Non-Appropriation Language Development Agreements
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MEMORANDUM
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May 30, 2006
TO:
The Honorable Mayor and City Council Members
FROM:
Michael C. Van Milligen, City Manager
SUBJECT: Non-Appropriation Language
The Iowa Supreme Court recently ruled that when a community uses tax increment
financing to support an economic development project, that the amount of payments
committed by that community for property tax rebates must be applied against the City's
statutory debt limit. A 135,000 square foot office complex having a 10 year TIF would
use $6 million of the City of Dubuque's statutory bond limit, estimated at $195 million in
Fiscal Year 2013.
Some communities that are nearing their statutory bond limit are inserting what is called
non-appropriation language into their development agreements which says that any
year during the TIF rebate period the city council could vote to not make the payment to
the business. Therefore, instead of all ten years of the 135,000 square foot office
complex payments being counted against the City of Dubuque's statutory debt limit,
only one year would be counted against the limit, or approximately $600,000.
City of Dubuque Budget Director Dawn Lang did an analysis to see what impact tax
increment financing rebates to private projects would have on the City of Dubuque's
bonding capacity. With all the existing anticipated debt for large items, like the Drainage
Basin Master Plan and the future renovation of the Water Pollution Control Plant, the
existing City of Dubuque Tax Increment Financing Agreements and anticipated
agreements show that by 2013 the City of Dubuque would still have $112 million of its
$195 million bonding capacity available if we did not include this non-appropriation
language in these development agreements.
Therefore, City staff is not negotiating the non-appropriation language into development
agreements and the 61/151 Development Agreement for the old Smithfield site, which
has already been set for public hearing by the City Council and has the non-
appropriation language inserted, has a request to remove that language from their
agreement.
The only thing that could change this position in the future is if there are other large City
projects that need significant bonding or such a large economic development project
that the non-appropriation language should be considered for that particular project.
I have discussed this strategy with City Attorney Barry Lindahl and the City's bond
counsel, Bill Noth, and they feel comfortable with this approach.
ftl (;;:, ,fJktl
Michael C. Van Milligen ~
MCVM/jh
Attachment
cc: Barry Lindahl, Corporation Counsel
Cindy Steinhauser, Assistant City Manager
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BAR R Y A. L I N 0 A H L, ESQ.
CITY ATTORNEY
MEMO
To:
Michael C. Van Milligen
City Manager
DATE:
May 24, 2006
RE:
TIF Rebates in Development Agreements
Mike:
In 2003, the Iowa Supreme Court held that unless a city's obligation to make TIF
payments in a development agreement is subject to some contingency, the TIF
payments are considered debt for purposes of the city's constitutional debt limits. Fults
v. City of Coralville, 666 NW.2d 548 (Iowa 2003)(opinion enclosed)
The case has prompted some cities that are close to their debt limit to include "non-
appropriation" language in development agreements. This non-appropriation language
provides that the city council is only obligated to appropriate TIF payments for one year
at a time and could, in the city council's discretion, suspend TIF payments. However,
even though such language is included in a development agreement, it is extremely
unlikely that a city would not appropriate the payments because that would have
disastrous effects on the city's bond rating.
If we are concerned about our debt limit, we should include non-appropriation language
in our development agreements where the agreement provides for a TIF rebate. Sample
language is attached.
Attachment
OFFICE OF THE CITY ATTORNEY DUBUQUE, IOWA
SUITE 330, HARBOR VIEW PLACE, 300 MAIN STREET DUBUQUE, IA 52001-6944
TELEPHONE (563) 583-4113/ FAX (563) 583-1040 / EMAIL balesq@cityofdubuque.org
SAMPLE NON-APPROPRIATION LANGUAGE
(5) Non-appropriation/Limited Source of Funding. Notwithstanding anything in this
Agreement to the contrary, the obligation of City to pay any installment of the Economic
Development Grant shall be an obligation limited to currently budgeted funds, and not a
general obligation or other indebtedness of City or a pledge of its full faith and credit
under the meaning of any constitutional or statutory debt limitation, and shall be subject
in all respects to the right of non-appropriation by the City Council as provided in this
Section_. City may exercise its right of non-appropriation as to the amount of the
installments to be paid during any fiscal year during the term of this Agreement without
causing a termination of this Agreement. The right of non-appropriation shall be
exercised only by resolution affirmatively declaring City's election to non-appropriate
funds otherwise required to be paid to Developer in the next fiscal year under this
Agreement. Such resolution shall be considered for adoption by the City Council at a
public hearing held on or before December 1 st of any year, and notice of such hearing
shall be given to Developer at least 30 days prior to the hearing. The resolution shall be
approved by not less than a majority of the total number of members to which the City
Council is entitled. Developer and all other persons having an interest in the matter
shall be given an opportunity to be heard at such hearing and prior to the adoption of
such resolution.
(i) In the event the City Council elects to not appropriate sufficient funds in the
budget for any future fiscal year for the payment in full of the installments on the
Economic Development Grant due and payable in that fiscal year, then: i) City shall
have no further obligation to Developer for the payment of all installments due in the
next fiscal year which cannot be paid with the funds then appropriated for that purpose;
and, ii) Developer shall be released from all further obligations under this Agreement
during that same fiscal year.
(ii) Each installment of the Economic Development Grant shall be paid by City solely
from funds appropriated for that purpose by the City Council from taxes levied on the
Property that are allocated to the special fund pursuant to Iowa Code (2005)
9403.19(2).
(Hi) The right of non-appropriation reserved to City in this Section _ is intended by
the parties, and shall be construed at all times, so as to ensure that City's obligation to
pay future installments on the Economic Development Grants shall not constitute a legal
indebtedness of City within the meaning of any applicable constitutional or statutory
debt limitation prior to the adoption of a budget which appropriates funds for the
payment of that installment or amount. In the event that any of the provisions of this
Agreement are determined by a court of competent jurisdiction to create, or result in the
creation of, such a legal indebtedness of City, the enforcement of the said provision
shall be suspended, and the Agreement shall at all times be construed and applied in
such a manner as will preserve the foregoing intent of the parties, and no event of
default shall be deemed to have occurred as a result thereof. If any provision of this
Agreement or the application thereof to any circumstance is so suspended, the
suspension shall not affect other provisions of this Agreement which can be given effect
without the suspended provision. To this end the provisions of this Agreement are
severable.
