
    The TAXPAYERS AND CITIZENS OF SHELBY COUNTY v. Daniel M. ACKER, et al. Steven R. SEARS, taxpayer and citizen of Shelby County, Alabama v. Daniel M. ACKER, et al.
    1930713, 1930760.
    Supreme Court of Alabama.
    April 15, 1994.
    
      Robert D. Owens, Jr., Dist. Atty., Colum-biana, for appellant.
    Steven R. Sears, pro se.
    Frank C. Ellis, Jr. of Wallace, Ellis, Fowler & Head, Columbiana, E. Alston Ray and Mark E. Ezell and James C. Huckaby, Jr. of Haskell Slaughter Young & Johnston, P.A., Birmingham, for appellees.
   INGRAM, Justice.

Pursuant to Ala.Code 1975, § 6-6-750 et seq. (the “validation law”), the trial court validated the issuance and sale of certain “limited obligation refunding warrants.” The taxpayers and citizens of Shelby County appeal.

On December 27, 1993, the Shelby County Commission adopted Resolution 93-12-27-15, which authorized the issuance and sale of its “limited obligation refunding warrants” in a principal amount not exceeding $30,000,000. In February 1994, this resolution was amended and superseded by Resolution 94-02-12-10. The issuance of the warrants was authorized pursuant to Ala.Code 1975, § 11-28-2 (the “warrant law”), for the purposes of refunding, in advance of their respective maturities, the following indebtednesses: (A) the courthouse warrants, (B) the sewer warrants, and (C) the Series 1990-B warrants. Basically, the Shelby County Commission made a decision to refinance certain debts because of a substantial drop in interest rates.

Pursuant to Act No. 93-188, Ala.Acts 1993, a special sales tax (the “special tax”) has been levied in Shelby County by the Shelby County Commission. The special tax is generally parallel to the statewide sales tax and consists of a privilege or license tax on persons engaged in the business of selling at retail in the County any tangible personal property or engaged in the business of conducting places of amusement or entertainment in the county, generally measured by the gross receipts of such business.

The special tax provides that proceeds of the tax may be used only to pay indebtedness of the County that existed on the effective date of the act providing for the special tax and that the special tax may be collected only until all of the indebtedness payable therefrom has been retired and in no event for more than 10 years. The special tax was first levied and collected on June 1, 1993.

The warrant resolution provides that the indebtedness evidenced and ordered paid by the warrants shall be a limited obligation of the County payable solely from, and secured by a pledge of, the proceeds of the special tax.

The trial court held that Shelby County and the Shelby County Commission met all of the requirements of the validation law. Specifically, the trial court held:

“All proceedings and all acts, conditions and things required to happen, exist or be performed precedent to or in the adoption of the Warrant Resolution had happened, did exist and had been performed at or before the adoption thereof, in the manner and in the time required by the Constitution and laws of the State of Alabama.
“The warrants will not constitute a debt or indebtedness of Shelby County under the provisions of Section 224 of the Constitution of Alabama.
“... [I]n a statutory validation proceeding such as this it is not the duty or role of the Court to pass upon the wisdom or prudence of the financing arrangements relating to the proposed Warrants or the undertakings financed by any of the Refunded Warrants ..., but rather to determine the essential legality and validity of the legal arrangements relating to the Warrants.... The answers and defense, after consideration of proof, have shown no cause why the prayer of the Plaintiffs should not be granted and have disclosed no illegality in the proceedings of the County Commission of the County or in the Warrants or the covenants, agreements and obligations therein or in the proceedings authorizing the same, and the defenses and objections in said answers should be and they hereby are overruled.”

The taxpayers contend that the trial court erred in validating the warrants, because they argue that the warrants constitute a debt or indebtedness of the County under the provisions of Amendment 342 (amending Art. XII, § 224) of the Constitution of Alabama. In support of their argument, the taxpayers cite Taxpayers & Citizens of the Town of Georgiana v. Town of Georgiana, 265 Ala. 654, 93 So.2d 493 (1956).

Amendment 342 (amending § 224, Ala. Const. 1901) provides in part as follows: “No county shall become indebted in an amount including present indebtedness, greater than five per centum of the assessed value of the property therein.”

The purpose of this provision is to curb excessive indebtedness by counties and thus protect the taxpayers against excessive and unnecessary burdens. Town of Georgia-na, supra (applying related provision of § 225 relating to municipalities). This provision is intended to limit the burden imposed upon taxpayers by new obligations and to stabilize the economic position of the county. Norton v. Lusk, 248 Ala. 110, 26 So.2d 849 (1946). It is directed against indebtedness and is not directed to purposes for which indebtedness is incurred. Wharton v. Knight, 241 Ala. 218, 2 So.2d 310 (1941). While courts must be careful to see that the indebtedness limitation is strictly observed, they should remember that the limitation is aimed at actual, rather than theoretical, indebtedness, and they should look to substance rather than mere form. Taxpayers & Citizens of Shelby County v. Shelby County, 246 Ala. 192, 20 So.2d 36 (1944). The restrictions in § 224 and Amendment 342 are intended to guard against “extravagant or unwise expenditure of public funds.” Shelby County, 246 Ala. at 196, 20 So.2d at 39.

