Dykes v. Northern Virginia Transportation District Commission

*361PRIOR OPINION

JUSTICE WHITING

delivered the opinion of the Court.

This is a proceeding to validate a proposed bond issue to be repaid solely by funds appropriated by a county’s board of supervisors, and which is not to be submitted to a vote of the people. The issue is whether the county will incur a long-term debt proscribed by Article VII, § 10(b) of the Constitution of Virginia (Article VII, § 10(b)).

In order to finance a part of the cost of completing the Fairfax County Parkway, the Fairfax County Board of Supervisors (the county) approved a proposed contract (the contract) with the Northern Virginia Transportation District Commission (the commission). The contract would obligate the commission to issue its “Transportation Contract Revenue Bonds” (the bonds) in an aggregate amount not to exceed $330,000,000. In return, the county would agree to fund the annual principal and interest payments and other listed expenses of the bond issue, to be disbursed by a trustee.1 These funds would come from the county’s “general revenues” and from “the Business, Professional and Occupational License Tax . . .or any other revenue appropriated ... in substitution for or in addition thereto by” the county.

However, Section 4.05 of the contract would provide that

[t]he obligation of the County to make any payments ... is contingent upon the appropriation for each fiscal year by the Board of Supervisors of the County of funds from which such payments can be made. The County shall not be liable for any amounts that may be payable pursuant to this Contract unless and until such funds have been so appropriated for payment and then only to the extent thereof. It is understood and agreed by the parties hereto that nothing in this Contract shall be deemed to obligate the Board of Supervisors of the County to appropriate any sums on account of any payments to be made by the County hereunder. This Contract shall not constitute a pledge of the full faith and credit of Fairfax County or a bond or debt of Fairfax County in viola*362tion of Section 10 of Article VII of the Constitution of the Commonwealth.

As security for the payment of the bonds, the commission would transfer its interest in the contract by a proposed trust agreement (the trust agreement). The trust agreement, and the bonds themselves, would provide that “[t]he Bonds are limited obligations of the Commission payable solely from” the moneys provided to the Trustee by the County. The trust agreement further would provide that “[t]he obligation of the County ... to make such payments ... is subject to and contingent upon the annual appropriation by the County of moneys for such purpose.”

On May 4, 1990, pursuant to the provisions of Code § 15.1-214, the commission and the county, as a “Plaintiff/Intervenor” (the plaintiffs), filed this bond validation proceeding against the “[tjaxpayers, property owners and citizens” of Fairfax County and other localities serviced by the commission. Osgood Tower, Marcia P. Dykes, and “John Doe and Jane Doe numbers 1-25,” Fairfax County citizens and taxpayers (the taxpayers), opposed the bond validation.

On July 12, after extended hearings and argument, the trial court validated the proposed bond issue. The taxpayers appeal.

The taxpayers argue that because the indebtedness represented by the bond issue would extend for a period beyond the fiscal year of its proposed year of issue, it would be a long-term debt contracted by the county without voter approval. Therefore, the taxpayers contend that the bond issue would violate the following provision of Article VII, § 10(b):

No [long-term] debt shall be contracted by or on behalf of any county . . . except by authority conferred by the General Assembly by general law. The General Assembly shall not authorize any such debt [except listed debts not relevant here] unless in the general law authorizing the same, provision be made for submission to the qualified voters of the county or district thereof or the region or district thereof, as the case may be, for approval or rejection by a majority vote of the qualified voters voting in an election on the question of contracting such debt. Such approval shall be a prerequisite to contracting such debt.

*363The plaintiffs respond that the financing plan would not violate Article VII, § 10(b) because they say that contracts subject to appropriation and bonds payable solely from payments pursuant to such contracts are not ‘debts’ as prohibited by the Virginia Constitution. Here, the plaintiffs seek to extend the scope of what is known as the “special fund” exception to constitutional limitations upon incurring long-term governmental debts without voter approval.

In a case dealing with a long-term state debt and analogous constitutional limitation upon the state’s power to incur such debts, we summarized the special fund exception by quoting from Miller v. Watts, 215 Va. 836, 841, 214 S.E.2d 165, 169 (1975):

[N]o constitutionally prohibited indebtedness is created when bonds issued to finance a particular State capital project are to be paid solely from a special fund derived from the revenues of that project; when the legislature is not obligated to appropriate funds for payment of the indebtedness-, and, when the indebtedness is not secured by the general faith, credit, and taxing power of the State.

Baliles v. Mazur, 224 Va. 462, 469-70, 297 S.E.2d 695, 699 (1982) (emphasis added).

