Opinion ID: 2609273
Heading Depth: 1
Heading Rank: 1

Heading: special fund doctrine

Text: It was the application of the special fund doctrine to the excise taxes on cigarettes that gave rise to the Gruen decision. The court held that bonds payable from a special fund created by excise taxes on cigarettes, under a declaration that the general credit of the state not be pledged and that no resort be had to property taxation, was not a debt within the constitutional debt limitation. The debt limitation applied solely to debts payable from a general levy and not to excises. Essential to this holding is the belief that the framers of our constitution in 1889 had little or no knowledge of excise taxes when they drew up and propounded the constitution, as the territorial government derived its revenues almost exclusively from ad valorem taxes on realty. But the first case to arise under the debt limitation article of the constitution does not seem to support the Gruen decision; indeed, the language of the case describing the special fund implies that, if the funds are derived from general taxation, they do not come within the meaning of a special fund. Allen v. Grimes, 9 Wash. 424, 37 Pac. 662 (1894). By the Enabling Act, Congress granted to the state 130,000 acres of land which were to be sold and the proceeds therefrom expended for the erection of public buildings at the state capital. The legislature created the State Capitol Building Fund with directions that all proceeds from the sales of these lands were to be deposited therein. It appropriated money for the erection of public buildings therefrom, with a proviso that there was to be no other appropriation for public buildings except from funds derived from the sale of these lands. Before any of the lands granted had been sold and any money deposited in the fund, relator, as a member of the State Capitol Commission, brought mandamus to compel the State Auditor to issue a warrant for his services and expenses  these being properly chargeable against the fund. The Attorney General defended upon the ground that, under the provisions of art. 8 of the constitution, the issuance of the warrant claimed would create a debt against the state. This court ventured into the special fund doctrine for the first time by saying: It thus appears that the intention of the legislature is to limit all payments of money expended for the erection of a state capitol building to the money actually derived from the sale of the lands granted by the government; and, to make the intention the more apparent, the proviso to § 15 prohibits any appropriation, or more properly, payment from any other fund. The idea of the creation of a debt against the state is by the language used expressly negatived. There is under the law absolutely no obligation resting upon the state to pay any sum whatever, and those who may receive the auditor's warrants will be limited in their rights to the requirement of the proper officers to perform their duties as prescribed by the statute. Even were the law such that the state could be sued upon an ordinary contract the same as an individual, no cause of action could be stated against it by the holder of a warrant. Allen v. Grimes, supra . The Allen v. Grimes, supra , ruling was confirmed in State ex rel. Troy v. Yelle, 36 Wn. (2d) 192, 217 P. (2d) 337 (1950), when we held that warrants drawn on the general fund in excess of the $400,000 constitutional limitation for current expenses did not constitute a debt, though bonds issued to fund such warrants probably would be a state debt in violation of the constitutional provision. Thus, at the outset, we made it clear that revenues in the fund out of which the bonds were to be paid could not come from general taxation in any part and remain outside the debt limitation. Similarly, warrants authorized by the State Capitol Commission drawn upon the State Capitol Building Fund, a fund derived exclusively from the sale and lease of federally donated lands, was held good, there being no general taxes involved in State ex rel. Attorney General v. McGraw, 13 Wash. 311, 43 Pac. 176 (1895), although this precise constitutional provision was not mentioned. That this was thought to be a decision of bedrock stability is seen in the next important case involving Article 8 of the constitution, when, in State Capitol Comm. v. State Bd. of Finance, 74 Wash. 15, 132 Pac. 861 (1913), the mere guaranty of the principal and interest by the state of Capitol Building Construction Bonds  even though there appeared to be more than ample revenues derived from the sale of public lands to discharge the bonds  was held to contravene the constitutional debt limitation of $400,000 fixed by Article 8. Counsel argued that, since the value of the capitol lands, the proceeds from the future sales of which were pledged to the payment of these bonds, exceeded the principal and interest of the bonds, the state would not be required to pay any part thereof out of its general revenues, and that the state was thereby incurring an obligation in form only and not in substance. The proposition was squarely put that the issuance of the bonds was not the creation of a state debt under Article 8. Answering this thesis, we said: ... notwithstanding the possibility and even probability that the obligation sought to be so incurred will be eventually liquidated by funds derived from the sales of the capitol land, and thus the burden be entirely removed from the taxpayers, they must nevertheless be regarded as general state bonds for the purpose of investing the general school fund therein. They cannot be regarded as such, in our opinion, without violating both the spirit and the letter of the sections of article 8 of the state constitution above quoted. There was little relief for the embattled State Capitol Commission, for scarcely had its bonds been struck down in State Capitol Comm. v. State