I am unable to agree with the majority.
In 1940 the City Council of Pittsburgh refunded $2,398,000 of "electoral" bonds; in 1944 it refunded $1,000,000 of "electoral" bonds; the ordinances challenged in this case provide for the refunding of an additional $600,000 of "electoral" bonds. As a result of these refunding operations the City Council of Pittsburgh has borrowed approximately $4,000,000 for current expenses without increasing its "councilmanic" debt and without decreasing its "electoral" indebtedness.
Does the Constitution of Pennsylvania require the indebtedness of a municipality to be liquidated, or may its debt, by a process of refunding, continue outstanding indefinitely?
The Constitution sets two limits on the debt of municipalities. Article IX, Section 8, limits the debt which can be incurred to 7% of the assessed valuation of the taxable property. Of this 7% only 2% can be borrowed without the consent of the electors.
Article IX, Section 10, and Article XV, Section 3, are concerned with liquidation of the debt. They provide that before or at the time of incurring an indebtedness a municipality must provide "for the collection of an annual tax sufficient to pay the interest and also the principal thereof within thirty years". (Italics added.) Every municipality is required to "create a sinking fund, which shall be inviolably pledged for the payment of the debt".
The Municipal Borrowing Act of 1941 requires that taxes collected each year shall be deposited in the sinking funds for the payment of outstanding bonds. Section 503 of the Act, which is concerned with refunding, says that "All assets in the sinking fund applicable to the payment of the principal of the bonds to be refunded shall first be so applied." But, in this instance the City did not deposit any taxes in the sinking funds and there *Page 538 were therefore no assets in the sinking funds to apply to the payment of the bonds.
The statement in the majority opinion that "The moneys in the sinking funds applicable to the payment of the maturing bonds are to be used for that purpose" is meaningless.
The result of the decision in this case is that taxes need not be levied each year to pay off the debt, and that the debt need not be liquidated in thirty years; that by the device of refunding, the City can keep the outstanding indebtedness indefinitely unliquidated.
This is a clear violation of the Constitution. It also offends the laws of sound financing. The kind of refunding now legalized in Pennsylvania by the decision in this case will permit municipalities to obtain money for current operations which should be used to liquidate their bonded indebtedness. Municipalities in Pennsylvania are no longer compelled to reduce and pay their funded debt.
This Court has repeatedly said that these Constitutional provisions are mandatory: Ohlinger v. Maidencreek T., 312 Pa. 289,167 A. 882; Campbell v. Wilkins Twp., 273 Pa. 204,116 A. 823.
In Brooke v. Philadelphia, 162 Pa. 123, 29 A. 387, Mr. Justice DEAN, speaking for the Court, page 129, said:
"Then came section 3, article 15 of the constitution of 1874, which directs that: 'Every city shall create a sinking fund which shall be inviolably pledged for the payment of the public debt'. 'Every city shall create a sinking fund,' — that is, there shall be set apart from all other city money, for a specific purpose, the redemption or payment of the funded debt, a portion of the annual revenues of the city; then, when this portion of the revenue reaches the fund, it is inviolably pledged for the payment of the funded debt. No temptation however great, no necessity however imperious, shall move the city to divert one dollar of the fund to a purpose *Page 539 other than the redemption or payment of the debt". And on page 130 he added: "So far, then, as relates to the general public, . . . what is called the sinking fund is the mere conduit, through and by which the money raised by annual taxation reaches its destination; it goes into the fund for a specific purpose, to which it is inviolably pledged, . . ."
All this has now been completely ignored and overruled. Instead a municipality is now permitted to divert annual taxes from the sinking fund and use them for other purposes. In other words the method prescribed by the Constitution for the payment and reduction of the funded indebtedness is entirely set aside.
The framers of the Constitution were concerned not only with the payment of the funded debt but also with an annual reduction of the debt. The contention of the City is that the money received from refunding goes into the sinking fund for payment of the bonds, and that this satisfies the Constitutional requirement. This argument loses sight of the fact that the Constitution requires annual taxes to be used for payment of the debt and requires the debt to be reduced annually and completely liquidated in thirty years.