666 N.W.2d 548, Fults v. City of Coralville, (Iowa 2003)
*548 666 N.W.2d 548
Supreme Court of Iowa.
Karen FULTS and Wayne Siems, Appellants,
v.
CITY OF CORALVILLE, Appellee.
No. 02-1857.
June 11, 2003.
Rehearing Denied Aug. 7, 2003.
Property owners filed petition for declaratory
judgment against city, challenging city's financing
of consolidated urban renewal area that included
highway corridor. The District Court, Johnson
County, William L. Thomas, J., ruled in favor of
city and disntissed petition. Property owners
appealed. The Supreme Court, Streit, J., held that:
(1) city properly followed statutory requirements
when it designated areas of city as a consolidated
urban renewal area; (2) city had authority to amend
original urban renewal areas and combine them to
promote economic development in one of combined
areas; (3) city substantially complied with statutory
notice and public hearing requirements; and (4)
notes and bonds did not constitute constitutional
debt.
Affrrmed.
West Headnotes
[I] Municipal Corporations ~953
268-...
268XIII Fiscal Matters
268XIII(C) Bonds and Other Securities, and
Sinking Funds
268k952 Payment
268k953 In General.
Pursuant to authority to conduct tax increment
fmancing (TIP), municipality may fund public
improvements in area slated for redevelopment by
recapturing, for a time, all or portion of increased
property tax revenue that may result if
redevelopment stimulates private reinvestment.
I.C.A. ~ 403.19.
[2] Declaratory Judgment ~393
118A _m
Page 1
118AIII Proceedings
118AIII(H) Appeal and Error
118Ak392 Appeal and Error
118Ak393 Scope and Extent of Review in
General.
Supreme Court's standard of review concerning
whether trial court erred in fmding that city
properly designated highway right-of-way as
economic development area was for correction of
errors of law in property owners' declaratory.
judgment action that challenged city's fmancing of
consolidated urban renewal area that included
highway corridor. I.C.A. ~ 403.19.
[3] Declaratory Judgment ~393
118A ---
118AIII Proceedings
118AIII(H) Appeal and Error
118Ak392 Appeal and Error
118Ak393 Scope and Extent of Review in
General.
Supreme Court would review de novo whether
district court erred in finding city's annual
appropriation obligations did not constitute
constitutional debt, in property owners' declaratory-
judgment action that challenged city's fmancing of
consolidated urban renewal area that included
highway corridor, because constitutional issues
were involved. I.C.A. Const. Art. 11, ~ 3.
[4] Municipal Corporations ~282(1)
268..-
268IX Public Improvements
268IX(A) Power to Make Improvements or
Grant Aid Therefor
268k282 Basis or Plan of Improvements
268k282(1) In General.
[See headnote text below]
[4] Municipal Corporations ~30l
268 .---
268IX Public Improvements
268IX(B) Preliminary Proceedings and
Ordinances or Resolutions
268k300 Ordinance, Resolution, or Order for
Improvement
268k301 Necessity.
<D 2006 Thomson/West. No claim to original U.S. Govt. works.
666 N.W.2d 548, Fults v. City of Coralville, (Iowa 2003)
City properly followed statutory requirements
when it designated areas of city as a consolidated
urban renewal area, although consolidated area
included highway right-of-way, since city council
stated that purpose of plan was to encourage
continued economic well-being, council passed
resolution of necessity, which stated thst plan was
necessary in interest of welfare of city residents,
and council submitted plan to planning and zoning
commission for approval. I.C.A. ~~ 403.2, subd.
3,403.4,403.5, subds. 1,2, 3,6,403.6,403.17,
subd. 10.
[5] Municipal Corporations ~323(3)
268 ----
2681X Public Improvements
2681X(B) Preliminary Proceedings and
Ordinances or Resolutions
268k323 Restraining Making of Improvement
268k323(3) Proceedings.
In property owners' declaratory-judgment action
that challenged city's financing of consolidated
urban renewal area thst included highway corridor,
property owners had heavy burden of showing
city's designation of urban renewal area was
arbitrary, unreasonable, or capricious. I.C.A. ~
403.6.
16] Municipal Corporations ~267
268 ----
2681X Public Improvements
2681X(A) Power to Make Improvements or
Grant Aid Therefor
268k267 Nature and Purposes of
Improvements in General.
City councils have wide discretion in carrying out
urban renewal laws. I.C.A. ~ 403.6.
[7] Municipal Corporations ~267
268 ----
2681X Public Improvements
2681X(A) Power to Make Improvements or
Grant Aid Therefor
268k267 Nature and Purposes of
Improvements in General.
City had authority to amend original urban renewal
areas and combine them to promote economic
development in one of combined areas. LC.A. ~
Page 2
403.5, subd. 6.
[8] Municipal Corporations ~282(1)
268 ----
2681X Public Improvements
2681X(A) Power to Make Improvements or
Grant Aid Therefor
268k282 Basis or Plan of Improvements
268k282(1) In General.
Once city adopts urban renewal plan, it may
modify original plan through additional resolutions.
LC.A. ~ 403.5, subd. 6.
[9] Municipal Corporations ~303(1)
268 ----
2681X Public Improvements
268IX(B) Preliminary Proceedings and
Ordinances or Resolutions
268k300 Ordinance, Resolntion, or Order for
Improvement
268k303 Form, Requisites, and Validity in
General
268k303(1) In General.
City council is under no statutory obligation to
make specific findings before declaring area as
economic development area suitable for designation
as urban renewal area; statute merely requires
declaration by city council in resolution of necessity
that area is suitable for economic development to
support and stimulate commercial and industrial
growth. I.C.A. ~ 403.5, subd. 1.
[10] Municipal Corporations ~294(2)
268 ----
2681X Public Improvements
2681X(B) Preliminary Proceedings and
Ordinances or Resolutions
268k294 Notice of Proposed Improvement or
Resolution
268k294(2) Necessity.
[See headnote text below]
[10] Municipal Corporations ~298
268 ----
2681X Public Improvements
268IX(B) Preliminary Proceedings and
Ordinances or Resolutions
@ 2006 Thomson/West. No claim to original U.S. Gov!. works.
