SAN LUIS COASTAL UNIFIED SCHOOL DISTRICT v. KUNKEL

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Court of Appeal, Second District, Division 6, California.

SAN LUIS COASTAL UNIFIED SCHOOL DISTRICT, Plaintiff and Respondent, v. Gary A. KUNKEL et al., Defendants and Appellants.

No. B066612.

Decided: June 29, 1993

Jonathan M. Coupal, Director of Legal Affairs and Trevor A. Grimm, Gen. Counsel for Howard Jarvis Taxpayers Ass'n, for Gary Kunkel, defendant and appellant. Thomas R. Shearer, Jr., Kenneth C. Mennemeier, Courtney J. Linn, Orrick, Herrington & Sutcliffe and Sharon K. Garrett, for San Luis Coastal Unified School Dist., plaintiff and respondent. Joseph R. Symkowick, Gen. Counsel and Michael E. Hersher, Deputy Gen. Counsel, California Dept. of Educ., amicus curiae for respondent.

 “A general diffusion of knowledge and intelligence being essential to the preservation of the rights and liberties of the people, the Legislature shall encourage by all suitable means the promotion of intellectual, scientific, moral, and agricultural improvement.”  (Cal. Const., art. IX, § 1.)  “The Legislature shall provide for a system of common schools by which a free school shall be kept up and supported in each district․”  (Cal. Const., art. IX, § 5.)   The framers of the California Constitution undoubtedly were aware that the “diffusion of knowledge” was and would always be essential to the well being of our most precious resource, our children.   As our Supreme Court has observed, education is a fundamental interest that lies at the core of our free and representative form of government.  (Butt v. State of California (1992) 4 Cal.4th 668, 683, 15 Cal.Rptr.2d 480, 842 P.2d 1240;  Serrano v. Priest (1976) 18 Cal.3d 728, 767–768, 135 Cal.Rptr. 345, 557 P.2d 929.)

In these troubled fiscal times, the Legislature has been forced to make difficult decisions within the limitations put upon it by the California Constitution.   In what has become an all too familiar refrain, the Legislature is often accused of mandating certain programs but failing to provide the financial means to accomplish their goals.   Here, by contrast, the Legislature has provided a “suitable means” to further the “diffusion of knowledge” and the “free school guarantee” of the California Constitution.   It has enacted Education Code section 39308.5.1

In this first impression case, we consider whether the continued imposition of a property tax to finance new school facilities falls within the “prior indebtedness” exception of Proposition 13.  (Cal. Const., art. XIIIA, § 1, subd. (b)(1).) 2  The trial court ruled that a pre-Proposition 13 voter-approved tax override could be used to finance a new school bond measure approved by a majority of voters of the San Luis Obispo Coastal Unified School District (District.)   We affirm and hold that the “prior indebtedness” exception to Proposition 13 and section 39308.5 allowed the school district to “piggyback” new construction, in the form of lease-purchase financing, onto a pre-Proposition 13 voter approved tax assessment.

Proposition 13, enacted by initiative on July 1, 1978, limits ad valorem taxes on real property to one percent of full cash value.  (Cal. Const., art. XIIIA, § 1, subd. (a).)  Excepted from the limitation are “ad valorem taxes or special assessments to pay the interest and redemption charges on (1) any indebtedness approved by the voters prior to July 1, 1978․”  (Cal. Const., art. XIIIA, § 1, subd. (b);  see Patton v. City of Alameda (1985) 40 Cal.3d 41, 43, 219 Cal.Rptr. 1, 706 P.2d 1135.)

In 1987 the Legislature enacted section 39308.5 so that school districts could utilize the “prior indebtedness” exception to finance additional facilities.   In those districts where a tax rate increase to construct schools was approved by district voters before Proposition 13, the tax override may be used to finance additional school facilities.  Section 39308.5, however, requires that continued imposition of the tax override be approved by a majority of the electorate.3

Here, the tax override was based on a 1977 lease-purchase financing agreement.   In 1977, District voters approved a ballot measure for the lease-purchase of three school sites.  (§§ 39307, 39308.)   The measure provided for a 25–year tax not to exceed 43 cents per $100 of assessed valuation.4

After the voters approved the 1977 ballot measure, the District leased the school sites to the San Luis Coastal Unified School District Educational Facilities Corporation, a nonprofit corporation.   The corporation sold tax-exempt bonds to construct the facilities and leased the property back to the District.  (§ 39305.)

