Hartwick v. Thorne ( 1990 )

John I. Purtle, Justice.

This is an appeal of a chancellor’s ruling requiring the appellants to refund to the appellee taxpayers the principal and interest on a part of a bond issue proceeds which could no longer be spent for a designated project. The appellants argue that the court erred in finding the bond issue to be an illegal exaction and in requiring the accumulated interest on funds set aside from the bond issue to be refunded to the taxpayers. The trial court ruled correctly on each issue, and we therefore affirm.

On July 9,1975, the North Little Rock City Council enacted Ordinance No. 4532 for the purpose of calling an election to issue $2,605,000 in Amendment 13 bonds. The ballot title for the proposed bond issue stated the following purpose:

For an issue of bonds in the amount of $2,605,000 for the construction of street improvements (including various improvements, but including, without limitations, the construction of an underpass on Pershing Boulevard, and a drainage canal between Faulkner Lake and the Arkansas River and various curbing and guttering improvements).

Between the enactment of Ordinance No. 4532 on July 9,1975, and the special election on the bond issue held on August 26, 1975, intense campaigning was conducted by the proponents and opponents of the bond issue. Those favoring the bond issue apparently feared that it would not pass without the support of the residents of the area in North Little Rock known as Rose City. The ordinance and ballot title specifically proposed a drainage canal between Faulkner Lake and the Arkansas River, although neither specified a particular sum for construction of the canal. The resulting drainage, proponents maintained, would afford the residents of Rose City much-needed relief from water overflow during heavy rain. The bond election encompassed other proposed projects not at issue in this appeal.

During the election campaign, the proponents paid for an advertisement in a newspaper supplement which stated that the Corp of Engineers had devised a plan to keep Faulkner Lake at an even level: “This is done by constructing a drainage ditch from the Lake to the Arkansas River. The city share of the cost is $700,000.” The bond issue was approved by voters on August 26, 1975.

On February 9, 1976, the North Little Rock City Council enacted Ordinance No. 4607, which authorized and directed the mayor and city clerk to establish a special bank account in the amount of $700,000, drawn from the bond issue, for eventual use as payment for the construction of the Faulkner Lake drainage project. The ordinance further provided that the interest earned on the deposit “shall remain in said account to offset any increased cost of construction due to inflation.”

The Faulkner Lake drainage canal was never completed because the Corp of Engineers determined that it was not feasible. Meanwhile, the appropriated funds together with accumulated interest remained on deposit. On March 9, 1987, the North Little Rock City Council enacted Ordinance No. 6034, which stated that the canal project was not feasible and repealed the ordinance establishing the separate fund. On the same date, the city council also passed Resolution No. 3115, authorizing the mayor to enter into contract negotiations with an engineering firm to consider curbing and guttering improvements in Rose City. These improvements were to be paid for from the funds originally set aside by Ordinance No. 4607 for the construction of the Faulkner Lake drainage canal. The appellees filed suit to force the refund of these disputed funds rather than to allow them to be used for curbs and guttering. They alleged that such an expenditure would amount to an illegal exaction.

On January 25,1989, the chancellor ruled that spending the bond issue proceeds that had been set aside for the canal project for the alternative purpose of street and drainage improvement constituted an illegal exaction. She ordered a refund to the taxpayers of the principal amount of $700,000 plus the accrued interest amounting to over $1,800,000. In her opinion, the chancellor stated:

The proposed Drainage Canal was well publicized and it is not unreasonable to speculate that had the Drainage Canal project not been a part of the proposed use of the funds, the electorate might not have approved the Ordinance. This is the exact evil that the constitutional provision is designed to guard against. If bond money is raised for purposes A, B, and C, it is unconstitutional for the money to be used only for purposes A and B. Those voting in favor of the bond issue solely or primarily because of the designated use provided for by purpose C are misled.

At the heart of the issue before us is a provision of the now-repealed Amendment 13 to the Arkansas Constitution (amending Article 16, Section 11), which was in effect at the time of the bond issue in question. Although Amendment 13 was repealed by Amendment 62 in 1984, it still governs the situation in the present case. Amendment 13 provided, in pertinent part:

[N]o money raised under the provisions of this Amendment by taxation or by sale of bonds for a specific purpose shall ever be used for any other or different purpose. It shall be the duty of the mayor and the city council or other governing body established by law, to exercise supervision over the sale of any bonds, which may be voted on by the people at an election held for that purpose and they shall expend economically the funds so provided for the specified purposes for which they were voted.

In considering the restrictions of Amendment 13, we must decide the specific issue of whether the expenditure of funds for curbs and gutters from the sum set aside for the abandoned canal project is within the meaning or purpose for which the bonds were issued. We must consider not only Amendment 13 but also the requirement of Ark. Code Ann. § 14-58-203(b)(l) (1987) that: “Funds resulting from taxes levied under statutes or ordinances for specific purposes may not be diverted to another purpose.”

An illegal exaction is an act that is not authorized or which is contrary to law. Neither fraud nor bad faith must be shown before a taxpayer may seek relief. Mackey v. McDonald, 255 Ark. 978, 504 S.W.2d 726 (1974). We have long held that Section 13 of Article 16 of the Arkansas Constitution is self-executing and requires no enabling act or supplemental legislation to make its provisions effective. In Samples v. Grady, 207 Ark. 724, 182 S.W.2d 875 (1944), this court held that Section 13 of Article 16 confers the right upon any citizen to institute suits in his own behalf and that of all other interested citizens to protect against any illegal exaction. The Samples opinion went on to state that citizens are given the right as taxpayers to present misapplication of public funds by seeking an injunction in chancery.