666 N.W.2d 548, Fults v. City of Coralville, (Iowa 2003)
268k298 Hearing of Persons Interested.
[See headnote text below]
[10] Municipal Corporations ~917(1)
268 ----
268XIII Fiscal Matters
268XIII(C) Bonds and Other Securities, and
Sinking Funds
2681<917 Proceedings Preliminary to Issue of
Bonds
2681<917(1) In General.
Before city could initiate proceedings to issue
bonds and notes regarding urban renewal project,
city was required to substantially comply with
statute governing notice and public hearings relating
to financing issues for urban renewal areas. r.C.A.
S 384.25, subd. 2.
[II] Municipal Corporations ~917(1)
268 ----
268XIII Fiscal Matters
268XIII(C) Bonds and Other Securities, and
Sinking Funds
2681<917 Proceedings Prelintinary to Issue of
Bonds
2681<917( 1) In General.
City substantially complied with statutory notice
and public hearing requirements relating to
fmancing issues for urban renewal areas, although
published notice did not contain information of
contingent nature of loans or of effect loans may
have had on municipal credit rating, since notice
precisely stated amount of proposed bonds, urban
renewal purpose, and public's right to petition. and
notice stated that repaymeut of notes and bonds was
subject to right of nonappropriation by city council
each fiscal year. r.C.A. S 384.25, subd. 2.
[12] Municipal Corporations .548 ~864(4)
268 ----
268XIlI Fiscal Matters
268XIII(A) Power to Incur Indebtedness and
Expenditures
268k862 Limitation of Amount
268k864 Debts and Expenditures Subject to
Limitation
268k864(4) Indebtedness Payable Out of
Special Fund or from Special Assessment.
Page 3
Notes and bonds issued by city regarding urban
renewal area did not constitute "constitutional debt,"
and thus city's obligation on notes and bonds was
not subject to provision of state constitution that
limits amount of debt political subdivision may
create, although city designated a debt service fund,
since bonds and loan agreement for notes stated that
repayment was subject to nonappropriation in any
fiscal year, city had option each year to appropriate
money for repayment, money in debt service fund
was from initial proceeds of sale of notes and
bonds, and creditors did not have right to receive
and enforce payment. r.C.A. Const. Art. 11, S 3;
r.C.A. S 403.19.
[13] Municipal Corporations ~863
268 _m
268XIII Fiscal Matters
268XIII(A) Power to Incur Indebtedness and
Expenditures
268k862 Limitation of Amonnt
268k863 In General.
For purposes of provision of state constitution that
limits amount of debt political subdivision may
create, if there is no legally enforceable obligation
to continue repayments in future, such debt is not
considered constitutional debt. r.C.A. Const. Alt.
11, S 3.
[14] Municipal Corporations ~863
268 m_
268XIII Fiscal Matters
268XIII(A) Power to Incur Indebtedness and
Expenditures
268k862 Limitation of Amount
268k863 In General.
For purposes of provision of state constitution that
limits amount of debt political subdivision may
create, 'constitutional debt" exists only when it
appears such contingency is sure to take place
irrespective of any action taken or option exercised
by city in future. r.C.A. Const. Alt. 11, S 3.
[15] Municipal Corporations ~863
268 ---
268XIII Fiscal Matters
268XIlI(A) Power to Incur Indebtedness and
Expenditures
@ 2006 Thomson/West. No claim to original U.S. GoV!. works.
666 N.W.2d 548, Fults v. City of Coralville, (Iowa 2003) Page 4
268k862 Limitation of Amount LC.A. Const. Art. 11, ~ 3.
268k863 In General.
For purposes of provision of state constitution that
limits amount of debt political subdivision may
create, city's debt is not considered "constitutional
debt" where none of its resources or property can
be taken for, or subjected to, payment of any bond.
LC.A. Const. Art. 11, ~ 3.
[16] Municipal Corporations cg,::,863
268--
268XIIl Fiscal Matters
268XlII(A) Power to Incur Indebtedness and
Expenditures
268k862 Limitation of Amount
268k863 In General.
Where holder of security has no recourse against
city in event of non-payment, there is no debt in
constitutional sense, for purposes of provision of
state constitution that limits amount of debt political
subdivision may create.
[17] Municipal Corporations cg,::, 863
268 ----
268Xm Fiscal Matters
268XIn(A) Power to Incur Indebtedness and
Expenditures
268k862 Limitation of Amount
268k863 In General.
Repayment of debt that is not certain to take place
regardless of future events is not subject to
constitutional debt limitation, for purposes of
provision of state constitution that limits amount of
debt political subdivision may create. LC.A.
Const. Art. 11, ~ 3.
[18] Municipal Corporations cg,::,863
268 ----
268XlII Fiscal Matters
268Xlll(A) Power to Incur Indebtedness and
Expenditures
268k862 Limitation of Amount
268k863 In General.
Constitutional debt limitation provlSlon of state
constitution regarding amounts that political
subdivisions may borrow applies to legally
enforceable obligations, not to moral obligations.
[19] Municipal Corporations cg,::,863
268--
268Xlll Fiscal Matters
268XIll(A) Power to Incur Indebtedness and
Expenditures
268k862 Limitation of Amount
268k863 In General.
For purposes of provision of state constitution that
limits amount of debt political subdivision may
create, if express terms of city's agreement do not
offend constitution, then purpose alone will not
render agreement unconstitutional. LC.A. Cons!.
Art. 11, ~ 3.
*550 Bruce D. Nestor of De Leon & Nestor,
Minneapolis, Minnesota, for appellants.
*551 Dennis W. Johnson of Dorsey & Whitney,
Des Moines, for appellee.
STREIT, Justice.
Property owners challenge a city's amending two
urban renewal areas to support the development of a
hotel and conference center. The City of Coralville
amended two distinct urban renewal areas to include
the highway corridor connecting the two areas and
consolidated both into one urban renewal area. To
finance, in part, the hotel/conference center project,
the city took out $33 million in notes and bonds.
Property owners in the urban renewal area
challenge the city's inclusion of the highway
corridor in the economic development area to
support the creation of the consolidated urban
renewal area. The property owners also argue the
city exceeded its constitutional debt limitation in
taking out $33 million in notes and bonds. Because
we find the city complied with the urban renewal
law of Iowa Code chapter 403 and the
appropriations-backed "debt" does not constitute
constitutional debt, we affirm.
