September 19, 2006
Dear City Manager:
I have reviewed your proposed resolution on the conveyance of a portion of the city building to the utility department to satisfy the city’s debt to the utility department, which is essentially the purpose of the conveyance.
As I have told you on the telephone a couple of times, I’ve spent considerable time researching the question of whether the city can convey its property in the manner and for the purpose reflected in the resolution. I cannot find a single case in the United States where a similar conveyance has been an issue, let alone resolved in one way or the other.
Generally, municipalities have broad discretion over the sale and lease of their property if their charters or the general laws which govern them give them the authority to sell and lease their property. In State ex rel. Association for the Preservation of Tennessee Antiquities v. City of Jackson, 573 S.W.2d 750 (Tenn. 1978), the Tennessee Supreme Court upheld a long-term lease by the City of Jackson to Association for the Preservation of Tennessee Antiquities of the Casey Jones Railroad Museum, which the city owned. The museum had been operating at a considerable financial loss for the city. The Court reasoned that:
In the present case no question is raised as to the legality of the initial acquisition of the “Casey Jones Museum” by the City of Jackson or the property of its subsequent use by the City for the combined cultural, commercial and educational purposes shown in the record. It seems to use, therefore, at a minimum, that it was a matter of judgment to be exercised by the duly elected City officials as to whether the continued operation of that facility at a financial loss was or was not in the public interest and as to whether the leasing of the facility for operation under private management was or was not a suitable alternative. We find no abuse of discretion by the City officials in their decision to permit the removal of the residence and artifacts from their original site. The lease amply secures the City in the event of a default by tenant. The City may then terminate the lease short notice and require the tenant to restore the properties to the original site or to any other public location. No question is raised in the present record as to the solvency or responsibility of the tenant.
Insofar as prior cases have held that cities are without authority to dispose of publically owned facilities by lease, sale or otherwise, where the properties are held in a “governmental capacity,” we are of the opinion that each case must be examined in light of its own facts and circumstances. Obviously cities must be and legally are free, within their charter provisions, to dispose of outmoded, surplus or unprofitable properties, where these are not held under a grant imposing a specific trust or other limitation upon ownership or use. [Emphasis is mine.]
In the present case the Jackson charter expressly confers upon the city, without limitation, the authority:
“To acquire or receive and hold, maintain, improve, sell, lease, mortgage, pledge, or otherwise dispose of any property, real or personal, and any estate or interest therein, within or without the City or State.”
The charter also contains language that its terms are not to be deemed restrictive and that they shall be construed “...so as to permit the City to exercise freely any one or more such powers as to any one or more such objects for any one or more of such purposes.”
We are not prepared to decide this case solely upon the proposition that the City may have acquired and held the “Casey Jones Museum” in part at least, in a “proprietary” capacity. On the other hand, we are of the opinion that appellants have failed to demonstrate that the subject lease is contrary to the public interest, that it represents a misuse or abuse of the discretion and authority of the Board of Commissioners, or that it is in any other way ultra vires or beyond the legitimate charter powers of the City. [At 775]
Also see Fulton County Board of Education v. Citizens for Education and the Environment, 552 S.E. 483 (Ga. Ct. App. 2002); Cooper v. South Carolina Public Service Authority, 215 S.E.2d 197 (S. Car. 1975).
There is no question but that a city owns and operates a city hall in its governmental capacity. (However, generally, utilities are owned and operated in a proprietary capacity). But Association for the Preservation of Tennessee Antiquities stands for the proposition that the governmental/proprietary distinction is not the key to determining whether a sale of municipal property is legal. The key to the legality of the sale is whether it is “contrary to the public interest, that it represents a misuse or abuse of discretion, or that it is in any other way ultra vires or beyond the legitimate charter powers of the city.”
Your City is chartered under the general law manager-commission charter found at Tennessee Code Annotated, § 6-18-101 et seq. Section 6019-101(8) gives the city the power to “Acquire or receive and hold, maintain, improve, sell, lease, mortgage, pledge, or otherwise dispose of property, real or personal, and any estate or interest therein, within or without the city or state.” That provision of the charter gets the city past the threshold question of whether the city has the charter authority to alienate its property, in this case, to sell it.
The question of whether the sale of the property under the circumstances is an abuse of discretion on the part of the board of commissioners, is more difficult to answer. In fact, I have wrestled with that question for a long time. It is fairly common for municipalities and utilities to jointly own buildings they use for both city hall and utility operational purposes, or for one of them to lease space in the city hall or utility building of the other. There is nothing inherently illegal in those arrangements. In few, if any of such cases, is there a question of an abuse of discretion on the part of the municipality’s governing body, or on the part of the utility.
