STATE, EX REL. LYNCH v. RHODES

Supreme Court — Concurrence necessary to declare law unconstitutional — Creation of "debt" on behalf of state — Certificates of obligation issued by Commissioners of Sinking Fund — Borrowing money — Public debt.

The conclusion of the majority of this court must necessarily rest upon their determination either (1) that Section 129.41, Revised Code, is unconstitutional because it purports to authorize a debt prohibited by Article VIII of the Constitution or (2) that amended House Bill No. 291 of the 105th General Assembly is unconstitutional to the extent that it purports to irrevocably appropriate money for payments to be paid two years after its effective date of April 26, 1963.

Article IV, Section 2, of the Constitution reads:

"No law shall be held unconstitutional and void by the Supreme Court without the concurrence of at least all but one of the judges, except in the affirmance of a judgment of the Court of Appeals declaring a law unconstitutional and void."

Since less than six of the judges of this court concur in the foregoing determinations with respect to Section 129.41, Revised Code, and amended House Bill No. 291 of the 105th General Assembly, the writ prayed for must be denied.

Writ denied.

O'NEILL, J.

This is a simple case. It is agreed that the Commissioners of the Sinking Fund, who are the Governor, the Attorney General, the Auditor of State, the Treasurer of State and the Secretary of State, issued on February 14, 1964, 228 certificates of obligation, having a gross face value of $25,000,000, and the Treasurer of State delivered these certificates to Saloman Brothers and Hutzler of New York City and received the net sum of $25,000,627.50. Such certificates bear interest at 2.17%, payable June 30, 1964, December 31, 1964 and June 30, 1965, on which last date the principal is to be paid.

The pertinent language of each of these certificates reads as follows:

"State of Ohio Certificate of Obligation * * *. The State of Ohio, by the Commissioners of the Sinking Fund, for value received, hereby acknowledges itself indebted and promises to pay to bearer, or * * * the registered holder * * * the sum of [each certificate contained an amount of $100,000 or a multiple thereof] on the 30th day of June, 1965 and to pay * * * interest on said sum from the date hereof at the rate of two and seventeen-one hundredths per centum * * *.

"This certificate is one of a series of certificates in the aggregate principal sum of $25,000,000 issued by the State of Ohio, acting by and through the Commissioners of the Sinking Fund * * *.

"This certificate is fully negotiable * * *.

"In witness whereof, the State of Ohio, by the Commissioners of the Sinking Fund under the authority aforesaid, has caused this certificate to be executed by the facsimile signatures of its Governor and its Secretary of State and by the signature of its Treasurer of State and has caused the facsimile of the Great Seal of the State of Ohio to be hereunto affixed, and has caused the interest coupons hereto attached to be executed with the facsimile signature of its Treasurer of State * * *." (Emphasis added.)

Incredible as it might seem, the respondents in this case assert that the borrowing of this amount of money from this investment house did not create a debt of the State of Ohio prohibited by Article VIII of the Constitution of the State of Ohio.

This is the question to be decided by this court. Did the borrowing of the money [$25,000,000] and the delivery of the certificates bearing the promise to pay the principal with interest create a debt of the State of Ohio?

The principal and interest is to be repaid from tax monies allocated to the Highway Department and appropriated by the Legislature for that purpose.

Section 1, Article VIII of the Constitution reads as follows:

"The State may contract debts [borrow money], to supply casual deficits or failures in revenues, or to meet expenses not otherwise provided for; but the aggregate amount of such debts, direct and contingent, whether contracted by virtue of one or more acts of the General Assembly, or at different periods of time, shall never exceed seven hundred and fifty thousand dollars; and the money, arising from the creation of such debts, shall be applied to the purpose for which it was obtained, or to repay the debts so contracted, and to no other purpose whatever." (Emphasis added.)

The respondents rely entirely upon State v. Medbery, 7 Ohio St. 522, and State, ex rel. Preston, Dir., v. Ferguson, Treas., 170 Ohio St. 450.

Judge Swan, in State v. Medbery, supra, recognized the distinction between borrowing money and claims against the state arising from agreements entered into by the state for services to be performed or materials and labor to be furnished [Medbery dealt with this latter kind of agreement] when he said at page 534:

"* * * Admitting, then, that the whole of the first section, [of Article VIII], from the fact that it declares that the money arising from the creation of `such debts shall be applied for the purpose for which it was obtained,' relates to debts for borrowed money only, it is manifest, that the general and sweeping inhibition of the third section does not deal with any particular class of debts; nor with the consideration of debts, whether they arise from services, borrowed money, or otherwise; nor simply with the particular class of debts mentioned in the first and second sections, but prohibits any debt whatever."

