State ex rel. State Road Commission v. O'Brien

Browndstg, Judge:

The State Road Commission of West Virginia invoked the original jurisdiction of this Court by filing herein its petition for a writ of mandamus seeking to require the respondent, D. Pitt O’Brien, Secretary of State of West Virginia, to attest and affix the great seal of the State of West Virginia to a bridge revenue bond issued by the petitioner, pursuant to the provisions of Code, 17-17, as amended. A rule was issued returnable on June 8, 1954, at which time the respondent appeared and demurred to the petition on the ground that the statutory provision authorizing and directing the State Road Commission to allocate from the State Road Fund sufficient funds to pay the principal and interest on Bridge Revenue Bonds, if there are insufficient funds in the State Sinking Fund to pay the principal and interest on such bonds, is violative of Article X, Section 4 of the West Virginia Constitution.

Pursuant to the provisions of Chapter 8, Acts of the Legislature, Regular Session, 1929, the State Road Commission adopted a resolution authorizing the issuance *116 and sale of $1,800,000.00 of toll bridge revenue bonds. The bond in question, being one of that issue, is for the purpose of paying this State’s proportionate share of the cost of a bridge to be constructed across the Kanawha River at ■Winfield, West Virginia, the Federal Government having provided a like sum for that purpose. The resolution, after first stating that the bonds shall not be an indebtedness of the State of West Virginia or any political subdivision thereof, provided for the payment of principal and interest out of the revenues to be derived from the operation of the bridge, but further states: “* * * the Commission covenants that, as additional security for the payment of principal and interest on the Bonds, it will allocate and transfer to the State Sinking Fund Commission from the moneys in the State Road Fund, any sums needed for the payment of principal or interest on said bonds * * * to the full extent that the moneys on deposit in the Sinking Fund [from the bridge revenues] * * * are insufficient for the payment of the principal and interest

The pertinent statutory provisions are: “Any bridge or bridges constructed under the provisions hereof and forming a connecting link between two or more state highways, or providing a river crossing for a state highway, are hereby adopted as a part of the state road system, but no such bridge or bridges shall be constructed without the approval in writing of the state road commissioner and the governor. If there be in the funds of the state sinking fund commission an amount insufficient to pay the interest and sinking fund on any bonds issued for the purpose of constructing such bridge or bridges, the state road commission is authorized and directed to allocate to said commission, from the state road fund, an amount sufficient to pay the interest on said bonds and/or the principal thereof, as either may become due and payable.”

The constitutional provision with which it is alleged by the demurrer that this legislation is in conflict, Article *117 X, Section 4, follows: “No debt shall be contracted by this State, except to meet casual deficits in the revenue, to redeem a previous liability of the State, to suppress insurrection, repel invasion or defend the State in time of war; but the payment of any liability other than that for the ordinary expenses of the State, shall be equally distributed over a period of at least twenty years.”

In 1942, the people of this State amended their Constitution by adding Section 52 to Article VI, which section reads as follows: “Revenue from gasoline and other motor fuel excise and license taxation, motor vehicle registration and license taxes, and all other revenue derived from motor vehicles or motor fuels shall, after deduction of statutory refunds and cost of administration and collection authorized by legislative appropriation, be appropriated and used solely for construction, reconstruction, repair and maintenance of public highways, and also the payment of the interest and principal on all road bonds heretofore issued or which may be hereafter issued for the construction, reconstruction or improvement of public highways, and the payment of obligations incurred in the construction, reconstruction, repair and maintenance of public highways.”

The framers of our Constitution, being acutely aware of the experience of the Commonwealth of Virginia with debts contracted by.it, and with the numerous suits resulting in heavy judgments and costs against her, in 1872 adopted the provisions of Article X, Section 4, providing that this State should not contract indebtedness except in specified instances.

This Court held in Bates v. State Bridge Commission, 109 W. Va. 186, 153 S. E. 305, that bridge revenue bonds did not constitute debts of the State of West Virginia when payment of such bonds was to be made exclusively from the revenues derived from the project, and respondent makes no contention to the contrary. Neither is it contended that under the broad powers with which it is invested that the State Road Commission could not con *118 struct, as a part of the State Road system, if it desired and funds were available therefor, a free bridge at Winfield, with moneys from the State Road Fund, inasmuch as such bridge will form a connecting link between two state highways, and provide a river crossing for a State highway. The issue thus presented, as to whether toll bridge revenue bonds, the primary security for the payment of which is the income from the project, may be further secured by pledging the resources of the State Rqad Fund upon condition that the income from the primary source becomes inadequate, is one of first impression in this State. If such procedure constitutes the contraction of a debt by the State, it is prohibited by Article X, Section 4, of the Constitution. Although novel to this jurisdiction, an examination of the authorities shows that the question has arisen and been decided in many others.

