Tucson Transit Authority, Inc. v. Nelson

• Decision Date: 04 June 1971
• Docket Number: No. 10350,10350
• Parties: TUCSON TRANSIT AUTHORITY, INC., Petitioner, v. Gary K. NELSON, Attorney General, Respondent.
• Court: Arizona Supreme Court

Page 816

485 P.2d 816

107 Ariz. 246

TUCSON TRANSIT AUTHORITY, INC., Petitioner, v. Gary K. NELSON, Attorney General, Respondent.

No. 10350.

Supreme Court of Arizona, In Banc.

June 4, 1971.

Rehearing Denied June 29, 1971.

Gust, Rosenfeld & Divelbess, by Fred W. Rosenfeld, Jane Rex Greer, Phoenix, for petitioner.

Gary K. Nelson, Atty. Gen., by Charles S. Pierson, Asst. Atty. Gen., Ralph E. Willey, Asst. Atty. Gen., Phoenix, for respondent.

UDALL, Justice:

The petitioner, Tucson Transit Authority, Inc., has invoked the original jurisdiction of this Court by filing a petition for special action seeking to compel the Attorney General, as respondent, to execute his approval and certification of a proposed $2,000,000 issuance of Tucson Transit Authority, Inc. Bonds.

The facts surrounding the proposed issuance of the Transit Authority Bonds are as follows: Tucson Transit Authority, Inc., hereinafter referred to as the Transit Authority, was formed pursuant to the Urban Mass Transportation Systems Act. Sections 40--1101 to 40--1147, A.R.S. On July 27, 1970, the City of Tucson, pursuant to A.R.S. § 40--1113, adopted Ordinance No. 3473 declaring that it was 'necessary for the preservation of the peace, health, and safety' of the City of Tucson that this ordinance, granting permission to incorporate a transit authority, become effective immediately. A board of directors to the proposed Transit Authority was appointed, and immediately thereafter the Transit Authority was organized and the Articles of Incorporation filed with the Arizona Corporation Commission and the Secretary of State.

On November 18, 1970, the board of directors met and adopted a resolution authorizing the issuance of $2,000,000 principal amount of Tucson Transit Authority, Inc. Bonds. On December 15, 1970, this resolution was submitted to the Attorney General for his approval, but approval was not forthcoming. The Transit Authority, thereupon commenced this Special Action to compel the Attorney General, as respondent, to approve the proceedings relative to the proposed issuance of the Transit Authority's bonds and to certify such bonds in accordance with § 40--1146, A.R.S.

The statutory procedures relative to formation and incorporation of the Transit Authority are not in dispute. Respondent has acknowledged that the Transit Authority was formed and the bonds prepared in accordance with the provisions of the Act. He, nevertheless, has declined to certify the bonds on the grounds that the Act, itself, is unconstitutional. In support of this assertion of unconstitutionality respondent has advanced several arguments. We have considered these arguments and having found that the Act contravenes Article 7, Section 13 of the Arizona Constitution, A.R.S., in that it fails to provide for prior electorate approval of the bonds sought to be issued, we need not indulge in any lengthy discussion of respondent's other contentions. We hold that the bonds sought to be issued are general obligation bonds and are not revenue bonds so as to exempt their issuance from the prior electorate approval requirement of Article 7, Section 13. We also hold that the Transit Authority, being a public service corporation, cannot be exempted from taxation and must be subject to Corporation Commission control.

Article 7, Section 13, Arizona Constitution reads, in part, as follows:

' § 13. Submission of questions upon bond issues or special assessments

Section 13. Questions upon bond issues or special assessments shall be submitted to the vote of * * * qualified electors of this State, and of the political subdivisions thereof affected by such question.'

The prior electorate approval requirement of this section remains unaffected in spite of the recent United States Supreme Court decision in City of Phoenix v. Kolodziejski, 399 U.S. 204, 90 S.Ct. 1990, 26 L.Ed.2d 523 (1970), wherein the Supreme Court found Arizona's constitutional and statutory provisions, excluding nonproperty owners from voting in elections for the approval of the issuance of general obligation bonds, to violate the equal protection clause of the Fourteenth Amendment. The Court held that a state may not condition one's right to vote in elections for the approval of general obligation bonds on being a real property owner, since the difference between a property owner's interests and those of a nonproperty owner in the outcome of such elections is not sufficiently substantial to justify exclusion of the latter from the franchise.