Bd. of Finance, supra , when it again fought its way into court to sustain another issue of Capitol Building Bonds authorized by the legislature of 1915, in the case of State ex rel. State Capitol Comm. v. Lister, 91 Wash. 9, 156 Pac. 858 (1916). These bonds, as in State Capitol Comm. v. State Bd. of Finance, supra , were payable in principal exclusively from the State Capitol Building Fund which, in turn was built up solely from the sale of public lands granted to the state by the United States to finance the construction of public buildings. Laws of 1915, chapter 191, § 3, p. 700, added a minor provision that the State Board of Equalization levy a tax sufficient to pay the interest on the bonds, but that money so paid in interest was to be deemed only a loan from the general fund of the state, and any moneys so advanced were to be repaid to the general fund from the Capitol Building Fund after other charges thereon had been paid. To add a constitutional fillip, provision was made that no money from the fund be expended until the Temple of Justice, the building where this court now sits, was paid for in full. Despite the blandishment of this latter provision, giving priority to erection of this court's home, the entire bond issue was held invalid as violative of the debt limitation of the state constitution. We said: Turning, then, to the word `debt' in the constitution: Does it apply to the interest upon the bonds in question which is evidenced by the coupons attached. This interest becomes due at times and in amounts definite and certain. The plain purpose of providing in the constitution that `no debts shall hereafter be contracted' was to prevent the taxpayers of the state from being called upon to meet obligations which had not been authorized by a vote of the people. State ex rel. State Capitol Comm. v. Lister, 91 Wash. 9, 15, 156 Pac. 858. And, further: If the interest upon these bonds is not to be held a debt, then the door opens, notwithstanding the constitutional provision, for the legislature to bond the lands of the state which are set apart for the various public institutions, and require the interest thereon to be paid by general taxation.... Then, answering the suggestion that since interest could not be paid from general taxes without an appropriation and, thus, would not constitute a debt against the state but only against the fund, this court said: It is probably true that the money coming into the capitol building interest fund could not be applied in payment of the interest coupons until it was so appropriated by the legislature; but it may be asserted, with dogmatic certainty, that, if the bonds and coupons should be issued, at no time would the legislature refuse to make an appropriation for the purpose of meeting the matured interest coupons. Refusing to make the appropriation would be equivalent to repudiation of the obligation. Such a position on the part of the state is unthinkable. This, however, is beside the question. It is not what the legislature would or would not do; but can the debt be created and the money collected from the taxpayers of the state without the people being heard upon the question when the constitution gives them this right. The act upon its face bears unmistakable evidence of a studied effort to circumvent the constitution. To hold that the interest coupons issued under the provisions of the act are not evidence of a debt, within the meaning of the constitution, would be to give judicial approval to a subterfuge. Thus it is clear that, when any of the moneys going into the special fund or any of the credit to support the special fund are derived from general taxes, they constitute a state obligation. So, the mere guaranty of principal and interest of Capitol Building Bonds, where it was highly improbable that any general tax funds whatever would ever be employed, was held to be a pledge of the general credit of the state and the contracting of an indebtedness in State Capitol Comm. v. State Bd. of Finance, supra ; and even a loan of the interest from general taxes, with a guaranty of repayment of such interest back into the general fund, likewise was held to be outside the special fund doctrine as constituting a debt in violation of the constitution in State ex rel. State Capitol Comm. v. Lister, supra . Nor was there any departure from this view in State ex rel. State Capitol Committee v. Clausen, 134 Wash. 196, 235 Pac. 364 (1925), where mandamus was granted to compel the Auditor to issue bonds for the construction of capitol buildings, which bonds were supported and redeemable by money in the Capitol Building Construction Fund. The fund derived its money from two sources, tax moneys levied at the rate of one-half mill on property, and the sale and lease of federally granted lands. The tax moneys were levied by an earlier act of the legislature, Laws of 1917, chapter 167, p. 776, and were to be paid into the Capitol Building Construction Fund to be used for the purchase of land, completion of buildings under construction, and the payment of interest on warrants outstanding against both the Capitol Building Fund and the Capitol Building Construction Fund. Laws of 1917, chapter 167, § 8, p. 778, stated that all moneys derived from this one-half mill tax levy be deemed loans from the state and be returned to the state treasury from money derived from the lease, sale or disposition of the federal land grant, but such refund be made only after all bonds, warrants and outstanding obligations against the Capitol Building Fund had been paid. This court upheld the bonds in the Clausen case, presumably on the theory that the 1917 act levying the tax for the Capitol Building Construction Fund contained no language pledging its renewal by the state, and on the language of Laws of 1925, chapter 27, § 1, p. 61: ... Such bonds shall ... be payable only from the capitol building construction fund from revenues