Rizzi v. Governor

Finan, J. delivered the opinion of the Court. This is a taxpayers’ suit brought by the complainants, husband and wife, registered voters and owners of property in Baltimore, on which State and city real estate taxes are levied, seeking injunctive and declaratory relief relative to a proposed sale of $40,000,000 of State bonds. The proposed sale represented five separate issues of State bonds to have been known as the Second, Third, ⁷⁰⁰ Fourth, Fifth and Sixth Series of the State and Local Facilities Loan of 1969, all of which had been consolidated for public offering by a resolution of the Board of Public Works (Board) at a meeting held September 18, 1969. 1 The Governor, State Comptroller and State Treasurer, in their individual capacity and as the officials constituting the Board, were party defendants. This suit was engendered by the inflationary fiscal climate which presently and for many months has affected public financing throughout the nation.

This climate which has produced spiraling interest rates has caused state and local governments to reappraise their programs for funding capital expenditures. In Maryland, concern became acute last January when the Board sold $55,805,000 of State bonds designated as the “State and Local Facilities Loan of 1969, First Series.” The coupon rates on the bonds were 5%, 4.25% and 4.40% and the net interest cost to the State on all of the bonds was at the rate of 4.3255%. The maximum interest rate which the Board may pay is controlled by each of the enabling acts authorizing State loans, which for the purpose of the bond issues involved in this case is 5% per annum. Maryland Code Art. 31, § 2B (e) (3).

For an understanding of the problem presented in this case it is essential that we bear in mind that in addition to the 5% interest limitation expressly set forth in the enabling acts, all of the acts require the Board to issue certificates of indebtedness evidencing the loan according to what is known as “the serial annuity plan” so worked out as to discharge the principal represented by the certificates “within fifteen (15) years” from the date of issue; 2 provided, however, it is not necessary for the ⁷⁰¹ Board to provide for the redemption of any part of the principal for the first two (2) years from the time of issue. An enabling act, typical of all acts consolidated under the several “Series” comprising the “State and Local Facilities Act of 1969,” is Chapter 72 of the Acts of 1962, Section 1 of which reads as follows: “Section 1. Be it enacted by the General Assembly of Maryland, that the Board of Public Works is authorized and directed to issue a State loan to be known as the Sewage Treatment Works Loan of 1962, in the aggregate amount of Five Million Dollars ($5,000,000). “The certificate evidencing said loan may be issued all at one time or, in groups, from time to time, as hereinafter provided. All of said certificates evidencing said loan, or any group thereof shall be issued according to what is known as the serial annuity plan so worked out as to discharge the principal represented by said certificates within fifteen (15) years from the time of its issue; provided, however, that it shall not be necessary to provide for the redemption of any part of the principal represented by any certificates for the first two (2) years from the time of the issuance of said certificates.” Bonds issued under a “serial annuity plan” customarily have been divided into series maturing over a fifteen year period.

On this basis, interest only is paid during the first two years; then annually for the next thirteen years, interest and a portion of the principal is paid. The amount of principal to be paid each year is so calculated that as interest payments decrease, principal payments increase in such amounts that the total annual cost for interest and principal remains approximately ⁷⁰² the same throughout the 13 years. The method is similar to the level payment plan of a home mortgage. Thus, the amount of real and personal property taxes which must be collected to repay the bonded indebtedness remains substantially constant over the 13 year period, during which both principal and interest are paid.

In accordance with its practice of selling bonds twice a year the Board planned to market on July 16, 1969, $59,830,000 of bonds to be known as the “State and Local Facilities Loan of 1969, Second Series.” 3 However, confronted with the interest limitation of 5 c/c and the knowledge of soaring interest rates, the Board, and understandably so, became market shy and postponed the July sale. After the Board postponed the July 16, 1969 sale, the public press reported that the Board was considering various alternatives to attempt a sale of bonds within the statutory 5% interest limitation. One alternative was to issue bonds that had a shorter maturity period than the 15 years which tráditionally had been used. This proposal was prompted by the knowledge that bonds bearing an interest rate limitation of 5% and a 15 year maturity period were unmarketable.