I. Background and Facts
[I] The City of Coralville established the Highway
6 Urban Renewal Area in 1992. Five years later, it
created the Mall Urban Renewal Plan Area to
fmance development of the Coral Ridge Mall. In
2001, the city amended its general plan to include a
hotel/convention center (the "project") to be built in
<<:> 2006 ThomsonlWest. No claim to original U.S. Govt. works.
666 N.W.2d 54S, Fults v. City of Coralville, (Iowa 2003)
the Highway 6 Urban Renewal Area. However,
this area alone would not generate sufficient tax
increment fmancing (TlF) revenue to fund the
project. (FNl) To resolve this problem, the city
consolidated the two previously existing urban
renewal areas to fmanee the project. The two areas
were connected by Interstate SO. Each of the
original urban renewal plans was modified to
include the I-SO corridor, a strip of land along the
interstate from the Coral Ridge Mall east to
Highway 6. The addition of the Interstate SO
corridor to each of the previously existing urban
renewal areas physically and visually connected the
two urban renewal areas. The city called this newly
created area the "Mall and Highway 6 Urban
Renewal Plan Area" (the "plan").
To finance the hotel project's construction, the city
approved a financiog project of $20 million io notes
and $13 million io bonds. The notes and bonds
were contingent obligations subject to repayment
only if the city wouldarmually appropriate the funds
necessary for repayment.
*552 Plaiotiffs Karen Fults and Wayne Siems are
residents of the City of Coralville and owners of
property io the Highway 6 Urban Renewal Area
(the "property owners"). The property owners filed
a petition for declaratory judgment challengiog the
city's fmanciog of the project. The property
owners argued the consolidation of the two urban
renewal areas was iovalid because the I-SO right-of-
way carmot be designated an urban renewal area for
economic development. The property owners also
challenged the city's compliance with the statutory
procedure for issuiog the bonds and notes. Finally,
the property owners asserted the city's issuance of
notes and bonds caused the city to exceed its
constitutional debt limit. The property owners
sought a declaration of the appropriate assessment
ro be used in setting the base valuation and the
portion of taxes reserved to the respective taxing
districts.
The district court ruled io favor of the city on each
issue and dismissed the property owners' petition.
The property owners appeal contending the city's
designation of the I-SO right-of-way as an economic
development area was arbitrary, capricious, or
unreasonable. The property owners also argue the
annual appropriation debt constitutes debt subject to
the debt limitation provision of the Iowa
Constitution.
Page 5
II. The Merits
[2][3] On appeal, we exantine two maio issues.
The property owners ask us to determine whether
the district court erred in finding the city properly
designated the I-SO right-of-way as an economic
development area. Our review of this issue is for
correction of errors of law. Iowa Coal Min. Co. v.
Monroe County, 494 N.W.2d 664, 66S (Iowa 1993)
. We also consider whether the district court erred
in fmding the city's armual appropriation obligations
do not constitute constitutional debt. As to the
second issue, our review is de novo because
constitutional issues are iovolved. Id.
A. Designation of the Urban Renewal Area
[4][5] The property owners challenge the city's
ioclusion of the I-SO corridor as part of the
consolidated urban renewal area. The property
owners misconstrue the real issue before us by
concentrating their argument on the legality of
declariog the I-SO corridor itself an economic
development area. We do not review whether the
I-SO right-of-way as it stands alone complies with
chapter 403, but rather whether the MalI and
Highway 6 Urban Renewal Area (of which the I-SO
right-of-way is a part) is consistent with our state
urban renewal law. Property owners have the
heavy burden of showing the city's designation of
this urban renewal area was arbitrary, unreasonable,
or capricious. Dilley v. City of Des Moines, 247
N.W.2d IS7, 190 (Iowa 1976).
[6] As we have said before, it is critical to exantine
the nature of the city council1 s action to determine
whether the city acted io conformance with the
urban renewal laws of Iowa Code chapter 403.
McMurray v. City Council, 642 N.W.2d 273, 277
(Iowa 2002). A municipality is vested with "all the
powers necessary or convenient to carry out and
effectuate the purposes and provisions of [chapter
403.)" Iowa Code 9 403.6 (2001). In McMurray,
we summarized the proper actions of a city council
io achieviog the purposes of our urban renewal
statute as follows:
In general, the City Council acts io a legislative
capacity. Chapter 403 grants city councils
authority to carry out urban redevelopment,
rehabilitation, and renewal projects. As such, the
City Council's action io designating this economic
*553 development area iovolved determination of
legislative, not judicial, facts. Legislative facts are
@ 2006 Thomson/West. No claim to original U.S. Govt. works.
666 N.W.2d 548, Fults v. City of Coralville, (Iowa 2003)
"generalized propositions of fact or policy guiding
the exercise of legislative judgment." (Citation
omitted.) Moreover, legislative facts are not
concerned with particular problems of individuals,
but involve a determination of what is in the best
interests of the public generally. Trager v.
Peabody Redevelopment Au/h., 367 F.Supp. 1000,
1002 (D.C.Mass.1973) ....
Such decisions by the city council involving
legislative facts necessarily involve the exercise of
considerable discretion. Legislative deciarations,
such as the one before us, are entitled to great
weight. See, e.g., Miller v. City of Tacoma, [61
Wash.2d 374] 378 P.2d 464, 470 (Wash.1963)....
Consequently, we have no power to interfere with
the City Council's legislatively given discretion to
carry out the purposes of the urban renewal law.
See, e.g., Dilley v. City of Des Moines, 247
N.W.2d 187, 192 (Iowa 1976).... Rather, we
presume the City Council, as a governing body of
elected officials, acted in the overall best interests
of the public.
McMurray, 642 N.W.2d at 277. Bearing in mind
the wide discretion city councils have in carrying
out our urban renewal laws, we turn to whether the
city in this particular case complied with the
requirements of chapter 403.
Iowa Code chapter 403 provides that one reason a
municipality may create an urban renewal area is to
encourage general economic development for a
community. Iowa Code ~ 403.2(3); see
McMurray, 642 N.W.2d at 278 (citing Bowers v.
Polk County Bd. of Supervisors, 638 N. W .2d 682,
697 (Iowa 2002)). In this instance, the city had
already created two separate urban renewal areas.
