City of Bowling Green v. Kirby

• Decision Date: 24 June 1927
• Parties: CITY OF BOWLING GREEN v. KIRBY.
• Court: Kentucky Court of Appeals

295 S.W. 1004

220 Ky. 839

CITY OF BOWLING GREEN v. KIRBY.

Court of Appeals of Kentucky.

June 24, 1927

Appeal from Circuit Court, Warren County.

Suit by J. S. Kirby against the City of Bowling Green for an injunction. Judgment for plaintiff, and defendant appeals. Reversed and remanded.

N. P Sims, of Bowling Green, for appellant.

R. C P. Thomas and Thomas & Logan, all of Bowling Green, for appellee.

LOGAN J.

Bowling Green is a city of the third class. It owns its waterworks plant, which was established about 1872. It is agreed that the value of the waterworks at this time is $600,000. The plant is inadequate. The city contains a population of about 12,000, and in addition thereto there are continuously in the city 3,000 students attending the various schools and colleges who are not permanent residents of the city. Originally the built-up portions of the city were confined to the valley, but in recent years it has spread over the hilltops to such an extent that the present water plant and equipment do not furnish an adequate supply of water to all portions of the city. The assessed valuation of the property in the city subject to taxation is in round numbers $9,500,000, the floating indebtedness of the city is about $40,000, and the bonded indebtedness, exclusive of school bonds, is $308,500.

Conceiving that it had the authority so to do, the governmental authorities of the city have undertaken to issue bonds to raise sufficient funds to enlarge and improve the water plant. The basis of the belief of the governmental authorities of the city that it may so issue bonds is found in chapter 133 of the Acts of the General Assembly of 1926. An elaborate ordinance carefully and aptly prepared was enacted by the city council. This ordinance has for its object the granting of authority to issue bonds in the sum of $400,000 under the provisions of the aforesaid chapter of the Acts of the General Assembly of 1926. The proceeds of these bonds, so the ordinance provides, shall be used for the construction of extensions and improvements to the water plant of the city. It provides for the denomination of the bonds, rate of interest, dates of maturity, the form of the bonds, and such other details as make definite and certain the terms of the bonds and the authority for their issual. Before entering into a consideration of the contemplated improvements, the city procured the services of a competent engineer who made a report to the city showing the character of work required to bring the waterworks plant up to the standard as contemplated by the arrangements and the cost thereof. The city has made arrangements to issue bonds in the sum of $309,000 to carry on the work.

For the payment of the bonds and the interest thereon, the income and revenues from the waterworks plant of the city are set aside into a separate and special fund to be used for that purpose and in maintaining the plant 45 per cent. of the income and revenue shall be applied to the operation and maintenance of the plant; 10 per cent. of the income and revenue shall be set aside as a depreciation fund to be used in making good any depreciation in the plant; 45 per cent. of the income and revenue shall be set aside in the treasury of the city and held for the purpose of paying the principal and interest of the bonds authorized to be issued. The ordinance shows on its face that the city council found that these percentages of the income would be sufficient for the purposes contemplated.

As long as any of the bonds are outstanding the water rates shall be reasonable and just, taking into account and consideration the value of the waterworks, the cost of maintenance and operation, the necessary allowance for depreciation, and an adequate return on invested capital. The city shall also pay a rate that is reasonable and just for the services furnished it by the water company. The city binds itself not to sell, lease, or dispose of the waterworks plant or any extension thereto until all the bonds authorized shall have been paid in full or until arrangements have been made for the payment of such bonds in full. The city agrees to maintain and operate the waterworks plant and to charge and collect reasonable compensation for the service rendered by the plant. A statutory mortgage lien is granted as provided in chapter 133 of the Acts of the General Assembly of 1926, and this statutory mortgage lien shall take effect immediately upon the delivery of any bonds authorized to be issued under the provisions of the ordinance. Any bondholder may institute a suit in equity or at law to protect the statutory mortgage lien given by ordinance and may further enforce and compel performance of all duties required by the ordinance, including the making and collecting of sufficient rates, the segregation of the income and revenue and the application thereof in accordance with the provisions of the ordinance. Any bondholder may in case of default in the payment of the bonds or the interest thereon have a receiver appointed to administer the waterworks plant on behalf of the city with power to charge and collect rates sufficient to provide for the payment of any bonds, obligations outstanding against the waterworks plant, and for the payment of the operating expenses. All of these provisions are found in the ordinance with many others. Briefly stated, the ordinance authorizes the city to issue bonds to the amount of $400,000 for the purpose of constructing an extension to the waterworks plant, and pledges the income in part from the operation of the waterworks plant to the payment of the bonds so issued.

