Opinion
June 24, 1940.
June 25, 1940.
Constitutional law — Municipality — Indebtedness — Limitation — Approval of electors — Self-liquidating projects.
1. After the general borrowing capacity of the City of Philadelphia is exhausted, the City may nevertheless incur new debt, provided the proceeds are to be invested in a public improvement which will be self-liquidating. [352]
2. Under Article IX, section 8, of the Constitution, any new debt which increases the indebtedness of the City of Philadelphia to an amount exceeding two per centum upon the assessed valuation of the taxable property must be approved by the electors, even though such new debt is for a self-liquidating improvement. [352]
Argued June 24, 1940.
Before SCHAFFER, C. J., MAXEY, DREW, LINN, STERN, BARNES and PATTERSON, JJ.
Appeal, No. 227, Jan. T., 1940, from decree of C. P. No. 1, Phila. Co., March T., 1940, No. 4332, in equity, in case of Margaretta V. Atkins v. The City of Philadelphia et al. Decree affirmed.
Bill in equity.
The facts are stated in the opinion of the lower court, by FLOOD, J., as follows:
This is a taxpayer's suit, brought to restrain the City of Philadelphia from proceeding with the sale of an $18,000,000 bond issue, authorized by an appropriate ordinance of March 8, 1940 and approved by the electorate of the City at a general election held April 23, 1940. The proceeds of the bond issue, as provided in the ordinance, are to be used for the rehabilitation of the City's water supply system.
The case is before us upon bill and answer. There is no dispute as to the facts. The general borrowing capacity of the City of Philadelphia is, by constitutional provision, limited to 10% of the assessed value of the taxable property therein. Since February 20, 1933 the City has had no general borrowing capacity, and on February 29, 1940, according to a report of the City Controller, the net debt of the City after making all allowable deductions, exceeded the debt limit by $24,000,000.
On January 26, 1940, the City, pursuant to an ordinance of Council, filed a petition in this Court to have determined the amount of its debt invested and about to be invested in its water supply system which might be excluded from the City's indebtedness in ascertaining its borrowing capacity. This was in accordance with the procedure outlined in the Act of May 21, 1921, P. L. 1054, 53 PS sec. 6767 et seq. A decree was thereupon entered which directed the exclusion of $28,438,900 of the outstanding indebtedness, and of further sums, not to exceed $22,000,000, proposed to be borrowed and invested in the water supply system. Following the entry of this decree, the Mayor approved the ordinance of March 8, 1940 authorizing the $18,000,000 bond issue, the validity of which is now being attacked. The ordinance made the loan conditional upon the consent of the electorate, whose approval was obtained by a vote of 164,905 to 28,931 at the election of April 23, 1940.
It is plaintiff's contention that the proposed bond issue is illegal for two reasons:
1. It is not authorized by the Act of May 21, 1921, supra. Moreover, if the Act of 1921 were construed to authorize the issuance of said bonds, it would be unconstitutional because of a defective title.
2. The proposed increase in the City's debt is violative of the municipal debt limitation provision contained in Article IX, sec. 8, of the Pennsylvania Constitution.
1. The City has pointed out that the indebtedness is not to be incurred under the Act of 1921 but under Article XVIII, of the City Charter Act of June 25, 1919, P. L. 581, 53 PS sec. 3301 et seq. The City is correct in this since the Act of 1921 has to do entirely with the procuring of a determination by the court of the amount of its debt which the City may have deducted from its indebtedness in ascertaining its borrowing capacity under the Constitution. Therefore, while plaintiff is right in asserting that the Act of 1921 does not authorize the bond issue, and that if it did so it would be unconstitutional because its title gives no notice of such a provision, yet this is unimportant since the loan is authorized by the Charter Act and not by the Act of 1921.
2. The Charter Act in Article XVIII authorizes the creation of this debt provided it is permitted by the Constitution. The Legislature has plenary power to permit municipalities to incur indebtedness subject only to the restrictions of the Constitution. In this act it has exercised this plenary power with regard to the City of Philadelphia and we have only to determine whether the particular debt here incurred violates the applicable Constitutional provisions.
