City of Frankfort v. Fuss

Opinion of the Court by Commissioner Hobson Reversing. John Fnss, a citizen and taxpayer of Frankfort, brought this action in April, 1928, against the city, alleging in his petition these facts: Frankfort is a city of the third class, having a population of more than 10,000 but less than 15,000; the assessed value of the property in the city is $7,753,151. The city has, an outstanding, legally incurred bonded indebtedness of $290,000, of which $215,000 was incurred before the adoption of the present Constitution. In addition to this, the city had an outstanding floating indebtedness of approximately $121,000 legally incurred. The city for many years made no provision to create a sinking fund to pay the interest or retire the bonded indebtedness of the city, but every year, since the adoption of the Constitution, took from the revenues derived from the regular levy a sum sufficient to pay the interest on the bonded indebtedness, thereby depriving the city of funds sufficient to pay the current expenses of the city, although the city did not in any year create an indebtedness in excess of revenues of that year. On April 9, 1928, the council enacted an ordinance providing for the issuing of $120,000 of bonds to fund a like amount of the floating indebtedness of the city, providing’ by the ordinance when the bonds should be payable and providing for a levy each year to provide a sinking fund and pay the interest on the bonds. A purchaser had offered to take the bonds at par, bearing interest at 4% per cent, per annum. He alleged that the ordinance created an indebtedness of the city beyond the current revenues for the year and prayed that the council be enjoined from issuing and selling the bonds. Other taxpayers intervened and filed pleadings, charging that the indebtedness of $120,000 had not been lawfully-created, also that the city had not a population of 10,000 and that the council was without authority to issue the bonds. Proof was taken, and on final hearing the circuit *146 court granted the plaintiffs an injunction as prayed. The city appeals. The proof wholly fails to show that any part of the indebtedness was illegally created. The' presumption is that the officers did their duty. The burden of proof to show the illegality of the indebtedness was upon the party alleging that the indebtedness was illegal. Bradford v. City of Glasgow, 143 Ky. 404, 136 S. W. 647, and cases cited. Section 157 of the Constitution, after providing that the tax rate of cities, towns, etc., shall not exceed a certain amount, concludes with these words: “No county, city, town, taxing district, or other municipality, shall be authorized or permitted to become indebted, in any manner or for any purpose, to an amount exceeding, in any year, the income and revenue provided for such year, without the assent of two-thirds of the voters thereof, voting at an election to be held for that purpose; and any indebtedness contracted in violation of this section shall be void. Nor shall such contract be enforceable by the person with whom made; nor shall such municipality ever be authorized to assumje the same. ’ ’ Section 158 of the Constitution, after providing that the cities and towns, etc., shall not be authorized to incur indebtedness exceeding a certain percentage of the taxable property therein, concludes with these words: “Provided, Any city, town, county, taxing district, or other municipality may contract an indebtedness in excess of such limitations when the same has been authorized under laws in force prior to the adoption of this Constitution, or when necessary for the completion of and payment for a public improvement undertaken and not completed and paid for at the time of the adoption of this Constitution: And provided further, If, at the time of the adoption of this Constitution, the aggregate indebtedness, bonded or floating, of any, town, county, taxing district or other municipality, including that which it has been or may be authorized to contract as herein provided, shall exceed the limit herein prescribed, then no such city or town shall be authorized or permitted to increase its indebtedness in an amount exceeding two per centum (2%), and no such county, taxing district or' other municipality, in an amount exceeding one per centum (1%), in the aggregate upon the value of the taxable property therein, to be ascertained as herein provided, until the aggregate of its indebtedness shall have *147 been reduced below the limit herein fixed, and thereafter it shall not exceed the limit, unless in case of emergency, the public health or safety should so require. Nothing herein shall prevent the issue of renewal bonds, or bonds to fund the floating indebtedness of any city, town, county, taxing district or other municipality. ’ ’ In the City of Winchester v. Nelson, 175 Ky. 69, 193 S. W. 1040, 1043, the court thus stated its conclusion as to the proper construction of these provisions: “It is our judgment that the proper construction of these three provisions of sections 157 and 158 of the Constitution is: First, that