CITY OF OXNARD, a municipal corporation, Petitioner, v. Ethel DALE, as City Clerk of the City of Oxnard, California, and Wm. H. Groff, as City Treasurer of the City of Oxnard, California, Respondents.
City of Oxnard, a municipality of the sixth class, seeks a writ of mandate to compel the city treasurer and city clerk to sign and countersign, respectively, certain revenue bonds which have been voted by the electors and authorized by resolution of the city council. The proceeds of said bonds when issued are to be used in the construction of certain interceptor sewers to feed a treatment plant now under construction at Ormond Beach. These bonds are to be serviced and redeemed solely from sewer system revenues. The treatment plant has been financed by sale of general obligation bonds. The city has an existing sewer system which has operated profitably since service charges were imposed in 1946. The system has been built largely from proceeds of general obligation bonds of which $795,000 face amount are now outstanding. Sewer system revenues have been applied in part toward payment of interest and redemption of one of said general obligation issues,—$84,354.54 having been used for redemption. But, according to the petition, the city ‘does not presently intend to make further transfers from sewer revenues toward the retirement of said bonds.’
The instant issue of revenue bonds was authorized pursuant to the Revenue Bond Law of 1941, Chapter 6, Part 1, Division 2, Title 5 of Government Code, section 54300 et seq. Respondents demur to the petition upon the ground of failure to state a cause of action. In their brief they argue that the issue in question constitutes an indebtedness or liability within the purview of section 18 of Article XI of the Constitution, and impliedly that the enabling statute is unconstitutional. Said section 18, so far as pertinent, provides: ‘No county, city, town, township, board of education, or school district, shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the qualified electors thereof, voting at an election to be held for that purpose, nor unless before or at the time of incurring such indebtedness provision shall be made for the collection of an annual tax sufficient to pay the interest on such indebtedness as it falls due, and also provision to constitute a sinking fund for the payment of the principal thereof, on or before maturity, which shall not exceed 40 years from the time of contracting the same; * * *.’
The constitutionality of the Revenue Bond Law of 1941 is inextricably involved in respondents' contention that the subject issue of bonds creates an indebtedness or liability forbidden by the constitutional provision above quoted. For the power of a city to issue any type of bonds must necessarily find a source in some charter or statute. 43 Am.Jur. § 37, p. 298; Sutro v. Pettit, 74 Cal. 332, 336–337, 16 P. 7; Lassen Municipal Utility Dist. v. Hopper, 5 Cal.2d 18, 21, 53 P.2d 347. And if the bonds in suit constitute a debt or liability within the constitutional concept the statute necessarily falls because (1) the proceedings at bar faithfully follow its provisions, mandatory and permissive, and (2) it authorizes such debt or liability upon the vote of a majority of those voting at the special election while the constitution requires a two-thirds favorable vote.
The special fund doctrine, that an obligation payable only out of the revenues of an instrumentality purchased or constructed from the proceeds of that obligation does not constitute a debt or liability within the ambit of a constitutional provision such as California's, prevails widely throughout the States1 and has been adopted in this jurisdiction. Our problem is to ascertain whether the California rule is the ‘broad special fund theory’ or the ‘limited’ or ‘restricted special fund theory’, for the bonds in question draw their sustenance from a special fund consisting of all the gross revenues of the Oxnard sewer system, including the main portion now operating, the treatment plant now under construction and the interceptor sewers to be built with the proceeds of this bond issue. The distinction between the two types of special funds is stated as follows in ‘A Joint Report of the Committees of the American Society of Civil Engineers and the Section of Municipal Law of the American Bar Association etc.’ (1951), 12 Ohio State Law Journal, 179, 182: ‘Revenue bonds are payable from special non-tax funds. Thus, the prevailing view is that they are not debts in the debt limitation sense, and that is true without regard to whether the revenues pledged are confined to those of the particular properties being financed. This is the ‘broad special fund theory.’
‘The courts of a few states, however, have placed a sharp limitation upon the application of this doctrine; they have held that any particular issue of revenue bonds does not escape constitutional limitations unless the bonds are to be paid solely from the revenue of the particular improvement which is to be constructed out of the proceeds of that issue, and not from the revenue of an entire system to which the improvement will be an addition. This is the ‘limited’ or ‘restricted special fund theory.”
