City of Bakersfield v. West Park Home Owners Assn. and Friends

Filed 10/31/16

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIFTH APPELLATE DISTRICT

CITY OF BAKERSFIELD,

F071869

Plaintiff and Respondent,

(Super. Ct. No. CV280593)

v.

WEST PARK HOME OWNERS OPINION

ASSOCIATION AND FRIENDS,

Defendant and Appellant.

APPEAL from a judgment of the Superior Court of Kern County. David R.

Lampe, Judge.

Brumfield & Hagan, Robert H. Brumfield III and Kristin A. Hagan for Defendant

and Appellant.

Kutak Rock and Neil L. Arney for Plaintiff and Respondent.

-ooOoo-

California Constitution1, article XVI, section 18, prohibits certain public entities,

including cities, from incurring indebtedness without a two-thirds vote of the qualified

electors. Nevertheless, alternative constitutionally permissible financing methods exist.

1 All further constitutional references are to the California Constitution.

Respondent, City of Bakersfield (City), proposed to finance road improvement

projects through a public benefit corporation and pay the debt from revenues held in

special funds. The City filed an action seeking validation of this finance plan under

Government Code section 53511 and Code of Civil Procedure section 860 et seq.

Appellant, West Park Home Owners Association and Friends (West Park), opposed the

finance plan.

West Park challenges the trial court‟s judgment validating the City‟s proposed

plan. According to West Park, the circumstances do not qualify as exceptions to the

voter approval requirement of the California Constitution. West Park further argues the

City could not use gas tax revenues to pay the debt.

Contrary to West Park‟s position, the overall financing scheme is valid. However,

the City cannot use gas tax revenues as part of the financing. Accordingly, the judgment

will be affirmed in part and reversed in part.

BACKGROUND

In July 2013, the Bakersfield City Council, the City‟s governing body, adopted a

resolution authorizing the formation of the Bakersfield Public Benefit Corporation

(Corporation). This nonprofit public benefit corporation was formed as a separate entity

to finance and develop public improvement projects. To carry out its purposes, the

Corporation has the power to “borrow the necessary funds.”

To finance the construction, improvement, maintenance, and operation of certain

public street and highway projects (Projects), the City Council passed a resolution in

September 2013 authorizing the City to enter into various agreements. These agreements

include: (1) an installment sale agreement between the City and the Corporation; (2) a

certificate purchase agreement authorizing the City and the Corporation to sell

certificates of participation to raise funds for the Projects; and (3) a trust agreement

designating a trustee to act with respect to the funds received from the sale of the

certificates.

2.

The installment sale agreement defines the relationship between the City and the

Corporation with respect to the Projects. The Corporation will “cause the design,

acquisition and construction” of the Projects for, and sell the Projects to, the City. In

turn, the City will pay the purchase price of the Projects, plus interest and an

administration fee, in installments as set forth in an installment payment schedule.

To carry out its obligation to make the installment payments, the City will

irrevocably pledge (1) the gas tax revenues received and deposited in the gas tax fund;

(2) the transportation impact fee revenues received and deposited in the transportation

impact fee trust fund; and (3) the restricted utility franchise and surcharge revenues

received and deposited in the roads program utility franchise fee and surcharge fund.

While the City‟s obligation to make the installment payments is described as “absolute

and unconditional,” it is nevertheless subject to the following liability limitation:

“Section 8.01. Liability of City Limited to Revenues.

Notwithstanding anything contained herein, the City shall not be required

to advance any moneys derived from any source of income other than the

Revenues for the payment of the 2013 Installment Sale Payments or for the

performance of any agreements or covenants required to be performed by it

contained herein.

“The obligation of the City to make the 2013 Installment Sale

Payments is a special obligation of the City payable solely from the

Revenues as provided herein, and does not constitute a debt of the City or

of the State of California or of any political subdivision thereof within the

meaning of any constitutional or statutory debt limitation or restriction.”

The trust agreement is the mechanism by which the certificates issued and sold to

raise funds for the Projects are to be administered. The trust agreement will be entered

into by the City, the Corporation, and a trustee. Under this agreement, the trustee is

authorized to prepare the certificates in an amount equal to the aggregate principal

amount of the installment sale payments to be made by the City to the Corporation.

