OPINION
HATHAWAY, Chief Judge.
In this appeal, we are faced with the question of the constitutionality of Arizona’s property tax increment financing scheme under the slum clearance and redevelopment law, A.R.S. Secs. 36-1471, et seq.
Our legislature has defined a method of redevelopment of slum or blighted areas within municipalities. After a finding of necessity has been made by the local governing body, a slum clearance and redevelopment commission may be formed to pre
pare a redevelopment plan.
A municipality is given broad powers of eminent domain and disposal of property in a redevelopment project area.
Redevelopment projects may be financed by municipal bonds, and, since 1977, by property tax increment bonds.
The concept of tax increment financing originated in California in the early 1950’s.
As a result of increasing difficulties in securing federal funding for redevelopment projects, use of this financing technique has increased, particularly over the last 10 years. Arizona’s statutes are very similar to those of many other states which have adopted tax increment financing. These statutes do not require voter approval prior to issuance of tax increment bonds.
In a typical project utilizing tax increment financing, the redeveloping municipality finances its activities by issuing bonds to be repaid from future tax increments for the duration of the project. The assessed valuation of the property within the redevelopment area is determined as of a particular date. This is referred to as the “frozen base value” or “base year assessed value.” After the bonds are sold and redevelopment occurs, the assessed valuation of the project property generally rises, which results in additional ad valorem tax revenues from that area. The difference in revenues received before and after the redevelopment, the “tax increment,” is paid into a special fund and applied to repayment of the tax increment bonds. Only revenues above and beyond what would have been collected from the property owners under the base year assessed valuation are diverted into the repayment fund. When the bonds are fully repaid from the captured increments, the allocation to the special fund terminates and the full taxes are disbursed to the respective taxing authorities.
In October 1977, the Tucson City Council adopted Resolution No. 10347, authorizing the issuance of $1.5 million of tax increment bonds for the Pueblo West Redevelopment Project. Pursuant to A.R.S. Sec. 36-1484, the proposal was submitted to the attorney general for certification. The attorney general'refused to certify the bonds, stating that “the bonds authorized by the City for issue would not be issued in accordance with the Constitution and laws of the State of Arizona.” The attorney general listed 12 reasons for his conclusion.
The city then filed the instant action against the attorney general and the three other taxing authorities affected,
requesting a special order directing the attorney general to certify that the Pueblo West tax^ increment bonds could be issued. The trial court ruled that the bonds were invalid and that the tax increment statutes adopted by the legislature were unconstitutional as creating a debt without an election in violation of Ariz.Const. art. 7, Sec. 13, as well as creating a “new tax” in violation of sections 3, 6 and 9 of article 9 and section 13 of article 4, part 2. To facilitate appeal, the trial court ruled in favor of the attorney general on all the remaining issues.
Ariz.Const. art. 7, Sec. 13 provides: “Submission of questions upon bond issues or special assessments Questions upon bond issues or special assessments shall be submitted to the vote of real property tax payers, who shall also in all respects be qualified electors of this State, and of the political subdivisions thereof affected by such question.”
The question before us is whether the issuance of property tax increment bonds constitutes a debt of the city which “affects” it, requiring an election under this provision.
It has long been established that a municipality is not affected by a bond issue or special assessment when it in no way incurs liability for payment.
City of Globe v. Willis,
16 Ariz. 378, 146 P. 544 (1915). For this reason, municipal revenue bonds or obligations payable out of a special fund separate from the city’s general funds do not require an election before they may be issued, and are not affected by constitutional restrictions on municipal indebtedness.
Guthrie v. City of Mesa,
47 Ariz. 336, 56 P.2d 655 (1936). The city contends that tax increment bonds fall into the category of revenue or special fund obligations described in
Willis
and
Guthrie.
It points out that the tax increment statutes provide that such bonds shall not give rise to a general obligation or liability of the municipality and “shall not constitute an indebtedness within the meaning of any constitutional or statutory debt limitation or restriction.”
