Opinion
Decided February 4, 1927.
Appeal from Kenton Circuit Court.
A.E. STRICKLETT for appellants.
STEPHENS L. BLAKELY and JOHN T. MURPHY for appellee.
Affirming.
Covington is a city of the second class and is operating under the commission form of government, the board of commissioners consisting of the mayor and four commissioners. This action was brought by four taxpayers and residents of the city to test the validity of a contract made between the city and appellee, O.F. Moore, doing business under the name of the O. F. Moore Company, the contract being for the construction of an additional pumping unit at the city waterworks. The city owns and operates a waterworks plant and distributes water to its inhabitants. The suit was brought on the theory that at the time the contract with Moore was made the anticipated expenditures, which included fixed charges and obligations incurred by contracts that had been entered into, exceeded the anticipated revenues of the city for the fiscal year without a vote of the people. After the suit had been instituted and before an answer had been filed the terms of office of two of the commissioners expired and they were succeeded by two newly elected members. On February 19, 1926, Moore filed an answer denying the averments of the petition, and in a cross-petition he made the city a party and asked for a judgment against it in the sum of $24,633.85, the amount due him at the time under the contract, and thereafter a majority of the commissioners, on behalf of the city, filed an answer to the cross-petition in which it was alleged that the contract with Moore violated section 157 of the Constitution and was void. Upon a submission of the case the chancellor found the contract valid and entered a judgment against the city for the amount claimed by Moore in his cross-petition. It is conceded the actual expenditures during the year 1925, exclusive of any payment to Moore, exceeded the income of the city for the year.
Section 3071, Kentucky Statutes, is in part as follows:
"Within the first month of each fiscal year the general council shall, by ordinance, as near as practicable, make all necessary apportionments of the revenue to be raised for such year for the expense of the several departments and for all public works, under proper headings, and for such other objects as it may be necessary to provide for. All ordinances that contemplate the appropriation of any money shall upon their second reading be referred to the appropriate committee of the board in which such ordinances are introduced, who shall obtain the endorsement thereon of the auditor to the effect that sufficient unappropriated means stand to the credit of the fund or revenue account therein mentioned to meet the requirements of such ordinances, and that the same is in the treasury, or it shall not be lawful to pass the said ordinance."
In compliance with this section of the statutes the board of commissioners on January 2, 1925, passed an ordinance apportioning the anticipated revenues for the fiscal year ending December 31, 1925, to the various departments to meet the general expenses of the city for the year. Exclusive of the school fund the anticipated revenues were estimated at $1,152,229.24. The actual revenues received during the year amounted to $1,159,340.14. To the department of public finance was apportioned the sum of $773,985.00, including the following: "Water-works pump fund. To this fund is apportioned the sum of $140,000.00, which shall be used exclusively for the purpose of paying the cost of the installation of a new pump at the waterworks plant."
Section 3175, Kentucky Statutes, is, in part, as follows.
"All taxes and license fees shall be levied or imposed by ordinance and the purpose or purposes for which the same are levied or imposed shall be specified therein, and the revenue therefrom shall be expended for no other purpose than that for which it is collected. Ordinances levying taxes or imposing license fees shall distinctly specify the purpose or several purposes for which the same are levied."
Section 3183, Kentucky Statutes, provides in substance that in the month of March the general council shall pass an ordinance levying an ad valorem tax on the assessed valuation of the property in the city which, with the estimated revenues from other sources, shall be sufficient to meet the anticipated expenditures for the current year, and that the ordinance shall specifically fix the rate of taxation for the estimated expenditures of each department of the city government, and for such other objects and purposes as it may be necessary to provide for. On March 5, 1925, the board of commissioners passed an ordinance levying a tax for the year 1925, section 2 of the ordinance providing: "The tax to be collected under the aforesaid levy is hereby apportioned to and for the exclusive purposes as hereinbefore stated and in accordance with the provisions of commissioner ordinance No. 1573, passed January 2, 1923, entitled 'An ordinance providing for and appropriating the anticipated revenues from all sources for the year ending December 31, 1925, and apportioning same to meet the general expenses of the city of Covington for said fiscal year.' " This ordinance levied 21c on each $100.00 of taxable property for the waterworks pump fund, which levy raised approximately $90,000.00.
