Court Opinion

ID: 6692489
Source: CourtListenerOpinion
Date Created: 2022-07-20 21:39:27.398395+00
Date Added: 2024-06-11T16:01:09.181139
License: Public Domain

BROWN, P. J.
I dissent. 'Under Constitution, art. 13, § 4, the city of Watertown is authorized to incur indebtedness for general purposes tO' the amount of 5 per cent of the assessed valuation of its taxable property for the year preceding that in which such indebtedness is incurred. In addition it may incur indebtedness to the extent of 10 per cent of such assessed valuation for the purpose of providing water and sewerage, and in addition. 8 per cent of such assessed valuation for the purpose of constructing electric light or other lighting plant. The additional indebtedness authorized for water and sewerage and electric light purposes cannot be incurred unless authorized by a vote in favor thereof by a majority of the electors, but the general indebtedness of 5 per cent' of the assessed valuation may be incurred *349by action of the governing body without any vote of the electors in so far as the provisions of article 13, § 4, of the Constitution, are concerned. Spangler v. City of Mitchell, 35 S. D. 335, 152 N. W. 339, Ann. Cas. 1918A, 373. The assessed valuation of the city of Watertown for 1928, the year preceding that in which the indebtedness involved in this action was incurred, was $12,040,342. It could incur indebtedness for general purposes of $602,017, an additional indebtedness for water and sewerage purposes of $1,204,034, and for lighting plant $963,227. Its indebtedness did not reach the limit in any of these lines. Its entire floating indebtedness was in the neighborhood of $10,000, and it had more than six times the amount in cash on hand, so that floating indebtedness may be disregarded in any discussion of the case. Of its entire bonded indebtedness, $300,000 had been issued pursuant to a valid election for waterworks and1 sewerage purposes, and $697,000 pursuant to- valid elections for electric light purposes, leaving only $133,750 of general indebtedness for which bonds had been issued. If to this we add $200,000 that had been authorized -but not issued for an auditorium building, and the proposed $150,000 for electric light extension, the total general indebtedness bonds would amount to only $483,750, while under the 5 per cent limitation $602,017 might be incurred. It is therefore clear that the $150,000 additional indebtedness for light extension may be incurred without the necessity of any vote of the electors unless such vote is required by Rev. Code 1919', § 6413, which provides that “every municipal corporation shall have power to borrow money on the credit of the corporation for any authorized corporate purpose, within the constitutional limitations of municipal indebtedness, and to issue its negotiable bonds therefor * * * provided, that no bonds shall be issued under the provisions of this section, * * * unless at an election after ten days notice in a newspaper published in the municipality, * * * the legal voters of such city, by a majority of those voting at such election, shall determine in favor of issuing the same.”
Since the corporation has power to incur the $150,000 indebtedness without vote of the electors except as controlled by section 6413, it follows that it may .borrow the money by issuing bonds, unless the money is borrowed “on the credit of the corporation.”
When bonds are issued to borrow money on the credit of the *350corporation, it is made the duty of the governing body of the city at or before the time of so doing, by ordinance or resolution to provide for the levying of an annual tax sufficient to pay the interest and1 also the principal thereof when due. Rev. Code 1919, § 6998. Ordinance C-31, providing for the issuance of the $150,000 bonds, expressly provides, and the bonds themselves explicitly state, that they are payable solely from the municipal electric plant development fund created from the earnings of the plant, and that “the taxing power of said city is not pledged and shall never be used to pay either principal or interest on the bond or any part thereof.” It therefore seems clear to me that the $150,000 bonds proposed to be issued for the extension of the light plant are not for money borrowed on the credit of the corporation, but are for money borrowed on the credit of the earnings of the light plant, and that no vote of the electors is necessary to authorize the governing body to- issue such bonds.
The case of City of Joliet v. Alexander, 194 Ill. 457, 62 N. E. 861, upon which the majority opinion seems largely to rely as authority for its conclusion, does not appear to me at all applicable to the facts in the case at bar. The question of when and under what circumstances a vote of electors is required before a city can issue bonds was not involved in that case at all. There the question was whether a contract for the extension of the existing waterworks system to be paid for by water fund certificates secured by a mortgage on the existing waterworks system and the extension would create a debt of the city. The Constitution of the state of Illinois prohibited the incurring of any 'debt by a city in excess of 5 per cent of its assessed valuation. The city of Joliet was already indebted largely in excess of the 5 per cent limit when it proposed the extension to be paid for by water fund certificates secured by a mortgage on the entire waterworks plant. The court, in City of Joliet v. Alexander, held that, although the holder of the certificates could not enforce their payment out of the general funds of the city, nevertheless, since such holders could foreclose whenever a default existed for ninety days and thus deprive the city of its property, the city by the terms of said contract incurred a debt in violation of the constitutional limitation of 5 per cent of the value of the taxable property. But in the instant case the question of whether or not the agreement to pay for the extension out *351of the municipal electric plant development fund does or does not constitute a debt is not controlling, because the governing body of of the city of Watertown had authority-to incur the entire proposed indebtedness without violating any constitutional provision, although no vote of the electors was had. After such indebtedness . was incurred, the city, instead of having transgressed the constitutional limitation, was still more than $118,000 within the limitation. The majority opinion at the outset says: “Whether the indebtedness proposed to be created constitutes a debt within the meaning of that section of the Constitution [Article 13, § 4] is a question on which authorities differ. No useful purpose would be served in deciding that question if the ordinance and bonds are invalid as violating the statutes of the state, as appellant also contends.”