The plaintiffs rely upon three cases in which an analogous constitutional limitation was considered in connection with long-term indebtednesses proposed for the state’s benefit. In those cases, we held that those indebtednesses would not be within the constitutional limitations because they were to be paid solely from special funds derived from the revenues of the financed projects. Baliles, 224 Va. at 466, 297 S.E.2d at 697 (rent for government’s use of office and other buildings); Harrison v. Day, 202 Va. 967, 970, 121 S.E.2d 615, 617 (1961) (rent for use of port facilities); Almond v. Gilmer, 188 Va. 822, 840, 51 S.E.2d 272, 279 (1949) (toll fees and other charges earned by bridges and ferries). Here, there is no special fund because no income will be derived from the use of the Parkway; the only source of revenue for bond payments will be the county’s annual appropriations from its occupational license receipts and other state revenues.

The plaintiffs contend that this would make no difference because we said in Baliles that “[t]he overriding consideration, therefore, is whether the legislative body is obligated to appropri*364ate the funds, not the source or composition of the special fund.” 224 Va. at 471, 297 S.E.2d at 700. That statement, however, was made in response to a contention that the “special fund” doctrine could not be applicable in Baliles because the rent to be paid by the Commonwealth for its use of the buildings was a “fund consist [ing] entirely of money appropriated by the legislature.” Id. As noted above, however, Baliles concerned a revenue-generating project and is therefore inapposite. Thus, this is the first case in which we have considered the implications of Article VII, § 10(b) in circumstances where the facility financed will not be a revenue-generating project.

In Terry v. Mazur, 234 Va. 442, 362 S.E.2d 904 (1987), we considered a statutory scheme purporting to authorize the Commonwealth Transportation Board to issue revenue bonds to finance highway improvements. The bonds were to be secured by a “pledge” of future excise and other taxes, as well as fees relating to motor vehicles. The Attorney General contended that the bond issue met the requirements of the “special fund” doctrine, and was therefore constitutionally permissible without submission to a vote of the people. We disagreed, refusing to extend the “special fund” doctrine to projects other than those which generate their own revenues. Id. at 455, 362 S.E.2d at 911. We adhere to that view.

The plaintiffs also contend that the bonds would not be a “debt” of the county because the bonds would be issued by the commission, not by the county. That, in our view, is a mere subterfuge. Because the trust agreement and the bonds themselves look to annual appropriations of the county’s funds as the sole source for repayment of the bonds, it is of no consequence that bonds would be issued by the county’s alter ego. “We must look to the purpose of the instruments, their substance and not their form. Merely giving to them a particular name or form [does] not take away the nature and effect of the transaction.” Bolling v. Hawthorne Coal Co., 197 Va. 554, 566, 90 S.E.2d 159, 168 (1955).

Although the contract permits the county to discontinue its promised appropriations, we must also consider the practical effect of such a calamitous event in deciding whether the county in fact would be bound to continue to service the bond issue and, therefore, has incurred a “debt” proscribed by Article VII, § 10(b). The county recognizes the importance of its fiscal integrity. It has been advised that the bond issue would not affect its triple A bond *365rating. In fact, the contract would prohibit the county from changing its designation of the proceeds of its annual business, professional, and occupational tax as the primary source of appropriations for its annual bond payments without obtaining “confirmation from those rating agencies that shall have . . . rated and maintained ratings on the Bonds, that the then current ratings on the Bonds will not be reduced as a result of such change.”

The county also recognizes the disastrous effect that would follow any failure by the board of supervisors to make an annual appropriation and the county argues that such a disaster would never be permitted to occur. That argument implicitly acknowledges that the bond issue would have the practical effect of a long-term debt binding the county.

The predecessor to Article VII, § 10(b) was adopted “[t]o safeguard the credit and fiscal integrity of the counties.” II A. Howard, Commentaries on the Constitution of Virginia 863 (1974) (emphasis added). In explicating the predecessor to Article VII, § 10(b), we said that

approval by a majority of the citizens voting on the question properly submitted to them, is a prerequisite to the power of the board of supervisors to create an obligation for any purpose, payable at some future time beyond the termination of the current fiscal year. In no other way, directly or indirectly, can the board bind the county on any such obligation.

American-LaFrance and Foamite Industries, Inc. v. Arlington County, 164 Va. 1, 9, 178 S.E. 783, 786 (1935) (emphasis added).

The plaintiffs here impermissibly seek to accomplish indirectly what they cannot do directly. See, e.g., Hart v. Commonwealth, 221 Va. 283, 290, 269 S.E.2d 806, 811 (1981); Foti v. Cook, 220 Va. 800, 807, 263 S.E.2d 430, 434 (1980). It is obviously contemplated that the issuance of the bonds in accordance with the contract would bind future boards of supervisors to make annual appropriations of sufficient funds to finance the bonds. Manifestly, the animating purpose of the bond contract arrangement is to create a long-term debt, without submitting the debt to a vote of the qualified voters of Fairfax County.

We hold, therefore, that the obligation thus incurred would be a “debt contracted by the county” in violation of Article VII, § 10(b) and, hence, that the bond issue would be invalid. Accord*366ingly, we will reverse the judgment of the trial court and enter final judgment invalidating the bond issue.

Subject to a reserved right not to make the appropriations, the county also would pay the commission’s listed expenses.