C.I.V.I.C. Group v. City of Warren , 88 Ohio St. 3d 37 ( 2000 )

Francis E. Sweeney, Sr., J.

In this case, we are asked to construe Sections 6 and 13, Article VIII of the Ohio Constitution to determine whether the city ordinances and reimbursement agreement are constitutional. Because we find that the ordinances and the reimbursement agreement violate Section 6, Article VIII, Ohio Constitution, and do not fit the exception of Section 13, Article VIII, Ohio Constitution, we reverse the judgment of the court of appeals.

Section 6, Article VIII of the Ohio Constitution provides:

“No laws shall be passed authorizing any * * * city * * *, by vote of its citizens, or otherwise, to become a stockholder in any joint stock company, corporation, or association whatever; or to raise money for, or to loan its credit to, or in aid of, any such company, corporation, or association * *

The history behind the adoption of this section is relevant to our determination today. In the early days of statehood, Ohio’s fertile soil and abundance of water provided many opportunities, yet Ohioans lacked the efficient means to get their products to market. Thus, Ohio’s prosperity depended on the construction of a transportation network. David M. Gold, Public Aid to Private Enterprise under the Ohio Constitution: Sections 4, 6, and 13 of Article VIII in Historical Perspective (1985), 16 U.Tol.Rev. 405, 407-408. As explained in the editorial comment to Section 4, Article VIII (the provision prohibiting state activities):

“Since the state’s own resources were limited (at least at first), the legislature relied heavily on private enterprise to build and operate roads, bridges, ferries, canals and railroads. Most of the canal system was financed directly by the state, resulting in debts of $16 million. In the 1830’s the state and local governments shifted to a policy of financing turnpike, canal and railroad companies by lending credit or purchasing stock. Insofar as an effective transportation network sprang into being in a remarkably short time, these practices had the desired result. But, they also had undesirable results: they put the state’s money and credit at risk in business schemes that often were risky at best, and the demonstrated willingness of the legislature and local bodies to use them was an open invitation for private interests to dip into the public till. Many of these companies failed, the public debt burgeoned as a consequence, and by 1850 the burden was more than the taxpayers could tolerate. This section was adopted to put a halt to these practices.” 2 Baldwin’s Ohio Revised Code Annotated (1993) 202.

The climate of the times was agitation and anger over the imposition of tax burdens on the citizens for the benefit of private corporations and for the public losses incurred when subsidized corporations failed. Gold, 16 Toledo Law Review, at 411. Although times may have changed, the reason for the existence of Section 6, Article VIII is as valid today as it was in 1851. Its purpose is to prohibit private interests from tapping into public funds at the taxpayers’ expense.

Cases construing Section 6 of Article VIII have found that it forbids the union of public and private capital or credit in any enterprise whatsoever. Alter v. Cincinnati (1897), 56 Ohio St. 47, 63, 46 N.E. 69, 70; McGuire v. Cincinnati (App.1941), 35 Ohio Law Abs. 423, 22 O.O. 334, 40 N.E.2d 435. It does not matter that the public may, directly or indirectly, benefit from the enterprise. In Taylor v. Ross Cty. Commrs. (1872), 23 Ohio St. 22, this court was asked to pass judgment on a legislative Act that authorized the building of portions of railroads by local governments and the sale or lease of those portions to private railroad companies. In finding the Act unconstitutional, this court stated: “It may be that, without the aid of this law, projects may fail, which could, under it, have been prosecuted to successful and useful results. But this consideration can have no influence in a judicial tribunal invested with the high trust of seeing, in the administration of justice, that the constitution suffers no detriment, from whatever quarter or in whatever shape the threatened invasion comes.” Id. at 84-85.

