SOUTHERN SERVICE CO v. LOS ANGELES COUNTY CITY OF LOS ANGELES (1938)

Plaintiff Southern Service Company, Ltd., and defendant County of Los Angeles have each appealed from portions of a judgment determining the validity of various items of the Los Angeles tax levy for the fiscal year 1933–1934.

On March 4, 1935, the board of supervisors of Los Angeles County denied a claim for refund which had been presented by plaintiff pursuant to section 3804 of the Political Code, and which was predicated upon alleged invalidity of the 1933–34 levy for three separate funds of the Los Angeles City School District, four funds of the Los Angeles City High School District, and one fund of the Los Angeles Junior College District; also for the General Fund of the City of Los Angeles and four funds of the County of Los Angeles. This action for refund followed, based upon the claim which was incorporated as an exhibit to the complaint.

Defendant county answered. Later both complaint and answer were amended and, over protests of plaintiff, the City of Los Angeles was permitted to intervene and to defend the second cause of action, which attacked the city levy. Upon these pleadings the cause went to trial. At the close of trial the court allowed plaintiff to file an amended complaint to conform to proof, and separate answers thereto were filed by defendant county and intervener city. Although the complaint as amended to conform to proof also incorporated plaintiff's claim, the allegations of that pleading asserted rights to refund different from those set up in the claim. However, upon this appeal counsel for all the parties have waived any technical objection to the form of the claim.

The trial court found for plaintiff with respect to all issues save two, one of which concerns a levy for bond interest to accrue in an eighteen months period and the other the levy made by the city. All items of levy except these two the court adjudged to be in part illegal, excessive, and void, and it ordered the county to refund to plaintiff the sum of $50.16 and costs. It further declared the city tax to be valid, and ordered that the city recover costs from plaintiff. The county appealed from all of the judgment except that portion relating to the two levies mentioned. Plaintiff appealed from the latter portion of the judgment.

The first question presented by the appeal of the county is this: Were the school district rates illegal because the levy was made in even cents per hundred dollars of assessed valuation, instead of in cents and fractions thereof, expressed in several decimal places. The facts with reference to this contention are illustrated by the following table:

It will be noted that application of the even cent rate resulted in an excess levy of $0.515 per $100 of assessed valuation, or an estimated return of $719,864.34 more than would have been produced by application of a rate carried to four decimal places. While the above table shows a total ratio of excess to need of 5.14%, the extent to which application of an even cent rate might result in a highly exorbitant levy is well illustrated by the sixth item relating to the levy for the Los Angeles City High School 1910 operative bonds. A tax rate of $0.0008 upon the assessed valuation amounts to $10,870.20. Making the levy in terms of an even cent, $0.01, resulted in an excess levy of $0.0092, producing an estimated excess revenue of $149,330.20, or a 1382% excess. It may be added that the figures which have been stated show only the probable excess levy caused solely by the even cent rate, without considering the effect of the further alleged excess levy caused by understatement of the taxes on securities and solvent credits, which presents another question for decision. Under the findings of the trial court on that issue, the excess levy caused by application of the even cent rate was larger than the amounts presented in the foregoing table.

The trial court found with respect to each of the school district items that the even cent levy on property on the realty roll ‘was in excess of a rate wholly sufficient to produce’ the budgeted requirement to the extent, upon each $100 of assessed valuation, of the difference between the even cent levy and the four decimal point levy which would have met the requirement. By the judgment plaintiff was awarded a refund of tax to the extent of the assessment resulting from the excess levy so caused.

The School Code provides for the determination of school district tax rates in section 4.374, as added by St.1931, p. 2493, which reads: ‘The board of supervisors must determine the rate of district tax necessary to be levied as follows: They must deduct ten per cent from the equalized value of the last general assessment-roll for the district and the amount required to be raised, divided by the remainder of the assessment-roll is the rate to be levied.’ The section does not specify the application of either an even cent or of a closer formula. It merely requires that the rate be found by dividing the requirement by ninety per cent of the assessed valuation. Section 3714 of the Political Code also relates to this subject. Subdivision 5 provides for the fixing of county rates in general, including school district rates, as follows: ‘Levy of taxes. The county board of supervisors shall, not later than the first day of September, fix the rates of county and district taxes designating the number of cents levied for each fund upon each one hundred dollars of assessed value of the county for the current fiscal year to raise the amount of the estimated expenditures as finally determined, less the total of the estimated revenues * * *.’

The county contends that section 3714 is controlling and requires application of an even cent formula in the fixing of school rates; that the word ‘cents' as used in the section means one hundredth of a dollar, not including fractions of cents. Plaintiff, on the other hand, asserts that the word ‘cents' is used as an expression of value and includes fractions or multiples of the unit of value, as well as the unit itself. The latter construction of the word is the correct one.

The statute requires that the levy be made ‘to raise the amount of the estimated expenditures * * *.’ This requirement can not reasonably be fulfilled by application of an even cent formula which produces an unreasonably excessive sum above the estimated expenditures. It is of course true that no formula can be applied to produce the exact estimate to the penny. Even with a rate fixed in terms of four decimal places, there is usually a slight excess, and this is allowable. But certainly there is no justification for so enlarging the rate by fixing it in even terms of the specified unit of value without including fractions, that a material and unreasonable surplus is produced. This court, in the case of Otis v. Los Angeles County, 9 Cal.2d 366, 70 P.2d 633, said (page 637): ‘It seems clear that after the valuations are fixed, and the sources of income and the amounts thereof are known, and after the board determines the amount to be spent, the fixing of the tax rate involves no discretion at all. After all the factors are known, the fixing of the rate is merely mathematical calculation. The board has no ‘legislative’ or other kind of discretion to make this calculation other than the science of mathematics dictates. Nor has it ‘discretion’ to make a mathematical error. Nor has it power to raise by taxation materially more than is required for expenditures except as permitted by law. It is true that any tax rate, made up as it is of various items each assessed separately, and expressed in a rate of four decimal places, with not produce exactly the amount of all the appropriations. There is usually a slight excess—but that is made necessary because of the limitations of the formula applied, and to the extent of that excess the levy is valid.'

This holding, and the construction of the word ‘cents' as used in section 3714, supra, to include fractions of that unit of value, does not mean that any levy other than one made by application of a rate carried to four decimal places, is necessarily excessive. To what decimal place the rate of levy should be extended is nowhere prescribed, and a rate in any of several extensions of the fraction may be proper. The exhibits produced upon the trial of this cause show that over a period of years levies have been made through the application of rates fixed in terms of anywhere from two to five or more decimal places. Such levies are referred to in many decided cases without question as to the propriety of the rate formula. In Esberg v. Badaracco, 202 Cal. 110, 259 P. 730, the rate had been fixed in terms of five decimal places. The case of Otis v. Los Angeles County, supra, considered a levy extended to four decimal points. The issue presented in Pasadena Junior College Dist. v. Board, 213 Cal. 61, 13 P.2d 678, arose over a tax assessed with a three decimal point rate.

It would seem that under the statute the rate, whether expressed in terms of even cents, or carried to three, four, five or more decimal places, will result in a valid levy if the application of that rate will produce approximately the budget requirement, with no more than a slight excess allowable to cover the limitations of the formula. Otis v. Los Angeles County, supra. But the rate will be held to result in an invalid levy if its application will produce a material and unreasonable excess over the estimated requirement. What amount constitutes the allowable slight excess, and what amount constitutes a material and unreasonable excess, is always a question of fact for the trial court. In the present case the trial court found as to each item that the even cent rate ‘was in excess of a rate wholly sufficient to produce’ the budgeted requirement, and it fixed a sufficient. rate in terms of four decimal places. This action was proper and the findings will not be disturbed, supported as they are by evidence that application of the even cent rate resulted in a levy which was excessive to an unreasonable and material degree.

