City of Bakersfield v. W. Park Home Owners Ass'n & Friends

• Decision Date: 31 October 2016
• Docket Number: F071869
• Citation: 4 Cal.App.5th 1199,209 Cal.Rptr.3d 346
• Court: California Court of Appeals Court of Appeals
• Parties: CITY OF BAKERSFIELD, Plaintiff and Respondent, v. WEST PARK HOME OWNERS ASSOCIATION AND FRIENDS, Defendant and Appellant.

4 Cal.App.5th 1199

209 Cal.Rptr.3d 346

CITY OF BAKERSFIELD, Plaintiff and Respondent,

v.WEST PARK HOME OWNERS ASSOCIATION AND FRIENDS, Defendant and Appellant.

F071869

Court of Appeal, Fifth District, California.

Filed October 31, 2016

Brumfield & Hagan, Robert H. Brumfield III and Kristin A. Hagan for Defendant and Appellant.

Kutak Rock and Neil L. Arney for Plaintiff and Respondent.

OPINION

MCCABE

, J.^†

California Constitution

¹, article XVI, section 18, prohibits certain public entities, including cities, from incurring indebtedness without a two-thirds vote of the qualified electors. Nevertheless, alternative constitutionally permissible financing methods exist.

Respondent, City of Bakersfield (City), proposed to finance road improvement projects through a public benefit corporation and pay the debt from revenues held in special funds. The City filed an action seeking validation of this finance plan under Government Code section 53511

and Code of Civil Procedure section 860 et seq. Appellant, West Park Home Owners Association and Friends (West Park), opposed the finance plan.

West Park challenges the trial court's judgment validating the City's proposed plan. According to West Park, the circumstances do not qualify as exceptions to the voter approval requirement of the California Constitution. West Park further argues the City could not use gas tax revenues to pay the debt.

Contrary to West Park' position, the overall financing scheme is valid. However, the City cannot use gas tax revenues as part of the financing. Accordingly, the judgment will be affirmed in part and reversed in part.

BACKGROUND

In July 2013, the Bakersfield City Council, the City's governing body, adopted a resolution authorizing the formation of the Bakersfield Public Benefit Corporation (Corporation). This nonprofit public benefit corporation was formed as a separate entity to finance and develop public improvement projects. To carry out its purposes, the Corporation has the power to “borrow the necessary funds.”

To finance the construction, improvement, maintenance, and operation of certain public street and highway projects (Projects), the City Council passed a resolution in September 2013 authorizing the City to enter into various agreements. These agreements include: (1) an installment sale agreement between the City and the Corporation; (2) a certificate purchase agreement authorizing the City and the Corporation to sell certificates of participation to raise funds for the Projects; and (3) a trust agreement designating a trustee to act with respect to the funds received from the sale of the certificates.

The installment sale agreement defines the relationship between the City and the Corporation with respect to the Projects. The Corporation will “cause the design, acquisition and construction” of the Projects for, and sell the Projects to, the City. In turn, the City will pay the purchase price of the Projects, plus interest and an administration fee, in installments as set forth in an installment payment schedule.

To carry out its obligation to make the installment payments, the City will irrevocably pledge (1) the gas tax revenues received and deposited in the gas tax fund; (2) the transportation impact fee revenues received and deposited in the transportation impact fee trust fund; and (3) the restricted utility franchise and surcharge revenues received and deposited in the roads program utility franchise fee and surcharge fund. While the City's obligation to make the installment payments is described as “absolute and unconditional,” it is nevertheless subject to the following liability limitation:

“Section 8.01. Liability of City Limited to Revenues.

Notwithstanding anything contained herein, the City shall not be required to advance any moneys derived from any source of income other than the Revenues for the payment of the 2013 Installment Sale Payments or for the performance of any agreements or covenants required to be performed by it contained herein.

“ The obligation of the City to make the 2013 Installment Sale Payments is a special obligation of the City payable solely from the Revenues as provided herein, and does not constitute a debt of the City or of the State of California or of any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction.”

The trust agreement is the mechanism by which the certificates issued and sold to raise funds for the Projects are to be administered. The trust agreement will be entered into by the City, the Corporation, and a trustee. Under this agreement, the trustee is authorized to prepare the certificates in an amount equal to the aggregate principal amount of the installment sale payments to be made by the City to the Corporation. Thereafter, the trustee is to deliver the certificates to the certificate purchasers upon payment of the purchase price.

