Opinion ID: 1266394
Heading Depth: 1
Heading Rank: 3

Heading: Financing Agreement/Constitutional Debt Limit

Text: The Plaintiffs argue that the resolution and its attendant agreements constitute a financing agreement and that the School District has exceeded its allowable amount of outstanding general obligation debt. We disagree. S.C.Code Ann. § 11-27-110(B) (Supp.2005) provides that unless a governmental entity obtains voter approval, the entity may not enter into a financing agreement if the sum of the principal balance of the financing agreement and the amount of the entity's outstanding bonded debt at the time of execution exceeds eight percent of the assessed value of taxable property in the entity's jurisdiction. [7] The Code defines a financing agreement in section 11-27-110(A)(6), and it is undisputed that the agreement at issue in this case does not qualify as a financing agreement under the version of the statute reproduced in the 2005 Code Supplement. [8] Act No. 388 of 2006, however, substantially revised § 11-27-110(A)(6), and it is these revisions that have led to the current dispute. Under revised § 11-27-110(A)(6), a financing agreement includes: any [contract] entered into after August 31, 2006, pursuant to which installment payments of the purchase price are to be paid by a school district or other political subdivision to a non-profit corporation, political subdivision, or any other entity, from any source other than the issuance of general obligation indebtedness by the school district, in order to finance the acquisition, construction, renovation, or repair of school buildings or other school facilities. Part V, Section 4, Act No. 388, 2006 S.C. Acts 3133, 3166-68 (emphasis added). The Plaintiffs allege the resolution and its attendant agreements meet this definition. [9] As the statute instructs, the application of the revised definition of a financing agreement in this case turns on the source of the funds that the School District will use to make installment payments to the Corporation. The Plaintiffs argue that although the School District manifests an intention to use constitutionally permissible amounts of general obligation debt to raise funds for the installment payments, the agreements use permissive terms that do not restrict the School District to using only general obligation debt. To counter, the School District argues that it intends to make installment payments using only funds derived from the issuance of general obligation debt, and that the permissive terms are used exclusively to protect the School District's rights (1) to opt out of making the payments at any time (an event generally referred to as non-appropriation) and (2) to use other funds that may be appropriated by another entity for this purpose in the future. A close examination of the scheme here at issue reveals no violations of the relevant constitutional or statutory provisions. The resolution and its attendant agreements specifically provide that the School District is not obligated to make any payments to the Corporation unless the School District appropriates funds for that purpose. Furthermore, unless and until the School District appropriates funds for an installment payment from a source other than the issuance of general obligation indebtedness, this claim is speculative and thus not ripe for judicial review. See Waters v. South Carolina Land Res. Conservation Comm'n, 321 S.C. 219, 227, 467 S.E.2d 913, 917-18 (1996) (stating that an issue that is contingent, hypothetical, or abstract is not ripe for judicial review). The crux of the Plaintiffs claim goes to the fund raising/repayment scheme on which they allege the School District plans to embark. To make installment payments to the Corporation, the Plaintiffs allege that the School District plans to use revenues to retire a portion of its outstanding general obligation debt, and then issue new general obligation bonds to raise proceeds for the installment payments. The Plaintiffs assert that this bond retirement/re-issuance scheme will occur on an annual basis, and that this process violates § 11-27-110(A)(6)'s requirement that, to avoid classification as a financing agreement, the installment payments must come from the issuance of general obligation indebtedness. While not entirely unpersuasive, this argument overlooks the inescapable fact that the scheme put in place by the resolution and its attendant agreements complies with the letter of the statute's requirements. Undoubtedly, a school district possesses the authority and ability to use revenue to retire a portion of its general obligation debt. Furthermore, the law clearly supports the proposition that a school district may incur general obligation debt provided the school district remains within the constitutional and statutory limits. We are aware of no authority permitting this Court to regulate a school district's activities of this type absent a violation of a constitutional or statutory limitation. Our jurisprudence in a similar area supports this conclusion. On several prior occasions, numerous South Carolina school systems have struggled with how to finance their infrastructural growth while remaining within the boundaries of their constitutional and statutory general obligation debt limitations. At one time, alternative financing arrangements known as lease-purchase agreements were a popular means by which school districts sought to achieve these