(FN2) The Mall Urban Renewal Area already had
substantial development, while the Highway 6
Urban Renewal Plan remained relatively
unchanged. By resolution, the city council amended
the Highway 6 Urban Renewal Area and the MaIl
Urban Renewal Area and created the Mall and
Highway 6 Urban Renewal Area. The city
combined these two areas to use the success and
stability of the Mall Urban Renewal Area to assist
in the economic development of the Highway 6.
Urban Renewal Area.
[7][8] It is common for a mrinicipality to amend
urban renewal areas to respond to changing needs
and circumstances. Once a city adopts an urban
renewal plan, it may modify the original plan
Page 6
through additional resolutions. Iowa Code section
403.5(6) states,
Upon approval by the municipality of an urban
renewal plan or of any modification thereof, such
plan or modification shall be deemed to be in full
force and effect for the respective urban renewal
area, and the municipality may then cause such
plan or modification to be carried out in
accordance with its terms.
Iowa Code ~ 403.5(6). Property owners do not
contend the city is prohibited from consolidating
urban renewal areas, especially those areas that are
not contiguous. No statute prohibits a municipality
from combining tax revenues within the combined
urban renewal areas to fund a new project. To the
contrary, the record shows it is common for a
municipality to consolidate existing urban renewal
areas to finance development of the community
within the expanded urban renewal area. Further,
the record reflects that it is not unusual for a
municipality to use a highway right-of-way to join
urban renewal *554 areas. It was within the city's
discretion to amend the original urban renewal areas
aod combine thern to promote economic
development in the Highway 6 area. The question
is whether the city's declaration of the consolidated
areas as one economic development area to support
the creation of the MaIl and Highway 6 Urban
Renewal Plan Area complied with chapter 403.
Before a municipality may designate an urban
renewal area, it must pass a resolution froding the
area is a slum or blighted area, or an economic
development area. The municipality must further
frod development in the area is necessary in the
public interest. In this case, we are reviewing the
creation of an economic development area to
support the urban renewal designation. Iowa Code
chapter 403 defines an economic development area,
in parr, as:
an area of the municipality designated by the local
governing body as appropriate for commercial and
industriaI enterprises, public improvements related
to housing and residential development, or
construction of housing and residential
development for low aod moderate income
families, including single or multifamily
housing.. ..
Iowa Code ~ 403.17(10).
@ 2006 ThomsonlWest. No claim to original U.S. Govt. works.
666 N.W.2d 548, Fults v. City of Coralville, (Iowa 2003)
[9] The urban renewal statutes provide a "a
municipality shall not approve an urban renewal
project for an urban renewal area unless the
governing body has, by resolution, determined the
area to be a[n] ... econontic development area ...
and designated the area as appropriate for an urban
renewal project." McMurray, 642 N.W.2d at 279
(citing Iowa Code ~ 403.5(1)). A city council is
under no statutory obligation "to make specific
fmdings" before declaring an area as an econontic
development area suitable for designation as an
urban renewal area. Id. "[T]he statute merely
requires a declaration by the City Council in the
resolution of necessity the area is suitable for
econontic development to support and stimulate
commercial and industrial growth." Id.
In the case before us, the city council complied
with the provisions for declaring the property an
econontic development area within an urban
renewal area. The city council stated the purpose of
the Plan was
to encourage the continued stability and econontic
well-being of the City of Coralville through the
support of econontic development and
redevelopment within the area.... The primary
goals ... are to stimulate, through public action and
comntitments, private investments in development
and redevelopment.
The Plan was to "encourage economic
development by providing . infrastructure
improvements to accommodate development of a
vital, dynantic and competitive regional commercial
area for the City of Coralville and the surrounding
region. " The city council also passed a resolution
of necessity pursuant to Iowa Code section 403.4,
stating "investigations have been conducted which
show the desirability of expanding the urban
renewal areas to add and include all property shown
[including the 1-80 right of way] ...." The
resolution stated the Plan was "necessary in the
interest of the public health, safety or welfare of the
residents" of the city. The resolution said
'sufficient need exists to warrant fmding" the area
of the 1-80 corridor "to be an econontic
development area. ... '
The city council further complied with the
remaining statutory requirements of chapter 403.
The council subntitted the proposed plan to the
Planning and Zoning Comntission for approval as
required by Iowa Code section 403.5(2). The city
Page 7
held a public hearing on January 8, 2002, for *555
the purpose of discussing the designation of the new
Mall and Highway 6 Urban Renewal Plan Area.
See id. ~ 403.5(3). Notice of the hearing was
published as required.
The property owners make a fmal effort to
challenge the motives behind the city's designation
of this econontic development area to support the
urban renewal plan. However, we have consistently
said we do not examine "the motives of those
exercising legislative power in a manner which is
not manifestly arbitrary, capricious, or
unreasonable." Dilley, 247 N.W.2d at 192; accord
McMurray, 642 N.W.2d at 280 ("It is not within
our province to decide whether the City made a
good or bad decision in designating this econontic
development area. '). In 1985, the legislature gave
municipalities authority to adopt an urban renewal
plan based solely upon the existence of an econontic
development area. The reason behind this
amendment to chapter 403 was to 'stem econontic
decline and promote economic growth. "
McMurray, 642 N.W.2d at 281; see also 1985
Iowa Acts ch. 66, ~ 1 (codified at Iowa Code ~
403.2(3) (1987)). Given this stated purpose of the
urban renewal statute, we conclude the city's action
in this case was reasonable.
In designating the Mall and Highway 6 Urban
Renewal Plan Area, the city promoted one of the
main goals of chapter 403, i.e., to encourage and
assist various industrial and commercial enterprises
in locating to the State of Iowa. See McMurray,
642 N.W.2d at 281-82. It was reasonable for the
city to consolidate two urban renewal areas in an
effort to increase the viability of both areas and the
proposed project. Including the 1-80 corridor in the
consolidated urban renewal area was also
reasonable. The record shows the city took such
action to "improve the appearance of the corridor ,"
to "enhance the identity of the metro area," and to
"complement adjoining areas." The land use pian
indicates, as a general planning goal, the city hoped
to "enhance the community image" with the 1-80
corridor by improving the aesthetics along the
corridor and linking the Iowa City and Coralville
developments. The property owners have shown
nothing more than their disagreement over whether
the urban renewal area is viable. Their
disagreement is insufficient to render the city I S
action unreasonable. As such, they have not met
their burden to prove the city's action was
unreasonable, arbitrary, or capricious.