hereafter received from leases and contracts of sale heretofore made, and from leases and sales hereafter to be made, of lands, timber and other products from the surface, or beneath the surface, of the lands granted to the State of Washington by the United States, pursuant to an act of Congress approved February 22, 1889, for capitol building purposes.... (Italics ours.) We have some difficulty in reconciling the Clausen holding with the ruling in State Capitol Comm. v. State Bd. of Finance, supra , and State ex rel. State Capitol Comm. v. Lister, supra , because of the provisions in the 1917 act which allowed a general tax to be levied at one-half mill to be available as a loan for the payment of interest on building construction bonds. It could well be that the court chose to regard this levy as a part of a pay-as-you-go program and not in any way the creation of a debt against the state. At any rate, the language of the Clausen case cannot be said to support the Gruen decision, for it is stated in Clausen : The legislative act under discussion expressly provides that the principal and interest of the bonds authorized shall be payable only from revenues hereafter received from the lease and sale of the granted lands. In no possible way is the credit of the state involved. Not one dollar of its general property can be used to discharge those bonds or the interest on them. Not one dollar of taxes can be put to that purpose. The state is only carrying into effect the trust imposed on it, which is to use these granted lands or moneys derived from them to construct capitol buildings. Its only obligation under this act is to see that all the revenues hereafter received from the lease or sale of the granted lands shall be applied towards the payment of these bonds and their interest. On no principle of law can it be said that, under these circumstances, any debt has been contracted `by or on behalf of this state.' State ex rel. State Capitol Committee v. Clausen, 134 Wash. 196, 235 Pac. 364. We have studied all of the other cases from this jurisdiction cited in Gruen on the question of state debt limitation, the only problem of constitutional law in the Gruen case concerning us now, and we get little help from any of them. Winston v. Spokane, 12 Wash. 524, 41 Pac. 888 (1895), simply holds that revenue bonds for the construction of a municipal water works, payable exclusively from 60 per cent of the revenues of the water system, did not violate Article 8, § 6 of the state constitution, the section limiting the indebtedness of municipalities. The reasoning of this case supports the view that the special fund doctrine is a sound one where all moneys in the fund are derived from revenues produced from the object created by the bonds. And the idea that the special fund only is liable for warrants on bonds issued against it, and is not a general obligation or debt, is made clear in Potter v. Whatcom, 25 Wash. 207, 65 Pac. 197 (1901) where street improvements, authorized by ordinance, to be paid for only from assessments upon property fronting the improved streets, were allowed as charges only upon the assessment fund and did not constitute a debt chargeable against the general fund of the city. Hence, when the assessments proved insufficient to pay off the warrants, the city was held not liable to pay the warrants from its general fund since it neither expressly contracted to pay the warrants nor did it collect the fund and misappropriate. Nor does Comfort v. Tacoma, 142 Wash. 249, 252 Pac. 929 (1927), support Gruen. There a guaranty fund was provided by the city from taxes, for the payment of local improvement district bonds, being limited to 5 per cent of the bonds outstanding. This was held to be merely a contingent liability and not a debt of the city. The holding was based on the view that the local improvement bonds themselves, issued as they were without the guaranty, were not debts of the city, but debts only of the special assessment funds, and the court should not anticipate that the assessments would be inadequate or that any of the guaranty fund would be required to pay any of the bonds. It gives no support to respondent's position here or to the special fund doctrine as contemplated by the Gruen case. The Gruen decision was handed down upon the reasoning that, if bonds are payable from a special fund and the special fund is in turn filled or replenished in whole or in part from excise taxes, the promise to levy the excise taxes to keep the fund solvent does not constitute a debt within the meaning of our constitution. There the special fund theory is neatly coupled to the excise taxes on the basis that excise taxes were not known to the framers of our constitution and, hence, that the use of the word debt must necessarily be restricted to mean only those obligations which were payable from the kind of taxes known to the constitutional convention, i.e., ad valorem taxes. But we find no authority for this proposition in our case law other than the assertion contained in Gruen, i.e., that the framers of the constitution had little or no knowledge of excises and that, when they used the word debt in our constitution, they therefore referred to an obligation payable only out of ad valorem taxes. On the contrary, we think that the men who drew up the constitution of 1889 knew of excises as one means of providing revenue for the general government, but in addition were mindful of the Constitution of the United States, Art. 1, § 8, of which reads: The congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defence and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States; ... (Italics ours.) That they did not, at the outset, choose to levy any excises in the first postconstitutional session of the legislature does not convince us that they were oblivious of the power to do so in the future. And though conceivably the men who drafted the