Kelley v. Earle

Plaintiff, a taxpayer, seeks in his bill to enjoin the enforcement of the Act of Assembly approved June 28, 1935, P. L. 452, known as the General State Authority Act. Defendants are the members of the General State Authority, the corporation organized under the provisions of that act. Original jurisdiction of the cause was taken upon plaintiff's petition and defendants' answer thereto, in which defendants joined in the prayer of the petition. A petition to intervene as party plaintiff and to file a supplemental bill was granted to another taxpayer. Defendants' answers to the bill of plaintiff and the supplemental bill of the intervenor admit the allegations of fact therein but deny the invalidity of the act and the agreements proposed to be executed thereunder. A stipulation of facts has been filed setting forth (a) the form of resolution under which the authority proposes to contract with the Commonwealth for the erection of needed improvements, (b) the form of "loan and grant agreement" proposed to be entered into between the authority and the federal government, and (c) the deed of trust proposed to be executed by the authority to secure its bond issue. The issue raised upon these pleadings is whether or not the act is unconstitutional and the various agreements to be executed under it invalid.

The act provides that the governor of the Commonwealth, the state treasurer, the auditor general, the secretary of internal affairs, the secretary of property and supplies, the president pro tempore of the senate by which the act was passed, and their respective successors in office, and two citizens of the state, one to be appointed by the governor and one by the president pro tempore of the senate, are "hereby created a body corporate and politic, constituting a public corporation and governmental instrumentality by the name of 'The General State Authority.' " The purpose of the authority is the construction, improvement, maintenance and operation of "sewers, sewer systems, and sewage treatment works for state institutions, public buildings for the use of the Commonwealth at the seat of the state government, state arsenals, armories, and military reserves, state airports and landing fields, state tuberculosis sanatoria, additions to present state hospitals, normal schools, teachers colleges, penal or correctional institutions, state highways, and bridges, tunnels, and traffic circles on state highways, swimming pools, and lakes on state-owned land, and low head dams and improvements to river embankments (any and all the foregoing being herein called 'projects')." No project is to be begun after the expiration of two years from the effective date of the act. It is further provided that "the purpose and intent of this act being to benefit the people of the Commonwealth by, among other things, increasing their commerce and prosperity, and not to unnecessarily burden or interfere with existing business by the establishment of competitive enterprises, none of the powers granted hereby shall be exercised in the construction, improvement, maintenance, extension, or operation of any project or projects which in whole or in part shall duplicate or compete with existing enterprises serving substantially the same purposes."

Certain specific powers are granted to the authority, among which are the power to exist as a corporation for 32 years, to sue and be sued, to acquire, purchase, hold, lease as lessee and use any property necessary or desirable for the purposes of the authority, to lease from the department of property and supplies any property, real, personal or mixed, or any interest therein, owned or subsequently acquired by the Commonwealth, with the approval of the governor, for a term of 99 years at a nominal rental or at such annual rental as may be determined, and, with the governor's approval, to lease as lessor to the Commonwealth or any city, county or other political subdivision, or any agency, department or public body of the Commonwealth any project constructed by the authority or property otherwise acquired by it. The authority is also given power to acquire and to construct, maintain and operate projects, to fix, charge and collect rates and rentals for the use of services of the authority or projects thereof, to borrow money and issue negotiable notes and bonds, to secure the payment of such bonds by pledge or deed of trust of all or any of its revenues, rentals and receipts, to make contracts, and to have the power of eminent domain. Section 4 finally stipulates: "Provided, however, that the Authority shall have no power at any time or in any manner to pledge the credit or taxing power of the Commonwealth or any of its cities, counties, or other political subdivisions, nor shall any of its obligations or debts be deemed to be obligations of the Commonwealth or of any of its cities, counties, or political subdivisions, nor shall the Commonwealth or any city, county, or political subdivision thereof be liable for the payment of principal of or interest on such obligations." Section 5, in providing for the issuance of bonds of the authority, states, in its third paragraph: "Any resolution or resolutions authorizing any bonds may contain provisions which shall be part of the contract with the holders thereof as to — (a) pledging the full faith and credit of the Authority (but not of the Commonwealth or any county or other political subdivision thereof) for such obligations, or restricting the same to all or any of the revenues, rentals, or receipts of the Authority from all or any projects or properties." The various remedies available to bondholders are set forth, and it is provided that, in addition to other rights and remedies, a holder of bonds of the authority may by mandamus or other action "enforce his rights against the Authority, including the right to require the Authority to collect fees, rentals, and other charges adequate to carry out any agreement as to or pledge of such fees, rentals, or other charges."

