METHODIST HOSPITAL OF SACRAMENTO v. SAYLOR

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Court of Appeal, Third District, California.

METHODIST HOSPITAL OF SACRAMENTO, a nonprofit corporation, and Verdugo Hills Hospital, doing business as Charles B. Behrens Memorial Hospital, a nonprofit corporation, Petitioners, v. Louis F. SAYLOR, M.D., as Director of Public Health, Department of Public Health, State of California, Respondent.

Civ. 12711.

Decided: March 05, 1971

Hermann E. Lorenz, Jr., Sacramento, and Musick, Peeler & Garrett, Bruce E. Clark, John R. Browning, by Charles Forbes, Los Angeles, for petitioners. Thomas C. Lynch, Atty. Gen., by Walter J. Wiesner, Deputy Atty. Gen., Sacramento, for respondent. Orrick, Herrington, Rowley & Sutcliffe, San Francisco, amicus curiae.

This mandate action tests the constitutionality of a statutory plan by which the State of California would insure loans for private and public hospital construction and expansion.

The plan has its basis in article XIII, section 21.5, of the State Constitution, approved by the electorate in 1968 and authorizing the Legislature ‘to insure or guarantee’ hospital construction loans without regard to other constitutional limitations.1 Following adoption of section 21.5, the 1969 Legislature sought to implement if by enacting the California Health Facility Construction Loan Insurance Law (Health & Saf. Code, § 436 et seq., Stats. 1969 Ch. 970). The program is administered by the State Department of Public Health. Petitioners, Methodist Hospital of Sacramento and Verdugo Hills Hospital Association, both applied to the Director of Public Health for action looking to the insurance of loans for the construction of new hospitals. Expressing doubt as to the validity of the financial provisions of the 1969 legislation, the director refused to take action. This lawsuit followed. Petitioners seek a writ compelling the director to implement the program by adopting necessary rules, by prescribing application forms and by entertaining loan insurance applications.

We first describe constitutional provisions which limit the state's power to spend money and undertake financial obligations. We then analyze the California Health Facility Construction Loan Insurance Law of 1969. We then determine whether the financial devices offered by that law are consistent with constitutional limitations.

Article XVI, section 1, of the California Constitution prohibits the Legislature from creating any state debt exceeding $300,000, except by means of a bond issue approved by the Legislature by a two-thirds vote and by the people by a majority vote. Section 2(a) of the same article (fn. 11, infra) prohibits state bond issue authorizations which take the form of constitutional amendments. Article XIII, section 21, declares that no money shall be withdrawn from the state treasury ‘but in consequence of appropriation made by law.’

Against the background of these constitutional limitations the voters in 1968 approved section 21.5 of article XIII, authorizing the Legislature ‘to insure or guarantee loans' for hospital construction and expansion. According to section 21.5, neither the constitutional restrictions on public indebtedness nor other constitutional limitations are to limit this authority.

The Health Facility Construction Loan Insurance Law declares its purpose ‘to provide, without cost to the state, an insurance program for health facility construction loans * * *.’ (Health & Saf.Code, § 436.1.) It directs the Department of Public Health to administer the insurance program and to adopt necessary rules and regulations. (§ 436.3.) It permits insurance on loans which (in the case of a nonprofit corporation) are secured by a mortgage or trust indenture, or which (in the case of a political subdivision such as a local hospital district) take the form of an authorized bond issue. (§ 436.8.) The loan must contain complete amortization provisions, mature within 31 years and not exceed 90 percent of the total construction cost. (§ 436.8.) The department is to charge each insured borrower an annual insurance premium, not exceeding one-half of one percent per annum of the outstanding debt, and these premiums are to be deposited in a fund in the state treasury known as the Health Facility Construction Loan Insurance Fund, which is permanently appropriated for the needs of the program. (§§ 436.2(g), 436.7, 436.26.)