Several of the further questions presented by the appeal of the county concern issues identical with or similar to those determined in Otis v. Los Angeles County, supra, a case involving the validity of levies for the fiscal year 1933–34, wherein this court reviewed some of the very county levies which are here under attack. One of these questions relates to the proper method of computation of the legal maximum of the unappropriated reserves of the county general fund. Section 3714 of the Political Code provides: ‘The county board of supervisors may, if it deem advisable, set aside a portion of each fund, other than school funds, to be known as ‘unappropriated reserves' which shall not exceed ten per cent of the total amount of said fund exclusive of surplus * * *.’ Subdivision 3. The question is whether, in figuring ‘ten per cent of the total amount’, the unappropriated reserves allowance should be included in the base from which the 10% is taken. Plaintiff contends, and the trial court adopted this view, that it is apparent from the context of the statute that ‘the total amount’ means the sum total of the items of the fund prior to computation and inclusion of the ten per cent. This construction is correct. The point is determined in Otis Case in the following language:

‘The defendant * * * contends that both the ‘unappropriated reserves' and the ‘general reserves' should be added to the ‘appropriations' in arriving at the percentage for ‘unappropriated reserves.’ The contention cannot be sustained as to the inclusion of the ‘unappropriated reserves.’ While it is true that the ‘unappropriated reserves' is a budget item, and therefore properly included in the budget for the purpose of fixing the tax levy, it is not an item which enters into the computation of the 10 per cent. of the several funds in arriving at the amount of the ‘unappropriated reserves.’ The weakness of the defendant's position in this respect is that, according to its contention, the fund upon which the statutory 10 per cent. limitation is to be computed includes the very amount which the computation aims to disclose. Under no construction of the statute would it be permissible to add to the definite amount which forms the basis of the ascertainment of the permissible 10 per cent. the 10 per cent. itself. The ‘unappropriated reserves' should therefore not have been included in the base for the ascertainment of that very fund.’

The county, in the present case, has asked us to reverse this holding. We have re-examined the question in the light of the further arguments presented in the briefs herein, but have found nothing which would cause us to alter our former conclusion.

In the computation of the unappropriated reserves, the trial court in the present case followed the same method as was used by the trial court in the Otis Case, and figured the maximum as ten per cent of the appropriations, less surplus, without including the general reserves. This was erroneous. The maximum should have been computed as ten per cent of the appropriations plus general reserves after deduction of surplus. The point is also decided in the Otis Case, where it is said: ‘It is clear that the ‘general reserves' should have been included in the base for the ascertainment of the 10 per cent. for ‘unappropriated reserves.’ The ‘general reserves' constitute a budget item. The fair and we think the only reasonable construction of the statute requires that the fund or funds upon which the 10 per cent. for ‘unappropriated reserves' is to be figured include all of the budget items to be raised by taxation for county general fund purposes. Included therein would be the fund of ‘general reserves,’ the amount of which is subject to the reasonable discretion of the board of supervisors, and is not dependent upon a limitation otherwise, nor upon a percentage of any other fund or combination of funds. The result of the inclusion of this fund would be that the base for the ascertainment of the percentage should be increased by the amount of the ‘general reserves,’ and the refund to the plaintiff decreased accordingly.' The application of this holding in the present case will require a decrease in the amount of the refund allowed plaintiff by the trial court.

We may also look to the Otis Case to find the proper determination of another question, to wit: Is not a tax levy on the realty roll of a county or school district void to the extent that tax levies for the same fund and same year on solvent credits, securities, and unsecured personal property were in whole or (as here) in part excluded from the computation of such levy?

The trial court answered this question in the affirmative. It found (after making allowance for the portion of taxes which were considered in the respective levies) that solvent credits, securities, and unsecured personal property taxes in the following net amounts had been disregarded in computation of the following levies:

The trial court found that these omissions resulted in a combined excessive tax rate of more than $0.08, and it awarded plaintiff a refund of the tax assessed by reason of such excess. This award was proper. The holding in Otis v. Los Angeles County, supra, with respect to the impropriety of disregarding taxes levied on securities and solvent credit rolls in computing the county tax rate is directly in point. Applied to the facts of this case that holding supports the trial court's conclusion that it was improper to exclude in whole or in part, from computation of the levies here in question, tax levies for the same funds and the same year on securities and solvent credits and also on unsecured personal property as well. See discussion in Otis v. Los Angeles County, supra, at pages 635–640, from which the following is quoted: ‘This [1933–34 county] levy was made on real and secured personal property. In addition to this levy the county had other sources of income such as certain estimated miscellaneous receipts. Also under article 13, section 9a, of the Constitution as added in 1924, a special rate was fixed for unsecured personal property, and pursuant to the 1928 constitutional amendment of article 13, section 16, of the Constitution, there was a special statutory rate on solvent credits and securities. Political Code, § 3627a (as amended by St.1931, p. 2479), as it read at the time here involved, fixed this rate at one mill per dollar of valuation on solvent credits and two mills per dollar of valuation on stocks and bonds. The proceeds of the taxes levied on solvent credits and securities are divided between the various tax agencies as provided in section 3627a. On the present appeal, as far as the point under discussion is concerned, we are interested only in the proceeds of the tax on solvent credits and securities. * * * It is * * * an admitted fact that in fixing the levy on real and secured personal property the board of supervisors gave no consideration to and did not include the revenue anticipated from the levy on solvent credits and securities. It is obvious that after the amount of all appropriations was fixed by the board of supervisors, so that the amount of money to be raised from all sources was known, a tax levy raising this amount solely on real and secured personal property, and completely disregarding such a known material source of revenue, necessarily resulted in an excessive levy on the real and secured personal property.’

The county asserts as a special defense that the above doctrine (even if conceded to be correct and applicable to the eight school levies) should not be applied in this cause to the four levies for county funds because plaintiff lost its right to attack those levies when it failed to appear and protest the preliminary budget in the manner provided by section 3714 of the Political Code. Admittedly plaintiff did not appear at the hearing on the preliminary budget and admittedly also that budget showed no items of revenue to be derived from taxes on unsecured personal property, solvent credits, or securities. Failure to protest the omission, however, did not preclude plaintiff from later raising the issue that in these respects the levy was excessive. This is so because plaintiff's challenge is directed to the use of an alleged erroneous formula in computing the tax rate rather than to error in preparation of the budget. Section 3714 does not require the preliminary budget to contain an estimate of tax revenues to be derived from taxes on unsecured personal property, solvent credits, or securities. This estimate may not be available on or before July 10th when the proposed budget items are filed with the county auditor (sec. 3714, subd. 1). The section, by express terms, requires only an estimate in the budget of probable revenues ‘from sources other than taxation’. The duty of the board to make allowance for anticipated revenues from the taxable sources here in question arises in connection with its computation of the tax rate. At the time the rate is fixed, which is not later than September 1st (sec. 3714, subd. 5), the board knows the valuation of unsecured personal property, the tax base thereon specified by article 13, section 9a of the Constitution, and the estimated amount of taxes to be received from this source. The board also knows the valuation of solvent credits and securities, the rate thereon fixed by statute (Pol.Code § 3627a; art. 13, sec. 16, Constitution), and the estimated amount of taxes to be received. This income must be considered in fixing the tax rate for county and district levies.

The duty to account for it arises by operation of law from the provisions which bring it into being. In computing the rate the board must apply a correct formula in which it has not only made allowance for ‘estimated revenues from sources other than taxation’, as expressly required by section 3714, subd. 5, but has also met the implied requirement to consider and account for all estimated tax income and revenue from all known tax sources, so that the amount of the levy will be limited to the needs of the county as fixed by the budget. As stated in Otis v. Los Angeles County, supra: ‘In the present case the board properly exercised its discretion in fixing the amount of the appropriations. It knew the assessed valuation of real and secured personal property. It knew the amount of surplus and the amount of miscellaneous revenue. It also knew the valuations of the solvent credits and securities in the county, and it knew that the rates in reference to them were fixed by statute on a state-wide basis. Obviously, to compute the proper tax rate, all that was required was for the board to take the total of all appropriations, deduct surplus, deduct all anticipated revenue, including the known anticipated revenue on solvent credits and securities, and the balance represented the amount to be raised by taxation on real and secured personal property. It is also obvious that, by omitting to deduct from the amount to be raised by the levy on real and secured personal property the known amount to be raised by the levy on solvent credits and securities, the properties on the realty roll, to that extent, were compelled to bear an undue portion of the burden.’ These statements apply equally to tax revenues from unsecured personal property.