The department of property and supplies of the Commonwealth is given the power, with the approval of the governor, to acquire title in the name of the Commonwealth to any lands which may be required for the corporate purposes of the authority, and to grant and assign, or lease for a term not exceeding 99 years, to the authority any lands or rights in lands owned or acquired by the Commonwealth so far as needed or convenient for the authority's purposes. In section 14 it is provided: "The Commonwealth does hereby pledge to and agree with any person, firm, or corporation, or Federal agency subscribing to or acquiring the bonds to be issued by the Authority for the construction, extension, improvement, or enlargement of any project or part thereof, that the Commonwealth will not limit or alter the rights hereby vested in the Authority until all bonds at any time issued, together with the interest thereon, are fully met and discharged. The Commonwealth does further pledge to and agree with the United States and any other Federal agency that in the event that any Federal agency shall construct or contribute any funds for the construction, extension, improvement, or enlargement of any project, or any portion thereof, the Commonwealth will not alter or limit the rights and powers of the Authority in any manner which would be inconsistent with the continued maintenance and operation of the project or the improvement thereof, or which would be inconsistent with the due performance of any agreements between the Authority and any such Federal agency, and the Authority shall continue to have and may exercise all powers herein granted, so long as the same shall be necessary or desirable for the carrying out of the purposes of this act and the purpose of the United States in the construction or improvement or enlargement of any project or such portion thereof."

The form of resolution contained in the stipulation of facts, under which the authority proposes to contract with the Commonwealth for the erection of needed improvements, is drawn with specific reference to a particular project. It recites the need for an improved water supply and waterworks for the State Colony for Epileptics near Selinsgrove, the cost of which is to be $50,909. The recital further discloses that the federal emergency relief administration of public works has approved the project and that, through the benefits of an act of Congress known as the Federal Emergency Work Relief Act, 45 per cent of the total cost of the construction of the project will be paid by the federal government, and the balance, $28,000, will be loaned to the authority by the federal government if satisfactory terms can be arranged. It is then resolved that the authority may enter into an agreement with the department of welfare of the Commonwealth, and that the terms of that agreement shall in substance provide: "(a) The Commonwealth to make available the necessary site or sites, together with pipe line easement in lands upon which the project will be erected and established, to be conveyed or leased to this authority for a nominal consideration. (b) This authority to construct on the sites thus made available and transferred a complete water-works system which shall be rented to the Department of Welfare of the Commonwealth of Pennsylvania for a term not exceeding thirty years at an annual rental not exceeding $2800.00 for the first third of the term, $2520.00 for the second third of the term and $2240.00 for the balance of the term. Said lease also to provide that the Commonwealth of Pennsylvania, acting through its appropriate department or agency will keep said water-works in good order and repair and maintaining the same in operating condition. (c) That at the expiration of the term of the lease and upon payment of the rent stipulated therein, title to said water-works to be transferred or conveyed to the Commonwealth of Pennsylvania, free and clear of all encumbrances, together with the site or sites upon which the same is to be erected if the same shall have been conveyed, or with release of the lease of said sites, as the case may be." A clause, entitled "Conditions Precedent to the Government's Obligations," in the form of loan and grant agreement between the authority and the federal government, provides: "The Government shall be under no obligation to pay for any of the Bonds or to make any part of the Grant: . . . (e) If the Supreme Court of the State shall not render a decision satisfactory to the Administrator holding that: (i) Act No. 190 [the General State Authority Act] is constitutional, . . . (iv) the Lease between the Department and the Borrower is a valid, binding and irrevocable agreement, although not a debt of the State within the meaning of any constitutional or statutory provision or limitation."

