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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)



STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL


Opinion No. 6041

February 19, 1982

BONDS:

Transfer of bond proceeds or debt retirement funds to general fund

CITIES:

Use of bond proceeds and debt retirement funds where bonds are still outstanding

CONSTITUTIONAL LAW:

Const 1963, art 9, Sec. 6--levy of taxes for payment of principal and interest on bonds

TAXATION:

Levy for payment of bonds issued for water and sewer improvements

A successor city to a township may levy taxes without limitation as to rate or amount to pay principal and interest due on bonds issued by the county under a contractual agreement with the township prior to the effective date of the 1963 Constitution, even though the tax limitation voted by the township electors has expired.

Taxes levied for payment of principal and interest on bonds must be placed in a segregated account and may only be used to pay principal and interest on the bonds for which the millage was levied while the bonds are outstanding.

Moneys in debt retirement fund excess to current debt service requirements may not be transferred out of the fund while bonds are outstanding.

Excess proceeds of a bond issue not required for project must be placed in the debt retirement fund to be used to purchase bonds or to call bonds in accordance with the bond contract.

Honorable Edward E. Mahalak

State Representative

The Capitol

Lansing, Michigan

You have requested my opinion on four questions related to several water and sewer bonds which are currently outstanding and were issued by Wayne County for the City of Romulus. (1) Your questions may be phrased as follows:

1. May debt service millage for certain bonds issued by Wayne County for the township of Romulus before the effective date of the 1963 Constitution, and which had millage voted for a period of 20 years, now expired, continue to be levied without limitation as to rate or amount since the passage of the Headlee Amendment to Const 1963, art 9, Sec. 6?

2. If the response to the first question is negative, will the city be required to return debt millage levied subsequent to the millage expiration date?

3. May money in the debt retirement funds related to these bonds, excess to the current debt service requirements, be transferred out and used for other purposes while the bonds are outstanding?

4. Since there may also be excess bond proceeds remaining from these issues which are not required for the projects financed, what is the proper disposition of this money?

You first ask whether debt service millage for certain bonds issued for the City of Romulus before the effective date of the 1963 Constitution, and which had millage voted for a period of 20 years, now expired, may continue to be levied without limitation as to rate or amount since the passage of the Headlee Amendment to Const 1963, art. 9, Sec. 6.

Const 1963, art 9, Sec. 6, as originally adopted, provided in the first paragraph a tax limitation for counties, townships and school districts therein of 15 mills aggregate, separate limitations of 18 mills aggregate, if voted, and up to 50 mills aggregate, if voted, for a period not to exceed 20 years. The second paragraph of this section, generally referred to as the 'non-limitation clause,' provided that the millage limitations of the first paragraph did not apply to taxes levied for bonded debt, other evidences of indebtedness, or to meet contract obligations in anticipation of which bonds were issued, which taxes could be levied without limitation as to rate or amount.

In Butcher v Township of Grosse Ile, 387 Mich 42, 60-61; 194 NW2d 845, 852 (1972), the court concluded that this clause permitted unlimited ad valorem taxation or debt that was not voted by the electors. Justice Black, writing for the majority, noted in Butcher:

'Bluntly stated truth in the 'Address', exposing fairly the actual purpose of Sec. 6, probably would have defeated the narrowly surviving Constitution of 1963. Yes, the property taxpayers of Michigan were yensed (2) in 1963, by Sec. 6.

'It is obiter of course to say that there may be a judicial remedy for this unfolded situation. The people doubtless are bound by the plainly written language of Sec. 6, for it was the constitution itself, distinguished from the subsequently prepared 'Address,' which the people approved in 1963. Behold the dismal end of that great effort of a beset and embittered people who, in the property tax crisis of 1932, rose up and successfully initiated the since battered and now extinct Sec. 21 of the tenth article of the former constitution. To one who lived through that crisis and the property tax moratorium effected by 1934 PA (Ex Sess) 11, and through the tragic sales of property which finally took place pursuant to the land board act of 1937 (No 155), it is not difficult to predict that, sooner doubtless that later, the people will have to repeat their initiatory action of 1932 lest they endure again what this Court--unaided at the time by legislation--had to stop on March 1, 1933, that is, the annual sale for unpaid taxes of more than half the taxable property of Michigan. . . .

'An Upper Peninsula colloquialism meaning deluded and duped, or conned and cozened, or beguiled and bilked; sometimes in a ribald or suggestive sense.'

Therefore, under Const 1963, art 9, Sec. 6, debt service on all outstanding full faith and credit bonds may be met by tax levy without limitation as to rate or amount after the effective date of the 1963 Constitution.

As anticipated by Justice Black in Butcher, supra, the Headlee Amendment to the 1963 Constitution was approved by the electors effective December 23, 1978, and amended the 'non-limitation clause' in Const 1963, art 9, Sec. 6, to provide that taxes may be levied without limitation as to rate or amount only for bonds or other evidence of indebtedness approved by the electors.

However, the Headlee Amendment to Const 1963, art 9, also added section 31. This section provides in pertinent part:

'Units of Local Government are hereby prohibited from levying any tax not authorized by law or charter when this section is ratified or from increasing the rate of an existing tax above that rate authorized by law or charter when this section is ratified, without the approval of a majority of the qualified electors of that unit of Local Government voting thereon . . . The limitations of this section shall not apply to taxes imposed for the payment of principal and interest on bonds or other evidence of indebtedness or for the payment of assessments on contract obligations in anticipation of which bonds are issued which were authorized prior the effective date of this amendment.' [Emphasis added.]

