Advisory Opinion re Constitutionality of 1973 Pa 1 & 2

211 N.W.2d 28, 390 Mich. 166

• Court: Michigan Supreme Court
• Decided: October 17, 1973
• Docket: No. 17; Docket Nos. 54,722, 54,723
• Status: Published

Opinions

T. G. Kavanagh, J.

In response to the requests of the Senate of the State of Michigan, made in accordance with Const 1963, art 3, § 8, requesting the opinion of the Supreme Court as to the constitutionality of 1973 PA 1 and 1973 PA 2, on April 16, 1973 we issued the following order:

"On order of the Court, the requests of the Senate of the State of Michigan made pursuant to section 8, article 3 of the Michigan Constitution of 1963 to render opinions on the following questions of law:

" 'Does the State of Michigan violate Sections 14, 15 or 18 of Article 9 of the Michigan Constitution of 1963 if it borrows money and issues notes, pursuant to Section 139 of Act No. 258 of the Public Acts of 1972, as added by Act No. 2 of the Public Acts of 1973, being Section 388.1239 of the Compiled Laws of 1970, the proceeds of which shall be used for loans to certain school districts pursuant to Section 138 of Act No. 258 of the Public Acts of 1972, as added by Act No. 2 of the Public Acts of 1973, being Section 388.1238 of the Compiled Laws of 1970?

" 'Is a school district subject to the 15 mill limitations of Section 6 of Article 9 of the Michigan Constitution of 1963 if it imposes an ad valorem tax to pay principal and interest on notes or bonds issued to fund present or projected operating deficits as provided in Section 681 of Act No. 269 of the Public Acts of 1955, as amended by Act No. 1 of the Public Acts of 1973, being sections [sic] MO mi of the Compiled Laws of 1970?’ are hereby granted. It is further ordered that the Attorney General of the State of Michigan be requested to brief both sides of these questions. One brief and argument to be directed to the constitutionality of the acts and one brief and argument to be presented as to why the acts should be held unconstitutional. The Attorney General’s brief supporting constitutionality shall be filed in typewritten form by May 2, 1973, and his brief opposing constitutionality shall be filed by May 17, 1973. Printed briefs as required by GCR 1963, 857, shall be filed in substitution for the typewritten copies, as soon as practicable. This matter shall be presented to the Court, without oral argument, in accordance with the rules of practice on appeals to this Court.”

In compliance with our order, the Attorney General filed briefs and presented argument for and against the constitutionality of the legislation.

Both sides agree and it was conceded in argument that §§ 14, 15 and 18 of art 9 were not applicable to the bond issues contemplated in the subject legislation, but it was argued and briefed by the opponents of constitutionality that these sections did not exhaust the possibilities of constitutional infirmity. It was urged that § 12 of art 9 must also be considered in order to determine the constitutionality of the legislation.

We agree, for we are convinced, in light of the language of § 2 of each of the acts " * * * the legislature requests the opinion of the supreme court as to the constitutionality of this act”, that the intent of the request was to encompass all of the sections of art 9 bearing on the constitutional question. Accordingly we include § 12 in our consideration.

We do so also because we judicially notice that steps have already been taken to effectuate the financing plan intended by the legislation. The state has loaned the School District of Detroit $30,000,000 pursuant to the first operative paragraph of 1973 PA 2 (MCLA 388.1238; MSA 15.1919 [638]), that paragraph requires repayment of the money within 180 days. The acts contemplate the sale of state notes iri an amount sufficient to reimburse the treasury not only for that $30,000,-000 but also to permit an additional loan of up to $45,000,000 to cover the full deficit of the Detroit School District, which has been determined to be $73,000,000 as of June 30, 1973.

We are further advised that the proposed issue of state notes of up to $75,000,000 cannot be sold until this Court renders an advisory opinion. If we advise the Senate that the state may not borrow money in accordance with the plan, some other plan must be promptly developed to accomplish the object sought by this legislation.

