Caddell v. Lexington County School District No. 1

373 S.E.2d 598, 296 S.C. 397, 1988 S.C. LEXIS 115

• Court: Supreme Court of South Carolina
• Decided: October 24, 1988
• Docket: 22917
• Status: Published

Opinions

Chandler, Justice:

In a Declaratory Judgment action the Circuit Court held unconstitutional certain lease/purchase agreements entered into by Lexington County School District No. 1 (District) for construction and renovation of public school buildings. The Court reasoned that the agreements constitute general obligation debt in violation of Article X, § 15 of the State Constitution.

We reverse.

FACTS

All parties agree that burgeoning pupil enrollment in the District has created a pressing need for construction of additional school buildings as well as renovation of existing facilities.

After voters on three occasions rejected referenda authorizing bonded indebtedness in excess of the 8% limit in Article X, § 15, the District’s Board of Trustees adopted an alternative method of funding, known in the marketplace as lease/purchasing.

Under the specific plan proposed here, land and school buildings to be renovated would be leased by the District to a nonprofit corporation (Corporation) for a term of thirty years. The Corporation would sell Certificates of Participation (Certificates) to investors to provide the necessary financing. The new and renovated structures would then be leased back to the District under an agreement providing for year-to-year rental. Rent payments are set at an amount sufficient to pay the principal and interest due under the Certificates.

Critical to this leaseback arrangement is a provision known as the “non-appropriation clause,” under which the District may decline, without penalty, to renew, the annual lease by failing or refusing to appropriate the necessary funds.

ISSUE

The sole issue we address is whether the lease/purchase agreements constitute debt as that term is used in Article X, §15.

DISCUSSION

The limitations placed upon school districts by Article X, § 15, apply only to general obligation debt, defined in subsection (2) as “any indebtedness of the school district which shall be secured in whole or in part by a pledge of its full faith, credit and taxing power.” In its historical context, general obligation debt refers to that which is “ultimately secured by taxes on the property within the political entity.”¹

Thus, general obligation debt embraces neither yearly expenses payable from current revenues nor contingent liabilities of the governmental entity.² This is so because the governmental entity is not obligated to impose property taxes for their payment.³

Similarly, a leaseback arrangement containing an explicit non-appropriation clause places no such requirement on the political entity. Under the plan here, rental payments are to be included in the District's annual budget. Liability under the leaseback agreement is, at most, contingent: The District has the option of terminating simply by refusing to appropriate money for rent.

We hold that the lease/purchase agreements do not constitute debt under Article X, § 15, of the Constitution. Our holding accords with the overwhelming majority of jurisdictions.⁴

Caddell maintains that, because the District would temporarily lose the use of its property upon an election not to renew, the lease/purchase agreements constitute pledges of the District’s credit. We disagree.

We rejected a similar contention in Nichols v. South Carolina Research Authority, supra. In Nichols, the Budget and Control Board deeded 1500 acres of State-owned property to the Authority. The Authority, in turn, sought to mortgage the acreage to secure obligations of privately owned firms locating in its industrial parks. Notwithstanding that the property could be permanently lost upon a business failure, we held that the mortgage, which covered a known and quantifiable asset only, was not a pledge of the State’s credit in that it imposed no potential taxpayer liability.

Likewise, the District’s lease of land and school buildings to the Corporation imposes no potential taxpayer liability. Indeed, the potential detriment to the District is less than that created by the mortgage in Nichols. Here, the ownership of the land and buildings could never be impaired by an election not to renew; at most, the use of the property would be lost for a limited period of time.