‘Debentures' form the fiscal device by which the state will make good on its loan insurance. Upon receiving notice of the default of an insured loan, the Department of Public Health may acquire the loan and its security by delivering to the lender debentures equal to the remaining obligation. (§ 436.16.) Alternatively, a lender who has foreclosed and taken possession of the hospital, may transfer it to the department in exchange for debentures issued by the State Treasurer. (§ 436.13.) Upon the default of insured hospital loans of a political subdivision, the state would issue debentures in exchange for the outstanding bonds. (§ 436.14).) The debentures, in multiples of $1,000, would be negotiable, interest-bearing obligations signed by the State Treasurer; would mature at the same time as the insured loan they replace; would be payable primarily out of the Health Facility Construction Loan Insurance Fund, and if not paid out of that fund, out of other money in the State Treasury ‘not otherwise appropriated.’ (§ 436.20.)2 The department's authority to insure loans is limited to $750 million spread through the first five fiscal years of the program, but this ceiling is removed July 1, 1974. (§ 436.28.)

Our analysis leads to the conclusion that the statutory authorization to issue debentures is constitutionally limited to the uncommitted balance in the Health Facility Construction Loan Insurance Fund at the time of issuance; that issue of debentures over that limit would violate the constitutional ban on state indebtedness; that the constitutional authorization to insure or guarantee hospital loans does not insulate the debenture system from that ban.

In empowering the Legislature to insure or guarantee loans, the 1968 constitutional amendment expressly and impliedly trimmed back the constitutional ban on state indebtedness. The trimming went only to the extent of permitting the kind of obligation fairly embraced within the terms ‘insure’ and ‘guarantee.’ Insurance is an agreement by one person to pay money to another on the destruction or loss of someone or something by specified perils. (California Physicians' Service v. Garrison (1946) 28 Cal.2d 790, 803–804, 172 P.2d 4.) A guaranty is a promise to answer for the debt or default of another (Civ.Code, § 2787.) In the protection of lenders, both insurance and guaranty serve approximately the same function. The obligation of the insurer or guarantor does not mature into an unqualified duty to pay money until the primary borrower's default. Relative to the problem at hand, the preeminent feature shared by insurance and guaranty is the secondary character of the insurer's or guarantor's obligation.

Article XIII, section 21.5, permits the Legislature to authorize an array of secondary obligations, some of which may mature into primary obligations, others of which may not. Confining one's expectations to the 1968 constitutional amendment and eschewing the hindsight supplied by the 1969 legislation, one would expect the matured obligations to be paid from the available funds of the insurer or guarantor. An insurance carrier possesses—or creates through premium income—a fund of cash or liquid assets from which to pay the beneficiary when the insured loss occurs. A guarantor may also create or possess a fund out of which to make good. If he does not, he will be forced to borrow money, that is, to incur a new debt in order to pay off the matured debt resulting from his original guaranty.

Conventional insurance programs, government as well as private, depend upon the creation of a fund as a source of loss payments. Two problems confront the creator of such a fund. One is the provision of initial capital; the other is the supply of income to supplement or replace original capital. A number of insurance programs of the federal government are available for comparison. When the Federal Deposit Insurance Corporation was created in 1933, its initial capital of $289 million was supplied in part by the federal treasury and in part by federal reserve banks. These contributions were supplemented by borrowing authority. The initial advances were later repaid out of insurance premium income.3 The Federal Crop Insurance Corporation was authorized to issue capital stock, whose sole subscriber was the federal government.4 The various insurance programs of the Federal Houising Administration are funded in part through the General Insurance Fund (formerly the Mutual Mortgage Insurance Fund) and in part through two government corporations, the Government National Mortgage Association and the Federal National Mortgage Association. Upon the foreclosure of certain FHA-insured mortgage loans the lender may be paid off in cash or by government-guaranteed debentures issued against the General Insurance Fund. (12 U.S.C.A. §§ 1708, 1710, 1735c.) The two federal corporations are authorized to purchase insured mortgages and to issue and sell securities backed by their inventories of mortgages. (12 U.S.C.A. §§ 1717–1719.)

In summary, the capital of these federally sponsored insurance funds has come from relatively small congressional appropriations, internal and external borrowing authorized by Congress and through mortgage banking operations. Income (for example, loan insurance premiums) has been used to augment initial capital or to repay advances or loans originally authorized by Congress. (See Report to the President, Committee on Federal Credit Programs (U. S. Govt. Printing Office, 1963) p. 29; Willmann, The Department of Housing and Urban Development (1967) pp. 72–79.)