THE CONSTITUTIONAL LIMITATIONS

Article 9 of the Constitution of 1963 treats of finance and taxation. It makes specific provision for state borrowing (§§ 14, 15, 16) and proscribes the issuance of any evidence of state indebtedness except for debts authorized pursuant to the Constitution (§ 12). It also forbids the granting of the credit of the state except as authorized in the Constitution (§ 18).

Section 14 authorizes short term borrowing to meet obligations incurred pursuant to appropriations for any fiscal year and the issuance of the state’s full faith and credit notes pledging undedicated revenues to be received during the same fiscal year. This short term borrowing power is limited to 15% of the undedicated revenues and the debt must be repaid as the revenues are received but no later than the end of the fiscal year.

Section 15 authorizes long term borrowing for specific purposes but the purpose, amount, and method of repayment of the debt must be submitted to and approved .by the electors.

Section 16 authorizes borrowing for the purpose of making loans to school districts for funding capital expenditures. It contemplates the issuance of state notes or bonds pledging its full faith and credit and also the issuance of school district bonds for repayment of the loan according to the provisions therefor specified by the Legislature. In this connection it is noteworthy that the power to tax for the repayment of principal and interest on such bonds is expressly without limitation as to rate or amount.

Manifestly the financing plan provided for in PA 1 & 2 of 1973 is not one authorized by §§ 14 or 15, and because it is not for funding capital expenditures but operating deficits, is not authorized by §16.

Accordingly then we must determine whether the plan for state borrowing to establish the loan fund creates a "debt” of the state, for if not § 12’s injunction would have no application and—unless the plan be deemed to provide a grant of state credit—would not be barred by § 18.

THE PLAN

In essence the plan provides:

(1) The State Treasurer will borrow up to $75,000,000 to create a fund to loan to school districts having an operating or projected operating deficit in excess of $100 per pupil. (The Detroit deficit exceeds $250 per pupil.) 1973 PA 2 provides that the state notes "shall not be a general obligation of the state, shall not pledge the full faith and credit of the state and shall not be an indebtedness of the state within the meaning of any constitutional limitation on state indebtedness, but shall be payable solely and only from the payments of principal and interest on the loans made by the state treasurer to a district or districts as provided in this section.” MCLA 388.1239; MSA 15.1919(639).

(2) The state notes are to mature serially with annual maturities in not more than ten years. The notes of the school district to the state are to have corresponding maturities and pledge for their payment "any funds of the district legally available therefor,” including a newly-levied income tax of not exceeding 1% or a newly-levied ad valorem tax of not more than 2.25 mills (the power to levy such taxes being provided in 1973 PA 1), and as secondary security future "state aid moneys and any other funds of the district legally available therefor.” MCLA 388.1239(6), 340.681(4); MSA 15.1919(639X6), 15.3681(4).

(3) The school district must authorize the State Treasurer, and in the event of default the Treasurer is required, to deduct from the next state school aid payment of the district an amount equal to the amount in default. MCLA 388.1239(7); MSA 15.1919(639X7).

OPINION REGARDING BORROWING BY THE STATE

The idea that some borrowed money is not a debt comes from cases approving the funding of "self-liquidating public works” through "revenue bonds”.

The history and theory of the "revenue bond” exception is set forth in detail in Young v Ann Arbor, 267 Mich 241; 255 NW 579 (1934), and reaffirmed and extended in Attorney General, ex rel Eaves, v State Bridge Commission, 277 Mich 373; 269 NW 388 (1936).

This latter case was followed and expanded in State Highway Commission v Detroit Controller, 331 Mich 337; 49 NW2d 318 (1963), where the "revenue bond” concept was applied to "analogous” bonds which looked for repayment only to the highway fund made up of vehicular "privilege” taxes levied on users of highways built with proceeds of the bonds.