A reading of his entire opinion indicates that he treated the contract for the repair of public works involved in that case as an agreement to perform services and furnish materials and labor for such repair work. He held that such an agreement created a contingent liability to pay for such services and the furnishing of such materials and labor when the services had been performed and the materials and labor had been furnished. He stated that the contingency in this obligation was not resolved until the services were performed or the materials and labor furnished but that once this was done, the contingency was removed and the state was obligated to pay.

Judge Swan correctly stated that in the normal functions of state government there would be an appropriation and certification that the money was available and as soon as the contingency was met and the obligation accrued, payment would be made as soon as the mechanics of payment could be performed.

Judge Swan stated, at page 530:

"* * * Such financial transactions are not therefore to be deemed debts."

That is not this case. There was no borrowing of money in Medbery.

However, he held that where such services were to be performed or materials and labor furnished during a period of years which extended beyond the biennium in which the agreement was entered into and thus beyond the term of office of the then members of the General Assembly and thus beyond the time for which that General Assembly had power to make appropriations, that even though that liability was contingent and would not accrue until the services were performed or the materials and labor were furnished, such a contingent liability was a debt and prohibited by the Constitution of Ohio.

It might be argued in the instant case that the agreement between the Department of Highways and the Commissioners of the Sinking Fund is an agreement similar to the agreement in the case of State, ex rel. Preston, Dir., v. Ferguson, Treas., supra, and that there is only contingent liability upon the Director of Highways which does not accrue until the Commissioners of the Sinking Fund deliver the deeds for the parcels of real estate to the Director of Highways, at which time he delivers payment for those parcels of real estate. Thus, there is no accrued obligation which is a debt prohibited by Section 3, Article VIII of the Ohio Constitution.

It can not be contended, however, that there was anything contingent about the exchange between the Saloman investment company and the Treasurer of the State of Ohio of $25,000,000 for a written promise to repay the principal with interest. That obligation accrued upon that exchange and no matter what happened thereafter, by the terms of that contract of debt, the State of Ohio was required to repay the principal sum with interest thereon.

Such a borrowing of money is expressly prohibited by Section 1, Article VIII of the Constitution of Ohio and such certificates of obligation are invalid.

I have already indicated how Medbery, supra, is distinguished from the instant case and pointed out that it expressly did not deal with the question before this court.

Likewise, the Preston case, supra, dealt with an agreement between the School Employees Retirement Board and the Department of Highways, whereby the School Employees Retirement Board invested its funds in parcels of real estate and took title thereto. The Director of Highways, pursuant to this agreement, then purchased these parcels of real estate and took title to them in the name of the State of Ohio and paid the Retirement Board for them from appropriations made by the Legislature from tax funds allocated to the Department of Highways.

The Preston case, supra, treated this under the reasoning of Medbery, supra, as a contingent liability which did not accrue until the Highway Director received title to the parcels of real estate. The Retirement Board, upon executing and delivering the deeds, would receive payment for said parcels. Thus, at the time the contingency was resolved and the debt accrued, the payment was immediate.

That is not this case.

This theory of reasoning may be applicable to the agreement between the Commissioners of the Sinking Fund and the Highway Department in this case, but it clearly is not applicable to the accrued debt incurred by the borrowing of $25,000,000 by the Commissioners of the Sinking Fund from a private investment house. It is not even contended, and could not be, by respondents that this was a contingent obligation, or a contingent liability.

It is obvious from the actions taken by the Treasurer of State and the representatives of the investment house, and from the terms of the certificates, and from the delivery of the $25,000,000 in exchange for the certificates, that a debt accrued on February 17, 1964. The payment of interest was required upon the principal of that debt in three installments and the repayment of the principal and interest was required upon a date certain.

The certificates are invalid because their issue was prohibited by Section 1, Article VIII of the Constitution and the money in a sum not to exceed $25,000,627.50 should be returned, less whatever interest has been paid, because interest can not be paid upon a debt which is prohibited by the Constitution.

The writ under those terms should be allowed.

TAFT, C.J., ZIMMERMAN and MATTHIAS, JJ., concur in the foregoing opinion.

HERBERT, J.

An examination of the record in this cause reveals that relator has presented one question for this court's determination: whether the certificates of obligations represent debts of the state of Ohio within the meaning of Section 3 of Article VIII of the Ohio Constitution.

