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AGO 1964 No. 83 - February 06, 1964
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John J. O'Connell | 1957-1968 | Attorney General of Washington


CITIES AND TOWNS ‑- THIRD CLASS ‑- LOCAL IMPROVEMENT DISTRICT LOCATED PARTLY OR ENTIRELY OUTSIDE CITY ‑- OBLIGATIONS ‑- GUARANTY FUND ‑- ESTABLISHMENT OF WATER REVENUE FUND.

(1) The provisions of chapter 35.54 RCW (local improvement guaranty fund) are applicable to obligations issued in connection with a local improvement district located partly or entirely outside the limits of a third class city under RCW 35.43.030 as amended by chapter 56, Laws of 1963.

(2) It is not legally permissible for a city of the third class to establish a fund consisting of water revenues to act as a guaranty fund for the purposes of guaranteeing unpaid bonded indebtedness of such an L.I.D.

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                                                                 February 6, 1964

Honorable Don L. Talley
State Senator, 18th District
104 South Pacific Avenue
Kelso, Washington

                                                                                                                Cite as:  AGO 63-64 No. 83

Dear Sir:

            By letters previously acknowledged you have requested the opinion of this office on two questions which we paraphrase as follows:

            1. Are the provisions of chapter 35.54 RCW (local improvement guaranty fund) applicable to obligations issued in connection with a local improvement district located partly or entirely outside the city limits of a third class city under RCW 35.43.030 as amended by chapter 56, Laws of 1963?

            2. Would it be legally permissible for a city of the third class to establish a fund consisting of water revenues to act as a guaranty fund for the purpose of guaranteeing unpaid bonded indebtedness of such an L.I.D.?

            We answer your first question in the affirmative, and your second question in the negative.

                                                                     ANALYSIS

            1. As a background for discussing the problems involved, it may be helpful to outline some of the basic statutory provisions relating to both the formation of local improvement districts and the use of the  [[Orig. Op. Page 2]] LID guaranty fund.  RCW 35.43.040 provides in pertinent part as follows:

            "Whenever the public interest or convenience may require, the legislative authority of any city or town may order the whole or any part of any local improvement . . . to be constructed, reconstructed, repaired, or renewed . . . and may levy and collect special assessments on property specially benefited thereby to pay the whole or any part of the expense thereof, . . ."

            RCW 35.43.080 provides in pertinent part:

            "Every ordinance ordering a local improvement to be paid in whole or in part by assessments against the property specially benefited shall establish a local improvement district to be known as 'local improvement district No.       ,' which shall embrace as nearly as practicable all the property specially benefited by the improvement."

            As to the financing of such local improvements, chapter 35.45 RCW authorizes and sets forth the procedure for issuing bonds and warrants payable out of a local improvement district fund.  RCW 35.49.010 then provides in pertinent part as follows:

            "All assessments for local improvements shall be collected by the city treasurer and shall be kept in a separate fund to be known as 'local improvement fund, district No.       ' and shall be used for no other purpose than the redemption of warrants drawn upon and bonds issued against the fund to provide payment for the cost and expense of the improvement."

            The local improvement guaranty fund, to which you refer in your letter, is created pursuant to RCW 35.54.010 (codifying portions of chapter 209, Laws of 1927), providing as follows:

            "There is established in every city and town a fund to be designated the 'local improvement guaranty fund' for the purpose of guaranteeing, to the extent of the fund, the payment of its local improvement bonds and warrants issued to  [[Orig. Op. Page 3]] pay for any local improvement ordered:  (1) In any city of the first class having a population of more than three hundred thousand, subsequent to June 8, 1927; (2) in any city or town having created and maintained a guaranty fund under chapter 141, Laws of 1923, subsequent to the date of establishment of such fund; and (3) in any other city or town subsequent to April 7, 1926:  Provided, That this shall not apply to any city of the first class which maintains a local improvement guaranty fund under chapter 138, Laws of 1917, but any such city maintaining a guaranty fund under chapter 138, Laws of 1917 may by ordinance elect to operate under the provisions of this chapter and may transfer to the guaranty fund created hereunder all the assets of the former fund and, upon such election and transfer, all bonds guaranteed under the former fund shall be guaranteed under the provisions of this chapter."

            RCW 35.54.060 provides for an annual tax levy for the guaranty fund, and RCW 35.54.070 sets forth the main purpose of the fund as follows:

            "Defaulted bonds, interest coupons and warrants against local improvement funds shall be purchased out of the guaranty fund, and as between the several issues of bonds, coupons, or warrants no preference shall exist, but they shall be purchased in the order of their presentation."