It is clear that the action of the board of supervisors in fixing the rates of county and district taxes by the use of an incorrect formula, which excludes known anticipated revenues from solvent credits, securities, and unsecured personal property taxes, is not an error which may be foreseen at the time of proceedings for preparation of and hearing on the preliminary budget. Therefore, a taxpayer is not barred from raising the issue by a failure to appear or object at the budget hearing.

As a second special defense the county urges that if it be conceded that the tax rate was excessive and illegal at the time of levy, nevertheless it would be inequitable to permit plaintiff to obtain a refund for the following reasons: The record shows that because of nonpayment of taxes levied on the realty roll, there was an under-realization in 1933–34 of income sufficient to cover the requirements shown on the face of the budget, even after allowing full credit for the actual tax revenues which were collected (in a sum exceeding estimates) from solvent credits, securities, and unsecured personal property. The county contends that a taxpayer claiming a refund based upon an alleged excessive tax rate, applicable alike to all taxpayers, should receive only his just proportion of the actual excess produced by application of the invalid rate and that this actual excess must be shown to exist as a surplus or trust fund from which refunds may be made; that if there is no actual excess, then the taxpayer has but paid his fair share of the cost of government, and it is inequitable to award him a refund which taxpayers of later years must carry the burden of paying. The answers to this contention are many. An under-realization in cash of budget requirements of the year of levy is not proof that application of the illegal rate will not produce an actual excess, because consideration must be given to the specific or assumed allowance for anticipated delinquencies made at the time of preparation of the budget. To compel the taxpayer who has paid promptly and made timely claim for refund not only to litigate the validity of the levy but also to trace his payment into the various funds in order to determine whether any excess revenue, resulting from application of the excess rate, exists as a surplus or trust fund available to meet claims for refund, would be highly inequitable and it would also discriminate in favor of the delinquent taxpayer. This is obvious. Admittedly the legality of the tax rate is determined as of the date of levy. An excessive and invalid tax rate results in the payment of a sum which the county is not entitled to retain. The county cannot escape liability to make a refund, regardless of whether it has expended the excess revenue or has put it aside as a surplus. Plaintiff here was only awarded a refund of the excess payment made by reason of the invalid levy, that is, the amount produced by applying the difference between the rate actually levied and what was found to be the correct rate. Therefore, there is no foundation for application of the doctrine of equitable off-set.

Taking up the points presented by plaintiff's appeal from the judgment, it appears that the City of Los Angeles was permitted to intervene and contest plaintiff's claim, alleged in the second cause of action of the complaint, that the city tax levy for 1933–34 was invalid to the extent of $0.105999 per $100 of assessed valuation, an aggregate of about $1,250,000, and that plaintiff should recover from the county the proportion of tax which the county collected by reason of such illegality. The trial court sustained the validity of the city's levy and the plaintiff appealed from this portion of the judgment. The city asserts that so far as its levy is concerned, even if it were invalid plaintiff is precluded at the outset from procuring relief, because it neglected to file a separate claim for refund with the city in accordance with provisions of the city charter and to sue thereon.

The determination of this question requires an examination of the provisions of section 3804 of the Political Code, which is an integral part of the county system of taxation, and of pertinent charter provisions and ordinances of the city. In the year 1917 the city, which had previously maintained its own separate system of taxation, passed an ordinance adopting the county system, and contracted with the county to assume and discharge the city functions relating to taxation. Thereafter the present city charter was adopted, and it provided for a continuance of use of the county system.

The this action the trial court found, and the findings have all support in the evidence, that payment of tax by plaintiff was made to the county tax collector acting for and on behalf of the respective entities concerned, and acting, in so far as the city was concerned ‘under and by virtue of the consolidation of the assessment and collection as more particularly provided by contract between the County of Los Angeles and the City of Los Angeles, on or about the year 1917, and codified in the provisions of’ city ordinance No. 40302 N.S. and expressly ratified and adopted subsequently as part of the fiscal method of the city by section 342 of the city charter. The court found that under said contract, ordinance and charter, it had been the practice of the city and county since approximately 1917, and at all times since 1921, ‘to refund through and by reason of a claim filed with the county auditor of the County of Los Angeles, acting for and on behalf of the board of supervisors of the County of Los Angeles, as to that portion of such consolidated dated taxes illegally collected on behalf of the City’; and that since 1921 it has been the custom to make refund of taxes illegally collected on behalf of the city, upon a single claim filed by the taxpayer with the county auditor, and passed upon by the county board of supervisors, and at no time has it been the practice for a taxpayer to file a separate claim for such portion of the consolidated taxes paid by him on behalf of the city tax rates with the city council or other board or official of the city. From these findings the trial court concluded that plaintiff's claim, so far as the form thereof was concerned, was sufficient and was properly filed with the county auditor, even though it included a charge of illegality of taxes levied by the city but collected by the county for and on behalf of the city, and that the claim in all respects complied with the provisions of section 3804 of the Political Code, the city charter, and the ordinances of the city so far as referable thereto.

Assuming that the city is in a position to challenge this conclusion, its objections cannot be upheld. Section 342 of the city charter, as adopted January 22, 1925, and later amended, reads: ‘Until otherwise provided by ordinance, the city shall continue to use, for purposes of municipal taxation, the county system of assessment and tax collection. Should the city resume the work of assessment and tax collection, in that case the mode and manner of assessing property for purposes of municipal taxation and the levying and collecting of taxes for municipal purposes, the nature of the lien therefor and the manner and method of enforcing the same, and of the redemption of property sold for nonpayment of taxes, and all proceedings relating to said matters shall be fixed by ordinance and, so far as applicable, shall be substantially the same as may be provided at the time by law for such matters in relation to county taxes in the county of Los Angeles, except that in relation to the city taxes the proper officers of the city shall discharge the duties imposed by law upon the corresponding officers of said county. * * *’ Since the enactment of this section, the city has never ‘otherwise provided by ordinance’, but has continued to use the county system of assessment and tax collection. Construing the section in the light of legislative history (Stats.1917, chap. 3, p. 1686; ordinance 40302 [N.S.] adopted May 13, 1920 as amended by ordinance 45027 [N.S.], approved November 14, 1922), and of the charter provisions as a whole, it is apparent that it in effect accepted the benefits of the procedure authorized by section 3804 of the Political Code as well as other statutes governing the assessment and collection of county taxes, and that the city's continuance of use of the county system included the handling by the county of claims for city refund. For example, ordinance 40302 as amended by ordinance 45027 (N.S.), supra, provided: ‘Any taxes, together with any penalties thereon heretofore or hereafter paid for the use of or on behalf of the City of Los Angeles may be refunded by the County Auditor in all cases where a refund of county taxes and penalties thereon is provided for under the provisions of Part 3, Title 9 of the Political Code of the State of California.’ Section 3804 of the Political Code is found in part 3, title 9 thereof.

The city argues that the adoption of the county system included only the assessment and collection of taxes, not the refund procedure; that the functions with respect to the refund of taxes were retained by the city and are governed by sections 360–376 of the charter, which require the filing of a claim for refund with the city within six months; and that these sections are a limitation upon the power of the city council to contract with the county for the collection of taxes. This position is untenable. Section 342, which appears under the heading ‘Finance’, prescribes a complete method of tax procedure by adoption of the county system, whereas sections 360–376, which appear under the heading of ‘Disbursements and Liabilities' prescribe the procedure for the handling of general governmental claims against the city, not including tax refund claims. This is evident from the wording of the several sections, particularly sections 360 and 361 which provide that no claim will be paid until ‘there has been presented to or secured by the Controller adequate evidence that the demand has been approved by every board, officer or employee required by this charter to approve the same’, and ‘that the supplies, materials, property, or services for which payment is claimed have been actually delivered or rendered * * *; that the prices charged are just and reasonable; that the quantity, quality and prices correspond with the original specifications, orders or contracts. * * *’ These requirements obviously bear no relation to claims for the refund of taxes while the city allows the county to assess and collect taxes levied by it, assuming that they would otherwise apply.