Numerous constitutional objections are raised against the act and the agreements contemplated under it. Of these we need consider only one. Section 4 of article IX of the Constitution provides: "No debt shall be created by or on behalf of the State, except to supply casual deficiencies of revenue, repel invasion, suppress insurrection, defend the State in war, or to pay existing debt; and the debt created to supply deficiencies in revenue shall never exceed, in the aggregate at any one time, one million dollars: Provided, however, That the General Assembly, irrespective of any debt, may authorize the State to issue bonds, to the amount of one hundred millions of dollars, for the purpose of improving and rebuilding the highways of the Commonwealth." We are of the opinion that the lease which the Commonwealth proposes to execute under the stipulation in the record, and other leases like it, are within the prohibition of that section. We have not often been called upon to consider the meaning and effect of section 4 of article IX. It is clear, however, that the vice intended to be prevented by it is not different from that prohibited by section 8 of article IX, which limits the indebtedness of municipalities, and which we have frequently had to consider. We pointed out in Kelley v. Baldwin, 319 Pa. 53, at page 60, that the mischief sought to be avoided by section 4 was "the accumulation of a state debt (subject to the $1,000,000 leeway for deficiency in revenue) by expenditures in excess of current biennial revenue." In Com. v. Liveright, 308 Pa. 35, it was said, at page 66: "This section was intended to restrict legislative acts which incurred obligations or permitted engagements on the credit of the State beyond revenue in hand or anticipated through a biennium, and establishes the principle that we must keep within current revenue and $1,000,000." We have likewise several times asserted that the sort of indebtedness prohibited by section 8 was the "contractual obligation to pay in the future for considerations received in the present": see Keller v. Scranton, 200 Pa. 130, 135; Lesser v. Warren Borough,237 Pa. 501, 508; Georges Township v. Union Trust Co., 293 Pa. 364,372. The respective purposes of the two sections are undoubtedly parallel, and it therefore becomes relevant to consider the cases construing section 8.

It is true that a contract of a municipality which is within the current revenues of the municipality does not constitute a debt within the meaning of the constitutional restriction thereon. In City of Erie's Appeal, 91 Pa. 398, it was said, at page 403: "If the contracts and engagements of municipal corporations do not overreach their current revenues, no objections can lawfully be made to them, however great the indebtedness of such municipalities may be; for in such case their engagements do not extend beyond their present means of payment, and so no debt is created."^* Thus, a contract, the purpose of which is to meet the ordinary expenses and recurrent needs of the community, is not within the constitutional restraint (Reuting v. Titusville, 175 Pa. 512), even though the undertaking may extend beyond the current fiscal term: Wade v. Oakmont Borough, 165 Pa. 479; Scranton Electric Co. v. Old Forge Boro., 309 Pa. 73. Where it does not appear, however, that an obligation incurred by a municipality can be met out of current revenues, the obligation must be considered a debt in the constitutional sense if it in fact represents an extraordinary or capital expenditure, even though it may be arranged so as to appear to be an ordinary and usual expense: Brown v. City of Corry, 175 Pa. 528; McKinnon v. Mertz, 225 Pa. 85; Lesser v. Warren Borough, supra; see Georges Township v. Union Trust Co., supra.

In the Brown case, the contract was for the construction of a waterworks, to be delivered to and operated by the city upon completion. Payment was to be in annual installments for 20 years, title to remain in the contractor until the city had fully performed its contract. In a "supplementary statement" it was declared to have been the original intention of the parties to the agreement that the payments were to be "payable . . . annually from the current revenues of said city and not otherwise." The contention was made for the city that the contract was merely for the supply of water and was confined to current revenues. It was none the less held that the purpose of the arrangement was the acquisition of a capital improvement and did not fall within the rule enunciated in City of Erie's Appeal, supra, concerning current revenues. Since the city's borrowing power was exhausted, the debt thereby created was invalid. A similar scheme, for the construction of a school building, was struck down in McKinnon v. Mertz, supra, notwithstanding a "supplemental agreement" attempting to restrict the indebtedness to "funds legally available." In Lesser v. Warren Borough, supra, the proposal was to construct a waterworks, to be financed by a bond issue, which was to be met solely from the revenues of the waterworks, "without other liability whatsoever" on the part of the borough. It was pointed out that, if the bonds were not paid, the waterworks, borough property, could be taken in payment. In holding the proposed undertaking a violation of the restriction on municipal indebtedness, we said, at page 513: "In determining whether any legislative or municipal act conflicts with the Constitution, its substance, and not its form, must always be the test. To sanction what the appellant proposes to do would permit municipalities burdened with debt almost up to the constitutional limit, to constantly overstep it, with results easily to be conjectured. Public improvements which could not be made in the face of the Constitution would be made in defiance of it. To permit a borough or city to borrow money under a contract that it shall not be liable for its repayment, but that the lender must look solely to pledged municipal property or assets, would, in effect, annul the constitutional restriction upon municipal improvidence and strike down a safeguard against municipal profligacy. The Constitution is not to be thus set at naught."

