Loading...
6. CI-75 Updatet_ zAX,1, ii TO: Al Thelen, City Manager FROM: RICH HICKEL SUBJECT: CI-75_Update DATE: February 16, 1999 Al: You have requested clarification of certain issues relating to CI-75 and various City revenue sources.' I prepared a memorandum which was submitted to Glen on November 16, 1998 in which I provided my opinion on what City revenue sources would be subject to public vote, if increased. Since preparation of that opinion, there has been considerably more discussion statewide of the new legislation. This has added to my overall understanding of the issues and at this time, merits a new review of my previous memorandum. In general, I continue to believe that increases in most revenue sources discussed in the Nov. 16 memo would be subject to voter approval under CI-75. Note however, that the key phrase in my previous opinion is voted increase. This does not address the question of whether continuation of existing rates of assessments and mill levies is permissible. Nor, did I previously address the 1 CI-75 has been codified at Article VIII, Section 17 of the Montana Constitution. For clarity, I will continue to use the common term, CI-75. CI-75--February 199 Update 1 issue of service rates which had previously been passed by the City Council and which actually contemplated future increases. Specifically, the City sewer connection fees were scheduled for estimated annual increases of 5% per year. QUESTIONS PRESENTED AND CONCLUSIONS 1. Whether the City's annual tax levy must be approved by a majority of the City electors to be enacted as a valid tax? 2. Whether fee increases for operation and maintenance of infrastructure improvements paid for by bonds, and which were scheduled prior to passage of CI-75 are subject to voter approval? 1. No. The continuation of the existing levy does not constitute an "extension of an expiring tax" and is not thereby deemed to be a tax increase. 2. No. Rate increases were established before CI-75 became effective. Because the rate scheme contemplated future increases, and because CI-75 operates prospectively only, such increases are not subject to a public vote under CI-75. DISCUSSION DISCUSSION RELEVANT TO BOTH QUESTIONS: On November 3, 1998, Montana voters adopted CI-75 which amended the state constitution. The amendment now appears as Article VIII, Section 17 of the Montana Constitution. The amendment, which became effective upon passage, states in pertinent part that the state, or any political subdivision of the state, including but not limited to local CI-75--February `99 Update 2 governments, school districts, and other districts, must have advance voter approval for: (1) any new tax imposed by a governmental unit; (2) any tax extended to a geographical area not formerly subject to the tax; (3) an increase in the rate of a tax; (4)- an expansion in the legal definition of a tax base; (5) an extension of an expiring tax; (6) complete or partial repeal of inflation indexing; (7) a required acceleration in payment of a tax; and (8) beginning with the tax years following November 3, 1998, any increase in a governmental unit's expected annual property tax revenue that is not attributable to property improvements or to personal property being moved into the geographic area subject to the governmental unit. DISCUSSION No. 1: The City Council annually approves the mill levy for real property located within the City. City services supported by the annual levy include the City Council, Municipal Court, City Manager, City Clerk, City Attorney, Finance, Public Works, Police and Fire, Parks and Recreation, and Community Development. Constitutional provisions like statutes are to be construed utilizing the same rules as apply to statutes. Keller v. Smith, 170 Mont. 399, 553 P2d 1002 (1976) ; Great Falls Tribune v. Great Falls Public Schools, 841 P2d 502, 504 (Mont.1992) . The rule of statutory construction applied by the Montana Courts is found at M.C.A. §1-2-101 and provides: In the construction of a statute, the office of the judge is simply to ascertain and declare what is in terms or in substance contained therein, not to insert what has been omitted or to omit what has been added. Where there are CI-75--February 199 Update 3 several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all. This basic rule has been restated in numerous Montana cases. See e.g., State v. Crane, 784 P2d 901 (Mont .1989) ; Security Bank 6 Trust Co. v. Connors, 550 P2d 1313 (Mont.1976) . Further, constitutional construction should not lead to absurd results if reasonable construction will avoid it. Billings Properties, Inc. v. Yellowstone County, 394 P2d 182 (Mont.1964) . No language contained in the constitutional initiative evinces any intent to de -fund essential governmental services, which would be the effect if the initiative were interpreted to permit voters to reject current annual levies. This would be the type of absurd result that rules of constitutional construction caution against. A more reasonable interpretation would be to find that the drafters of the constitutional provision intended it to reasonably restrain growth of government. M.C.A. §1-3-233. (interpretation must be reasonable). Compare, Colo. Const. Art.X, Section 20(1), commonly referred to as the "Taxpayer's Bill of Rights" or TABOR. The general provisions contained therein, state in part, "[I]ts preferred interpretation shall reasonably restrain most [sic] the growth of government;" See also, Bolt v. Arapahoe Cty. School Dist. Six, 898 P2d 525, 537 (1995)("[w]e decline to adopt a rigid interpretation of Colorado Constitution Art.X, Section 20 (4) (a), which would have the effect of working a reduction in government services.") CI-75--February `99 Update 4 Obviously the intent of CI-75 when applied to new taxes or increases of current taxes is to require voter approval of proposed increased revenues. A logical, natural and unstrained conclusion