goals. Under these agreements, a school district would typically lease its land and buildings to a non-profit corporation for a long period of time. After execution of the lease, the corporation would privately raise funds to finance the school renovation and construction, and the corporation would lease the new and renovated facilities back to the school district until the school district had repaid the principal and interest necessary to fund the construction. As occurred in the instant case, taxpayers challenged these arrangements as violating the relevant limits on a school district's general obligation indebtedness. In both Redmond v. Lexington County Sch. Dist. No. Four, 314 S.C. 431, 445 S.E.2d 441 (1994), and Caddell v. Lexington County Sch. Dist. No. 1, 296 S.C. 397, 373 S.E.2d 598 (1988), this Court held that lease-purchase arrangements did not constitute general obligation debt as defined under Article X, § 15 of the South Carolina Constitution. Caddell represents this Court's first pronouncement on the subject, and in that case, the Court began by examining the Constitution's definition of general obligation debt. 296 S.C. at 399-400, 373 S.E.2d at 599. Noting that this definition included only debt that is secured... by a pledge of [the school district's] full faith, credit and taxing power, this Court held that the lease-purchase agreements did not implicate the school district's constitutional debt limit. Id. at 400, 373 S.E.2d at 599. The Court stated: In its historical context, general obligation debt refers to that which is ultimately secured by taxes on the property within the political entity. Thus, general obligation debt embraces neither yearly expenses payable from current revenues nor contingent liabilities of the governmental entity. This is so because the governmental entity is not obligated to impose property taxes for their payment.    Similarly, a leaseback arrangement containing an explicit non-appropriation clause places no such requirement on the political entity.... Liability under the leaseback arrangement is, at most contingent: The District has the option of terminating simply by refusing to appropriate money for rent. Id. (footnotes omitted). Although the instant case involves an installment-purchase agreement and not a lease-purchase agreement, we believe that much of Caddell's reasoning nonetheless applies. As we stated in Caddell, and reiterated in Redmond: The premise of the plaintiffs' argument that the plan for financing and construction ... is a fraud or works an injustice upon the city's taxpayers is that it is a device to accomplish, by change of form with no change of substance, the same result which has been rejected by the voters. This premise is faulty. It is not the construction . . . for which voter approval is required.... Rather, it is the creation of a general obligation debt ... which requires the assent of the voters. The plan submitted to and rejected by the voters would have created such a general obligation debt. The plan now proposed does not. This difference is constitutionally significant. Redmond, 314 S.C. at 434, 445 S.E.2d at 443; Caddell, 296 S.C. at 401-02, 373 S.E.2d at 600 (quoting Gude v. City of Lakewood, 636 P.2d 691, 697 (Colo.1981) (internal citations and internal emphasis omitted)). Although it presented the identical issue dealt with in Caddell, Redmond is particularly informative because it added the element of an expression of legislative dissatisfaction with school districts' use of lease-purchase arrangements. Specifically, at the time this Court rendered its decision in Redmond, legislation requiring that the amount expended in a lease-purchase agreement be counted towards a school district's general obligation debt limit had passed the South Carolina Senate and was under consideration in the South Carolina House of Representatives. See Redmond, 314 S.C. at 434-35, 445 S.E.2d at 443. This Court stated, [i]f this bill is eventually passed ... the Defendant's position will obviously not merit the same result reached in Caddell and in this case. Until the legislature has definitively spoken on this issue, however, we must apply the law as it currently exists. Id. Turning to the instant case, revised § 11-27-110(A)(6), particularly the definition in effect after this coming December 31, clearly represents a legislative pronouncement of the type discussed in Redmond. Unlike Redmond, this case involves legislation which has been passed by the Legislature, signed by the Governor, and is now effective. However, as in Redmond, the instant case involves a scheme which complies with the letter of the statutes currently in effect. The portion of § 11-27-110(A)(6) currently in effect requires only that the school district use funds derived from the issuance of general obligation debt to make payments under an installment-purchase agreement. So long as the School District abides by this requirement, they have not violated the statute's requirements. Accordingly, we deny the Plaintiffs' request for a declaratory judgment that the resolution and its attendant agreements are financing agreements which implicate the School District's constitutional and statutory debt limits. Additionally, and in accordance with the Defendants' request, we hereby issue a declaratory judgment that the resolution and its attendant agreements are in compliance with the relevant constitutional and statutory provisions and limitations.