The tax override generated enough revenues to satisfy the projected amount due and owing on the lease obligations.   In 1984, District created an irrevocable trust to fund the remaining lease obligations and reduced the tax levy to zero.5

Between 1985 and 1991, District lacked the resources to build additional facilities.   On June 4, 1991, it placed Measure A on the ballot for the lease-purchase financing of five new facilities and renovation of nineteen facilities.   The measure, approved by a majority of the voters, authorized the District to use the 1977 tax override to pay the lease-purchase debt.

District's governing board thereafter adopted a resolution to enter into lease-purchase agreements with the San Luis Coastal Unified School District Educational Facilities Corporation.   The resolution provided that the corporation will finance the construction with tax-exempt bonds in the form of certificates of participation.   Investors will receive a pro rata portion of the lease payments.

On July 15, 1991, District brought the instant action to validate Measure A, the resolution, the lease-purchase financing agreements, and the tax override.  (Gov.Code, § 53511, Code Civ.Proc., § 860 et seq.)   Appellant challenged the action contending that the resolution will result in an ad valorem tax that violates Proposition 13.   The trial court disagreed.   It ruled that the tax override was based on a “prior indebtedness” and was not subject to the Proposition 13 one percent limitation.   This appeal followed.

 For the first time on appeal, appellant argues that the 1977 lease-purchase indebtedness has been discharged and is no longer an “indebtedness.”   He relies on the District's verified complaint which alleges that the indebtedness has been “paid and discharged.”   Appellant did not assert this claim at trial and he is precluded from doing so for the first time on appeal.  (Ward v. Taggart (1959) 51 Cal.2d 736, 742, 336 P.2d 534;  Menefee v. County of Fresno (1985) 163 Cal.App.3d 1175, 1182, 210 Cal.Rptr. 99.)   In addition, appellant filed an answer denying the allegation and put the matter at issue.  “Issues arise upon the pleadings when a fact ․ is maintained by the one party and controverted by the other.”  (Code Civ.Proc., § 588;  see Fuentes v. Tucker (1947) 31 Cal.2d 1, 4, 187 P.2d 752.)   Appellant is therefore estopped from arguing that the allegations in the complaint constitute a fatal admission.

 On the merits, substantial evidence was presented to support the trial court's finding that the 1977 lease obligation was not “paid and discharged” and was and is, in fact, a continuing debt.   Rory Livingston, Assistant Superintendent for District Business and Physical Support Services, testified that $9 million remains due and owing for the 1977 ballot measure.   It was uncontroverted that the District must pay the lease indebtedness if the trust fails to do so.   Because the District was authorized “․ to levy a corresponding tax, the tax power could not be revoked until the contract [here, the lease obligation] was fulfilled.  [Citations.]”  (Carman v. Alvord (1982) 31 Cal.3d 318, 332, 182 Cal.Rptr. 506, 644 P.2d 192.)

 Appellant next asserts that the 1977 tax override is site specific and may not be used to finance facilities at other school sites.   Appellant is half correct.   The 1977 ballot measure only specified three school sites.   (See ante, fn. 3.)   But section 39308.5, subdivision (a), provides that a district may finance new facilities at sites it “proposes to lease.”   Under the statute, a school district may “․ conduct an election to seek voter consent to fund certain other school construction to the extent of a previously approved tax rate without regard to the date of the original election in which the tax rate was approved.”  (Legislative Counsel's Digest, ch. 47, p. 121, S.B. No. 164 (Reg.Sess.) Deering's, Cal.Codes, 1989–No. 2, p. 170.)   Thus, the Legislature has allowed a school district with simple majority voter approval, to “piggyback” new school construction financing on an existing “prior indebtedness.”

Appellant's reliance on Morgan Hill Unified School Dist. v. Amoroso (1988) 204 Cal.App.3d 1083, 252 Cal.Rptr. 1 is misplaced.   There, a voter-approved tax was imposed to construct a high school in 1972.   Thirteen years later, the school district adopted a resolution to enter into an amended facility lease and $3.75 million supplemental indenture for additions and improvements without submission to the voters.   A taxpayer successfully challenged the scheme.   The Court of Appeal held that the school district lacked the authority to amend the original lease and use the tax override to finance new construction.  (Id. at pp. 1087–1088, 252 Cal.Rptr. 1.)   Section 39308 required that district voters approve each building to be constructed and leased.

