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Court of Appeal, Second District, Division 2, California.

Richard M. CARMAN, individually and on behalf of all persons and entities similarly situated, Plaintiffs and Appellants, v. H. B. ALVORD, Tax Collector of the County of Los Angeles; Mark H. Bloodgood, Auditor-Controller of the County of Los Angeles; Board of Supervisors, County of Los Angeles; City of San Gabriel; City Council of City of San Gabriel, Defendants and Respondents.

Civ. 59757.

Decided: September 29, 1981

Miller & Daar and David Daar, and Erwin Sobel, Beverly Hills, for plaintiffs and appellants. Graham A. Ritchie, City Atty., San Gabriel and Simmons, Ritchie, Segal and Stark, Los Angeles, for defendants and respondents, City of San Gabriel and City Council of San Gabriel.


Plaintiff (appellant) individually and upon behalf of a class of taxpayers1 in the City of San Gabriel, appeals from a judgment of dismissal after sustaining of demurrer without leave to amend. We reverse.


Appellant for himself and the class seeks recovery of tax unlawfully levied. His complaint alleges that the Los Angeles County Tax Collector collected an ad valorem tax imposed by the City of San Gabriel (City), all contrary to the provisions of California Constitution article XIII A, (popularly knows as Proposition 13). The tax objected to is in addition to a one percent (1%) tax already levied and collected. The tax is described on the secured tax bill as being imposed for a “San Gabriel Bond”. In truth there is no such bond. The offending tax is in reality a tax to cover the amount of annual payments by City to an employees' retirement plan. These payments are made pursuant to a contract entered into in 1948 by City and the State Employees' Retirement System, now Public Employees' Retirement System (PERS). (Gov.Code, s 20000 et seq.) Entry into the contract, participation in the state's system and authority to levy taxes necessary to participate were submitted to and approved by the San Gabriel voters in 1948. This was all done pursuant to statute permitting such participation. (Gov.Code, s 20450). These facts are not in dispute. City, nonetheless, claims the tax is lawful under the exemption of subdivision of article XIII A, section 1 of the California Constitution.


Is the levy and collection by City of an ad valorem tax on real property in excess of the one percent (1%) state constitutional limitation valid, where such excess is used to pay City's share of participation under its contract with PERS?

The answer is no.


Article XIII A of the California Constitution reads as follows:

“Article XIII A.

Section 1. (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 valorem taxes or special assessments to pay the interest and redemption charges on any indebtedness approved by the voters prior to the time this section becomes effective.“

This constitutional provision prohibits taxation of real property at more than the described one percent for any purpose, except that particularly described in subdivision (b) set forth above.

Emphasizing the fact of voter approval in 1948, City contends that the contract with PERS created an indebtedness approved by the voters before the constitutional prohibition of article XIII A, section 1, sub. (a) became effective. Therefore, City argues, the tax is used to pay this indebtedness.

The history of the City-PERS contract, including its submission to the voters, the city ordinance, and the actual execution all in 1948, is not disputed. But it is irrelevant to the pivotal and significant question at bench, namely, whether the City-PERS contract created an indebtedness within the meaning of the constitutional provision. We hold it did not. This conclusion is compelled by several considerations.

We first consider that we are interpreting the word “indebtedness” as used in a constitutional enactment. As such the word “must receive a liberal, practical common-sense construction A constitutional amendment should be construed in accordance with the natural and ordinary meaning of its words.” (Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization (1978) 22 Cal.3d 208, 245, 149 Cal.Rptr. 239, 583 P.2d 1281.) In this respect we must also keep in mind that article XIII A was “principally addressed to the subject of real property tax relief.” (Id. at p. 243, 149 Cal.Rptr. 239, 583 P.2d 1281.) In simple terms, its purpose was to limit the burden of real property for the costs and expenses of day-to-day government. This purpose is achieved by the one percent limitation.

On the other hand, it would be unfair to those who have advanced money to local governments and agencies upon the general credit of such agencies, to deprive them of the security of such general credit and the repayment in the time and manner agreed upon. For example, many persons have advanced money to local governments for such things as long-term capital improvements and other building projects, by the purchase of municipal or state bonds. Although not limited to such, bond holders are clear examples of those to whom there is a true indebtedness.

This court has previously recognized that it would be inequitable to leave such bond holders “remediless to recover moneys lent in good faith on the strength of a duly adopted borrower's resolution authorized by statute. A clearer case of impairment of contract than removal of a creditor's sole source of security for repayment of a debt is difficult to imagine.” (Solvang Mun. Improvement Dist. v. Board of Supervisors (1980) 112 Cal.App.3d 545, 550, 169 Cal.Rptr. 391. To not pay such bond holders on the basis of article XIII A, section 1, subdivision (a) would amount “to a direct impairment of the obligation of contract, one which cannot survive the federal constitutional prohibition against state passage of any law impairing the obligation of contracts.” (Ibid.) This result is prevented by subdivision (b) of article XIII A, section 1. To avoid such impairment is the manifest purpose of the subdivision. On the other hand, subdivision (b) is not intended to permit taxation thereunder merely to permit the continuance of a contract which does not create an indebtedness or obligation to repay. Nor does it permit taxation simply to continue a contract which merely provides a method of paying part of the salaries or other day-to-day expenses of government.

The word “indebtedness” legitimately may be construed to mean other than merely the obligation to repay money loaned by another or to repay money earned by another for goods delivered or services given. But in examining the contract at bench in the light of the intendment of subdivision (b) of article XIII A, section 1, the contract simply does not qualify.

The contract here created no indebtedness. PERS did not advance money to the City, nor was there any obligation to do so. The contract was not one for long-range financing of any capital building or acquisition or building purchases. It is a service contract. But it is an annually executory contract. It is a contract terminable at the will of the city by vote of the city council (Gov.Code, s 20560) or by vote of the city electorate (Gov.Code s 20561). Upon such termination there remains no indebtedness, other than possibly the amount for that particular year's service charge.