In the case of Birch v. County of Orange, 186 Cal. 736, 200 P. 647, a question similar to the present one arose with respect to construction of the general claims provisions of the Political Code. The action was brought against the county to procure a refund of taxes, payment of which has been protested under section 3819 of the Political Code. It was contended that plaintiffs should have presented their claim or demand to the board of supervisors under the provisions of section 4075 of the Political Code before commencing suit This court held that sections 4075, et seq. (analagous to sections 360–376 of the charter) prescribed only the procedure for the handling of general claims against the county, and were inapplicable to tax refund claims. ‘Section 4075’, said the court, ‘does not purport to declare what claims shall be presented to the board of supervisors as a prerequisite to bringing suit, but prescribes the manner in which certain claims shall be itemized and presented before the board may pass upon them. It requires that the board shall not—‘credit or allow any claim or bill against the county or district fund, unless the same be itemized, giving names, dates and particular service rendered, character of process served, upon whom, distance traveled, where and when, character of work done, number of days engaged, supplies or materials furnished, to whom, and quantity and price paid therefor.’ These are not particulars which would seem to relate to the sort of demand sued on in this action. * * * In addition to the foregoing reasons for holding that the presentation of a claim to the board of supervisors is not necessary, attention may be called to the fact that section 3804 of the Political Code, amended in 1913 by the same Legislature that amended section 3819 of the Political Code (Stats. 1913, p. 228, § 3804, and Stats. 1913, p. 948, § 3819) provided two different methods for the recovery of taxes paid. * * * The fact that in section 3804 express provision is made for the filing of a verified claim for the recovery of taxes so paid is an indication that the Legislature did not consider that section 4075 included such a claim.' (Page 650.)

Support for the view that adoption of a general scheme for the assessment and collection of taxes may include the handling of refunds is found in the case of Hellman v. City of Los Angeles, 147 Cal. 653, 654, 82 P. 313. There the plaintiff sought to recover taxes for the year 1900–1901, payment of which he had protested in conformity with section 3819 of the Political Code. This court said (page 314): ‘In 1895 the Legislature, revising the subject of the revenue and taxes of the state (St.1895, p. 335, c. 218), amended section 3819 of the Political Code, providing for the payment of taxes under protest, to read, ‘and when so paid under protest the payment shall in no case be regarded as voluntary payment,’ and in case of suit may be ‘recovered back.’ The charter of the city of Los Angeles, in section 46, declares: ‘The mode and manner of collecting such municipal taxes * * * shall substantially be the same as the mode and manner * * * for the collecting of state and county taxes.’ Charter of Los Angeles, St.1889, p. 471, c. 1. It is quite plain that section 3819, found in chapter 7 of the Political Code, under the title of ‘Collection of Property Taxes,’ is a part of the ‘mode and manner’ of collecting state and county taxes, and is none the less a part of that mode and manner in that it deals with the right of the taxpayer to pay under protest. It would be absurd to say that the mode and manner of collecting taxes was limited solely to the right of the state and its tax collectors, and had reference only to the duties of the taxpayer, and no pertinency whatever to the taxpayer's correlative rights. It is a provision definitely declaring a certain mode and manner in which the taxpayer may pay his taxes and preserve his rights, in case the assessment and levy should be found void.' See, also Keyes v. City and County of San Francisco, 177 Cal 313, 173 P. 475.

The city relies upon the case of Farmers & Merchants' Bank v. City of Los Angeles, 151 Cal. 655, 91 P. 795. That decision, rendered in 1907, involved taxes paid under protest for the fiscal year 1902–1903. This was prior to the adoption of the present city charter and before the city contracted with the county for the latter to collect its taxes. While the case was decided upon the point that the then charter required a prior presentation of the plaintiff's claim, the opinion went no further than to express doubt as to whether section 3819 was applicable to the city of Los Angeles. This fact was commented upon in Keyes v. San Francisco, supra, at page 323, 173 P. 475. Reference should also be made to Birch v. County of Orange, supra, in this connection.

It seems clear that when the city authorized the county to assess and collect its taxes it also authorized the county to allow refunds without the presentation of any claim to city officers. The question concerning the levy made by the city must, therefore, be considered on the merits.

Plaintiff contends that the city improperly struck from its proposed budget an income item of $1,250,000, to be received from the Los Angeles Department of Water and Power, and that adoption of the budget without this item of income caused the tax levy to be excessive and void to the extent of $0.105999 per $100 of assessed valuation. The proposed budget showed the following items: Estimated tax revenues (estimate fixed by applying the maximum rate of $1.01 to the ad valorem valuation for city property, less the estimated delinquency on tax collections, plus estimated payments on account of taxes for prior fiscal years, including estimated unsecured personal property and solvent credits tax collections for the then current fiscal year), $12,675,000; other estimated income (itemized) $4,325,000; and estimated income from ‘Water and Power’, $1,250,000: Total, $18,250,000. Estimated expenditures (itemized), $17,000,000, and estimated expenditure for ‘Water and Electricity (Department of Water and Power)’, $1,250,000: Total, $18,250,000. When the final budget was adopted both the estimated income and estimated expenditure items of $1,250,000 were stricken and the budget was balanced at $17,000,000.

Plaintiff does not question the city's right to strike the $1,250,000 expenditure item, but it asserts that the elimination of the $1,250,000 item of income was illegal and fraudulent, motivated by a desire to create an unbudgeted surplus revenue in that amount. Plaintiff, states that if the city council did not desire to make the proposed appropriation of $1,250,000 for water and power purposes, then it was proper to remove the item of expenditure, but in such event the income item should have been retained and applied to reduce the amount to be raised by taxes, and the general tax rate; that is, instead of levying the maximum rate to raise $12,675,000 from taxes, a lower rate sufficient to raise $11,425,000 should have been fixed. The particular question is this: Was the $1,250,000 in fact a known item of estimated income at the time it was stricken from the budget? If it was, then under the charter limitations upon the city's taking power (hereinafter discussed), the elimination of that item of income was unauthorized and resulted in an excessive levy.

The trial court found that the city council ‘had the power to strike from the proposed budget any proposed revenues which, in its opinion, would not be received by it with certainty during the said fiscal year 1933–34, and including revenues to be received from the Department of Water and Power’. It also found that ‘the said City Council might properly have anticipated that the city would not receive in its general fund the sum of $1,250,000, or any other sum, from the Department of Water and Power, during said fiscal year 1933–34, on account of * * * advances to such department by said city * * *’. The plaintiff's appeal presents for decision the question of the sufficiency of the evidence to support the latter finding.

It appears that for a number of years prior to 1933 the Los Angeles Department of Water and Power had received advances from the city; as the trial court found, ‘that said Department * * * is and was, for a long time prior to the fiscal and tax year 1932–33, the recipient from the city * * * of amounts of money paid by the City * * * on account of principal or interest on general obligation bonds issued by the City * * * but for and on account of municipal works of the said Department * * * and to which the power revenue fund * * * and the water revenue fund of said Department * * * pertain’. During the fiscal years 1931–1932 and 1932–1933 the Department had repaid $1,616,000 to the city. On May 11, 1933, it still owed the city $28,356,196.97. It was authorized by section 221 of the charter to appropriate money from the water revenue fund and power revenue fund for the repayment of this sum. The section allows appropriations from these funds for operating and maintenance expense; for payment of principal and interest on indebtedness issued against revenues; for expense of construction; for the pension system; for a reserve fund to insure payment of bonds; for transfer of surplus to the city's reserve fund; and ‘to return and pay into the general fund of the City, from time to time, upon resolution * * * from any surplus money in either such revenue fund (water and power), any sums paid by the City from funds raised by taxation for the payment of principal or interest of any municipal bonds issued by the City for or on account of the municipal works to which such revenue fund pertains, or of liability arising in connection with the construction, operation or maintenance of the municipal works to which said fund pertains'.