Thereafter, the trustee is to deliver the certificates to the certificate purchasers upon

payment of the purchase price.

3.

The trust agreement also requires the Corporation to assign its rights to receive the

installment sale payments from the City to the trustee. These amounts are to be held in

trust and then used by the trustee to pay the certificate owners.

In October 2013, the City filed a complaint under Government Code section

53511 and Code of Civil Procedure section 860 et seq. to validate the proposed plan to

finance the Projects. West Park appeared as an interested party and answered the

complaint.

Following a hearing, the trial court entered judgment in the City‟s favor. The

court concluded that the City‟s proposed obligations would not exceed the debt limits

under article XVI, section 18, because they were payable out of a special fund, not the

City‟s general funds. The court further found that the proposed use of the gas tax

revenues complied with the California Constitution. Finally, the court held that the

Corporation is a valid separate legal entity, not a “sham” as urged by West Park.

DISCUSSION

1. Validation proceedings.

A local agency, such as the City, “may bring an action to determine the validity of

its bonds, warrants, contracts, obligations or evidences of indebtedness.” (Gov. Code,

§ 53511; Code Civ. Proc., § 860.) The purpose of such a proceeding is to promptly settle

all questions about the validity of the agency‟s actions. (Quantification Settlement

Agreement Cases (2011) 201 Cal.App.4th 758, 833.) It is an in rem action that binds the

agency and all other persons. (Ibid.)

2. The City’s finance plan does not violate the constitution’s debt limitation.

a. The special fund doctrine.

Article XVI, section 18, prohibits the City from incurring “any indebtedness or

liability in any manner or for any purpose exceeding in any year the income and revenue

provided for such year, without the assent of two-thirds of the voters.” Essentially,

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article XVI, section 18, mandates balanced budgets. (Rider v. City of San Diego (1998)

18 Cal.4th 1035, 1045 (Rider).) The purpose of this constitutional protection is to

safeguard the general funds and property of a public entity by preventing bondholders

from forcing an increase in the taxes of, or foreclosing on the general assets and property

of, the issuing entity to obtain payment. (City of Redondo Beach v. Taxpayers, Property

Owners, etc., City of Redondo Beach (1960) 54 Cal.2d 126, 131 (City of Redondo

Beach).)

In light of this purpose, a judicially created exception to the voter approval

requirement has evolved known as the special fund doctrine. Under this doctrine, the

constitutional debt limitation provision is not violated by obligations that are “payable

solely from a special fund, provided the governmental body is not liable to maintain the

special fund out of its general funds, or by tax levies, should the special fund prove

insufficient.” (City of Oxnard v. Dale (1955) 45 Cal.2d 729, 733 (Dale).) Thus, the

indebtedness at issue must not be an indebtedness or obligation of the governmental

body, here a city. Further, payments into the special fund beyond the current year cannot

be a charge on the general fund. Rather, the revenue must be supplied by the agency to

be benefited. (City of Palm Springs v. Ringwald (1959) 52 Cal.2d 620, 624 (Ringwald).)

Accordingly, revenues pledged from a special fund do not “create a situation in which

future taxpayers might be strapped with obligations incurred by a prior administration

without the ability to meet those obligations or the necessary voter approval.” (Law

Offices of Cary S. Lapidus v. City of Wasco (2004) 114 Cal.App.4th 1361, 1368.)

Nevertheless, there must be a reasonable connection or nexus between the special

fund revenues and the project to be financed with those revenues. Before the California

Supreme Court ruled in Dale, supra, 45 Cal.2d 729, “there had been some doubt whether

the source of revenue for the special fund had to be restricted to the improvements for

which the bonds were issued or whether there could be a pledge of revenue from the

entire facility or agency to be benefited.” (Ringwald, supra, 52 Cal.2d at p. 625.) The

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Dale court adopted the broader view and concluded that the special fund doctrine applies

“where the revenues of the entire existing system, as well as those of the proposed

improvement, are pledged.” (Dale, supra, 45 Cal.2d at pp. 734, 737.) Thus, in Dale, the

court held that the city‟s proposal to finance interceptor sewer lines to transport sewage to

a sewage treatment plant from revenues produced by the entire existing sewer system,

rather than limit the revenues to those produced from the interceptor lines alone, was

valid. The court found no “sound reason” to distinguish between the two sources of

revenue. (Id. at p. 737.)