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666 N.W.2d 548, Fults v. City of Coralville, (Iowa 2003)
In sum, becanse the city conncil followed the
reqnirements of the Iowa Code in designating the
consolidated property an economic development
area, we will not interfere with the city's decision.
It was a matter based upon public policy and we
will not second-guess whether it was a "good or bad
decision." See id. at 280. Because the property
owners have failed to show the city's actions in
designating the economic development area were
arbitrary, capricious, or unreasonable, we affIrm.
B. Constitutional Debt Limitation
The second issue is whether the annual
appropriation obligations to repay the debt on the
bonds and notes constitute constitutional debt
subject to the limitation of article XI, section three
of the Iowa Constitution. Property owners contend
the TIP plan at issue, inclnding the notes and bonds,
cause the city to exceed its constitutional debt
limitation. . The property owners also argue the city
failed to comply with the requirements of Iowa
Code sections 384.24(3)(q ) and 384.25(2) (2001)
for a public hearing on the matter. The city argues
its repayment obligation is conditional on yearly
appropriations and is .556 therefore not subject to
the constitutional debt limitation.
[10][11] We begin our discussion considering
whether the city complied with the public hearing
requirements related to financing issues for urban
renewal areas. The applicable code provisions
state, in part,
Before the conncll may institute proceedings for
the issuance of bonds for an essential corporate
purpose, a notice of the proposed action, inclnding
a statement of the amount and purposes of the
bonds, and the time and place of the meeting at
which the conncil proposes to take action for the
issuance of the bonds, must be published as
provided in section 362.3. At the meeting, the
connell shall receive oral or written objections
from any resident or property owner of the city.
After all objections have been received and
considered, the council may, at that meeting or any
adjournment thereof, take additional action for the
issuance of the bonds or abandon the proposal to
issue the bonds.
Iowa Code ~ 384.25(2).
The property owners argue the notice published in
January 2002 did not contain information of the
Page 8
contingent nature of the loans or of the effect the
loans may have on the municipal credit rating.
However, absent in the statute quoted above is any
langnage that the city shall provide notice of these
particular matters. The city was required to
substantially comply with the statutes. See Green v.
City of Cascade, 231 N.W.2d 882,885 (Iowa 1975)
(substantial compliance is required for the valid
issuance of municipal general obligation bonds by a
city). The city has substantially complied with the
notice provisIon. The notice precisely stated the
amount of the proposed bonds, the urban renewal
purpose, and the public's right to petition. Further,
the notice expressly stated repayment of the notes
and bonds is "subject to the right of
nonappropriation by the City Council each fiscal
year." We now turn to the critical issue which is
whether the notes and bonds constitute constitutional
debt. If we find these loans are subject to the
constitutional debt limitation, the city would exceed
its debt limit.
[12] The Iowa Constitution limits municipalities to
indebtedness no greater than five percent of the total
value of property within the corporate limits of the
municipality~ Iowa Const. art. XI, S 3. The city
has a debt limitation of approximately $50 million.
The city presently has $39 million in outstanding
constitutional debt. Both parties agree that the $33
million of bonds and notes fmancing the project, or
either part of it, would exceed the city's debt
limitation, if considered constitutional debt.
[13][14][15][16] The Iowa Constitution imposes a
limitation on the amount of debt a political
subdivision may create to "prevent the general taxes
of a political subdivision from becoming
overburdened by obligations." Richards v. City of
Muscarine, 237 N.W.2d 48, 64 (Iowa 1975);
accord Banta v. Ciarke County, 219 Iowa 1195,
1200-02, 260 N.W. 329, 336 (1935) (purpose of
constitutional debt limitations is to confme
indebtedness within certain limits). If there is no
legally enforceable obligation to continue
repayments in the future, such "debt" is not
considered constitutional debt. Coustitutional debt
exists only when it
appear[,] such contingency is sure to take place
irrespective of any action taken or option exercised
by the city in the future. That is, if a present
indebtedness is incurred or obligations assumed
which, without further action on the part of the
city, have the effect to create an indebtedness at
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666 N.W.2d 548, Fults v. City of Coralville, (Iowa 2003)
some future day, such *557 are within the
inhibition of the constitution.
But, if the fact of indebtedness depends upon
some act of the city, or upon its volition to be
exercised or determined at some future day, then
no present indebtedness is incurred, and none will
be until the period arrives, and the required act or
option is exercised, and from that time only can it
be said there exists an indebtedness.
Burlington Water Co. v. Woodward, 49 Iowa 58,
62 (1878); accord Windsor v. City of Des Moines,
110 Iowa 175, 187-88, 81 N.W. 476, 478 (1900).
A city's "debt II is not considered constitutional debt
where "none of its resources or property can be
taken for, or subjected to, the payment of any
bond." Interstate .Power Co. v. Town of McGregor,
230 Iowa 42, 56, 296 N.W. 770, 777 (1941).
Where the holder of the security has no recourse
against the city in the event of non-payment, there
is no debt in the constitutionai sense. See
Empluyers Ins. Co. v. State Bd. of Exm'rs, 117
Nev. 249, 21 P.3d 628,632 (2001).
To determine whether the city has bound itself to
repay its debts, we look to the document creating
the claimed obligation. The loan agreement for the
notes read,
The Notes are special, lintited obligations of the
City, payable from amounts on deposit in the
City's Debt Service Fund, and other revenues and
funds, to the extent lawfully available for such
purpose, but subject to nonappropriation in any
fiscal year. The Notes do not constitute a general
obligation of the City or other fmancial obligation
of the City for any fiscal year and shall not
constitute debt within the meaning of any
constitutionai debt lintitation. The Notes sha11 not
directly or indirectly obligate the City to make
payments thereon during a fiscal year beyond those
for which funds have been appropriated by the
City Council for such fiscal year.
In the event that the City Council ... does not
budget and appropriate funds for any fiscal year in
an amount sufficient to meet the payments of
interest and principal due under the Notes during
such fiscal year ..., the City'sobligations under the
Notes shall terminate and become null and void on
the last duy of the fiscal year for which the
necessary funds were appropriated.