In 49 Am. Jur. 280, States, Territories, and Dependencies, § 67, under the subheading “Obligations payable from Special Funds”, this statement appears: “Although the cases are not entirely in accord and dissenting opinions have been frequent, it has generally been held that an obligation payable from a special fund created by the imposition of fees, penalties, or excise taxes, and for the payment of which the general credit of the state is not pledged and resort may not be had to property taxation, is not a debt within the meaning of constitution debt limitations. Such a limitation applies solely to that arising from a general levy and not excise taxes.”

Many states have followed the so-called “Special Fund Doctrine”, even where such funds were created and segregated solely by statutory authority, without the benefit of a constitutional provision. In Willett v. State Board of Examiners, (Mont.), 115 P. 2d 287, the issuance of bonds was proposed for the construction of a state building, the bonds being payable out of two funds, a Veteran’s Memorial Fund, and income from the Capitol Building land grant. The court, in holding that the issuance of such *119 bonds did not create a debt in violation of the constitutional provisions of that state, said: “The next point raised is that the Act authorized the creation of a debt contrary to section 2, Article XIII of the Constitution. That section prohibits the creation of a debt in excess of $100,000 unless the law authorizing it shall have been submitted to the people. However, it should be noted that the bonds authorized by Chapter 79 are not an obligation payable from the general fund of the State of Montana. The bonds are expressly made payable from the two funds named in the Act, and the Act does not contemplate the levy of any taxes for the purpose of discharging the bonds. When bonds are made payable from a fund in being, and where they will not involve the levy or collection of any additional tax, there is no debt created within the meaning of section 2 of Article XIII.* * *” To the same effect is State v. Connelly, (N. M.), 46 P. 2d 1097, where the issuance of bonds had been authorized for the construction of an addition to the State Capitol Building, and provision was made that the bonds were to be paid from a specified amount levied upon every civil action filed in the state courts. The court, holding that no debt was created in the constitutional sense, said:

“With these obvious implications that the framers of the Constitution were writing and thinking of a debt repayable from the proceeds of a property tax levy against the general assessment rolls, it is easy to believe that the debt whose creation is thus prohibited, or whose amount is so limited, is one pledging the general faith and credit of the state or other subdivision, with a consequent right in the holders of such indebtedness to look to the general taxing power to satisfy the same.

“And so we conclude that the debentures in question, neither requiring nor warranting a resort to the general taxing power of the state for their retirement, but payable instead from proceeds of an imposition in the nature of an excise laid upon all civil actions filed with the various *120 district clerks of the state, in addition to the regular docket fee, to be converged into a special fund in the hands of the state treasurer, will not constitute a general obligation on the part of the state. Hence, they are not within the interdiction of article 9, § 8, of the State Constitution.”

The South Carolina court reaffirmed its position approving the special fund doctrine in State v. Lewis, 186 S. E. 625, citing several previous decisions of that court, and by the use of the following language appears to have taken a more extreme stand than any other court upon this question: “We have consistently held that bonds issued by the state or its political subdivisions which are payable out of special funds do not create debts of the state or its political subdivisions, although the full faith credit, and taxing powers of the state or its political subdivisions are pledged for the payment of the same, where the revenues provided for are reasonably sufficient to pay the principal and interest of the obligations incurred.” To the same general effect are the following cases: Moses v. Meier, (Or.), 35 P. 2d 981; Ajax v. Gregory, (Wash.), 32 P. 2d 560; Briggs v. Greenville County, (S. C.), 135 S. E. 153; State v. Moorer, (S. C.), 150 S. E. 269; State v. Stevens, (S. C.), 175 S. E. 213.

.The Virginia court, where the validity of a provision in a bond revenue act for toll bridges, authorizing the use of funds available for the construction of state highways for the redemption of such bonds was questioned, held, in Almond v. Gilmer, 188 Va. 822, 51 S. E. 2d 272, that the act was not unconstitutional, inasmuch as the commission or the legislature could exercise discretion as to whether the holders of the bonds should be paid interest and principal if the necessity arose, and that, therefore, the state was not directly or contingently obligated to make appropriations for their payment. There is authority to the contrary. In Boswell v. State, (Okla.), 74 P. 2d 940, involving certain notes secured by a pledging of revenues derivable from a gasoline tax, pursuant to statutory authority, the court held the statute unconstitutional, using this *121 rather pungent language: “A careful study of the various authorities cited by the defendants discloses that in some jurisdictions the failure to observe the distinction between a particular fund derived from a specific tax levied for a specific purpose, which has been termed a ‘special fund,’ and a fund partaking of the nature of a trust fund derivable from a self-liquidating project under the ‘special fund doctrine,’ has led to a confused interpretation and to an unwarranted extension of the ‘special fund doctrine,’ which we refuse to follow.”