The appellee filed his petition seeking an injunction to prevent the issual of the bonds, and the lower court upheld his contention and enjoined the city from carrying out its plans in relation to this project. Appellee has filed an exhaustive brief in which he urges numerous grounds in support of the judgment of the lower court and in opposition to the validity of the ordinance. His points may be summarized as follows: (1) The issual of the bonds creates a debt in excess of the provisions of both section 157 and section 158 of the Constitution of Kentucky; that no election was held authorizing the indebtedness, and, even if an election had been held, the indebtedness would be invalid as it is in excess of the amount authorized by section 158 of the Constitution. (2) Chapter 133 of the Acts of the General Assembly of 1926 does not allow the common council to mortgage the waterworks plant or to pledge the income for the purpose of raising funds to improve or extend the waterworks system; that if the aforesaid chapter allows an indebtedness to be incurred in excess of the constitutional limitations, it is unconstitutional and void. (3) The common council may not mortgage or incumber the waterworks property without the assent of two-thirds of the total number of legal voters in the city voting at an election held for that purpose as is required by section 3290a, Ky. Stats. (4) If the mortgage lien should be enforced the purchaser of the waterworks plant would be authorized to conduct the business of furnishing water without the necessity of procuring a franchise as provided in section 164 of the Constitution of Kentucky, and for this reason the ordinance is invalid. (5) The ordinance attempts to exempt the bonds to be issued from taxation, and, if they are treated as municipal bonds, they would become a burden on the taxpayers of the city and thereby increase the indebtedness of the city beyond constitutional limitations. (6) Chapter 133 of the Acts of the General Assembly of 1926 and the ordinance enacted by the common council are against the public policy of the state.

It is admitted at the outset that a municipality cannot issue bonds or contract a debt in excess of the income and revenue provided for the year in which the debt is created without the assent of the qualified voters thereof at an election to be held for that purpose. This has been often held in construing section 157 of the Constitution. It is admitted that $309,000, the amount of bonds which the city proposes to issue, is in excess of the income and revenue for the present fiscal year. It has also been written by this court many times in construing section 158 of the Constitution that a municipality of the third class may not become indebted in excess of 5 per cent. of the assessed value of the taxable property in such municipality with certain exceptions not necessary to name here. It is also admitted that the amount of bonds proposed to be issued when added to the present indebtedness of the city will bring the total amount to a sum in excess of 5 per cent. of the assessed value of the taxable property. It needs no argument, therefore, to convince us that the main question for determination is whether the indebtedness created as proposed in the ordinance is a debt of the city within the meaning of section 157 and section 158 of the Constitution. If it is such an indebtedness it follows as a matter of course that the issual of the bonds should be prohibited as was done by the lower court, but if it is not such an indebtedness, then other questions must be determined.

If the bonds are issued they are not the obligations of the municipality as a corporate entity. No tax can be levied to pay either the bonds or the interest thereon. The ordinance carefully provides that the bonds and the interest must be paid out of the income from the operation of the waterworks plant. If the debt cannot be discharged in that manner, then it cannot be discharged at all so far as the municipality in its corporate capacity is concerned. There is no power given to impose a tax on the property within the city to discharge the obligations. If...