City of Hartford v. Kirley
| Decision Date | 16 December 1992 |
| Docket Number | No. 91-1390-OA,91-1390-OA |
| Parties | The CITY OF HARTFORD, Petitioner, v. Dean T. KIRLEY and John C. Spielmann, Respondents. |
| Court | Wisconsin Supreme Court |
For the petitioner there were briefs by Thomas Armstrong, Paul R. Schilling, Julianna Ebert and Quarles & Brady, Milwaukee and oral argument by Thomas Armstrong and Paul R. Schilling.
For the respondent there was a brief by Karen M. Christianson, Phillip J. Eckert and O'Meara, Eckert, Pouros & Gonring, West Bend and oral argument by Karen M. Christianson.
Amicus Curiae brief was filed by Henry A. Gempeler, Reed Groethe and Foley & Lardner, Madison for City of Madison and League of Wisconsin Municipalities.
Amicus Curiae brief was filed by James H. Schneider, Madison for the League of Wisconsin Municipalities.
This is an original action, brought pursuant to sec. 809.70, Stats. 1989-90, by the City of Hartford, Wisconsin, against Dean T. Kirley and John C. Spielmann, respectively the mayor and city clerk for the City of Hartford. The City of Hartford (City) seeks a declaratory judgment that the tax incremental bonds (TIF bonds) it plans to issue for Tax Incremental District No. 4 (TID No. 4) pursuant to sec. 66.46, Stats.1989-90, do not constitute debt within the meaning of art. XI, sec. 3, of the Wisconsin Constitution. 1
For the reasons set forth below, we conclude that the City's TIF bonds for TID No. 4 to be issued pursuant to sec. 66.46, Stats. 1989-90, constitute debt within the meaning of art. XI, sec. 3, Wis. Const.
This case comes before us on stipulated facts. 2 The controversy arises from the City's creation on June 13, 1988, of Tax Incremental District No. 4. TID No. 4 consists of approximately 1,120 acres sited for an industrial project. To pay a portion of the project costs associated with TID No. 4, the City issued $4,155,000 of general obligation anticipation notes. As of May 14, 1991, as a result of this borrowing, the City was left with less than $2,000,000 in general obligation borrowing capacity within its constitutional debt limit. On that date, the Common Council of the City of Hartford authorized the issuance of $2,300,000 in TIF bonds for TID No. 4. The City had not previously issued TIF bonds. Banc One Capital Corporation (Banc One) offered to act as underwriter and purchase the TIF bonds subject to execution of a bond purchase agreement by the mayor and the city clerk.
In May 1991, the mayor and city clerk sought a legal opinion from the city attorney to confirm that the TIF bonds would not constitute an indebtedness of the City for purposes of the constitutional debt limitation. On May 21, 1991, the city attorney concluded that the issuance of the TIF bonds would constitute debt and would violate the constitutional limitation on debt under art. XI, sec. 3, Wis. Const.
Upon receipt of the city attorney's opinion, the mayor and city clerk informed the Common Council of the City of Hartford that they would not sign the bond purchase agreement. Banc One refused to purchase the TIF bonds until it received a definitive ruling that the bonds would not result in an unconstitutional issuance of debt. The Common Council of the City of Hartford retained counsel to commence this original action seeking a declaration that TIF bonds issued pursuant to sec. 66.46 are exempt from the constitutional debt limitation of art. XI, sec. 3. To date, the parties have held steadfast in their positions: The mayor and city clerk refuse to sign the purchase agreement, and Banc One refuses to purchase the TIF bonds in the absence of a definitive ruling on the debt question.
First we summarize the statutes creating tax incremental districts. Then we discuss whether the City's TIF bonds for TID No. 4 issued pursuant to the statutes are debt under the constitution.
Section 66.46 of the Wisconsin statutes adopted in 1975, 3 authorizes cities and villages to create tax incremental districts 4 to assist them in financing public improvement projects in areas which are "blighted" (sec. 66.435(3), Stats.1989-90), in need of "rehabilitation or conservation work" (sec. 66.435(3), Stats.1989-90) or suitable for "industrial sites" (sec. 66.52, Stats.1989-90). Prior to creating a district, the municipality must take a number of preliminary steps, including designating the boundaries of the tax incremental district (sec. 66.46(4)(b), Stats.1989-90), preparing and adopting a proposed project plan for the district (sec. 66.46(4)(f), Stats.1989-90), and gaining the approval of a joint review board whose membership is prescribed by the statute (sec. 66.46(4m), Stats.1989-90). The decision of the joint review board about whether the municipality should proceed with the district must be based upon a number of factors, including whether the development expected in the district would occur without the use of tax incremental financing (sec. 66.46(4m)(c) 1 a, Stats.1989-90). In the case at hand, the parties agree that the City has satisfactorily fulfilled all the procedural requirements.
