Opinion ID: 2219255
Heading Depth: 2
Heading Rank: 2

Heading: Constitutional Debt Limitation

Text: The second issue is whether the annual appropriation obligations to repay the debt on the bonds and notes constitute constitutional debt subject to the limitation of article XI, section three of the Iowa Constitution. Property owners contend the TIF plan at issue, including the notes and bonds, cause the city to exceed its constitutional debt limitation. The property owners also argue the city failed to comply with the requirements of Iowa Code sections 384.24(3)( q ) and 384.25(2) (2001) for a public hearing on the matter. The city argues its repayment obligation is conditional on yearly appropriations and is therefore not subject to the constitutional debt limitation. We begin our discussion considering whether the city complied with the public hearing requirements related to financing issues for urban renewal areas. The applicable code provisions state, in part, Before the council may institute proceedings for the issuance of bonds for an essential corporate purpose, a notice of the proposed action, including a statement of the amount and purposes of the bonds, and the time and place of the meeting at which the council proposes to take action for the issuance of the bonds, must be published as provided in section 362.3. At the meeting, the council shall receive oral or written objections from any resident or property owner of the city. After all objections have been received and considered, the council may, at that meeting or any adjournment thereof, take additional action for the issuance of the bonds or abandon the proposal to issue the bonds. Iowa Code § 384.25(2). The property owners argue the notice published in January 2002 did not contain information of the contingent nature of the loans or of the effect the loans may have on the municipal credit rating. However, absent in the statute quoted above is any language that the city shall provide notice of these particular matters. The city was required to substantially comply with the statutes. See Green v. City of Cascade, 231 N.W.2d 882, 885 (Iowa 1975) (substantial compliance is required for the valid issuance of municipal general obligation bonds by a city). The city has substantially complied with the notice provision. The notice precisely stated the amount of the proposed bonds, the urban renewal purpose, and the public's right to petition. Further, the notice expressly stated repayment of the notes and bonds is subject to the right of nonappropriation by the City Council each fiscal year. We now turn to the critical issue which is whether the notes and bonds constitute constitutional debt. If we find these loans are subject to the constitutional debt limitation, the city would exceed its debt limit. The Iowa Constitution limits municipalities to indebtedness no greater than five percent of the total value of property within the corporate limits of the municipality. Iowa Const. art. XI, § 3. The city has a debt limitation of approximately $50 million. The city presently has $39 million in outstanding constitutional debt. Both parties agree that the $33 million of bonds and notes financing the project, or either part of it, would exceed the city's debt limitation, if considered constitutional debt. The Iowa Constitution imposes a limitation on the amount of debt a political subdivision may create to prevent the general taxes of a political subdivision from becoming overburdened by obligations. Richards v. City of Muscatine, 237 N.W.2d 48, 64 (Iowa 1975); accord Banta v. Clarke County, 219 Iowa 1195, 1200-02, 260 N.W. 329, 336 (1935) (purpose of constitutional debt limitations is to confine indebtedness within certain limits). If there is no legally enforceable obligation to continue repayments in the future, such debt is not considered constitutional debt. Constitutional debt exists only when it appear[s] such contingency is sure to take place irrespective of any action taken or option exercised by the city in the future. That is, if a present indebtedness is incurred or obligations assumed which, without further action on the part of the city, have the effect to create an indebtedness at some future day, such are within the inhibition of the constitution. But, if the fact of indebtedness depends upon some act of the city, or upon its volition to be exercised or determined at some future day, then no present indebtedness is incurred, and none will be until the period arrives, and the required act or option is exercised, and from that time only can it be said there exists an indebtedness. Burlington Water Co. v. Woodward, 49 Iowa 58, 62 (1878); accord Windsor v. City of Des Moines, 110 Iowa 175, 187-88, 81 N.W. 476, 478 (1900). A city's debt is not considered constitutional debt where none of its resources or property can be taken for, or subjected to, the payment of any bond. Interstate Power Co. v. Town of McGregor, 230 Iowa 42, 56, 296 N.W. 770, 777 (1941). Where the holder of the security has no recourse against the city in the event of non-payment, there is no debt in the constitutional sense. See Employers Ins. Co. v. State Bd. of Exm'rs, 117 Nev. 249, 21 P.3d 628, 632 (2001). To determine whether the city has bound itself to repay its debts, we look to the document creating the claimed obligation. The loan agreement for the notes read, The Notes are special, limited obligations of the City, payable from amounts on deposit in the City's Debt Service Fund, and other revenues and funds, to the extent lawfully available for such purpose, but subject to nonappropriation in any fiscal year. The Notes do not constitute a general obligation of the City or other financial obligation of the City for any fiscal year and shall not constitute debt within the meaning of any constitutional debt limitation. The Notes shall not directly or indirectly obligate the City to make payments thereon during a fiscal year beyond those for which funds have been appropriated by the City Council for such fiscal year. In the event that the City Council ... does not budget and appropriate funds for any fiscal year in an amount sufficient to meet the payments of interest and principal due under the Notes during such fiscal year ..., the City's obligations under the Notes shall terminate and become null and void on the last day of the fiscal