When Const 1963, art 9, Secs. 6 and 31 are read together, it is apparent that ad valorem taxes to meet debt service on all full faith and credit bonds outstanding on December 22, 1978--not just those bonds issued January 1, 1964, the effective date of Const 1963--may be levied without limitation as to rate or amount.

In response to your first question, I am, therefore, constrained to conclude that in order to meet debt service on outstanding bonds, which are general obligations or which pledge the full faith and credit of the municipality, and were issued before December 23, 1978, the municipality may levy taxes without limitation as to rate or amount.

Response to your second question is rendered moot by my answer to your first question.

You next ask whether money in the related debt retirement funds which are excess to the current year's debt service requirements may be transferred out and used for other purposes while the bonds are outstanding. The surplus apparently accumulated because the authorized millage voted by the electors to support the bonds was higher than the actual debt service requirements, but the municipality levied the entire amount authorized.

I am advised that the ballot proposals approved by the electors were: (1) 3 mills voted in 1958 for the purpose of 'providing funds to pay indebtedness and contractual obligations of the Township in the aggregate principal amount of not exceeding Two Million Seven Hundred Fifty Thousand ($2,750,000.00) Dollars incurred for the purpose of acquiring water improvements and refunding outstanding water revenue bonds of the Township and for the payment of which indebtedness and contractual obligations revenues of the water system and special assessments levied therefor are not sufficient' and (2) 4 mills voted in 1961 for the purpose of 'paying indebtedness and construction obligations of the Township for acquiring and constructing facilities in said Township, or that will service said Township, for the collection and disposal sanitary sewerage.'

Since both millages were approved for a period of 20 years, the maximum permitted under Const 1908, art 10, Sec. 21, it is clear that both millages were approved for the purpose of meeting the contractual obligations of the township and could therefore be levied only for that purpose. Furthermore, millage levied for debt service must be accounted for as provided in the Municipal Finance Act, 1943 PA 202, as amended; MCLA 131.1 et seq; MSA 5.3188(1) et seq, ch 7, Secs. 1a and 1b. These sections provide in pertinent part:

'Sec. 1a. (1) If a municipality has obligations outstanding, . . . an officer or official body charged with a duty in connection with the determination of the amount of the next taxes to be raised or with the levying of the next taxes, shall include in the amount of taxes levied each year:

(a) An amount such that the estimated collections will be sufficient to promptly pay, when due, the interest on all obligations and the portion of the principal falling due either at maturity of the obligations or, in the case of term obligations, by the prior redemption or maturity of those obligations, before the time of the following year's tax collection.

'(3) If there is surplus money on hand for the payment of principal or interest at the time of making an annual tax levy, and provision has not been made in the bond resolution for the disposition of that money, credit may be taken upon the annual levy for principal or interest.

'Sec. 1b. Debt retirement funds . . . shall be kept separate from each other and separate from other moneys of the municipality and shall be used only to retire the funded indebtedness of the municipality for which the debt retirement fund was created.'

Although these sections have been amended since originally enacted, the substantive requirements are basically the same for the type of bonds under discussion.

In response to your third question, it is my opinion that millage levied for debt service must be placed in a segregated account and the money in the account, along with all investment income thereon, may only be used to pay principal and interest on the bonds for which the millage was levied while the bonds are outstanding.

In your final question you ask: What is the proper disposition of excess bond proceeds remaining from such bond issues which were not required for the projects financed?

These bonds were issued under either 1939 PA 342, as amended; MCLA 46.171 et seq; MSA 5.2767(1) et seq, or 1957 PA 185, as amended; MCLA 123.731 et seq; MSA 5.570(1) et seq. Under each of these statutes, the county has issued bonds which are to be paid by anticipated contract payments to the county by the successor city and, for some of the bonds, other municipalities involved in the improvement.

Although neither 1939 PA 342, supra, nor 1957 PA 185, supra, addresses the use of excess bond proceeds, each of the contracts related to the bonds provides for the disposition of excess bond proceeds (2) and states that any surplus shall be used to purchase bonds on the open market or, in certain contracts only, may be credited as advance payment of the township's contract obligation by the successor city or to acquire additional water or sewage facilities.

The contract does not specify a time period for the disposition of said surplus proceeds and, therefore, a reasonable time from the completion of the projects financed will be read into the contracts. Duke v Miller, 355 Mich 540; 94 NW2d 819 (1959); McCune v Grimaldi Buick-Opel, 45 Mich App 472; 206 NW2d 742 (1973).

Although reasonable time may be a factual question, the projects financed by the bonds have previously long since been completed, inasmuch as the bonds were issued during the late 1950's and early 1960's. There is no reason for the excess proceeds to be held separately at this time.

In response to your fourth question, it is my opinion that the excess proceeds should be immediately returned to the debt service account of the respective bond issues and used to retire bonds either by purchase or early call, in accordance with provisions of the respective bond contract, and thereby reduce the corresponding debt service on such bonds.

Frank J. Kelley

Attorney General

(1) Romulus incorporated as a home rule city and adopted a charter in 1970. The bonds were issued prior to 1970 by Wayne County payable by the then Township of Romulus through a contractual obligation. There are currently outstanding one water and seven sewer bonds which are the subject of this discussion.

(2) The excess bond proceeds account must also include all investment interest earned thereon. See, OAG, 1981-1982, No 6028, p ___ (January 19, 1982).

 


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