Naftalin v. King

• Decision Date: 09 May 1958
• Docket Number: No. 37494,37494
• Citation: 252 Minn. 381,90 N.W.2d 185
• Parties: Arthur NAFTALIN, Commissioner of Administration of the State of Minnesota, Respondent, v. Stafford KING, State Auditor of the State of Minnesota, Appellant.
• Court: Minnesota Supreme Court

Page 185

90 N.W.2d 185

252 Minn. 381

Arthur NAFTALIN, Commissioner of Administration of the State of Minnesota, Respondent, v. Stafford KING, State Auditor of the State of Minnesota, Appellant.

No. 37494.

Supreme Court of Minnesota.

May 9, 1958.

Syllabus by the Court

1. A state indebtedness is not created within the meaning of the constitution when certificates of indebtedness are authorized and issued pursuant to a legislative act which makes them exclusively payable from a special fund, the proceeds of which are derived from the levy and collection of a tax authorized for that particular purpose.

2. Although the legislature may not surrender, suspend, or contract away the state's power of taxation (Minn.Const. art. 9, § 1), there is nothing in the constitution which prohibits the legislature from irrevocably binding its taxing power to provide the funds necessary to fulfill the state's contractual obligations to pay money.

3. Once the state, pursuant to a legislative act, has exercised its power and entered upon a contract, as it does when it issues either bonds or certificates of indebtedness under a statute providing for tax levies to be paid into a special fund for their repayment, the state, under the contract clauses of the state and the Federal constitutions, cannot impair that contract but is bound to carry out its terms without repealing, postponing, or diminishing, or otherwise impairing the tax levies so established for its fulfillment.

4. It is generally recognized that statutory provisions existing at the time of the issuance by the state of bonds or other undertakings to pay money, which control or regulate their manner and source of payment, constitute--in the absence of a stipulation to the contrary--a part of the state's contractual obligation.

5. The provision in Minn.Const. art. 9, § 5, prohibiting the state from engaging in works of internal improvement has no application to those activities--inclusive of the construction and rehabilitation of state buildings and grounds--which are carried on or performed by the state in its sovereign capacity and in the discharge of its governmental functions.

6. Works which are reasonably essential to the performance of the state's governmental functions do not lose their governmental status or character because they incidentally embrace some activity which may possibly be operated as a proprietary undertaking for profit, such as a parking lot, and this holds true as long as the primary purpose of such incidental activity is not to obtain revenue but to further the discharge of a governmental function.

Hugh H. Barber, Minneapolis, for appellant.

Miles Lord, Atty. Gen., John R. Murphy, Asst. Atty. Gen., for respondent.

MATSON, Justice.

Appeal by defendant from a judgment entered pursuant to plaintiff's motion for judgment on the pleadings.

We are concerned with three basic questions: First, whether the issuance by the state, pursuant to statute, of certain tax anticipation building certificates to defray the cost of constructing and rehabilitating a variety of state buildings will create a state debt within the debt limitations of Minn.Const. art. 9, §§ 5, 6 and 7, M.S.A., and, second, whether such certificates, if issued, will be valid and binding obligations not subject to impairment by future legislative acts repealing or diminishing the tax sources for their payment. The final issue is whether the construction and rehabilitation program to be financed by said certificates involves works of internal improvement in contravention of Minn.Const. art. 9, § 5.

Plaintiff, as commissioner of administration of the State of Minnesota, brought this action against the defendant, the state auditor of Minnesota, to compel the latter to issue and sell the certificates of indebtedness which are authorized by L.1955, c. 855 (as amended by L.1957, c. 729) and Ex.Sess. L.1957, c. 2. The 1955 act, as amended, levies (for the years 1955 to 1974, inclusive) upon all taxable property in the state a tax to produce $28,803,432.35 1957, c. 729, the tax levies are for the the state building fund for the payment of tax anticipation certificates to be issued thereon. The act passed in the 1957 extra session levies (for the years 1957 to 1976, inclusive) a tax of $55,121,939 in the same manner and for the same purposes. Defendant, as state auditor,--challenging the constitutionality of the acts--refuses to issue and sell the certificates, despite the certification to him by plaintiff, commissioner of administration, that the funds appropriated under both acts are presently needed to carry out the project specified therein.

