Opinion ID: 1262044
Heading Depth: 1
Heading Rank: 3

Heading: what was meant by interest and redemption charges on ... any indebtedness approved by the voters?

Text: Subdivision (b) of article XIII A, section 1, provides, The [1 percent] limitation ... shall not apply to ad valorem taxes or special assessments to pay the interest and redemption charges on any indebtedness approved by the voters prior to the time this section becomes effective. (Italics added.) (3a) City and amici contend that its PERS levy is within the exemption. Plaintiff argues that the 1978-1979 payment owed PERS was not a prior indebtedness approved by the voters because the charge arises each year, is annually executory, and may be terminated by City at will. (See § 20560 et seq.) He notes that, if on termination the employer fails to pay unfunded amounts due PERS, employees' benefits simply are reduced accordingly (§ 20564). The contention has two prongs: first, that within the meaning of subdivision (b) no true indebtedness ever arises under a PERS contract; second, that no annual contribution assessed after the article XIII A limit became effective can meet the requirement of prior voter approval. Both prongs involve the premise that article XIII A seeks to exempt only traditional, fixed, long-term debt for borrowed funds. What plaintiff's theory ignores is the employer's duty to employees to pay pensions promised and earned. By entering public service an employee obtains a vested contractual right to earn a pension on terms substantially equivalent to those then offered by the employer. (See, e.g., Olson v. Cory (1980) 27 Cal.3d 532, 540-541 [178 Cal. Rptr. 568, 636 P.2d 532]; Betts v. Board of Administration (1978) 21 Cal.3d 859, 863-864 [148 Cal. Rptr. 158, 582 P.2d 614]; Kern v. City of Long Beach (1947) 29 Cal.2d 848, 852-853 [179 P.2d 799].) On the employee's retirement after he has fulfilled pension conditions an immediate obligation arises to pay benefits earned. Earned benefits are deferred compensation ( Olson, supra, 27 Cal.3d at p. 540) and, when payable, become a fixed indebtedness of the employer. [4] Theoretically, the employer can provide for the indebtedness in varying ways. It can pay obligations from current revenue as they accrue, or it can insure them through PERS (§ 20000 et seq.) or by other means (§ 45300 et seq.). Contributions to PERS are in the nature of insurance premiums (§ 20456); during the contract term they represent the employer's ongoing share of the actuarial equivalent of amounts necessary to fund current and future benefits due covered employees, statewide. (See, e.g., §§ 20564, 20750 et seq.) From premiums paid by all, PERS discharges each employer's indebtedness as it arises. (§ 21200 et seq.) City's voters empowered it to offer the pension plan provided by PERS. They authorized the special tax set by statute insofar as necessary to fund the obligations. (Former § 20532.) [5] Necessarily they approved all indebtedness to employees, current and future, that would be incurred. (Cf. fn. 11, post. ) Contributions to PERS are an efficient means of discharging City's pension debts; the debts, as approved by the voters, continue to accrue regardless of participation in the state system. [6] (4) The term `indebtedness' has no rigid or fixed meaning, but rather must be construed in every case in accord with its context. ( County of Shasta v. County of Trinity (1980) 106 Cal. App.3d 30, 38 [165 Cal. Rptr. 18]; see 42 C.J.S., Indebtedness, p. 555.) It can include all financial obligations arising from contract (see, e.g., § 23231, defining indebtedness in county boundary-change proceedings), and it encompasses obligations which are yet to become due as [well as] those which are already matured. ( Provident etc. Assn. v. Davis (1904) 143 Cal. 253, 255 [76 P. 1034].) (3b) We hold that indebtedness as traditionally understood covers obligations arising under City's pension plan. Plaintiff and taxpayers argue that subdivision (b) limits the kinds of indebtedness exempted, since it applies only to interest and redemption charges. Interest routinely is defined as compensation for the use or forbearance of money. (E.g., Civ. Code, § 1915.) (5) Redemption often means the act of buying back or repurchasing; it may connote a change of interest in the thing to be redeemed, implying that there is something to be redeemed, `something lost to be gotten