Thus, the concept of "special obligation” bonds payable out of taxes levied for the privilege of use came to be recognized as another exception to the constitutional limitation on the incurment of state indebtedness and, whatever the logic of it, we are committed to its acceptance, since the people, presumably aware of the exception, did not eliminate it in the 1963 Constitution. See Schureman v State Highway Commission, 377 Mich 609; 141 NW2d 62 (1966).

The plan proposed by the acts now before us does not comprehend repayment of the loan from revenue derived from the operation of a facility. These are not "revenue bonds”.

The plan does not provide for repayment of the loan from privilege taxes levied on users of the facility. These are not "special obligation” bonds.

These loans will be repaid from general taxes, an income tax or an ad valorem tax or payments received from the school aid fund made up of constitutionally dedicated sales tax revenue and appropriations largely derived from general taxation.

We are not disposed to extend exceptions to this constitutional limitation. Each extension seems to invite another. Given the ingenuity of those who urge avoidance of the limitation, we could effectively eliminate it altogether by extending exceptions to it.

Although the borrowed funds will not be used directly by the state but will be lent to a school district, and the several loans contemplated (to the State Treasurer and by him to the school district) have been structured so that the indebtedness will be repaid, not by the people of the state at large, but primarily by residents of the school district through added taxation,¹ the borrower is the state. It is the obligation of the State Treasurer to see to it that principal and interest installments falling due on the state notes are paid and, if there is a default in the payment of the school district’s notes, he is required to use state sales tax revenues allocable to the school district to cure the default.

The argument in support of the constitutionality of this legislation would use the non-debt doctrine as a lever to change the plain meaning of the term "state indebtedness”, limiting that term to indebtedness which constitutes a general obligation of the state supported by its full faith and credit. We are told that the focus should be on the source of repayment, that the question is not whether the state borrowed the money but rather the manner of contemplated repayment. Thus it is proposed to make the exception the rule. The camel having gotten its nose under the tent for revenue bonds, and this having been extended to users’ privilege tax bonds, we are now asked to hold that henceforth the state can incur indebtedness as long as it withholds its full faith and credit and has limited repayment to a carved-out portion of general tax revenues set aside ánd called a special fund. It is proposed, thus, by reasoning from one analogy to another, to enable the state to borrow whatever amounts may be desired without limitation through the expedient of issuing non-debt obligations repayable out of special tax funds.

On the floor of the convention Mr. Brake distinguished between "general obligation indebtedness” and "various forms of borrowing used in connection with state government but not actually by state government,” citing as examples State Highway Department borrowing, tax anticipation bonds, revenue bonds and a building "built by an authority”. 1 Official Record, Constitutional Convention 1961, p 605. The state notes now proposed to be sold are not highway bonds to be paid only from privilege taxes levied against users; they are not tax anticipation bonds (art 9, § 14); they are not revenue bonds. The borrower is not "an authority” but the State of Michigan.

Dubbing the users’ privilege tax bonds dealt with in the State Highway Commissioner cases "special obligation bonds” does not expand the scope of the exception created by those cases.

The question is not whether the state has pledged its full faith and credit to pay the notes to be issued by the State Treasurer, but whether the notes are state indebtedness. The framers used the term "full faith and credit” in §§ 14 and 16 of art 9 and the term "general obligation bonds” in § 16 of art 9. If they intended to prohibit only the issuance of general obligation bonds or full faith and credit obligations presumably they would have used those terms in § 12 of art 9 rather than the term "state indebtedness”.

The state notes here involved, in contrast with the notes of the State Housing Development Authority dealt with in the Advisory Opinion re Constitutionality of PA 1966, No 346, 380 Mich 554, 563; 158 NW2d 416 (1968), are direct obligations of the state. It is not contemplated that they will he repaid with revenue but with taxes. The taxes are levied generally, not merely against users of facilities to be constructed with the proceeds of the bonds. The bonds in that case are more closely akin to revenue bonds or users’ privilege tax bonds than the bonds in this case. Pertinent is the following observation in the opinion of the Court in that case:

"The framers of the 1963 Constitution created a pay-as-you-go government for the State of Michigan.”