Caddell further suggests that the agreements are a subterfuge to enable the District to construct needed facilities without contravening constitutional debt limitations. The identical argument was rejected by the Supreme Court of Colorado, which upheld the financing of a city hall through a lease/purchase agreement containing a non-appropriation clause. The following statement from that decision is pertinent here:

The premise of the plaintiffs’ argument that the plan for financing and construction of a city hall is a fraud or works an injustice upon the city’s taxpayers is that it is a device to accomplish, by change of form with no change of substance, the same result which has been rejected by the voters. This premise is faulty. It is not the construction of a city hall for which voter approval is required under Colo. Const. Art. XI, § 6. Rather, it is the creation of a general obligation debt of the city which requires the assent of the voters. The plan submitted to and rejected by the voters would have created such a general obligation debt. The plan now proposed does not. This difference is constitutionally significant. [Emphasis supplied].⁵

The concerns expressed in both the dissent and the Order of the Circuit Court are matters of policy and must be addressed, if at all, through constitutional amendment or legislative proscription. At present, nothing in either the South Carolina Constitution or the South Carolina Code of Laws inhibits the adoption of the financing agreements at issue in this litigation.

Accordingly, the judgment of the Circuit Court is reversed.

Reversed.

Gregory, C. J., and Harwell and Toal, JJ., concur. Finney, J., dissenting in separate opinion.

1 City of Beaufort v. Griffin, 275 S. C. 603, 605, 274 S. E. (2d) 301, 303 (1981).

2 United States Rubber Products, Inc. v. Town of Batesburg, 183 S. C. 49, 190 S. E. 120 (1937); Luther v. Wheeler, 73 S. C. 83, 52 S. E. 874 (1905); Bradley v. City Council of Greenville, 212 S. C. 389, 46 S. E. (2d) 291 (1948); Lillard v. Melton, 103 S. C. 10, 87 S. E. 421 (1915).

3 See Carll v. South Carolina Jobs-Economic Dev. Auth., 284 S. C. 438, 327 S. E. (2d) 331 (1985); see also Nichols v. South Carolina Research Auth., 290 S. C. 415, 351 S. E. (2d) 155 (1986).

4 Opinion of the Justices No. 183, 278 Ala. 298, 178 So. (2d) 76 (1965); Gude v. City of Lakewood, 636 P. (2d) 691 (Colo. 1981); Cochran v. Mayor of Middletown, 14 Del. Ch. 295, 125 A. 459 (1924); Berger v. Howlett, 25 Ill. (2d) 128, 182 N. E. (2d) 673 (1962); Steup v. Indiana Housing Fin. Auth. 273 Ind. 72, 402 N. E. (2d) 1215 (1980); State ex rel. Fatzer v. Armory Bd., 174 Kan. 369, 256 P. (2d) 143 (1953); Davis v. Board of Education of Newport, 260 Ky. 294, 83 S. W. (2d) 34 (Ct. App. 1935); Edgerly v. Honeywell Information Systems, Inc., 377 A. 2d 104 (Me. 1977); St. Charles City-County Library Dist. v. St. Charles Library Bldg. Corp., 627 S. W. (2d) 64 (Mo. App. 1981); Ruge v. State, 201 Neb. 391, 267 N. W. (2d) 748 (1978); Enourato v. New Jersey Bldg. Auth., 90 N. J. 396, 448 A. (2d) 449 (1982); Halstead v. McHendry, 566 P. (2d) 134 (Okla. 1977); McFarland v. Barron, 83 S. D. 639, 164 N. W. (2d) 607 (1969); Texas Pub. Bldg. Auth. v. Mattox, 686 S. W. (2d) 924 (Tex. 1985);’ Municipal Bldg. Auth. v. Lowder, 711 P. (2d) 273 (Utah 1985); Baliles v. Mazur, 224 Va. 462, 297 S. E. (2d) 695 (1982); State ex rel. W. Va. Resource Recovery — Solid Waste Disposal Auth. v. Gill, 323 S. E. (2d) 590 (W. Va. 1984); State ex rel. Thomson v. Giessel, 271 Wis. 15, 72 N. W. (2d) 577 (1955). Contra State ex rel. Nevada Bldg. Auth. v. Hancock, 86 Nev. 310, 468 P. (2d) 333 (1970); McKinley v. Alamogordo Mun. School Disk Auth., 81 N. M. 196, 465 P. (2d) 79 (1969).

5 Gude v. City of Lakewood, supra at 697.