The certificates of obligation resulted from an agreement entered into between the Director of Highways and the Board of Commissioners of the Sinking Fund, pursuant to the provisions of Section 5501.115, Revised Code. The agreement recites that the parties to the agreement have determined that a number of parcels of real property throughtout this state will be used as right-of-way for highways planned for construction and that Sections 129.41, 129.42, 5501.115, 5501.116, and 5501.117, Revised Code, provide a procedure to acquire said property and pay the cost of such acquisition.

The agreement provides that the Commissioners will issue the certificates of obligation and the money realized from their sale will be deposited in a special fund, created pursuant to Section 129.42, Revised Code. The Director of Highways is authorized to act as an agent for the commissioners in the acquisition of the desired property, the purchase price being drawn from the special fund. Upon completion of the purchase, title to said properties is in the commissioners. The Director of Highways is then required to purchase said properties from funds already appropriated to the Department of Highways according to a price schedule set forth in the agreement.

The agreement also states that the Director of Highways acknowledges that the agreement encumbers moneys appropriated to the Department of Highways by the 105th General Assembly and appended to the agreement is a certification by the Director of Finance that there exists in the appropriations made by House Bill No. 291, enacted by the 105th General Assembly, sufficient funds to honor the certificates of obligation created by the agreement and that these funds are not otherwise obligated to pay any preceding obligation. Subject to certain renewal provisions, the agreement is specified to terminate on June 30, 1965. Five days prior to the expiration of the agreement, the Treasurer must notify the Director of Highways of any insufficiency in funds to honor the certificates of obligation and the Director of Highways must immediately pay to the commissioners the amount of the issufficiency in funds.

The agreement, entered into pursuant to the above cited statutes, sets forth a procedure whereby the Director of Highways may purchase right of way property for planned highways prior to the actual construction of the highways. It provides a procedure for obtaining funds for the purchase of these properties and encumbers moneys which have been previously appropriated by the General Assembly to the Director of Highways.

A procedure similar to the one described above, was held constitutional in State, ex rel. Preston, v. Ferguson, Treas. (1960), 170 Ohio St. 450. Paragraphs one and two of syllabus therein provide as follows:

"1. Section 5501.112, Revised Code, creates a method for financing the cost of the advance acquistion of land to be used for highway purposes and authorizes the Director of Highways to enter into agreements with the School Employees Retirement Board whereby such board is to use its funds to acquire title to property that the Director of Highways `deems will be necessary for the improvement of the state highway system'; and the board retains such title subject to later purchase by the Department of Highways on behalf of the state.

"2. Obligations of the state for which revenue has been provided and appropriations made for the payment thereof in the then current biennium are not debts within the meaning of Sections 1, 2c and 3, Article VIII, Ohio Constitution. ( State v. Medbery, 7 Ohio St. 522, approved and followed.)"

In Preston and here the Director of Highways utilized certain funds generated for the purchase of land. In both cases the Director of Highways entered into an agreement with another political body of the state. And in both cases, the other political body generated funds which the Director of Highways utilized subject to granting an encumbrance against funds already appropriated by the General Assembly to the Department of Highways. Finally, in both cases, the agreements terminated on the last day of the fiscal biennium of the General Assembly that enacted the appropriation; and the appropriation was subjected to an encumbrance by the terms of the agreements.

The single factual difference between Preston and the instant case is that in Preston the political body that generated the funds already had them within its control. In the instant case, the Commissioners obtained funds from private sources. However, in both cases, the funds generated were not previously under state ownership.

Relator urges that the Preston decision rests solely on the fact that the funds utilized were, in effect, already state funds and hence, no debt was created. This conclusion is directly contrary to the opinion and syllabus in Preston and is without merit. The Preston decision rests on an interpretation of Section 3, Article VIII of the Ohio Constitution, to wit, did the agreement therein create a debt prohibited by that provision of the Constitution? We are required to make a similar interpretation in this cause.

Relator does not request that we reconsider our holding in Preston. Upon analysis of that decision, it is our conclusion that the principles of law contained therein are totally consistent with judicial precedent and are to be approved and followed.

The issue in the instant case is whether a certificate of obligation (in contrast to a contract to pay money) held by parties not connected with the state (in contrast to a body subject to state regulations) creates a debt prohibited by the Constitution.