back.' [Citations.] ( Stafford v. Realty Bond Service Corp. (1952) 39 Cal.2d 797, 802-803 [249 P.2d 241].) Usually it suggests repurchase or retrieval of a security  whether evidence of indebtedness or tangible or intangible property  by paying the obligation secured. Yet redemption, like indebtedness, is not fixed or inflexible; its meaning derives from context. It has been defined broadly as [t]he payment of principal and unpaid interest on bonds or other debt obligations. (Black's Law Dict. (5th ed. 1979) p. 1149, italics added.) [7] (3c) Plaintiff suggests that the phrase interest and redemption charges shows an intent to limit the indebtedness protected by subdivision (b) to bonded or secured debt. Article XIII A does not, though, use these well-known limitations on the term indebtedness. (See, e.g., Gov. Code, § 43605 [limiting certain debt for public improvements; indebtedness defined as bonded indebtedness].) Rather it speaks of  any indebtedness approved by the voters. (Italics added.) (See County of Shasta, supra, 106 Cal. App.3d 30, 39; compare, e.g., Cal. Const., art. XVI, § 18 [distinguishing any indebtedness (incurred) in any manner or for any purpose from indebtedness in the form of general obligation bonds].) (6) Courts construe constitutional phrases liberally and practically; where possible they avoid a literalism that effects absurd, arbitrary, or unintended results. ( Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization (1978) 22 Cal.3d 208, 244-245 [149 Cal. Rptr. 239, 583 P.2d 1281], and cases cited.) (3d) Subdivision (b)'s focus on voter approval implies a concern that irrevocable, long-term obligations, solemnly approved by local electorates and entered on faith in taxing powers then available, not be frustrated by a revolutionary tax limitation imposed from outside the community. (Cf. Los Angeles County Transportation Com. v. Richmond (1982) ante, pp. 197, 202-204 [182 Cal. Rptr. 324, 643 P.2d 941].) It also implies a recognition that failure to create a prior debt exception might lead to problems under the federal contract clause. (See County of Shasta, supra, 106 Cal. App.3d 30; see also, discussion post, pp. 332-333.) As we have seen, any indebtedness can include all obligations to pay money, whether or not evidenced by bonds, notes, or security. We should not assume that the phrase interest and redemption charges is a hypertechnical, arbitrary category meant to protect some, while excluding other, indebtedness [previously] approved by the voters. In the context of subdivision (b), we conclude, interest and redemption charges denotes no more or less than the sums from time to time necessary to avoid default on obligations to pay money, including those for pensions. [8] The most pertinent Court of Appeal precedents reject the notion that subdivision (b) applies only to borrowed funds or bonded debt. In Kern County Water Agency v. Board of Supervisors (1979) 96 Cal. App.3d 874 [158 Cal. Rptr. 430], a district sought levy of a special 1978-1979 property tax to pay charges due under contract with the Department of Water Resources (Department) for allocations from the State Water Project (Project). The tax was intended to make up deficits remaining after the district's resale of water. The contract with the Department, and levy of a tax necessary to fulfill it, had been approved by the voters before article XIII A became effective. Bonds for the Project were payable primarily from the Department's sales. The tax sought involved only 20 percent of the district's obligation to the Department, while 60 percent of the Department's revenues went to amortizing the bonds. The Court of Appeal therefore concluded that the entire district levy, ostensibly sought to pay a contract obligation for water, was necessary to meet interest and redemption charges on bonded indebtedness approved by the voters. (P. 879.) A more recent decision, County of Shasta, supra, 106 Cal. App.3d 30, discusses subdivision (b) at length. There the voters in five counties approved a new joint junior college district to supersede a three-county district. Under statutes then in effect the new district elected to keep the college's facilities in the old district's name and not to assume its bonds. However, the voters in each new-district county authorized an annual use charge  payable to the old district from a special new-district property tax  to defray bond