APPEAL from a judgment of the Superior Court of Sacramento County, Loren E. McMaster, Judge. Affirmed. (Super. Ct. No. 07AS03613).
The opinion of the court was delivered by: Hull, J.
CERTIFIED FOR PUBLICATION
In response to severe overcrowding in the state's prison system, the Legislature enacted Assembly Bill No. 900 (2007-2008 Reg. Sess.), the Public Safety and Offender Rehabilitation Services Act of 2007 (AB 900 or the Act), authorizing the California Public Works Board (board) to issue up to approximately $7.4 billion in bonds for the construction and renovation of prisons to be operated by the California Department of Corrections and Rehabilitation (CDCR).
Plaintiffs, Taxpayers for Improving Public Safety, Gail Brown, and Matt Gray, initiated this taxpayer lawsuit against Arnold Schwarzenegger, in his capacity as the Governor of California, James Tilton, in his capacity as the Secretary of the CDCR, and John Chiang, in his capacity as the State Controller, asking for declaratory and injunctive relief to bar implementation of AB 900. Plaintiffs allege the proposed bonds will violate article XVI, section 1, of the California Constitution (article XVI, section 1 or the state debt limit), which prohibits the Legislature from creating any debt that exceeds an allowable maximum without obtaining a two-thirds vote of the Legislature and a majority vote of the people.
Defendants demurred to the complaint, and the trial court sustained the demurrers without leave to amend. The court concluded that, because bonds issued by the board under AB 900 will be repayable solely from a special fund maintained through lease payments received by the board from CDCR, no debt will be created within the meaning of the state debt limit.
Plaintiffs contend the trial court erred, because (1) a declaratory relief claim is not subject to demurrer; (2) the complaint states a claim under article XVI, section 1; and (3) they should have been granted leave to amend in order to present evidence supporting their claim.
We conclude that, while plaintiffs' declaratory relief claim may not have been subject to demurrer, we may nevertheless resolve the legal issue presented by that claim.
We further conclude defendants' demurrers to the complaint were properly sustained. The underlying purpose of the state debt limit is to force government to operate within its means. Consistent with this purpose, the courts have carved out a number of "exceptions," including one where the state undertakes an obligation to make periodic payments that are contingent on the future use or availability of property, goods, or services. The most common example of this contingency exception is where the state enters into a long-term lease of property and future lease payments are contingent on future availability of the property.
Because plaintiffs have mounted a facial challenge to the Act, it must be upheld if there is any way the Act may be implemented that would not violate the state debt limit. As we shall explain, we conclude the Act may be implemented in such a way as to fall within the contingency exception. The Act provides for the construction of prison facilities financed by bonds to be repaid from the state's general fund. Those bonds may be structured in such a way that future periodic payments are contingent on future use or availability of the facilities. Hence, the state has not undertaken an obligation that offends the pay-as-you-go principle underlying the state debt limit.
Finally, we conclude defendants' demurrers were properly sustained without leave to amend, because a demurrer tests the adequacy of the complaint's allegations, not whether plaintiffs can produce evidence to support those allegations. We therefore affirm the judgment of dismissal.
Overcrowded prisons are nothing new to California. In 1985, 47,082 State prisoners were housed in facilities designed to hold only 29,042. (Carlin, Chapter 252: Helping to Manage California's Overcrowded Jails (2008) 39 McGeorge L. Rev. 602, 603, fn. 8.) By 2007, the prison population had increased to approximately 173,000, while the prison capacity had grown to only half that amount. (Muradyan, Government: California's Response to Its Prison Overcrowding Crisis (2008) 39 McGeorge L.Rev. 482, 485.) It has been suggested this increase in prison population has been due to several factors, including enactment of the Determinate Sentencing Law, which tended to increase terms for most offenses, the three strikes law, and the State's parole and rehabilitation systems. (Id. at 485-487.) Prison overcrowding has prompted federal class action lawsuits attacking the adequacy of medical and mental health care provided by CDCR. (See id. at pp. 487-488.) On February 14, 2006, in Plata v. Schwarzenegger, No. C01-1351 TEH, the United States District Court for the Northern District of California took the drastic step of appointing a receiver to take control of the delivery of medical care within the state's prisons. (We grant defendants' request for judicial notice of the federal court's February 14 order, attached as exhibit B to defendants' May 27, 2008 Request for Judicial Notice. We also grant defendants' request for judicial notice of exhibits C and D, which are federal court orders convening a three-judge panel to consider the release of prisoners as a remedy for overcrowding. The trial court previously took judicial notice of each of these items. (See Evid. Code, § 459, subd. (a)(1).))