Further, the city argues, the tax increments are placed in a special fund to pay off the bonds and that the only obligation undertaken by the city is to collect and pay over the incremental tax revenues, if any, resulting from any increased valuation within the redevelopment project area. We agree that under the statutory scheme the city’s general funds would not be liable even in the event that no incremental tax revenues are ever collected. The parties stipulated below and it appears uncontradicted that ad valorem taxation presently affects the property in question, that the probabilities are that such taxation will continue to exist in the future, and that the fair market value of the property will probably increase in the future.
Notwithstanding the legislature’s recital that tax increment bonds do not constitute a debt within the meaning of Ariz. Const, art. 7, Sec. 13, we must look to the transaction for what it is, and not what it is called.
City of Phoenix v. Phoenix Civic Auditorium & Convention Center Ass’n,
99 Ariz. 270, 408 P.2d 818 (1965), reh. 100 Ariz. 101, 412 P.2d 43 (1966). The
Phoenix Civic Auditorium
opinions are particularly instructive on the issue before us. In that case, a lease-back agreement under which the City of Phoenix was to condemn land and lease it to a nonprofit association, which would construct a civic center and rent the land back to the city, was held to create a debt upon the city exceeding the constitutional debt limitation.
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OPINION
HATHAWAY, Chief Judge.
In this appeal, we are faced with the question of the constitutionality of Arizona’s property tax increment financing scheme under the slum clearance and redevelopment law, A.R.S. Secs. 36-1471, et seq.
Our legislature has defined a method of redevelopment of slum or blighted areas within municipalities. After a finding of necessity has been made by the local governing body, a slum clearance and redevelopment commission may be formed to pre
pare a redevelopment plan.
A municipality is given broad powers of eminent domain and disposal of property in a redevelopment project area.
Redevelopment projects may be financed by municipal bonds, and, since 1977, by property tax increment bonds.
The concept of tax increment financing originated in California in the early 1950’s.
As a result of increasing difficulties in securing federal funding for redevelopment projects, use of this financing technique has increased, particularly over the last 10 years. Arizona’s statutes are very similar to those of many other states which have adopted tax increment financing. These statutes do not require voter approval prior to issuance of tax increment bonds.
In a typical project utilizing tax increment financing, the redeveloping municipality finances its activities by issuing bonds to be repaid from future tax increments for the duration of the project. The assessed valuation of the property within the redevelopment area is determined as of a particular date. This is referred to as the “frozen base value” or “base year assessed value.” After the bonds are sold and redevelopment occurs, the assessed valuation of the project property generally rises, which results in additional ad valorem tax revenues from that area. The difference in revenues received before and after the redevelopment, the “tax increment,” is paid into a special fund and applied to repayment of the tax increment bonds. Only revenues above and beyond what would have been collected from the property owners under the base year assessed valuation are diverted into the repayment fund. When the bonds are fully repaid from the captured increments, the allocation to the special fund terminates and the full taxes are disbursed to the respective taxing authorities.
In October 1977, the Tucson City Council adopted Resolution No. 10347, authorizing the issuance of $1.5 million of tax increment bonds for the Pueblo West Redevelopment Project. Pursuant to A.R.S. Sec. 36-1484, the proposal was submitted to the attorney general for certification. The attorney general'refused to certify the bonds, stating that “the bonds authorized by the City for issue would not be issued in accordance with the Constitution and laws of the State of Arizona.” The attorney general listed 12 reasons for his conclusion.
The city then filed the instant action against the attorney general and the three other taxing authorities affected,
requesting a special order directing the attorney general to certify that the Pueblo West tax^ increment bonds could be issued. The trial court ruled that the bonds were invalid and that the tax increment statutes adopted by the legislature were unconstitutional as creating a debt without an election in violation of Ariz.Const. art. 7, Sec. 13, as well as creating a “new tax” in violation of sections 3, 6 and 9 of article 9 and section 13 of article 4, part 2. To facilitate appeal, the trial court ruled in favor of the attorney general on all the remaining issues.
Ariz.Const. art. 7, Sec. 13 provides: “Submission of questions upon bond issues or special assessments Questions upon bond issues or special assessments shall be submitted to the vote of real property tax payers, who shall also in all respects be qualified electors of this State, and of the political subdivisions thereof affected by such question.”