In City of Redondo Beach, the city proposed to finance the construction of a

harbor from three sources: the operating revenues of the harbor; revenues from

hydrocarbon substances from the city‟s tidelands; and the part of the sales, use and

license taxes attributable to the additional business related to the harbor construction.

(City of Redondo Beach, supra, 54 Cal.2d at pp. 129–130.) The court held that the harbor

revenues and tidelands proceeds constituted special funds. However, the court concluded

that the sales, use and license taxes were general revenues and therefore could not be

used to repay a bond issue without having first satisfied the constitutional debt limitation

provision. (Id. at p. 132.) Although the city sought to measure and use only those taxes

attributable to the increased business due to the harbor construction, the court found that

the asserted relationship of such funds to the harbor project during the life of the bonds

was “too indirect and intangible to effectively remove what are ordinarily general funds

from that category.” (Id. at pp. 132–133.)

Similarly, in Ringwald, the court held the city‟s plan to pledge future revenue from

the city‟s sales and use taxes to finance the construction of parking lots violated the

constitutional debt limitation. Although the proposed revenue from the parking facilities

to be acquired and street parking meters qualified as special funds, the court concluded

the pledge of sales and use taxes was a charge on the general funds unrelated to the

parking district. (Ringwald, supra, 52 Cal.2d at pp. 622, 626.)

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b. The three proposed revenue sources qualify as special funds.

As noted above, the City proposes to fund the road improvement projects through

three funds: the gas tax revenues fund, the transportation impact fees fund, and the

restricted utility franchise and surcharge fees fund. The gas tax revenues constitute all

amounts received by the City related to the purchase of motor vehicle fuels, including

amounts received under Streets and Highways Code sections 2103, 2105, 2106, and

2107. The transportation impact fees are fees paid to the City by developers to mitigate

the regional traffic impacts of development projects. The restricted utility franchise and

surcharge fees are a surcharge on the franchise fees imposed on Pacific Gas & Electric

and Southern California Gas Company related to their use of the City‟s streets for

transmitting and distributing electricity and gas. These funds are segregated from all

other revenues and general funds and are not maintained from the City‟s general funds.

i. The obligation will not be paid from general funds.

West Park contends that, under the terms of the installment sale agreement, the

City will be absolutely and unconditionally held responsible for repayment of the debt if

the proposed revenue sources are insufficient and therefore the City‟s general assets will

be at risk. However, West Park is incorrect. The installment sale agreement clearly

states that, notwithstanding anything contained in the agreement, the obligation of the

City is payable solely from the pledged special funds “and does not constitute a debt of

the City or of the State of California or of any political subdivision thereof within the

meaning of any constitutional or statutory debt limitation or restriction.”

In addition, West Park singles out the restricted utility franchise and surcharge

fees as being general funds, not special funds. West Park contends that, because the City

is not legally required to account for these fees in a separate fund, the City‟s effort to

segregate the money from the general fund does not transform the money into special

funds. According to West Park, the City has simply diverted what would otherwise be

general funds into a special fund.

7.

The City adopted an ordinance establishing the “ „Roads Program Utility

Franchise Fee and Surcharge Fund.‟ ” This fund was to be segregated from all other

revenues and general funds and not maintained from the general funds. Thus, the City

did not divert what had been general funds. Rather, the fund was created to hold the new,

additional surcharge to be collected from Pacific Gas & Electric and Southern California

Gas Company related to their use of the City‟s streets. The City had the power to create

this special fund by ordinance and thereby require these supplemental franchise fees to be

segregated. (Ott Hardware Co. v. Holmberg (1916) 32 Cal.App. 229, 232–233;

Monterey Club v. Superior Court (1941) 48 Cal.App.2d 131, 147.) Therefore, these fees

qualify as special funds.

ii. The nexus requirement is satisfied.