In Clark v. Philadelphia, 328 Pa. 521, 196 A. 384, where a statute had been passed by the legislature consolidating forty-four sinking funds of the City of Philadelphia, this Court held that the statute was unconstitutional, and concluded: "It therefore appears that the constitution, the statute and the ordinance providing for the loans, required an annual tax sufficient for the purposes stated. These, then, are among terms of the contract which the City agreed to perform; they are part of the obligation."
In this case sixty-two issues of bonds are being refunded by the City of Pittsburgh. Each of the ordinances creating the bonds which are now being refunded contained a provision for the levy and assessment of an annual tax for the payment of the bonds. This obligation is part of the contract made by the City: Brooke v. Philadelphia, supra. *Page 540
The vice of such refunding is demonstrated in the record before us, which shows the refunding of $50,000 of bonds of the City of Pittsburgh which were issued in 1944 to refund bonds which became due that year. The kind of refunding approved by the decision in this case will surely result in a procession of refunding by many municipalities. The device is nothing better than a rotation of refunding bonds, which can be carried to the point where all bonds of a municipality are refunded and none are ever paid.
By the same device a municipality which has reached its limit in borrowing power may continue indefinitely obtaining money for current expenses by using taxes which should go to liquidation of its bonds.
I do not believe that the Municipal Borrowing Act of 1941 was intended to permit unlimited refunding. Article 5 of the Act contains provisions for funding and refunding bonds. Section 503 provides that where, in the opinion of the council, there is or will be a default in the payment of principal of funded bonds, the municipality for the purpose of paying off such bonds may issue and sell refunding bonds. The default contemplated is a default "in the payment of the bonds". This means that although a tax has been levied and appropriated to the sinking fund it is not sufficient to pay off the bonds when they mature. This would occur only in an emergency, as for instance, where there has been a great failure of taxpayers to pay their taxes, or where a bank in which the sinking funds were deposited failed, or some such unexpected happening over which the municipality had no control. Such an emergency existed in Com. ex rel. v. Cannon, 308 Pa. 321, 162 A. 277. There, because of a great economic depression the County of Cambria was unable to pay its bonded debt and was permitted to refund. President Judge McCANN, in his opinion, said: "The situation confronting the County Commissioners is an urgent need to relieve an almost intolerable financial burden resting upon the County. *Page 541
"This situation is brought about, in part by the collapse of the coal trade, which has reduced this County from one of the richest in the State to a condition of financial stringency, and in part by the world wide depression, the latter having resulted in economic distress in Cambria County of such severe nature and far reaching extent as to tax seriously the ability of the County to look after its unemployed by the extending of relief in the most insignificant amounts.
"The County is scarcely able to carry on its most needed functions. Our Courts have been suspended for a period of several months as a necessary economy move, and the outlook for the immediate future is indeed dark."
I cannot believe that the legislature in speaking of a default meant that council could divert taxes inviolably pledged for the payment of bonds to current expenses and describe the result as a default in the payment of bonds. The default contemplated by the statute is certainly one over which council has no control. The default announced by the City of Pittsburgh in Ordinances 312 and 313 is one which council created. The Municipal Borrowing Act, Section 503, does not permit the municipalities of the Commonwealth to create a default in every issue of bonds as they mature by diverting the taxes pledged for the payment of the bonds to the payment of current expenses or other obligations.
It may well be that the City of Pittsburgh needs additional revenue for current expenses. If so, there are a number of methods known to the law by which such need can be supplied. To accomplish the result it is not necessary to nullify the Constitution and place municipal finances on an unsound basis. So far as Pittsburgh is particularly concerned it is well within its debt limitation, and in the usual legal way, by increasing its indebtedness, can obtain the money it needs.
Mr. Justice LINN joins in this dissent. *Page 542