Lacher v. Board of Trustees

Hammond, }., delivered the opinion of the Court. This case involves the validity of a proposal by the Board of Trustees of the State Colleges to pledge certain revenues (student fees) from existing buildings at two of the State Colleges for the payment of the interest and principal of revenue bonds to be sold to raise money to build new dormitories at those two colleges. 1 ⁵⁰³ The State traditionally has paid the cost of building facilities for the State Teachers Colleges, including residence halls. However, in his budget message of 1965 to the General Assembly, Governor Tawes said that the State no longer would be able to provide funds for the construction of dormitories, dining halls and student activity buildings at the Colleges. On January 12, 1965, the Director of the Planning Department of the State wrote the Board of Trustees of the State Colleges: “After careful consideration, it was decided that State funds would not be provided for the construction of a dormitory at either [Frostburg or Salisbury] * ** *.

Many reasons support this decision. The capital needs study which was recently completed disclosed that during the next 10 years, rising enrollments will necessitate capital expenditures by the State in the amount of $82,000,000 for academic facilities only. And this does not include essential ancillary projects which will be necessary to make those facilities usable, such as power supply, heat, water and other utilities, roads, walks, and parking areas. Moreover, we cannot overlook the equally pressing demands for facilities in other areas of State activity such as mental health, welfare and others—none of which can be neglected. “It has become quite apparent that the State will no longer be able to afford to provide funds for the construction of dormitories, dining halls, and other auxiliary facilities.

Rather than being heavily subsidized by ⁵⁰⁴ the State, as in the past, such facilities must be put on a self-supporting basis. There are other means available for financing such projects, for example, Federal loans, and various lease and lease-purchase arrangements.” The new Board pondered the facts that at Frostburg State College enrollment had increased from 367 in 1952 to 1650' in 1965 and that in the same period the number of students living in the residence halls at the college rose from 95 to 649, and that it was estimated that by 1976 enrollment would total 3444, as well as the comparable figures at Salisbury State Teachers College—233 students in 1952 (169 in residence) and 678 in 1965 (392 in residence) with 2612 estimated for 1976—and concluded, quite understandably, that despite the cessation of flow of State funds, new residence facilities must be built. The Board canvassed the possibility of private capital building the facilities but found that it, as a State agency, could build the dormitories more cheaply by the use of tax exempt revenue bonds because a private builder must pay more for the money he would use to build and also seek to make a profit. It also found that to make the bonds salable at an economically practicable rate of interest sources of revenue to repay them above the fees from the buildings to be constructed must be provided.

The Board then decided to ask the Legislature for express authority to issue revenue bonds to produce funds for the building of new facilities. The Legislature responded by the passage of Ch. 739 of the Laws of 1965 which authorized the Board (by ten new sections added to Art. 77 of the Code, to be known as Sections 165A to 165J, inclusive) to, in the accurately descriptive words of the title: “construct, equip, maintain and operate one or more buildings to provide additional housing facilities, living accommodations, and facilities, including recreational and eating facilities, authorizing the said Board of Trustees to impose fees, rents and charges for the use thereof and for the use of similar existing facilities under its direction and control, and authorizing the said Board of Trustees to issue revenue bonds to pay ⁵⁰⁵ the cost of all or any part of such project or projects, the principal thereof and the interest thereon to be payable solely from the fees, rents and charges for the use of the facilities provided by the buildings constructed with the proceeds of said bonds and for the use of similar existing facilities under the direction and control of said Board of Trustees except for interest prior to, during and for one year after completion of construction, providing that interest during such period may be paid out of bonds proceeds and/or out of such other moneys as may be allocated for such purpose, and providing that the said bonds in no way be the debt or obligation of the State of Maryland or any subdivision thereof, except said Board of Trustees, and exempting said bonds from taxation, and relating generally to additional housing facilities and the issuance of revenue bonds to pay the cost of all or any part of the same.” The Board by resolution has indicated that it intends to utilize the authority of Ch. 739 to issue $2,000,000 of revenue bonds to build a new dormitory at P'rostburg and a new dormitory at Salisbury. Bond counsel advised the Board that the provisions of Sec. 165 C (f) of Ch. 739, that the Board: “may increase from time to time, fees, rents and charges for the use of any existing housing unit or existing housing units at any of the public colleges under the direction and control of said Board of Trustees and may designate and pledge all or any part of such increase in such fees, rents, charges and other revenues from any such existing housing unit or existing housing units, as additional security for the bonds authorized by Sections 165A-165J, inclusive, of this sub-title. The fees, rents, charges and revenues so designated and pledged as additional security shall be subject to any pledge or assignment provided in any trust agreement entered into pursuant to Section 165D of this sub-title and shall be treated in all respects the same as provided in Sections 165A-165J, ⁵⁰⁶ inclusive, of this sub-title for fees, rents, charges and revenues received from the use of the housing unit or housing units constructed from the proceeds of the bonds issued under the provisions of Sections 165A-165J, inclusive, for this sub-title,” were of doubtful validity and required a test case to establish the legality of the revenue bonds authorized by the resolution.