In meeting the funding problem of the California hospital loan insurance program, the 1969 Legislature might have supplied a fiscal patrimony by appropriating public money.5 It chose not to do so. Indeed, the Legislature frankly declared its purpose to provide—somehow—an insurance program ‘without cost to the state.’ (Health & Saf. Code, § 436.1.) Borrowing, a congressional device for supplying initial capital, was not available to the Legislature, because the Federal Constitution does not inhibit government borrowing while the California Constitution does. According to the 1969 legislation, the Health Facility Construction Loan Insurance Fund starts off with no initial capital and only one established prospect of future capital—the future premiums paid by future recipients of future loans.

Foreseeing a likelihood that premium income would be inadequate to the needs of the fund, the Legislature chose the debenture device. A debenture is simply one form of evidence of debt. (United States v. Leslie Salt Co. (1956) 350 U.S. 383, 388, 76 S.Ct. 416, 100 L.Ed. 441; People v. Leach (1930) 106 Cal.App. 442, 448, 290 P. 131.) Debentures, written evidences of debt, are to be delivered to lenders in exchange for the mortgaged hospital property. Because the debentures are negotiable, lenders may sell them on the open market. Whenever they mature, they may be presented to the State Treasurer, who is directed by statute to pay the holder.6 Although the Health Facility Construction Loan Insurance Fund is ‘primarily liable,’ principal and interest of the debentures are ‘fully and unconditionally guaranteed * * * by the State.'7

At this point a marked distinction emerges between the guaranty authorized by the 1968 constitutional amendment and that described in the 1969 debenture statute. Although technically denoting a secondary obligation to make good on the default of the primary debtor, the term ‘guarantee’ may also be used to describe a primary rather than secondary obligation. (Jones v. Wilton (1938) 10 Cal.2d 493, 497, 75 P.2d 593; Roberts v. Reynolds (1963) 212 Cal.App.2d 818, 824, 28 Cal.Rptr. 261.) In the guaranty mentioned in section 436–20 of the Health and Safety Code, nothing—neither primary debtor nor contingent event—stands between the State Treasurer and the holder of debentures. The latter is an immediate and direct creditor of the state. From its inception, the debenture is a primary pledge of payment, running directly from the public treasury to the holder.

The ‘primary’ liability of the Health Facility Construction Loan Insurance Fund does not armor the general revenues and general credit of the state against the pledge, for the 1969 law does not confine the aggregate of debentures to the assets in the special fund. The so-called primary liability of the fund is meaningless in relation to debentures exceeding the fund's uncommitted balance. Instead of pledging the state's general credit to establish an insurance fund at the program's inception, the 1969 legislation only postpones the pledge until debentures are issued at the time of loan default. Without an authorizing vote of the people, the later pledge is no more permissible than the earlier. The 1968 constitutional amendment permits secondary obligations by way of insurance or guaranty. These obligations could have been funded by supplying initial capital. The 1969 legislation withholds that kind of funding and transcends the constitutional permission by calling for debentures which pledge the credit of the state as a primary obligor.

This is not a case where the obligation withholds a pledge of general credit by confining the public's liability to a special, self-supporting fund. (See City of Palm Springs v. Ringwald (1959) 52 Cal.2d 620, 624–625, 342 P.2d 898; In re California Toll Bridge Authority (1931) 212 Cal. 298, 298 P. 485.) Nor is the debenture a future, contingent obligation or one calling for payment when and if future consideration is furnished. (See Dean v. Kuchel (1950) 35 Cal.2d 444, 218 P.2d 521; American Co. v. City of Lakeport (1034) 220 Cal. 548, 557–558, 32 P.2d 622.) Rather, it constitutes an immediate and unconditional promise to make future payment, creating a debt which violates the constitutional limitation on state indebtedness. (Garrett v. Swanton (1932) 216 Cal. 220, 13 P.2d 725; Mahoney v. City and County of San Francisco (1927) 201 Cal. 248, 257 P. 49; In re City and County of San Francisco (1925) 195 Cal. 426, 233 P. 965; Chester v. Carmichael (1921) 187 Cal. 287, 201 P. 925.)