In our view, the word “indebtedness” as used in subdivision (b) refers to an actual debt of an amount certain for money already received, such as upon the sale of construction or improvement bonds, and to be repaid in periodic payments in installments upon principal and interest with the intent and purpose of redeeming the original debt. Whether this definition is exclusive we need not decide, but it would be unreasonable to believe subdivision (b) was intended to include a terminable agreement to be a member of a retirement system. This point of view of the meaning of indebtedness based on the purposes of subdivision (b) is implicit from the language of Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization, supra, 22 Cal.3d 208, 149 Cal.Rptr. 239, 583 P.2d 1281, and the contemporaneous legislative interpretation noted in Amador at p. 247: “(T)he exemption for prior, voter-approved indebtedness (art. XIII A, s 1, subd. (b)) includes amounts necessary to meet annual payments on the principal as well as the interest on such indebtedness (Gov.Code, s 26912, subd. (b)(3); Rev. & Tax.Code, s 2235, subd. (a)).”

The tax at bench is not used to “pay the interest and redemption charges of any indebtedness” but is used to pay a part of the remuneration of employees' salaries into a plan from which City may at any time withdraw. The contract by which City and its employees participate is subject to the statutory provisions permitting termination leaving no obligation. But more importantly, the contract between City and PERS, unlike the contracts in the cases upon which City relies, County of Shasta v. County of Trinity (1980) 106 Cal.App.3d 30, 165 Cal.Rptr. 18, and Kern County Water Agency v. Board of Supervisors (1979) 96 Cal.App.3d 874, 158 Cal.Rptr. 430, does not contain an agreement that money raised by an ad valorem tax by City shall be paid to the other party, PERS, and used by it for payment upon an indebtedness, bonded or otherwise.

We have no quarrel with the language in the opinion in County of Shasta v. County of Trinity to which City refers. To the contrary, we use it as guidance in taking a common sense and fair look. “The term ‘indebtedness' has no rigid or fixed meaning, but rather must be construed in every case in accord with its context. (Citation.) In Provident etc. Assn. v. Davis (1904) 143 Cal. 253, at page 255, 76 P. 1034, the California Supreme Court indicated that indebtedness means a complete and absolute liability to the extent that payment must ultimately be made, but that it does not necessarily mean that such liability has matured or that it is immediately payable. This holding is in accordance with those of other states that have considered the meaning of the term. (Citation.) There is neither any authority nor any persuasive rationale requiring that the term ‘indebtedness' be given a fixed, inflexible meaning which would exclude the type of payment we are considering here. In short, the term is not a word of art which excludes, as a matter of law, the annual charge due from the new district to the old.” (County of Shasta v. County of Trinity, supra, 106 Cal.App.3d 30, 38-39, 165 Cal.Rptr. 18.)

Significant in the foregoing quotation is the statement that indebtedness “means a complete and absolute liability to the extent that payment must ultimately be made.” At bench there is no absolute liability for which payment must ultimately be made. The contract being executory, as indicated earlier, the obligation to remain in the system and to continue making payments is cancelable.

By contrast, in County of Shasta v. County of Trinity, supra, 106 Cal.App.3d 30, 41, 165 Cal.Rptr. 18, the voters of a smaller district voted to join a larger college district which had a bonded indebtedness. The new district voted to pay an annual charge for the use of the larger district's property in an amount equal to a pro rata share of the amount required for the interest and redemption of the bonded indebtedness incurred in acquiring the property. (Id. at p. 41, 165 Cal.Rptr. 18.) Similarly, in Kern County Water Agency v. Board of Supervisors, supra, 96 Cal.App.3d 874, 158 Cal.Rptr. 430, the voters of the local water agency approved the contract between the local agency and the Department of Water Resources whereby the local water agency agreed to pay to the Department the agency's pro rata share of the cost to the State Water Resources and the redemption of the state water bonds. The amount of payment was to be raised by the local agency from water sold to it, and any deficit needed in order to pay the pro rata share of the state water bonds to be raised by the local water district through ad valorem taxation. In both cases the taxation was held to be valid under section 1, subdivision (b) of article XIII A. But also in each case the purpose of the tax was to pay an agreed share of an existing bonded indebtedness upon the calculated pro rata share. Such feature or anything similar to it is totally lacking from the contract at bench.

City may not lawfully fund its employees' retirement plan either by itself or as a participant in PERS with money collected by taxes in excess of the one percent constitutional limitation. (Cal.Const., art. XIII A, s 1, subd. (a).)

This result may “impose intolerable financial hardships and administrative burdens in different forms and with varying intensity on public entities, programs, and services ” (Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization, supra, 22 Cal.3d 208, 248, 149 Cal.Rptr. 239, 583 P.2d 1281.) Nonetheless, in the language of the court in Amador, “ it is our solemn duty ‘ ”to jealously guard“ ‘ the initiative power, it being ’ ”one of the most precious rights of our democratic process. “ ‘ (Citation.)” (Id. at p. 248, 149 Cal.Rptr. 239, 583 P.2d 1281.) In performing this duty, we must not permit a strained and unreasonable interpretation of individual words of the constitutional provision involved to result in accomplishing the very thing which the constitutional initiative was aimed to prevent.

The judgment is reversed and the cause remanded to the superior court for further proceedings consistent with this opinion.


1.  In a related earlier appeal from a judgment of dismissal, based on the class issue, another division of this court, in an unpublished opinion 57981, held that plaintiff may represent the class in this matter.

BEACH, Associate Justice.

ROTH, P. J., and COMPTON, J., concur.