With regard to Article 7, Section 13 of the Arizona Constitution, the Kolodziejski case, involving general obligation bonds, has not abrogated the requirement that bond issuances affecting the political subdivision seeking to issue same must first be submitted to a vote. To this general rule there is one notable exception. It is now well-established that 'revenue bonds' are exempt from the constitutional requirement of prior electorate approval where a 'special fund' is created into which certain designated funds are to be deposited and from which all expenses are to be paid; providing, however, that the issuing entity does not, in any form whatsoever, assume any liability therefor. The use of the 'special fund' method of financing, i.e., 'revenue bonds', has been approved by this Court on numerous occasions. City of Globe v. Willis, 16 Ariz. 378, 146 P. 544 (1915); Board of Regents v. Sullivan, 45 Ariz. 245, 42 P.2d 619 (1935); Arizona State Highway Commission v. Nelson, 105 Ariz. 76, 459 P.2d 509 (1969).

The purpose in requiring an election on general obligation bond issuances is to provide the electors of an affected district with a voice in accepting or rejecting a proposed expenditure which they ultimately may bear. Because bond issues in most instances involve the borrowing of large sums of money, the repayment of which is ordinarily projected over a considerable period of time, this Court has held that the creation of an indebtedness to be evidenced by bonds payable not in the immediate future but rather over a considerable number of years should only be with the consent of the qualified electorate of the affected district. Ackerman v. Boyd, 74 Ariz. 77, 244 P.2d 351 (1952). An election is required even though the proposed increase in indebtedness would not violate the political subdivision's constitutional debt limitations. The only exception to this rule requiring prior electorate approval is the special fund method of financing mentioned above and first espoused in City of Globe v. Willis, supra, where we stated our reasons for so holding:

'Bonds issued by a municipality as evidence of its obligations are included within the terms of this provision, as also special assessments for the payment of which it becomes liable, for in both cases the municipality, as such, is 'affected by such question.' But a municipality is not 'affected' by a bond issue or a special assessment when it in no way incurs liability for their payment, even though it be constituted under the law the agency by and through which the bonds are issued or the special assessment, is made. 'Questions upon bond issues or special assessment'--that is, questions affecting the primary liability of the municipality--must be submitted to the property taxpayers therein, otherwise qualified as electors. Bond issues and special assessments that do not become a direct charge against the municipality, and do not increase its indebtedness, cannot be said to 'affect' it, and are not under this provision of the Constitution to be submitted to a vote as therein prescribed. That the first state Legislature understood section 13, article 7, to mean what we have indicated is clearly shown by its legislation.' 16 Ariz. 378 at 382, 146 P. 544 at 545.

Of crucial importance in arriving at this decision was the fact that the Sewer Act specifically provided that the city was to incur no liability, direct or contingent, in issuing the bonds and undertaking the improvement and only the real property benefitted was to bear the cost of all expenditures made for such improvement.

In Guthrie v. City of Mesa, 47 Ariz. 336, 56 P.2d 655 (1936), this Court had occasion to construe the validity of a pledge of gross income to payment of bond principal and interest which made no provision for prior payment of expenses incurred in maintaining and operating the water plant and system. We held that the amount thus pledged would be upheld, although it purported to be a 'gross pledge' of revenue, as long as it was taken.

'* * * from what remains after the expenses of a operation and maintenance are taken care of, that is, from the net income, a result that follows from the direction to the governing body that it shall at all times prescribe rates that will make the utility self-liquidating, namely, pay all operating and maintenance costs and in addition, take care of the bonds and interest thereon as they become due.' 47 Ariz. 336 at 346, 56 P.2d 655 at 659.

A gross pledge of all income to the payment of a revenue bond cannot be sanctioned where there are maintenance, operation or other expenses which will have to be provided for by resort to the general credit of the originating entity, i.e., the City of Tucson. In the instant case it is common knowledge that municipal transit systems are financially a losing proposition. That deficits are anticipated is evidenced by the legislature's grant of taxing power to supplement the income of the Transit Authority in covering its expenses. By pledging the taxing power of the district to be served, i.e., the City of Tucson, the legislature has thereby pledged the district's general credit and such pledge necessarily results in a transformation in the nature of the proposed bond issuance from revenue bonds to general obligation bonds; thus subjecting the issuance to the prior electorate approval requirement of Article 7, Section 13.

Such method of funding bonds unquestionably creates an...