A group of California decisions supplies foothold for the claim that the existence of an effective appropriation at the time the state obligates itself prevents inception of a ‘debt’ in the constitutional sense. (Riley v. Johnson (1936) 6 Cal.2d 529, 531–532, 58 P.2d 631; Riley v. Johnson (1933) 219 Cal. 513, 520–521, 27 P.2d 760; People ex rel. McCullough v. Pacheco (1865) 27 Cal. 175, 176, 220–221.) It is thus necessary to inquire into the existence and character of an appropriation for payment of the hospital debentures.

When article XIII, section 21, of the State Constitution declares that no payment shall be drawn from the Treasury but in consequence of appropriation made by law, it means only that no money shall be drawn except in pursuance of law. (People ex rel. McCauley v. Brooks (1860) 16 Cal. 11, 28.) No set formula is necessary to create an appropriation. (City & County of San Francisco v. Kuchel (1948) 32 Cal.2d 364, 366, 196 P.2d 545.) Appropriations may be made in anticipation of future treasury receipts. (Ingram v. Colgan (1895) 106 Cal. 113, 117–118, 38 P. 315.) The requisites of an appropriation are certainty of purpose, of amount and of the treasury fund which is to stand the expenditure. (Ingram v. Colgan, supra; Ryan v. Riley (1924) 65 Cal.App. 181, 187, 223 P. 1027.) The State Treasury comprises a series of special funds and the general fund, the latter consisting of all treasury receipts not earmarked by law for a special fund. (Gov.Code, § 16300; see also Gov.Code, §§ 12440, 17000.) A special fund may be permanently appropriated without specifying an amount, for the appropriation is limited to the fund's earmarked income. (Board of Fish and Game Com'rs of State of California v. Riley (1924) 194 Cal. 37, 42–43, 227 P. 775; Ryan v. Riley, supra, 65 Cal.App. at pp. 187–190, 223 P. 1027.) Because the general fund is theoretically inexhaustible, the legislature must place a maximum limit on each general fund appropriation. (Ingram v. Colgan, supra; Stratton v. Green (1872) 45 Cal. 149, 151; Ryan v. Riley, supra.) The need for a ceiling on general fund appropriations is satisfied if the limit of expenditure is ascertainable from any statutory source. (Riley v. Johnson, supra, 219 Cal. at p. 520, 27 P.2d 760; Wood v. Riley (1923) 192 Cal. 293, 303, 219 P. 966.) If an appropriation bill specifies no other fund, the appropriation is from the general fund. (Ingram v. Colgan, supra; Proll v. Dunn (1889) 80 Cal. 220, 226–227, 22 P. 143.)

One provision of the 1969 law, Health and Safety Code section 436.26, appropriates the entire Health Facility Construction Loan Insurance Fund to the purposes of the loan insurance program. Because the Loan Insurance Fund is a special, limited fund, the Legislature may make a continuing appropriation of it and its income. Health and. Safety Code, section 436.20 (fn. 2), is designed as a counterpart appropriation of general fund money for the payment of matured debentures. If the Loan Insurance Fund fails to pay, section 436.20 directs the State Treasurer to pay holders ‘the amount thereof which is authorized to be appropriated, out of any money in the Treasury not otherwise appropriated, * * *.'8 The phrase ‘not otherwise appropriated’ adequately identifies the general fund as the subject of appropriation. Section 436.20 does not itself designate the maximum amount of the appropriation. The insuring authority of the Department of Public Health is limited to $750 million spread through the five fiscal years preceding July 1, 1974, and is unlimited from that point onward. (Health & Saf.Code, § 436.28.) While the aggregate of defaulted hospital loans cannot be fixed, there is an outside limit of $750 million on the potential liability of the general fund. So fixed and so limited, section 436.20 makes a constitutionally valid appropriation from the general fund. Beyond the theoretical ceiling of $750 million, the ultimate amount is not ascertainable. Hence the general fund appropriation is valid only up to the $750 million ceiling (Ryan v. Riley, supra, 65 Cal.App. at pp. 187–188, 223 P. 1027.)

