CITY OF REDONDO BEACH v. TAXPAYERS PROPERTY OWNERS CITIZENS ELECTORS OF CITY OF REDONDO BEACH (1960)

Appeal is taken from a judgment entered in favor of plaintiff, a chartered municipality, against defendants as taxpayers and property owners therein.

Plaintiffs' action seeks a judgment validating a proposed $9,000,000 revenue bond issue pursuant to sections 54580 to 54586 inclusive of the Government Code of the State of California. The proceeds from the sale of the bonds are to be used for the acquisition, construction and improvement of a public small boat harbor in the city of Redondo Beach. The project is to be financed by the proceeds from such bonds issued pursuant to the Revenue Bond Law of 1941, section 54300 et seq., of the Government Code.

On January 9, 1956, the city covenanted with the federal government to install certain facilities necessary and convenient in connection with the development of such harbor in the city in return for the agreement by the government to expend approximately $5,000,000 to construct breakwaters and moles to become an integral part thereof. The government met its commitment and constructed a breakwater protecting a portion of the city's westerly shoreline and a haven now exists for distressed marine craft.

On February 24, 1959, the city council of plaintiff adopted ordinance Number 1674 providing for the submission of the revenue bond proposition to the voters of the city. This ordinance provided in section 2 thereof the purpose for which the bonds are to be issued, the language being substantially identical with the language set forth in section 54309 of the Government Code, and in section 3 that the bonds are to be revenue bonds payable exclusively from the revenues more fully described in the bond proposition, and are not to be payable from ad valorem property taxes or secured by the property taxing power of the city.

At a special election held on April 14, 1959, in the city of Redondo Beach, the bond proposition was submitted to the voters specifically providing, as set forth in the ordinance, that the bonds were not to be payable from the proceeds of property taxes but solely from the following sources: Operating revenues from the harbor to be constructed with the proceeds of the bonds supplemented by net revenues from oil and gas and other hydrocarbon substances derived from the city's tidelands already dedicated to harbor purposes; such part of the city's sales, use and license tax revenues collected from the harbor area as will not exceed the increase in such revenues resulting from the construction of the harbor project.

The results of such election were duly canvassed by the city council and on April 21, 1959, in resolution Number 3297 it was declared and determined that the number of votes cast at said election was 6,383, of which 5,475 were in favor of said proposition and 887 were against and that said proposition accordingly carried by the vote of more than two-thirds (2/3) of the qualified electors of said city voting at an election held for such purpose.

The city council thereupon adopted ordinance Number 1682 which provides for the issuance of the bonds and the manner in which they are to be secured. Section 3 of said ordinance provides that (1) the bonds are to be special obligations secured by a pledge of and lien upon the operating revenues of the harbor to construct which the bonds are to be issued, (2) the general funds of the city are not liable for payment of the bonds, (3) neither the general credit nor the ad valorem taxing power of the city is pledged for the payment of the bonds, (4) no bondholder can compel the exercise of the taxing power of the city except in respect to the sales taxes pledged, and no city property can be forfeited and (5) the bonds are not a debt of the city nor a legal or equitable pledge, charge, lien or encumbrance upon any of its property or any of its income, receipts or revenues except those specifically pledged.

Defendants' contentions on appeal are substantially those presented and decided adversely to them at the trial and may be summarized: First, is there authority for the pledge of sales tax revenues growing out of the project and certain oil and gas revenues already dedicated to harbor purposes, to the payment of the bonds; second, does the making of such pledge constitute the bonds a debt or liability within the meaning of section 19.11 of article XIX of the Charter of plaintiff city and section 18 of article XI of the California Constitution, these charter and constitutional restrictions being substantially identical, and third, if the bonds do constitute such debt or liability, have they been authorized by an election in such manner as to satisfy the constitutional and charter requirements?

As indicated, plaintiff proposes to finance the revenue bonds in part by such portion of the city's sales, use and license tax revenues collected from the harbor area as do not exceed the increase in such revenues resulting from the construction of the harbor project. These revenues are pledged to a special fund.

As said in City of Palm Springs v. Ringwald, 52 Cal.2d 620, 342 P.2d 898, 901: ‘California has recognized the special fund doctrine, which holds that revenue bonds or other obligations of a governmental body payable solely from a special fund do not violate section 18 of article XI of the California Constitution, provided the governmental body is not liable to maintain the special fund out of its general fund, or by tax levies, should the special fund prove insufficient.

‘This doctrine is recognized by decisions of the courts of this state and not by statute. The cases that have recognized and defined the doctrine in this state have placed certain limitations upon its applicability. It has been held, first, that the indebtedness so created must not be an indebtedness or obligation of the governmental body concerned, which in this case is a city.’ The plaintiff has met this requirement.