obligations. Once article XIII A went into effect, Trinity County refused to levy its tax or pay its use charge. The other district members sought mandate. As in Kern County, the Court of Appeal stressed the connection with bonded indebtedness and held that the new-district levy was exempt under subdivision (b). It noted, though, that `indebtedness' and `bonded indebtedness' are not synonymous and that subdivision (b) excludes  any indebtedness approved by the voters. The choice of the broader, more flexible term over the more narrow and restrictive term indicates that the voters did not intend to limit subdivision (b) to bonded indebtedness.... (P. 39 of 106 Cal. App.3d.) The aim of subdivision (b), the court concluded, was to prevent the impairment of contracts approved by the voters in reliance upon the power of the district to levy the tax necessary to fulfill that contract. [Citation.] ... (P. 40.) Plaintiff calls our attention to Revenue and Taxation Code sections 2260 and 2270, property-tax limitation statutes in effect at the time article XIII A was drafted. They exempted certain interest and redemption charges on bonded or other indebtedness (§§ 2260 and 2270, subds. (1), (2)) and also the cost of retirement and pension benefits or plans which are being provided pursuant to provisions of a city or county charter or which have been specifically approved by the voters of a local agency ... (subd. (5)). [9] Plaintiff suggests that similarities and differences in the statutory and constitutional provisions are intentional. They show, he urges, that article XIII A's drafters intended to distinguish pension costs from debt redemption, preserving the exemption for the latter but repealing it as to the former. We disagree. Except for pensions (subd. (5)) and school taxes (subd. (8)), sections 2260 and 2270 speak narrowly of redemption costs for bonded or other indebtedness (subds. (1), (2)) and other costs associated with bond financing (subds. (3), (4), (6), (7)). The constitutional replacement eliminates those complexities and extends the exemption to redemption costs for any voter-approved indebtedness. No distinction for bonds or pensions is articulated. Plaintiff's theory may be plausible, but more persuasive is the view that article XIII A merely simplifies and broadens the exemption. Plaintiff points out that the voters' pamphlet analysis of Proposition 13 by the Legislative Analyst described the exemption as applying only to bonded debt. (Ballot Pamp., Proposed Amends. to Cal. Const. with arguments to voters, Primary Elec. (June 6, 1978) p. 57.) Election materials may be helpful but are not conclusive in determining the probable meaning of initiative language. ( Amador Valley, supra, 22 Cal.3d 208, 246.) The analyst's view is contradicted by the Attorney General's official title and summary, which report that the tax rate is limited except to pay indebtedness previously approved by voters. (Ballot Pamp., supra, at p. 56, italics added.) The initiative's phrase any indebtedness casts further doubt on the analyst's interpretation. We should not assume that his brief comments accurately reflected the full intent of the drafters or the understanding of the electorate. [10] On the other hand, in Amador Valley we stressed the deference to be accorded the Legislature in resolving definitional gaps in article XIII A. (22 Cal.3d at p. 246; see also State of South Dakota v. Brown (1978) 20 Cal.3d 765, 777 [144 Cal. Rptr. 758, 576 P.2d 473]; Associated Home Builders etc., Inc. v. City of Livermore (1976) 18 Cal.3d 582, 598 [135 Cal. Rptr. 41, 557 P.2d 473, 92 A.L.R.3d 1038].) In 1978, soon after passage of Proposition 13, the Legislature enacted Revenue and Taxation Code section 2237, designed to clarify assessment and allocation of taxes under the new constitutional limitation. (Stats. 1978, ch. 292, § 31, p. 609, as amended.) Section 2237 provided for a single ad valorem tax of 1 percent or less, levied by each county and distributed among all local agencies. No other local agency was to levy a property tax, except for certain purposes including annual payments for the interest and principal on general obligation bonds or other indebtedness approved by the voters prior to July 1, 1978 [art. XIII A's effective date]. (Subd. (a).) In 1979 the Legislature adopted section 2237.1. (Stats. 