The commissioner of public property, pursuant to a resolution adopted by the board of commissioners on February 11, 1925, advertised for bids for the construction of an additional unit at the city waterworks in accordance with plans and specifications that had been adopted, and a number of bids were submitted and opened on March 25, 1925, that of appellee, amounting to $126,937.00, being the lowest. The board of commissioners entered into a contract with appellee on April 30, 1925, and he began work uinder the contract in May, 1925, and received two payments amounting to approximately $28,000.00 for his work, which the contract provided should be paid for as the work progressed at the rate of 90 per cent of the estimates. Before this contract was entered into, in compliance with section 3071, Kentucky Statutes, the commissioner of public finance and the city auditor made the following endorsement upon the ordinance ordering the improvement to be made: "We hereby certify that there are sufficient unappropriated means available to the new pump fund, year 1925, to liquidate the cost of the within improvement."
The question for decision on this appeal is: Did the city of Covington at the time the contract was made with Moore exceed its revenues for the fiscal year 1925, thus bringing the contract within the inhibitions contained in section 157 of the Constitution?
Counsel for appellants in his brief forcefully argues that all of the expenditures for the year 1925 were for necessary governmental purposes and therefore fixed charges, and as they exceeded the revenues for the year as well as the sums appropriated to the various departments by the apportionment ordinance of January 2, 1925, the apportionments were palpably erroneous, and all reventies of the city must first be applied to the payment of these fixed charges; and there being no funds remaining to appropriate to the pump fund, the contract between the city and appellee is invalid.
Conceding for the purpose of argument that all of the expenditures were made for governmental purposes, it cannot be said they were fixed charges in the sense that the amount that would be expended for such purposes during the year was fixed at the beginning of the year. Even in expenditures for governmental purposes the board of commissioners may exercise a certain degree of discretion as to the amount to be expended, except where the amount is fixed by law or contract. In Overall v. City of Madisonville, 125 Ky. 684, 102 S.W. 278, 12 L.R.A. (N.S.) 433, this court said:
"Another complaint is that the city, in order to buy its light plant, neglected to repair its streets, and neglected other governmental duties. There is no evidence in the record to this effect; but, if the charge were sustained, we do not see how that could vitiate its contracts with those who sold it the machinery and other equipment for the light plant. After all, the city council is to judge what public improvements are most needed by the city, and, if all that it needs cannot be got at once, to select that which is the most urgent. If any discretion is to be left in the city council, it is as to such matters. Whether it has criminally neglected its streets, so as to render the city or the members of its council liable to penal prosecution therefor, is not shown, and, if it was, has no place in this litigation."
Appellants fix the amount expended during the year for necessary governmental purposes at $1,184,230.91, which exceeded the total income and revenue for the year $24,890.77. Many of the items making up this total, although representing expenditures for governmental purposes, were not fixed at the beginning of the year as to the amount that might be expended during the year, that being, to some extent, within the discretion of the board of commissioners. Appellants having attacked the validity of the contract with Moore, the burden was on them to establish its invalidity by showing the obligation created by the contract, when added to the anticipated expenditures for the year for necessary governmental purposes and to obligations created by contracts theretofore entered into, would exceed the income and revenue of the city provided for the year. Carter v. Krueger, 175 Ky. 399, 194 S.W. 553; Durrett Construction Company v. Caldwell County, 196 Ky. 158, 244 S.W. 409. If the contract was valid when made it could not thereafter be invalidated by the city by making expenditures for other purposes in excess of its revenue for the year. Persons entering into contracts with a city are bound to take notice of the constitutional limitation and to know the rights and powers of the city officials to make contracts, but they are not bound to anticipate that illegal claims will be incurred by officers willing to violate the Constitution. Southern Bithulithic Company v. DeTreville, 156 Ky. 513, 161 S.W. 560; Carter v. Krueger, supra. Whether the one contracting with the city is acting in good faith may depend on the existence or nonexistence of fraud or mistake on the part of the board of commissioners in passing the apportionment or tax levying ordinances. If the apportionment ordinance materially overestimated the probable receipts of the city from taxes or other sources during the fiscal year or appropriated sums materially less than required to meet charges fixed by law or contract, those contracting with the city would be required to take notice of such error, whether caused by fraud or mistake. No such case is presented here. No fraud is charged or proven kind there is no satisfactory proof the expenditures could not have been kept within the apportionments.