The question before us is whether the issuance of property tax increment bonds constitutes a debt of the city which “affects” it, requiring an election under this provision.
It has long been established that a municipality is not affected by a bond issue or special assessment when it in no way incurs liability for payment.
City of Globe v. Willis,
16 Ariz. 378, 146 P. 544 (1915). For this reason, municipal revenue bonds or obligations payable out of a special fund separate from the city’s general funds do not require an election before they may be issued, and are not affected by constitutional restrictions on municipal indebtedness.
Guthrie v. City of Mesa,
47 Ariz. 336, 56 P.2d 655 (1936). The city contends that tax increment bonds fall into the category of revenue or special fund obligations described in
Willis
and
Guthrie.
It points out that the tax increment statutes provide that such bonds shall not give rise to a general obligation or liability of the municipality and “shall not constitute an indebtedness within the meaning of any constitutional or statutory debt limitation or restriction.”
Further, the city argues, the tax increments are placed in a special fund to pay off the bonds and that the only obligation undertaken by the city is to collect and pay over the incremental tax revenues, if any, resulting from any increased valuation within the redevelopment project area. We agree that under the statutory scheme the city’s general funds would not be liable even in the event that no incremental tax revenues are ever collected. The parties stipulated below and it appears uncontradicted that ad valorem taxation presently affects the property in question, that the probabilities are that such taxation will continue to exist in the future, and that the fair market value of the property will probably increase in the future.
Notwithstanding the legislature’s recital that tax increment bonds do not constitute a debt within the meaning of Ariz. Const, art. 7, Sec. 13, we must look to the transaction for what it is, and not what it is called.
City of Phoenix v. Phoenix Civic Auditorium & Convention Center Ass’n,
99 Ariz. 270, 408 P.2d 818 (1965), reh. 100 Ariz. 101, 412 P.2d 43 (1966). The
Phoenix Civic Auditorium
opinions are particularly instructive on the issue before us. In that case, a lease-back agreement under which the City of Phoenix was to condemn land and lease it to a nonprofit association, which would construct a civic center and rent the land back to the city, was held to create a debt upon the city exceeding the constitutional debt limitation. The supreme court stated that the issuance of bonds which are not payable from general funds but solely from revenues of an independent revenue-producing asset or utility does not constitute a debt of the municipality, but that the lease-back terms amounted to a purchase agreement which made “the general taxing power of the City” the real “security for the debts.” On rehearing, the court held that if the lease was amended to provide that the proceeds of ad valorem taxes could not be subjected to payment of rent, the lease would not violate the Arizona Constitution.
The key constitutionál infirmity in Arizona’s tax increment statutes is that ^they allow the pledge of proceeds from ad valorem taxation to pay off municipal property tax increment bonds. Even though the incremental tax revenues are placed into a special fund, the “special fund” doctrine of
City of Globe v. Willis,
supra, and
Guthrie v. City of Mesa,
supra, does not remove these bonds from the category of obligations which must be approved by the voters under our constitution. Our supreme court has addressed the special fund doctrine by quoting at length from a Washington Supreme Court opinion,
State ex rel. Washington State Finance Committee v. Martin,
62 Wash.2d 645, 384 P.2d 833 (1963):
“ ‘That the special fund doctrine is a useful and valid tool of government is apparent when one thinks of all of the institutions and devices of government supported by it. But the true test of its
application here is not what comes out of the fund, but what goes into it. If the revenues in it derive exclusively from the operation of the device or organ of government financed by the fund, as in the case of a toll bridge, or the operation of the State Liquor Control Board, or from sales or leases of publicly owned lands, any securities issued solely upon the credit of the fund are not debts of the state, but debts of the fund only. But if the state undertakes or agrees to provide any part of the fund from any general tax, be it excise or ad valorem, then securities issued upon the credit of the fund are likewise issued upon the credit of the state and are in truth debts of the state. Hence, we must take care that the employment of peripheral doctrines do not lead us away from the main point of the case. What is a debt of the State of Washington? Any obligation which must in law be paid from any taxes levied generally is, we think, a debt of the state. It matters little whether the tax be ad valorem or an excise.’
