Opinion
No. 26593
Decided July 13, 1938.
Taxation — One per cent limitation — Section 2, Article XII, Constitution — Limitation directed against new debts — Municipal funding bonds not subject to amended constitutional limitation, when.
1. The inhibitions of Section 2, Article XII of the Ohio Constitution, with respect to tax rate limitations, are directed against new and not against pre-existing debts.
2. Municipal funding bonds, exchanged for an original indebtedness created prior to the adoption of a constitutional tax limitation, are not subject to such limitation even though the tax levy for the payment of principal and interest of such bonds exceeds such new limitation.
IN MANDAMUS.
The agreed statement of facts sets forth that in the years 1929 to 1930, the council of the village of Hudson adopted a number of "resolutions declaring the necessity of improving several streets in the village upon the basis of the assessment of part or the entire cost of the improvements upon benefited property, such assessments to be paid in annual installments. Each of said resolutions described the improvement, determined it was conducive to the public health, convenience and welfare, determined the general nature of the improvement, recited the grades of the streets and curbs, approved the plans, specifications, estimates and profiles for the proposed improvement, all of which had been filed prior to the passage of such resolutions, determined the method of the assessment, the mode of payment, that the cost should include the expense of the preliminary and other surveys, interest upon notes and bonds issued in anticipation of the collection of deferred assessments, and all other necessary expenditures, and that notes and bonds of the village should be issued in anticipation of the collection of said assessments by installments and in an amount equal thereto."
The council of the village thereafter "adopted ordinances determining to proceed with the improvements in conformity with the resolutions of necessity, and took all further steps required by law to be taken for the improvements involved."
In 1930, the council authorized the issuance of notes, in anticipation of the levy of assessments for these improvements, aggregating the sum of $224,494.68. These notes were issued on various dates in 1930 and in various denominations, some bearing interest at the rate of five per cent per annum and some at the rate of six per cent per annum, payable semi-annually. All notes matured in two years from date of their respective issues.
The ordinance authorizing the issuance of these notes provided that they be issued in anticipation of the sale of bonds, which bonds were in turn to be issued in anticipation of the collection of special assessments to be levied.
The notes were to be paid from the proceeds of the sale of these bonds. The ordinance provided that the full faith and credit of the village, the special assessments, and the proceeds of the bonds should be pledged for the payment of these notes and the interest thereon, and that if bonds were not issued a general tax should be levied for the payment of the notes.
The ordinance read in part: "Said notes * * * shall be the full general obligation of said village, for the payment of which the full faith, credit and revenue of said village are hereby pledged. * * * It is hereby determined that assessments will be levied for the foregoing improvements and bonds issued in anticipation of the collection thereof. The proceeds of such bonds and any surplus remaining in the construction fund after the completion of said improvements shall be used only for the redemption of said note or notes at maturity and are hereby pledged and appropriated for such purpose. The assessments so to be levied shall be applied toward the payment of said note or notes and interest thereon until the same are fully paid and thereafter shall be applied to the payments of the bonds hereafter to be issued, together with interest thereon. * * *
"In the event that assessments are not levied for said improvements or bonds are not issued to provide a fund for such note or notes at maturity, then and in that event a general tax shall be and the same hereby is levied upon all of the property subject to taxation in the village for the payment of such note or notes and the interest thereon."
These notes were negotiable in form and each contained recitals that they were issued in anticipation of the issuance of bonds and under authority of, pursuant to, and in full compliance with the general laws of the state of Ohio, and pursuant to ordinances duly passed by the council of the village of Hudson.
All of these notes were sold in 1930. The proceeds of sale, aggregating $224,494.68, were paid into the various improvement funds for which the notes were issued and were spent accordingly.
On November 1, 1930, relator purchased part of these notes, aggregating the sum of $102,274, bearing interest at the rate of five per cent per annum, payable semi-annually. These notes were delivered to relator on November 8, 1930.
After these improvements were completed, the cost was determined and the council of the village, on June 6, 1933, by ordinance duly enacted, levied the special assessments for the improvements, payable in fifteen annual installments, aggregating the sum of $254,000. On June 15, 1933, the council passed an ordinance authorizing the issuance of bonds in the aggregate sum of $254,000, in anticipation of the collection of special assessments levied on June 6, 1933, in order to pay the cost and expense of the improvements. One section of this ordinance provided: "That for the purpose of providing the necessary funds to pay the interest on the foregoing issue of bonds promptly as the same shall become due and also to create and maintain a sinking fund sufficient to discharge the bonds at maturity, there shall be and is hereby levied on all the taxable property of the village, in addition to all other taxes, a direct tax annually during the period for which said bonds are to run, in an amount sufficient to provide funds to pay interest upon said bonds as and when the same falls due, and also to provide a fund for the discharge of the principal of said serial bonds at maturity, which tax shall not be less than the interest and sinking fund tax required by Section 11 of Article XII of the Constitution of the state of Ohio; provided, however, in each year that the assessments anticipated by said bonds are payable and are applicable to the payment of such interest and principal, and are appropriated for that purpose, the amount of such tax shall be reduced by the amount of the assessments so appropriated."