the first provision of section 157 is simply a limitation upon the power of the taxing authorities, without the assent of -the voters, to levy taxes; second, that the second provision of section 157 permits with the consent of the voters, the creation of an indebtedness that cannot be taken care of out of the levy permitted in the first part of section 157; and, third, that section 158 of the Constitution places a final limitation upon the power to create debt of the voters themselves.” In Vaughn v. Corbin, 217 Ky. 521, 289 S. W. 1104, 1105, the court, after quoting section 158 of the Constitution and section 3284, Kentucky Statutes, said: “But it will be observed that bonds issued to fund the lawfully contracted floating indebtedness of any city are excepted out of the operation of that section. It results therefore that the city council has power to issue the $75,000 of bonds, although this may increase the bonded indebt(edness of the city beyond the limit fixed in that section. “The issuing of bonds to fund a floating debt adds nothing to the indebtedness of the city. It merely changes the form of the existing debt. The power to fund a .floating indebtedness is as broad as the power to incur such indebtedness.” To same effect, see City of Covington v. O. F. Moore Co., 218 Ky. 102, 290 S. W. 1066; Wilson v. Covington, 220 Ky. 798, 295 S. W. 1068; Davis v. Newport, 224 Ky. 546, 6 S. W. (2d) 693; Baker v. Rockcastle County Court, 225 Ky. 99, 7 S. W. (2d) 846; Welch v. Nicholasville, 225 Ky. 312, 8 S. W. (2d) 400; Wilson v. Board of Education, 226 Ky. 476, 11 S. W. (2d) 143; Rowland v. Paris, 227 Ky. 570, 13 S. W. (2d) 791; Masonic, etc., Home v. Corbin, 229 Ky. 375, 17 S. W. (2d) 215. *148 The record indicates that the debt of $120,000 has been gradually created by reason of unusual expenses falling upon the city. To illustrate, the bridge over the Kentucky river, connecting the south side and the State Capitol with the main business portion of the city, became in a dangerous condition, and the public safety required that it be repaired at once, and this cost a large sum. Two of the main sewers fell in and the outfall sewer was not properly performing. The public needs required that these be put in order, and there were other like unusual expenses, in all amounting to a large sum. In addition, no proper levy was made to pay interest on the bond issues and provide a sinking fund. The record does not show that the debt was illegally created or that the city funds have been improperly expended. The debt is now largely represented by outstanding city warrants, bearing interest at 6 per cent. The bonds sold at par will lessen the interest on the debt, which cannot be paid by a levy made in one year. The council therefore did not exceed its authority in passing the ordinance providing for the bond issue and the injunction prayed should not have been granted. Section 159 of the Constitution provides: “Whenever any city, town, county, taxing district or other municipality is authorized to contract an indebtedness, it shall be required, at the same time, to provide for the collection of an annual tax sufficient to pay the interest on said indebtedness, and to create a sinking fund for the payment of the principal thereof, within not more than forty years from the time of contracting the same.” Section 180 also provides: “Every act enacted by the general assembly, and every ordinance and resolution passed by any county, city, town, or municipal board or local legislative body, levying a tax, shall specify distinctly the purpose for which said tax is levied, and no tax levied and collected for one purpose shall ever be devoted to another purpose.” Under these provisions the council should annually make a separate levy sufficient to provide for the interest and sinking fund of each of its bond issues made since the adoption of the Constitution, and the money in each fund should be kept separate and not used for any other purpose. A separate levy to cover the general expenses of the city should be made annually, and this fund should only be expended for the purposes for which it was levied. A separate levy to pay the interest on the *149 bonds issued before the adoption of the Constitution, should also be made and this fund should be kept separate and only used for that purpose. If new bonds are issued, then a levy to pay the interest and provide a sinking fund should be made annually and the fund should only be so applied. By section 157 of the Constitution the tax rate for Frankfort may not be over $1 on each $100 of the taxable property therein if it has a population of 10,000, and it may not be over 75 cents on each $100 of taxable property if the population is under 10,000 “unless it should be necessary to enable such city ... to pay the interest on, and provide a sinking fund for the extinction of indebtedness contracted before the adoption of this Constitution.” By the terms of the section, the tax limit there provided does not include the levy necessary to pay the interest on and provide a sinking fund for the payment- of any