The issue under discussion was in fact authorized by more than two-thirds of the voting electors at a special election. The initiating resolution No. 1610 provides for a $450,000 issue pursuant to the Revenue Bond Law of 1941 for the purpose of providing funds for acquisition, construction and financing of interceptor sewers, ‘said bonds to be payable solely from the Sewerage Service Fund of said City (a fund into which all revenues derived from said sewer system are to be paid) or any other fund or funds into which moneys from said Sewerage Service Fund have been transferred for that purpose, and are not to be secured by the taxing power of the City * * *.’ The bond incorporates by reference all provisions of the resolution and of the statute. Section 2 of the resolution provides that the bonds are ‘special obligations of the City of Oxnard and shall be and are secured by a pledge of and lien upon, and shall be and are a charge upon, and shall be and are payable * * * solely from the gross revenues * * * of the enterprise which is defined * * * as follows: ‘the entire sanitary sewer and sewage disposal system of the City of Oxnard as such system now exists, together with all additions and improvements to said system hereafter made, including the acquisitions, extensions and improvements made with funds derived from the sale of the revenue bonds herein proposed to be issued.’' Section 3 specifies that the bonds are ‘secured by an exclusive pledge, charge and lien upon all of the revenues of the enterprise’,—i. e. the existing sewer system with all additions and improvements thereto. Section 4: ‘The general fund of the City of Oxnard is not liable for the payment of the bonds or their interest, nor is the credit or taxing power of the City of Oxnard pledged for the payment of the bonds or their interest. The holder of the bonds or coupons shall not compel the exercise of the taxing power by the City of Oxnard or the forfeiture of any of its property. The principal of and interest on the bonds and any premiums upon the redemption of any thereof are not a debt of the City of Oxnard nor a legal or equitable pledge, charge, lien, or encumbrance, upon any of its property, or upon any of its income, receipts, or revenues, except the revenues of the enterprise which are, under the terms of this resolution and said Revenue Bond Law, pledged to the payment of said bonds and interest.’ Section 13 sets up five funds, Construction, Sewerage Service, Bond Service, Reserve, and Maintenance and Operation. Into the Construction Fund go the proceeds of sale of bonds. Into the Sewerage Service Fund go all gross receipts from the entire sewer system and all improvements and additions, present and prospective. Sufficient moneys to pay interest on the bonds are transferred monthly from the Sewerage Service Fund to the Bond Service Fund, and a sum adequate to provide for accruing principal has to be transferred from Sewerage Service to Reserve Fund. Next in order of transfer are monthly sums sufficient for current expenses of operation and maintenance of the enterprise. Any surplus remaining after those transfers must under the present law follow the course prescribed by sections 54424, 54425 and 54426 of the Government Code. Section 54424: ‘So long as any bonds or interest thereon are unpaid the revenues and interest thereon shall not be used for any other purpose, except as provided in Sections 54425 and 54426.’ Section 54425: ‘If the interest and principal of the bonds and all charges to protect or secure them are paid when due an amount for the maintenance and operation costs of the enterprise may be apportioned from the revenues.’ Section 54426: ‘Unless the legislative body provides otherwise in the resolution calling the election, the principal, interest, and sums for other security funds shall be paid from the revenues prior to paying the maintenance and operation costs of the enterprise.’ Foreseeing a statutory amendment the draftsman of the ordinance provided in section 19 that surplus funds may be invested in direct obligations of the United States, and ‘said surplus may also be used, if permitted now or when permitted hereafter under amendments to the Revenue Bond Law of 1941: (a) for the payment of the costs of extensions of or additions to and improvements of the enterprise, (b) for payment of principal and interest of general obligation bonds of the city issued for sewer purposes, or (c) for any other sewer purpose, and no other transfer or uses of said revenues may be made.’ Such an amendment did eventuate at the last session of the legislature. Senate Bill 1045 was passed, has been signed by the Governor, and becomes effective September next. It amends section 54425 to read: ‘If the interest and principal of the bonds and all charges to protect or secure tham are paid when due an amount for the necessary and reasonable maintenance and operation costs of the enterprise, which costs include the reasonable expenses of management, repair and other expenses necessary to maintain and preserve the enterprise in good repair and working order, may be apportioned from the revenues, and subject to any limiting covenants in the resolution providing for the issuance of bonds, the remaining surplus may be used for any lawful purpose of the local agency.’ (New matter is in italics.) This leaves the gross revenue of the entire enterprise applicable first to the principal and interest of these revenue bonds, both under the statute and under section 19 of the resolution.
