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[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 186 [EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 189 The above three actions are brought by taxpayers and, in each, the plaintiffs demand that the municipal authorities of the city of New York be restrained from committing the city to certain proposed contracts for the construction of a subway in Brooklyn and for various other public improvements, and from issuing corporate stock therefor; upon the ground that thereby, the provisions of the Constitution of the state, with respect to the limitation of the city indebtedness, will be violated. Upon an application for a preliminary injunction, an order of reference was made, which was extended to each action, whereby the referee was required to take proof of, and to report with his opinion, the amount in which the city was indebted for any purpose, or in any manner, on June 30th, 1908; to take proof as to its obligations *Page 192 and to classify such indebtedness, to the end that the court may be "enabled to determine thereupon the amount of existing indebtedness coming under constitutional limitations". The learned referee, with great care and elaborateness, complied with the order and, in his report, he has discussed, with marked ability, the important questions presented. Upon the coming in of his report, the applications for an injunction were denied and, on appeal to the Appellate Division, in the first department, the orders of the Special Term were affirmed. Leave was given to the plaintiff to appeal to this court and a great number of questions have been certified for our review.
The constitutional provisions, which are brought into question, are contained in section 10 of article VIII of the State Constitution, and they read as follows: "No county or city shall be allowed to become indebted for any purpose or in any manner to an amount which, including existing indebtedness, shall exceed ten per centum of the assessed valuation of the real estate of such county or city subject to taxation, as it appeared by the assessment rolls of said county or city on the last assessment for state or county taxes prior to the incurring of such indebtedness; and all indebtedness in excess of such limitation, except such as now may exist, shall be absolutely void, except as herein otherwise provided. No county or city, whose present indebtedness exceeds ten per centum of the assessed valuation of its real estate subject to taxation, shall be allowed to become indebted in any further amount until such indebtedness shall be reduced within such limit. This section shall not be construed to prevent the issuing of certificates of indebtedness or revenue bonds issued in anticipation of the collection of taxes for amounts actually contained, or to be contained in the taxes for the year when such certificates or revenue bonds are issued and payable out of such taxes. Nor shall this section be construed to prevent the issue of bonds to provide for the supply of water * * *.
"All certificates of indebtedness or revenue bonds issued in anticipation of the collection of taxes, which are not retired *Page 193 within five years after their date of issue, and bonds issued to provide for the supply of water * * * shall be included in ascertaining the power of the city to become otherwise indebted; except that debts incurred by the city of New York after the first day of January, 1904, * * * to provide for the supply of water, shall not be so included."
The assessment roll of the year 1907 was taken as the basis for a statement of the assessed valuation of the real estate subject to taxation; necessarily, forasmuch as that for 1908 did not go into effect until July 6th. From such assessment roll that assessed valuation appears to have been $6,240,500,602. The constitutional limit for the incurring of municipal indebtedness would be ten per centum of that amount, or $624,050,060.20.
It is strenuously objected that, in computing the indebtedness of the city, within the purview of this provision of the Constitution, it was incorrect to include special franchises as a part of the real estate, which is valued for assessment purposes. It was shown that they entered into the valuation of the real estate, appearing by the tax assessment rolls, to the amount of $466,855,000, and the referee held that they were properly so assessed. The language of the constitutional article is explicit that "the assessed valuation of the real estate" must be taken "as it appeared by the assessment rolls", and I think the rolls are made conclusive upon the subject. In these complaints, they are not attacked and are assumed to be correct. But, if we should assume that the items in the real estate column of the assessment rolls are open to legal objections, with respect to their classification as real estate for purposes of taxation, the referee's conclusion was absolutely correct. These special franchises are rights, or privileges, of a public nature, the exercise of which is permitted under grants from the state to corporations, and the legislature, in the General Tax Law, has classified them as real estate. (See Laws of 1896, chap. 908, sec. 1, sub. 3, as amended by Laws of 1899, chap. 712.) In the nature of incorporeal hereditaments, at common law, franchises partook *Page 194 of the nature of realty and these special franchises are inseparable from real property in their enjoyment. They fall, necessarily, into that one of the two general divisions of property made by the statute, which is described as real estate. (Washburn on Real Property [6th ed.], sec. 1185; 1 R.S. 750, sec. 10; Real Property Law, Laws of 1896, sec. 1, chap. 547.)