This case concerns the proposed financing of the development within TID No. 4. The tax increment law, sec. 66.46(9), Stats.1989-90, gives a municipality several options for financing development in a tax incremental district. Among these options is the method chosen by the City, the issuance of TIF bonds. Section 66.46(9)(a)8, Stats.1989-90.
Financing through TIF bonds is premised on the assumptions that increased tax revenue will be generated by development in the tax incremental district and that this increased tax revenue will be sufficient to pay the holders of TIF bonds in full. The process by which a municipality levies and collects property taxes is not altered by the creation of a tax incremental district. The municipality remains free to adjust the annual rate of taxation and all property owners pay the same tax rate without regard to whether they are located inside or outside of the TIF district. The statutory framework for achieving this result is described briefly below.
When a municipality creates a tax incremental district, the Wisconsin department of revenue determines the aggregate equalized value of all taxable property within the district. Section 66.46(5)(b), Stats.1989-90. This beginning value is termed the "tax incremental base." Section 66.46(2)(j), Stats.1989-90. Annually thereafter, the department recalculates the aggregate equalized value of all taxable property in the district. Section 66.46(5)(g), Stats.1989-90. This latter figure less the tax incremental base is termed the "value increment." Section 66.46(2)(m), Stats.1989-90. The value increment represents the increase (or decrease) of the aggregate equalized property value that has occurred in the tax incremental district since its creation.
The value increment is then used to calculate the incremental tax revenues (the tax increment) which, at least in theory, are attributable to development in the tax incremental district. To calculate incremental tax revenues, the total local general property taxes levied on all taxable property within the district in a year are multiplied by a fraction having as its numerator the value increment for that year in that district and as its denominator that year's aggregate equalized value of all taxable property in the district. Section 66.46(2)(i), Stats.1989-90. 5
In the years following the creation of a tax incremental district, all incremental tax revenues collected in the tax incremental district must be deposited into a special fund for that district. Section 66.46(6)(c). The special fund may thus include incremental tax revenues received after the district is created but before the TIF bonds are issued. Section 66.46(6)(am)4, Stats.1989-90. 6 The municipality may, but is not required to, deposit additional money into the special fund. Section 66.46(6)(c), Stats.1989-90.
No monies may be paid out of the special fund except to pay project costs of the district, to reimburse the municipality for the payment of project costs, or to satisfy the claims of holders of bonds issued with respect to the district. Section 66.46(6)(c), Stats.1989-90. The extent of a TIF bondholder's claim against the special fund, and against the municipality itself, is spelled out in section 66.46(9)(b)4. The TIF bonds are payable only out of the special fund created under sub. (6)(c). Each TIF bond shall contain the statements necessary to show that it is only payable out of the special fund and that it does not constitute an indebtedness of the municipality or a charge against its general taxing power. Under the statute the local legislative body shall irrevocably pledge all or a part of such special fund to the payment of such bonds or notes. 7
Several other passages of section 66.46 are relevant to an understanding of the nature of the TIF bonds. Section 66.46(7), entitled "Termination of Tax Incremental Districts," provides that the tax incremental district shall terminate when the earliest of three events occurs. One such event is dissolution of the district by the local legislative body. Upon dissolution of the district the municipality becomes liable for all unpaid project costs actually incurred which are not paid from the special fund. The statute expressly provides that the municipality's termination of the district does not make the municipality liable for any TIF bonds issued. 8
Also relevant is the legislature's apparent recognition that, given the uncertain nature of a TIF bondholder's claim against the municipality, the municipality may need to make additional pledges of security in order to attract bond purchasers. Section 66.46(9)(b)5 Stats.1989-90. Thus, "to increase the security and marketability of tax incremental bonds," the legislature explicitly authorizes a municipality to take actions, "not inconsistent with the Wisconsin constitution," to make the...
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