Accordingly, on September 18, 1969, the Board met and adopted resolutions to issue bonds with more attractive short term maturity dates. The five separate issues totaling $40,000,000 and their terms and conditions are as follows: . 1. $5,920,000 State and Local Facilities Loan of 1969, Second Series. This issue would be for a five-year term. Interest only would be paid during the first year and the principal would be paid in annual installments over the remaining four years.

It appears that the amount of the principal installments has been so calculated that the total of ⁷⁰³ principal installment and the interest will be approximately the same throughout each of the four redemption years. 2. $7,810,000 State and Local Facilities Loan of 1969, Third Series. This issue would be for a five-year term. Interest only would be paid during the first two years and the principal would be paid in annual installments over the remaining three years. It appears that the amount of the principal installments has been so calculated that the total of principal installment and the interest will be approximately the same in each of the three redemption years. 3. $5,030,000 State and Local Facilities Loan of 1969, Fourth Series.

This issue would be for a four-year term. Interest only would be paid during the first year and the principal would be paid over the remaining three years. It appears that the amount of the principal installments has been so calculated that the total of principal installment and interest will be approximately the same in each of the three redemption years. 4. $6,105,000 State and Local Facilities Loan of 1969, Fifth Series. This issue would be for a three-year term.

Interest only would be paid during the first two years and the total principal would be payable in the third year. 5. $15,135,000 State and Local Facilities Loan of 1969, Sixth Series. This would be for a fifteen-year term. Interest only would be paid during the first two years; in the third year 90% of the principal would be ⁷⁰⁴ paid; in the fourth through fifteenth year, each year $125,000 of principal would be paid. In this issue the annual payments of principal and interest would vary from year to year.

In the third year, the payment would be very large. The three basic issues raised by the complainants both in the lower court and before us are (1) that the proposed action by the Board to issue bonds for less than fifteen years violates the provisions of Art. Ill, § 34 of the Constitution of Maryland, (2) that the action of the Board in issuing the proposed bonds is arbitrary and capricious because it will increase the burden to the taxpayer and impair the State’s AAA credit rating, and (3) the proposed manner of issuing the bonds violates the “serial annuity plan” provided by the enabling acts and Maryland Code (.1968 Cum. Supp.) Art. 31, § 2B (e) (5). We believe that the desire to have the assurance attendant to a Court interpretation is the reason prompting the inclusion in this case of the issue regarding the period of amortization for State bonds provided by Art. Ill, § 34 of the Constitution of Maryland, rather than any sincere doubt on the part of the complainants as to its true meaning.

The complainants present the argument that the language of Art. Ill, § 34, makes it mandatory that bonds be issued for a full 15 year term and not for any lesser term. Such an interpretation would require that the phrase “within 15 years” be interpreted as meaning “at least” or “not less than.” We find no support for such an interpretation in the language used in Art. Ill, § 34. Black’s Law Dictionary, 4th Ed., defines “within” as: “* * * In inner or interior part of, or not longer in time than. In re White’s Estate, 130 Kan. 714 , 288 P. 764, 765 .

Through. Mississippi Cent. R. Co. v. Pace, 109 Miss. 667 , 68 So. 926, 927 . Inside the limits of.

Sacks v. Legg, 219 Ill. App. 144, 148 ; Ex parte Watson, 82 W. Va. 201 , 95 ⁷⁰⁵ S. E. 648 . On. Continental Life Ins.

Co. v. Wilson, 3 6 Ga. App. 540 , 137 S. E. 403 . “When used relative to time, has been defined variously as meaning any time before; at or before; at the end of; before the expiration of; not beyond; not exceeding; not later than. Glenn v. Garrett, Tex. Civ.