            Your present inquiries concern the effect of chapter 56, Laws of 1963.  This act (apparently for the first time in this state) authorizes cities and towns to form local improvement districts composed entirely or in part of unincorporated territory outside the city's or town's corporate limits.  This purpose is accomplished simply by amending RCW 35.43.030 to include the underlined language in § 1, which provides as follows:

            "(RCW 35.43.030) This and the following chapters relating to municipal local improvements shall supersede the provisions of the charter of any city of the first class inconsistent herewith.

            "They shall apply to all unincorporated cities and towns, including unclassified cities and  [[Orig. Op. Page 4]] towns operating under special charters.

            "The council of each city and town shall pass such general ordinance or ordinances as may be necessary to carry out their provisions and thereafter all proceedings relating to local improvements shall be conducted in accordance with this and the following chapters relating to municipal local improvements and the ordinance or ordinances of such city or town.

            "Cities or towns may form local improvement districts composed entirely or in part of unincorporated territory adjacent to such city or town's corporate limits in the manner provided in this chapter."

            The first problem arises by virtue of the language of RCW 35.54.010,supra, describing the purpose of the local improvement guaranty fund as guaranteeing certain obligations issued to pay for any local improvement ordered "in" cities and towns.  It could be argued, perhaps, that the use of the local improvement guaranty fund is, therefore, limited to local improvements within the corporate limits of a city or town only.  However, such an argument would presuppose the existence of a choice between guaranteeing obligations of local improvement districts within and those without the corporate limits.  However in 1927, when RCW 35.54.010 was enacted there was no authority to create local improvement districts outside the corporate limits of a city or town.  Therefore, in our opinion, it would be erroneous to attribute to the 1927 legislature any particular intention, by the use of the word "in," other than to describe the class of city ordering the local improvement.  The 1963 legislature has now amended the basic statutes (RCW 35.43.030, supra, et seq.) to allow the formation of local improvement districts composed entirely or in part of unincorporated territory adjacent to the corporate limits of the city or town.  It must be presumed that the legislature, by inserting this additional authority as an amendment to the general law relating to local improvements without establishing special procedures for financing them, intended the general procedures to apply as in the case of all other local improvements.

            It is necessary to inquire, however, whether or not there is any constitutional provision which would prevent the adoption of such a construction.  When a statute is open to two constructions, one of which will render it constitutional and the other of which will render it unconstitutional or open to grave doubt, the former construction and  [[Orig. Op. Page 5]] not the latter is to be adopted.  Soundview Pulp Co. v. Taylor, 21 Wn.2d 261, 150 P.2d 839 (1944).  See, also,Hammack v. Monroe St. Lumber Co., 54 Wn.2d 224, 339 P.2d 684 (1959).  Our inquiry, then, is whether or not the constitution prohibits the use of a local improvement guaranty fund to guarantee the obligations of local improvement districts formed outside the corporate boundaries of the city or town (since the local improvement guaranty fund consists of moneys raised by taxes levied entirely within the corporate limits).

            The only constitutional provision which would appear to have any clear bearing upon the question is Article VII, § 1 (Amendment 14) of the Washington State Constitution, which provides in pertinent part as follows:

            ". . . All taxes . . . shall be levied and collected for public purposes only. . . ."

            In our opinion, a complete answer is to be found in the opinion of our supreme court inComfort v. Tacoma, 142 Wash. 249, 252 Pac. 929 (1927), at page 253, discussing the constitutionality of the guaranty fund law as follows:

            "It is next urged that to tax appellants' property, which receives no special benefit, to guarantee a payment of bonds issued against other property, is contrary to law, because the whole theory of local assessments is one of special benefits to the property assessed.  But this is not a special assessment.  The city has the right to initiate local improvements and to pay the whole cost thereof out of general taxes.  This tax is imposed on all alike, and is general in its application.  A benefit accrues to every property owner because the additional guaranty of the bonds is reflected naturally in the increased price at which the bonds sell, thereby reducing the cost of all improvements.  In time, every property owner will come within some improvement district, either for original improvements or for new improvements to take the place of those worn out or obsolete, and thus receive a benefit at that time by reason of the increased value of the bonds."