Page 9
(Emphasis added.) The bonds contained
substantially similar language indicating the city's
repayment of the bonds was "subject to
nonappropriation in any fiscal year."
[17] There is nothing in the agreements creating
the notes and bonds that binds the city to any
particular future course of action. Each year, it is
the option of the city council to appropriate the
necessary money for repayment. If the city council
does not appropriate money for this purpose, the
city is not bound to repay the remaining amount on
the notes and bonds. These notes and bonds are
debts only if each year the city council says they are
debts. This is the very essence of debt that does not
constitute constitutionai debt. The repayment of a
debt that is not certain to take place regardless of
future events is not subject to the constitutionai debt
limitation. The contingency provided for in the
case before us, i.e., appropriation of funds for
repayment, Can hardly be said to be "sure to take
place irrespective of any action taken or option
exercised by the city in the future." See
Woodward, 49 Iowa at 62.
Property owners argue the practicai effect of the
language creating the notes and bonds is that the
city has "pledged" to repay the money.
Specifically, property owners assert "[w]hen a
future city council faces the decision of whether to
cause [a *558 nonappropriation] to happen, it will
both morally and practically be in a position where
it must continue to appropriate general tax
revenues." Property owners predict a certain
disastrous result of nonappropriation; the city's
inability "to borrow money for even essential city
services or of having that money at higher interest
rates." Given these claimed consequences of a
nonappropriation, the property owners, in essence,
argue the city has morally bound itself to repay the
notes and bonds. Because of the likelihood of
repayment, the property owners urge us to expand
the defmition of constitutional debt to include
appropriations-backed debt. We are not persuaded
by their contention.
[] 8] "A moral obligation ... is not in and of itself
'debt.'" Schulz v. State, 84 N.Y.2d 23], 616
N.Y.S.2d 343, 639 N.E.2d 1140, 1148 (]994).
"[T]his is an extra-legal consideration urged on the
basis of an undemonstrated detrimental effect of a
possible default upon the State's general reputation
and credit rating." Wilmington Med. Ctr., Inc. v.
Bradford, 382 A.2d 1338, 1349 (De1.l978). That
@2oo6 ThomsonlWes!. No claim to original U.S. Gov!. works.
666 N.W.2d 548, Fults v. City of Coralville, (Iowa 2003)
is, the constitutional debt limitation provision of our
constitution applies to legally enforceable
obligations, not to moral obligations. See In re
Olda. Capitol Improvement Auth., 958 P .2d 759,
768 (Okla.), cert. denied, Fent v. OklLl. Capitol
Improveme7ll Auth., 525 U.S. 874, 119 S.C!. 174,
142 L.Ed.2d 142 (1998); State ex rei. Kane v.
Goldschmidt, 308 Or. 573, 783 P .2d 988, 993
(1989). Though the consequences that could follow
from the city's nonappropriation may serve to
assure creditors of repayment, this assurance does
not constitute a legal obligation. Id. Even if the
practical effect of these agreements is that the city
will repay the notes and bonds, this does not affect
our analysis as long as the city cannot be held
legally responsible for the debt for a year other than
one in which funds have been appropriated. See
Mun. Bldg. Auth. v. Lowder, 711 P.2d 273, 279
(Utah 1985). The claimed expectations of the notes
and bonds holders do not create cognizable debt
because these beliefs do not impose an enforceable
duty or liability upon the city. See Dykes v. N. Va.
Tramp. Dist. Comm'n, 242 Va. 357,411 S.E.2d I,
10, cen. denied, Tower v. N. Va. Transp. Dist.
Comm'n, 504 U.S. 941, 112 S.Ct. 2275, 119
L.Ed.2d 201 (1992).
Moreover, the fact the city has designated a "Debt
Service Fund" does not turn this situation into one
of an uncouditional obligation to repay the notes.
The money in the Debt Service Fund is from the
initial proceeds of the sale of the notes and bonds.
It was set aside to pay interest on the notes and
bonds from the date of signing until December 2004
(the expected opening of the hotel and conference
center). The Debt Service Fund does not include
any revenue derived from city taxes. The monies in
this fund do not constitute "debt" because the
monies are comprised of proceeds from the initial
sale rather than monies that must be replenished by
taxation. See St. Charles City-County Library Dist.
v. St. Charles Library Bldg. Corp., 627 S.W.2d 64,
67 n. I (Mo.C!.App.1981). Unlike the Debt
Service Fund, the city's supplemental debt reserve
fund does contain tax revenue. However, nothing
in the loan agreement states the money in either of
these debt reserve funds is set aside for repayment
in the event of a nonappropriation. According to
the terms of the agreement, the funds are subject to
nonappropriation just as all other revenue and funds
available for repayment are subject to this
condition.
[19] Finally, property owners' argument that the
Page 10
city is attempting to do indirectly what it may not
do directly is similarly unavailing. If the express
terms of the city's agreement do not offend the
*559 constitution, then the purpose alone will not
render the agreement unconstitutional. See Lowder,
711 P.2d at 280.
The notes and bonds clearly indicate the only way
the city incurs an obligation to repay the money is
an affirmative act authorizing an appropriation in
each fiscal year. There is no language indicating
the city "shall pay" the money back. The city's
obligation is restricted to the fiscal year within
which the city council appropriates money for
repayment. At the end of that fiscal year, the city
has no obligation or liability under the loan
agreement for the notes and bonds. In other words,
the creditors in this case do not have a right to
receive and enforce payment. The agreements are
designed to give future city councils the flexibility
to continue repayment, depending upon the city's
budgetary needs in any given fiscal year. Such
condition of repayment compels our conclusion that
the notes and bonds do not constitute constitutional
debt. (FN3) Simply because the city council in any
given fiscal year may appropriate money for
repayment does not convert the "debt" into a legal
obligation to pay. Because the property owners
have failed to meet their burden to prove the notes
and bonds constitute constitutional debt and are
subject to limitation, we affirm.
m. Conclusion
We affirm the district court's decision in all
respects. The city complied with the requirements
of chapter 403 in designating the consolidated area
an economic development *560. area to support the
urban renewal plan. The bonds and notes issued by
the city to fund the project do not constitute
constitutional debt because repayment is expressly
conditioned upon the city council's appropriation of
funds for repayment in each fiscal year. The loan
agreements clearly state the city's obligation under
the loan terminates and becomes null and void on
the last day of a fiscal year in which the necessary
funds were appropriated.