There was nothing decided in People ex rel. MetropolitanStreet Ry. Co. v. State Board of Tax Commissioners, (174 N.Y. 417), which is opposed to this view. These franchises could never be classified as personal property and if a new subject of taxation, that fact is of no consequence in determining the correctness of their classification as taxable property. In my opinion, the article of the Constitution, in the respect under consideration, must be deemed to comprehend within the term real estate all properties which the statute makes taxable as such.
In ascertaining the limit of the city's capacity to become further indebted, the referee, very properly, has read the constitutional provision as contemplating what may be termed a permanent, or funded, debt, for permanent improvements, to be paid by future taxation, and a temporary indebtedness, created to pay the current expenses of administration and to be liquidated from the taxes levied for the year. The total of the debt represented by bonds outstanding of the several cities, towns, villages and counties, which, in 1898, were consolidated into the present city; by corporate stocks, issued by the present city for various purposes, and by its general fund, assessment and certain of its revenue bonds, aggregated $779,543,128.85. To this amount the referee added certain of the city's obligations, or liabilities, other than bonded indebtedness, which aggregate $26,529,785.71. In estimating the permanent debt, represented by corporate stocks, or bonds, there were only included of the revenue bonds, issued in anticipation of the collection of taxes, such as had not been retired within five years of their issue. Under section 187 of the city's charter, the comptroller is authorized to borrow, in anticipation of its revenues, not to exceed in amount the *Page 195 amount of such revenues, such sums as may be necessary to meet expenditures under the appropriations for each current year. For this purpose, revenue bonds might be issued, to be redeemed out of the proceeds of the tax levy. Within the constitutional provision, such of these bonds, only, are to be included, in ascertaining the indebtedness, as have been outstanding for more than five years since their issue. I agree with the referee that it is not essential to their exception, under the constitutional provision, that these revenue bonds should have been issued during the year, when the taxes became payable against which they are issued; provided that, when issued, they represented those taxes, within the amount unpaid of the levy, and were payable from the proceeds of their collection. Neither constitution, nor charter, fixed the times for issuing them. That was a matter left to the discretion of the comptroller, to be governed in its exercise by the city's needs and the amount of the particular year's uncollected taxes. Another class of revenue bonds, not included as part of this permanent debt, consists of such as have been issued under the authority of section 187 of the charter, "for purposes other than to meet expenditures under the appropriations for each current year", and which were made redeemable "out of the tax levy for the year next succeeding the year of their issue", under an appropriation therefor "by the Board of Aldermen and the Board of Estimate and Apportionment in the budget for such year". Bonds of this class were issued in 1908 to be redeemed in 1909. They do not differ, in their temporary character, from other revenue bonds. They are issued in emergencies and provisionally. Instead of being in anticipation of the revenue for the year, in which issued, they are redeemable in the ensuing year under a special appropriation to be made. They should not be included in the computation. There were assessment bonds, aggregating $28,370,632,65, which were issued to pay the cost of local improvements. Though the cost is assessed back, more or less, upon the property benefited, the bonds are the absolute and unqualified obligations of the city; are issued upon its faith and *Page 196 credit, alone, and, when due, are payable directly. As the referee says, the lien of the city upon the property "can be regarded only as a general asset." The general fund bonds are issued under section 222 of the charter and it is plain therefrom that they are to be classified with the city's corporate stock; as the faith and credit of the city are pledged for the fulfillment of their obligation. As held by the sinking funds, they are the subject of deduction, in the computation of the permanent debt, with other sinking fund holdings. Among the other obligations of the city, which were included in the estimate of the general permanent debt, are "Contract" and "Land" liabilities. The former comprehend such amounts as had been actually earned upon contracts outstanding, on June 30th, 1908, for public improvements. As to the correctness of this item, I shall have considerable to say presently. In "Land Liability" the referee has included the amount owing by the city to the owners of private property taken for public use. The amount, with interest, is approximated by taking the assessed value of the property; which appears from the evidence to be conceded to represent, at least, the measure of the awards. The appraisal may exceed; but it has not been known to be less. By law, the owners are entitled to recover the value of the land, with interest, from the city; in which had become vested the title and possession, upon formal proceedings taken by the municipal authorities looking to the acquisition of the land. The aggregate of the indebtedness, as thus ascertained, is $806,072,914.56.
