Court Opinion

ID: 3570957
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:23:44.543564+00
Date Added: 2024-06-11T07:40:56.604161
License: Public Domain

The great weight of judicial authority is committed to what is called the "special fund" doctrine. As applied to a situation like that now before us, it permits the pledging of the net revenues arising from the operation of a public utility to raise funds with which to pay for the purchase or construction thereof. 72 A.L.R. 687. The theory of the majority cases affirming the doctrine is that neither property nor income presently owned is required, nor is resort to the taxing power necessary, to support the pledge; hence no additional burden is cast on the taxpayer, and there is no debt created in the constitutional sense.
But in Joliet v. Alexander, 194 Ill. 457, 62 N.E. 861, although seemingly unnecessary to a decision of the case, the distinction seems first to have been emphasized that a pledge of the assured income from a presently owned plant along with the increased income of the plant as enlarged, for the purpose of making extensions or betterments, does create a debt in so far as the existing income is a part of the pledge.
The distinction thus suggested apparently commended itself as sound to the courts of certain jurisdictions, and has been followed by them. Hesse v. City of Watertown, 57 S.D. 325,232 N.W. 53, 63; Garrett v. Swanton, 216 Cal. 220, 13 P.2d 725,730; Bell v. City of Fayette, 325 Mo. 75, 28 S.W.2d 356; Hight v. City of Harrisonville, 328 Mo. 549, 41 S.W.2d 155; Miller v. City of Buhl, 48 Idaho, 668, 284 P. 843, 72 A.L.R. 682; Zachary v. City of Wagoner, 146 Okla. 268, 292 P. 345; City of Campbell, Mo., v. Arkansas-Missouri Power Co. (C.C.A. 8th Cir.) 55 F.2d 560; and possibly Byars v. City of Griffin, 168 Ga. 41,147 S.E. 66, and Morton v. City of Waycross, 173 Ga. 298, 160 S.E. 330.
Investigation has satisfied me that the weight of authority is also against appellant on the distinction sought to be drawn in the Joliet Case as it is upon the general proposition first above mentioned. Certainly the Idaho and Oklahoma courts, as shown by the note in 72 A.L.R. 687, and apparently those of Georgia as indicated by the cases from that jurisdiction hereinabove cited, are on the minority side of the major proposition. Of course, in jurisdictions which prescribe, as the creation of a debt without surmounting constitutional barriers or as exceeding the constitutional limitation on amount, any attempt to pledge revenues for the purchase or construction of a new plant, it goes without saying that an attempted pledge of revenues from a plant already owned would fall within the interdiction of such a holding.
The opinion in Hesse v. City of Watertown, supra, a South Dakota case, was participated *Page 397 
in by five judges. The four judges committing themselves on the soundness or unsoundness of the distinction drawn in the Joliet Case were evenly divided. Mr. Justice Burch, who concurred specially in the result announced by those supporting the distinction, had this to say on the subject: "The argument that, if such bonds are a debt of the city, they are necessarily issued `on the credit of the corporation,' is far from convincing to my mind."
So that, for clear-cut holdings sustaining the distinction, so far as my research discloses, we are confined to the courts of California, Missouri, and the United States Circuit Court of Appeals of the Eighth Circuit. Against this line of decisions we find arrayed the courts of the following jurisdictions, to wit: Winston v. City of Spokane, 12 Wash. 524, 41 P. 888; Griffin v. City of Tacoma, 49 Wash. 524, 95 P. 1107; Barnes v. Lehi City,74 Utah, 321, 279 P. 878; Lang v. City of Cavalier, 59 N.D. 75,228 N.W. 819; City of Bowling Green v. Kirby, 220 Ky. 839,295 S.W. 1004; Jones v. City of Corbin, 227 Ky. 674, 13 S.W.2d 1013; Ward v. City of Chicago, 342 Ill. 167, 173 N.E. 810, 812; Searle v. Town of Haxtun, 84 Colo. 494, 271 P. 629; City of Jerseyville, Ill., v. Connett (C.C.A. 7th Cir.) 49 F.2d 246, 249; and apparently also Brockenbrough v. Board of Water Commissioners,134 N.C. 1, 46 S.E. 28, 34.
It is worthy of mention that the Joliet Case from Illinois, the first to sense and promulgate this distinction in and limitation on the right to pledge revenues, has since beer definitely rejected on this point in the jurisdiction which gave it birth. See Ward v. City of Chicago, supra, discussing which Circuit Judge Alschuler, speaking for the Eight Circuit Court of Appeals in City of Jerseyville, Ill., v. Connett, supra, said: "Now it is true that in that opinion reference was made to the Joliet Case, and the court stated that `these certificates were secured by a mortgage which covered both the existing system and the extensions constructed under the ordinance. The court properly held that an indebtedness within the constitutional prohibition was thereby created.' But in the Ward Case the effect of a mortgage was not in issue, for there was no mortgage, and what was said in approval of the Joliet Case in no way conflicts with the views we have indicated respecting the conditions under which the Joliet decision was made. But the Ward Case is distinctly antagonistic to that part of the decision in the Joliet Case where it is said that the pledging of the income from the old plant for the payment of water fund certificates issued for enlargement or extension constituted the certificates an indebtedness of the municipality within the constitutional provision."