‘The second requirement is that payments into the special fund beyond the current year, that is, payments in futuro, cannot be a charge upon the general fund; rather, the revenue must be supplied by the agency to be benefited.

‘In each case upholding the special fund doctrine, the payments pledged to be paid into the special fund have been from the revenue of the particular project to be benefited or the district or agency of which the project was to become a part.

‘Prior to the decision in City of Oxnard v. Dale, 45 Cal.2d 729, 290 P.2d 859, there had been some doubt whether the source of revenue for the special fund had to be restricted to the improvements for which the bonds were issued or whether there could be a pledge of revenue from the entire facility or agency to be benefited. The broader view was adopted by this court, and the special fund doctrine in California was clarified accordingly. The rule governing the source of the special fund was stated by Mr. Chief Justice Gibson, [45 Cal.2d] at page 733 [290 P.2d at page 861]: ‘The cases in California are not entirely clear as to the extent of the operation of the special fund doctrine, and there is a conflict of authority on the subject in other states. Some of the courts in other jurisdictions have held that revenue bonds payable solely from a special fund will not be free from the constitutional limitation unless the fund is restricted to the revenues from the particular improvement which is to be constructed out of the proceeds of the bonds in question, but under the prevailing view the doctrine may be applicable where the revenues of the entire existing system, as well as those of the proposed improvement, are pledged. * * *’

‘As hereinabove set forth, in order for the special fund doctrine to apply, payments in futuro cannot be a charge upon the general funds. As was said in City of Oxnard v. Dale, supra: ‘* * * an obligation which is payable out of a special fund is not an ‘indebtedness or liability’ of a governmental body within the meaning of section 18 of article XI of the Constitution if the governmental body is not required to pay the obligation from its general funds, or by exercise of its powers of taxation, should the special fund prove insufficient.''

In the case just quoted the proposed bond issue was to finance the acquiring of property for public parking facilities, a trust fund to be created for the payment of the bonds from revenues from parking meters to be supplemented by a part of city sales and use taxes to be received in future years. The court continued: ‘The words ‘not required to pay the obligation from its general funds' are here controlling. The sales and use taxes which petitioner proposes to pledge are excise taxes and will constitute general funds of petitioner unrelated to the parking district. Therefore, the fund established by the ordinance here in question does not meet the requirements of the special fund doctrine. Accordingly, the sales and use taxes may not be diverted from petitioner's general funds for the purpose proposed for a period beyond the year in which received unless there has been compliance with section 18 of article XI of the Constitution.’

Plaintiff argues that the pledge of a part of the city's sales, use and license tax revenue to the special fund is only such part as is collected in the area immediately adjacent to the harbor and which results from the construction of the project, such part to be measured by the increase in such revenues collected in the harbor area as compared with the revenues collected in that area prior to the new construction. Such funds when collected are nevertheless excise taxes and therefore will constitute general funds of the city unrelated to the harbor improvement. They may not be diverted to the special fund for a period beyond the year in which received unless, as will be hereinafter discussed, there has been compliance with section 18 of article XI of the Constitution.

Defendants additionally challenge the right of plaintiffs to finance the revenue bonds in part from net revenues received by the city as a result of the production or sale of oil or gas derived from tide or submerged lands owned or controlled by the city by virtue of a grant thereof by the State of California. Stats.1915, p. 62.

The terms of the grant provide that said lands shall be used by the city for the establishment, improvement and conduct of a harbor; for the establishment and construction of bulkheads or breakwaters for the protection of its harbor; and the construction, maintenance and operation therein of wharves, docks, piers, slips, quays and other utilities, structures and appliances necessary or convenient for the promotion or accommodation of commerce and navigation. The grant further makes it incumbent on the city to improve the harbor without expense to the state.

A portion of the city's tide and submerged lands have been leased for the production and sale of oil and gas and the city is receiving revenue from wells that have been drilled thereon.

Article XXV of the City Charter establishes a Harbor Improvement Fund and designates two accounts within said fund, one designated ‘Harbor Revenue Account’ and the other ‘Oil Revenue Account.’ The Harbor Revenue Account receives all gross receipts including fees, costs, rentals, charges and other revenues received by the city from the operation of harbor facilities. The Oil Revenue Accounts receives all net revenues received by the city from or in connection with the production or sale of oil, gas and other hydrocarbon subtances. Section 25.1 of this article designates that the Harbor Improvement Fund shall be used in order of priority for: (a) current operating costs of the harbor; (b) payment of principal and interest on any bonds of the city, including general obligation bonds issued for the acquisition, construction, extension or improvement of harbor facilities; (c) any balance remaining after paying or providing for the payment of (a) and (b) above, then due or which will become due during the next ensuing 12 months period, may be used for the purpose of acquiring, constructing, extending or improving harbor facilities.