On May 11, 1933, the department, desiring to make a payment on the indebtedness to the city, duly adopted resolution 943, which reads: ‘Whereas, there has been transferred from the Power Revenue Fund to the General Fund of the City during the past two years a total of $1,616,000, which was made available in part for direct relief through the Social Service Commission and in part available for relief to property owners and taxpayers; and, Whereas, during the coming fiscal year there is great need for funds supplementing contributions available for direct relief and a fund supplementing those available from taxation for meeting requirements of departments of the City dependent on tax funds; Now, Therefore, Be It Resolved, that the Board of Water and Power Commissioners, in conformity with the recommendation of the Chief Electrical Engineer and General Manager of the Bureau of Power and Light, will transfer from the Power Revenue Fund to the General Fund of the City, from time to time during said year, amounts totaling $1,250,000, $450,000 of which may be made available for direct relief work and $800,000 of which may be made available as an aid in balancing the budget for the benefit of the requirements of other departments of the City and that street lighting required for police purposes need not be curtailed.’ The department also made provision in both its proposed and final departmental budget for this payment.

On May 12, 1933, a copy of resolution 943 was transmitted to the clerk of the city council. On May 29th, the then city mayor, pursuant to section 344 of the charter, transmitted the proposed city budget to the city council. This proposed budget showed the sum of $1,250,000 both as an item of income and as an item of appropriation. It also contained a copy of the departmental budget, as required by section 345 of the charter, showing the proposed appropriation of that sum by the department for payment to the city. In a letter transmitting the proposed budget to the city council, the mayor commended the timely nature of the department's action saying: ‘The amount of $1,250,000, which is to be made available during the fiscal year under consideration, should be sufficient to provide the water and electricity to be furnished to the general government by the Department. * * * I am of the opinion that the return of this money to the general government should be the first step in a definite plan to repay completely all advances for bond redemption and interest made from the general funds of the City.’

On June 15th, the city council adopted the final budget, eliminating from the one proposed both the estimated revenue of $1,250,000, and the proposed appropriation of that sum, and making no appropriation for charitable purposes. Following the provisions of section 356 of the charter, the final budget also contained a copy of the final budget of the department, showing that it had made an appropriation of $1,250,000 for payment to the general fund of the city.

During the period between submission of the proposed city budget and adoption of the final city budget, there was considerable discussion between department officials and city officials over the use to be made by the city of the $1,250,000. However, so far as the evidence shows the discussion about this appropriation concerned only the manner in which the money was to be used by the city. There is no intimation that the department's officers ever contemplated withdrawing the appropriation. The department could place no legal restriction upon the use of money paid by it to the city in reduction of amounts which had been advanced to it. However, the department's officers apparently felt that any payment to the city was an act of grace rather than one which a fair consideration of the city's finances required, and they claimed the right to dictate how this money should be spent. Nevertheless, even while the respective officials were still conferring, the department passed a resolution authorizing an immediate payment of $8,000 to enable the city to carry on its accustomed relief work for sixty days, pending arrangements for federal aid. This resolution did not authorize the payment as a new and independent appropriation but referred to the desire of the city council for a transfer of funds pursuant to the resolution of May 11th (Resolution 943).

On July 14th the city council approved the following report of the finance committee: ‘* * * This committee recommends that inasmuch as the allocation of $1,250,000 from the (Department) * * * as set forth in the resolution adopted by said board, had been tentatively approved in the Mayor's Budget, and inasmuch as there has been some difference in understanding as to the use of said sum, the Water and Power Committee of the City Council contact the * * * Department * * * and ascertain what items, as set forth in the proposed budget, are satisfactory to said Board, in order that the city budget for the current year may be adjusted accordingly.’ According to this report the difference of opinion related merely to the city's proposed use of the money, no question being raised concerning the payment of it. The recommendation of the committee seems to have led to an early close of the discussion. On July 25th the department reiterated its ‘expectation and wish’ in providing for the $1,250,000 transfer to the general fund of the city that ‘$450,000 of the amount be appropriated as transferred from time to time, for direct relief purposes; that $800,000 be available in the General Fund of the City for use by the City Council in meeting the general expenses of the City under its Budget; and that the City Council provide in the General City Budget items estimated to total $747,000, for compensation during the year to the Bureau of Power and Light for street lighting, general lighting and power service. * * *’ Shortly thereafter the department commenced payments to the city which were continued from time to time throughout the fiscal year. These payments aggregated in excess of $1,250,000, which amount was expended by the city substantially in the manner indicated in the department's resolution 943.

This evidence and the other data in the record in our opinion afford no support whatsoever for the trial court's finding that the ‘city council might properly have anticipated that the city would not receive in its general fund the sum of $1,250,000 or any other sum, from the Department of Water and Power, during said fiscal year 1933–34’. On the contrary the nature of the revenue and the certainty of its receipt was definitely established. The evidence shows without contradiction that the city council knew that the $1,250,000 payment had been appropriated by the department in its proposed budget and also in its final departmental budget. We are referred to no statement or act of the department which might reasonably have raised any question concerning the payment of the money to the city. The discussion which the city insists was an actual existing controversy affecting the certainty of the payment, had to do solely with the proposed use of the money. If this discussion can be said to have created any uncertainty at all, it was an uncertainty as to whether the city should accede to the department's request and wish with respect to expenditure of the money, and not an uncertainty as to whether it would be received, assuming that the department could have revoked the appropriation made by its final budget. Furthermore, revenues listed in a city budget as estimated income are necessarily always anticipatory to some degree; money actually received is no longer estimated revenue but surplus. The evidence in the present case establishes as a matter of law that the $1,250,000 was a ‘known item of estimated income’.

It is not necessary to this conclusion to decide whether the department was, as plaintiff contends, a separate entity against which the city could have enforced payment of the promised sum by writ of mandate. It is likewise immaterial (assuming the correctness of the trial court's finding that the department was not a separate entity from the city) whether in the last analysis a transfer from the department to the city would constitute a departmental transfer from one city fund or department to another. For purposes of the tax levy, the appropriations made by the department to the city constituted estimated revenue for which the city was required to account. that the proposed payments were more than mere book entries from debit to credit side or vice versa of the water, power and general funds is apparent from the fact that the city made partial use of the funds for general purposes, such as relief work. The appropriation by the department from its water and power revenues was made for the purpose of repaying money belonging to the taxpayers which had been advanced for the payment of principal and interest on bonds issued to secure money for construction of the utility plant. This appropriation was estimated revenue which the city anticipated receiving and the city was without power or discretion to omit the amount from the budget. The purpose of requiring preparation of a budget as a condition precedent to levy of a valid tax is to show taxpayers the needs which must be met by taxation, the purposes for which funds will be expended, and the true condition of the public finances. If a tax levying body could disregard the plain provisions of the city charter and omit items of estimated revenue from its budget, it would have large unbudgeted sums at its disposal during the tax year, a result which the law clearly prohibits. It is the duty of the city council to account for all income and revenue from every known material source. Otis v. County of Los Angeles, supra. The plaintiff very fairly states in its brief that in the tax years subsequent to 1933–34, the final budget adopted by the city council has included estimated revenues from the department.

In this connection the city urges that even if it had retained the $1,250,000 in the final budget as an item of income, after excluding the item of expenditure, it would not necessarily have had to balance the budget in the manner contended for by plaintiff (applying the item of income to reduce the general tax requirement), but that it could have adopted any one of several courses. For example, after striking the appropriation item, the budget could have been maintained in balance by adding $1,250,000 to the unappropriated balance, or by carrying the sum in the estimated reserve (charter sec. 344 [9]), or the city council might have created new appropriations in lieu of the stricken item of expenditure. Also the mayor might have vetoed the cancellation. However, assuming that these things might have been done, the question at issue concerns only what was done and the rights of one whose property has been levied upon to meet the tax needs of the city as shown in the final budget which was adopted.