regarding current levels of taxation and services would say that it was the intent of the voters that the status quo be maintained. See, Gaub v. Milbank Ins. Co., 220 Mont. 424, 427, 715 P2d 443, 445 (language of a statute must be reasonably and logically interpreted). If the drafters of CI-75 had intended current levies to be annually subjected to public vote, they could have said so. To hold otherwise, would be to impose an implied condition precedent (i.e., voter approval) to continuation of current levies. To imply this condition precedent would remove from CI-75 much of the meaning from the phrase "no new tax or tax increase may be enacted ..." and would render the phrases "new" and "tax increase" to be mere surplusage.2 As a rule of interpretation, this is to be avoided if a reading that given effect to all provisions can be reasonably inferred. M.C.A. §1-2-101. See also, Beisler v. C.I.R., 814 F2d 1304, 1307 (9th Cir.1987); Central Montana Elec. V. Adm'r of Bonneville Power, 840 F2d 1472, 1478 (9td Cir.1988) (appeal from D. Mont.) (courts avoid any statutory interpretation that renders any section superfluous and does not give effect to all words used 2 The resulting reading would be to conclude that subpart (1) of Art. VIII, Section 17 actually means, "No tax may be enacted unless first approved by a majority of the electors voting on the measure in the geographic area subject to the tax.' CI-75--February 199 Update 5 by Congress) ; American Linen Supply Co. V. Dept. of Revenue, 189 Mont. 131, 617 P2d 131, 133 (1980); M.C.A. §1-3-232. Under what situations would "extension of an expiring tax" apply? A reasonable interpretation would be those current tax measures containing a "sunset clause.i3 The other common examples would be all types of improvement district assessments and school levies. Once authority for the improvement district assessment has expired, there would no longer be the need to the additional revenue generated. It would seem that the intent of the drafters was to disallow any resulting "windfall" to the appropriate governmental entity once the up -front improvement district expenditures had been repaid in their entirety. Read as a whole, CI-75 limits government from enacting new taxes or increasing current revenues by means other than public vote [subsection (3)(a) and (b)]; EXCEPTING THEREFROM, emergency as authorized by 3/4 of the members of each house of the legislature [subsection (3)(c)); or, revenue increases as a result of property improvement or movement of personal property within the governmental unit's taxing jurisdiction [section (2)(d)(vi)]. Continuation of the current levy does not increase taxes nor does it impose new taxes. A reasonable and logical interpretation of 3 Sunset clauses or provisions are occasionally contained in legislation providing that upon occurrence of a condition subsequent, the legislation will at that time terminate. A typical condition subsequent is passage of time. A recent example would be the Old Fund Liability Tax which terminated effective January 1, 1999. CI-75--February 199 Update 6 CI-75 therefore leads to the only conclusion that current taxation levels and levies were not to be put to public vote. DISCUSSION No. 2: The City of Kalispell has bonded indebtedness outstanding for certain infrastructure improvements, most notably, the sanitary/storm sewer system. The bond offering circular specifies therein that connection fees, and fees for operation and maintenance will be maintained at adequate levels as an integral component to repayment of bonded indebtedness and to maintain continued operation of the sewerage system. Where charges for operations and maintenance are integral components to bond repayment, utilizing the rules of reasonable interpretation quoted in the previous section, it would logically follow that such charges or future increases would not be subject to new vote. In reaching this conclusion, the experience and jurisprudence of the State of Colorado is helpful. The State of Colorado adopted TABOR, supra, in 1992. Many of the provisions contained in TABOR are similar to CI-75, though the two are not identical. In construing language of a constitutional amendment, the Colorado Supreme Court stated, "the courts must ascertain and give effect to the intent of the electorate adopting the amendment." Bolt, 898 P2d at 532. In 1993, the Executive Director of the Department of Labor and Employment requested an opinion from the Attorney General on the question of whether TABOR required public vote on adjustments to the employment tax rates, CI-75--February 199 Update 7 which rate schedules were in effect prior to the effective date. The Colorado Attorney General, in AG File No. OHR9300681.GAB, 1993 Colo. AG LEXIS 4 (April 6, 1993) answered the question in the negative. Attorney General Norton discusses the method by which unemployment tax rates are set. Norton recognized that such taxes: [a]re calculated based on established objective criteria including employer "excess," fund balance, amount of paid benefits not chargeable and tax rates contained in the schedules. An "experience rate" is calculated utilizing the positive or negative excess of taxes paid over the total benefits chargeable to the employer's account. While a particular employer's rate and taxes may fluctuate from year to year, it was recognized that this was "solely a function of the established criteria set forth in the statute, and not as a result of a change or increase in the tax rate schedule." The AG concluded: Because the present tax structure was enacted in 1986, and therefore was in place before TABOR became effective on November 4, 1992, any rate change which occurs by operation of this scheme is not a "new tax, tax rate increase," or other event within the meaning of TABOR's subsection (4) Of course, a change in the structure itself --the addition or deletion of a statutory variable, a change