            The difference between that case and the present situation is that in the instant case the property being improved lies outside the corporate  [[Orig. Op. Page 6]] limits of the city or town and therefore is not subject to general city taxes equally with the property of taxpayers residing within the city limits.  In our opinion there is no significance in that distinction.  The same problem could arise where the local improvement district is located entirely inside the corporate limits (as in a case where all or a major portion of the property within the LID is tax-exempt property under Amendment 14, supra, and chapter 84.36 RCW).  Furthermore, the court's opinion does not seem to attach a great deal of importance to whether or not the property within the local improvement district was assessed for taxes in exactly the same proportion as the property outside of the district.  Rather, it seems clear that the court's rationale was concerned with the fact of equal benefit to all, derived from the use of the local improvement guaranty fund.  As the court said in the above‑quoted portion of its opinion in the case:

            ". . . A benefit accrues to every property owner because the additional guaranty of the bonds is reflected naturally in the increased price at which the bonds sell, thereby reducing the cost of all improvements. . . ."

            This rationale, of course, is applicable whether or not any portion of the L.I.D., or all of it, is located outside the corporate limits of the city or town.

            If it is constitutional at all for a city or town to create a local improvement district located entirely outside the corporate limits (and we must presume as a matter of legal presumption as well as office policy that the statute granting this power is constitutional‑-see, Port of Tacoma v. Parosa, 52 Wn.2d 181, 324 P.2d 438 (1958); AGO 1891-92:93, 116 [[1891-92 OAG 93; 1891-92 OAG 116]]; and AGO 45-46:269 [[1945-46 OAG 269 to Prosecuting Attorney, Pacific County on July 17, 1945]], AGO 1891-92:93, 116; and AGO 45-46:269), then it is certainly necessary and lawful for the city or town to finance the improvement according to the sole prescribed statutory procedure, including the issuance and sale of bonds and warrants.  In such a case, the protection of the city's credit by the availability of the local improvement guaranty fund is at least as much of a benefit to the corporate entity and its inhabitants as it is to the owners of property located within the local improvement district, but outside the corporate limits.

            Finally, to the extent that the court's opinion in Comfort v. Tacoma, supra, may have been based upon the premise that tax funds might have been lawfully used to construct the improvements in question, the same premise could be held applicable in this case, although it does not appear to be a necessary element of the supreme court's opinion.  It is not necessarily unconstitutional for a city to expend its own funds, pursuant to legislative authority, outside its corporate limits.

             [[Orig. Op. Page 7]]

            See,State ex rel. Walla Walla v. Clausen, 157 Wash. 457, 289 Pac. 61 (1930).  While in that case the funds were to be expended upon a municipal airport, the same result has been reached by courts from other jurisdictions as to certain local improvements to be constructed outside the corporate limits.  See, 13 McQuillin, Municipal Corporations, (3rd ed.) § 37.11, and cases cited therein.

            In summary, it is our opinion that the provisions of chapter 35.54 RCW relating to the local improvement guaranty fund are just as applicable to obligations issued in connection with LIDs located in part or entirely outside the corporate limits of a city or town as to those located entirely within.

            2. As we have concluded above, the local improvement guaranty fund is legally available to the city to guarantee obligations of LIDs, including those which are located entirely or in part outside the corporate limits of the city.  Our research discloses no clearly expressed legislative intent to allow a city to establish some other type of guaranty fund for that purpose other than the fund established by RCW 35.54.010,supra.  Therefore, no such additional authority can be implied.  See,State ex rel. Eastvold v. Maybury, 49 Wn.2d 533, 539, 304 P.2d 663 (1956).

            Furthermore, there are statutes indicating that the use of the statutory local improvement guaranty fund is exclusive.  For instance, RCW 35.54.070 provides as follows:

            "Defaulted bonds, interest coupons and warrants against local improvement funds shall be purchased out of the guaranty fund, and as between the several issues of bonds, coupons, or warrants no preference shall exist, but they shall be purchased in the order of their presentation."

            The only remedy specially given by statute to bondholders, in the event of default on local improvement district bonds, is recourse against the local improvement guaranty fund.  See, RCW 35.45.080.  RCW 35.45.030, mandatory in form, requires each bond to ". . . (5) provide that the bondholders' remedy in case of nonpayment shall be confined to the enforcement of the special assessments made for the improvement and to the guaranty fund . . ."

            Your second question, then, as to whether or not a city of the third class may legally create a special fund from revenues to guarantee the obligations of a local improvement district located entirely outside the city limits, must be answered in the negative in view of our  [[Orig. Op. Page 8]] answer to your first question to the effect that the local improvement guaranty fund is legally available for that purpose.

            We trust the foregoing will be of assistance to you.

Very truly yours,

JOHN J. O'CONNELL
Attorney General

ROBERT F. HAUTH
Assistant Attorney General

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