The only evidence introduced by appellants to show the character and amount of expenditures made during the year was furnished by an accountant who had made an examination of the city's books and who merely gave the total expenditures by the various departments of the city without giving the dates when the expenditures were made or when the contracts were entered into which authorized them. Appellants assume that all of the expenditures were indispensably necessary for governmental purposes and therefore fixed at the time the Moore contract was made. A reference to a few of the items given by the accountant will suffice to show the fallacy of such an assumption. The amount expended for street lighting during the year was $72,849.55, the appropriation ordinance having provided $65,000.000 for this purpose. The amount expended for street maintenance and repairs was $90,735.55, and in addition several thousands of dollars were expended for the construction of new streets. The proof does not show when these sums were expended nor does it show the existence or dates of any contracts for lighting or repairing streets. Even if lighting and repairing streets are treated as governmental duties devolving on the city, the board of commissioners has a wide discretion in the amount to be expended for these purposes. If a municipality takes over the operation of a waterworks it becomes its duty to supply its inhabitants with a plentiful supply of pure water as well as to light and repair its streets for their convenience and safety, and to carry out this duty it may become necessary to reduce the expenditures for other, though desirable, purposes. The proof as to the character and amount of the expenditures for all other purposes during the year is subject to the same criticism as the proof relative to expenditures for lighting and repairing the streets. As said by the chancellor in his opinion when referring to the evidence:
"There is not any witness who testified to any facts as to what expenditures were made in the previous year for that purpose (repairing streets), only a general statement of a witness that they were not unusual. This is applicable throughout to such items as were sought to be made fixed charges by a mere comparison of expenditures for those purposes in the previous year. This would be wholly insufficient as proof, even if the nature of the expenditure would be susceptible of being made a fixed charge by such comparison."
The appellants fail to show the state of the city's finances at the time when the Moore contract was made, and from the record it is impossible to determine the date when the revenues of the city for the year were exceeded. It is clear that the board of commissioners violated section 157 of the Constitution at some time during the year, but the burden was upon appellants to establish that this was done at or before the time the Moore contract was made. In Durrett Construction Company v. Caldwell County, supra, this court said:
"Nor have we been able to observe any merit in the defense that the fiscal court, in letting the contract, exceeded its authority under section 157 of the Constitution. The determination of that question depends on the facts in evidence, for it is certainly true that, if the appropriation for the work, whatever amount was done, exceeded the expendable revenues of the county for the year, to that extent there can be no recovery on the contract. Nevertheless, it was obligatory on the county to establish its defense in this respect, as it will be presumed that the fiscal court acted within its authority in letting the contract. And it may be stated here that the defense cannot be established by merely showing what the county received and expended for the year, but the state of the county finances at the date when the contract was made must also be shown. To meet this requirement it was necessary for the county to show what indebtedness it had incurred prior to the making of the contract, and also the total of the county's fixed constitutional and statutory expenses for the balance of the year. . . . The exhibit filed by the county clerk, showing the amount of taxes collected and the expenditures made, is wholly insufficient to meet these requirements, and this is true, even if the alleged indebtedness of approximately $19,000.00, brought over from preceding years, be considered in arriving at the fixed expenses for the year 1915. It is not shown in the statement of expenditures for that year when the appropriations for the expenditures were made, with reference to the date of the contract in question, and therefore, the priority of right as between them and the indebtedness in dispute here is unascertainable. In view of these deficiencies in the proof, the presumption that the fiscal court acted within its constitutional authority is conclusive.
The facts in this case bring it within the rule announced in the Durrett Construction Company case. The contract on its face is valid. At the time it was made all statutory requirements had been complied with. Sufficient funds had been apportioned for the work covered by the contract, a tax levied and the proper officials had certified there was a sufficient sum in the fund to meet the requirements of the contract. While the tax levied did not raise a sum equal to the amount of the contract the city received large revenues not raised by the tax levy, and these revenues were considered when the apportionment was made. The appellee has done all in his power to protect himself and he should not suffer when the evidence fails to show that all or any part of the fund that should have been applied on his contract was expended for indispensable governmental purposes.
The finding of the chancellor being in accordance with the views herein expressed, the judgment is affirmed.