We agree with the Washington court that where the bonds are payable only from a constitutionally authorized fund, which is separate and distinct from the State’s general revenues, the bonds thus funded are obligations of the special fund and not of the state.”
Arizona State Highway Commission v. Nelson,
105 Ariz. 76, 80, 459 P.2d 509, 513 (1969).
See also,
Tucson Transit Authority, Inc. v. Nelson,
107 Ariz. 246, 485 P.2d 816 (1971).
Despite the presumption in favor of the constitutionality of a legislative enactment and our duty to view any attack in favor of the validity of the statute,
New Times, Inc. v. Arizona Board of Regents,
110 Ariz. 367, 519 P.2d 169 (1974), we are constrained to hold that the provisions of our slum clearance and redevelopment law which authorize tax increment financing in its current form are unconstitutional as violative of Ariz.Const. art. 7, Sec. 13. The Supreme Court of Kentucky reached the same result in
Miller v. Covington Development Authority,
539 S.W.2d 1 (Ky.1976), stating that ad valorem taxes cannot be put in the “special fund” category, and that any obligation payable from ad valorem taxes is a debt. The Supreme Court of Iowa, while holding that state’s tax increment statutes constitutional on due process and other grounds, also held that property tax increment bonds must be treated as a municipal debt obligation:
“The purpose of Sec. 3 [Iowa’s constitutional debt limitation, similar to Ariz. Const, art. 9, § 8], as indicated by the special assessment and revenue bond cases, is to prevent the general taxes of a political subdivision from becoming overburdened by obligations. The taxes which will be used to pay the proposed urban renewal bonds and interest will be general taxes. This is not a case of a special assessment tax which was never intended to be used, and could not be used, to meet other expenses of the city. Nor is this a case where the bonds are to be paid from the operating revenues of a municipal enterprise which generates income, such as a power plant.
Ultimately the ‘credit’ of a city is its power to levy general taxes. When it pledges all or part of that power, it pledges its credit and in a realistic sense incurs an obligation. We think the bonds must realistically be treated as a debt for the purposes of Sec. 3.
Clearly the urban renewal bonds would constitute a constitutional debt if they were payable from the general revenues of the city without limitation. We think the result is not different because Sec. 403.19 carves out a certain portion of a city’s general revenues and limits the liability of the city to those revenues. If the result were otherwise, a city could divide its general revenues into several special funds, each with a bond issue restricted to recourse against its own fund — and thus commit large portions of the city’s revenues without regard to Sec. 3. The constitutional debt limitation could thus be virtually nullified.”
Richards v. City of Muscatine,
237 N.W.2d 48, 64 (Iowa 1975)
We perceive another reason why an election must be held in this instance. The electors of the affected district shall be given a voice in accepting or rejecting a proposed expenditure which ultimately pledges their district’s general taxing power. An election is required even if the proposed increase in indebtedness would not violate constitutional debt limitations.
Ackerman v. Boyd,
74 Ariz. 77, 244 P.2d 351 (1952); see also,
Tribe v. Salt Lake City Corp.,
540 P.2d 499 (Utah 1975) (Henriod, C. J., dissenting).
We have reviewed the tax increment statutes of other jurisdictions together with case law interpreting these provisions and find no authority which dictates a different conclusion. The majority of these statutes have not been attacked on constitutional grounds in their respective jurisdictions. It is significant to note that California, the state which first adopted tax increment financing, amended its constitution to allow such financing in the face of its debt limitation provisions. Cal.Const. art. 16, Sec. 16.
The trial court correctly declared the instant bond issue invalid and the tax increment financing scheme set forth in A.R.S. Secs. 36-1481 and 36-1488.01 unconstitutional under Ariz.Const. art. 7, Sec. 13. We do not address the additional objections raised by counsel since the statutes do not survive this initial constitutional barrier.
Affirmed.
HOWARD and RICHMOND, JJ., concur.