The ordinances and agreement in question clearly violate Section 6, Article VIII. The usual course of business, when developing a residential subdivision, requires the private developer to put in the streets and utilities, and recover the cost in the price of each lot in the development. The property owners are in effect assessed when the property is sold. Here, however, there is no assessment, and the developers still plan to realize the profits on the lots. Moreover, the city is paying twenty percent of the construction bill and financing the remainder of the private developers’ costs. The city is also paying advertising costs, permit fee costs, and legal expenses, as well as a portion of the engineering costs. These actions by the city “raise money for” and “loan its credit to or in aid of’ private corporations.

The city, however, does not believe that a violation of Section 6, Article VIII occurred. The city argues that Section 6 is not implicated because the street and other improvements have been dedicated for public use and thus are city property. Moreover, the city contends that the construction of streets and utilities are traditional governmental functions and are valid pursuant to Heffner v. Toledo (1907), 75 Ohio St. 413, 80 N.E. 8, and R.C. Title 7.

Although a municipality has the power to construct streets and improvements, see R.C. 715.19 and 717.01, R.C. Chapter 727 provides for assessing costs to abutting property owners. A special assessment levied pursuant to R.C. Chapter 727 is a lien against the land being assessed, which runs with the property. R.C. 727.27. Thus, when a new property owner purchases the property that has benefited from construction financed by a special assessment, the new owner is responsible for the remaining payments. This method ensures that in case of a nonpayment, the municipality has a method to recover its costs. R.C. 727.31. Here, this procedure was not followed. The reimbursement agreement and enabling ordinances provide that the developers will reimburse eighty percent to the city in thirty-two installments, on a per-lot basis, with each installment based on the amount of frontage of the lot. An installment is due upon the sale of each lot, with any remainder of the loan due in fifteen years. No liens will run with the land when title transfers from the developers to the purchasers. If the corporations become insolvent, bankrupt, or otherwise unable to repay, the city is left without a remedy to collect on the outstanding debt. This type of repayment scheme is not authorized by R.C. Chapter 727 and places taxpayers’ funds at risk. If the project fails, the taxpayers are saddled with the debt. This is what Section 6, Article VIII was intended to prevent.

Although the court of appeals agreed that this was a loan, it found that the exception in Section 13, Article VIII applied. However, even the city believes that this was a stretch. In fact, at oral argument, the city’s attorney admitted that the courts went too far in finding that Section 13 applied. We agree.

Section 13, Article VIII of the Ohio Constitution provides: “To create or preserve jobs and employment opportunities [and] to improve the economic welfare of the people of the state, * * * it is hereby determined to be in the public interest and a proper public purpose for the state or its political subdivisions * * * to * * * construct * * * [and] improve * * * property, structures, equipment, and facilities within the State of Ohio for industry, commerce, distribution, and research, to make or guarantee loans and to borrow money and issue bonds or other obligations to provide moneys for the * * * construction * * * [and] improvement * * * of such property * *

In Zupancic, we found that this exception enabled the construction of for-profit, multiunit, low- and moderate-income rental housing where a profitable exchange of rent money for services takes place. In finding that rental housing fit the definitions of industry and commerce, we focused on the activities that would occur once construction was complete rather than those occurring during the construction itself. 62 Ohio St.3d at 301, 581 N.E.2d at 1089, fn. 8. The construction of this street containing two cul-de-sacs and related improvements does not meet the definitions of industry and commerce. Once construction is complete, no one is benefited except the residential property owners. We will not stretch the narrow exception found in Section 13, Article VIII to justify this private enterprise.

Accordingly, we hold that where a city contributes to the payment for and financing of a residential subdivision development project, the city is taking action “to raise money for” and “loan its credit to, or in aid of’ private corporations in violation of Section 6, Article VIII of the Ohio Constitution. The city’s actions do not fall within the exception contained in Section 13, Article VIII of the Ohio Constitution. Thus, we find that the city’s financing of the construction of the street and reimbursement agreement and its enabling ordinances are unconstitutional. We reverse the court of appeals’ judgment.

Judgment reversed.

Moyer, C.J., Douglas and Resnick, JJ., concur. Pfeifer, Cook and Lundberg Stratton, JJ., dissent.