Borrowing and Incurring Debt: Basic Town Powers and Limitations 05-08-2001

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For more information on governmental, municipal and township issues, contact Tim A. Strom, tas@hanftlaw.com or 218-722-4766.
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Introduction

Bill Paxton recently completed a movie with Charlize Theron, a striking actress. When asked what he thought of his co-star he replied, "Too much for this cowboy."

There are times I've felt that way about this topic and paper. The powers of a town to incur debt and, as important, the limitations on those powers can at times become absolutely baffling. For some questions there are no statutes or cases on point. For others, there are statutes and cases that mostly seem to only muddy things. For others, the cases and attorney general opinions are 50-120 years old, and you have to wonder whether they retain validity today. It is a difficult subject, and I would hope that in the future others might pick it up and try to polish (and probably in some instances correct) what I've attempted to do here.

I have tried to set out a fairly comprehensive overview of a town's power to incur debt and borrow money and the limitations on that power. The first section deals with the town's need to identify a source of power or authority for the project and the loan that it is contemplating, as well as an overview describing bonds and certificates of indebtedness. The second section deals with the primary limitations on town borrowing, including general town law statutes, debt limitation statutes, and two important but little known statutes (§ 275-27 and § 471.69). We then consider a useful financing device--certificates of indebtedness--and the process for borrowing money with them. Finally, there is an overview of a number of other types of debt-incurring devices, and a discussion about some of the considerations and limitations that apply to them.

Make no mistake about it, some of this is thick, gooey stuff. I've tried to make it as straightforward and simple as I could, but haven't always succeeded. It's an overview, not a substitute for legal advice. If your town is going to borrow money or incur debt, get your town attorney involved.

Despite my attempts to keep it simple there will be times when even the most dogged and determined reader will get bogged down. Here's my advice when that happens. Get up and walk around for a few minutes, muttering, "Too much for this cowboy." Then give it another shot. It might come in handy down the line.

Section One:
Power to Perform the Project and Incur Debt for the Project
And Bonds and Certificates of Indebtedness in General

Towns have limited powers. A town cannot do whatever it wants or thinks best. Before doing anything--including borrowing money or incurring debt-a town must consider whether it has the power and authority to do what it proposes.

That usually involves three somewhat related questions. Does the town have authority to do the thing for which the debt is going to be incurred-in other words, does the town have power to do the project itself? If so, does the project have a public purpose? If so, does the town have authority to borrow money or incur debt for that project? Let's look briefly¹ at each of these three questions.

Towns are creatures of the Minnesota Legislature, and only possess those powers that the legislature has bestowed.² The usual source of power is a statute that says that a town can do something. There's nothing tricky about that--if you want, for example, to regulate games of skill and amusement you root around in the statute books until you come across Section 366.01, subdivision 2, which says towns can regulate games of skill and amusement. On the flip side, if you have this unshakable feeling that the town really needs to buy an Apache helicopter, you probably aren't going to find any statute authorizing that.

Where it can get tricky is when the statute expressly authorizes an end but not the means to that end. If the means are reasonably necessary to reach the end, the means are implicitly authorized. For example, there is no statute expressly saying that a town can buy paper and pencils, but there are statutes requiring towns to keep books and records--the express requirement that towns keep books and records implicitly empowers the town to buy pencils and paper.³ In short, towns have those powers that are (1) expressly granted by statute or (2) necessary to exercise express statutory powers.⁴ When considering whether the town should borrow money or incur debt for any project, the town has to ask first if it has power to carry out the project.

A second question is whether the project has a public purpose. Taxes may be levied and collected only for public purposes.⁵ If the primary purpose of a municipal expenditure is to serve a private end, the expenditure is illegal.⁶ As a practical matter, if the project itself is authorized by a statute (as it must be under our first question) it usually will have a proper public purpose.

The third question is whether there is power and authority to incur debt or borrow money for the project in question and, if so, through what means? To a large extent, that's what the rest of this paper is about. A few points should be made here regarding the power to issue certificates of indebtedness and bonds, which are two of the most common devices towns use when incurring debt.

Towns have power to issue bonds, but not for any and all purposes. The situations in which towns can issue bonds are limited. Here, I will describe those statutes that I have found which grant towns bonding power-frankly, there may be more but these were all I could find.