It is clear that the revenue bonds in question are not to be payable from property taxes nor is the general fund of the city obligated. Funds accruing to the Oil Revenue Account are to be disbursed in order of the priority indicated. The use of such funds where available for the construction and operation of the harbor improvements in question is entirely consistent with both the grant from the state and the charter of plaintiff city. See People v. City of Long Beach, 51 Cal.2d 875, 880, 338 P.2d 177, approving lease of building on tidelands for use of harbor personnel; City of Oakland v. Williams, 206 Cal. 315, 331, 274 P. 328, warehouse for goods; Haggerty v. City of Oakland, 161 Cal.App.2d 407, 413, 326 P.2d 957, 66 A.L.R.2d 718, convention, exhibition and benquet halls for use by trade, shipping and commercial organizations.

Defendants further contend that the small boat harbor to be built by plaintiff is for recreational purposes and does not constitute the establishment of a harbor within the terms of the grant from the state. Based on substantial supporting evidence the trial court found ‘that the harbor of the City [Redondo Beach], improved as contemplated by the bond ordinance, will constitute a public harbor for all purposes of commerce and navigation as required by Article XXV of the City Charter and Chapter 57 of the Laws of the State of California (Statutes 1915) and the acquisition of such harbor improvements will constitute the establishment, improvement and conduct of a harbor as therein contemplated.’

A somewhat analogous situation was presented in the recent case of Ventura Port District v. Taxpayers, Property Owners, Etc., 53 Cal.2d 227, 1 Cal.Rptr. 169, where revenue bonds were involved the proceeds of which were to finance the acquisition and construction of a marina or small craft recreational harbor. In holding that the district could validly proceed the court said [53 Cal.2d at page 230, 1 Cal.Rptr. at page 172]: ‘From the foregoing examples and from evidence received at the trial, it is clear that while the basic character of the proposed development is recreational, consideration has been given to providing needed facilities as a harbor for refuge and for commercial purposes to the extent that such needs are now apparent, as well as to providing flexibility for expansion along such lines as future community needs, in correlation with statewide plans for shoreline development and improvement, may dictate.

‘If the district were already operating a commercial port and as part of its over-all development plan contemplated the providing of facilities for mooring small craft, no question would be raised. However, in the furture the district may be operating a complete commercial and industrial port, of which the present contemplated marina could be but a minor part. There is no prohibition against the construction of a marina as part of an over-all commercial port, and there is nothing in the statute that provides what port facilities or portions thereof must be acquired first. It follows that the fact that it is planned to construct a marina first does not deprive the district of its authority to construct it.’

The proposed small boat harbor is a harbor within the terms of the grant from the state and is a proper subject for expenditure of Oil Revenue Account funds.

The net revenues received by plaintiff city from the production or sale of oil or gas from tide and submerged lands owned by it resulting from the grant by the state are not excise taxes nor do they constitute general funds of the city. By terms of both the grant from the state and the charter of the city they are usable only for specific purposes relating to harbor facilities. These revenues may properly be construed as a part of the entire facility or agency to be benefited and may be pledged to a special fund for the proposed harbor improvement without necessity of compliance with section 18 of article XI of the Constitution. City of Palm Springs v. Ringwald, supra, 52 Cal.2d 620, 342 P.2d 898; City of Oxnard v. Dale, supra.

With the exception of the constitutional question herein discussed all acts and proceedings of the governing body of plaintiff city relating to the revenue bond issue in question and the special election therefor, taken prior to July 6, 1959, were confirmed, validated and legalized insofar as any lack of legislative authority is concerned. This is accomplished by the terms of the First Validating Act of 1959 (Stats.1959, ch. 1447, p. 3723) and which became effective as an emergency measure on the above date. This was followed by the Second Validating Act of 1959 (Stats.1959, ch. 1448, p. 3728) effective September 18, 1959.

Plaintiffs' complaint to determine the validity of the proceedings for the proposed revenue bonds was filed August 10, 1959, more than 30 days after the effective date of the First Validating Act. No other legal proceedings seeking to test the legality of such matter were then pending or undetermined.

These validating acts further confirmed, validated and declared legally effective all acts and proceedings taken by or on behalf of any public law, for the authorization, issuance, sale or exchange of bonds of any such public body for any public purpose prior to July 6, 1959. The term ‘bonds' is defined in the acts as ‘all instruments evidencing an indebtedness of a public body incurred or to be incurred for any public purpose, and all instruments evidencing the borrowing of money in anticipation of taxes, revenues or other incomeome of such body, and all instruments payable from revenues or special funds of such public bodies, and all instruments funding or refunding any thereof or any indebtedness.’