App. 84 S.W.2d 515, 516 .” In McDougald v. Incorporated Town of Broken Bow, 71 Okl. 231 , 176 P. 959 (1918), after reviewing many legal definitions of the word “within,” the Court ruled that the word, as used in the Constitution of the State of Oklahoma providing that municipal bonds be repaid within 25 years, was intended to have its natural meaning and that an issue of bonds maturing in 15 years came within the meaning of the word as used in the Constitution. In Pumphrey v. Stockett, 187 Md. 318 , 49 A. 2d 804 (1946), our predecessors in construing the election laws of this State refused to define “within” in such a manner as would equate it with “at least” or “not less than.” Accordingly, it is our opinion that the “State and Local Facilities Loan of 1969,” Second, Third, Fourth, Fifth and Sixth Series, which are amortized over periods of five years, five years, four years, three years and fifteen years respectively, are not in violation of Art. Ill, § 34 of the Constitution of Maryland. Nor do we think that the action of the Board in issuing the proposed bonds was arbitrary and capricious. We believe that the Board in issuing shorter term bonds was pursuing a reasonable alternative.

The record reveals the testimony of a knowledgeable investment banker, Mr. Melrose B. O’Rourke, Vice President in charge of municipal bonds for Stein Brothers & Boyce, a large brokerage house based in Baltimore which deals in municipal issues throughout the country, to the effect that, historically the shorter term bonds pay lower interest rates. It is true that the issuance of the bonds as proposed in the “State and Local Facilities Loan of 1969,” as set forth in the opinion, will increase the real property tax ⁷⁰⁶ burden over the next five years; however, the total amount of taxes paid will be no greater than if the bonds were amortized over a fifteen year period. As a practical matter, the total amount which a taxpayer will pay to service the bonds will be less since the total amount of interest paid is less when bonds are liquidated over a short period of time. Furthermore, there is no logic to the contention that the proposed plan for issuing the bonds will affect the AAA credit rating now enjoyed by this State.

To the contrary shorter term bonds come closer to placing the State on a “pay as you go” basis and should actually enhance the State’s credit rating. Viewing these fiscal considerations against the background of the emergency which confronted the State and the necessity for it to obtain the funds necessary to begin and complete public improvement projects already authorized, we do not think the Board’s action was arbitrary and capricious but rather was in promotion of the general welfare of the public. Truitt v. Board of Public Works, 243 Md. 375, 391, 392 , 221 A. 2d 370 (1966). We think that Judge Evans, in his opinion in the court below, gave such an excellent review of the historical development in Maryland of “serial annuity financing” that we adopt his opinion treating upon the third contention raised by the complainants: “The Complainants’ third contention is that under Article 31, § 2B (The Consolidating Act) of the Annotated Code of Maryland (1968 Cum.

Supp.), and under the enabling acts which authorize State loans (Enabling Acts), the Board is required to issue bonds According to the serial annuity plan. They further contend that none of the proposed bonds, and particularly the Fifth and Sixth Series, comply with the definition of serial annuity plan. Section 1 of the Enabling'Acts of each of the bond issues which make up the five consolidated bond issues contains the following language : ⁷⁰⁷ ‘The certificates evidencing said loan may be issued all at one time, or in groups, from time to time, as hereinafter provided. All of said certificates evidencing said loan, or any group thereof, shall be issued according to what is known as the serial annuity plan so worked out as to discharge the principal represented by said certificates within fifteen (15) years from the time of its issue;’ [Emphasis supplied.] “Moreover, the Enabling Acts require that, in the resolution authorizing the issuance of the loan, the Board * * set forth in detail the dates when any of the certificates representing said loan or any portion thereof are to be redeemed and the amount to be redeemed upon such dates, respectively, according to the serial annuity plan applied to said loan as a whole or to the group of certificates evidencing a part of said loan issued at a particular time, as the case may be.’ The term “serial annuity plan” is apparently unique to Maryland.

The first use of the term in a bond statute occurred in Chapter 267 of the Acts of 1914 which