These bonds were authorized to be dated April 1, 1933, and to bear interest at the rate of six per cent per annum, payable semi-annually, and maturing in annual installments commencing October 1, 1934, and ending October 1, 1948, the first payment of interest to be made on April 1, 1934, and on October 1st and April 1st each year thereafter. The bonds were issued and advertised for sale in accordance with law, but remained unsold for want of bidders. These bonds contained recitals that they were issued in anticipation of the collection of special assessments theretofore levied for the various street improvements authorized by ordinances and "under authority of, pursuant to, and in full compliance with, the general laws of the state of Ohio, particularly the Uniform Bond Act of the General Code," and pursuant to the ordinance of the village, duly passed on the 15th day of June, 1933.
In April, 1934, pursuant to a resolution theretofore adopted by the council of the village, a portion of these bonds, to the amount of $252,100, was exchanged for the above mentioned notes, at par value of the bonds for par value of the notes, plus unpaid interest to April 1, 1933. The five per cent notes which relator held were exchanged for six per cent bonds which relator still holds. These bonds are now in default for the payment of interest, including that due on April 1, 1936, and are delinquent in the payment of principal on the bonds which matured on and since October 1, 1934.
Relator instituted an original action in mandamus in this court, praying for an order to compel respondents to "forthwith apply any and all monies on hand in the treasury and any and all monies on hand in the sinking fund which are applicable to the bonds hereinbefore described in paragraph 'H,' to the payment of interest accrued to date of payment on said bonds and all other bonds of the same issue; further commanding the village treasurer to determine the amount of the tax necessary to provide for the payment in full of principal and interest on said bonds and all other bonds of the same issue; to certify the amount of such tax to the village council of said village; further commanding the said village council and members thereof, and the mayor of said village to amend the tax budget of the village of Hudson for the year 1937 and following years so as to include the full amount required to pay the interest charges and principal charges or maturities on the bonds hereinbefore described in paragraph 'H' and all other bonds of the same issue without reference to any tax limitation whatever; further commanding the county auditor to lay such budget, as amended, before the Budget Commission of Summit county; further commanding said budget commission and the members thereof to ascertain that the levies for such debt charges are properly authorized and provided for and to approve such levies without modification; further commanding said the County Auditor and the County Treasurer of Summit county to certify and collect such taxes and apply the proceeds thereof to the payment of said debt charges in the current year and succeeding years, according to law, and further commanding each and all of said defendants to do and perform, and cause to be done and performed, all other acts required of them by law in the premises to provide the money with which to pay the interest on said bonds and the principal thereof as the same falls due."
Respondents, in their answer, admit the essential facts, the default, and that the relator has no means of collecting other than by a writ of mandamus; and, by way of affirmative defense, aver that if an annual tax were to be levied sufficient to pay the interest and principal of the bonds, both the ten and fifteen mill constitutional tax limitations would be exceeded.
The case is submitted on an agreed statement of facts.
Mr. Kenneth B. Johnston, Mr. Herbert S. Peterson and Mr. Thomas M. Miller, for relator.
Mr. Alva J. Russell, prosecuting attorney, Mr. Hugh A. Sullivan, Messrs. Eagleson Laylin and Mr. W.A. Spencer, for respondents.
The question is whether relator is entitled to a writ of mandamus, compelling respondents, among other things, to levy such taxes as shall be sufficient to produce the full amount required to pay the interest and principal on the bonds held by it and others similarly situated, as they fall due, without reference to any tax limitation whatever. Respondents' first contention is that the notes which were exchanged for the bonds were issued under the provisions of Section 2293-24, General Code, and not under those of Section 2293-25, General Code; that under the first-mentioned section, notes may be issued in anticipation of the levy of special assessments or in anticipation of the issuance of bonds; that the proceeds of the bonds thereafter issued in anticipation of the collection of assessments, and of all assessments collected, must be applied to the payment of the notes and interest thereon; that there is no requirement, however, for the making of any provision for the levy and collection of a general property tax for the specific purpose of paying such notes or interest thereon; that when notes are issued under Section 2293-25, General Code, in anticipation of the issuance of bonds, the village is required and can be compelled to make provision "for the levy of a tax during the year or years while such notes run"; and that since the notes were issued under Section 2293-24, General Code, and not under 2293-25, General Code, the relator has no legal right to have a tax levied for the specific purpose of paying such notes.