 Section 39308.5 was enacted to address the problem discussed in Morgan Hill Unified School Dist. v. Amoroso, supra.  (Stats.1987, ch. 90, § 1.)   A school district must obtain voter approval before it uses a previously approved tax override to finance the construction of facilities at other sites.

 Appellant, however, argues that section 39308.5 does not apply because the tax override was reduced to zero in 1985.   We disagree.   If the trust lacks the funds to pay the 1977 lease and bond obligations, District may readjust the tax rate.   We reject the argument that the “prior indebtedness” is tied to the amount levied in a particular year or is extinguished when the tax is reduced to zero.   The power to tax continues until the indebtedness is paid in full.

An indebtedness approved prior to July 1, 1978, may qualify as a “prior indebtedness” even though a portion of the debt is incurred after the enactment of Proposition 13.  (Metropolitan Water Dist. v. Dorff (1982) 138 Cal.App.3d 388, 396, 188 Cal.Rptr. 169.)  “ ‘The term “indebtedness” has no rigid or fixed meaning, but rather must be construed in every case in accord with its context.’  [Citations.]  It can include all financial obligations arising from contract ․ and it encompasses ‘obligations which are yet to become due as [well as] those which are already matured.’  [Citation.]”  (Carman v. Alvord, supra, 31 Cal.3d 318, 326–327, 182 Cal.Rptr. 506, 644 P.2d 192.)

The critical inquiry is whether District voters obligated themselves in 1977 to make future expenditures for a specified purpose.  (Patton v. City of Alameda, supra, 40 Cal.3d 41, 46, 219 Cal.Rptr. 1, 706 P.2d 1135;  City of Watsonville v. Merrill (1982) 137 Cal.App.3d 185, 193, 186 Cal.Rptr. 857.)   If the answer is yes, then the 1991 measure, a lease-purchase obligation, may be financed by the override until 2002, when the 1977 indebtedness terminates.

“[B]ecause the obvious purpose of Proposition 13 was to limit drastically the power of local entities to levy ad valorem taxes, it necessarily follows that any exceptions written into the constitutional amendment in mitigation of [its] new restriction should be broadly construed in favor of the objectives of that exception.”  (Metropolitan Water Dist. v. Dorff, supra, 138 Cal.App.3d 388, 393, 188 Cal.Rptr. 169.)

Patton v. City of Alameda, supra, 40 Cal.3d 41, 219 Cal.Rptr. 1, 706 P.2d 1135, illustrates the principle.   In Patton, a property tax to fund the city's libraries was approved by the voters in 1937 as part of the city charter.   After the enactment of Proposition 13, the city continued to levy an ad valorem tax in excess of one percent.   A taxpayer challenged the tax on the ground it violated Proposition 13.   The Supreme Court upheld the tax and ruled that the charter provision constituted a voter-approved obligation to make expenditures for a specified purpose.  (Id. at pp. 46–48, 219 Cal.Rptr. 1, 706 P.2d 1135.)

Here, the District voters approved a 25–year indebtedness to build school facilities.  Section 39308.5 authorized the District, with the electorate's approval, to use the tax override to construct additional facilities.   Because the taxes may only be used to construct facilities identified in Measure A, appellant's reliance upon Arvin Union School Dist. v. Ross (1985) 176 Cal.App.3d 189, 221 Cal.Rptr. 720 is misplaced.   There, the tax overrides were not tied to school construction, “․ but rather serve[d] to generally increase the revenue available to a school district.”  (Id. at p. 200, 221 Cal.Rptr. 720.)