In Arkansas-Missouri Power Company v. City of Rector, 214 Ark. 649, 217 S.W.2d 335 (1949), a very similar case, the city of Rector enacted an ordinance providing for an election to issue bonds in the amount of $65,000 for the purpose of building a power plant and distribution system. The sale of the bonds was approved, and the city appropriated the $65,000 to construct the plant and distribution system. It was announced after the election, however, that $65,000 would be insufficient to build the structures. The city officials acknowledged that they had known all along that $65,000 would prove inadequate, but, they insisted, with the added state and federal grants the system could be built. The taxpayers were unsuccessful in their efforts in chancery court to have the funds declared an illegal exaction. They argued that the election was invalid due to misleading advertising and misstatements made by bond proponents.

In reversing the chancery court in the Rector case and declaring the bond issue to be an illegal exaction, this court held that the voters, in determining how to vote, were entitled to look to the title of the ordinance, the preamble of the ordinance, the body of the ordinance or the proposition to be voted on as listed on the ballot, along with the notice of the election. The opinion specifically pointed out that discussions in city council meetings, street conversations, speeches at mass meetings, and such incidents are not what the courts look to in making a determination of the purpose for which bonds are issued. The Rector opinion stated:

The ballot title is the final word of information and warning to which the electors had the right to look as to just what authority they were asked to confer, and we think its implication and ordinary meaning is that it was proposed to construct the plant with the proceeds of the bond sale.

The ordinary meaning attaching to the wording of the ballot title in this case clearly conveyed the message to the electorate that the city intended to use a part of the funds to construct a canal between Faulkner Lake and the Arkansas River. It is evident that everyone concerned believed that some of the proceeds of the bond issue would be used on the canal project. However, the determination of unfeasibility and the accumulation of interest changed things. It is understandable that the city, and no doubt some taxpayers, desired to put this fund to a good use. That, however, is not the issue before us. We must decide whether it can be accomplished legally.

This court was called upon to make a decision concerning Article 16, Section 11 of the Arkansas Constitution in the case of Mears v. Little Rock School Dist., 268 Ark. 30, 593 S.W.2d 42 (1980), where we held that the interest on tax monies raised on behalf of the school district belonged to the schools and not to the county. We cited with approval Pomona City School Dist. v. Payne, 9 Cal. App. 2d 510, 50 P.2d 822 (1935), which held that interest on school taxes was part of the principal and belonged to the schools in the absence of legislative action. The Mears opinion noted that Miles v. Gordon, 234 Ark. 523, 353 S.W.2d 157 (1962), had relied on the California case in reaching a decision that “Article 16, Section 12 of the Constitution, which prohibits taking money out of the state treasury without an appropriation, did not apply to interest on tax money when the two were separated by legislation.” The Miles case involved an act of the legislature in using interest accrued on investments, a part of the revenue stabilization reserve fund, after it had been collected for another purpose. Miles went on to hold that interest on funds, unless lawfully separated therefrom, was a part of the principal. However, the interest collected in Miles was on funds which had been deposited into the general revenues of the state treasury.

In addition to Miles, the appellants have also relied on Board of Education of Ouachita Co. v. Morgan, 182 Ark. 1110, 34 S.W.2d 1063 (1931), and Easterling v. Cook, 175 Ark. 574, 299 S.W. 1009 (1927), for the proposition that accrued interest amounts on tax monies are not taxes and therefore are not required to be refunded as proceeds from an illegal exaction. The Morgan and Easterling cases have been implicitly overruled by Mears and Miles and are now explicitly overruled to the extent that they conflict with this opinion.

We considered another illegal exaction in Special School Dist. No. 100 v. Sebastian Co., 277 Ark. 326, 641 S.W.2d 702 (1982), applying the mandates of Article 16, section 11, of the Arkansas Constitution. The central issue again was whether taxes collected for one purpose may be used for any other purpose. We expressly held that the use of school funds for other than their intended purpose is specifically prohibited.

More recently, we held in Bell v. Crawford Co., 287 Ark. 251, 697 S.W.2d 910 (1985), that “A tax dedicated to one purpose cannot be used for another and accordingly, money appropriated from a hospital fund should not be used for county roads.” The Bell opinion was almost directly on point with respect to the present case when it stated: “[W]e have held that the taxpayers, in instances of bond surpluses accumulating as a result of the retirement of the original bond issue, are entitled to a refund.” The opinion directed the trial court in the manner of handling refunds in instances where individual taxpayers could not be located.

There is no implication, nor was it argued, that the city of North Little Rock was acting in bad faith at any time during the proceedings upon which this appeal is based. The city may have been acting in the utmost good faith — nevertheless, it tried to appropriate monies arising from taxes for purposes other than the objective which caused the citizens to approve the bond issue. Although there may not have been a legal requirement that the city have appropriated $700,000 for the canal project, it seems to be a reasonable figure in view of the circumstances of this case. The advertising before the election used this figure, and the ordinance setting aside the fund was passed shortly after the election.

The appellant argues that Act 490 of 1989, enacted on March 10 of this year and codified at Ark. Code Ann. § 14-72-701 (Supp. 1989), is dispositive of the issue of interest accumulated on these funds. The statute may have been intended for this exact purpose, but it was not in existence at the time the chancery court rendered a final judgment in the matter, nor did it include language indicating retroactive application. Since Act 490 of 1989 was not presented to the trial court — indeed it could not have been presented — we do not consider it on appeal.

Affirmed.

Hays and Newbern, JJ., dissent.