year for which the necessary funds were appropriated. (Emphasis added.) The bonds contained substantially similar language indicating the city's repayment of the bonds was subject to nonappropriation in any fiscal year. There is nothing in the agreements creating the notes and bonds that binds the city to any particular future course of action. Each year, it is the option of the city council to appropriate the necessary money for repayment. If the city council does not appropriate money for this purpose, the city is not bound to repay the remaining amount on the notes and bonds. These notes and bonds are debts only if each year the city council says they are debts. This is the very essence of debt that does not constitute constitutional debt. The repayment of a debt that is not certain to take place regardless of future events is not subject to the constitutional debt limitation. The contingency provided for in the case before us, i.e., appropriation of funds for repayment, can hardly be said to be sure to take place irrespective of any action taken or option exercised by the city in the future. See Woodward, 49 Iowa at 62. Property owners argue the practical effect of the language creating the notes and bonds is that the city has pledged to repay the money. Specifically, property owners assert [w]hen a future city council faces the decision of whether to cause [a nonappropriation] to happen, it will both morally and practically be in a position where it must continue to appropriate general tax revenues. Property owners predict a certain disastrous result of nonappropriation; the city's inability to borrow money for even essential city services or of having that money at higher interest rates. Given these claimed consequences of a nonappropriation, the property owners, in essence, argue the city has morally bound itself to repay the notes and bonds. Because of the likelihood of repayment, the property owners urge us to expand the definition of constitutional debt to include appropriations-backed debt. We are not persuaded by their contention. A moral obligation ... is not in and of itself `debt.'  Schulz v. State, 84 N.Y.2d 231, 616 N.Y.S.2d 343, 639 N.E.2d 1140, 1148 (1994). [T]his is an extra-legal consideration urged on the basis of an undemonstrated detrimental effect of a possible default upon the State's general reputation and credit rating. Wilmington Med. Ctr., Inc. v. Bradford, 382 A.2d 1338, 1349 (Del.1978). That is, the constitutional debt limitation provision of our constitution applies to legally enforceable obligations, not to moral obligations. See In re Okla. Capitol Improvement Auth., 958 P.2d 759, 768 (Okla.), cert. denied, Fent v. Okla. Capitol Improvement Auth., 525 U.S. 874, 119 S.Ct. 174, 142 L.Ed.2d 142 (1998); State ex rel. Kane v. Goldschmidt, 308 Or. 573, 783 P.2d 988, 993 (1989). Though the consequences that could follow from the city's nonappropriation may serve to assure creditors of repayment, this assurance does not constitute a legal obligation. Id. Even if the practical effect of these agreements is that the city will repay the notes and bonds, this does not affect our analysis as long as the city cannot be held legally responsible for the debt for a year other than one in which funds have been appropriated. See Mun. Bldg. Auth. v. Lowder, 711 P.2d 273, 279 (Utah 1985). The claimed expectations of the notes and bonds holders do not create cognizable debt because these beliefs do not impose an enforceable duty or liability upon the city. See Dykes v. N. Va. Transp. Dist. Comm'n, 242 Va. 357, 411 S.E.2d 1, 10, cert. denied, Tower v. N. Va. Transp. Dist. Comm'n, 504 U.S. 941, 112 S.Ct. 2275, 119 L.Ed.2d 201 (1992). Moreover, the fact the city has designated a Debt Service Fund does not turn this situation into one of an unconditional obligation to repay the notes. The money in the Debt Service Fund is from the initial proceeds of the sale of the notes and bonds. It was set aside to pay interest on the notes and bonds from the date of signing until December 2004 (the expected opening of the hotel and conference center). The Debt Service Fund does not include any revenue derived from city taxes. The monies in this fund do not constitute debt because the monies are comprised of proceeds from the initial sale rather than monies that must be replenished by taxation. See St. Charles City-County Library Dist. v. St. Charles Library Bldg. Corp., 627 S.W.2d 64, 67 n. 1 (Mo.Ct.App.1981). Unlike the Debt Service Fund, the city's supplemental debt reserve fund does contain tax revenue. However, nothing in the loan agreement states the money in either of these debt reserve funds is set aside for repayment in the event of a nonappropriation. According to the terms of the agreement, the funds are subject to nonappropriation just as all other revenue and funds available for repayment are subject to this condition. Finally, property owners' argument that the city is attempting to do indirectly what it may not do directly is similarly unavailing. If the express terms of the city's agreement do not offend the constitution, then the purpose alone will not render the agreement unconstitutional. See Lowder, 711 P.2d at 280. The notes and bonds clearly indicate the only way the city incurs an obligation to repay the money is an affirmative act authorizing an appropriation in each fiscal year. There is no language indicating the city shall pay the money back. The city's obligation is restricted to the fiscal year within which the city council appropriates money for repayment. At the end of that fiscal year, the city has no obligation or liability under the loan agreement for the notes and bonds. In other words, the creditors in this case do not have a right to receive and enforce payment. The agreements are designed to give future city councils the flexibility to continue repayment, depending upon the city's budgetary needs in any given fiscal year. Such condition of repayment compels our conclusion that the notes and bonds do not constitute constitutional debt. [3] Simply because the city council in any given fiscal year may appropriate money for repayment does not convert the debt into a legal obligation to pay. Because the property owners have failed to meet their burden to prove the notes and bonds constitute constitutional debt and are subject to limitation, we affirm.