In construing Proposition 13 and section 39308.5, we apply the well-established rule that the California Constitution does not grant power to the Legislature but is a limitation on its plenary power.  (Methodist Hosp. of Sacramento v. Saylor (1971) 5 Cal.3d 685, 691, 97 Cal.Rptr. 1, 488 P.2d 161;  see also Butt v. State of California, supra, 4 Cal.4th 668, 681, 688, 15 Cal.Rptr.2d 480, 842 P.2d 1240.)  “․ [I]t is our duty to uphold [section 39308.5] unless its unconstitutionality is clear and unquestionable.  [Citations.]”  (Arcadia Unified School Dist. v. State Dept. of Education (1992) 2 Cal.4th 251, 265, 5 Cal.Rptr.2d 545, 825 P.2d 438.)

 Appellant does not challenge the facial constitutional validity of section 39308.5 but does challenge its validity “as applied.”  (See discussion, infra, at pp. 729–730.)   At oral argument District claimed that, of necessity, we must consider the facial validity of section 39308.5.   We agree.

“ ‘In considering the constitutionality of a legislative act we presume its validity, resolving all doubts in favor of the Act.   Unless conflict with a provision of the state or federal Constitution is clear and unquestionable, we must uphold the Act.  [Citations.]  Thus, wherever possible, we will interpret a statute as consistent with applicable constitutional provisions, seeking to harmonize Constitution and statute.  [Citations.]’ ”  (Arcadia Unified School Dist. v. State Dept. of Education (1992) 2 Cal.4th 251, 260, 5 Cal.Rptr.2d 545, 825 P.2d 438.)  Section 39308.5, when viewed in the context of Proposition 13 and other constitutional provisions, passes constitutional muster.   It is not “․ clear and unquestionable that the statute [§ 39308.5], on its face, violates ․ [the California Constitution.]”   (Arcadia, supra, at p. 265, 5 Cal.Rptr.2d 545, 825 P.2d 438.)

Rider v. County of San Diego (1991) 1 Cal.4th 1, 2 Cal.Rptr.2d 490, 820 P.2d 1000, relied upon by appellant, does not compel a different result.   There, the Supreme Court invalidated a supplemental sales tax because it violated Proposition 13 and constituted a special tax.  (Id. at pp. 10–14, 2 Cal.Rptr.2d 490, 820 P.2d 1000.)   The case did not involve a prior indebtedness or ballot measure to continue imposition of a pre-Proposition 13 tax override.

“In California the financing of public school facilities has traditionally been the responsibility of local government.”  (Candid Enterprises, Inc. v. Grossmont Union High School Dist. (1985) 39 Cal.3d 878, 881, 218 Cal.Rptr. 303, 705 P.2d 876).   The passage of Proposition 13 has drastically restricted the ability of local government to use ad valorem taxes as a source of revenue.  (§ 17786.) 6

Lease-purchase financing is part of an integrated plan to finance the construction of school facilities.  (§§ 39300–39325;  Morgan Hill Unified School Dist. v. Amoroso, supra, 204 Cal.App.3d 1083, 1086, 204 Cal.App.3d 1083, 252 Cal.Rptr. 1;  62 Ops.Cal.Atty.Gen. 209, 210 (1979).)  Section 39308.5 plays an essential role because it codifies the Proposition 13 “prior indebtedness” exemption.   It is the genesis for Revenue and Taxation Code section 97.65, subdivision (a)(3), which provides for property taxes “[t]o make payments pursuant to lease-purchase programs approved by the voters before July 1, 1978, provided that the jurisdiction imposed the property tax rate in the 1982–1983 fiscal year.”

Finally, section 39308.5 is not unconstitutional as applied to the instant case.   Appellant asserts that Proposition 13 only exempts a prior indebtedness if it was fixed and certain when approved by the voters.   Not so.   In Carman v. Alvord, supra, 31 Cal.3d 318, 182 Cal.Rptr. 506, 644 P.2d 192, the taxpayer argued that “․ subdivision (b) [of Proposition 13] exempts only indebtedness which was fixed and certain when approved.   But the subdivision imposes no such restriction.   It speaks only of the time of the approval, not the time an indebtedness is incurred or accrues.”  (Id., at p. 326, fn. 6, 182 Cal.Rptr. 506, 644 P.2d 192.)

We conclude the ballot measure for continued imposition of the tax override does not constitute a new tax.   The purpose of the tax override, the tax rate, and the duration of the tax remain the same.

The judgment is affirmed.   Respondents to recover costs on appeal.