The opinion in Ward v. City of Chicago, in discussing the Joliet Case, said: "Counsel for appellant in the present case lay considerable stress upon certain language of the opinion to the effect that indebtedness within such constitutional prohibition may be created by pledging an existing income of the city, arguing that in the present case *Page 398 
there can be no way of determining how much income would be attributable to the enlargement of the system when made or how much would be attributable to the new rates to be put into effect; that the so-called new income cannot be segregated from the present income; that the present income will thereby be taken away and lost; and that so cutting off and pledging it will create an indebtedness within the meaning of the language invoked. The position thus taken seems to be that pledging the water fund creates indebtedness within the constitutional prohibition unless the pledge is confined to such precise income as can be directly traced to the particular new physical element of the plant to pay for which the obligation secured was issued, leaving the original income in effect intact and usable by the city for other purposes altogether. The Decatur Case [322 Ill. 82, 152 N.E. 602] is decisive against the soundness of such a position. There the income from the original plant was in effect cut off and lumped into the fund resulting from the operation of the plant as enlarged. It is not apparent that any effort was there made to preserve such original income intact or exempt it in any manner or degree from the claim of the water company, or that moneys made available to the water company under the contract were at all limited to income traceable to the elements of the plant which it had financed."
Garrett v. Swanton, supra, the per curiam opinion of the Supreme Court of California, is perhaps the most persuasive decision following the Joliet Case. It cites and appears to place considerable reliance on it as well as Schnell v. City of Rock Island, 232 Ill. 89, 83 N.E. 462, 14 L.R.A. (N.S.) 874, a later Illinois case, both preceding the Ward Case. The Ward Case apparently was not called to the attention of the California Supreme Court, although antedating its opinion in the Garrett-Swanton Case by almost two years.
There is language in the opinion in the California case suggesting a distinction between the facts of that case and the one at bar, to wit: "The contract here involved is not payable solely from the income of the improvement contemplated, but is payable from the revenues of the entire water system. Part of those revenues can, and in fact must [italics mine], be applied to the payment of the interest and principal on the bonds which is a general obligation of the city."
Here, as the record discloses, there is no pledge irrevocable or otherwise by the city of any part of the revenues of the existing water system to the retirement of the general obligation bonds of 1916. The fact that under the old ordinance the surplus revenues may have gone into the "bond fund" and have been used for such purpose does not alter the case so long as the city has not irrevocably dedicated the surplus revenues to that purpose.
The language of Chief Justice Brown of the Supreme Court of North Dakota in his dissenting opinion in Hesse v. City of Watertown, *Page 399 
supra (although upon the precise question now considered the court was equally divided), is quite apropos the contention that this diversion of surplus income from payment of general obligation bonds constitutes the transaction a "debt." In that case there were $750,000 of general obligation bonds outstanding, proceeds of which had been employed to purchase and equip the plant. It was proposed to issue $150,000 of new bonds for purchase of an extension and to pledge revenues of the plant as enlarged to secure the issue. The Chief Justice whose opinion was concurred in by Mr. Justice Sherwood said:
"The $750,000 of bonds previously issued were issued pursuant to elections called for the purpose. An inseparable part of such issue was that the governing body should provide for the levying of an annual tax sufficient to pay the interest and also the principal thereof when due. Rev. Code 1919, § 6998. If the city in fact in the past has taken the net income from the light plant and applied it in payment of the interest or principal of these bonds the city has just been donating that much to the taxpayers. It was under no obligation to apply the net income to the payment of the interest or principal of such bonds and thus relieve the taxpayers from the obligations imposed upon them by the ordinance providing for the annual tax sufficient to pay the interest and principal of the bonds. The city is under no obligation to continue this donation, and, if it now takes the income from the entire plant to provide for payment of the bonds issued for the extension, this does not constitute any forbidden diversion of the income from the original plant. If it should become necessary to take a portion or even the whole of the income from the entire plant in order to pay the principal and interest of the $150,000 bonds issued for the extension, and in consequence thereof the tax to provide a sinking fund for the $750,000 bonds had to be levied, as required by the provisions of Rev. Code 1919, § 6998, that would not constitute the levying of any tax either direct or indirect for the payment of the bonds issued for the extension.