The resolution contains a series of covenants,—to preserve and protect the security of the bonds, make punctual payments, discharge all lawful claims, operate the enterprise efficiently and economically, not to mortgage or otherwise encumber the enterprise; to maintain adequate insurance; to furnish to free sewer service except to the extent presently required by contract; but the City is not thereby required ‘to enpend any funds other than the revenues received or receivable from the enterprise’ in order to perform said covenants. It is also covenanted that the City will prescribe and collect charges for service sufficient to take care of this issue of revenue bonds, all payments required to meet any other obligations of the City ‘which are charges, liens, encumbrances upon or payable from the revenues of the enterprise’, and all expenses of operation and maintenance. (Emphasis added.) No additional bonds shall be issued under any law having priority of payment out of the revenues of the enterprise. Section 33 declares the resolution to be a contract between the City and the bondholders enforceable by mandamus, accounting, mandatory injunction, etc. Like provision is found in section 54642 of the Government Code. Section 34 of the resolution says ‘* * * from and after the sale of the bonds the general fund of the City shall not include the revenues of the enterprise and no contract or other obligation payable from the general fund of the City shall be payable from the revenues of the enterprise, except as provided in Section 19 hereof.’ Section 19 is the one relating to use of surplus funds, quoted above. Sections 54428–54432 of the Code contain these specific provisions: ‘§ 54428. * * * The general fund of the local agency is not liable for the payment of the bonds or their interest.
‘§ 54429. * * * The credit or taxing power of the local agency is not pledged for the payment of the bonds or their interest.
‘§ 54430. * * * The holder of the bonds or coupons shall not compel the exercise of the taxing power by the local agency or the forfeiture of its property.
‘§ 54431. * * * The principal of and interest on the bonds and any premiums upon the redemption of any thereof are not a debt of the local agency, nor a legal or equitable pledge, charge, lien, or encumbrance, upon any of its property, or upon any of its income, receipts, or revenues except the revenues of the enterprise and other funds that may be legally applied, pledged, or otherwise made available to their payment.
‘§ 54432. * * * Every bond shall recite in substance that the principal of and interest on the bond are payable solely from the revenues and other funds pledged or otherwise made available to its payment and that the local agency is not obligated to pay it except from the revenues of the enterprise and from such other funds.’
The attack upon the bonds is aimed at the provisions of the resolution and the statute which siphon all of the gross revenues of all of the sewer system into a special fund for servicing and payment of the instant issue of revenue bonds, without any segregation of income from the interceptor sewers acquired with the proceeds of the particular issue, and without the possibility of any of the gross revenue from the entire system being used to service or pay general obligation bonds whose proceeds helped to create that system. Counsel also stress the argument that any shortage in the special fund will, as a practical matter, impose upon the general funds of the city a necessity of feeding the special fund, thus indirectly creating a general obligation payable out of taxes.
When first adopted in this state the special fund doctrine was stated in broad terms, which were entirely sufficient for the case in hand. California Toll Bridge Authority v. Wentworth, 1931, 212 Cal. 298, 302, 298 P. 485, 486: ‘The overwhelming weight of judicial opinion in this country is to the effect that bonds, or other forms of obligation issued by states, cities, counties, political subdivisions, or public agencies by legislative sanction and authority, if such particular bonds or obligations are secured by and payable only from the revenues to be realized from a particular utility or property, acquired with the proceeds of the bonds or obligations, do not constitute debts of the particular state, political subdivision, or public agency issuing them, within the definition of ‘debts' as used in the constitutional provisions of the states having limitations as to the incurring of indebtedness.’ The case involved section 1 of Article XVI of the Constitution, which, so far as pertinent is set forth in the margin.2 It arose under a special statute relating to a bridge across San Francisco bay, which created a special fund consisting of the revenues of the particular bridge. The court held, on the authority of Shelton v. City of Los Angeles, 206 Cal. 544, 275 P. 421, and cases in other states, that such a special-fund bond does not create a debt within the meaning of the constitutional limitation. There was no occasion to consider in the said Toll Bridge case (or in Shelton) the necessity of segregation of revenues when creating the fund. But that problem did arise soon.