In Town of Georgiana the town attempted to adopt an ordinance authorizing the issuance of “tax anticipation warrants” for the purpose of obtaining money to build a public hospital. To pay for the warrants, the town also adopted an ordinance levying a privilege and license tax against all persons. This tax was in addition to all other taxes and provided that the proceeds of the tax were pledged for payment of the principal of, and interest on, the warrants. It provided, however, that, if necessary, the,revenue accruing from the tax must be applied first to pay the essential and legitimate governmental expenses of operating the town.

The trial court held the warrants valid, but this Court reversed, holding that by the issuance of the warrants the municipality would become “indebted” within the meaning of § 225 of the Constitution. This Court held that limited obligation warrants of a municipality secured by a pledge of proceeds of a gross receipts tax levied by that municipality did constitute a debt for purposes of the Alabama Constitution. This Court held that “[a]ny obligation ... which directly or indirectly increases the burden of taxation, is a debt in the constitutional sense.” Town of Georgiana, 265 Ala. 654, 657, 93 So.2d 493, 496.

However, the present case is distinguishable from Town of Georgiana. In Town of Georgiana, the governing body of the municipality levied a broad-based gross receipts tax and pledged the proceeds thereof to the payment of the proposed warrant issue. The proceeds would otherwise have been available for general municipal purposes. The pledge of the tax for the payment of the warrants could have indirectly imposed a greater burden on the taxpayer because of the fact that revenues otherwise available for general municipal purposes were being displaced.

The facts of this case, however, are different from those in Town of Georgiana. If the pledge of the Shelby County special tax affects taxation, it could result in reducing rather than increasing taxes for the County’s citizens. The special tax has been levied for the purpose of retiring existing debt of the County and, in the absence of revocation of the levy by the governing body of the County, it will continue in effect even if the warrants are never issued. Here, a reduction in debt service could result in an earlier retirement of the balance of all outstanding debt of the County; that earlier retirement would then result in the termination of the special tax at a date earlier than 10 years from the date of the first levy. An early termination of the special tax, rather than imposing an additional burden on the citizens, would be an unexpected relief from a burden that, without the issuance of the warrants, will continue for the full 10-year period authorized for the collection of the special tax.

Additionally, the warrants proposed to be issued in Town of Georgiana had as then-source of payment revenues that otherwise would have been available for general municipal purposes and those warrants would thus constitute a debt in the constitutional sense. Here, however, the warrants the County proposed to issue have as their source of payment a limited, specified source of funds not otherwise available for payment of general municipal expenses. The warrants here are neither secured by nor payable out of the general credit of the County. A single source of revenue has been secured for the payment of the warrants, and it is to this source alone that a warrant holder must look for payment. The County has made no promise to pay in the event that the proceeds of the special tax are insufficient; neither has the County pledged that the proceeds will be sufficient; nor is there a pledge of the general credit of the County. Rather, the warrant resolution limits the payment source of the warrants to the proceeds of the special tax and states that the warrants are limited obligations of the County, not subject to payment from any other source or funds of the County if the proceeds of the special tax prove inadequate. There is no guarantee offered that the revenues derived from the special tax will be adequate to pay the debt service secured thereby.

The proceeds of the special tax cannot be mingled with funds available for general municipal purposes, but are to be deposited into a special account “to be used exclusively to pay off the indebtedness of the county that is existing on the effective date of this act.” Act 93-188, § 8.

Here, the County made a decision to refinance certain debts because of a substantial drop in interest rates, and it was presented with an opportunity that could very well benefit the taxpayers of Shelby County. The pledge of the special tax to the payment of the proposed warrants will not increase taxation and may actually decrease the tax burden currently borne by the County’s citizens. This is certainly not the type of situation that § 224 and Amendment 342 were intended to prevent. “After all, it is a practical proposition, and the constitutional limitation should be viewed from a common-sense standpoint.” Shelby County, supra, 246 Ala. at 196, 20 So.2d at 39. Therefore, bearing in mind the purpose of their enactment, we hold that neither the resolution nor the act authorizing the issuance of the warrants and securing the payment thereof constitutes a debt or indebtedness for purposes of § 224 and Amendment 342 of the Constitution of Alabama.

AFFIRMED.

MADDOX, HOUSTON, STEAGALL and COOK, JJ., concur.

ALMON and SHORES, JJ., dissent.

SHORES, Justice

(dissenting).