in the method by which rates are computed, or any increase in the standard or computed rates in the tax tables --would trigger the need for voter approval, assuming a resultant net revenue gain. Similar logic would apply to rate schedules previously established by the City Council pursuant to the revenue bond authorization. The Kalispell bond offering circular recognizes CI-75--February 199 Update 8 that connection fees would increase "roughly 5% during each of the years 1996 through 2012." So long as the methodology by which rates are determined does not change and thereby alter the rate scheme which was in effect at the time CI-75 was approved by the voters, there is no resulting "new tax or tax increase." Indeed, to find other would, in all likelihood, contravene with Mont. Const. Article II, Section 31, which prohibits the impairment of obligation of contracts. When analyzing a contract clause challenge, the Montana Supreme Court employs a three-part test: (1) Is the state law a substantial impairment to the contractual relationship? (2) Does the state have a significant and legitimate purpose for the law? (3) Does the law impose reasonable conditions which are reasonably related to achieving the legitimate and public purpose? Carmichael v. Workers' Camp. Court, 763 P2d 1122, 1125 (1988); Billings v. County Water Dist., 935 P2d 246, 251 (1997) . Assuming arguendo, that CI-75 serves a significant and legitimate purpose of restraining growth of government by requiring voter approval of rate increases, the issues raised by parts 1 and 3 remain. Bondholders obviously have a reasonable and legitimate interest in having government fulfill its bond repayment obligation. The City likewise has a legitimate and substantial interest in preserving its bond rating and meeting its debt obligations. Operating and maintaining the integrity of the sewerage system is essential to CI-75--February 199 Update 9 fulfilling both the needs of the City to preserve its repayment ability and the repayment expectations of bondholders to whom the City is obligated. Actions which would have the effect of reducing the City's ability to repay its debt obligations could substantially impair its contractual obligation to bondholders. Further, restraints on operations and maintenance charges that were relied upon by bondholders when the offering was made, would arguably not be a reasonable condition to be imposed on holders after the bond purchase. To summarize, connection fee rates which were in effect at the time of passage of CI-75 should not be altered in a manner that would impair the City's contractual obligation to its bondholders. In Bolt, the Colorado Supreme Court reached a similar conclusion. The Court reasoned: It is evident from the language of Amendment 1 that the voters wanted to reserve for themselves the decisions on whether to increase debt or increase taxes. With respect to the bond redemption mill levy, this purpose has been fulfilled because the voters approved the bonds. Since the bonded debt was approved with the understanding that the school district would be able to raise revenues to meet the bond obligations, we conclude that the school district had votes approval in advance for its bond redemption mill levy increases. 898 P2d at 536. Having ruled as such, the Court did not deem it necessary to discuss the School District's alternative argument pertaining to the possible impairment of obligation of contract under its constitution. .Id. CI-75--February '99 Update 10 Section 3 of the ballot initiative provided, "If there is an irreconcilable conflict between any part of section 1 and any other pre-existing or contemporaneously approved constitutional provision, section 1 prevails." CI-75 does not create irreconcilable conflict with Art. II, Sec. 31 if it is interpreted as applying prospectively only. That is, all new bond issues which contemplate new or increased service fees and charges would be subject to public vote. Pre-existing rate schedules which contemplated future increases and which were designed to ensure debt repayment ability should not be affected by CI-75. There is nothing to indicate it was the intention of the drafters of CI-75 to apply it retroactively to all pre-existing tax and service charge schedules. The drafters, we presume, were aware that there were rate schedules in existence at the time CI-75 was written and they could have included a provision on retroactive application had they chosen to do so. The fact that they did not include such a provision negates any implication that retroactive - application was intended. Further, to imply retroactive application would contravene with the impairment of obligation of contracts clause of the constitution. Reading CI-75 in a logical sense, it is apparent that previously -scheduled fee increases for infrastructure improvements for which bonds were issued, are not subject to public vote under CI-75. CI-75--February `99 Update 11 SUMMARY 1. Article VIII, Section 17 (CI-75), inter alia, sets limits on new taxes or extensions of expiring taxes. It did not, by its own terms, apply to all taxes. So long as the City does not increase its levy or expand the definition of taxable property subject to the annual levy, a public vote is not required. 2. The City established the rate schedules for connection charges to the sewerage system prior to the enactment of Article VIII, Section 17 of the Constitution. Under the previous rate design, it was contemplated that increases in connection charges would be imposed at the approximate rate of 5% per year from 1996- 2012. So long as there is no change to the methodology by which these increased charges are set, voter approval is not required for the annual increase. DATED this 16", day of February, 1999. OFFICE OF THE CITY ATTORNEY AKKal,isell, Montana Richard M. Hic el Assistant City Attorney cc: Glen Neier Amy Robertson cZ-75--February `99 Update 12