The definition of ‘bonds' as set forth in the cited validating acts encompasses the revenue bonds proposed to be issued by plaintiff. ‘The rule is that the Legislature may supply through a validatung act any authority which it could have supplied prospectively through an enabling act. Cf. City of Fairfield v. Hutcheon, 33 Cal.2d 475, 478[4], 202 P.2d 745.’ Ventura Port District v. Taxpayers, Property Owners, Etc., supra, 53 Cal.2d 227, 1 Cal.Rptr. 169.

We now address ourselves to the question as to whether the city council of plaintiff municipality has complied with section 18 of article XI of the California Constitution and with section 19.11 of article XIX of the charter of plaintiff city in the bond election proceedings. Except that the charter section refers to a 20-year limitation as distinguished from the 40-year limitation on maturities established by the constitutional provision, the sections are identical and will be considered together for the purposes of this discussion. Section 18 of article XI of the Constitution reads as follows: ‘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 * * *’

Bonds may be issued by a local agency pursuant to the provisions of the Revenue Bond Law of 1941 when authorized by a majority vote of all voters voting on the proposition. § 54386, Gov.Code. Ordinance Number 1674 as adopted by the city council provides in section 7 thereof that ‘if the proposition * * * shall be carried at such election by the requisite number of votes, * * *’ the bonds were to be issued. No limitation to a majority vote was expressly contained in the ordinance. Even though the proposition received more than a two-thirds vote of all voters voting thereon, it is contended that the proceedings for the issuance of the bonds are void for failure to designate in ordinance Number 1674, or in some other order or record prior to the election, whether the revenue bonds for the harbor imporvement were to be issued under the Revenue Bond Law of 1941 or some other act or law, or would require a vote in compliance with section 18 of article XI of the Constitution. Plaintiffs argue that so long as the provisions of the Election Code, § 1 et seq., relating to the calling and holding of municipal elections are followed, as was here done, there is nothing in the law requiring the designation referred to. In support of the latter position our attention is directed to City of San Diego v. Potter, 153 Cal. 288, 295, 95 P. 146, and Jaeger v. City of Hillsboro, 164 Kan. 533, 190 P.2d 420.

Even though we assume for the purpose of this discussion that the proceedings followed by the city council for the issuance of the bonds provided a sufficient notification to the electorate that a two-thirds vote would be required for approval, we find it unnecessary to decide this question as the bond election proceedings are defective and violative of section 18 of article XI of the Constitution in other particulars.

In addition to requiring the assent of two-thirds of its qualified electors voting at an election held for the purpose of authorizing a city to incur any indebtedness or liability in any manner for any purpose in any one year in excess of its income and revenue provided for that year other steps are required. Indebtedness in excess of the limit may not be incurred even with the consent of two-thirds of the electors, unless before or at the time of the incurring thereof provision is made for collection of an annual tax sufficient to pay the interest on such indebtedness as it falls due, and for a sinking fund for the payment of principal on or before maturity, which may not exceed 40 years from the time of contracting the indebtedness. 35 Cal.Jur.2d § 272, p. 99; Garrett v. Swanton, 216 Cal. 220, 13 P.2d 725; Mahoney v. City and County of San Francisco, 201 Cal. 248, 257 P. 49; In re City and County of San Francisco, 195 Cal. 426, 233 P. 965.

In the bond proceedings here before us for consideration no provisions were made for the collection of an annual tax to cover accruing interest payments nor for a sinking fund for the payment of principal when the bonds matured. Therefore, the sales, use and license tax revenue of plaintiff city, being general tax funds, may not be diverted to the special fund provided for by the bond proceedings herein, for a period beyond the year in which they are received. By express terms of ordinance Number 1682 these sales, use and license taxes were pledged in support of the bonds for a period of 39 years and six months, being the maturity date thereof and are clearly violative of both section 18 of article XI of the Constitution and section 19.11 of article XIX of the charter of plaintiff city.

Our Supreme Court well stated the purpose of this constitutional provision as applied to the problems of municipal financing when it said: ‘The purpose of section 18, article XI, of the Constitution is not to interfere with the city's exercise of its discretion in determining for what objects of public convenience and welfare its power shall be exercised or for which money may be appropriated. It is designed to afford the people who are required to pay the cost of providing such objects of public convenience and welfare an opportunity to express their approval or disapproval of a long-term indebtedness. The constitutional provision does not prohibit the legislative body of the city from spending any or all of its current income for whatever it deems proper or necessary objects of public convenience or welfare. It simply provides that the legislative body may not encumber the general funds of the city beyond the year's income without first obtaining the consent of two thirds of the electorate.’ City of Palm Springs v. Ringwald, supra, 52 Cal.2d at page 627, 342 P.2d at page 902.

For the reasons heretofore stated the judgment appealed from is reversed.

KINCAID, Justice pro tem.

ASHBURN, Acting P. J., and HERNDON, J., concur.