In the present case, the Commonwealth proposes to construct a waterworks at its Selinsgrove institution. To that end, the Commonwealth is to give to the authority land now owned, or subsequently to be acquired, upon which the latter shall construct the waterworks with money borrowed by it. The land, with the completed waterworks and other improvements thereon, is then to be leased to the Commonwealth for a term of 30 years, at an annual rental calculated to pay the operating expenses of the authority and the interest on its bonds, and to amortize the principal of the bonds. In addition to payment of the rental, the Commonwealth shall agree to provide for the maintenance, operation and repair of the waterworks. At the end of the term, and upon full payment of the stipulated rental, the Commonwealth shall acquire full title to the land and waterworks.

It cannot be doubted that the purpose of the arrangement contemplated is the acquisition by purchase of a capital improvement or improvements, for which the state cannot now pay and payment for which is therefore to be made in annual installments extended over a period of 30 years. We are not confronted with an ordinary expenditure, nor is it a case in which the means of payment is provided at the time the obligation is incurred. The particular waterworks described in the record is but a single instance of a program of public works to which no limit has been set either by the act or by the officers of the Commonwealth and the authority. It was stated at the bar of the court that the authority is expected to receive some $60,000,000, of which some $33,000,000 must be repaid. It is clear that the rentals to be paid by the Commonwealth for the various projects constitute the only contemplated source of revenue of the authority, apart from whatever self-liquidating projects may be undertaken. If the authority defaults, the bondholders may, under the act, compel it to enforce its agreements with the Commonwealth, and may take the property originally conveyed by the Commonwealth to the authority in payment of their claims. The engagement extends beyond the present biennium; no means of payment are presently provided; the purpose is to purchase a capital asset; and it in no way appears, nor can it be assumed, that there will be sufficient surplus revenues in this or future bienniums to meet the contemplated payments. Clearly, the Commonwealth is buying on credit and living beyond its means. The intention embodied in the constitutional restriction on debt was to preserve in the financial administration of the Commonwealth the principle of paying as it goes, subject to the specified exceptions. The proposed leases violate that principle and therefore transgress both the letter and the spirit of the Constitution.

Tranter v. Allegheny County Authority, 316 Pa. 65, is urged upon us as decisive in defendants' favor. There, however, the proposed projects were self-liquidating. The revenue for construction was to come, not from the county, but from tolls collected from users of the projects, and the sole obligation imposed upon the county was for the maintenance, operation and repair of the projects. The county undertook to pay the costs of insurance and of lighting, sweeping, cleaning, and removing snow from structures and approaches. The maintenance agreement was in fact expressly sustained on the understanding that the costs of maintenance would be well within the county's annual current revenues, to which it was said the parties had agreed. No such agreement is shown here, nor is there any evidence to indicate that current revenues will be adequate to meet maintenance costs in the future. In view of the fact that the proposed expenditures are for capital purposes, upon which no limit has been placed, a future sufficiency of surplus current revenue may not be assumed. The Tranter case very plainly can afford no solace to defendants. It is suggested in their brief that some self-liquidating projects are contemplated under the present act. In so far as such projects are permitted by the Tranter case, no valid objection to them could be founded upon section 4 of article IX. But it must be obvious that the nature of most of the projects envisaged excludes the possibility of self-liquidation. So far as those projects are concerned, the Tranter case offers no support.

The clear premise underlying the record and briefs and the oral presentation in this case is that the scheme is to be considered as a whole, and that the particular project described in the record is merely typical of many projects, to which no limit is set. In this view of the matter, we have no doubt that a creation of indebtedness on the part of the Commonwealth in excess of the constitutional limitation is contemplated, and we therefore do not hesitate to enjoin the execution of the proposed leases, whereby such indebtedness will be incurred. It is the plain purpose of the act, and the agreements to be executed under it, to permit the Commonwealth to construct public works for which it is not now able to pay, and for which it cannot directly borrow. The attempt is to evade the constitutional restriction on debt, and, since the method proposed is illegal, it must be struck down. The fundamental law may not thus be infringed.

The bills are retained, and the injunction prayed for is granted, costs to be paid by defendants.

^* See also: Spangler v. Gallagher, 182 Pa. 277, 280; Addyston Pipe Steel Co. v. City of Corry, 197 Pa. 41, 49; Schilling v. Ohio Twp., 260 Pa. 113, 117; Georges Twp. v. Union Trust Co.,293 Pa. 364, 371; Athens Nat. Bank v. Ridgebury Twp., 303 Pa. 479,484.