Because the factual distinctions noted above are irrelevant to the reasoning of the Preston decision, we must conclude that no debt was created within the meaning of Section 3, Article VIII of the Ohio Constitution. In both cases private funds were utilized. While the School Retirement System is state regulated, this fact hardly makes the funds deposited therein by school teachers throughout the state, "in effect," state funds. Also, a certificate of obligation which, by its terms, requires the payment of money from an existing appropriation within the fiscal year biennium in which the certificate was created cannot be distinguished from a contract created for that same purpose. Both the contract and the certificates require the payment of funds within the fiscal biennium. As analyzed in Preston, supra, this is not a "debt."

Moreover, judicial precedent requires the above conclusion.

The initial point of discussion is found in State v. Medbery (1857), 7 Ohio St. 522. Therein the court held that certain contracts creating a present obligation of the state to pay money five years beyond the biennium for which legislative appropriations could be made, created a debt of the state.

The second paragraph of the syllabus reads:

"That no officers of the state can enter into any contract, except in cases specified in the Constitution, whereby the General Assembly will, two years after, be bound to make appropriations either for a particular object or a fixed amount — the power and the discretion, intact, to make appropriations in general devolving on each biennial General Assembly, and for the period of two years." (Emphasis added.)

In State, ex rel. Youngstown, v. Jones, 136 Ohio St. 130, this court considered the power of the General Assembly to appropriate funds. The opinion states, at page 134:

"The only limitation on the power of the General Assembly as to appropriations is found in Section 22, Article II of the State Constitution: `No money shall be drawn from the treasury, except in pursuance of a specific appropriation, made by law; and no appropriation shall be made for a longer period than two years.' * * * The language employed in the Constitution, in our judgment merely limits the time for and during which an appropriation may be made to two years from the time legislative action was taken with reference thereto. At the end of this two-year period, the appropriation lapses, but the constitutional provision does not prohibit the appropriation of excise revenues collected after the General Assembly making the appropriation has ceased to exist through the expiration of its biennium, providing the excise taxes have been previously or contemporaneously laid and imposed by valid enactment, and the appropriation set apart revenues collected within two years after the appropriation is made."

At this point we may note that Medbery and Youngstown represent unchallenged authorities that each General Assembly controlled its fiscal year; that claims and expenses extinguished within that period were not "debts"; and that claims against appropriations must be presented within two years "from the time legislative action was taken with reference" to the appropriation.

In 1960, this court decided the case of Preston, supra.

In Preston this court considered the lawfulness of certain agreements entered into, pursuant to Section 5501.112, Revised Code, between the Director of Highways and the School Employees Retirement Board. Matthias, J., speaking for the court, analyzed the import of the Medbery decision and cited with approval the following principles of law as contained in Medbery: First, where appropriations are made and revenues provided for a two-year obligation there is "constitutional compliance"; second, a strict interpretation of the term debt cannot be substituted for the fiscal year; and third, claims arising and extinguished in the fiscal year are not debts within the meaning of the Ohio Constitution.

The holding in Preston is that the agreements there in question, extending in time for a period of two years and coinciding with the commencement and termination of the then present fiscal year were not a creation of debt and therefore not contrary to the Ohio Constitution. It is expressly stated therein, at page 460, that "an obligation supported by an appropriation but remaining unpaid at the end of a [fiscal] biennium accrues into a debt at such time. * * * it is possible for the new General Assembly, by prompt action, to pass an appropriation act which will become law before the end of the old [fiscal] biennium. * * *

"* * * in the event an agreement * * * is entered into after the beginning of a current [fiscal] biennium, such agreement could, in no event, extend beyond the terminal date of that current [fiscal] biennium." (Emphasis added.)

The respondents, in the instant case, have performed exactly as required by the above principles: (1) An appropriation was made at the beginning of a current biennium; (2) the appropriation did not exceed two years duration; (3) the appropriation expressly provided for the payment of any agreements created by the Sinking Fund Commission; (4) the Sinking Fund Commission did in fact enter into an agreement for a specific purpose authorized by the appropriation within the effective period of the appropriation; and (5) the agreements created expressly provided for its termination within the effective period of the appropriation.

We note that the fiscal biennium of the 105th General Assembly extends from July 1, 1963, through June 30, 1965. The fiscal biennium of the 105th General Assembly thus extends six months into the elective term of the 106th General Assembly. The practice of overlapping the fiscal biennium with the elective biennium has been utilized by the General Assembly for over the last dozen years. This appears to be a matter of convenience in order to provide continuity in fiscal action and a six-month grace period for the incoming General Assembly wherein the proposed fiscal program of the incoming General Assembly may be considered in calm and deliberateness rather than haste.