Section 2293-24, General Code, provides: "Subdivisions shall have power to issue bonds in anticipation of the collection of special assessments. Such bonds may be in sufficient amount to pay that portion of the estimated cost of the improvement or service for which the assessments are levied, and the assessments as paid shall be applied to the liquidation of such bonds. Subdivisions may borrow money and issue notes, due and payable not later than two years from the date of issue, in anticipation of the levy of special assessments or of the issuance of bonds as provided in this section. The notes shall not exceed in amount that portion of the estimated cost of the improvement or service for which the assessment is levied. When such notes are issued, the proceeds of bonds thereafter issued in anticipation of the collection of assessments and all of the assessments collected for the improvement shall be applied to the payment of the notes and interest thereon until both are fully paid; and thereafter said assessments shall be applied to the payment of said bonds and interest thereon. Bonds or notes issued under this section may be combined in a single issue with other assessment bonds or notes, and with bonds or notes to pay the subdivision's share of the cost of the permanent improvements for which such assessment bonds are issued. Bonds or notes issued in anticipation of the levy of special assessments or the collection thereof shall be full general obligations of the issuing subdivision, and for the payment of the principal and interest of same the full faith, credit and revenues of such subdivision shall be pledged."
Section 2293-25, General Code, provides: "Whenever the taxing authority of a subdivision has legal authority to, and desires to issue bonds without vote of the people, it shall pass a resolution or ordinance declaring the necessity of such bond issue, its purpose and amount. In such resolution or ordinance the taxing authority shall determine, and in any case where an issue of bonds has been approved by a vote of the people, the taxing authority shall by ordinance or resolution determine, whether notes shall be issued in anticipation of the issue of bonds, and, if so, the amount of such anticipatory notes, not to exceed the amount of the bond issue, the rate of interest, the date of such notes, and their maturity, not to exceed two years. Except in the case of notes issued in anticipation of special assessment bonds, such notes shall be redeemable at any interest period and a resolution or ordinance providing for the issue of notes in anticipation of the issue of bonds shall provide for the levy of a tax during the year or years while such notes run, not less than that which would have been levied if bonds had been issued without the prior issue of such notes. A copy of such resolution or ordinance shall be certified by the fiscal officer of the subdivision to the county auditor of the county in which such subdivision is located."
At the outset, it must be noted that Section 2293-24, General Code, stands related to the subsequent sections, is in pari materia therewith, and they must be read and construed together.
Section 2293-24, General Code, grants power. It authorizes the issuance of notes in anticipation of the levy of special assessments, or the issuance of bonds in anticipation of the collection of special assessments. It applies only to the special assessment anticipatory notes and bonds — the notes anticipatory to levy and the bonds anticipatory to collection. The statute provides that such notes or bonds shall be the full, general obligation of the issuing subdivision for the payment of which the full faith, credit and revenue of such subdivision shall be pledged.
The provisions of Section 2293-25, General Code, are procedural. They require that provision be made for the levy of a tax during the year or years which such notes run.
The village first adopted a resolution of necessity, determining that the improvements were conducive to public health, convenience and welfare and determined the details thereof. The village next determined to issue notes in anticipation of the issue of bonds. It later determined to issue bonds in anticipation of the collection of special assessments and provided for a levy of taxes if "bonds are not issued to provide a fund for such note or notes at maturity" or "in the event that assessments are not levied for said improvements.
In our opinion, there is a sufficient compliance with the statutory requirement that the resolution "shall provide for the levy of a tax during the year or years while such notes run." It therefore became the mandatory duty of the village, under the statute, to levy a tax.
Where the assessments anticipated by bonds are insufficient to pay the same, mandamus will lie to compel the political subdivision to levy a sufficient tax. State, ex rel. Bruml, v. Village of Brooklyn, 126 Ohio St. 459, 185 N.E. 841.
At the time that the notes were issued, Section 5625-2, General Code (112 Ohio Laws, 392), was in effect, reading as follows: "The aggregate amount of taxes that may be levied on any taxable property in any subdivision or other taxing unit of the state shall not in any one year exceed fifteen mills on each dollar of tax valuation of such subdivision or other taxing unit, except taxes specifically authorized to be levied in excess thereof. The limitation provided by this section shall be known as the 'fifteen-mill limitation.' "
Respondents contend that this statute imposed a fifteen-mill tax limitation and, by implication, likewise imposed a fifteen-mill debt limitation. However, the question, under the facts in the case, is not whether, on issuing the funding bonds, the statutory debt limitation was exceeded, but rather, assuming that it was exceeded, can the municipality at this late hour, after the money raised thereby has been expended on public improvements, be heard to deny its authority to incur the obligation? The notes and the bonds, on their face, contained a recital that no limitation of indebtedness or taxation, either statutory or constitutional, had been exceeded. The municipality is estopped to deny the truth of this recital against a bona fide purchaser for value without any notice or knowledge of facts to the contrary.
