing projects. It thus concluded that such a sale at a below-market price would not constitute a gift of public funds. Finally, in Board of Supervisors v. Dolan, supra, 45 Cal. App.3d 237, the court upheld as serving a public purpose the issuance of bonds to public entities for the purpose of making long-term, low-interest rate loans to private individuals for residential rehabilitation in depressed housing areas even though the dwellings might subsequently be made available to families without regard to income. Respondent seeks to distinguish each of these cases: Dolan did not involve the construction of new homes; Winkelman rested on an alternative holding; in Hayes and Dockweiler, the housing projects were to be developed only by a public agency; and in Dockweiler, the projects were designed only for low-income families. While no prior case approves a housing scheme containing the identical combination of elements involved in the program herein at issue, we discern and trace in these prior cases common threads of substantially equivalent public purposes and policies. The additional objectives expressed in the program before us represent the integration of further public goals with that of increased safe and decent housing. For example, the requirement that projects financed under the second and third resolutions provide units for tenants who can afford rentals at the market rate reflects a legitimate public purpose in avoiding ethnic, economic, and racial isolation in certain areas (§§ 41006, 41391). The participation of private developers and lenders in the program is part of an appropriate effort to enlist private capital in the implementation of the state's housing policy. (See Appel v. Beyer (1974) 39 Cal. App.3d Supp. 7, 11 [114 Cal. Rptr. 336].) Each of those elements of the housing program at issue herein not previously upheld appears carefully designed to assist in achieving valid public purposes. For example, both the extensive regulations affecting the method by which private parties involved in the program must utilize the resources made available to them, and the restrictions on the profits that they may accumulate (§ 41482), are tailored to further the legislative purpose of supplying reasonable incentives to parties who would not otherwise provide the needed housing (see § 41003). Similarly, commercial facilities are permitted in the projects only after the Agency determines that such activities are necessary or convenient to the operation of the development (§ 41043) and any financial benefit accruing to these tenants derived from below-market interest rate financing must be contributed by the tenants to the development (§ 41480, subd. (c)). The Act's provisions for the purchase of loans from qualified mortgage lenders and the financing of existing mortgages are directly related to the legislative finding that the shortage of decent housing is a result, in part, of the spread of slum conditions and blight to formerly sound and healthy neighborhoods (§ 41003). These provisions also support the Legislature's policy of protecting the equities that residents have accumulated in their homes (§ 41007). We note that in the face of contentions that housing programs similar to the one now before us constituted an illegal extension of public credit and gift of public funds, several states have upheld legislative schemes providing for the purchase of loans from lenders and the refinancing of mortgages. (E.g., Minnesota Housing Finance Agency v. Hatfield (1973) 297 Minn. 155 [210 N.W.2d 298]; Maine State Housing Auth. v. Depositors Trust Co. (Me. 1971) 278 A.2d 699; Martin v. North Carolina Housing Corporation (1970) 277 N.C. 29 [175 S.E.2d 665]; Vermont Home Mtg. Cr. Ag. v. Montpelier Nat. Bank (1970) 128 Vt. 272 [262 A.2d 445]; Walker v. Alaska State Mortgage Association (Alaska 1966) 416 P.2d 245.) The creation of a supplementary reserve fund to meet any deficiencies in the incomes and revenues of the projects used to pay bondholders is also an appropriate means to further valid public purposes. The Agency explains that by providing this additional security, it is able to obtain money for the projects at lower interest rates, thereby reducing rents and enabling occupancy in the projects by lower income persons. Private lenders and developers, whose profit is limited under section 41482, cannot benefit from this supplementary reserve protection. Bondholders, according to the Agency, are not directly benefited for they receive lower interest rates because of the additional security. This justification appears rational and in line with the program's legitimate public purposes. Given the broad public purposes supporting the program and the close relationship between the elements of the program and these purposes, we conclude that the Act, and the Agency's resolutions thereunder, do not violate the constitutional prohibition against the gift of public funds and extension of public credit.