From this indebtedness deductions were made of the following items. Bonds issued by the counties, prior to the consolidation, amounting to $21,808,279.64, were, properly, deducted. They are not to be included in the computation of the city's indebtedness. (Adams v. East River Savings Institution, 136 N.Y. 52.) Water supply bonds were, correctly, deducted to the amount of $33,168,254.13. Under the article of the Constitution, bonds issued to provide for the supply of water, after January 1st, 1904, are not to be included in ascertaining the power of the city to become indebted. In *Page 197 the statement of the general debt, the referee had included the whole issue of such bonds, amounting to $58,208,163. The amount to be deducted was ascertained by taking the amount issued from January 1st, 1904, to June 30th, 1908, being $38,937,318.26, less the amount thereof used to pay the debts incurred prior to January 1st, 1904, being $5,769,064.13. There were deducted holdings by the sinking funds of bonds, other than those not included in computing the city's indebtedness within the constitutional requirements, amounting to $191,442,165.76. City stocks, or bonds, so held are not debts, which it can be called upon to pay, within the meaning of the constitutional prohibition. (Bank for Savings, etc., v. Grace, 102 N.Y. 313,325, 326.) "The object of every sinking fund," it was said, "is to diminish the debt, whose existence warranted its foundation", and the amount "required to pay off the city debt, if it all came presently to maturity," would be a sum "equal to its bonds or stock, not including that held by the sinking fund". There was deducted an amount of $6,662,498.26, representing water supply bonds held by the various sinking funds. The objection that it was a double deduction, pro tanto, is untenable. In the statement of the account, there was left in, as an item of the so-called permanent debt, so much of the amount of the water supply bonds issued since January 1st, 1904, as had been used to pay that class of debts incurred prior to January 1st, 1904; namely, $5,769,064.13. The bonds held by the sinking fund commissioners were of the class, which had been issued after January 1st, 1904, and, consequently, are not to be included in the city's indebtedness, within the constitutional provision. It must be, therefore, that, either, to the extent of their possible use by the commissioners, they would amortize the constitutional indebtedness; or, they would be applicable in offsetting the other bonds of the class included in the indebtedness. Other deductions were cash in the sinking funds, $4,237,927.70; of the annual installment included in the budget of 1908, required to be paid into the sinking fund, $5,531,864.02; bonds payable in 1908, provision *Page 198 for whose payment was made in the budget for that year, $820,825.47; cash in treasury from unallotted proceeds of bonds, issued to pay debts incurred and which are included in reaching the figure of the city's indebtedness, $15,923,744.14 and cash on hand, applicable to the discharge of contract liabilities, $8,633,009.90. Deducting the sum of these items, or $288,228,569.02, from $806,072,914.56, the gross amount of the city's indebtedness, as it has been above stated, we have $517,844,345.54, as the total of the permanent indebtedness, within the meaning of the Constitution. This amount deducted from $624,050,060.20, the ten per centum of the assessed valuation of real estate subject to taxation, leaves $106,205,714.66, as the margin of the city's limit for incurring further indebtedness, according to the referee's statement.
I find myself in accord with the referee's reasoning and conclusions; except upon one question, which is of great importance. I refer to the question of whether certain outstanding contracts, validly entered into by the city for public improvements, should be regarded as an existing indebtedness within the purview of the Constitution. There were, on June 30th, 1908, such contracts, which obligated the city to an amount estimated to be in excess of $54,000,000, and, except as to the amount which had been earned upon them, which is stated to have been, on that day, $2,553,933.92, the referee has refused to include that sum as an indebtedness. I think the referee was in error. The distinction made by him is that such debts do not create a debt, but are agreements for future indebtedness to be incurred upon performance by the party contracted with. In that view, he says that these contracts by the city represent, not a present debt for the $54,000,000, but contract obligations out of which a future debt may arise. He holds that the indebtedness to be taken into account, in determining whether the constitutional debt margin has been exceeded, "is the indebtedness, or the amount due and payable under such contract, at the time the testis made". In my opinion, this is taking a view of the constitutional provision, which is too technical and which tends to *Page 199 narrow too much a provision intended to safeguard the municipalities of the state against coming under an excessive indebtedness. It was held in Bank for Savings, etc., v.Grace, (supra), that the "indebtedness referred to is an indebtedness to be met in the future by taxation" and "the mischief to be prevented was the creation of an excessive debt for local improvements, or public works, or the loaning of municipal credit, so payable that the burden should not fall upon those who contracted the obligations, or on their revenues, but on posterity". (p. 318.) Undoubtedly, as it was held in that case, the constitutional prohibition was aimed at "an actual and not a theoretical indebtedness"; but it would be quite incorrect, in my opinion, to regard the obligations of the contracts in question as a theoretical indebtedness. In that case, the question was whether bonds of the city of New York, held by the commissioners of the sinking fund, constituted an indebtedness of the city within