The city further urges that striking the item of income did not result in an excessive levy for the reason that there was no limit on the power of the city council to levy any rate of tax it desired, so long as it levied a sufficient tax and did not exceed the maximum rate. In this connection, section 352 of the charter provides: ‘On or before the last day of August of each year, the council shall adopt an ordinance levying upon the assessed valuation of the property of the city * * * a rate of taxation upon each * * * $100 of valuation, which, with the total amount estimated by the controller to be received from fines, licenses, and other sources of revenue, will be sufficient to raise the amount appropriated in the annual budget, provided that the amount of such tax shall not exceed the limit elsewhere in this charter provided.’ Reviewing the legislative history of this section and comparing it with the rule embraced in section 3714 of the Political Code, the city asserts that although it imposes a duty to levy a sufficient tax to meet requirements, it does not prohibit a levy which is more than sufficient and will produce an excess over requirements, provided the specified maximum rate is not exceeded. The city further asserts that under the charter provisions the fixing of the tax is not a ‘mathematical calculation’ but is a matter of ‘discretion’ of ‘legislative policy’. and that therefore language found in Otis v. Los Angeles County, supra, construing the Political Code provisions dealing with the same subject, is not controlling. This position cannot be sustained. In addition to the elementary rule that the needs of government always mark the limitation of its taxing power, the charter provisions relating to the tax levy (secs. 343–356) clearly impose a taxing limitation substantially identical with that found in section 3714 of the Political Code. The language of the Otis Case defining that limitation has been quoted in part. The taxing body is ‘required to account for all income and revenue from every known material source’, and ‘the amount of the levy is limited to the needs'. Furthermore, ‘after all the factors are known, the fixing of the rate is merely mathematical calculation’, and there is no ‘power to raise by taxation materially more than is required for expenditures except as permitted by law’. The principle is stated in Madary v. City of Fresno, 20 Cal.App. 91, 128 P. 340, and quoted with approval in the Otis Case as follows: ‘The power of government to exact from the citizen a part of his property in way of taxation is indeed vast, but it is not unlimited. It may be exercised only for the public good and for a public purpose. Cooley's definition of taxes as ‘enforced contributions levied for public needs' states concisely both the nature and illimitation of taxes. Taxes are the property of the citizens demanded and taken by the government to enable it to discharge its functions. In his work on Tax Titles, Blackwell defines taxes as ‘burdens imposed by the legislative power upon persons or property to raise money for public purposes.’ The needs of the government constitute then both the occasion and limitation of the taxing power. To take from the citizen a dollar beyond the needs of government is not taxation; it is extortion.'

Lastly the city asserts as a defense that plaintiff's right to relief is barred by reason of its failure to appear before the budget session of the city council and protest the change in the proposed budget. This defense is untenable because the record shows that the resolution of the city council for modification of the proposed budget did not indicate that the item of income would be removed. The resolution, after noting among other modifications the elimination of the item of expenditure, stated: ‘change to conform to the foregoing modifications'. This was not sufficient to constitute a notice of removal of the revenue item. It would have been as reasonable for a taxpayer to assume from the clause that the budget would be balanced in the manner contended for by plaintiff (retention and application of revenue item to reduce amount to be raised by taxes) as to assume that it would be balanced by elimination of the revenue item, or by any of the methods suggested by the city. A taxpayer's duty to present his objections at the preliminary budget hearing does not mean that he must protest alleged errors or irregularities which have not yet been committed, are not known, and cannot reasonably be foreseen at that time.

Our conclusion that the evidence establishes that the city levy was invalid to the extent of the excess caused by the improper removal of the $1,250,000 item of anticipated revenue from the final budget will require an amendment of the findings of the trial court, and an according increase in the amount of refund awarded plaintiff.

The second and final major question presented by plaintiff's appeal concerns the validity of levies made for principal and interest on bonds to accrue over a period of eighteen months. The trial court held this levy to be valid, and plaintiff has appealed from that portion of the judgment.

The issue arises from the fact that with respect to two funds—The Farm and Hospital I & S Fund and the New Hall of Justice I & S Fund, the county included in its budget an appropriation sufficient to pay interest and sinking fund requirements not only for the fiscal year 1933–1934, but also for the first six months of the subsequent fiscal year, 1934–1935. In other words, the county made an eighteen months' levy, rather than a twelve months' levy, for interest and sinking fund purposes. Plaintiff contends that the appropriations for payment of interest and principal coming due after the close of the fiscal year 1933–1934 were invalid. The facts relating to the challenged levies are as follows:

(1) Farm and Hospital I & S Fund: The budget included an appropriation of $807,433.05. Of this amount $431,725 was for interest and principal maturing and payable between July 1, 1933, and June 30, 1934, and $337,500 was for principal and interest maturing and payable on July 1, 1934. The balance consisted of a 10% allowance for delinquency in tax collections and for general reserve. The county levy by reason of this appropriation was $0.0204 upon each $100 of assessed valuation. Plaintiff claims that the appropriation for principal and interest payable in the fiscal year 1934–35, and amounting to the sum of $337,500, was illegal, thus causing an excessive levy of $0.0163, and resulting in the collection from plaintiff of an excessive and invalid tax in the sum of $6.14.

(2) New Hall of Justice I & S Fund: The budget included an appropriation of $323,598.33. Of this amount $172,525 was for interest and principal maturing and payable between July 1, 1933, and June 30, 1934, and $135,000 was for principal and interest maturing and payable on July 1, 1934. The balance consisted of a 10% allowance for delinquency in tax collections and for general reserve. The county levy by reason of this appropriation was $0.0086 upon each $100 of assessed valuation. Plaintiff claims that the appropriation for principal and interest payable in the fiscal year 1934–35, and amounting to the sum of $135,000, was illegal, thus causing an excessive levy of $0.0065, and resulting in the collection from plaintiff of an excessive and invalid tax in the sum of $2.45.

The trial court found, with respect to the questioned appropriations, that ‘it was reasonable for the board of supervisors * * * to make provision in the preceding fiscal year for interest and sinking fund requirements of the succeeding fiscal year and coming due in the first six months of such succeeding fiscal year’, and that the appropriations were ‘legal and authorized, as within the power and discretion of the board of supervisors so to anticipate interest and sinking fund requirements of a succeeding fiscal year in a prior fiscal year’.

Contending that these conclusions are erroneous and that a valid levy could not be made in the fiscal year 1933–34 to cover payments falling due in the fiscal year 1934–35, plaintiff relies upon the fundamental principle of fiscal practice in this state that public expenditures are to be made upon a cash, or pay as you go basis, with the revenues of each year used to take care of the expenses of that year but not of future years, and upon the debt limitation clause of the Constitution which reads: ‘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 forty years from the time of contracting the same * * *.’ Const. art. 11, sec. 18. Plaintiff urges that the provision for collection of an ‘annual tax’, to pay interest ‘as it falls due’ and to constitute a sinking fund, means that interest and sinking fund payments maturing each year can be paid only from the year's revenue, and that there can be no levy of a tax in any one fiscal year to meet requirements which are not a present or existing liability for that year but which will fall due in a following fiscal year.

The constitutional provision was construed as early as the year 1882 in the case of San Francisco Gas Co. v. Brickwedel, 62 Cal. 641, which was an action wherein the plaintiff sought to compel an audit of certain bills for gas furnished the city of San Francisco. The answer pleaded the defense that the revenue for the year in which the indebtedness was incurred had been exhausted at the time the bills were presented. In deciding the issue this court held: ‘We think it clear that when the framers of the present Constitution said, as they did by Section 18 of Article 11 of that instrument, that [quoting the section] * * * they meant that no such indebtedness or liability should be incurred (except in the manner stated) exceeding in any year the income and revenue actually received by such county, city, town, township, board of education, or school district. In other words, that each year's income and revenue must pay each year's indebtedness and liability, and that no indebtedness or liability incurred in any one year shall be paid out of the income or revenue of any future year. The system previously prevailing in some of the municipalities of the State, by which liabilities and indebtedness were incurred by them far in excess of their income and revenue for the year in which the same were contracted, thus creating a floating indebtedness which had to be paid out of the income and revenue of future years, and which, in turn, necessitated the carrying forward of other indebtedness, was a fruitful source of municipal extravagance. The evil consequences of that system had been felt by the people at home and witnessed elsewhere. It was to put a stop to all of that, that the constitutional provision in question was adopted. The change was eminently wise. * * * We have neither the right nor the disposition, by judicial interpretation, to take away the wholesome restriction upon municipalities thus imposed by the Constitution. Of course, in giving effect to this radical change from the pre-existing condition of things, it will be strange if some shall be found to suffer. But it must be remembered that all are presumed to know the law, and that whoever deals with a municipality is bound to know the extent of its powers. Those who contract with it * * * do so with reference to the law, and must see that limit is not exceeded.’