West Park also argues that the three sources of revenue pledged by the City to

make the installment payments do not satisfy the nexus requirement under the special

fund exception. West Park opines that the taxes and fees to be collected by the City have

no direct correlation to the particular improvements that make up the Projects and

therefore a sufficient nexus between the special funds and the Projects does not exist.

West Park interprets the special fund doctrine as requiring that the funds be

derived from fees collected for providing services to those directly benefiting from the

improvement or fees collected from the overall system of which the improvement is

incorporated. West Park argues that, because neither the road improvements nor the

overall highway system of which they are a part are revenue generating enterprises, the

special fund exception does not apply. According to West Park, the sources of revenue

proposed by the City have no direct correlation to the Projects and thus do not constitute

special funds.

However, West Park is reading the cases discussing the special fund exception and

the reasonable nexus requirement too narrowly. While in some cases the revenue from

the improvement itself generates the funds, it is not required. (Dale, supra, 45 Cal.2d at

8.

pp. 734, 737.) It is also not necessary for the existing system or agency of which the

improvement is a part to itself generate all of the revenue directly from the services it

provides. For example, in City of Redondo Beach, supra, the court concluded that

revenues from exploiting the hydrocarbon substances in the city‟s tidelands could be a

special fund source for construction of a harbor despite such hydrocarbon production

being separate from the business of the harbor. The court opined “[t]here can be little

doubt that the … tidelands proceeds constitute such special funds.” (City of Redondo

Beach, supra, 54 Cal.2d at p. 132.)

Here, the entire system consists of the City‟s streets and highways. All of the

revenues are either taxes or fees paid by individuals or companies for the use of, and/or

impact on, these streets and highways. The gas tax is imposed on motor vehicle fuels for

use in motor vehicles upon public streets and highways (art. XIX, § 2, subd. (a)) and thus

the revenues are generated by the public‟s use of those streets and highways. The

transportation impact fees are imposed “so as to assure that new development bears a

proportionate share of the cost of capital expenditures necessary to provide a regional

transportation system” in that all development projects have an impact on, and increase

the need for, the regional transportation system. Finally, the restricted utility franchise

and surcharge fees are imposed to compensate the City for the use of its streets to

transmit and distribute electricity and gas.

The Projects are improvements to the City‟s streets and highways that are

necessary to maintain the system. The revenues derive from the same system of streets

and highways of which the Projects are a part and are related to the use of, and impact on,

that system. Accordingly, a reasonable nexus exists between the revenues and the

Projects that will be financed by those revenues.

3. The City cannot pledge gas tax revenues to make the installment payments.

As noted above, the City receives a share of state gas tax funds that it must deposit

in a “ „special gas tax street improvement fund.‟ ” (Sts. & Hy. Code, §§ 2106, 2107,

9.

2113.) The use of these funds is restricted by article XIX, section 2. That section

provides, in part: “Revenues from taxes imposed by the state on motor vehicle fuels for

use in motor vehicles upon public streets and highways … shall be used solely for the

following purposes: [¶ ] (a) The research, planning, construction, improvement,

maintenance, and operation of public streets and highways .…”

Further limitations on how gas tax revenues can be spent are imposed by article

XIX, section 6 and Streets and Highways Code section 2107.4. These sections set forth

the maximum amount of the funds allocated to a city or county that can be used to make

payments on voter-approved road improvement bonds. Streets and Highways Code

section 2107.4 provides, in part:

“Not more than one-quarter of the funds allocated to a city or county

from the Highway Users Tax Account … for the construction of streets

therein may be used to make principal and interest payments on bonds

issued for such construction, if the issuance of such bonds is authorized by

a proposition approved by a majority of the votes cast thereon.…”

West Park acknowledges that the gas tax revenues may be indirectly applied to the

uses set forth in article XIX, section 2. (City of Costa Mesa v. Connell (1999) 74

Cal.App.4th 188, 193 (Connell).) Nevertheless, West Park asserts that the installment

payments are not being used for road improvements because they are being made to a

shell corporation that is entirely uninvolved in any road improvement or other activity

permitted by article XIX, section 2. West Park notes that in Connell, supra, the court

held that sublease payments on golf courses were impermissible because golf courses are

not streets or highways and contends that the same rationale applies here.