Garrett v. Swanton, 1932, 216 Cal. 220, 13 P.2d 725, deals with a conditional sale contract between Fairbanks, Morse & Co., as seller, and City of Santa Cruz, as buyer. It covered the installation of a pumping plant which was to be an adjunct to the city's existing water distributing system. The price was $152,960, payable $30,000 cash and balance in sixty monthly installments. The contract contained an appropriate forfeiture clause operative in case of default by the city. It also ‘stated that ‘it is agreed that the obligation to pay the installments hereunder is not a general obligation of the said municipality payable from taxes or its general funds but only a special obligation payable from the Water Development Fund. * * * The municipality covenants to operate the said (water) department in an efficient and economic manner, and to maintain rates for the product or service of said department which will produce sufficient revenue for the payments called for by this contract so far as it may be permitted to do so by law.’' 216 Cal. at page 224, 13 P.2d at page 727. The city had previously incurred an indebtedness of $555,000 in bonds which were general obligations of the city, the proceeds having been used in the acquisition and maintenance of the water system. By ordinance the entire receipts from the water system had been set aside for use solely in construction, improvement, extension, maintenance of the plant and payment of principal and interest on any bonded indebtedness then existing or thereafter incurred for any of said water system purposes. The contract was challenged by a taxpayers' suit. And it was shown that the necessary expenditures of the city for the fiscal year including the total obligation of the Fairbanks, Morse contract would exceed the entire revenues of the city. It was claimed that this created a liability or indebtedness forbidden by Article XI, section 18, of the Constitution, there having been no authorization of the contract by two-thirds vote of the electors. The problem was stated in these words: ‘Essentially the transaction above outlined presents a situation where the city agrees to purchase certain machinery on the conditional sales plan, title to remain in the seller until paid for, and agrees to pay for the same, part in cash and the balance in installments over a period of years, out of a special fund, which fund is created not only by the profits from the property purchased, but contains also the profits earned by the entire water plant of the city. Can a city, when the total amount of such a purchase exceeds its income, enter into such a contract without submitting the same to a vote of the people?’ 216 Cal. at page 226, 13 P.2d at page 727. The court first held that a liability for the full purchase price arose upon execution of the contract, and that it violated the constitutional limitation ‘unless that provision does not apply to this type of contract because of the fact that all payments are to be made from the water fund, and are not to constitute a general obligation of the city.’ 216 Cal. at page 227, 13 P.2d at page 728. California Toll Bridge Authority v. Wentworth, 212 Cal. 298, 298 P. 485, was quoted (as we have done supra), and the court said at page 229 of 216 Cal., at page 729 of 13 P.2d: ‘It therefore follows that, if the contract here involved comes within the limits of the ‘special fund’ doctrine, it does not violate the debt limit provision of the state Constitution. In order to determine this question, it is necessary to determine the exact limits and extent of that doctrine. * * * An examination of the cases from other jurisdictions establishes the fact that there are at least two well-settled limitations or exceptions to the ‘special fund’ doctrine. Thus it is well established that an indebtedness or liability is incurred when by the terms of the transaction a municipality is obligated directly or indirectly to feed the special fund from general or other revenues in addition to those arising solely from the specific improvement contemplated. It also seems to be well settled, as a second limitation to the doctrine, that a municipality incurs an indebtedness or liability when by the terms of the transaction the municipality may suffer a loss if the special fund is insufficient to pay the obligation incurred.' At page 230 of 216 Cal., at page 729 of 13 P.2d: ‘It is the fund created from the revenue of the entire water system from which the payments on the contract are to be made. In other words, it is not only the income earned by the property purchased that constitutes the special fund from which the payments are to be made, but the income from the entire water system constitutes such special fund. It is obvious that, although the contract provides the payments to Fairbanks, Morse & Co. shall solely by made from this fund, and shall not constitute a general obligation of the city, indirectly such contract does create a general indebtedness or liability of the city. It seems too clear to require further elaboration that, if the water fund be depleted by the payments made to Fairbanks, Morse & Co. for the pumping plant, the fund created for the payment of interest and principal on the bonds will be depleted, and that, since such bonds are a general obligation of the city, the taxpayers must at all times be ready to feed the special fund if the income is not sufficient to pay both the interest and principal on the bonds and the payments to Fairbanks, Morse & Company. It follows, of course, that, when this contract was executed, the taxpayers became indirectly liable to pay the amount thereof. We do not believe that the ‘special fund’ doctrine was ever intended to be applied to a situation where the municipality, directly or indirectly, is or may be compelled to feed the special fund from other revenues in addition to those arising from the special improvement contemplated. Such a subterfuge, if sanctioned would go far to effectually wipe out the purpose and intent of the constitutional provisions.' Quoting from Schnell v. City of Rock Island, 232 Ill. 89, 93 N.E. 462, 14 L.R.A.,N.S., 874: “A city may acquire a system of waterworks by pledging the income until it shall pay for the system, and no indebtedness is created. The same rule might apply to some definite extension of waterworks where the income of the extension could be separated and applied to payment, but an obligation to pay with the income of property already owned by a city is not different from an obligation to pay with any other funds, so far as the question whether the transaction amounts to a debt is concerned.'3
‘The logic of these cases, and of the cases cited by the Federal Circuit Court, seems unescapable. 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, be applied to the payment of the interest and principal on the bonds which is a general obligation of the city.’ 216 Cal. at pages 232, 233, 13 P.2d at page 730. The contract was held illegal upon the ultimate ground that ‘If this [special] fund is depleted, the obligation to feed the fund will fall upon the taxpayer.’ 216 Cal. at page 233, 13 P.2d at page 730. It was also held that the forfeiture clause rendered the contract violative of the constitution because ‘[t]he practical compulsion to protect the investment by making the payments from the general fund if the special fund prove insufficient constitutes, in our opinion, a violation of the constitutional provision in fact.’ 216 Cal. at page 234, 13 P.2d at page 731.