Such a case was arranged and appellants, residents, voters and taxpayers of Maryland sought (1) a declaration that Ch. 739 of the Laws of 1965 and the resolution of the Board to proceed thereunder were null, void and of no effect because they purport to authorize the Board to create a debt of the State not meeting the requirements of Section 34 of Art. Ill of the State Constitution, and (2) an injunction forbidding the Board “to take any action pursuant to the purported authority of Chapter 739 or the resolution.” In a thorough and competent opinion, Judge Harris dismissed the bill for declaratory and injunctive relief, finding that the proposed revenue bonds would not constitute an indebtedness or obligation of the State or of any political subdivision of the State within the meaning of Section 34 of Art. Ill of the Constitution of Maryland. We think that he was right. The contentions of the appellants are (1) that the first sentence of Section 34 of Art. III requires any “debt” contracted by the General Assembly to be paid from “an annual tax or taxes sufficient to pay the interest on such debt as it falls due, and also to pay the principal thereof within fifteen years from the time of contracting the same”; (2) that a “debt”—within the constitutional meaning of Sec. 34—is created if there is a pledge of existing State property or the income from existing State property; (3) Ch. 739 authorizes the issuance of bonds, the interest and principal of which are to be paid in part from increases in fees from existing State properties; and (4) since Ch. 739 permits bonds to be issued with maturities of up to forty years the requirements of Sec. 34 are not met. Appellants-- concede that Maryland, in company with almost all jurisdictions that have considered the matter, holds that a State debt is not created by the issuance of bonds that are to be repaid from funds, not taxes, flowing solely from the fácil ⁵⁰⁷ ity to be created by the proceeds of the bonds, as long as there is no pledge of existing State property and no pledge of income from existing State property, Wyatt v. State Roads Comm., 175 Md. 258, 266 (finding legal, as not a debt of the State, bonds sold to construct bridges to be paid from tolls—“There is a large volume of cases which have decided that no debt, in the constitutional sense, is created by issues of bonds payable out of revenues, only a very few courts having come to a contrary conclusion, and some of those courts having subsequently adopted the view of the majority.

See studies in 43 Yale Law Journal, 924, 953 ; 4 Fordham Law Review, 12; 47 Harvard Law Review, 688; and 84 Univ. of Pa. Law Review, 555”). This view is known as the Special Fund Doctrine. See Chermak, The Law of Revenue Bonds 88-92 (1954), and cases cited.

The author says: “The Special Fund Doctrine has application where the obligation incurred is payable wholly out of the income and revenue of the enterprise which it finances. These revenues provide a fund out of which the revenue bonds are paid, and no other funds of the governmental unit subject to the debt limitation avoided, may be pledged to pay such special obligations. “The Special Fund Doctrine has been tested in relation to the issuance of revenue bonds by municipalities in all the states having constitutional municipal debt limits, and has been accepted in its broadest aspects in 27 of these states.” Some thirty cases are cited in support of these statements. Ten other states have no constitutional prohibition requiring the application of the doctrine or expressly permit it. See also Williams and Nehemkis, “Municipal Improvements as Affected by Constitutional Debt Limitations,” 37 Colum.

L. Rev. 177 , 188-90 (1937). Appellants’ contention that the pledge of revenues from existing buildings contaminates the purity of the Special Fund Doctrine and makes the financing under Ch. 739 a debt of the State is based on language in Baltimore v. Gill, 31 Md. 375 . ⁵⁰⁸ In Gill the Court held that the pledge by Baltimore City of such number of valuable income-producing shares of stock of the Baltimore and Ohio Railroad Company as might be necessary to raise $1,000,000 to be invested in bonds of the Western Maryland Railroad Company created a debt of the City (in that it was a borrowing to be expended in the construction and equipment of the Western Maryland Railroad) contrary to the provisions of law controlling the creation of debt by the City. The Court said that the applicable constitutional provisions were intended to restrain the City from borrowing money “except for the purposes and in the manner prescribed, either upon the general credit of the city, or by a pledge of its revenues or assets”; the