To address the prison overcrowding problem, the Governor called a special session of the Legislature in the summer of 2006. However, this failed to produce any meaningful improvements. (California Correctional Peace Officers Assn. v. Schwarzenegger (2008) 163 Cal.App.4th 802, 809.) On October 4, 2006, the Governor issued a proclamation directing the CDCR to mitigate overcrowding in 29 state prisons by transferring inmates to out-of-state correctional facilities. (We grant defendants' request for judicial notice of this proclamation, attached as exhibit A to defendants' Request for Judicial Notice. The trial court previously took judicial notice of this item as well.) The proclamation said there were more than 15,000 inmates being housed in areas of the indicated prisons that were "never designed or intended for inmate housing, including, but not limited to, common areas such as prison gymnasiums, dayrooms, and program rooms," thereby posing substantial health and safety risks to both inmates and prison employees. According to the proclamation, "in addition to the 1,671 incidents of violence perpetrated in these 29 severely overcrowded prisons by inmates against CDCR staff last year, and the 2,642 incidents of violence perpetrated in these prisons on inmates by other inmates in the last year, the suicide rate in these 29 prisons is approaching an average of one per week."
The following year, the Legislature enacted AB 900. The Act adds two chapters to part 10b, division 3, title 2 of the Government Code, the State Building Construction Act of 1955 (the State Building Construction Act or SBCA) (Gov. Code, § 15800 et seq.; further undesignated section references are to the Government Code). As recently amended by Senate Bill No. 14 (2008-2009 Reg. Sess.), AB 900 authorizes CDCR to design, construct, or renovate housing units, support buildings, and programming space at new or existing prisons to accommodate an additional 12,000 beds, to design, construct and renovate re-entry program facilities to house 6,000 inmates, and to design, construct and establish new buildings at facilities to provide medical, dental, and mental health treatment or housing for 6,000 inmates. (§ 15819.40, added by Stats. 2007, ch. 7, § 2, amended by Stats. 2009, ch. 16, § 1.) It also authorizes CDCR, the board, and participating counties to acquire, design and construct local jail facilities. (§ 15820.901, added by Stats. 2007, ch. 7, § 4.) The Act requires CDCR to implement a system of incentives to increase inmate participation in academic and vocational education (Pen. Code, § 2054.2, added by Stats. 2007, ch. 7, § 6), to develop and implement a plan to obtain additional rehabilitation and treatment services (id., § 2062, added by Stats. 2007, ch. 7, § 8), to expand substance abuse treatment services to accommodate at least 4,000 additional inmates (id., § 2694, added by Stats. 2007, ch. 7, § 10), to develop an inmate treatment and prison-to-employment Plan (id., § 3105, added by Stats. 2007, ch. 7, § 13), and to implement a plan to address management deficiencies within CDCR (Id., § 2061, added by Stats. 2007, ch. 7, § 7). Finally, the Act authorizes the board to issue revenue bonds to finance the foregoing. (Gov. Code, §§ 15819.403, subd. (a), 15819.413, subd. (a), 15820.903, subd. (a), 15820.913, subd. (a), added by Stats. 2007, ch. 7, §§ 2 through 5, amended by Stats. 2009, ch. 16, §§ 2, 9, 12.)
Plaintiffs initiated this action seeking to prevent implementation of the Act. As noted, the complaint contains two causes of action, one asking for declaratory relief and one asking for an injunction. Plaintiffs allege defendants "seek to sell revenue bonds for the purpose of constructing prisons and jail cells in California . . . ." They further allege a present controversy exists between them and defendants, in that plaintiffs contend issuance of the bonds would violate article XVI, section 1, whereas defendants contend they are entitled to issue such bonds under exceptions to the state debt limit.
Plaintiffs moved for a preliminary injunction, but their motion was denied. Defendants then demurred to the complaint on the ground that it fails to state a claim.
The trial court sustained the demurrers without leave to amend. The court concluded that only obligations that are legally enforceable against the state's general fund or taxing power are covered by the constitutional debt limit, and bonds issued under the Act would not be legally enforceable against the state's general fund but only against rent payments received from CDCR. Plaintiffs appeal from the ensuing judgment of dismissal.