Because these state notes evidence state indebtedness we need not consider whether the plan also constitutes a grant of state credit proscribed in § 18.

We are not unmoved by the argument of those who say that this limitation imbedded in the Constitution is self-deceiving, in that it only serves to increase the cost of borrowing in this day when borrowing is recognized as a legitimate and sometimes necessary method of governmental financing. But if this limitation is to be removed from the Constitution it should be done by the informed choice of the electorate rather than by our decisions.

OPINION REGARDING NON-VOTED MILLAGE

We are also asked to express our opinion on whether the ad valorem tax authorized by 1973 PA 1 is subject to the millage limitation of art 9 §6.

The School District of Detroit is not borrowing to fund current or future deficits, but past deficits —deficits which from one school fiscal year to another have been largely funded through borrowings on the strength of revenues expected to be received in the next fiscal year. It is proposed to replace the diversion of current income resulting from the obligation to pay this accumulated short-term borrowing with new long-term borrowing and thereby to refinance the previously incurred deficits.

Noteworthy is that the power of the state to authorize a school district to borrow money to pay operating deficits is not challenged. Nor is it claimed that operating deficit indebtedness may not be repaid with non-voted income taxes levied by the school district. It is claimed only that such indebtedness may not be serviced with non-voted millage.

We considered the effect of § 6 in Butcher v Grosse Ile Twp, 387 Mich 42; 194 NW2d 845 (1972). There we held that by reason of the "nonapplication of limitation” language of §6 there is no constitutional limitation on the amount of ad valorem taxation that may be imposed to pay debt service on bonds or other evidences of indebtedness.

. In Butcher this Court rejected contentions that voted millage could be levied to pay principal and interest on bonds or other evidences of indebtedness only when the bond or other evidence of indebtedness

—has been authorized by the vote of the taxpayers,

—when issued, was expected to be paid without resort to non-voted millage,

—is in default because of nonpayment of principal or interest or, unless non-voted millage is levied, will be in default.

Now that those refinements have been rejected others are urged. It is contended that the nonapplication provision permits the levy of non-voted millage to pay bonds or other evidences of indebtedness issued to fund or refinance operating deficits only when

—the deficit was not anticipated and, thus, not budgeted,

—r-the bond or other evidence of indebtedness is of a kind that had been authorized by the Legislature and, thus, presumably in contemplation when the 1963 Constitution was adopted (cf. Bacon v Kent-Ottawa Metropolitan Water Authority, 354 Mich 159; 92 NW2d 492 [1958]), like the short-term tax anticipation notes authorized by 1943 PA 202; MCLA 134.1 etseq.; MSA 5.3188(13) et seq.

There was no discussion on the floor of the convention of the nonapplication provision. It was adopted as part of a compromise substituted for an earlier-adopted proposal which would have eliminated the 15-mill limitation altogether. 1 Official Record, Constitutional Convention 1961, pp 927-928, 2 Official Record, Constitutional Convention 1961, pp 2628-2631. The compromise restored the 15-mill limitation but made it inapplicable to taxes imposed to pay debt service on bonds or other evidences of indebtedness. We have no basis for moderating the simple and clear language used to express this compromise. We have been presented with nothing justifying a departure from the "natural and ordinary meaning” of the words used in the Constitution. See Cooley, Constitutional Limitations (6th ed), ch 4, p 73.

The suggestion that the nonapplication provision was meant to apply to obligations issued for monies used to pay capital expenditures but not to obligations that have been incurred because of operating deficits, strikes us as much the same kind of argument we have just rejected when urged by those who favor extending the non-debt borrowing doctrine.

In both cases persons dissatisfied with the scope of the constitutional language ask us to create exceptions which they assert will better serve the public interest.