state constitution may have been ignorant of excise taxes, we are sure that they had no knowledge whatever of the special fund doctrine, for it had not yet been invented. [1] That the special fund doctrine is a useful and valid tool of government is apparent when one thinks of all of the institutions and devices of government supported by it. But the true test of its application here is not what comes out of the fund, but what goes into it. If the revenues in it derive exclusively from the operation of the device or organ of government financed by the fund, as in the case of a toll bridge, or the operation of the State Liquor Control Board, or from sales or leases of publicly owned lands, any securities issued solely upon the credit of the fund are not debts of the state, but debts of the fund only. But if the state undertakes or agrees to provide any part of the fund from any general tax, be it excise or ad valorem, then securities issued upon the credit of the fund are likewise issued upon the credit of the state and are in truth debts of the state. Hence, we must take care that the employment of peripheral doctrines does not lead us away from the main point of the case. What is a debt of the State of Washington? Any obligation which must in law be paid from any taxes levied generally is, we think, a debt of the state. It matters little whether the tax be ad valorem or an excise. Our views in this re-examination of the special fund doctrine, as it applies to Article 8, §§ 1 and 3 of the state constitution on the question of debt limitation, are, we think, confirmed by the subsequent motor vehicle fuel tax amendment. In 1944, the people of this state adopted amendment 18 to the state constitution which provides that all revenues derived from excise taxes on motor vehicle fuels, license fees, and other revenues for highway purposes, be kept in a special fund and used for highway purposes only. Bonds issued against this fund were correctly held not violative of Article 8, §§ 1 and 3, in State ex rel. Bugge v. Martin, 38 Wn. (2d) 834, 232 P. (2d) 833 (1951), where it was pointed out in a concurring opinion that the very restriction of the fund to the revenues from specifically authorized constitutional sources saved the bonds from any doubts inhering in the Gruen decision. We think that amendment 18 should have been given greater weight when the Gruen case came on for hearing as a persuasive adjunct to the idea that the creation of a special fund alone, from which an obligation would be paid, does not make the obligation any less a state debt if it is promised that general taxes are to go into the fund. We are now convinced that the 80 million dollars in limited revenue bonds authorized by Laws of 1949, chapter 180, p. 496 for the payment of a bonus to veterans issued against the War Veterans' Compensation Fund, financed by excises upon the retail sales and handling of cigarettes, containing as it did an express promise by the state to continue to levy such taxes until the bonds and interest thereon were paid, did create an 80 million dollar debt against the state without a vote of the people. And it is, and was, a debt of the state despite the assertion in § 12 of that act that the same ... not be construed to constitute a pledge of the general credit of the State of Washington. Neither the finespun reasoning of the majority opinion in Gruen nor the cases from other jurisdictions are very convincing on the question of debt limitation. When the legislature bonded the state's revenues in 1949 by promising to maintain the excises on cigarettes until the $80,000,000 veterans' bonus was paid in full, it in fact put the state in debt without a vote of the people in violation of Article 8, §§ 1 and 3. Though the passing of time has, we hope, served to clarify our thinking on the problem of debt limitation under the Gruen case, we must, nevertheless, reaffirm it as to all matters for which it may be deemed authority until the remittitur is filed in the instant case, for Gruen has been cited with approval more than 25 times by this court without hints as to its precarious standing on many of its various phases, except that of debt limitation. On the question of debt limitation, Gruen has been cited only once, Municipality of Metropolitan Seattle v. Seattle, 57 Wn. (2d) 446, 357 P. (2d) 863 (1960), to affirm the principle that obligations payable from a special fund and solely from anticipated service revenue do not constitute a debt within the meaning of a constitutional debt limitation. Not until our decision in State ex rel. Washington Toll Bridge Authority v. Yelle, supra , came down did this court imply that Gruen might not be held to express the law of this state on the question of debt limitation under Article 8, §§ 1 and 3. Thus it was that officers of state government, officials of the various school districts, contractors and workmen on public school building projects, lending and investment institutions, both public and private, were entitled to accept the Gruen holding at face value, act under it, and be guided by it, as the ultimate expression of the law of this state on the points directly involved in it. They had a right to rely on the Gruen decision and to apply it; hence, we cannot rightly look backward in overruling Gruen on this debt limitation problem, but must, of necessity, require that the effect of the instant decision be prospective and look to the future only. Looking to the future, then, we are thus obliged to and do overrule Gruen v. State Tax Comm., 35 Wn. (2d) 1, 211 P. (2d) 651 (1949), in so far as it purports to hold that the issuance and sale of limited obligation bonds funded by excise taxes on the sales and handling of cigarettes did not contravene Article 8, §§ 1 and 3, of the state constitution, and as to all future enactments cognizable under the debt limitation ruling of that case, we declare it is no longer the law.