The reason that there is a strong possibility of an abuse of discretion on the part of Your City’s governing body in making and accepting the conveyance of a part of the city hall in payment of the city’s debt to the utility is that the arrangement rests on an illegal loan of money made by the utility to the city, which loan was undoubtedly prohibited by Tennessee Code Annotated, § 7-34-115. Subsection (a) of that statute provides that:
Notwithstanding the provisions of any other law to the contrary, as a matter of public policy, municipal utility systems shall be operated on sound business principles as self-sufficient entities. User charges, rates and fees shall reflect the actual cost of providing the services rendered. No public works shall operate for gain or profit or as a source of revenue to a governmental entity, but shall operate for the use and benefit of the consumers served by such public works and for the improvement of the health and safety of the inhabitants of the areas served. Nothing in this section shall preclude a municipality from subsidizing, in accordance with the adopted budget of the municipality, a public works system with tax revenues.
The same subsection further provides that: “Any municipality shall devote all revenues derived from a public works to or for: [There follows a list of expenditures that public utilities can make.] None of the expenditures on that list contemplate loans or gifts of money to the general city government.
Finally, subsection (f) of the same statute provides that:
If a municipality violates the provisions of this section, it must repay any funds illegally transferred. If the municipality does not have sufficient funds to repay any funds illegally transferred, the municipality is required to submit a plan covering a period not to exceed five (5) years in which to repay the funds. The plan shall be submitted to and approved by the director of local finance in the office of the comptroller of the treasury. Upon discovery of such violation through an audit, any city official in violation of this section is subject to ouster under title 8, chapter 47.
That provision makes clear the serious nature of using a municipal utility as a municipal cash cow. I am not suggesting that the present board of commissioners was responsible for the borrowing of the money, but regardless of which board of commissioners borrowed the money, the utility has become a “source of revenue” for the city in violation of Tennessee Code Annotated, § 7-34-115(a)
It can also be argued that the language, “If the municipality does not have sufficient funds to repay and funds illegally transferred [to the municipality], the municipality is required to submit a plan covering ring a period not to exceed five (5) years in which to repay the funds,” does not contemplate the city’s repayment of the funds through the conveyance of property, but in money.
It recently struck me that there are probably not one, but two, possible avenues for an abuse of discretion in Your City’s case. The first one involves the conveyance of part of the city’s building to the utility by the board of commissioners acting as the city’s governing body, to satisfy the city’s debt to the utility system. The second one involves the acceptance of the conveyance by the board of commissioners acting as the operator of the city’s utility system, in satisfaction of the debt. Some municipal utility systems in Tennessee have separate utility boards that run the city’s utility systems. In such cases there is at least a degree of independence on the part of the utility system with respect to the contracts and agreements into which it enters. In the City, the board of commissioners is both the city’s governing body and the operator of the utility system. For that reason, where there is an illegal debt created such as the one at issue, the board of commissioners almost has an irreconcilable conflict of interest in settling the debt. For that reason, it appears to me that the question of whether the conveyance of property in the manner proposed by the city is an abuse of discretion would be subject to an even greater level of scrutiny on the part of the courts.
Under the resolution the utility would own a portion of the building commensurate with the debt the city owes it from which the utility will operate its utility functions. At first glance, based on the appraisal of the building reflected in the resolution, and assuming that the proportional allocation of the building to the utility reflects roughly what the city owed the utility, the utility would get the dollar value of the city’s debt from the conveyance. But a second glance suggests that might not be true. I am not an expert in the valuation of real property interests, but it occurs to me that in many, if not most cases, if property, including buildings and land, is appraised at, say $5,000,000, including the surrounding property, and equal parts of only the building are conveyed to the five tenants, none of the tenants are conveyed property worth $1,000,000 each. I also suspect that might be true even if the land surrounding the building is included in the conveyance to each of the five tenants in equal shares. It is a case of the divided parts not being equal to the sum of the whole. In short, I am not sure that the utility would receive in the conveyance of the part of the building it uses, the value of the dollars the city borrowed from it.
The illegal borrowing of the money by the city board of Commissioners from the utility may be so serious a violation of Tennessee Code Annotated, § 7-34-115, that the conveyance to the utility of the portion of the city building it uses in satisfaction of the city’s debt to the utility might questionable under the best of circumstances. But it also appears to me that the city may have a difficult time makes the cases for the proposition that the city’s debt to the utility is being satisfied by the conveyance.
That is the best answer I can give to your question.
Sidney D. Hemsley
Senior Law Consultant