But both the provisions limiting the state’s power to incur indebtedness and the nonapplication provision are stated in language which is crystal clear. "No evidence”, says the Constitution, of state indebtedness shall be issued except for debts authorized pursuant to the Constitution. The millage limitations, says the Constitution, "shall not apply” to taxes imposed for the payment of principal and interest on bonds or other evidences of indebtedness. There is simply no room to en-graft the kind of well-meaning exceptions which those dissatisfied with this clear and unqualified language would add.

It is our opinion that whether the purpose of the authorized bond issue be for the funding of capital expenditures, or as contemplated here, the funding of accumulated operating deficits, the limitations of art 9, §6 do not apply and non-voted millage may be levied to pay principal and interest on such bonds.

The limitations do apply to ad valorem taxation for purposes other than levies to pay principal and interest on bonds or other evidences of indebtedness. We repeat what Justice Adams said in Butcher (p 66):

"[W]hat purports to be a 15-mill general ad valorem tax limitation upon real and tangible personal property in the first paragraph of § 6 is, if not illusory, certainly a much more miniscule limitation than was depicted to the people in the Address to the People accompanying the proposed 1963 Constitution. The limitations of the first paragraph do apply to counties, townships and school districts, and all of the operations of such governmental units, except for authorized operations of such units involving bonds or other evidences of indebtedness or assessments or contract obligations in anticipation of which bonds were issued.”

Neither Butcher nor the non-application of limitation provision has nullified the 15-mill limitation. It still applies to millage used to cover current operating needs of a school district; if the millage allocated to the school district within the 15-mill limitation is not adequate to cover such needs, additional millage may be levied only if approved by a majority of the electors voting on the question. Const 1963, art 9, § 6. The innumerable operating millage elections conducted since Butcher are testimony that the 15-mill limitation is still very much alive and that it is still necessary to obtain a favorable vote of the people to levy additional millage for operating purposes.

The Legislature may impose whatever limitations it deems necessary to prevent deficit spending and the issuance of bonds and other evidence of indebtedness. Here, the proposed borrowing by the School District of Detroit was authorized by the Legislature. It is not claimed that the School District of Detroit could sell these notes without legislative authorization.

At first blush it may seem strange that while the state is constitutionally prohibited from incurring indebtedness except limited short-term borrowing or long-term borrowing for specific purposes approved by the vote of two-thirds of the Legislature and the vote of the electorate, with the exception of counties which may not incur indebtedness in excess of 10% of assessed valuation (Const 1963, art 7, § 11), the borrowing capacity of local units of government is not limited by the Constitution. But state constitutions are historically intended to provide limitations on an otherwise omnipotent Legislature and the Legislature in turn is expected to protect the people by appropriate legislation from deficit spending by local units of government.

The Legislature has stepped up to its responsibility in this legislation as 1973 PA 1 and 2 provide that a school district which borrows pursuant to the provisions of either act must submit its budget for review and approval to the Department of the Treasury which is authorized to take any steps necessary to assure that the school district does not expend amounts greater than its revenues and that it maintains a balanced budget, and financial reports must be filed with the Auditor General every 30 days. MCLA 340.681(1), (10), 388.1240; MSA 15.3681(1), (10), 15.1919(640).

Legislation requiring like reporting by any school district or local unit of government facing financial difficulty might prevent some operating deficits or at least reduce their size, thereby forestalling or reducing future obligations issued to fund or refinance deficits.

We are of the opinion that the plan embodied in 1973 PA 1 and 2 violates Const 1963, art 9, § 12 insofar as it provides for the issuance of state notes, but the provision of the plan for repayment with non-voted millage of school district notes issued to fund accumulated operating deficits does not violate Const 1963, art 9, § 6.

T. E. Brennan, Swainson, Levin, and M. S. Coleman, JJ., concurred with T. G. Kavanagh, J.

1 A large proportion of ad valorem taxes is paid by nonresident persons and corporations. The newly-authorized school district income tax may be levied on corporations and resident individuals. MCLA 340.689(1); MSA 15.3689(1).