The decisions9 holding that a ‘debt’ is negatived by the passage of an appropriation have only limited scope. The ongoing functions of the state demand a continuum of activity, fiscally authorized by existing appropriations but actually financed out of future revenues. In one sense such commitments are ‘debts,’ but not necessarily debts within the meaning of the constitutional prohibition. The holdings in question are confined to statutory activities of the state government financed out of established revenue sources. Their limitation is described in Veterans' Welfare Board v. Jordan (1922) 189 Cal. 124, 134, 208 P. 284, 288: ‘It will be observed that all these cases dealt with statutes providing for annual payments to be met by annual tax levies. The decisions do not, therefore, apply to a single indebtedness, exceeding $300,000 evidenced by bonds of the state. Such an indebtedness, when created by the legislature without the vote of the people, was held to be invalid under the provisions of article 8 of the Constitution of 1849 in the case of Nougues v. Douglass, supra [7 Cal. 65], notwithstanding the act in question made provision for payment of the bonds as they accrued.’

Veterans' Welfare Board v. Jordan points out that a state bond issue creates a debt within the scope of the constitutional debt limitation even though the authorizing statute provides ways and means for their repayment. (189 Cal. at pp. 134–135, 208 P. 284.) Like bonds, the hospital debentures would similarly indebt the state even though the authorizing statute makes an effective, limited appropriation for their payment. The 1969 legislature could not constitutionally authorize the issue of certificates of indebtedness by the expedient of presently appropriating the revenue of future years as a source of payment.

Because the debentures are practically indistinguishable from bonds, amicus curiae suggests that article XIII, section 21.5, is not a valid part of the State Constitution. He grounds his suggestion upon section 2(a) of article XVI, which prohibits state bond issue authorizations which take the form of constitutional amendments.11 On the assumption that this issue may be raised after the voters have approved such an amendment, it is not troublesome here. It is not troublesome because, as we have held, section 21.5 does not authorize debentures.

At this point we reach the question of the writ of mandate. The writ is discretionary. In weighing the peremptory writ the court considers not only the parties' respective rights and duties, but also the writ's practical effect; it should withhold the writ where it will promote confusion and disorder or otherwise work injustice. (Bruce v. Gregory (1967) 65 Cal.2d 666, 670–671, 56 Cal.Rptr. 265, 423 P.2d 193; Bashore v. Superior Court (1907) 152 Cal. 1, 3–4, 91 P. 801.)

We have concluded that the constitutional debt limit bars debentures exceeding the assets of the Health Facility Construction Loan Insurance Fund. Debentures within the limits of that fund do not constitute a debt in the constitutional sense, for they would be issued against fully appropriated money on hand. (Riley v. Johnson, supra, 219 Cal. at pp. 520–521, 27 P.2d 760.) The debenture provisions of the 1969 law are thus invalid in part. The partially invalid debenture scheme is severable from the remainder of the 1969 legislation. Aside from its partially invalid phase, the 1969 law is within the authority extended by article XIII, section 21.5, of the Constitution and may, from a constitutional standpoint, operate as a complete loan insurance program. It has operational capacity because several provisions of the legislation appear to permit insurance benefits in the form of warrants drawn directly on the loan insurance fund, which is continually appropriated for the purpose of the program. (Health & Saf. Code, §§ 436.15, 436.17, 436.26.) However truncated the program, the state's obligations as insurer may be met through debentures within the limits of the Loan Insurance Fund or by warrants drawn against the fund.

Thus, legal considerations do not prevent the state's administrative officials from placing the program in operation. Possibly, constitutionally forced curtailment of the program will pose practical impediments. Conceivably, the constitutional limit on debentures may destroy the utility of the entire plan. Conceivably, premium income may be far too skimpy to create an insurance fund attractive to potential lenders. Whatever the impediment to the curtailed program under existing law, it is one of financial acceptability rather than legality.