The trust agreement also requires the Corporation to assign its rights to receive the installment sale payments from the City to the trustee. These amounts are to be held in trust and then used by the trustee to pay the certificate owners.

In October 2013, the City filed a complaint under Government Code section 53511

and Code of Civil Procedure section 860 et seq. to validate the proposed plan to finance the Projects. West Park appeared as an interested party and answered the complaint.

Following a hearing, the trial court entered judgment in the City's favor. The court concluded that the City's proposed obligations would not exceed the debt limits under article XVI, section 18

, because they were payable out of a special fund, not the City's general funds. The court further found that the proposed use of the gas tax revenues complied with the California Constitution. Finally, the court held that the Corporation is a valid separate legal entity, not a “sham” as urged by West Park.

DISCUSSION

1. Validation proceedings.

A local agency, such as the City, “may bring an action to determine the validity of its bonds, warrants, contracts, obligations or evidences of indebtedness.” (Gov. Code, § 53511

; Code Civ. Proc., § 860.) The purpose of such a proceeding is to promptly settle all questions about the validity of the agency' actions. (Quantification Settlement Agreement Cases (2011) 201 Cal.App.4th 758, 833, 134 Cal.Rptr.3d 274.) It is an in rem action that binds the agency and all other persons. (Ibid . )

2. The City's finance plan does not violate the constitution' debt limitation.

a. The special fund doctrine.

Article XVI, section 18

, prohibits the City from incurring “any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the voters.” Essentially, article XVI, section 18

, mandates balanced budgets. (Rider v. City of San Diego (1998) 18 Cal.4th 1035, 1045, 77 Cal.Rptr.2d 189, 959 P.2d 347 (Rider ).) The purpose of this constitutional protection is to safeguard the general funds and property of a public entity by preventing bondholders from forcing an increase in the taxes of, or foreclosing on the general assets and property of, the issuing entity to obtain payment. (City of Redondo Beach v. Taxpayers, Property Owners, etc., City of Redondo Beach (1960) 54 Cal.2d 126, 131, 5 Cal.Rptr. 10, 352 P.2d 170 (City of Redondo Beach ).)

In light of this purpose, a judicially created exception to the voter approval requirement has evolved known as the special fund doctrine. Under this doctrine, the constitutional debt limitation provision is not violated by obligations that are “payable solely from a special fund, provided the governmental body is not liable to maintain the special fund out of its general funds, or by tax levies, should the special fund prove insufficient.” (City of Oxnard v. Dale (1955) 45 Cal.2d 729, 733, 290 P.2d 859

(Dale ).) Thus, the indebtedness at issue must not be an indebtedness or obligation of the governmental body, here a city. Further, payments into the special fund beyond the current year cannot be a charge on the general fund. Rather, the revenue must be supplied by the agency to be benefited. (City of Palm Springs v. Ringwald (1959) 52 Cal.2d 620, 624, 342 P.2d 898 (Ringwald ).) Accordingly, revenues pledged from a special fund do not “create a situation in which future taxpayers might be strapped with obligations incurred by a prior administration without the ability to meet those obligations or the necessary voter approval.” (Law Offices of Cary S. Lapidus v. City of Wasco (2004) 114 Cal.App.4th 1361, 1368, 8 Cal.Rptr.3d 680.)

Nevertheless, there must be a reasonable connection or nexus between the special fund revenues and the project to be financed with those revenues. Before the California Supreme Court ruled in Dale, supra, 45 Cal.2d 729, 290 P.2d 859

, “there had been some doubt whether the source of revenue for the special fund had to be restricted to the improvements for which the bonds were issued or whether there could be a pledge of revenue from the entire facility or agency to be benefited.” (Ringwald, supra, 52 Cal.2d at p. 625, 342 P.2d 898.) The Dale court adopted the broader view and concluded that the special fund doctrine applies “where the revenues of the entire existing system, as well as those of the proposed improvement, are pledged.” (Dale, supra, 45 Cal.2d at pp. 734, 737, 290 P.2d 859.) Thus, in Dale, the court held that the city's proposal to finance interceptor sewer lines to transport sewage to a sewage treatment plant from revenues produced by the entire existing sewer system, rather than limit the revenues to those produced from the interceptor lines alone, was valid. The court found no “sound reason” to distinguish between the two sources of revenue. (Id. at p. 737, 290 P.2d 859.)

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