Towns may issue bonds to acquire and improve town halls, town roads, and town bridges. ⁷ Towns may issue bonds to acquire and improve nursing homes and homes for the aged.⁸ They may issue bonds to acquire equipment for four purposes--road construction, road maintenance, snow removal, and fire fighting.⁹ They may issue bonds to acquire and improve buildings used for housing and maintaining that type of equipment.¹⁰ A town may issue bonds to pay judgments against the town.¹¹ A town may issue bonds to refund outstanding bonds, fund "floating indebtedness" and, in certain situations, fund all or a portion of a town's liability for a pension or retirement fund.¹² A town, through complicated proceedings and for a number of purposes, may issue various special types of bonds known as improvement bonds, assessment revenue notes, revenue bonds, and temporary improvement bonds.¹³ Subject to certain restrictions a town may build, obtain, repair or improve a waterworks, sewage, or storm sewer system and issue bonds to pay for all or part of the project price.¹⁴ A town may issue bonds to finance the acquisition, maintenance, and operation of certain recreational facilities, including ball fields, playgrounds, and swimming pools.¹⁵ An "urban" town--one that has qualified for and has elected to exercise powers under Chapter 368--may issue bonds to acquire or improve warning systems.¹⁶

The point is, a town cannot issue bonds for any purpose. If a town wants to issue bonds, not only must it have the statutory power to perform the underlying project but it also must find a statute that expressly says that it may issue bonds for it.

I will not discuss bonds extensively. Bond work is a very technical, specialized area of law, and I have very little experience with it. As a general proposition, I think most town attorneys should be unwilling to personally handle a bond issue, and would refer the town to an experienced bond attorney. Certified bond counsel almost certainly will have to give a final opinion on any bond issue and likely will want to be involved from the start. Bond attorneys--at least the ones I've met--are the scariest of all attorneys, part lawyer, part CPA, dour and humorless, more anal than Cotton Mather.

In a very basic sense, the following should be said about bonds. Bonds are one of the principal means by which towns incur indebtedness. If a town has a significant project that is going to require substantial debt that cannot comfortably be repaid in less than five years, bonds might be the most attractive funding device. The board must pass a resolution to issue the bonds, stating the purpose and the maximum amount of the bonds. The electors must vote upon the proposed bond issue, and a majority vote is required for the bonds to issue. The actual process of issuing the bonds is highly technical and complicated, and goes beyond the scope of this paper and the expertise of this writer.

A second primary funding device is a certificate of indebtedness. The statutes do not specifically define "certificate of indebtedness." The legal jargon that you will hear-and that I will use--is that a town "enters into" or "issues" a "certificate of indebtedness." What does that mean?

I'd encourage you to think of a certificate of indebtedness, in most instances, as the papers that a town signs when it borrows money, usually (but not always) from a bank. When you hear or read that a town "enters into" or "issues" a "certificate of indebtedness," think in terms of the town borrowing money, usually from a bank, and signing some specialized loan papers called a certificate of indebtedness that essentially say that the town is indebted in the amount of the borrowed money and will pay it back according to a fixed schedule. To equate a certificate of indebtedness with a bank loan undoubtedly oversimplifies things, but it takes a lot of the mystery out of the legal jargon and should suffice for our purposes.¹⁷

A copy of a certificate of indebtedness is included at the end of this article.

Unlike bonds, which can be issued by towns only for purposes specifically set out in the statutes, a town can issue certificates of indebtedness (borrow money and sign the loan papers) for any town purpose authorized by law.¹⁸ In other words, if the town has power to do the project and if the project is for a public purpose then the town may usually¹⁹ issue certificates of indebtedness (borrow money and sign the papers) to finance the project.²⁰ However, certificates of indebtedness, unlike bonds, have to be repaid in five years or less (as a general rule, bonds can run for 30-40 years), making certificates of indebtedness less useful if, due to the amount involved, the debt cannot be paid off in that time period.²¹

In summary, a town needs to consider whether it has the power to do the underlying project and whether the underlying project is for a legitimate public purpose. If so, it has power to issue certificates of indebtedness (borrow money and sign papers) to finance the project. It may be able to issue bonds to finance the project, if a statute allows a bond issue for that type of project. However, the town's ability to issue certificates of indebtedness or bonds is limited by a number of qualifications, and that is what we turn to next.