However, in this case the Corporation is obligated to “cause the design, acquisition

and construction” of the street improvements for, and sell those improvements to, the

City. To finance the projects, the Corporation is to sell certificates to third party

investors that will be repaid over time by using, among other sources, the gas tax

revenues. Thus, the gas tax revenues are being used to pay for street improvements as

10.

required by article XIX, section 2. No impermissible uses, such as golf course lease

payments, are involved.

West Park further contends the City‟s use of gas tax revenues violates article XIX,

section 6 and Streets and Highways Code section 2107.4 in that the City is using gas tax

revenues on non-voter approved financing. On this issue, West Park is correct.

In Connell, supra, the court was faced with a financing scheme similar to the one

present here. There, the city used a public finance authority, a joint powers authority of

the city and its redevelopment agency, to raise funds for street widening. As part of the

financing, the finance authority issued non-voter approved bonds and the city made

payments to the finance authority coinciding with the timing and amount of the finance

authority‟s debt service payments due on the bonds. The city‟s payments consisted, in

part, of state gas tax revenues. (Connell, supra, 74 Cal.App.4th at p. 191.)

The Connell court held that paying for non-voter approved street improvement

bonds with gas tax revenues was impermissible. The court concluded that article XIX,

section 6, and Streets and Highways Code section 2107.4 were not limited to voter

approved bonds as urged by the city. Rather, the ability to use 25 percent of the gas tax

revenues on street construction bonds “ „if the issuance of such bonds is authorized by a

proposition approved by a majority of the votes cast thereon‟ ” “means no more than that

a percentage of the funds may be used for bond financing of voter-approved bonds.” The

court noted that any other interpretation would lead to absurd results. (Connell, supra, 74

Cal.App.4th at pp. 195–196.)

The city in Connell further argued that it was irrelevant whether the bonds were

voter approved because they were issued by the financing authority, which was not

required to obtain voter approval to issue bonds. The Connell court opined that this

argument missed the point. The court concluded the city was misusing gas tax revenue

by making payments on non-voter approved bonds and the fact that the bond debt was the

11.

financing authority‟s, not the city‟s, was irrelevant. (Connell, supra, 74 Cal.App.4th at

p. 196.)

Here, in arguing the financing does not violate article XIX, section 6 or Streets and

Highways Code section 2107.4, the City relies on similar financing plans having been

validated by at least eight California trial courts. The City requests this court to take

judicial notice of these trial court orders. However, trial court orders hold no precedential

value. (Bolanos v. Superior Court (2008) 169 Cal.App.4th 744, 761.) Accordingly, we

will neither rely upon, nor take judicial notice of, these orders.

The City further asserts that the term “bonds” as used in article XIX, section 6 and

Streets and Highways Code section 2107.4 means “bonds” and is distinct from making

installment payments under an installment sale agreement. The City notes that the term

is not defined in these sections and therefore must be given the meaning it bears in

ordinary use. (Bounds v. Superior Court (2014) 229 Cal.App.4th 468, 480.)

The term “bond” has been defined as: “ „ “[A]ny instrument in writing that legally

binds a party to do a certain thing. „Bond,‟ „obligation,‟ and „instrument in writing‟ are

sometimes used in convertible terms,” ‟ ” “ „ “[a]n instrument that implies an obligor

bound to do what is agreed shall be done,” ‟ ” and “ „ “[a]ny instrument in writing that

legally binds a party to do a certain thing.” ‟ ” (Karsh v. Fidelity Union Casualty Co.

(1932) 119 Cal.App. 543, 546.)

Under the certificate purchase agreement, the Corporation will agree to sell and

deliver certificates representing a proportionate undivided interest in the installment sale

payments made by the City to the Corporation. Payments will be made to the certificate

holders from the specified funds. The certificates will be delivered to facilitate the

financing of street improvements. The certificates will include a maturity date, principal

amount, interest rate, price, and yield.

Thus, the certificates will be written instruments that will bind the Corporation to

make payments to the certificate holder as set forth in the certificate. This fits the

12.

definition of a bond. The fact that the City and the Corporation call the instruments

“certificates” rather than “bonds” is not determinative. The title of the instrument does

not change its nature.