Because the constitutionally permissible phases of the insurance plan seem workable as a matter of law, we have decided to issue a peremptory writ commanding their implementation. The writ may be issued only after the passage of 60 days from the filing of this decision. (People v. District Court of Appeal (1924) 193 Cal. 19, 222 P. 353.) If, for practical reasons unknown to us, the writ places the Director of Public Health or the state's fiscal officers in an untenable position, they may apply for relief. The court will mold its writ to reasonable practicalities. Moreover, the Legislature is now in session and may provide statutory sustenance to the program.

Let a peremptory writ issue as prayed.

FOOTNOTES

1.  The full text of article XIII, section 21.5, is as follows:‘The Legislature shall have the power to insure or guarantee loans made by private or public lenders to nonprofit corporations and public agencies, the proceeds of which are to be used for the construction, expansion, enlargement, improvement, renovation or repair of any public to nonprofit hospital, hospital facility, or extended care facility, facility for the treatment of mental illness, or all of them, including any outpatient facility and any other facility useful and convenient in the operation of the hospital and any original equipment for any such hospital or facility, or both.‘No provision of this Constitution, including but not limited to, Section 1 of Article XVI and Section 18 of Article XI, shall be construed as a limitation upon the authority granted to the Legislature by this section.’

2.  At this point Health and Safety Code section 436.20 provides in part:‘* * * All such debentures shall be exempt. both as to principal and interest, from all taxation now or hereafter imposed by the state or local taxing agencies, shall be paid out of the fund, which shall be primarily liable therefor, and shall be, pursuant to Article XIII, Section 21.5 of the California Constitution, fully and unconditionally guaranteed as to principal and interest by the State of California, which guaranty shall be expressed on the face of the debentures. In the event that the fund fails to pay upon demand, when due, the principal of or interest on any debentures issued under this chapter, the State Treasurer shall pay to the holders the amount thereof which is authorized to be appropriated, out of any money in the Treasury not otherwise appropriated, and thereupon to the extent of the amount so paid the State Treasurer shall succeed to all the rights of the holders of such debentures. The fund shall be liable for repayment to the Treasury of any money paid therefrom pursuant to this section in accordance with procedures jointly established by the State Treasurer and the department.’

3.  See descriptive pamphlet published by FDIC June 15, 1966: see also, Randall, The Federal Deposit Insurance Corporation: Regulatory Functions and Philosophy. 31 Law and Contemporary Problems 696, 697–700 (1966).

4.  See 7 Kan.L.Rev. 361–362 (1959).

5.  Accompanying the 1969 legislation was an appropriation of $94,754 for the Health Facility Construction Loan Insurance Fund to defray the program's administrative expenses during the 1969–1970 fiscal year ending June 30, 1970 (Stats. 1969, ch. 970, § 3.) The parties have not called our attention to any later appropriations to the fund.

6.  Health and Safety Code, section 436.20, quoted in footnote 2, supra.

7.  Ibid.

8.  The phrase ‘authorized to be appropriated’ is a mutation in California appropriation law, apparently Imported from the Federalese. According to congressional custom, one bill authorizes an appropriation, and a separate bill, not necessarily in the same amount, makes the appropriation. California legislative practice dispenses with the preliminary statutory authorization. As petitioners have pointed out, section 436.20 seems to have been modeled after a provision of the FHA legislation (12 U.S.C.A. § 1710(d)) which authorizes debentures in exchange for defaulted FHA loans and pledges federal credit to the payment of these debentures. The modeling was too close. A salient distinction between the federal and state debenture plans is that the former is untroubled by a constitutional limit on public indebtedness.

9.  Riley v. Johnson, supra, 6 Cal.2d 529, 531–532, 58 P.2d 631; Riley v. Johnson, supra, 219 Cal. at pp. 520–521, 27 P.2d 760; People ex rel. McCullough v. Pacheco (1865) 27 Cal. 176, 220–221.

11.  Article XVI, section 2(a) provides:‘No amendment to this Constitution which provides for the preparation, issuance and sale of bonds of the State of California shall hereafter be submitted to the electors, not shall any such amendment to the Constitution hereafter submitted to or approved by the electors become effective for any purpose.‘Each measure providing for the preparation, issuance and sale of bonds of the State of California shall hereafter be submitted to the electors in the form of a bond act or statute.’

FRIEDMAN, Associate Justice.

PIERCE, P.J., and JANES, J., concur.