A. Overview of the Constitutional Debt Limits
To aid in analyzing the Act and addressing the contentions of the parties, we first discuss the legal framework under which AB 900 was enacted.
The California Constitution contains two general constraints on borrowing to finance governmental activities. Article XVI, section 18 of the California Constitution (sometimes referred to as the local debt limit) applies to local governments. (Further references to articles are to the California Constitution.) It reads in relevant part: "No county, city, town, township, board of education, or school district, shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the voters of the public entity voting at an election to be held for that purpose . . . ." The counterpart for state government is article XVI, section 1. It reads in relevant part: "The Legislature shall not, in any manner create any debt or debts, liability or liabilities, which shall, singly or in the aggregate with any previous debts or liabilities, exceed the sum of three hundred thousand dollars ($300,000), except in case of war to repel invasion or suppress insurrection, unless the same shall be authorized by law for some single object or work . . . ; but no such law shall take effect unless it has been passed by a two-thirds vote of all the members elected to each house of the Legislature and until, at a general election or at a direct primary, it shall have been submitted to the people and shall have received a majority of all the votes cast for and against it at such election . . . ."
The underlying purpose of these debt limits is to force government to operate within its means. (State ex rel. Pension Obligation Bond Com. v. All Persons Interested etc. (2007) 152 Cal.App.4th 1386, 1398 (Pension Obligation); Pooled Money Investment Bd. v. Unruh (1984) 153 Cal.App.3d 155, 160.) Hence, they have been viewed more accurately as balanced budget requirements than debt limits. (Rider v. City of San Diego (1998) 18 Cal.4th 1035, 1045 (Rider II); Pension Obligation, at p. 1398.) As explained by the State Supreme Court more than 150 years ago: "The power of taxation was given to the Legislature, without limit, for all purposes allowed by the Constitution, and the framers of that instrument knew that it was not the practice of governments, well conducted, to borrow money for the ordinary expenses of government. These expenses are regular and certain, and can easily be provided for by taxation. In reference to such expenses, there is no cause for surprise upon the Legislature. It is easy to anticipate their amount with a reasonable degree of certainty, and the framers of the Constitution knew that if they permitted the Legislature to borrow money to defray the ordinary expenses of the government, it would not be long before the State must be brought practically to rely upon the yearly revenue; for the reason, that a yearly deficit of the revenue would soon destroy the credit of the State, so that she could not borrow for any such purpose. A family, or State, that borrows to pay ordinary expenses, must soon have no power to borrow; and as the State, from the very nature of the case, must sooner or later come to the point of 'paying as you go,' it was wise in the framers of our Constitution, to bring her to it at an early period." (Nougues v. Douglass (1857) 7 Cal. 65, 68, italics omitted.)
Consistent with the underlying purpose of the constitutional debt limits, the courts have carved out a number of "exceptions." Although, in each instance, the so-called "exception" is fundamentally a recognition that the transaction or legislation in question does not create a "debt" owed by the governmental entity within the meaning of the debt limit provisions, but is instead a payment arrangement that falls entirely outside of those provisions, we will refer to them as "exceptions" as others have done before us. In any event, as a general rule, such a debt subject to debt limitations arises only if a financial obligation is created that must be satisfied from the governmental entity's general funds or taxing power. (City of Oxnard v. Dale (1955) 45 Cal.2d 729, 737.)
For example, in San Francisco S. Co. v. Contra Costa Co. (1929) 207 Cal. 1, the state high court found the local debt limit inapplicable where the county issued bonds for the improvement of streets and the bonds were to be repaid through special assessments on the properties benefiting from the improvements. (Id. at pp. 4-5.) Because the bonds were to be repaid from this special fund rather than the county's general fund, no prohibited debt had been created.
In California Educational Facilities Authority v. Priest (1974) 12 Cal.3d 593, the high court applied this special fund exception to the state debt limit. There, legislation created the California Educational Facilities Authority for the purpose of issuing revenue bonds to provide funding for expansion by institutions of higher education. The legislation authorized the authority to acquire land and construct or rehabilitate facilities and to lease those facilities to the educational institutions. The bonds were to be repaid solely from the lease payments; the authority was given no power to tax or appropriate public funds for this purpose. (Id. at pp. 596-597.) The high court concluded that, because the bonds were to be repaid solely from a special fund maintained from lease payments, no state debt had been created. (Id. at p. 607.)