Article IX, sec. 8, reads as follows:
"The debt of any county, city, borough, township, school district, or other municipality or incorporated district except as provided herein, and in section fifteen of this article, shall never exceed seven (7) per centum upon the assessed value of the taxable property therein, but the debt of the City of Philadelphia may be increased in such amount that the total city debt of said city shall not exceed ten (10) per centum upon the assessed value of the taxable property therein, nor shall any such municipality or district incur any new debt, or increase its indebtedness to an amount exceeding two (2) per centum upon such assessed valuation of property, without the consent of the electors thereof at a public election in such manner as shall be provided by law. In ascertaining the borrowing capacity of the City of Philadelphia, at any time, there shall be deducted from such debt so much of the debt of said city as shall have been incurred, or is about to be incurred, and the proceeds thereof expended, or about to be expended, upon any public improvement, or in the construction, purchase, or condemnation of any public utility, or part thereof, or facility therefor, if such public improvement or public utility, or part thereof, whether separately or in connection with any other public improvement or public utility, or part thereof, may reasonably be expected to yield revenue in excess of operating expenses sufficient to pay the interest and sinking-fund charges thereon. The method of determining such amount, so to be deducted, may be prescribed by the General Assembly."
Plaintiff regards this provision as an absolute prohibition against the incurring of new indebtedness when the net outstanding debt exceeds 10% of the value of Philadelphia's taxable property. The second sentence dealing with revenue producing utilities, it is said, is but a yardstick by which the borrowing capacity of the City is to be ascertained, and permits nothing more than the deduction of that part of the debt which is presently so invested.
If this construction were the true one, the anomalous situation illustrated by the following example could result:
Assume the City's debt limit to be $100,000,000 all of which has been invested in non-revenue producing improvements. If the City then desired to borrow $10,000,000 more to invest in its water supply system it could not do so. However, if $10,000,000 of the outstanding debt were invested in a revenue producing utility, by appropriate proceedings, that amount could be excluded from the net debt, and the City would then have the power to borrow $10,000,000 more for any legitimate purpose. The result in both cases is exactly the same, a gross debt of $110,000,000; yet the first proposal is impossible of attainment.
Plaintiff has no answer to this dilemma but does state that under her interpretation all debt increases of over 2% of the taxable property would have to be approved by a vote of the people, whereas the defendants' construction of Article IX, sec. 8, would permit the contracting of new debts for revenue producing improvements at the discretion of the Mayor and Council alone even though the outstanding indebtedness of the City exceeded the 2%, or even the 10% limit. This position, however, fails to give any consideration to the fact that no such debt could ever be incurred without the sanction of the court, whose duty it is to investigate the proposed loan in determining whether or not the intended use meets the constitutional requirements. Furthermore, the people adopted the Constitution, and if they wanted electoral approval, before self-liquidating debts could be incurred by a municipality, they could have voted against the amendment now in effect. As it is now worded, we cannot read such a limitation into the Constitution, no matter how beneficent we may think it to be. It is to be noted that Section 3 of Article XVIII of the City Charter Act of 1919, as amended by the Act of July 13, 1923, P. L. 1084, 52 PS sec. 3303, authorizes the council of the City to submit an increase of indebtedness to the electors even though it is of a type which may be incurred without the consent of the electors.
3. The proper construction of Article IX, sec. 8, we believe, is that suggested by the defendants. Their theory is that the municipal debt can be divided into two categories, a general or ordinary indebtedness and an indebtedness arising from investments in revenue producing improvements. Only the first of these is affected by the debt limitations of the Constitution. New loans for investment in self-sustaining utilities, on the other hand, may be floated whether or not the City has any general borrowing capacity.