The appropriation period under the above system remains for two years in compliance with Section 22, Article II of the Ohio Constitution, and has received tacit approval in Melbery, Youngstown and Preston, supra. Absent a true litigation of this practice, we do not feel obligated to disturb this approval.

Chief Justice Taft states that the appropriation relied upon by the respondents "was made by an act of the 105th General Assembly (House Bill No. 291) which became effective on April 26, 1963." (Emphasis added.)

In State, ex rel. Ach, v. Evans (1914), 90 Ohio St. 243, 247, the following statement appears:

"Now, it has always been recognized as a proper exercise of legislative power for the legislature to determine for itself when the act or part thereof shall go into effect."

Therein this court determined that the Legislature could properly provide that a particular act go into effect 120 days after its passage.

In Machine Co. v. Power Co., 99 Ohio St. 429, paragraph two of the syllabus, is as follows:

"Where a future time is named in an act when it shall become effective, it will speak and operate only from that time unless a different intention is manifested."

Therein this court approved legislative action which provided that a particular act go into effect 17 days after its passage.

The Ach and Power decisions must be approved and followed. A more necessary and useful power of the Legislature to determine when an act may go into effect can hardly be envisioned. To hold otherwise would require that the General Assembly schedule its sessions according to the time it desired the act to go into effect. Such a rule would severely affect the efficiency of legislature procedure.

With the above judicial precedents in mind, it becomes necessary to examine House Bill 291. The pertinent provisions of that bill are as follows:

"To make appropriations for highway purposes for the biennium beginning July 1, 1963 and ending June 30, 1965. (Emphasis added.)

" Be it enacted by the General Assembly of the State of Ohio:

"Section 1. There are hereby appropriated out of any moneys in the state treasury to the credit of the funds set forth below and not otherwise appropriated, the sums set forth in this section for the specific highway purposes designated.

"Except as provided in Section 6 of this act [not herein relevant] sums named in the column designated 1963-1964 shall not be expended to pay liabilities or deficiencies existing prior to July 1, 1963, nor to pay liabilities incurred subsequent to June 30, 1964; those named in the column designated 1964-1965 shall not be expended to pay liabilities or deficiencies existing prior to July 1, 1964, or incurred subsequent to June 30, 1965. (Emphasis added.)

"* * *

"All unexpended balances of moneys received or accrued in prior years under previous acts appropriating funds to the Department of Highways, or refunds thereto, or other departmental receipts, may be carried forward to subequent appropriation years at the request of the Director of Highways.

"* * *

"Section 2. All moneys accruing to any special highway acquisition fund created in Section 129.42 of the Revised Code are hereby appropriated to the Sinking Fund Commission for the purposes set forth in said section."

It can only be observed that the General Assembly provided, in express language, that the appropriations contained in the above bill were "for the biennium beginning July 1, 1963" and that the appropriations contained therein "shall not be expended to pay liabilities or deficiencies existing prior to July 1, 1963." Any obligation of the state of Ohio, arising under the certificates of obligation, having been fully satisfied, it appears that the questions raised by the relator are now moot.

For the above reasons the writ of mandamus should be denied.

SCHNEIDER, J., concurs in the foregoing opinion.

BROWN, J.

It is clear that the certificates of obligation have already been issued and sold by the Commissioners. Relator's prayer is for a writ commanding and directing the respondent commissioners to revoke and rescind their actions, to return to the purchasers and unexpended funds received from the sale of the certificates and to apply such other highway funds as are under the control of the respondents for the immediate call and retirement of the certificates described.

It is not the function of the writ of mandamus to correct alleged errors made by a public officer. State, ex rel., v. Crites, 48 Ohio St. 460; State, ex rel. Conrad, v. Langer, 68 N.D. 167, 176, 277 N.W. 504; Kaufman Construction Co. v. Holcomb, 357 Pa. 514, 520, 55 A.2d 534.

Section 2731.01, Revised Code, provides:

"Mandamus is a writ, issued in the name of the state to an inferior tribunal, a corporation, board, or person, commanding the performance of an act which the law specially enjoins as a duty resulting from an office, trust, or station."

Since it is apparent that the relator's petition does not seek to command the performance of an act which the law specially enjoins, the writ should be denied.

SCHNEIDER, J., concurs in the forgoing opinion.