The facts as established by the pleadings are undisputed. Plaintiff's complaint and defendant's answer both prayed for a judgment declaratory of the duty of the defendant and determining the validity and constitutionality of the issuance and sale of the certificates authorized by the foregoing acts. Defendant, in his answer, admitted all allegations of the complaint. Plaintiff moved for judgment on the pleadings and in the alternative for summary judgment. Since no material issue of fact existed, the trial court granted judgment on the pleadings. The trial court's judgment decreed it to be the duty of the defendant to issue and sell the building certificates as authorized and adjudged such certificates to be valid and binding special obligations of the state which cannot be repealed or impaired until paid, further adjudging that the works authorized by the statutes do not constitute works of internal improvements.

In passing on the issues raised by this appeal, it becomes necessary to state with more particularity the scope and purpose of the pertinent statutory provisions.

The Minnesota legislature originally created the Minnesota state building fund by enacting L.1935, c. 383. The act provided for the levy of a tax for a 10-year period upon all taxable property in the state, for the crediting of the proceeds of the tax to such fund, and for the appropriation of the same for the construction of a new state hospital and for the building or improvement of various other state buildings. The state auditor was directed to issue and to sell building certificates payable out of the fund. Proceeds from the sale of the certificates were to be credited to the fund, and the certificates were in turn to be made payable from the fund out of the moneys derived from the tax levy. Interest due on the certificates was payable out of the revenue fund until taxes were collected to meet the interest payments.

The 1955 and 1957 acts here involved appropriate money from the state building fund for the construction, remodeling, and repair of a variety of public buildings. The acts, after designating the purpose and amount appropriated for each item, provide a detailed plan for replenishing the building fund to meet the financing of these projects. Under each act the financing is accomplished by imposing a tax levy over a period of 20 years ¹ in an amount sufficient to equal the amount of expenditures plus interest on the certificates of indebtedness authorized by the act. Proceeds of the tax levies are to be paid into the state building fund. Each act specifically provides that certificates of indebtedness may be issued as funds are needed, subject to the limitation that the certificates cannot exceed the authorized aggregate appropriation. The certificates are to be a charge and a lien upon the tax levy authorized in each act, with principal and interest payable only from such taxes. An exception exists in that payment of interest may be made from the general revenue fund subject to reimbursement. This exception is quoted below:

'* * * provided that such interest as may become due at an time when there is not on hand a sufficient amount from the proceeds of such taxes to pay the same, shall be paid out of the general revenue fund in the state treasury, and the amount necessary therefor is hereby appropriated To be reimbursed from the proceeds of such taxes when received.' (Italics supplied.) L.1955, c. 855, § 14, subd. 2 (as amended), and Ex.Sess. L.1957, c. 2, § 14, subd. 2.

In subd. 1 of § 14 in both of the above acts, there is a clear provision for tax levies to meet repayments which shall be necessary under the provisions. After providing for tax levies in a fixed amount, the subdivision provides that the state auditor shall levy:

'* * * additional amounts sufficient to produce such sums as may be necessary to pay the interest upon certificates of indebtedness * * *. In case of a deficiency in the proceeds of such tax levy for any year, the auditor shall levy sufficient additional amounts in succeeding years to compensate therefor until the full amount herein authorized has been raised.'

Thus, it is apparent that the scheme of the acts contemplates the payment of principal and interest on the certificates Exclusively from the tax levies provided by the acts. Any deficiency in the fund must be compensated for in the succeeding year by an increase in the tax levy. General revenue funds may be used only to meet interest payments on certificates, not principal, and the general revenue fund must clearly be reimbursed during the succeeding year. The acts provide that the state auditor shall levy and collect the tax and issue and sell the certificates of indebtedness.

1. Defendant's contention that the 1955 and 1957 acts ² violate Minn.Const. art. 9, §§ 5, 6, and 7, and are consequently void, raises a basic issue that was first presented to this court nearly half a century ago in Brown v. Ringdal, 109 Minn. 6, 122 N.W. 469. ³ That decision held that tax anticipation certificates of indebtedness issued to defray the cost of building a new state prison, and payable exclusively from moneys in a special prison building fund derived from a tax levied and collected over a 10-year period on all taxable property in the state (in the same manner as other taxes)...