That this interpretation is a necessary inference from the language contained in the second sentence of Article IX, sec. 8, is made clear by a review of history of that provision. The Constitution of 1874, in its original form, contained the first limitation on municipal indebtedness affecting Philadelphia. That section was amended in 1911, 1915 and 1918. After the 1938 [sic. 1918] amendment, the provision relating to debt invested in self-sustaining facilities read as follows:
"In ascertaining the borrowing capacity of the said city of Philadelphia, at any time, there shall be excluded from the calculation and deducted from such debt so much of the debt of said city as shall have been incurred, and the proceeds thereof invested, in any public improvements of any character which shall be yielding to the said city an annual current net revenue. . . ." (Italics supplied.)
Under the provision, as it existed prior to 1920, it may be that no self-sustaining debt could be incurred if the general debt limit had been reached, for the language contemplated the deduction only of debts already contracted. In 1920, another amendment to this section was passed, changing it as follows:
"In ascertaining the borrowing capacity of the City of Philadelphia, at any time, there shall be deducted from such debt so much of the debt of said city as shall have been incurred, or is about to be incurred, and the proceeds thereof expended, or about to be expended, upon any public improvement. . . ." (Italics supplied.)
As defendant points out, the change in the language of Article IX, sec. 8, indicates that the City can contract new loans for self-sustaining utilities regardless of the status of its general borrowing capacity. It is difficult, otherwise, to give any meaning to these words, except in the most unusual circumstances. The legislature that proposed and the electorate that approved the amendment of 1920 intended, we think, to put the two classes of loans in separate categories and entirely to remove self-liquidating utility loans, so declared by the Court, from the ban of Constitutional debt limitations.
Nor is such a conclusion out of harmony with the general law on this subject. A majority of the states, as defendant points out in his brief, have debt limitation provisions in their constitutions, and many expressly exempt from that limitation debts contracted for investment in certain specified public utilities. E. G.: Wash. Const., Art. VII, sec. 6; Okla. Const., Art. X, sec. 27; S.C. Const., Art. VIII, sec. 7. Furthermore, in all these states, judicial interpretation of the relevant provisions lend support to our conclusion that the indebtedness arising from investment in self-sustaining improvements is a matter with which the constitutional limitation on general indebtedness has nothing to do. See e. g.: Schooley v. Chehalis, 84 Wn. 667, 147 P. 410 (1915); Ennis v. Herndon, 168 Va. 539, 191 S.E. 685 (1937).
The bill is therefore dismissed, costs to be paid by the City of Philadelphia.
Final decree entered dismissing bill. Plaintiff appealed.
Errors assigned, among others, related to the action of the court below in dismissing exceptions to the findings and conclusions of the chancellor.
Leon J. Obermayer, of Edmonds, Obermayer Rebmann, with him J. Warren Brock, for appellant.
Herman N. Schwartz, with him John P. Berry and Ernest Lowengrund, Assistant City Solicitors, and Francis F. Burch, City Solicitor, for appellees.
We are in accord with the views expressed by Judge FLOOD in the opinion filed in the court below except in his assertion that new debts for self-liquidating improvements may be contracted by the Mayor and Council of the City of Philadelphia without approval by the electors even though such new debt were to increase the City's indebtedness to an amount exceeding two per centum upon the assessed valuation of the taxable property.
In our opinion the provision in Article IX, section 8, of the Constitution in regard to debts incurred in connection with a self-liquidating improvement applies to the method of ascertaining the borrowing capacity of the City of Philadelphia, but, as the City itself admits, it does not restrict or nullify the provision in the section that, even if an increase in the debt is within the borrowing capacity, it must be approved by the electors if it effects an increase in the indebtedness to an amount exceeding two per centum upon the assessed valuation of the taxable property. This is because the requirement of the electors' approval of an increase over two per centum is stated expressly to be applicable to any new debt, and therefore it applies to debts incurred by reason of self-liquidating improvements as well as to all other debts. Though the question is here academic because the proposed loan involved in this case was in fact approved by a vote of the electors of the City of Philadelphia, we have thought it best thus to indicate that on this question we do not agree with the view expressed in the opinion of the court below.
The decree dismissing plaintiff's bill is affirmed, costs to be paid by the City of Philadelphia.