the purview of the Constitution, and they were held not to be such. Theoretically, they were, until actually canceled by the commissioners. The discussion, there, was in view of the discretionary power of the commissioners to sell the city stock, or bonds, at any time held by them, for the sole purpose of buying, with the proceeds of the sale, other city stock redeemable at an earlier day; the result being an exchange of stocks and not an enlargement of the body of indebtedness. The term "theoretical", as applied to an indebtedness, was used in reference to bonds so held and not canceled. If we are to fix the margin of the constitutional limit for indebtedness with reference to what are the fixed obligations of the city, as are its stocks, or its bonds, then these contract obligations must be excluded; but I am strongly of the opinion that to do so will result in the failure of the purpose, which led to the constitutional provision. That purpose is obvious. It was to prevent the municipalities from improvidently contracting debts for other than ordinary current expenses of administration. It was to restrict their borrowing capacity and, thus, to minimize the mischievous consequences to the taxpayers of extravagance in city expenditures. The language is significant: "no county, *Page 200 or city, shall be allowed to become indebted for any purpose, orin any manner", etc. That is a mandate directed to all municipal officers, which, in effect, forbids them to obligate the municipality in any manner, which may result in an indebtedness in excess of ten per cent of the assessed valuation of the city's real estate. The words, in which the People have expressed their will in the fundamental law of the state, should be read in the broadest sense, which will give effect to it. Indebtedness is a state of being in debt and a debt is defined to be "that which one person is bound to pay to another"; or an "obligation". It is that which is due by express agreement and its definition is not affected by the manner, or condition, upon which it is to be paid. The constitutional provision is a limitation upon the power of the city to become indebted; that is to say, to contract any indebtedness, which shall exceed an amount fixed with reference to its taxable real estate, and if the question, whether liabilities upon contract obligations are to be included in ascertaining the present indebtedness, is a debatable one, then it should be resolved in favor of the view which effectuates the purpose of the provision in all its integrity. It is conceded that none of these contracts, involving expenditures for upwards of $54,000,000, was payable from current revenues, or annual tax collections. They were made for permanent public improvements, pursuant to section 149 of the charter, under certification by the comptroller as to the fund applicable thereto. They are chargeable to, and are payable from, bonds issued for a term of years. Such bonds are to be paid from future taxation and their issue had been authorized by the municipal authorities, prior to the execution of the contracts. Why should these contracts not be regarded as constituting an indebtedness of the city? The law presumes that the parties to a contract will perform their agreements. If the incurring of contractual obligations to pay for public improvements does not represent an indebtedness, which is to be taken into account in ascertaining the margin of the debt limit, the force of the constitutional prohibition becomes *Page 201 doubtful. If the provision applies, not to the time of the execution of the contract, but, only, to the time when payments become due, very remarkable results may follow. To illustrate: if, prior to the time of the completion of a contract for an extensive public improvement, made when the margin of the city's debt limit, as measured by an indebtedness consisting in direct, or absolute obligations, seemed to warrant it, the debt limit is reached, through the issuance of bonds to meet payments upon other contracts subsequently made, but completed at an earlier date, is the obligation of payment upon the first contract avoided? The constitutional provision is that "all indebtedness in excess of such limitation, * * * shall be absolutely void"; with an exception which does not apply to the case supposed. Can that provision be invoked by a taxpayer to defeat an obligation of the city, valid and binding when incurred? I do not think we should agree to that. Then, may the validity of a contract obligation depend upon conditions, as determined by subsequent facts? If contracts are binding when made, are they to be invalidated by after-occurring events in the city's financial career? If the answer is obvious, it is, at once, suggested to the mind that the constitutional debt limitation does include within its provision the actual, or estimated, indebtedness upon such contracts. Again, to illustrate what I conceive to be the fallacy of the argument in favor of the exclusion of such contract obligations from the computation of indebtedness, if the assessed valuation of taxable real estate should be less in a subsequent year and the margin of the debt limit is, in consequence, reached, or narrowed, is the indebtedness to be met upon a contract, made upon the basis of the assessment rolls in a prior year, showing an ample debt margin, avoided, because the payment will put the city in debt beyond the constitutional limit? I recognize that, as a rule, the figures of assessed valuations of real estate increase each year; but it does not impair the usefulness of the illustration. If the provision as to the debt limit is not applicable to binding contract obligations, when incurred, then how is it safely *Page 202 applicable when the obligations mature? If it is not heeded, when obligations exist upon contracts for public improvements, of what avail will it be, if the obligation to meet payments maturing in subsequent years shall result in a burdensome taxation?