After having thus designedly evaded a decision of the constitutional question, the opinion later on argues at great length that the proposed! indebtedness does constitute such a debt, citing City of Joliet v. Alexander, supra, and other cases following that case in support of the argument, which it concludes with the statement, “Under the holdings of all these cases, the proposed revenue bonds would constitute a debt of the city of- Watertown.” But whether or not they would constitute a debt is not the question before us. for decision. If it foe conceded that the proposed bonds constitute a debt, still the governing body had power to incur that debt and to issue bonds therefor without any election being held unless such bonds were issued for money borrowed on the credit of the corporation. I think it is plain that money is not borrowed on the credit of a municipal corporation unless it is loaned in reliance upon all resources of the corporation for payment. “The credit of an individual, is the trust reposed in him by those who deal with him; that he is of the ability to meet his engagements; and he is trusted, because through the tribunals of the country, he may be compelled' to pay.” Owen v. Branch Bank at Mobile, 3 Ala. 258, 267.
Webster’s International Dictionary defines credit as “the relation existing between one person and another who trusts him to pay or render something in the future.” The bondholders in the present case do not trust the city, they expressly renounce reliance on the city. They trust in the revenue of the light plant alone. If that fails, they cannot resort to other revenues of the city or *352call upon the credit of the city to save them. Their money was not 'borrowed on the credit of the corporation. In the majority opinion it is said that, if the obligation of the city were to turn over to the bondholders the net income from an electric plant to'be purchased with the proceeds of the bonds proposed to be issued, without any other promise to pay, it may well be doubted whether the provisions of section 6413 would apply thereto; and the opinion of the Supreme Court of North Dakota, in Lang v. City of Cavalier, 228 N. W. 819, 825, is quoted from to the effect that “the great weight of authority is to the effect that a municipality does not create an indebtedness within the purview of'prohibitions against incurring indebtedness by purchasing property to be paid! for wholly out of the income therefrom with no general liability.”
But it is said in the instant case the entire obligation of the city is not simply to turn over to the bondholders the net income of property to be purchased with the proceeds of the proposed bonds; that the city, in addition to paying the income from the $150,00, agrees to seven further engagements, the first of which is, “A written promise to pay a sum certain in money out of a fund, the sufficiency of which the city assures.” This seems to me an oibvious misconstruction of the language of the bond. The city does not assure the sufficiency of the fund. In no event can any resources of the city other than the municipal plant development fund be called upon to make that fund sufficient to pay the bonds. Instead of assuring the sufficiency of the fund, the recitals in the bond assume the sufficiency of the fund, but, if that assumption should prove unfounded, the bondholder cannot call upon the city to make good the fund. He himself, in that event, agrees to stand the loss. The second such engagement is a pledge of the income of the original $750,000 plant and the third a pledge that the city will not use the net income of the $750,000, plant as it had' heretofore been used to, to pay the bonds voted to construct it. These two engagements or promises are, in substance, one, and in my opinion constitute no objection to the authority of the governing body to issue the bonds. 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 *353in 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. To buttress the third obstacle to- the issuing of the bonds, section 6998 of the Code is cited in the majority opinion as follows: “Whenever any city * * * shall issue any bonds * * * the governing body thereof shall * * * provide for the levying of an annual tax sufficient to pay” them when due. The second set of asterisks in the foregoing quotation takes the place of a quite significant exception, which has been supplied by a change in the principal opinion, since this dissent was first written, the section reading, “Whenever any city 23 — Vol. 57, s. D. *354* * * shall issue any bonds, except municipal bonds issued in lieu of special assessment certificates,” the governing body shall provid'e for the levying of an annual tax sufficient to pay the principal and interest of the bonds when due. In issuing bonds in lieu of special assessment certificates (that is, bonds which are not issued on the credit of the city but on the credit of a fund which is to be created from sources other than on the credit of the city), no sinking fund tax is to be levied. This section, instead of supporting the theory of the majority opinion, is antagonistic to it, for it shows that bonds may be issued by a city which are not issued on the credit of the corporation and which therefore may be issued! without a vote of the electors. It is just possible that when our legislation for the government of municipal corporations was enacted municipal plant development bonds had not been heard of, but it is the boast of our law that it can adapt existing principles and rules to new situations, and the fact that section 6998 provides that municipal bonds may be issued in lieu of special assessment certificates tO' be paid out of a fund created by the special assessment, as to which bonds no sinking fund is provided, shows that bond's may be issued to- be paid for out of a specific fund not provided by taxation, such as is the Watertown municipal plant development fund, and that for the payment of such bonds no sinking fund is to be provided, no credit of the city to be resorted to for their payment, and that such bonds, not being issued on the credit of the corporation, may be issued! without the necessity of a vote of the electors. See Shields v. City of Loveland, 74 Colo. 27, 218 P. 913, and Searle v. Town of Haxtum, 84 Colo. 494, 271 P. 629, holding that “revenue bonds” such as those involved in the instant case are not a “debt” of the city issuing them.