"Instead of taking any part of the net income of the original plant and applying it to the payment of interest or principal on the $750,000 bonds, the city council might have taken that entire net income and placed it in a `hope chest' until it had accumulated to an amount sufficient to pay for the entire proposed extension. No taxpayer would have had any ground for complaint nor any right to require such net income to be applied in payment of the $750,000 bonds or interest thereon instead of being so accumulated, and, if the city could have accumulated the fund in advance for the proposed extension from the net profits from the operation of the lighting plant, I can see no reason why it cannot also take the current and future net income for the same purpose."
The reasoning of the cases sustaining the distinction drawn in the Joliet Case is that in subscribing to the special fund doctrine as applied to the pledge of revenues for the *Page 400 purchase
or construction of a new plant no hypothecation of any presently owned property or property right is involved. Thus it is argued that, the municipality having possessed no previous revenue from such source, neither property, nor revenue therefrom, belonging to the city, is pledged — a condition which, if shown to exist, would be deemed to result in creating a debt.
The transparency of this line of reasoning is at once exposed if we pause to consider it. For whatever form the transaction may take, whether a conditional sale with title reserved in seller until payment is complete, or otherwise, the municipality, by the retirement of its bonds as they mature or by meeting installments of the purchase price as they accrue, is constantly acquiring a progressively increasing beneficial or equitable ownership of the plant, an interest which may be the subject of transfer or assignment, and in the hands of a private holder could be reached to satisfy the claims of creditors. See Leonard v. City of Metropolis, 278 Ill. 287, 115 N.E. 813.
But the pledge keeps pace with acquirement of the interest, and the constitutional restriction runs abreast of them both, so that in final analysis the distinction drawn permits the very practice which it condemns. For prior to completion of payments the pledge is being satisfied in part and near the end almost wholly through income produced from property beneficially owned by the city. This reasoning, carried to its logical conclusion, would proscribe just as effectually the issuance of revenue bonds for the purchase of a new plant as an extension thereto. Nevertheless, practically a unanimity of opinion prevails in favor of their issuance for the former purpose.
I apprehend, if we at all times keep clearly in mind the fact that the "debt" resulting in the general obligation bonds was "created" at the time of their issuance in 1916, some needless confusion may be avoided. To be more specific, the whole controversy rages over whether the potential call upon the taxpayer to meet some portion of that originally created debt of which a fluctuating policy on the part of either the city or of the Legislature from time to time may have relieved him (by allocating to such purpose surplus income from the plant as it exists) so adds to his tax burden as to constitute the transaction the creation of a debt in the constitutional sense.
If it does, it must be the regeneration or recreation of a debt originally created in 1916, never thereafter fully discharged, and one which necessarily has existed as a debt since the time of its origin. Until some irrevocable dedication to such purpose of other funds than those arising from taxation is made, a permissible change in policy whereby temporary relief theretofore extended is withdrawn does not, in my opinion, result in the creation of a new debt.
In the opinion by Mr. Chief Justice Roberts in Lanigan v. Gallup, 17 N.M. 627, 131 P. 997, attention is called to the fact that the phraseology of sections 12 and 13 of article 9 of our state Constitution is practically the *Page 401 
same as that of section 8 of article 11 of the Colorado Constitution; the substance of our two separate sections being there covered into the one section. This similarity in constitutional provisions gives added weight as an authority to the case of Searle v. Town of Haxtun, supra, in which the Colorado Supreme Court declined to recognize the distinction first pointed out in the Joliet Case, again adverted to in the Schnell Case, supra, and finally repudiated by the Ward Case, all decisions of the Supreme Court of Illinois.
I do not doubt the power of the Legislature by Laws 1933, c. 57, to change or modify its policy with reference to disposition of income from public utilities as declared in Laws 1919, c. 47, as amended by Laws 1925, c. 51 (1929 Comp. St. §§ 90-2601 to 90-2603). In Brockenbrough v. Board of Water Com'rs, supra, in meeting a contention similar to that now before us, the Supreme Court of North Carolina said: "The plaintiffs suggest that, as the act of 1899 applied the rents and tolls of the waterworks, the act of 1903 cannot divert them. Certainly the holders of the bonds of 1897 had no lien upon or contract right to these rents. The bonds were issued two years before the act was passed. Therefore the purchasers could not look to any other claim upon the city than its general revenues."
I think it will be conceded that, if the 1933 Legislature had repealed outright the 1919 act, thus withdrawing from the taxpayer a partial relief it had theretofore afforded him, and a subsequent legislative session had enacted Laws 1933, c. 57, authorizing issuance of revenue bonds and the pledging of net income of the utility for their security, the taxpayer would have no standing to assert that bonds issued under the later act operated so to increase his tax burden as to constitute the transaction the creation of a debt in the constitutional sense. To my mind, it can make no difference in principle that the modification or repeal, to the extent the former is superseded by the later act, takes place simultaneously with the going into effect of the subsequent enactment. It is just as true in the one case as in the other that no new burden has been imposed upon the taxpayer.
I therefore concur in affirming the decree of the trial court.