It seems to me that the better conclusion to be reached upon this question, and the one in better accord with the policy of the constitutional provision, is that, in ascertaining the margin of the city's constitutional debt limit, "existing indebtedness" must be regarded as including the city's liability upon contracts for public improvements, which is intended to be met from an issue of bonds.
Decisions by the courts of other states are cited by counsel on either side of the question. Many are inapplicable, by reason of the differing provisions of the state constitutions. In Illinois, the decisions of the Supreme Court support the views which I have expressed upon the subject of what constitutes an indebtedness. The Constitution of that state prohibits allowing a city "to become indebted * * * to an amount, including existing indebtedness, in the aggregate exceeding five per centum on the value of taxable property therein, to be ascertained by the last assessment for state or county taxes" etc. In Culbertson v.City of Fulton, (127 Ill. 30), it was sought to restrain the city from accepting water works, constructed for it under a contract, on the ground that the constitutional provision would be violated. The court held that "by entering into the contract, the city became indebted. The obligations entered into by the terms of the contract constitute such an indebtedness as is contemplated by the language of the constitution. It cannot be said that the indebtedness did not come into being, until the work was completed and accepted by the city". In Walla WallaCity v. Walla Walla Water Company, (172 U.S. 1), to which the referee refers, the question arose as to whether a contract, by which the city agreed to pay a rental of $1,500 a year, for twenty-five years, for a water supply, created an indebtedness of the aggregate amount of the rentals in all the years. In *Page 203 holding that it did not, the United States Supreme Court considered that a distinction exists between contracts for the supply of water, or gas, for a stipulated rental, and contracts for the erection of a public improvement; observing that in the latter case "the debt is created at once, the time of payment being only postponed". I do not consider the case of Weston v.City of Syracuse, (17 N.Y. 110), also relied upon by the referee, to be applicable. It involved a construction of a clause of the city charter, which was intended to prevent the possibility of an increase of the city debt, "by providing a penalty in terrorem for a violation of law on the part of the members of the common council, * * * voting to contract such debt". The decision turned upon the peculiar phraseology of the charter provisions, in determining that the contract in question, though an obligation, was not a debt within the intendment of the charter.
Without an ampler discussion, I am of the opinion that the amounts, which, on June 30th, 1908, were involved in the contracts of the city for public improvements, and which the referee states as being upwards of $54,000,000, should have been included in ascertaining the city's "existing indebtedness". That would result in a reduction, pro tanto, of the "margin of constitutional limit of indebtedness", as stated by the referee; less, of course, by the amount already charged against the city, as earned upon the contracts, viz.: $2,553,933.92. On the referee's figures, the debt limit should have been stated as $54,759,646.74.
I agree with the referee that all unliquidated and disputed claims, pending against the city on June 30th, 1908, which he computes as upwards of $62,000,000, should not be included as a part of the city's existing indebtedness. Liability upon them is denied; they have not been adjudicated and, so far as they may be ultimately reduced to judgment, they will be payable from the proceeds of special revenue bonds; which, as it has previously been shown, do not enter into the constitutional purview of an existing indebtedness.
The views expressed, notwithstanding the difference with *Page 204 respect to the item of "contract liability", require the affirmance of the orders, which denied the applications for injunctions, restraining the defendants. The difference in view, merely, affects the margin of debt limit on June 30th, 1908. Reference to the report of the learned referee will be profitable, if a fuller understanding of the questions is desired. I advise that the questions certified be answered as follows: Questions 1 to 11, inclusive, 17 to 23, inclusive, 27, 31 to 41, inclusive and 43 should be answered in the affirmative. Questions 12 to 16, inclusive, 24 to 26 inclusive, 29 and 42 should be answered in the negative. Question 28 should be answered as follows: The real estate, which furnishes the basis for valuation, is what appears assessed as such in the assessment rolls. Question 30 should be answered as follows: The amount payable on a contract liability becomes an indebtedness, when the contract has been certified by the comptroller, under section 149 of the charter