The fourth obstacle to the legality of the bond issue urged in the majority opinion is “an obligation to charge customers rates high enough to^ insure prompt payment of the favored revenue bonds.” But the ordinance expressly provides that all rates shall be reasonable and just and within the limits prescribed by law. There is no obligation and no power under the ordinance to charge unreasonable rates, and, if the so-called “favored! revenue bonds” cannot be paid from the development fund provided by reasonable rates, the bondholders must bear the loss. The fifth obstacle mentioned is that the city agrees to pay reasonable rates for city ser*355vices from moneys raised by taxation. There is certainly nothing unjust in this, and, if the light plant were owned by a private corporation, the city would certainly have to pay for city services, and might have very little to say as to whether the rates they were required to pay were reasonable or unreasonable. A sixth obstacle seen by the majority is the clause binding the city not to sell or dispose of the municipal electric plant until all the proposed bonds shall have been paid! unless provision shall have been made for the payment of the bonds and the interest in full. It is said that this conflicts with Rev. Code § 6169, subd. 19, as amended by chapter 242 of the Taws of 1925, which reserves to the electors of the city the unlimited right to determine whether and when to sell or dispose of any plant furnishing light or power. As I read section 6169, it does not reserve to the electors the right to determine when or whether to sell. It rather gives them the right to forbid or authorize a sale, but not to sell; nor is it at all clear that the governing body could be compelled to make a sale even if authorized by a vote. In any event the right of the electors to determine whether to sell the plant is in no manner interfered! with. It is merely provided that, if a sale should be proposed, it should not be carried out without making provision for the payment of the bonds and interest. This is nothing more than a provision that, in case a sale should be made, the city would deal honestly and fairly with the bondholders, a condition that we may assume the electors would willingly provide for in case they should by a vote authorize a sale of the plant. The seventh and last obstacle enumerated in the majority opinion to the legality of the proposed bond issue is “an agreement that a receiver may be appointed with a delegation of power to such receiver to charge and collect rates sufficient to provide for the payment of these favored •bonds.” Again the majority overlook the fact that, should a receiver become necessary, he is only authorized to charge and collect rates sufficient to provide for the payment of the bonds and coupons “in conformity with this ordinance”; that is, he can only charge and collect reasonable rates.
Furthermore, I think, in view of the statement made near the close of the majority opinion, the possibility of a receiver is too remote for serious consideration. It is conceded! that the governing body of respondent city is composed of business men of tinques*356tioned integrity and’ ability; that the growth of the net earnings of the plant gives support to respondents’ plan; that these net earnings have increased from about $12,000 in 1924 to more than $58,000 in 19-28. This has been accomplished during a period when the city plant had competition with a private plant, which competition is now eliminated, in consequence of which the gross business is now larger and the expense less than it has been formerly.
Extraordinary decline in the business capacity and integrity of the members of the governing body would have to take place before a receivership would come within the range of practical possibility. It is hardly supposable that a community that has had the intelligence to elect in the past a governing body composed of members who have made such a success of the operation of its public utilities as is shown in this case will be likely within the period that the bond proposed to be issued will run to elect others who will make such a failure of the operation of those utilities that a receiver will have to be appointed to operate them.
The general plan of our-municipal corporation system contemplates that municipal government shall be representative; direct government by all of the inhabitants is not in general provided for. And, where there is no provision for a vote of the electors, the governing body has authority to carry out any municipal project within the authorized powers of the corporation without the necessity of taking any vote of the electors on the subject. The governing body has authority to borrow money within the 5 per cent limit without any vote of the electors unless where it borrows the money on the credit of the corporation. I am satisfied that the proposed bond’s in this case are not issued for money borrowed or to be borrowed on the credit of the corporation and therefore no vote of the electors is necessary to authorize their issue.
SHERWOOD, J. I concur in Judge BROWN’S dissenting opinion.