In the ensuing years this Garrett case has suffered a destructive erosion which will be considered presently. Viewed in the abstract the decision possesses considerable unspent logic and sound economics. The instant case serves to illustrate what may happen if the segregation rule of the Garrett case is abandoned. The general obligation issue of $375,000 for the Ormond Beach treatment plant was sold in 1954. The sewer system had been self-supporting and profitable ever since sewer charges began in 1946; and the profits had been devoted, at least in part, to servicing and redeeming general obligation sewer bonds. What more natural than a representation to the voters that the bonds would be self-sustaining and self-liquidating? And what more natural than a voter's approval of the new bonds in that belief? Then (we assume) the City follows with an issue of self-sustaining revenue bonds which the people also vote because they do not threaten any taxes. But the source of servicing the treatment plant issue is immediately diverted to the interceptor sewers issue and (without the 1955 amendment to section 54425, Government Code) the treatment plant issue must be sustained from general tax revenues. Under the 1955 amendment that issue receives part of the sewer revenues only if there is a surplus after costs of operation and the interceptor bonds have been fully cared for. But it has been authoritatively held in effect that such considerations do not prove the special fund issues to be an indebtedness or present, liability.
While Garrett v. Swanton, supra, 216 Cal. 220, 13 P.2d 725, is still cited as authority for the proposition that a forfeiture clause in a conditional purchase contract renders it obnoxious to the constitutional debt limitation, City of Los Angeles v. Offner, 1942, 19 Cal.2d 483, 486, 122 P.2d 14, 145 A.L.R. 1358; Dean v. Kuchel, 1950, 35 Cal.2d 444, 447, 218 P.2d 521, the segregation requirement of the decision can no longer be said to previal. And the same is true of an indirect obligation to feed the fund.
Some eight to ten months after the Garrett case came California Toll Bridge Authority v. Kelly, 1933, 218 Cal. 7, 21 P.2d 425, and Department of Water, etc., v. Vroman, 1933, 218 Cal. 206, 22 P.2d 698. The Toll Bridge case arose under Article XVI, section 1, Constitution, and involved revenue bonds payable out of a special fund derived from the tolls for use of the particular bridge that had been financed by the proceeds of the bonds. After this method of financing had been approved in California Toll Bridge Authority v. Wentworth, supra, 212 Cal. 298, 298 P. 485, certain legislation was passed to induce the Reconstruction Finance Corporation to purchase the bonds. This legislation specified that, so long as the bonds were outstanding the bridge and approaches should be maintained and operated and kept insured. Such costs and the cost of constructing the approaches were not to be paid out of the bridge revenues but from the state highway maintenance fund available for roadway purposes in the group of counties designated as group No. 1, ‘provided, that such cost of operation and maintenance ‘may be paid from any other fund or funds which may hereafter be made available for such purposes.’' 218 Cal. at page 12, 21 P.2d at page 426. It was contended that the practical result of these provisions would be to convert the revenue bonds into general obligations of the state. The court rejected the argument saying at pages 12 and 13 of 218 Cal., at page 427 of 21 P.2d: ‘While the practical effect of the plan may be to impose a burden on certain special funds of the state, to protect the state's outlay in the construction of the approaches to the bridge and for the purpose of maintenance, operation, and insurance of the structure, it does not result that the bonds will be general obligations of the state in any sense. * * * While it may be to the interests of the state, in the event of necessity, to make contribution for the preservation of the bridge, the better to conserve the amount of funds it has spent in assisting the consummation of the enterprise, it does not follow that the bonds themselves will be thereby converted into a liability against the general funds of the state. The construction of the bridge by the Bridge Authority with funds raised by the issuance and sale of revenue bonds which, under no circumstances, may create a general liability against the state, is one transaction, complete in and of itself. What the state may do in the way of assisting an enterprise which will result in the construction of an important link in its system of primary highways is a separate and distinct transaction, entirely aside the mark in considering the legality of the bonds in this case, unless by some legal transformation the bonds have been changed from revenue bonds, payable by the Bridge Authority from a special fund, into general liabilities of the state. Such transformation or transition is not apparent to the court.’ This looks like a rejection of the rule against possible feeding of the fund which was announced in the Garrett opinion. That case was then distinguished in these words: ‘We must not lose sight of the fact that these bonds are not, and cannot be, bonds of the state creating a general liability against it. So far as payment of principal and interest of the bonds is concerned, no funds of the state, general or special, can be resorted to. This fact serves to distinguish the present case from Garrett v. Swanton, 216 Cal. 220, 13 P.2d 725, and like cases from other jurisdictions cited and relied on by respondent. In Garrett v. Swanton, the contract for the purchase of the machinery provided that the price was to be paid from the revenues received from the operation of the entire water supply system, of which the new equipment was but a part. The bonds were city bonds, and were not payable solely from the special fund created by segregation of the revenues for that purpose, but also from the general funds of the city in the event the special fund should be insufficient.’ 218 Cal. at pages 13, 14, 21 P.2d page 427. This reasoning seems to recognize continued integrity of the Garrett rule. And it is followed by further discussion of the fact that shortage in the one special fund would at most cast an additional burden upon another special fund and hence the general revenues produced by the taxing power would not be called upon. This case cannot be said to overrule Garrett in the matter of the effect of possibility of feeding the fund.
Department of Water, etc., v. Vroman, supra, 218 Cal. 206, 22 P.2d 698 is less difficult to interpret. It involved the validity of a contract of the Los Angeles, Department of Water & Power to borrow from the Reconstruction Finance Corporation some $22,800,000 to finance construction of electricity transmission facilities from the Colorado River. The debt was to be evidenced by notes payable from the revenues of the entire electric system belonging to the city. The proceeds of a large issue of general obligation bonds had been placed in a power revenue fund created by the city charter and the revenues from the electric system had been used to pay, without resort to general funds or taxation, all principal and interest upon some ten million dollars of outstanding general obligation bonds. It was claimed that the borrowing on the revenue notes was invalid because the revenues from the electric system (the special fund) had previously been used to service and retire general obligation bonds. The court first held that the Department of Water & Power, not being one of the agencies named in section 18 of Article XI, was not subject to the limitation therein prescribed. 218 Cal. at pages 217, 219, 22 P.2d at pages 702, 703, 704. Then the court placed its ruling, which upheld the validity of the issue, upon a second ground which in effect puts an end to the segregation phase of the Garrett decision. At page 218 of 218 Cal., at page 703 of 22 P.2d: ‘We attach no particular significance to the first objection, as such, viz., that the loan agreement provides for the repayment of moneys to be borrowed by the department out of revenues from the existing electric system as well as from revenues for the transmission system proposed to be constructed, and that thereby the constitutional provision is violated. If it has any importance it is in connection with the second objection which is to the effect that, although the moneys to be borrowed are payable only out of the power revenue fund, said fund may prove to be inadequate, and the general taxpayers may in that event be required to pay taxes to meet the sums to become due on the general bonds of the city heretofore issued for the construction and acquisition of a municipal electric system, thus rendering the loan agreement and the notes to be issued pursuant thereto without the scope of the special fund doctrine to which this state is committed.’ And, in disposing of Garrett the court further said, 218 Cal. at page 219, 22 P.2d at page 704: ‘It is true that, if the contingency should arise that the funds of the department should be so depleted as to be insufficient to satisfy all of the obligations enjoined by contract and by the charter upon it, then the taxpayers might be called upon to provide the revenue with which to pay the principal and interest on certain outstanding general bonds. But the electors in authorizing those bonds bound the taxpayers constitutionally to meet those payments, and nothing has occurred since the issuance thereof which would relieve them of that burden, unless it may be said that by the charter amendment subsequently adopted the obligation to pay them has been transferred by the fundamental law of the city from the taxpayers to the board.
‘Each case must necessarily rest upon its own facts. On the showing here made, the department is and will be able, not only to repay the proposed loan from the federal government, but will also be able to meet, as provided by the charter, the obligations heretofore assumed by the city by general bond issue for electric system purposes. Under such circumstances the taxpayers would be in no position to complain by reason of the proposed loan, and under the law the special fund doctrine may be applied in its most comprehensive sense. We therefore conclude that the city, as such, has not by its own act incurred, nor is the board proposing to incur, an indebtedness or liability in violation of the constitutional provision.
