FEATURE ARTICLE

Non-Referendum Bonds Can Be Used to Pay Alternate Bonds

State appellate Court ruling Upholds the legality of a Long-standing Practice

by Heidi A. Katz, J.D. and Lynda K. Given, J.D.

Districts that use non-referendum general obligation bonds as a revenue source for servicing the debt on alternate bonds now have an appeals court decision they may use as a precedent to defend themselves against corporate taxpayers that file tax rate objections in such instances.

The Illinois Second District Appellate Court's ruling stems from the case of Commonwealth Edison Co. v. People ex rel. John H. Coffman, County Treasurer and ex officio County Collector of Ogle County. In that case, Commonwealth Edison argued that the Byron Forest Preserve District improperly used general obligation bonds to pay the debt service on alternate bonds used to build an 18-hole golf course for Ogle County residents and other members of the public.

But the Ogle County Court and, just this spring, the Illinois Appellate Court rejected ComEd's argument, saying that the Byron Forest Preserve acted within its authority as described in the Local Government Debt Reform Act (30 ILCS 350/1 et seq) and the Downstate Forest Preserve District Act (70 ILCS 805/13).

In this article, we will review the facts of the case and theories advanced by Commonwealth Edison in objecting to the district's tax levies. We will then set forth the appellate court's rationale for rejecting ComEd's argument, and we will discuss the Coffman decision's implications.

The District's 1989 and 1998 Alternate Bonds for Golf Course Development

On December 21,1989, the Board of Commissioners of the Byron Forest Preserve District, acting under Section 15 of the Debt Reform Act, adopted an ordinance authorizing the issue of $3,525,000 General Obligation Land Development Bonds (Alternate Revenue Source) for the purpose of developing forest preserve lands held by the district, including acquiring, constructing and equipping an 18-hole golf course.

Consistent with the Debt Reform Act requirements, the ordinance provided that the 1989 alternate bonds would be payable from two sources. The first was a "revenue source," which the Debt Reform Act defines broadly to include "a source of funds, other than enterprise revenues, received or available to be received by a governmental unit and available for any one or more of its corporate purposes." The revenue source pledged to the payment of the 1989 alternate bonds consisted of principal proceeds the district might from time to time receive from issuing its general obligation bonds as

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NON-REFERENDUM BONDS CAN BE USED TO PAY ALTERNATE BONDS

allowed by law (including Section 13 of the Downstate Forest Preserve District Act) and from such other district funds as might be lawfully available and annually appropriated for such payment. The second potential source of payment would come from property taxes levied in the district, without limit as to rate or amount.

The 1989 alternate bonds were issued after the district complied with the backdoor referendum procedure mandated by the Debt Reform Act. The Act requires, among other steps, publication of an authorizing ordinance and a notice of intent to issue the bonds, including the fact that the revenue source to be used to pay the bonds would include proceeds of non-referendum bonds to be issued from time to time as allowed by law. At that time, the district's voters could have challenged the district's funding plan by gathering a prescribed number of eligible signatures on a petition to force the issue to be submitted for a referendum. But the voters of the district did not seek a backdoor referendum on the issuance of the l989 alternate bonds.

Nine years later, the board adopted another ordinance authorizing the issue of $3,120,000 General Obligation Bonds, Series 1998 (Alternate Revenue Source) for the purpose of refunding the then-outstanding 1989 alternate bonds, so as to restructure the district's existing land development indebtedness. Like the 1989 alternate bonds, the 1998 alternate bonds were payable from: (1) a revenue source consisting of the principal proceeds the district might in the future receive from issuing its general obligation bonds as allowed by law including those permitted by the Downstate Forest Preserve District Act and such other district funds as might be lawfully available and appropriated for such payment; and (2) an unlimited property tax.

As with the 1989 alternate bonds, local electors did not seek a backdoor referendum on the proposed issuance of the 1998 alternate bonds.

The District's Non-referendum General Obligation Bonds Issued To Pay the Alternate Bonds

In November 1997, in accordance with the Downstate Forest Preserve District Act, the district issued non-referendum general obligation bonds to pay the December 1997 and June 1998 semiannual principal and interest payments on the 1989 alternate bonds. Similarly, the district issued more non-referendum general obligation bonds in 1998,1999 and 2000 to make principal and interest payments coming due on the 1998 alternate bonds.

