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March 24, 1959


Appeal, No. 344, Jan. T., 1958, from order of Court of Common Pleas of Lancaster County, Equity Docket No. 11, page 314, in case of Elmer L. Beam et ux. v. Borough of Ephrata et al. Order modified and affirmed.


B. M. Zimmerman, with him Brown & Zimmerman, for appellants.

George F. Baer Appel, with him F. Lyman Windolph and Townsend, Elliott & Munson, for appellees.

Before Jones, C.j., Bell, Musmanno, Jones and Cohen, JJ.

Author: Cohen

[ 395 Pa. Page 349]


This taxpayers' suit was brought to restrain the Borough of Ephrata and the individual members of the borough council from issuing $350,000 of non-debt revenue bonds, complaining if the bonds were issued a debt would be created in violation of the debt limitation

[ 395 Pa. Page 350]

    provision of the Pennsylvania Constitution.*fn1 The lower court sustained preliminary objections to the complaint in equity from which decree this appeal was taken.

It was stipulated that the gross revenues from the electric system, which was to be improved with the proceeds of the bond issue were sufficient to pay the operating expenses, principal and interest required by the proposed bonds, thereby providing a complete selfsustaining bond issue. It was further stipulated that the borough does not have sufficient councilmanic and electorial borrowing capacity under the constitutional provision to borrow the money necessary to pay for the proposed improvements.*fn2

The Borough of Ephrata passed Ordinance No. 725 which authorized the issuance of bonds pursuant to the borough code permitting non-debt revenue bonds to be issued for capital improvements to certain public service facilities.*fn3 The Municipal Borrowing Act provides

[ 395 Pa. Page 351]

    the method by which these revenue bonds may be issued.*fn4

The ordinance and the bonds proposed to be issued, among other things, provided that the bonds were payable solely out of electric revenues and that no taxes will be levied for the payment of the bonds or the interest that might accrue, and that no property of the borough may be taken to satisfy either the principal or interest requirements. We must decide whether the issuance of these bonds, which are issued to provide funds for improvements to an existing electric system and which are payable both as to interest and principal solely out of electric revenues and for which payment no taxes will be levied or borough property taken, create a debt within the meaning of Article IX, § 8 of the Constitution of Pennsylvania.

While it is true that in Lesser v. Warren Borough, 237 Pa. 501, 85 Atl. 839 (1912) we held that revenue bonds issued by the borough for the acquisition of a water company created a debt in violation of Article IX, § 8 of the Constitution, nevertheless, there the borough bonds were secured not only by the water works' revenue and income, but also by a mortgage liened against the physical property of the water works itself. Even though there was no "other liability whatsoever" on the part of the borough we held that a debt was created because, on default in the payment of the bonds

[ 395 Pa. Page 352]

    or their interest, borough property would be subject to foreclosure proceedings and the borough would lose both the property and the improvements. Here, the Ephrata Borough Council having the benefit of our decisions in Lesser v. Warren Borough, supra, as well as Tranter v. Allegheny County Authority, 316 Pa. 65, 173 Atl. 289 (1934); Kelley v. Earle, 325 Pa. 337, 190 Atl. 140 (1937); and Graham v. Philadelphia, 334 Pa. 513, 6 A.2d 78 (1939), provided for the issuance of a bond not secured by a mortgage or a lien on the physical property of the borough. Now in the event of default the borough would not lose the asset securing the mortgage. Thus, it is seen that the Lesser case has no application whatsoever to the instant plan of finance.

For the past twenty-five years we have observed all types of municipalities finance innumerable public improvements through the facility of the "Authority." These self-liquidating projects were developed outside of the framework of Article IX, § 8 of the Constitution and imposed no obligation or debt upon the municipality. Surely a municipality may do directly what it has done indirectly through the facility of an "Authority" without doing violence to Article IX, § 8.

A substantial number of our sister jurisdictions having provisions similar to Article IX, § 8 of our own Constitution have come to the conclusion which we now adopt,*fn5 namely - that revenue bonds issued to provide funds for improvements to a borough electric system and which bonds are repaid solely out of the electric revenues and, for the repayment of which, no taxes have been or are to be levied or borough property taken,

[ 395 Pa. Page 353]

    are not a debt within the meaning of Article IX, § 8 of the Constitution of Pennsylvania.*fn6

Appellants next attack the escrow agreement as an unlawful delegation of authority in violation of Article III, § 20 of our Constitution. The escrow agent, The Farner's National Bank of Ephrata, a private corporation, is vested, under the agreement, with authority to collect all the revenues of the electric system and act as a paying agent under predetermined arrangements specifically detailed therein.

Article III, § 20 prohibits delegation to any private corporation of "any power to make, supervise or interfere with any municipal improvement, money, property or effects, whether held in trust or otherwise, or to levy taxes or perform any municipal function whatever." This provision has been discussed in a number of cases but Lighton v. Abington Township, 336 Pa. 345, 9 A.2d 609 (1939) closely resembles the problem in the instant case. There, a taxpayers' suit was successfully instituted to enjoin the township from proceeding to float a bond issue which contained a trust indenture wherein the trustee, a private corporation, was appointed in the general role of paying agent with power to operate the municipal improvement in event of default. This Court held that the plain language of the Constitution prohibited the township from delegating any authority to the private trustee whether the municipal property was used in a governmental or proprietary capacity.

The escrow agreement here, while not containing the extensive grant of power found in the Lighton case, nevertheless is contrary to the plain language of the Constitution. It can scarcely be maintained that the agreement here did not delegate to the private corporation

[ 395 Pa. Page 354]

    the municipal functions sought to be protected by the Constitution. Our plain duty, in that event, is to strike down this agreement as violative of Article III, § 20. Since appellees concede that the agreement is not regarded as a vital part of their proposed revenue bond financing plan, the Borough of Ephrata can provide adequate arrangements that do not contravene Article III, § 20.

Finally, appellants dispute the provision in Ordinance No. 725 providing for a private sale of the non-debt revenue bonds at the option of borough council. They maintain that the non-debt revenue bonds should be first offered at public sale (before a private sale is authorized) in the same manner provided for general obligation bonds in the Act of June 25, 1941, P.L. 159, 53 P.S. § 6212. The act relating to the issuance and sale of non-debt revenue bonds*fn7 provides that they shall be serial bonds as provided in the act for general obligation bonds;*fn8 however, there is no mention of the type of sale contemplated. In view of the absence of any legislative expression as to the manner of sale for these non-debt revenue bonds borough council may adopt its own desired procedure. It would seem to us to be the better practice to offer these public improvement bonds for public sale, with the proviso however, that in the event the public sale does not prove successful, then the borough can proceed to sell the bonds through private arrangements. We would venture that this procedure would overcome any objections voiced by the taxpayers here and, at the same time, provide for public competition in this needed municipal improvement.


Order modified and affirmed.

[ 395 Pa. Page 355]


In my judgment it was not only wise but necessary for the Borough of Ephrata to make a public offering of these bonds.

With this exception I agree with the able opinion of Justice COHEN.

Mr. Justice BENJAMIN R. JONES joins in this concurring opinion.

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