I dissent. The sole issue before us is whether the warrants that were validated by the Circuit Court of Shelby County constitute a debt or indebtedness of Shelby County within the debt limit imposed upon counties by § 224, as amended by Amendment 342, of the Alabama Constitution of 1901. Although the warrants are entitled “limited obligation refunding warrants” and will be issued to refund or retire the debts on existing warrants before the maturity date of those warrants, our case law indicates that the limited obligation warrants are considered an indebtedness of the County pursuant to § 224 of the Alabama Constitution. Therefore, the warrants may not-be validated unless they do not increase the indebtedness of the County beyond the limits of Amendment 342.

The majority notes that “the indebtedness evidenced and ordered paid by the [limited obligation] warrants shall be a limited obligation of the County payable solely from, and secured by a pledge of, the proceeds of the special tax.” 641 So.2d at 260. It is undeniable that the warrants are obligations of the county. They are being issued to retire debts not of the county, but of independent authorities, and are to be repaid from revenues produced by those authorities. This Court wrote in Norton v. Lusk, 248 Ala. 110, 26 So.2d 849 (1946):

“The Constitution has also made a limitation on the amount of indebtedness which a county (§ 224) or a city (§ 226) may create.
“This has been construed to apply not only to an obligation to which the county or city pledges its full faith and credit, called a general obligation, but also when the county or city pledges existing property or revenue from existing sources to be derived in the future.... The full faith and credit of the county or city is not thereby pledged, but a part of it is pledged.”

248 Ala. at 117, 26 So.2d at 854. The special tax will continue to be levied until 2003, or until the County’s indebtedness as of June 1, 1993, has been paid off by the proceeds of that tax. The proceeds from the special tax (part of which is to be used to pay the County’s obligation on the limited obligation refunding warrants) represent “revenue from existing sources to be derived in the future.” Id. Therefore, the County’s obligation or indebtedness created by the warrants is a “constitutional debt” under § 224 and thus falls “within the inhibition of the debt limit provisions of our constitution.” Wharton v. Knight, 241 Ala. 218, 220, 2 So.2d 310, 311 (1941).

Rollings v. Marshall County, 263 Ala. 317, 82 So.2d 428 (1955), states:

“[T]he levy of a special tax under the second proviso of section 215 [of the Alabama Constitution], ... and the issuance of warrants payable out of such revenue in future years for the purposes there specified, constitute a debt within the meaning of sections 215 and 224, supra. So that a county which has reached its debt limit under section 224 cannot avail of the second proviso of section 215.”

263 Ala. at 321, 82 So.2d at 431, citing Hagan v. Commissioner’s Court of Limestone County, 160 Ala. 544, 49 So. 417 (1909). In other words, warrants payable out of special tax revenues constitute a debt of the county under § 224, and such warrants cannot be validated if they increase the county’s indebtedness beyond the debt limit of § 224.

Taxpayers & Citizens of the Town of Georgiana v. Town of Georgiana, 265 Ala. 654, 93 So.2d 493 (1956), is controlling here. Geor-giana correctly explains when an obligation by a county or city creates a debt within the meaning of § 224 or § 225. An obligation creates a debt within the meaning of § 224 or § 225 if the “obligation assumed by the city ... directly or indirectly increases the burden of taxation.” If the obligation increases the tax burden, it “is a debt in the constitutional sense.” 265 Ala. at 657, 93 So.2d at 496.

The County argues that the burden of taxation could be reduced by the limited obligation refunding warrants, and that, therefore, the refunding warrants should not be applied toward the constitutional debt limit of § 224. This argument is without merit. The debt that is being refinanced is not the debt of the county. The existing warrants are revenue warrants payable solely from revenue produced by the issuing authorities. Under the proposed scheme, the county assumes those debts and they will become payable from taxes imposed by the county. The fact that the proposed tax is a special tax does not diminish the county’s obligation under § 224.

The debt limit provisions of our constitution do not apply to revenue warrants because the indebtedness on revenue warrants is payable solely out of the income or revenue that is derived from the facilities funded by those revenue warrants.

“[T]he county or city does not pledge its faith or credit when the indebtedness incurred to purchase or develop new property or facilities is made repayable solely out of the income to be derived from such property or facilities. We have said that such an obligation by a county or city does not create a debt within the meaning of §§ 224 or 225.”

Georgiana, supra, 265 Ala. at 657, 93 So.2d at 496 (quoting Norton v. Lusk, 248 Ala. at 117, 26 So.2d at 854).