In accord with the Boswell case is People v. Barrett, (Ill.), 26 N. E. 2d 478, in which a statute authorizing the state to borrow money to construct roads, and pledge revenues from motor fuels to the payment of the indebtedness, was held in conflict with the debt provision of the Constitution. It is interesting to observe, however, that in neither case was the fund pledged created by constitutional amendment, but by statutes diverting part of the general revenues of the state. Even so, the Boswell case, supra, was decided by a closely divided court, five to four.

It would appear that the courts of other jurisdictions are unanimous in holding that a constitutional fund may ' be pledged to the payment of revenue bonds without violating debt provisions of their Constitutions, similar to those contained in Article X, Section 4, of the Constitution of this State.

In Alabama State Bridge Corp. v. Smith, (Ala.), 116 So. 695, a statute provided for the issuance of revenue bonds to construct toll bridges, and pledge gasoline tax revenues and moneys available from the state convict department as security for such bonds, in addition to the tolls to be collected. A constitutional amendment had previously pledged the gas tax fund, and the state convict fund, for use in highway construction, repair and maintenance. The court upheld the constitutionality of the act, pledging these funds as additional security, and said: “* * * Our judgment is that ‘debt,’ within the meaning, the purview, the whole content, of the constitutional provision, is that which the state in any event is bound to pay, *122 an obligation secured by the general faith and credit of the state. Bonds that may be issued for the construction of bridges under this act will not evidence such an obligation — will not be so secured.* * *. If these special funds should for any reason fail of realization, or should be exhausted in execution of the primary purposes for which they may be raised, nothing will be left to creditors advancing money on the faith of the bonds authorized but the right to collect tolls. There is no promise on the part of the state to pay in any event; there is no pledge that there will be a surplus of any fund; there is no pledge of the general credit of the state; there will be no debt within the meaning of section 213.”

The Colorado court, in a leading case on the question, in Johnson v. McDonald, 49 P. 2d 1017, held that the pledging of a constitutional fund does not constitute the creation of a debt within the meaning of the Constitution of that state. The court said: “* * * a debt is created when an obligation is created that requires revenue from a tax otherwisé available for general purposes to meet it. The payment of the anticipation warrants out of the fund provided by the act can never place any burden on the revenues available for appropriation for general state purposes.”

The Washington court held, in Gruen v. Tax Commission, (Wash.), 211 P. 2d 651, that the constitutional debt limitation provision of that state did not prohibit the payment of bonds out of a special fund, supplied by an excise tax, stating:

“The cases which we have considered state what must be held to be the unanimous view of the courts of this country upon the question of whether or not bonds payable out of a special fund, supplied by an excise tax, constitute a debt within the meaning of constitutional limitations fixing a general debt limitation. Based upon those cases and the cited cases decided by this court, which indicate an approval of the special fund doctrine and, further, that excise taxes are not controlled by constitutional provisions, we hold that the *123 issuance and sale of bonds provided for in this act do not in any way constitute a debt against the state' of Washington. The bonds provided for are to be paid from a special fund and solely from anticipated revenues to be derived from the sale of cigarettes. They are not, and cannot be, a general obligation of the state. In the event the anticipated profits do not materialize and the fund becomes exhausted, the purchaser of the bonds has no legal redress against the state. He must look solely to the fund upon which they are drawn.

“Whether there would be a moral obligation to redeem the bonds is a matter which does not concern this court. It is sufficient to say there is no legal obligation to do so in the event the special fund is exhausted. In that event, there will be no additional tax burden by reason thereof; for, as just stated, there is no general obligation on the part of the state to redeem the bonds. * * *”

To the same effect are the following cases: Ziegler v. Witherspoon, (Mich.), 49 N. W. 2d 318; State v. Jones, (N. D.), 23 N. W. 2d 54; Ajax v. Gregory, (Wash.), 32 P. 2d 560; State ex rel Richards v. Moorer, 152 S. C. 455, 150 S. S. 269; Moses v. Meier, 148 Oregon 185, 35 P. 2d 981; California Toll Bridge Authority v. Kelly, 218 Cal. 7, 21 P. 2d 425.