AFFIRMED.
(FN I.) Tax increment fmancing is the power to
fund public improvements granted to a
municipality by the legislature. Iowa Code ~
403.19 (2001). This method of public fmancing
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, ...,
I
/
I
/
666 N.W..
.~ville, (Iowa 2003)
"presupposf,~ ....:aevel0pUlent I will increase
property values, and h~ce increase the tax base,
of properties in the project area." City of EI Monte
v. Comm 'n on State Mandates, 83 CaI.App.4th
266, 99 CaI.Rptr.2d 333, 334 (2000). The
municipality may fund public improvements "in an
area slated for redevelopment by recapturing, for a
time, all or a portion of the increased property tax
revenue that may result if the redevelopment
stimulates private reinvestment. n Princeton City
Sch. Dist. Bd. of Educ. v. Zaino, 94 Ohio St.3d
66, 760 N.E.2d 375, 378 (2002). The property
taxes that are generated from the base value of the
area are distributed to the various taxing entities.
The incremental taxes generated from any
increased property value above the base value, I.e.
the excess, are allocated to the city to fmance the
public improvement in the urban renewal area. In
the instant case, the excess TIP revenues generated
by the Higbway 6 urban renewal area, on its own,
would be insufficient to fmance the construction of
the hotel/conference center. By consolidating the
two urban renewal areas, the surplus TIP revenues
from the expanded urban renewal area would
provide sufficient revenue to fund the project.
(FN2.) The property owners do not challenge the
designation of either the Highway 6 Urban
Renewal Area or the Mall Urban Renewal Plan
Area.
(FN3.) Our holding is supported by the majority of
jurisdictions upholding some form of
appropriations-backed debt. See Lonegan v. State,
176 N.J. 2, 819 A.2d 395, 404 n. 2 (2003) (citing
Opinion of the Justices, 335 So.2d 376, 379-80
(Ala. 1976); Ca"-Gottstein Props. v. State, 899
P.2d 136, 143-44 (Alaska 1995); Dean v. Kuchel,
35 CaI.2d 444, 218 P .2d 521, 523-24 (1950);
Glennon Heights, Inc. v. Cent. Bank Trust, 658
P.2d 872, 878-79 (Colo.1983); Wilmington Med.
Ctr. Inc. v. Bradford, 382 A.2d 1338, 1346-48
(DeU978); State v. Sch. Bd. of Sarasota CoUnty,
561 So.2d 549, 552-53 (Fla. 1990); Sheffield v.
State Sch. Bldg. Auth., 208 Ga. 575, 68 S.E.2d
590, 594-95 (1952); In re Anzai, 85 Hawal'i I,
936 P.2d 637, 640-43 (1997); Berger v. Howlett,
Page 11
25 D1.2d 128, 182 N.E.2d 673, 674-75 (1962);
Book v. State OfJice Bldg. Comm 'n, 238 Ind. 120,
149 N.E.2d 273, 286-89 (1958); State ex reI.
Fatzer v. Armory Bd., 174 Kan. 369, 256 P.2d
143, 146-51 (1953); Wilson v. Ky. Tramp.
Cabinet, 884 S.W.2d 641, 645-46 (Ky. 1994);
Edgerly v. Honeywell Info. Sys.. 377 A.2d 104,
108 (Me. 1977); In re Request for Advisory
Opinion Enrolled Senate Bill 558, 400 Mich. 175,
254 N.W.2d 544, 546-547 (1977); St. Charles
City-County Library Dist. v. St. Charles Library
Bldg. Corp., 627 S.W.2d 64, 67-69
(Mo.Ct.App.1981); Ruge v. State, 201 Neb. 391,
267 N.W.2d 748, 750-52 (1978); Employers Ins.
Co. of Nev. v. State Bd. of Exam'rs, 117 Nev.
249, 21 P.3d 628, 631-33 (2001); Schulz v. State,
84 N.Y.2d 231, 616 N.Y.S.2d 343, 639 N.E.2d
1140, 1148-50, cen. denied, 513 U.S. 1127, 115
S.Ct. 936, 130 L.Ed.2d 881 (1995); Manin v.
N.C. Housing Corp., 277 N.C. 29, 175 S.E.2d
665, 678-79 (1970); Haugland v. City of
Bismarck, 429 N.W.2d 449, 454-56 (N.D.1988);
In re Okla. Capitol Improvement Auth., 958 P.2d
759, 767-775 (Olda.), cen. denied, Fent v. Okla.
Capitol Improvement Auth., 525 U.S. 874, 119
S.C!. 174, 142 L.Ed.2d 142 (1998); State ex rei.
Kane v. Goldschmidt, 308 Or. 573, 783 P.2d 988,
993-96 (1990); Kelley v. Earle, 325 Pa. 337, 190
A. 140, 144-47 (1937); Opinion to the Governor,
112 R.I. 139, 308 A.2d 802, 807 (1973); Caddell
v. Lexington Caunty Sch. Dist. No. I, 296 S.C.
397,373 S.E.2d 598, 599-600 (1988); McFarland
v. Ba"on, 83 S.D. 639, 164 N.W.2d 607,609-11
(1969); Ragsdale v. City of Memphis, 70 S. W.3d
56, 63-70 (Tenn.C!.App.2001); Tex. Pub. Bldg.
Auth. v. Mattox, 686 S.W.2d 924,928 (Tex. 1985)
; Mun. Bldg. Auth. of Iron County v. Lowder, 711
P.2d 273, 277-81 (Utah 1985); Dykes v. N. Va.
Tramp. Dist. Comm'n, 242 Va. 357, 411 S.E.2d
I, 8-IO(Va.), cen. denied, Tower v. N. Va.
Tramp. Dist. Comm'n, 504 U.S. 941, 112 S.Ct.
2275, 119 L.Ed.2d 201 (1992); Dep't of Ecology
v. State Fin. Comm., 116 Wash.2d 246, 804 P.2d
1241, 1245-46 (1991); Dieck v. Unified Sch. Dist.
of Antigo, 165 Wis.2d 458, 477 N.W.2d 613,
617-21 (1991)).
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