The existing sewer revenue warrants and the courthouse revenue warrants are not obligations that directly or indirectly increase the burden of taxation on Shelby County’s citizens. The indebtedness on these revenue warrants is repayable solely out of the income derived from the facilities funded by those warrants; thus, this indebtedness is not payable out of the special tax, and it is not a debt within the meaning of § 224. The limited obligation warrants, because they will be payable from proceeds of the special tax, will be obligations that will directly or indirectly increase the burden of taxation. By replacing the revenue warrants with limited obligation warrants, whose indebtedness is to be payable from the proceeds of the special tax, the County will increase the tax burden on its citizens by an amount equal to the cost of refunding the revenue warrants (plus the cost of issuing the limited obligation warrants). By retiring the revenue warrants, and paying for this retirement by issuing limited obligation warrants, the County will create nearly $30,000,000 in new county debt within the meaning of § 224.

Because the special tax was levied to pay off the indebtedness of the County, and because this indebtedness will be increased by nearly $30,000,000 if the limited obligation warrants are issued, the proposed issue of the warrants will increase the tax burden on the citizens of Shelby County. Therefore, because the limited obligation warrants will create a debt under § 224, we can affirm the validation of the warrants only if this additional debt is within the limits of § 224. Because the record indicates that this additional debt will cause the County to exceed the maximum debt limit allowed by § 224. I would reverse the trial court’s judgment validating these proposed warrants.

Of course, the County can refund the series 1990-B warrants, because they are presently general obligation warrants, and the indebtedness on these general obligation warrants has already been applied toward the debt limit under § 224. In Taxpayers & Citizens of Shelby County v. Shelby County, 246 Ala. 192, 20 So.2d 36 (1944), we held that the issuance of refunding bonds by Shelby County for the purpose of using their proceeds to retire the county’s obligations did not create new indebtedness under the debt limitation provisions of § 224. 246 Ala. at 196, 20 So.2d at 39. However, that case involved the retirement of obligations that were already debt limit obligations under § 224. It did not involve the issuance of bonds that are constitutional debts under § 224 in order to retire revenue bonds that are not constitutional debts under § 224.

The County quotes Wharton v. Knight, supra, for the proposition that “obligations payable solely from the proceeds of privilege taxes, duly levied and pledged thereunto, not to become a burden on the general taxpayer, are not inhibited [under § 224].” 241 Ala. at 220, 2 So.2d at 311. However, in Georgiana, the Court dismissed that statement as dictum, stating, “It seems clear that the quoted statement, unsupported by any cited authority, was unnecessary to the decision in that case and is not to be taken as authority or controlling in the case now before us.” Georgiana, supra, 265 Ala. at 659, 93 So.2d at 498.

Debt limit restrictions like those in § 224 were established “for the purpose of providing a safeguard against extravagant or unwise expenditure of public funds” and ‘“to protect persons residing in municipalities from the abuse of their credit and the consequent oppression of burdensome, if not ruinous, taxation.’” Taxpayers & Citizens of Shelby County v. Shelby County, 246 Ala. at 196, 20 So.2d at 39, quoting 38 Am.Jur. Municipal Corporations p. 99. “‘Attempted evasions of constitutional provisions as to debt limit are viewed with disfavor by the courts.’” Id., quoting 38 Am.Jur. p. 107. Therefore, “care must be taken that no precedent be established which would lead to any method by which such restrictions could be circumvented.” Id.

For the reasons above, and because the majority opinion would establish a precedent that would allow the debt limit restrictions of our constitution to be circumvented, I respectfully dissent.

ALMON, J., concurs. 
      
      . Section 8 of Act 93-188, which provides for the levy of the special tax, states that "[u]pon certification by the chair of the county commission that such county indebtedness has been retired and that it no longer exists, or upon the expiration of 10 years from the first levy of this tax by the Shelby County Commission, whichever event first occurs, the tax levied pursuant to this act shall terminate and the provisions of this act and the tax shall automatically become null and void.” (Emphasis added.) Thus, the special tax expires on the earlier of 10 years from the first levy or the retirement of all County debt existing at the time of the levy.
     
      
      . Except for the retirement of the series 1990-B general obligation warrants, which are debts of Shelby County.
     
      
      . The second proviso of § 215 provides for the levy and collection of special county taxes that are applied exclusively to the payment of debts arising out of the erection, construction, or maintenance of necessary public buildings, bridges, or roads.
     
      
      . Section 225 of the Constitution establishes debt limits for certain cities, towns, and municipal corporations and is a counterpart to § 224, which establishes the debt limits for counties. Decisions construing § 225 are applicable to the interpretation of § 224. In re Opinion of the Justices No. 33, 230 Ala. 673, 163 So. 105 (1935).
     
      
      . The purpose of the refunding warrants is to refund the debt on the existing courthouse revenue warrants, sewer revenue warrants, and Series 1990-B general obligation warrants. Because interest rates are lower now than they were when the existing warrants were issued, the County intends to pay off the aggregate principal and interest on the existing warrants in advance of their maturity dates, and to cover the costs of paying off these warrants by issuing the refunding warrants at a lower interest rate.
     