FOOTNOTES

1.   All statutory references are to the Education Code unless otherwise indicated.

2.   Proposition 13 was added to the California Constitution June 6, 1978.   It was amended June 3, 1986.  Article 13A, section 1 now provides:  “(a) The maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property.   The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.  [¶ ] (b) The limitation provided for in subdivision (a) shall not apply to ad valoren taxes or special assessments to pay the interest and redemption charges on (1) any indebtedness approved by the voters prior to July 1, 1978, or (2) any bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978, by two-thirds of the votes cast by the voters voting on the proposition.”

3.   Section 39308.5 states:  “(a) If, at an election held pursuant to Section 39308, or the predecessor to that section, a majority of the electors voting on the proposition voted ‘Yes,’ the governing board may call an election pursuant to this section.  [¶ ] Before entering into one or more leases or agreements pursuant to this section and this article, the governing board of the district shall call, hold, and conduct an election in the manner provided in Section 42202 of the Education Code, as it existed on December 31, 1979, except that the ballot used in the election shall contain substantially the words:  ‘Shall the governing board of the _ District purchase (a site, sites) prepare plans and specifications [the reference to the site or sites and plans and specifications shall not be included if, prior to calling the election, the governing board of the district has acquired a site or sites or proposes to lease a site or sites or has prepared plans and specifications] and lease (a site, sites) and (a building, buildings) to be constructed for use by the school district (designating the location of the site or sites on which the building or buildings will be constructed and generally describing the building or buildings) and for those purposes, shall the tax rate increase authorized on [the date of the original election], be used solely and exclusively for those purposes in addition to those approved by the majority of electors at the election held pursuant to Section 39308, or the predecessor to that section, on [the date of the original election]?’  [¶ ] If, at the election held pursuant to this section, a majority of the electors voting on the proposition vote “Yes,” the governing board may proceed pursuant to this article to use that previously authorized tax increase for the purpose or purposes authorized under that election.  [¶ ] (b) It is the intent of the Legislature, in enacting this section, to permit the levy of a tax to the extent authorized at an election held pursuant to Section 39308, or the predecessor to that section, as modified to permit the proceeds of that tax to be expended for the purposes authorized at the election held pursuant to subdivision (a).”  (Emphasis added.)

4.   The 1977 ballot measure stated:  “Shall the Governing Board of the San Luis Coastal Unified School District prepare plans and specifications and lease buildings and facilities to be constructed for use by the District consisting of the hereinafter specified fully furnished, equipped and landscaped new school facilities to be located on the hereinafter specified sites:  (1) Classroom addition to Baywood Elementary School, 1330 Ninth Street, Los Osos;  (2) classroom, library, shop, multipurpose gymnasium, and physical education additions to San Luis Obispo High School, 1350 California Boulevard, San Luis Obispo;  and (3) classroom, shop, library, gymnasium and physical education additions to Morro Bay High School, 235 Atascadero Road, Morro Bay;  and for such purposes, shall the maximum tax rate of the District be increased by not to exceed forty-three cents (43¢) for each $100 of assessed valuation, such increase to be in effect in the San Luis Coastal Unified School for the years 1977–1978 to 2001–2002, and the amount of such increase to be used solely and exclusively for such purposes, the District reserving the right to lease less than all of the proposed buildings and facilities if circumstances so require?”

5.   District was required to adjust the tax rate to reflect the projected amount needed to pay the indebtedness.  Revenue and Taxation Code section 93, subdivision (a) states in pertinent part:  “Notwithstanding any other provision of law, ․ no local agency, school district, county superintendent of schools, or community college district shall levy an ad valorem property tax, other than that amount which is equal to the amount needed to make annual payments for the interest and principal on general obligation bonds or other indebtedness approved by the voters prior to July 1, 1978․”

6.   In 1979, the Legislature enacted the Emergency School Classroom Law of 1979 which recognized that “․ the ad valorem tax is no longer available as a source of revenue for the construction of necessary school facilities.”  (§ 17786.)   Amicus has requested and we have taken judicial notice of a 1991 State Department of Finance report projecting a 43.6 percent increase in public school enrollment over the next ten years.   This will generate a need for 40,000 new classrooms.   The estimated cost of new school construction is $30 billion.

YEGAN, Associate Justice.

STONE, P.J., and GILBERT, J., concur.