Another exception to the constitutional debt limits has been recognized where the governmental entity enters into a contingent obligation. "A sum payable upon a contingency is not a debt, nor does it become a debt until the contingency happens." (Doland v. Clark (1904) 143 Cal. 176, 181.) This contingency exception has been applied to uphold multiyear contracts, such as leases, where the governmental entity agrees to pay sums in succeeding periods in exchange for property, goods, or services to be provided during those periods. (Pension Obligation, supra, 152 Cal.App.4th at p. 1398.) Each periodic payment is viewed as a contemporaneous payment for the property, goods, or services received rather than an installment payment on a long-term debt.
For example, in City of Los Angeles v. Offner (1942) 19 Cal.2d 483 (Offner), the city proposed to enter into an agreement whereby the city would lease real property to a private entity for 10 years and the private entity would construct an incinerator on the property and lease the property and the incinerator back to the city. The agreement further provided the city with an option to purchase the incinerator at various intervals during the lease. (Id. at pp. 484-485.)
The Supreme Court rejected a challenge to this transaction under article XI, section 18, explaining: "[I]f the lease or other agreement is entered into in good faith and creates no immediate indebtedness for the aggregate installments therein provided for but, on the contrary, confines liability to each installment as it falls due and each year's payment is for the consideration actually furnished that year, no violence is done to the constitutional provision." (Offner, supra, 19 Cal.2d at p. 486.)
In Dean v. Kuchel (1950) 35 Cal.2d 444 (Dean), the high court took Offner's contingency exception one step further, applying it where, at the end of the lease term, title transferred automatically to the governmental entity. In Dean, the legislation authorized the state to lease real property to a private entity for up to 40 years under the condition that the entity construct a building or buildings on the property for use by the state and that title to such building pass to the state at the end of the lease term.
The high court rejected a challenge to this scheme under article XVI, section 1. The court said: "We find no logical distinction between the Offner case and the one at bar. It is true that there was an option to purchase in the former rather than a vesting of title at the end of the term in the instant case, but as far as liability is concerned, the state under the instrument here is in a better position, for it gets title without the payment of anything other than the rental. The essence of the Offner rule is that the payments are for a month-to-month use of the building. Here it is clearly stated that the rentals are for that purpose. There is no substantial or logical difference between the option to purchase in the Offner case and the vesting of title at the end of the term in this case. True, the city was not bound to execute the option and thus pay the purchase price, but it was required to pay the rentals. Here the rentals also must be paid but the state need not pay any more. We are satisfied therefore that the instant transaction qualifies as a lease for the purpose of the debt limitation." (Dean, 35 Cal.2d at pp. 447-448.)
A third exception to the constitutional debt limits has been recognized for obligations imposed by law. In Lewis v. Widber (1893) 99 Cal. 412, 415, the court concluded a county's obligation to pay its treasurer's salary was exempt from the local debt limit because the office was mandated by state law. The court explained the debt limit applies "only to an indebtedness or liability which one of the municipal bodies mentioned has itself incurred--that is, an indebtedness which the municipality has contracted, or a liability resulting, in whole or in part, from some act or conduct of such municipality." (Id. at p. 413.) According to the court: "[T]he stated salary of a public officer fixed by statute is a matter over which the municipality has no control, and with respect to which it has no discretion; and the payment of his salary is a liability established by the legislature at the date of the creation of the office. It, therefore, is not an indebtedness or liability incurred by the municipality within the meaning of said clause of the constitution." (Ibid.)
In County of Los Angeles v. Byram (1951) 36 Cal.2d 694 (Byram), the court held the cost of constructing a courthouse was not subject to the constitutional debt limit, because the county had a legal duty, imposed by state law, to provide "adequate quarters" for the court. (Id. at p. 699.) By contrast, in Arthur v. City of Petaluma (1917) 175 Cal. 216, the court concluded a debt incurred to print a city charter did not fall within the "obligation imposed by law" (Byram, at p. 698) exception. Although state law required a city to print its charter in a local newspaper for 20 days whenever it chose to adopt a charter, the city's decision to adopt a charter was itself discretionary. In other words, the obligation to pay the printing charge came about only because the city voluntarily chose to adopt the charter. Hence, this was not an obligation imposed by law. (Arthur, at p. 225.)
The last exception to the constitutional debt limit involves circumstances where, at the time a debt is created, the governmental entity makes an appropriation to retire the debt. This appropriation exception "provides that an obligation for which an appropriation is made at the time of its creation from existing funds, or reasonably anticipated funds subject to appropriation, is not within the constitutional ...