1979, ch. 941, § 1, p. 3245.) That statute declared that the term indebtedness approved by the voters prior to July 1, 1978, as used in section 2237, subdivision (a), included city charter provisions which were approved by the voters prior to July 1, 1978, which require a city to levy additional property taxes to pay obligations under the retirement system for city employees, up to the level of benefits approved by voters before that date. Section 2237 was recodified in 1980 as section 93, subdivision (a). (Stats. 1980, ch. 1256, §§ 1.5, 11.3, pp. 4246, 4252.) Section 2237.1, on the other hand, expired by its terms after the 1979-1980 fiscal year (Stats. 1979, ch. 941, supra, § 3, p. 3245). Moreover, the Legislature had stated that adoption of section 2237.1 was intended to extend emergency relief, not as an interpretation whether retirement system obligations are, or are not, intended to be considered `voter approved indebtedness' within the meaning of Article XIII A of the California Constitution. ( Id., § 6.) It was also stated, however, that section 2237.1 was an emergency statute, necessary for the immediate preservation of the public peace, health, or safety. The Legislature acted in recognition that [c]harter cities throughout the state are being impaired in their normal responsibilities and functions due to tax impounds arising from restrictive interpretations of the tax limit and that [t]he intent of Article XIII A ... is not clear. ( Ibid. ) The Legislature is presumed to adopt constitutional laws. ( In re Ricky H. (1970) 2 Cal.3d 513, 519 [86 Cal. Rptr. 76, 468 P.2d 204].) Its commendably prompt decision to clarify pension rights, even as a transitional measure, suggests its view that the voters did not intend to disrupt those important, voter-approved obligations. Finally, City and amici urge that article XIII A, if construed to repeal City's special pension tax, might so impair pension rights as to violate the federal contract clause. (U.S. Const., art. I, § 10, cl. 1.) Substantial issues of that nature indeed are present. Cases have held that when a municipality was authorized to contract and to levy a corresponding tax, the tax power could not be revoked until the contract was fulfilled. (See Hubert v. New Orleans (1909) 215 U.S. 170, 175-176 [54 L.Ed. 144, 147-148, 30 S.Ct. 40]; Wolff v. New Orleans (1881) 103 U.S. 358, 365 [26 L.Ed. 395, 398]; Von Hoffman v. City of Quincy (1867) 71 U.S. (4 Wall.) 535, 554 [18 L.Ed. 403, 410] (acknowledged in United States Trust Co. v. New Jersey (1977) 431 U.S. 1, 21, fn. 17 [52 L.Ed.2d 92, 108, 97 S.Ct. 1505]); see also Solvang Mun. Improvement Dist. v. Board of Supervisors (1980) 112 Cal. App.3d 545, 549-550 [169 Cal. Rptr. 391]; County of Shasta, supra, 106 Cal. App.3d 30, 40.) This court has said that [t]he pension provisions of a city charter or ordinance form an integral part of the employment contract. Where feasible they should be construed as providing adequate funds to meet employees' reasonable expectations. ( Bellus v. City of Eureka, supra, 69 Cal.2d 336, 351.) We need not decide here how the contract clause might apply to hypothesized facts. (See, e.g., Amador Valley, supra, 22 Cal.3d 208, 240-241.) Rather we adopt a reasonable interpretation of subdivision (b) that avoids the constitutional issue inherent in a contrary construction. ( Department of Corrections v. Workers' Comp. Appeals Bd. (1979) 23 Cal.3d 197, 207 [152 Cal. Rptr. 345, 589 P.2d 853].) We conclude that subdivision (b) exempts from the article XIII A tax limitation the voter-approved tax to fund City's pension commitments. [11] Plaintiff argues that such a holding could create a nonuniform scheme of taxation, fortuitously protecting only those pension plans authorized by a vote of the public, though voter approval never was required. (See § 20460; former §§ 20532, 45311.) As we have seen, there is a basis for distinguishing voter-approved debt. (See discussion ante, at p. 328; see also Rev. & Tax. Code, §§ 2260, subd. (5), 2270, subd. (5), supra. ) In any event, in a single case we cannot resolve all article XIII A's anomalies. ( Amador Valley, supra, 22 Cal.3d at pp. 245-247.) Nor need we decide how pension taxes authorized only by the governing body of a local agency might be treated. Here we conclude only that section 1, subdivision (b) of article XIII A exempts from the tax limit those pensions and corresponding tax levies approved by the voters before the limitation became effective.