Cotton v. City of Fayetteville

Robert H. Dudley, Justice. The City of Fayetteville proposed to issue $25,000,000.00 in municipal bonds to finance improvements to its wastewater treatment plant and to retire some outstanding bonds which it had previously issued. The city intends to repay the bonds with the proceeds of a one percent local sales and use tax and from revenue collected from the wastewater system. The sales and use tax would be the principal source of repayment. At a special election the voters approved the adoption of the tax, the issuance of the bonds, the pledge of the proceeds from the tax to repay the bonds, and the use of the bond proceeds to finance the improvements. Collection of the local sales and use tax commenced on November 1,1983. The city intends to pay a rate of interest greater than six percent per year. The appellant, a citizen and taxpayer, filed a class action challenging the validity of the proposed bond issue and the legality of the use tax. The case was submitted to the chancellor on a stipulation of facts and cross motions for summary judgment. The chancellor upheld the proposed bond issue and the use tax. We reverse. Jurisidction to interpret the constitution is in his court. Rule 29 (l)(a). . The Constitution of Arkansas provides that neither the state nor counties or cites shall ever lend their credit, nor shall cities or counties ever issue interest-bearing bonds unless five requirements are met. The five requirements are: (1) that the taxpayers vote on the issuance of the bonds, the pledge of the proceeds and the use of the bond proceeds; (2) that the bond proceeds be for a public project; (3) that the bond bear no greater rate of interest than six percent per year; (4) that the bonds be issued for no longer period of time than thirty-five years; (5) that the bonds be paid by a special property tax not to exceed five mills. Article 16, Section 1, as amended by Amendment 13. In 1932 this court created an exception to the constitutional requirements. We held that a city could issue bonds to be paid entirely from revenues, without elective approval, to purchase a water and light plant. McCutchen v. Siloam Springs, 185 Ark. 846, 49 S.W.2d 1037 (1932). In the landmark case delineating the exception to Amendment 13, Snodgrass v. Pocahontas, 189 Ark. 819, 75 S.W.2d 223 (1934), we stated that compliance with the constitutional provisions was required if the bonded indebtedness for the municipal improvement would place any burden on the taxpayer, but compliance was not required if the bonded indebtedness was to be repaid solely by revenues from the improvement. We have never abandoned the exception. McCutchen v. Siloam Springs, 185 Ark. 846, 49 S.W.2d 1037 (1932); Jernigan v. Harris, 187 Ark. 705, 62 S.W.2d 5 (1933); Hogue v. The Housing Authority of North Little Rock, 201 Ark. 263, 144 S.W.2d 49 (1940); and Boswell v. City of Russellville, 223 Ark. 284, 265 S.W.2d 533 (1954). Purvis v. Hubbell, Mayor, 273 Ark. 284, 620 S.W.2d 282 (1981). The week after Snodgrass was handed down we expanded the exception of “revenues from the improvements witout any burden on the taxpayer” in the consolidated cases of Johnson v. Dermott and Parker v. Little Rock, 189 Ark. 830, 75 S.W.2d 243 (1934). In the Dermott case, we approved a pledge of revenues from the municipal waterworks system to pay a bonded indebtedness incurred to build a municipal hospital, without an election. In the Little Rock case, also without an election, we held that an indebtedness for a municipal airfield could be paid out of revenues from the airport and in a significant move held that, in the event the airport revenues were insufficient to retire the indebtedness, the city could pay the bonds out of its general fund. In City of Harrison v. Braswell, 209 Ark. 1094, 194 S.W.2d 12 (1946), we held that even though the city’s water and sewer system were technically separate, a surplus in one system might be applied to the retirement of the bonds of the other. The revenue bond exception was then expanded further in Purvis v. Hubbell, Mayor, supra. There, in addition to revenues from a convention center, high-rise parking deck and hotel complex, the City of Little Rock pledged funds which would be derived from a special two percent sales tax and also pledged funds from any increase in state turnback from the state sales tax revenues. When we decided Purvis v. Hubbell, Mayor, supra, we recognized that the city, the attorneys, the developers, and the bond holders had relied on our past cases in defining the court created exception but a majority felt that we had gone too far with the concept. Still, the majority felt it would be manifestly unfair to restrict the exception without warnings, and so the opinion contained the following caveat: After carefully considering our previous decisions, it appears there has been a gradual expansion of the concept of revenue producing bonds, which require no popular approval, as was authorized for instance in Snodgrass v. Pocahontas, 189 Ark. 819, 75 S.W.2d 223 (1934). However, a change should not be made retroactively, after public agencies and investors have relied on our decisions; but in other instances we have given notice that an interpretation of the Constitution may or will be changed. Clubb v. State, 230 Ark. 688, 326 S.W.2d 816 (1959); Hare v. General Contract Purchase Corp., 220 Ark. 601, 249 S.W.2d 973 (1952). Accordingly, we give notice of our intention to prospectively reconsider our cases at the next opportunity after the present opinion becomes final. Purvis v. Hubbell, Mayor, 273 Ark. at 339, 620 S.W.2d at 287. In the case at bar, the City of Fayetteville does not propose to repay the bonds from revenues generated by improvements, but proposes to repay them out of a local sales and use tax. Consequently, the bonds are outside the court created constitutional exception for revenue bonds. The requirements of the constitution are mandatory, and therefore, since the bonds do not fulfill those requirements, they are invalid. Reversed. Hubbell, C.J., not participating. Hickman and Purtle, JJ., concur. Hays, J., dissents.