Sometime in 1945, the date not being shown, the city council of the city of Harrison, a city of the second class, passed ordnance No. 371, entitled "AN ORDINANCE TO PROVIDE FOR THE HEALTH AND SAFETY OF THE INHABITANTS OF THE CITY OF HARRISON, ARKANSAS, BY IMPROVING, ENLARGING, EXTENDING, REPAIRING, ALTERING, CORRECTING AND REBUILDING THE PRESENT WATER AND SEWER SYSTEMS OF SAID CITY; TO AUTHORIZE THE ISSUANCE OF WATER AND SEWER REVENUE BONDS OF SAID CITY, INCLUDING THE REFUNDING OF SEWER REVENUE BONDS OF SAID CITY NOW OUTSTANDING; PLEDGING WATER AND SEWER REVENUES FOR THE PAYMENT OF THE BONDS HEREIN AUTHORIZED; AND DECLARING AN EMERGENCY."
The preamble to the ordinance sets out a number of reasons for its enactment, some of them being, (a) that the city owns a debt-free waterworks system which is inadequate and is supplied by an inadequate water source, and that the council has determined the need of improving same, has caused plans and specifications to be made for such improvements, and that the cost thereof will be $140,000; (b) that it also owns a sewerage system which is inadequate, but on which it owes a balance of $97,000 in sewer 4 per cent. revenue bonds to the R. F. C., which has agreed to sell same to the city at a substantial discount and without accrued interest, a great saving to the city, and reciting the imperative need for enlarging and extending same, according to plans already made, at an estimated cost of $175,000, an amount sufficient to refund the R. F. C. debt and to make the improvements contemplated; and (c) that the council believes "the two improvements can be carried on as one project, although their respective costs can be separately determined and charged to each operation, but the city will receive a better offer for its bonds and will receive the advantage of a lower interest rate if it can sell the two issues *Page 1096 together or join the two issues into a combined water and sewer revenue issue."
The ordinance contains 13 sections, the last being the emergency clause. The other sections provide (1) for the expansion of the existing waterworks system at an estimated cost of $140,000; (2) the improvement and extension of the existing sewer system at an estimated cost of $175,000, including the refunding of the debt to R. F. C.; (3) finding the value of the present water system to be $40,000, and of the improved system to be $180,000; (4) finding the present value of the sewer system to be $97,000, and of the proposed improvements to be $78,000, or a total value of $175,000, when improved; (5) appoints a water and sewer committee, naming them, to have charge of construction of improvements and of operations after completion for both projects. Section 7 provides for advertising the sale of bonds under three alternatives: "(1) a sale of water revenue bonds separately; (2) a sale of sewer revenue bonds separately; and (3) a sale of a joint issue of water and sewer revenue bonds." It provides the form of the advertisement, setting out the date of the proposed issues (May 1, 1945) and the maturities each year to 1975 for each alternative. It also provides for the following in the advertisement: "If separate revenue bonds are issued, they will be separately secured by a pledge of the revenues from the respective operations for which they are issued, but with the additional provision that the surplus in each operation will be pledged, if necessary, to meet any deficiency in the revenues of the other operation, and if the bonds are combined in a joint issue, then the revenues of the two operations will be treated as a single fund and will be pledged to the payment of the joint revenue issue."
Section 8 of the ordinance pledges the city to use, when necessary, any available net surplus revenue of either system to pay the bonds and interest of the other, or the whole net revenue if the two are combined, in accordance with said advertisement. Section 9 provides the city will pass the necessary ordinance or ordinances for the execution and delivery of the bonds, including the pledging of revenues of the systems, "the granting of *Page 1097 the statutory mortgage on the systems, with all the rights and remedies provided by the statutes for the enforcement and collection of revenue bonds," and will fix adequate rates for the services to pay said bonds and interest thereon, the reasonable expenses of the operation and maintenance of the plants, with provision for depreciation and replacement, which rates shall never be reduced while any of said bonds issued are outstanding, but may be increased, if necessary. Section 10 provides that all bonds issued "shall be payable solely from the revenues pledged — and shall not constitute an indebtedness of the city of Harrison within any constitutional or statutory limitation."
Appellee, a resident property owner, taxpayer and user of both the sewer and water systems of the city, brought this action to have said ordinance declared invalid and to enjoin its enforcement on several grounds, some of which will be hereinafter discussed. The city answered admitting the allegations relating to the status of appellant and that the water system of the city is debt free, that the sewer system owes $97,000, and that the above ordinance had been passed. It denied all allegations of invalidity of said ordinance. Further answering, the city set up certain affirmative defenses and prayed that the complaint be dismissed. Appellee demurred to said answer upon the ground that it did not state a defense to the complaint. The court sustained the demurrer, holding that said ordinance is unconstitutional and that the city should be restrained from proceeding under it. The city declined to plead further and its answer was dismissed. This appeal followed.
It appears to be conceded, and it must be admitted, that the city can make the proposed improvement to its debt-free waterworks system and issue $140,000 in revenue bonds payable solely from the net revenues from such system under the provisions of Act 131 of 1933, as amended by Acts 3, 96, and 107 of 1935 and Act 178 of 1943; and the same thing is true with reference to the sewer system under the provisions of Act 297 of 1937, that is, it can issue a combined series of refunding and new construction sewer revenue bonds to pay R. F. C. and *Page 1098 make the proposed improvements to the sewer system, payable solely out of the net revenues arising from the operation of the sewer system. Jernigan v. Harris,187 Ark. 705, 62 S.W.2d 5. A number of other cases have cited and followed the Jernigan case. See Shepards Arkansas citations.