‘Counsel for the petitioner have exhaustively reviewed the authorities from other jurisdictions bearing upon the special fund theory, in an endeavor to show that the holding in Garrett v. Swanton, supra, is contrary to the weight of authority. In view of our conclusion that that case could in no event be controlling under the facts and the law here presented, it is unnecessary to review or comment on the cases cited.’ Thus it is held that reimposing the burden of the general bonds upon the taxpayers is not objectionable because they have voted to discharge that obligation and the fact that they have been temporarily relieved of it by the use of the revenues necessary to feed the special fund is legally inconsequential.
City of Glendale v. Chapman, 1951, 108 Cal.App.2d 74, 238 P.2d 162, upheld the validity of certain revenue water bonds of the City of Glendale. The proceeds were to be used for extension of the existing waterworks system, which was subject to certain outstanding general obligation bonds. All of the revenues of the system were to go into a special fund to be used primarily for servicing and liquidation of the new issue. The city covenanted to charge and collect rates adequate to care for the revenue bonds. Concerning the matter of possible necessity of feeding the special fund the court had this to say: ‘The amici curiae who appear in support of respondents contend that, although the moneys to be received from the sale of the bonds are payable only out of the net earnings of the waterworks, should that fund prove to be inadequate, the general fund will be invaded and the taxpayer be required to pay the sums due on the bonds. In reason how could such claim be made? In Shelton v. City of Los Angeles, 206 Cal. 544, at page 551, 275 P. 421, at page 424, Mr. Justice Shenk says this obligation ‘is not a financial one, in default of which the city would be required to disburse the general funds of the city or other moneys derived from taxation.’' 108 Cal.App.2d at page 80, 238 P.2d at page 165. ‘The contract of a city for the payment of money out of a special fund, such as is involved herein, may impose a strong moral obligation to approve a schedule of rates to discharge the principal and interest of the indebtedness as it becomes due. Such obligation is not of a financial character in default of which the city would be required to disburse its general funds derived from taxation.’ 108 Cal.App.2d at page 81, 238 P.2d at page 166. ‘While in the Garrett decision the court indicated that the depletion of the revenue fund below the safety point might render taxation necessary for the payment of the outstanding bonds thereby creating an indebtedness forbidden by section 18, article XI of the Constitution, yet in the subsequent Vroman decision with facts which closely parallel those at bar, the same court held that a depletion of the revenue fund to the same degree would not create an indebtedness contrary to the Constitution.’ 108 Cal.App.2d at page 84, 238 P.2d at page 167. The last quoted paragraph seems to be a fair appraisal of the effect of the Vroman decision upon the Garrett case. The Supreme Court denied a hearing.
Board of State Harbor Com'rs v. Dean, 1953, 118 Cal.App.2d 628, 258 P.2d 590, upholds an issue of revenue bonds, authorized under a special statute, for the improvement of San Francisco harbor. There was outstanding a series of general obligation bonds and the special fund consisted of revenues from the entire harbor, but only the net left after servicing all outstanding general obligation bonds and after payment of expenses of operation and maintenance. 118 Cal.App.2d at page 631, 258 P.2d at pages 591, 592. An honest and a sound economic approach. The revenue bonds were attacked as a violation of Article XVI, section 1, Constitution. The court ruled that the issue was within the special fund rule and valid. The opinion concludes as follows: ‘But however the future shall develop in this respect, the actual pledge of revenue proposed to be made is, as we have said, limited to the surplus remaining after servicing prior debts and providing for maintenance and operation, and under those contractual provisions bondholders cannot under any contingency make demand, legal, moral or by way of constraint, upon the general credit of the State.’ 118 Cal.App.2d at page 635, 258 P.2d at page 594. After reviewing the earlier cases, particularly Garrett, the court defined the present state of the law: ‘If the contract be in such form that the general revenues cannot be drawn upon, even though the special fund proves insufficient for all of the demands that may be made upon it, if no forfeiture of State interest can occur, then the case will not be one outside the scope of the doctrine.’ 118 Cal.App.2d at page 635, 258 P.2d at page 594. The Supreme Court denied a hearing in this case.