Later the effect of the provision on long term contracts was considered. In 1896, in the case of McBean v. City of Fresno, 112 Cal. 159, 44 P. 358, 31 L.R.A. 794, 53 Am.St.Rep. 191, applying the section to a contract of the city of Fresno to pay a specified sum annually for sewerage disposal, this court reaffirmed its prior declaration as to the intent and purpose of the restriction, saying (page 359): ‘In the constitutional provision under consideration, the framers had in mind the great and ever-growing evil to which the municipalities of the state were subjected by the creation of debt in one year, which debt was not, and was not expected to be, paid out of the revenues of that year, but was carried on into succeeding years, increasing like a rolling snowball as it went, until the burden of it became almost unbearable upon the taxpayers. It was to prevent this abuse that the constitutional provision was enacted. In San Francisco Gas Co. v. Brickwedel, 62 Cal. 641, and in Shaw v. Statler, 74 Cal. 258, 15 P. 833, the question is discussed, and the interpretation of the constitutional provision laid down, and the reasons for it given. Each year's income and revenue must pay each year's indebtedness and liability, and no indebtedness or liability incurred in one year shall be paid out of the income or revenue of any future year. The taxpayers of municipalities are thus protected against the improvident creation of inordinate debts, which may be charged against them and their property in ever-increasing volume from year to year.’ Upon this premise the court held that the liability created by the continuing contract was not a present liability for the aggregate amount of the payments, but was only an existing liability in each year to the extent of the installment due upon the contract for that year, and that each year's installment must be paid out of the year's revenue. The court said: ‘There need be here no struggles with the niceties of definitions given to ‘debt’ or ‘liability.’ * * * We base our views upon the conviction that, at the time of entering into the contract, no debt or liability is created for the aggregate amount of the installments to be paid under the contract, but that the sole debt or liability created is that which arises from year to year in separate amounts as the work is performed.' See also Bradford v. City and County of San Francisco, 112 Cal. 537, 44 P. 912; Arthur v. City of Petaluma, 175 Cal. 216, 165 P. 698; Garrett v. Swanton, 216 Cal. 220, 13 P.2d 725, and cases cited; section 3714, subdivision 5, Political Code.

The question before the court in the present case concerns the effect of the limitation as applied to a bonded debt incurred by a county with the assent of two-thirds of the qualified electors thereof. Is the power to levy for interest and sinking fund purposes, like general governmental levies, limited to requirements which have accrued or will accrue within the fiscal year of levy, or is the power to levy for such purposes (in the absence of fraud) limited only by the full amount of the debt which remains unpaid? For purposes of the tax levy, do maturing installments become an existing liability only as of the year in which they fall due, payable out of that year's revenue?

Plaintiff contends that the second clause of section 18, which states that the debt shall not be incurred ‘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’, must be read in connection with the first clause of the section, and must be construed in the light of the declared fiscal policy of this state; that when the section is so read and construed it plainly appears that the ‘annual tax’ for interest and sinking fund purposes is, like the governmental annual tax, limited to annual expenses, i. e., interest and sinking fund instalments falling due in the year of levy.

This position is a sound one. There is no substantial difference between a bonded debt and a long term continuing contract, so far as the constitutional provision is concerned. To approve a levy for indebtedness maturing in future fiscal years, would be to do violence to the intent of the constitutional framers as well as to endanger the stability of the structure which has been carefully guarded to bear the public debt. A power to tax for payments maturing in future years would make possible a levy in one year sufficient to discharge the full unpaid balance of the indebtedness, with the attendant danger of diversion of the funds and their expenditure for other purposes before the liability ever matured. This danger was recognized in the case of Connelly v. City and County of San Francisco, 164 Cal. 101, 127 P. 834, wherein plaintiff taxpayer questioned the validity of a city levy for interest and sinking fund purposes of bonds which at the time of the tax levy had been issued but not sold or contracted to be sold. This court said (page 836): ‘* * * It is made certain by the charter provisions, as it is under general law, that only for those bonds which have become an obligation of the city may a tax be levied. Were the construction contended for by respondent to prevail, it might result—and we are advised in this case it has resulted—in grave injustice to the taxpayer. The city might levy taxes year by year for bond interest and bond redemption and never sell a bond. At the end of each year it might transfer this fund to its general fund and use it for other purposes. At the end of any number of years of such practice, if the bonds eventually should be sold, the taxpayer would still have to pay into the treasury the full amount for interest and redemption. Aside from the hardship to the taxpayer, this would be to countenance a flat though indirect violation of the charter itself. The supervisors might make a general tax levy to the full amount permitted by the charter, and by the indirect method of this unauthorized bond tax levy secure from the taxpayer large sums of money for the sole purpose of transferring it to the general fund, and so by indirection defeat the express mandate of the law.’

The county contends that section 18 should be limited in its operation to voluntary contractual indebtedness created by the governing bodies of counties, and the other named entities, and that it has no application to a bonded debt incurred by action of the electors, as distinguished from the action of such governing bodies. It is true that the section is limited in its operation to obligations voluntarily assumed by the municipality, and that it does not apply to those imposed by law. American Co. v. City of Lakeport, 220 Cal. 548, 32 P.2d 622. Nevertheless a county, or other entity, is acting voluntarily both when it acts through its governing board, with or without the assent of the electors, and when it acts through the electors themselves; in a true sense, when the electors act they are the ‘county’ and not an outside agency.

The county argues that while section 18 prohibits the incurring of indebtedness payable out of the income and revenue of future years it does not prohibit the payment of current obligations out of the revenue of former years. It is, of course, a fact, that no annual tax levy will produce to the exact cent the amount needed for the year's expenditures, and it is a proper practice to carry forward the unencumbered surplus remaining at the close of one fiscal year to meet the obligations of the succeeding fiscal year. Otis v. Los Angeles County, supra. However, this practice does not authorize an express levy in one fiscal year for the creation of funds to be carried over to the next fiscal year to meet an obligation which will then (and not until then) mature.

The main difficulty which has been encountered in the practical operation of municipal affairs by reason of the debt limitation clause is that the constitutional framers failed to provide a method for meeting obligations which might accrue during the period following the close of one fiscal year and prior to the realization of tax revenues for the succeeding fiscal year. Thus in the present case the eighteen months levy was designed to cover payments for the twelve months of the 1933–34 fiscal year and payments for the first half of the 1934–35 fiscal year falling due July 1, 1934, several months prior to the collection of tax revenues. The county urges that the levy for the 1934–35 fiscal year must be sustained upon the following grounds: (1) Provision for payment of interest as it falls due and of principal as it matures is a constitutional condition to the incurring of a bonded debt. Section 18 is mandatory and self-executing, requiring a tax levy sufficient to meet bond obligations as they mature. This requirement must be read into every statute authorizing the creation of a bonded debt. (2) Express statutory authority for a levy such as that made in the present case is conferred by section 4088 of the Political Code, which provides for the levy of a tax by the board of supervisors ‘at the time of making the next general tax levy after incurring the indebtedness of any bonds', and annually thereafter, for the purpose of paying the bonds and interest, and that ‘such tax must not be less than sufficient to pay the interest on said bonds, and such portion of the principal, if any, as is to become due before the time for making the next general tax levy * * *.’ (3) Independently of either constitutional or statutory provision, the power to tax to meet bonded debt obligations when due is granted by necessary implication from those express statutory provisions conferring authority to incur such debt, and that as far as the duty to exercise this implied power is concerned, there is no difference between the obligation to pay promptly installments accruing during the year of levy and those accruing during succeeding months.