This Court is not required to, upon the issue involved in this case, and does not, approve the authorities, heretofore quoted, based upon the so-called “Special Fund Doctrine”, inasmuch as the State Road Fund, which is pledged to pay any deficits occurring in principal and interest from toll bridge revenue bonds, is a constitutional fund, implemented by the provisions of Code, 17-17-22, as amended, which directs the State Road Commission to allocate to the State Sinking Fund Commission, funds to pay the interest and principal on any bonds issued for the purpose of constructing bridges. The resolution adopted by the relator specifically states that such bonds are only secondarily secured by the State Road Fund, and that the primary security for the payment of the bonds are the *124 revenues derived from the use of the bridge. Furthermore, the resolution provides that the bonds are not to be an indebtedness of the State of West Virginia, or any political subdivision thereof, but that, of course, is a judicial, not a legislative, question. It is not necessary to, nor does this Court, approve by its decision in this case, the authorities cited wherein it has been held that the word “debt” in other Constitutions refers only to the creation of a debt payable from funds raised by ad valorem property taxes. To so hold would render innocuous the protective provision of Article X, Section 4, of the Constitution of this State, in view of the fact that since the tax limitation Amendment of 1932, the ad valorem tax on property, as a source of State revenue, has become relatively unimportant, and the major sources of this State’s revenues are excise and privilege taxes.

Furthermore, there is no inconsistency between Article X, Section 4, and Article VI, Section 52, of the State Constitution. Except for the purposes therein stated, Article X, Section 4, prohibits the contracting of a debt by this State. Article VI, Section 52, merely creates a fund in to which all revenues from gasoline, and other motor fuel, excise and license taxation, motor vehicle registration and license fees, and all other revenues, derived from motor vehicles, or motor fuels, shall go, and provides that such funds shall be used only for the construction, reconstruction or improvement of public highways, and the payment of obligations incurred therein. This section is not self-enacting, and the fund created by it must rely upon legislative enactment for its resources. It does not provide that any revenue shall come into the fund, but it does provide that if, by legislative enactment, taxes are derived from certain sources, they may not go into any other fund or be used for any other purpose. In other words, the moneys which go into this fund do not constitute a part of the general revenues of the State, since they can not be used for general purposes, but only for the purposes specified in the Amendment. The State Road Commission and the Governor, together, have the authori *125 ty to take from the State Road Fund sufficient funds, if they are available, to build a bridge at Winfield. They also have the authority to pay one-half of the cost of the project out of the fund and accept the other one-half from the Federal Government. In either case, the funds supplied by the State would come out of the State Road Fund. The administrators of this Fund have the authority to, and responsibility for, providing a bridge at this place to facilitate travel in this industrial and agricultural area, and under the plan proposed for the financing of its construction, by which the Federal Government furnishes one-half of the funds therefor, and revenue bonds are to be sold to provide the other half, they may do so without any cost to the Fund, inasmuch as its liability for securing the bonds is secondary. If payments in the future are required to be made from the Fund, upon its secondary contingent liability, it will be for a purpose for which the Fund was created, and for a project as deserving and necessary as any other for which its funds might be expended. If the additional contingent security is not given, the bonds may not be sold — the bridge may not be built — or, if sold, the premiums and higher interest rate would be additional burdens placed upon those interested in the enterprise. Of course, neither the great need for the improvement, nor the financial attractiveness to the taxpayers, would validate the proposal if it created a debt within the meaning of Article X, Section 4, of the Constitution. This Court holds that it does not. The resolution providing for the issuance of these bonds, and the words contained in them, make it clear to all who purchase them, that they are not general obligations of the State of West Virginia, and do not pledge the full faith and credit of this State. This is a pledge of funds in a constitutional fund, established by the people of this State for the purpose for which the pledge is made. This action does not bind any future Legislature to impose new, or continue present, taxes which, by the Constitutional Amendment, must go into this Fund. The Legislature may continue such taxes at the present rate, it may raise them, or it may *126 abolish all taxes that are directed into this Fund. There is no contractural assurance that sufficient funds will be available in the State Road Fund to pay the principal or interest bn the bonds in question in case it becomes necessary to do so. There is the practical assurance, however, that the automobile is here to stay, and so are taxes.

In most of the cases approving the Constitutional Fund Doctrine, the liability was primary and direct. Here it is only secondary and contingent. If revenue is not provided by the tolls from the bridge to pay the principal of, and interest on, these bonds, the only other security for such payment is the State Road Fund. Neither the general revenues, nor any other revenues of this State are committed to the payment of such principal and interest, and therefore, the bonds are not, and can not be, a general obligation of this State. It follows, therefore, that no debt is created as inhibited by Article X, Section 4, of the Constitution.

We conclude that the demurrer of the respondent to the relator’s petition must be overruled, and the writ of mandamus will issue, directing the respondent to attest and affix the great seal of the State of West Virginia to the bond in question.

Writ awarded.