These non-referendum general obligation bonds were issued in compliance with the provisions of the authorizing ordinances for the 1989 and 1998 alternate bonds, each of which pledged proceeds of future general obligation bond issues as a revenue source for the repayment of the alternate bonds. No referendum to approve the 1997,1998, 1999 and 2000 general obligation bond issues was required because none of the issues caused the district to incur indebtedness exceeding 0.3 percent of its equalized assessed valuation, which is the debt limit that might otherwise trigger a referendum for land development bonds under the Downstate Forest Preserve District Act.

Objections to the District's Tax Levies for Bond and Interest Purposes

Commonwealth Edison Company filed tax rate objections to the district's 1997,1998 and 1999 tax levies made for purposes of paying the principal and interest on the general obligation bonds. ComEd argued that: (1) the general obligation bonds were unlawful "refundings" of the 1989 and 1998 alternate bonds; and (2) the district had to submit the non-referendum general obligation bonds to referendum before they could legally be issued pursuant to the terms of the Downstate Forest Preserve District Act.

The court held that the Downstate Forest Preserve District Act clearly empowers forest preserve districts to own and operate golf courses and that the Byron Forest Preserve District had followed the Debt Reform Act's requirements in procuring the funds needed to enable it to acquire land and develop the golf course in Ogle County.

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NON-REFERENDUM BONDS CAN BE USED TO PAY ALTERNATE BONDS

Court Rulings on the Objections

The Fifteenth Judicial Circuit Court judge rejected both of the arguments advanced by the taxpayer when he granted the Ogle County collector's motion for summary judgment on the tax rate objections in December 2001.

Commonwealth Edison Company appealed, reiterating the theories it had asserted in the lower court and adding a third argument-namely, that the non-referendum general obligation bonds were not issued for the purpose of "development of forest preserve lands." However, in a decision published on April 9, 2003, the Illinois Appellate Court for the Second Judicial District affirmed the lower court's ruling.

Writing for a unanimous Second District panel. Justice John O'Malley found no merit in ComEd's claim that the non-referendum general obligation bonds amounted to unlawful refundings of the -1989 and 1998 alternate bonds. In response to the contention that the district had violated the Debt Reform Act's prohibition on issuing general obligation bonds to refund alternate bonds "except as expressly permitted by applicable law," the court observed that the district's ordinances authorizing the issuance of the 1989 and 1998 alternate bonds pledged future general obligation bonds as a revenue source by which to pay the alternate bonds, and added:

The language of section 3(1) of the Debt Reform Act is broad enough to encompass the issuance of general obligation bonds to provide such a revenue source for the 1989 and 1998 alternate bonds. The Forest Preserve's use of the 1997-2000 G.O. bonds to provide a revenue source for the 1989 and 1998 alternate bonds was specified in the enabling ordinance for each bond issue as well as authorized under the Debt Reform Act. Plaintiff's argument that the 1997-2000 G.O. bonds were issued unlawfully is unavailing....Because the bonds are plainly "revenue sources" as contemplated by section 3(1) of the Debt Reform Act, they were properly issued.

The court also confirmed that the district was not obliged to ask voters to approve the general obligation bond issues in question.

Finally, the court held that the Downstate Forest Preserve District Act clearly empowers forest preserve districts to own and operate golf courses and that the Byron Forest Preserve District had followed the Debt Reform Act's requirements in procuring the funds needed to enable it to acquire land and develop the golf course in Ogle County.

With all three arguments turned back by the court. Commonwealth Edison did not seek to appeal the Second District's decision to the Illinois Supreme Court.

Significance of the Coffman Decision

The court of appeals concluded its ruling by recognizing that:

The Debt Reform Act was intended to modernize the ability of local governmental units to incur indebtedness and to provide a supplemental means for them to do so ... The Forest Preserve could properly avail itself of the benefits of the Debt Reform Act while pursuing a proper corporate purpose as enumerated in the Downstate Act.

Since the enactment of the Debt Reform Act in 1989, numerous Illinois park districts have issued alternate bonds to fund capital improvements. In many circumstances, the revenue source pledged to the payment of the alternate bonds includes proceeds derived from the annual or semi-annual issuance of non-referendum bonds to pay debt service on the alternate bonds. The Coffman decision validates this practice.

Author Heidi A. Katz of Robbins, Schwartz, Nicholas, Lifton & To/for, Ltd., and co-author Lynda K. Given's colleague David T.B. Audley of Chapman and Cutler, LLP, represented the Collector as Special Assistant State's Attorneys for Ogle County in the Coffman appeal.

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