Rider v. City of San Diego

• Decision Date: 06 August 1998
• Docket Number: No. S058956,S058956
• Parties: , 959 P.2d 347, 98 Cal. Daily Op. Serv. 6193, 98 Daily Journal D.A.R. 8535 Richard RIDER et al., Plaintiffs and Appellants, v. CITY OF SAN DIEGO et al., Defendants and Respondents
• Court: California Supreme Court

Page 189

77 Cal.Rptr.2d 189

18 Cal.4th 1035, 959 P.2d 347, 98 Cal. Daily Op. Serv. 6193,

98 Daily Journal D.A.R. 8535

Richard RIDER et al., Plaintiffs and Appellants, v. CITY OF SAN DIEGO et al., Defendants and Respondents.

No. S058956.

Supreme Court of California

Aug. 6, 1998.

Carl Fabian, San Diego, Eric Norby and Lewis A. Wenzell for Plaintiffs and Appellants.

John W. Witt and Casey G. Gwinn, City Attorneys, Leslie J. Girard and Deborah L. Berger, Deputy City Attorneys, Luce, Forward, Hamilton & Scripps, Charles A. Bird, Thomas A. May, San Diego, Seltzer, Caplan, Wilkins & McMahon, Julia P. Dubick and Virginia C. Pearson, San Diego, for Defendants and Respondents.

O'Melveny & Myers, Richard M. Jones, Brian S. Currey, Kenneth R. O'Rourke, Los Angeles, Orrick, Herrington & Sutcliffe, Paul A. Webber, Robert E. Freitas, Los Angeles, and W. Douglas Kari as Amici Curiae on behalf of Defendants and Respondents.

CHIN, Justice.

In this case, we consider the validity of a financing plan under which a joint powers agency will issue bonds, use the bond proceeds to construct a capital improvement, and lease that improvement to a city. We conclude that the voter approval requirements that would apply if the city issued the bonds do not, by their terms, apply to the debts of a joint powers agency, and the city's obligation to make rent payments to the joint powers agency does not itself constitute a debt requiring voter approval. We also conclude that the law governing joint powers agencies gives these agencies independent authority to issue bonds without complying with restrictions, such as voter approval requirements, that apply to local governments. Finally, we conclude that state law does not in this regard violate the "home rule" provision of the California Constitution. Accordingly, we affirm the judgment of the Court of Appeal.

FACTUAL AND PROCEDURAL BACKGROUND

The San Diego Unified Port District (Port District) owns the San Diego Convention Center (Convention Center). The Port District is an independent governmental entity existing under state law and encompassing the Cities of San Diego, Chula Vista, Coronado, National City, and Imperial Beach. (Harb. & Nav.Code, appen. 1, § 5, subd. (a).) The City of San Diego (City) operates the Convention Center under a management agreement with the Port District. On June 21, 1994, the City and the Port District entered into a memorandum of understanding in which they agreed to expand the Convention Center and to finance the expansion through a third party specially created for that purpose. To implement this plan, the Port District and the City entered into a joint powers agreement (Gov.Code, § 6503.5) creating the Convention Center Expansion Financing Authority (Financing Authority) as "a public entity separate from the City and the District." The City, the Port District, and the Financing Authority then entered into the following agreements and transactions.

First, the Port District agreed to lease the existing Convention Center and the site of the planned expansion to the Financing Authority for $2.

Second, the Financing Authority arranged to issue "Lease Revenue Bonds" in an amount not to exceed $205 million. The indenture provided that the Financing Authority had to use the bond proceeds to cover financing costs and to pay, at the City's direction, the cost of the Convention Center expansion.

Third, the Financing Authority agreed to sublease the Convention Center and the expansion to the City. The City agreed to pay rent equal to the debt service on the bonds, including interest and principal, and additional rent to cover the Financing Authority's administrative expenses. Thus, in effect, the City agreed to provide funds to meet all the Financing Authority's obligations as they arose, calling those funds rent payments. The City also agreed to include these rent payments in its budget each year.

Fourth, the Port District agreed to pay the City $4.5 million annually for 20 years to help Fifth, when the Financing Authority had made all interest and principal payments on the bonds, it agreed that title to the Convention Center expansion would vest in the Port District, which owns the existing Convention Center. At the same time, the various leases would expire, and the Financing Authority would automatically cease to exist.

the City meet its obligations to the Financing Authority.