Accordingly, the City‟s gas tax revenues will be used to pay non-voter approved

bonds. This is an impermissible use of these funds. (Connell, supra, 74 Cal.App.4th at

p. 196.)

4. The Corporation has a separate existence from the City.

West Park contends there is a complete unity of identity between the City and the

Corporation that renders the Corporation a shell entity and therefore it is the City that is

issuing the certificates in violation of article XVI, section 18. According to West Park,

the City will be entirely responsible for the Corporation‟s debt and the City exercises

absolute control over the Corporation.

However, the Corporation was formed as a separate legal entity, a public benefit

corporation. (Corp. Code, § 5110 et seq.) Corporations Code section 5111 provides that

“a corporation may be formed under this part for any public or charitable purposes.” As

set forth in its articles of incorporation, the Corporation was formed to render assistance

to the City in multiple ways such as financing, refinancing, acquiring, constructing,

improving, remodeling, leasing and selling buildings; improving electrical, water, and

sewer facilities; and entering into contracts for services or other purposes. Thus, contrary

to West Park‟s characterization, the Corporation was not formed solely to issue the

certificates. Rather, in the installment sale agreement with the City, the Corporation

agrees to “cause the design, acquisition and construction” of the Projects.

Further, the California Secretary of State certified the articles of incorporation.

This is conclusive evidence that the Corporation was formed and prima facie evidence of

its corporate existence. (Corp. Code, § 5133.)

A financing plan similar to the one here was at issue in Rider, supra. In Rider, a

financing agency was to issue bonds, use the bond proceeds to construct a capital

13.

improvement, and lease that improvement to a city. The California Supreme Court

concluded that this financing plan was valid. (Rider, supra, 18 Cal.4th at p. 1039.) In

answer to the appellants‟ argument that the financing agency was controlled by the city

and therefore was a hollow shell, the court noted that it had never held that control by

itself establishes the identity of two separate government entities. Rather, the court held

that, because the financing agency had “a genuine separate existence” from the city, it did

not matter whether or not the city “essentially” controlled the financing authority. (Id. at

p. 1044.)

In so ruling, the court distinguished the earlier case of Rider v. County of San

Diego (1991) 1 Cal.4th 1 (Rider I). In Rider I, the court applied an “essential control”

standard. However, this “essential control” standard was not used to establish “the

identity of two separate governmental entities: „Rather than attempting to demonstrate

that the subject agency and county are identical entities, application of the “essential

control” test simply affords ground for reasonably inferring an intent to circumvent

Proposition 13.‟ ” (Rider, supra, 18 Cal.4th at p. 1044; accord San Diegans for Open

Government v. City of San Diego (2015) 242 Cal.App.4th 416, 437–438.)

Therefore, if the Corporation has a “genuine separate existence” it does not matter

what sort of control the City has over the Corporation. The trial court concluded the

Corporation was a validly and legally formed public benefit corporation. This finding is

supported by the record and thus will be upheld on appeal. Accordingly, the Corporation

can lawfully issue the certificates.

West Park further asserts that the City is essentially responsible for the

Corporation‟s debt and therefore voter approval was required under article XVI, section

18. However, the certificate purchase agreement states that the certificate is “payable

solely from 2013 Installment Sale Payments.” Further, the certificate itself provides “The

obligations of the City to make the 2013 Installment Sale Payments are special

obligations of the City payable solely from Gas Tax Revenues, Transportation Impact

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Fee Revenues and/or Restricted Utility Franchise and Surcharge Revenues (all as defined

in the 2013 Installment Sale Agreement), and do not constitute debts of the City or of the

State of California or of any political subdivision thereof within the meaning of any

constitutional or statutory debt limitation or restriction.” (Italics added.) Thus, the City

is not responsible for the Corporation‟s debt.

DISPOSITION

The portion of the judgment validating the use of the state gas tax revenues to

make payments on the certificates is reversed. The remainder of the judgment is

affirmed. The parties shall bear their own costs on appeal.

_____________________

MCCABE, J. †

WE CONCUR:

_____________________

HILL, P.J.

_____________________

FRANSON, J.

† Judge of the Merced Superior Court assigned by the Chief Justice pursuant to article VI,

section 6 of the California Constitution.

15.