Respondents next contend that the bonds in suit are not refunding bonds; that they are new and independent obligations and not merely the continuance of the debts evidenced by the various notes. Respondents point to the fact that the amount of the bonds authorized to be issued exceeded the amount of the notes, and that the rate of interest on the bonds was six per cent, whereas the rate of interest on some of the notes was only five per cent.
Increase in the rate of interest of funding bonds over that borne by the notes funded does not constitute the creation of a new debt. The right to fund or refund an existing obligation includes the right to fix such rate of interest within the limits prescribed by law (six per cent — Section 2293-8, General Code) as would make the funding or refunding possible. We are aware of no provision, statutory or constitutional, which imposes the requirement that the rate of interest of funding or refunding bonds shall be the same as that borne by the debt funded or refunded.
"The fact that the bonds when issued, bore rates of interest less than six per cent, does not determine the rate at which the refunding bonds may be issued. The rate of interest which bonds issued by a municipal corporation shall bear is fixed by the governing body of the corporation, in its discretion, within the statutory limitation." Bolich v. City of Winston-Salem (1932), 202 N.C. 876, 164 S.E. 361.
Nor does the fact that the amount of the funding bonds authorized to be issued exceeded the principal amount of the notes render the bond obligation new and independent. True, refunding bonds must be used exclusively for purposes of refunding. However, there is no evidence that any of the bonds were here used for any other purpose or that any of the bonds have been disposed of in any other manner. On the contrary, the record is clear that the amount of the bonds actually issued was only the amount of the debt due at that time.
Section 2293-8, General Code, provides that "bonds or notes issued by any subdivision shall specify on their face the purpose for which they are issued and the resolution or ordinance under which they are issued."
Respondents raise the objection that the bonds were not designated or advertised as refunding bonds. To this we attach little importance. If the recital in the bonds indicates that the purpose is public, there is sufficient compliance with the statute. Failure to label the bonds or to name them in the advertisement as "refunding" or "funding" is not material if the recital otherwise discloses the purpose of their issuance to be public. The bonds show on their face that they were issued for public improvements. This sufficiently states the purpose within the meaning of the provisions of Section 2293-8, General Code.
Does the fifteen-mill or ten-mill constitutional tax limitation here apply?
Authorization for the issuance of the notes was given by the council of the village of Hudson in 1930, and all were issued and sold during that year. The specific notes held by relator were purchased by it on November 1, 1930, and were delivered to it on November 8, 1930.
The amendment to Section 2, Article XII, of the Ohio Constitution, imposing a fifteen-mill tax limitation, was adopted on November 5, 1929, but did not go into effect until January 1, 1931.
The amendment to Section 2, Article XII, of the Ohio Constitution, changing the tax limitation from fifteen mills to ten mills, was adopted on November 7, 1933, and did not go into effect until January 1, 1934. The inhibitions of Section 2, Article XII, are directed against new and not against pre-existing debts. The note obligations were incurred prior to the adoption of either constitutional limitation and are not therefore subject thereto. Such obligations may be extended and continued without reference to such limitation.
In State, ex rel. Alden Corp., v. Village of Solon, 132 Ohio St. 362, 7 N.E.2d 550, the court held that the adoption of the fifteen-mill tax limitation and later the ten-mill tax limitation could in no wise affect the validity of the bonds for the reason that the obligations of an existing contract may not be impaired even by constitutional amendment.
The village of Hudson issued bonds and exchanged them for the notes, thereby continuing the debt. The existing debt was not thereby extinguished and a new debt was not thereby created. Merely, the form of the debt was changed. "The funding of notes into bonds is not the creation of any new indebtedness but a continuation of the original." State, ex rel. Alden Corp., v. Village of Solon, supra. To the same effect, see 6 McQuillin on Municipal Corporations (2 Ed.), 46, Section 2385; 1 Quindry, Bonds and Bond Holders, 723, Section 512.
Municipal funding bonds, exchanged for an original indebtedness created prior to the adoption of a constitutional tax limitation, are not subject to such limitation even though the tax levy for the payment of the principal and interest of such bonds exceeds such new limitation.
Writ allowed.
WEYGANDT, C.J., MATTHIAS, ZIMMERMAN, WILLIAMS, MYERS and GORMAN, JJ., concur.