Opinion ID: 1844610
Heading Depth: 1
Heading Rank: 2

Heading: statutory power

Text: The taxpayers contended that the City had no statutory power to use this three-step financing arrangement to finance the capital improvements. In January 1986, the City adopted a home rule charter providing for imposition of a city sales and use tax dedicated to capital improvements, debt retirement and property tax reduction. The sales and use tax was referred to the voters, who approved it in a November 1986 election. The voters also approved two additional propositions: Shall the City of Bismarck use local sales tax monies, when available, for the expansion of the Bismarck Veterans Public Library? Shall the City of Bismarck use local sales tax monies, when available, for the expansion of the Bismarck Civic Center? In April 1987, the City also adopted a city lodging and restaurant tax to be spent for acquisition and maintenance of buildings and property consistent with visitor attraction and promotion under NDCC ch. 40-57.3. While a home rule city can have broad powers over its property and to control its finances and fiscal affairs if those powers are included in the charter and implemented through ordinances, ( see NDCC 40-05.1-06) the City of Bismarck has not done so. Therefore, its powers are those bestowed by the legislature on all municipalities. NDCC 40-05-01. Five of them are involved in this case:  40-05-01. Powers of all municipalities. The governing body of a municipality shall have the power:       2. Finances and property. To control the finances, to make payment of its debts and expenses, to contract debts and borrow money, to establish charges for any city or other services, and to control the property of the corporation.       5. Borrowing money. To borrow money on the credit of the corporation for corporation purposes and to issue bonds therefor as limited and provided by title 21.       50. Public buildings. To construct, operate, and maintain all public buildings necessary for the use of the municipality.       55. Real and personal property. To acquire by lease, purchase, gift, condemnation, or other lawful means and to hold in its corporate name for use and control as provided by law, both real and personal property and easements and rights of way within or without the corporate limits for all purposes authorized by law or necessary to the exercise of any power granted. 56. Transfer property. To convey, sell, dispose of, or lease personal and real property of the municipality as provided by this title. Although the taxpayers argued that the transaction was an unauthorized mortgaging of municipal property, their principal claim was that subsection 5 is the exclusive method for the City to borrow money. They contended that the City may only finance the improvements by issuing general obligation bonds pursuant to NDCC ch. 21-03, referenced by subsection 5. Although the City argued that the power to sell municipal property implies the lesser power to mortgage municipal property, it primarily argued that it had the authority to sell any city property, to lease property and to acquire property, emphasizing subsections 55 and 56, and the step nature of the transaction. The City submitted: Since there is expressed statutory authority for a sale by the City and a lease by the City, this is all the authority necessary to provide the City with its authority for its sale of the Facilities to the Trustee and the subsequent lease by the City from the Trustee of these same assets. Section 40-05-01(55) and (56) provide the City with implied authority to combine a sale and leaseback in the same transaction. Recognizing that this step transaction was essentially a financing transaction, the City insisted that subsection 5 is not the exclusive means for a city to borrow money, but only the specific source of power for a city to borrow money when it issues general obligation bonds. The City urged that subsection 2 is an express authorization for the City to select alternative methods of financing capital improvements. The City's argument used the nonappropriation mechanism to make clear that the general taxing powers of the City are not obligated. This mechanism was spelled out in a series of clauses in the Official Statement prepared in connection with the issuance of certificates of participation, the Trust Agreement and the Lease-Purchase Agreement: Official Statement:  Non-appropriation and Default: The City may terminate the Lease Agreement, at its option, if the City does not appropriate funds to make Lease Payments. In addition, the Lease Agreement may be terminated by the Trustee upon an event of default. In the event of such termination, the recourse of the Certificate Holders would be to take possession of the Facilities and operate the Facilities or sell their interest in the Land and Facilities, since the City is only liable for Lease Payments for the then current fiscal year for which it has appropriated funds. There is no certainty that the remedies available to the Certificate Holders would produce sufficient funds to completely pay the Certificate Holders. Trust Agreement, Article VI, § 6.04:  No Obligation by the City to Owners. Except for the payment of Lease Payments when due in accordance with the Agreement and the performance of the other covenants and agreements of the City contained in the Agreement and in this Trust Agreement, the City shall have no obligation or liability to any of the other parties or to the Owners of the Certificates with respect to this Trust Agreement or the terms, execution, delivery or transfer of the Certificates, or the distribution of Lease Payments to the Owners by the Trustee. Lease-Purchase Agreement, Article II, § 2.01:  Representations, Covenants and Warranties of City.       (h) Except to the extent specifically provided herein, the City is not obligated to appropriate or otherwise provide moneys for the payment of the Lease Payments or any other amounts coming due hereunder; and in the event of Non-appropriation by the City Commission, the City shall not be liable for general, special, incidental, consequential or other damages resulting therefrom. This Agreement does not constitute a general obligation of the City, and the full faith and credit and taxing powers of the City are not pledged for the payment of the Lease Payments or other amounts coming due, or other actions required to be performed hereunder. In our view, NDCC 40-05-01(2) generally authorizes a municipal governing body to control municipal finances, pay its debts and expenses, contract debts and borrow money, and to control municipal property. Section 40-05-01(5) specifically authorizes the borrowing of money by issuing bonds in accordance with NDCC title 21. Subsection 5 does not provide the exclusive method of borrowing money, but specifies one method of exercising the borrowing authority granted in subsection 2, particularly when general taxing powers are obligated. Section 40-05-01(56) specifically authorizes a municipal governing body to convey, sell, or dispose of municipal property. [1] Section 40-05-01(50) specifically authorizes a municipal governing body to construct public buildings. Section 40-05-01(55) specifically authorizes a municipal governing body to acquire real property by lease or purchase. Thus, the City had statutory authority to sell existing facilities, construct facilities, and lease facilities. The question is whether the City had the statutory power to fund improvements to its existing facilities in a three-step sale-leaseback-purchase transaction. In defining municipal powers, the rule of strict construction applies. Lang v. City of Cavalier, 59 N.D. 75, 228 N.W. 819 (1930). Once a municipality's powers have been determined, however, the rule of strict construction no longer applies, and the manner and means of exercising those powers where not prescribed by the Legislature are left to the discretion of the municipal authorities. Id., 228 N.W. at 822. Leaving the manner and means of exercising municipal powers to the discretion of municipal authorities implies a range of reasonableness within which a municipality's exercise of discretion will not be interfered with or upset by the judiciary. See, e.g., Tayloe v. City of Wahpeton, 62 N.W. 2d 31, 35 (N.D.1953) (courts will not declare ordinances invalid unless they are clearly arbitrary, unreasonable and without relation to public health, safety, morals or public welfare.); Marks v. City of Mandan, 70 N.D. 474, 296 N.W. 39, 45 (1941) (reasonable exercise of legislative discretion does not invade constitutional rights of general taxpayers); 62 C.J.S. Municipal Corporations § 203, pp. 378-379 (1949) (As a general rule, the reasonableness of municipal action is subject to review and inquiry by the courts.... While courts are reluctant to declare municipal regulations or other acts invalid by reason of their unreasonableness,..., when such unreasonableness clearly appears, the courts may declare them invalid.). Taxpayers asserted that a step-transaction lease-purchase of new facilities, with a nonappropriation clause, would be a statutorily permissible transaction with which they would have no argument if existing city facilities were not at risk of loss. There is little, if any, functional difference in losing existing facilities and losing the equity acquired in new facilities through payments made pursuant to a lease-purchase agreement. A risk of loss of city property does not necessarily preclude the use of a step transaction by a city's exercise of the powers granted in NDCC 40-05-01(2), (50), (55) and (56). Lang v. City of Cavalier, supra , involved an agreement under which Cavalier agreed to provide an electrical distribution system and a building in which an electric generating plant would be installed by the Fairbanks-Morse Company. Cavalier agreed to pay for the plant in installments evidenced by pledge orders. If the city failed to pay any pledge order, the company could repossess the machinery and equipment. This court rejected the following arguments in a taxpayer's challenge of the arrangement: The plaintiff contends that this contract is merely a subterfuge resorted to for the purpose of evading the constitutional safeguard against excessive indebtedness; that, regardless of the terms of the contract and the verbal devices employed therein, the electric plant becomes the property of the city, and the city becomes obligated to pay the purchase price thereof; that, though a special fund is created out of the proceeds from the sale of light and power, such proceeds are the property of the city, and thus the city's property is to be used in discharging the obligation; that, in case of default at any time, even though the city is not generally liable, the property may be repossessed and sold, and, where a portion of the purchase price has been paid, to that extent, at least, the city's property is taken to discharge the obligation. 228 N.W. at 824. Thus, the holding in Lang v. City of Cavalier, supra , makes clear that some municipal property may be placed at risk of loss in financing improvements. Questions as to the extent of property that may be placed at risk and the degree of risk of loss to which it may be subjected are matters of legislative judgment and discretion on the part of municipal authorities, subject to reasonable exercise and judicial review for reasonableness. We conclude that the three-step sale-leaseback-purchase transaction employed by the City to fund the construction of improvements to its civic center, library and a watermain, with a nonappropriation mechanism to make clear that its general taxing powers are not obligated, was a reasonable exercise of the general powers granted in NDCC 40-05-01(2), and the specific powers granted in NDCC 40-05-01(50), (55) and (56).