Appellee contends, however, that the city of Harrison, while it has the power to pledge the net revenue from each system to the payment of the revenue bonds issued by each it does not have the power to pledge or to apply any surplus net revenue of one system to payment of the bonds of the other system. In other words, that if there be any surplus net revenue arising from the operation of the waterworks, the city may not use such surplus to pay bond obligations of the sewer system and vice versa. We cannot agree that this is true. A case in point to the contrary is Johnson v. Dermott, 189 Ark. 830,75 S.W.2d 243, where it was held that the city of Dermott might lawfully pledge and use "the profits derived from the operation of these plants" (water and light) as security for bonds issued to build a city hospital. Act 178 of 1943, which amends Act 131 of 1933, provides in 1: ". . .; and if a surplus shall exist in the bond and interest redemption account, the same may be applied by the legislative body in its discretion, subject to any limitations in the ordinance authorizing the issuance of bonds or in the trust indenture, (a) . . .; (b) . . .; (c) . . .; or (d) to any other municipal purpose." We think this language authorizes the proposed pledge of net surplus of one system to pay the bonds of the other. It is well known that many municipalities use the surplus revenue arising from utilities owned and operated by them to finance many municipal purposes. We do not think the case of Mathers v. Moss, 202 Ark. 554,151 S.W.2d 660, relied on by appellee, is in point here. This decision was prior to Act 178 of 1943, hereinafter referred to, and supplied the authority the court said was lacking.
We are also of the opinion that the city may, if it so elects, combine the two systems and issue water and sewer revenue bonds with a pledge of the net revenue *Page 1099 of both as the sole security therefor. It must be borne in mind, however, that 2 of said Act 178, which amends 10 of said Act 131, as amended, provides that the value of the existing water system shall be declared and also the value of the property proposed to be constructed, and that the revenues from the entire system when completed shall be divided according to such values, "and that so much of the revenue as is in proportion to the value of such betterments and improvements as against the value of the previous existing plant as so determined, shall be set aside and used solely and only for the purpose of paying the revenue bonds issued for such betterments," together with costs of operation and depreciation, or shall provide that all or any part of the surplus in the bond and interest redemption account, as provided for in 1, shall be used for the same purpose.
If the city can issue two separate series of revenue bonds and support each issue by a pledge of the surplus revenue for the other, as we have already held, we fail to see why the two proposed issues may not be combined into one issue with a pledge of the entire net revenue of both systems to support the revenue bonds issued for both. Nor does the fact that the water system improvements will be financed under the provisions of said Act 131, as amended, and the sewer system under said Act 297, affect the city's right and power to combine the two proposed issues into one. Both properties belong to the city, and it appears to be logical and reasonable to operate them as one project. A sanitary sewer system without water would be a total loss, and a water system without a sanitary sewer system would be impractical, if not entirely useless. So each complements or supplements the other. The demurrer admits that the combination of the two will effect substantial savings in costs of operation — clerical hire, collections of bills for service charges, office space, etc. Also, that the combined issue may be sold at a much lower rate of interest on its bonds, and for a better price than if sold separately. We see no constitutional or statutory objection to a combined issue.
Appellee argues that a pledge of the surplus revenues of one to pay the bonds of the other would be an unlawful *Page 1100 diversion of funds. We cannot agree. It must be remembered that we are not here dealing with the question of the power of the city to divert funds arising from taxation to a purpose other or different from that for which the tax was levied. Nor can it be said that the security of any creditor of the city is in any manner impaired. Payments by the users for the service rendered is not a tax within the meaning of the constitutional provision of art. 16, 11.
We have several times held that the revenue bonds issued pursuant to the acts here involved payable solely from the revenues, do not constitute debts of the municipalities. McCutcheon v. Siloam Springs, supra.
Appellee also contends that said Ordinance No. 371 is unconstitutional because it contemplates the placing of a lien or mortgage on the debt-free water system, in violation of amendment No. 10. Appellant, the city, denies that it is its purpose to encumber the existing water system. The ordinance in 9 does provide, among other things, for "the granting of the statutory mortgage on the systems, with all the rights and remedies provided by the statutes for the enforcement and collection of revenue bonds, . . ." This clause in the ordinance is, in effect, a mere repetition of the language used in 7 of said Act 131, which provides: "There shall be and there is hereby created a statutory mortgage lien upon the water-works system so acquired or constructed from the proceeds of the bonds hereby authorized to be issued," etc. We construe this language to mean that the statutory mortgage lien shall extend to and cover only the new and additional betterments to the water system constructed with the funds allocated to this purpose, and that such lien does not cover the existing plant. In this view amendment No. 10 cannot be involved, as the city incurred no liability payable out of its revenues or existing property. Snodgrass v. Pocahontas, 189 Ark. 819,75 S.W.2d 223; Jernigan v. Harris, supra.
Other incidental questions have been argued, all of which we have carefully considered and find them without merit. *Page 1101
Our conclusion is that the court erred in sustaining the demurrer to the answer and in dismissing same. The decree is reversed, and the cause is remanded with directions to overrule the demurrer to the answer and for further proceedings not inconsistent with this opinion.