Plaintiff replies that the county's first and third contentions have been completely answered by prior decisions. Connelly v. City and County of San Francisco, supra; Johnson v. Williams, 153 Cal. 368, 95 P. 655; American Co. v. Lakeport, supra, and other cases hereinafter cited. As to the second contention, plaintiff points out that even if the clause of section 4088, ‘before the time for making the next general tax levy’ refers to the date of levying the tax, rather than to the commencement of the new fiscal year, nevertheless the statute must bow to the constitutional mandate, which supplants all legislation in conflict with its provisions and must be read into all legislative enactments pertaining to the same subject. Furthermore, plaintiff asserts that even if it be conceded that there is a duty to prevent default in the payment of bonded indebtedness, an eighteen months' levy is not the proper method of meeting this duty, but the proper mode, which is the measure of the county's power to act in the premises, is through the use of advances from the general fund, general reserve of the general fund, or other general reserve of a governmental fund, as authorized by sections 3714, 4041.2, and 4054a of the Political Code. However, whether these sections provide the proper mode is not an issue in this case as the levy here in question was made directly for the payment of an indebtedness to accrue in a subsequent fiscal year, and not for a reserve fund of the current year.

In the case of Johnson v. Williams, supra, decided in the year 1908, the court was confronted with the problem of a bond issue with maturity dates so arranged that payment of obligations first falling due could not be provided for by revenues of the current year or paid when due from revenues of the succeeding year. The contention that provision for payment of installments as they fell due was a constitutional condition to the incurring of a valid bonded debt was there considered as well as a number of the other claims advanced by the county in this case. Although the holding announced has reference to a possible automatic default in a bond issue in its first year, the language is equally applicable to a possible delay in payments maturing in the first few months of a fiscal year. The court said (page 657): ‘The only remaining objection is one made to all the bonds, based on the provisions of section 18, of art. 11, of the Constitution. [Quoting from section 18 and also from section 4088 of the Political Code.] * * * The petition * * * shows that the board of supervisors did, at the time of making the order prescribing the form of bonds and coupons, etc., October 7, 1907, adopt an ordinance providing for the levying of an annual tax commencing with the general tax levy to be made in September, 1908, sufficient for the purposes stated, as well as for the purpose of paying all interest accruing on such bonds. This ordinance was adopted subsequent to the general tax levy for the year, 1907, which by law is required to be made in the month of September of each year, and the provisions therein for an annual tax fully complied with the requirements of the Constitution and the statute as to the principal, and as to all interest falling due after the first half of the year 1908. But the proposed bonds were to bear date December 10, 1907, with interest payable semiannually, and the first interest coupon on each bond would, by its terms, be due and payable on June 10, 1908, if such bond had been sold and delivered prior to that date. The result would be that the tax to be levied for the purpose of paying interest would not be available at the time the first installment of interest became due. It is upon this fact alone, as we understand it, that the claim of the defendant that the constitutional requirement has not been complied with rests. We are of the opinion, however, that there was a substantial compliance with the requirement of the constitutional provision. The provision was adopted in the light of the rule which has always existed in this state for an annual general tax levy. No levy at any other time than that of the general tax levy was contemplated. The object was simply to insure provision annually, at the time of such general tax levy, for such money as would be necessary to pay interest and principal falling due before the time of the next general tax levy, and to place in the sinking fund for the payment of the principal the amount required by law. That the payment of interest might be deferred for a short time pending proceedings for the collection of a tax for that purpose already levied, or that the payment of the first installment of the interest on the bonds might be deferred until a general tax levy and collection thereunder because it fell due prior to the first general tax levy after the incurring of the indebtedness, were not matters being guarded against by the framers of the Constitution. The important thing was that a tax sufficient to pay the interest and principal falling due, and to make up the necessary sinking fund, should be levied and collected annually, and this we are satisfied was all that was intended by the provision under discussion. Under this construction of such provision, the proceedings for the incurring of the indebtedness were in compliance with the constitutional requirement.’ See, also, Connelly v. City and County of San Francisco, supra.

A like construction of a constitutional provision almost identical with section 18 has been made by the courts of Oklahoma. See O'Neil Engineering Co. v. Incorporated Town of Ryan et al., 32 Okl. 738, 124 P. 19; St. Louis & S. F. R. Co. v. Thompson, 35 Okl. 138, 128 P. 685; Protest of Trimble, 151 Okl. 74, 300 P. 406; Breeding v. Excise Board, 180 Okl. 379, 69 P.2d 638. In the case of Coggeshall & Co. v. Smiley, 142 Okl. 8, 285 P. 48, considering the point here under discussion, the court said (page 57): ‘Where a bond is dated July 2, 1929, the first possible levy for the payment of interest would be July 1, 1930, and the tax so levied would not be due until November 1, 1930. If the municipal authorities provide for the maturity of the first interest coupon thereon prior to November 1, 1930, they do so with full knowledge that there will be no fund for the payment of that interest at maturity, and the purchaser of the bond does so with the same knowledge. We cannot change the law with reference to fiscal affairs to suit the convenience of individuals. We cannot approve a reservation of funds derived from a tax for a fiscal year for the purpose of paying a liability that will not arise until the next fiscal year.’

Defendant county cites Illinois cases as supporting its contentions and urges an adoption by this state of the Illinois rule and fiscal policy. East St. Louis v. Amy, 120 U.S. 600, 7 S.Ct. 739, 30 L.Ed. 798; People v. Day, 277 Ill. 543, 115 N.E. 732; People v. Scott, 300 Ill. 290, 133 N.E. 299; People v. Louisville & N. R. Co., 300 Ill. 312, 133 N.E. 340; People v. Chicago & N.W.R. Co. 331 Ill. 544, 163 N.E. 355; Gates v. Sweitzer, 347 Ill. 353, 179 N.E. 837, 79 A.L.R. 1151; People v. Westminster Bldg. Corp., 361 Ill. 153, 197 N.E. 573; People v. 110 South Dearborn St. Corp., 363 Ill. 286, 2 N.E.2d 68. These holdings, however, are grounded upon a constitutional provision unlike that of this state. The California provision adopts the annual limitation rule limiting indebtedness in any one year to the income and revenue for such year, while the Illinois provision adopts the percentage limitation, forbidding indebtedness in any one year in excess of a certain per cent of the value or assessed value of the taxable property of the municipality. These different methods of debt limitation have required different fiscal policies in the two states. The annual limitation rule provided by the California Constitution prevails in this state and the courts have no power to change it by judicial interpretation.

The county points out that the $337,500 levy was carried as part of the general reserve of the Farm and Hospital Sinking Fund, which aggregated $382,443.05, and that similarly the $135,000 levy was included in the general reserve of the Hall of Justice Interest and Sinking Fund, which aggregated $153,598.33. It argues that the levy, therefore, constituted a reserve ‘to meet the cash requirements of any fund to which the county's credit may be legally extended for that portion of such fiscal year prior to the receipt of taxes therein’, as authorized by subdivision 3 of section 3714, supra, particularly when that provision is read in connection with subdivision 6 of the same section, which states in part: ‘The unencumbered balance remaining in any fund at the end of the fiscal year shall be carried over to the credit of such fund for the next fiscal year, and shall be deducted from the amount finally determined as necessary to be expended by that fund, for such fiscal year.’ The answer to this contention is that it is directly contrary to supported findings of the trial court. There is no showing that the sums in question were appropriated as reserves, after ascertainment of cash requirements, in conformity with section 3714. The trial court found ‘that the total requirements for interest and sinking fund purposes of said farm and hospital bonds * * * were fixed in the budget * * * at $807,443.05 * * *;’ that said appropriation ‘included an appropriation of $337,500 for principal and interest maturing and payable between July 1st, 1934, and December 31st, 1934, to-wit, July 1st, 1934’; and that ‘the balance of said appropriation consisted of a 10 per cent allowance for delinquency in tax collections and for general reserve of said fund’. A similar finding was made with respect to the $135,000 item of the New Hall of Justice fund. An unauthorized levy cannot be made valid merely by placing it under the head of ‘general reserve’ in the fund in which it is carried, thus permitting the accomplishment by indirection of that which is forbidden to be done directly.

The judgment is reversed and the cause remanded with directions to the trial court to compute the amount of refund to which the plaintiff is entitled in accordance with the views expressed in this opinion, amending the findings as may be required, and to render judgment accordingly; on the appeal of the county each party to bear its own costs; plaintiff to recover costs on its appeal.

PER CURIAM.