The Port District and the City approved all these agreements and related documents on March 5, 1996. The Financing Authority approved the agreements on May 1, 1996. On May 3, 1996, plaintiffs filed this action, challenging the validity of the financing plan under Code of Civil Procedure section 863, which permits "any interested person [to] bring an action ... to determine the validity" of certain public agency matters. Plaintiffs named the City and the Financing Authority as defendants. These defendants filed answers, and the Coalition to Protect the Economy also appeared and answered under Code of Civil Procedure section 862, which allows "[a]ny party interested" to appear in an action of this type.

In their complaint, plaintiffs asserted that the Financing Authority has no existence independent of the City, but rather is a mere financing "shell" that acts at the City's behest, doing for the City what the City may not do in its own name. They noted that article XVI, section 18, of the California Constitution (section 18) prohibits the City from "incur[ring] any indebtedness ... exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the qualified electors," and article VII, section 90(a), of the City's charter imposes a similar two-thirds vote requirement. Plaintiffs argued that the financing of the Convention Center expansion without voter approval violates these restrictions.

Defendants moved for summary judgment, and the trial court granted the motion, finding the financing plan valid. (Code Civ. Proc., § 870, subd. (a).) The Court of Appeal affirmed, holding that the City's obligation to pay rent to the Financing Authority "did not create debt within the meaning of ... section 18," because "the lease provisions do not create present debt for future payments owed." The Court of Appeal also held that, under the Joint Exercise of Powers Act (Gov.Code, § 6500 et seq.) (the Act), the Financing Authority is not subject to the restrictions on issuing debt that apply to the City, and the Act does not, in this regard, violate the "home rule" provision of the California Constitution. (Cal. Const., art. XI, § 5, subd. (a).)

Because of the widespread use of similar financing plans throughout the state, and because any doubt about the validity of these financing plans could impact the cost of capital for the improvement of public resources, we granted review.

DISCUSSION

Plaintiffs make three somewhat overlapping arguments. First, they argue that we should not permit the City to circumvent the constraints of the two-thirds vote requirement simply by creating a shell entity--the Financing Authority--to do what the City cannot do on its own. Specifically, they argue that the two-thirds vote requirement applies to the debts of the Financing Authority and that, in any case, the City's obligation to pay rent to the Financing Authority constitutes a debt requiring voter approval. Second, plaintiffs argue that the Act subjects the Financing Authority to the same restrictions that apply to the City, including the limitations on "incur [ring] ... indebtedness," and therefore the Financing Authority cannot do what the City would not be able to do. Third, plaintiffs argue that, if the Act permits the Financing Authority to issue bonds without complying with the two-thirds vote requirement in the City's charter, then to that extent it violates the "home rule" provision of the California Constitution. We address these arguments in turn.

1) The two-thirds vote requirement does not extend to the debts of the Financing Authority, and the City's obligation to pay rent to the Financing Authority does not itself constitute a debt requiring voter approval.

Plaintiffs argue that the Financing Authority is a hollow shell that exists only on paper.

                For all practical purposes, they argue, the Financing Authority is the City.  The City's mayor and city manager make up half of the Financing Authority's governing board;  the City's funds cover the expenses of the Financing Authority, including payments on the bonds;  the City controls construction of the Convention Center expansion;  the City operates the expanded Convention Center;  and the Financing Authority automatically dissolves once its purpose is fulfilled.  Thus, plaintiffs argue that, through the legal equivalent of smoke and mirrors, the City has arranged to do what the Constitution and the City's charter do not permit it to do:  issue bonds without the approval of two-thirds of the electorate.  Plaintiffs refer to the Financing Authority as a "shadow government[ ]" and describe the financing plan variously as a "subterfuge," "artifice," "ruse," and "scheme[ ]."  Plaintiffs also remind us of local government efforts to circumvent the constitutional requirement of a two-thirds vote [959 P.2d 351] of the electorate to impose certain " special taxes."  (Cal. Const., art.  XIII A, § 4;  see generally, Rider v. County of San Diego (1991) 1 Cal.4th 1, 2 Cal.Rptr.2d 490, 820 P.2d 1000.)   They argue that, in this case, a local government--i.e., the City--is once again trying to circumvent constitutional constraints
                

The short answer to plaintiffs' argument is that the Constitution and the City's charter permit the City to avoid the two-thirds vote requirement by creating a joint powers agency to finance public works projects. Therefore, however we might characterize the financing plan at issue here, we cannot characterize it as unlawful.

Section 18 provides: "No county, city, town, township,...