Housing Authority of Los Angeles County v. Dockweiler, 1939, 14 Cal.2d 437, 94 P.2d 764, arose upon refusal of the chairman of The Housing Authority (a California agency) to sign a note in favor of United States Housing Authority as a preliminary to an issuance of certain revenue bonds. The note specified that it should not be payable out of any funds or property other than those of the local Housing Authority, ‘a first lien therefor being impressed upon all of petitioner's revenues.’ 14 Cal.2d at page 448, 94 P.2d at page 800. Apparently the bonds were to be payable and secured in the same manner. Having held that section 18 of Article XI does not apply to The Housing Authority the court at page 460 of 14 Cal.2d, at page 806 of 94 P.2d said: ‘However, even if it were assumed that housing authorities are subject to the debt limitation provision of the Constitution, its bonds being payable exclusively from the revenues or property of the project or projects which are constructed with their proceeds and with federal aid, would not constitute a debt within the meaning of the provision. California Toll Bridge Authority v. Kelly, 218 Cal. 7, 14, 21 P.2d 425; Department of Water & Power Co. Vroman, 218 Cal. 206, 217, 22 P.2d 698; California Toll Bridge Authority v. Wentworth, 212 Cal. 298, 302, 298 P. 485; Mesmer v. Board of Public Service Com'rs, 23 Cal.App. 578, 583, 138 P. 935; 11 So.Cal.L.Rev. 444, 469. It necessarily follows from what has been said that no violation of the debt limitation clause results from the loan contract between petitioner, The Housing Authority of the County of Los Angeles, and the United States Housing Authority by which the former agrees to sell and that latter to buy bonds issued by the local authority which are payable solely out of housing project revenues and any annual contributions made by the federal authority.’ It will be noted that the Garrett case is not cited, nor is either of its limitations upon the special fund rule mentioned.
In 1941 the legislature, having the benefit of all of the foregoing Supreme Court decisions (but not the City of Glendale or the Dean case, both decided by District Court of Appeal) enacted the ‘Sanitation, Sewer and Water Revenue Bond Law of 1941’, now known as ‘Revenue Bond Law of 1941.’ ‘The principle is well established that legislation should be construed in the light of court decisions existing at the time of its enactment.’ Miller v. McColgan, 17 Cal.2d 432, 439, 110 P.2d 419, 423, 134 A.L.R. 1424. And there is a presumption that the statute is constitutional. 23 Cal.Jur. § 132, p. 757; Franklin v. Peterson, 87 Cal.App.2d 727, 730, 197 P.2d 788. This statute in effect forbids segregation of revenues and requires withdrawal of all income of the entire ‘enterprise’ from other uses, such as servicing a general bond issue on the particular property, requires its use exclusively for the revenue bonds,—at least until they have been fully serviced and otherwise protected. It is our conclusion that the statute does correctly interpret and reflect the ruling of the Supreme Court, that it is constitutional, and that the present scope of the special fund doctrine is accurately stated in the Dean case, supra, 118 Cal.App.2d at page 635, 258 P.2d at page 594, as follows: ‘If the contract be in such form that the general revenues cannot be drawn upon, even though the special fund proves insufficient for all of the demands that may be made upon it, if no forfeiture of State interest can occur, then the case will not be one outside the scope of the doctrine.’ This is the broad special fund doctrine.
The bonds which are the subject of this proceeding are valid.
Let the writ issue as prayed.
1. See annotations in 72 A.L.R. 688; 96 A.L.R. 1385; 146 A.L.R. 328.
2. ‘The Legislature shall not, in any manner create any debt or debts, liability or liabilities, which shall, singly or in the aggregate with any previous debts or liabilities, exceed the sum of $300,000, except in case of war to repel invasion or suppress insurrection, unless the same shall be authorized by law for some single object or work to be distinctly specified therein which law shall provide ways and means, exclusive of loans, for the payment of the interest of such debt or liability as it falls due, and also to pay and discharge the principal of such debt or liability within 75 years of the time of the contracting thereof, and shall be irrepealable until the principal and interest thereon shall be paid and discharged, and such law may make provision for a sinking fund to pay the principal of such debt or liability to commence at a time after the incurring of such debt or liability of not more than a period of one-fourth of the time of maturity of such debt or liability; but no such law shall take effect until, at a general election, it shall have been submitted to the people and shall have received a majority of all the votes cast for and against it at such election; * * *.’
3. Illinois has gradually moved over into the ‘broad special fund’ group of states. See Poole v. City of Kankakee, 1950, 406 Ill. 521, 94 N.E.2d 416, 423.
ASHBURN, Justice pro tem.
SHINN, P. J., and VALLEÉ, J., concur.