indebtedness contracted before the adoption of the Constitution. The city may make the necessary levy for this purpose, and in addition may make the necessary levy for other purposes,- not exceeding the constitutional limit; for the city must maintain its existence and protect life and property and to this end may levy up to the constitutional limit when necessary. Am issue is made as to whether the population is under or over 10,000; but no levy has been made; and the propriety of any levy when it is made will depend on whether it is warranted by the rule above indicated. This question was not presented in Moss v. Frankfort, 231 Ky. 470, 21 S. W. (2d) 813, for in that case there was no showing that the levy included any interest or provision for a sinking fund on indebtedness created before the adoption of the Constitution. “The word ‘indebtedness,’ as used in Const, sec. 157, refers to indebtedness created by contract.” O’Bryan v. Owensboro, 113 Ky. 680, 68 S. W. 858, 859, 69 S. W. 800, 24 Ky. Law Rep. 469, 645; Overall v. Madisonville, 125 Ky. 684, 102 S. W. 278, 31 Ky. Law Rep. 278, 12 L. R. A. (N. S.) 433. It does not include a liability imposed by law for what is done without right. German Bank v. Covington, 164 Ky. 295, 175 S. W. 330, Ann. Cas. 1917B, 189; City of Henderson v. Redman, 185 Ky. 146, 214 S. W. 809, 7 A. L. R. 346. *150 It was not the purpose of the Constitution to disable a municipality to perform its civic duties imposed on it by law and necessary to its existence. By section 158 of the Constitution Frankfort could not incur indebtedness, including existing indebtedness, exceeding in the aggregate 5 per cent, “on the value of the taxable property therein;” but this is followed by the proviso that it at the time of the adoption of the Constitution, its indebtedness exceeded the limit prescribed, then it should not increase its indebtedness in an amount exceeding 2 per cent, of the taxable property therein. ^ It is shown that Frankfort then had a bonded indebtedness of $308,000. It is also shown that in 1920 the taxable property of the city was about $6,000,000. This shows that the bonded indebtedness at the adoption of the Constitution was more than 5 per cent, of the taxable property, for the proof shows that Frankfort has grown steadily. So under the facts shown it must be presumed that $308,000 was more than 5 per cent, of the city’s taxable property when the Constitution was adopted nearly forty years ago. This gave the city the right to the 7 per cent, limit at the time the Constitution was adopted. As the taxable property in the city is now $7,622,157, the bonded indebtedness $290,000, when added to the $120,-000 here in controversy, will make the total within the limits provided by the Constitution as things then stood. The fact is, as shown by the record, that the city has not really on the whole increased its indebtedness.. It has only changed the form of it by not observing the constitutional direction to keep the funds separate and apply each fund only to the purposes for which it was levied. The concluding words of section 158 were inserted to maintain municipal credit and aptly cover the situation presented here. Five per cent, of $7,622,157 is $381,107.-85. This would make $18,892.15 of the proposed bond issue in excess of the 5 per cent, limit; but from the record it is clear that more than this much of the present indebtedness has been in existence since the Constitution was adopted and is the result of the city’s then financial condition. These rules are well settled and must be kept in mind: 1. The ordinance levying taxes must distinctly specify the purpose for which it is levied, and the money may not be applied to any other, leaving unpaid the purpose so specified. The provision of the Constitution is *151 self-executing, and any officer so knowingly misapplying the money is personally liable therefor. 2. The city may not become indebted in any year in excess of the revenue provided for the year, and any indebtedness so incurred is void. 3. The city may not become indebted more than 5 per cent, of the value of the taxable property therein; and though it was indebted more than 5 per cent, of the value of its taxable property when the Constitution was adopted, when part of this indebtedness is paid and the amount left is less than 5 per cent, it may not thereafter increase its indebtedness above 5 per cent., unless in an emergency the public health or safety should so require. 4. The tax levy limit in section 157 does not include a tax levied to pay interest and provide a sinking fund for the payment of bonds issued on a vote of the people since the adoption of the Constitution or on bonds then in existence or bonds issued in renewal thereof, but it does include a tax levied to pay interest or provide a sinking fund for such bonds as here are in controversy issued to fund a floating debt. The judgment is reversed, and the cause is remanded for a judgment dismissing the petition and intervening petition with costs. Whole court sitting. Chief Justice Thomas and Judges Ebbs and Dietzmajst dissent.