Section Two:
Primary Spending and Borrowing Limitations

Even if a town has the ability--in the abstract--to perform a project and incur debt to finance the project through certificates of indebtedness, bonds, or other funding devices,²² some significant limitations may still restrict the town's ability to incur debt.

General Town Law Limitations

One source of debt limitation is general town law. Let's review the primary general town law statutes that discuss or touch upon incurring debt.

A town is obligated to pay all expenses it legitimately incurs.²³ Taxes to pay for those expenses must be levied on the town's taxable property.²⁴

At the annual meeting, the electors set the budget²⁵--they vote upon and set the amount of money needed to pay the town's legitimate expenses and any further amount that, in their discretion, should be raised for town purposes.²⁶ The tax that is levied for town purposes must not exceed the amount raised at the annual meeting.²⁷ More important for our purposes, the board (subject to some exceptions we'll discuss) may not in any year (1) spend more money than the taxes levied for that year or (2) contract debts in excess of the taxes levied for that year.²⁸

Some towns have a "rainy day fund" consisting of money that has been raised in previous years but not spent, and in 1999 the legislature expressly validated this practice.²⁹ The board can cover a deficit in one town fund by transferring a surplus in a different fund, if the surplus is beyond the needs of the current year and if the supervisors unanimously vote to make the transfer.³⁰

The town supervisors tell the town treasurer which bills or expenses to pay.³¹ The treasurer receives and is in charge of all money belonging to the town, and to pays it out only upon the lawful order of the board.³² These orders for payment "shall be paid in the order in which they are registered, out of the first money that comes into the treasurer's hands for that purpose."³³ That indicates that the treasurer has no ability to pay if there is no cash on hand for payment, and pays bills and expenses in the order received by the board to the extent of money on hand for payment. The supervisors direct the treasurer to pay claims and expenses, the direction to do that is called an "order," and that order is drawn by checks written on the town's account at its depository bank.³⁴

A town may enter into any contract that is necessary for the town to use any of its powers.³⁵ A town may buy, take, hold, convey, and dispose of any real and personal property belonging to a town, so long as it is done for a public purpose.³⁶

Those are the primary general town law statutes applicable to this subject. Let's consider a few things.

One could argue, I suppose, that a town could use its general contracting powers to incur debt or issue bonds for any legitimate town purpose. After all, Sections 365.02 and 365.025 say that a town can make any contract necessary or desirable for the use of any town power,³⁷ and loans (even bond issues) are at bottom arguably a kind of contract. Why can't a town, to accomplish a valid town purpose, simply go down to the bank and borrow money for it? Doesn't the grant of power to make any contract necessary to carry out a legitimate town purpose give a town the power to do that? I'm uncomfortable with that idea. While the general, broad contracting powers authorized by Sections 365.02 and 365.025 certainly give additional authority to incur debt, it seems to me that the legislature has laid out such an elaborate system of town borrowing that you are on much safer grounds if you can point to more specific statutes that authorize the particular type of debt you have incurred (this is more fully discussed on page 20).

The most important restriction is the general rule that a town cannot incur debts or spend money in any one year in excess of the taxes levied for that year, and that the levy cannot exceed the amount approved by the electors at the annual meeting.³⁸ That general rule is subject to a number of exceptions, some of which will be discussed more fully later. Let's note three primary exceptions. The first is that the town can exceed this spending limit if the majority of electors approve of it at a special town election called for the purpose.³⁹ The second is that bonds cannot issue (usually) unless electors vote in favor of the bond issue, so a bond issue "trumps" this restriction.⁴⁰ The third is that supervisors, under certain circumstances and following certain procedures that we will discuss shortly, can issue certificates of indebtedness (borrow money from a bank) in excess of the limitation. When the proper procedures are followed, the issuance of the certificates (the taking of the loan) can result in the spending limit legitimately being exceeded.

Debt Limits

All municipalities, including towns, operate under debt limits. If a town is going to incur debt, it needs to consider its debt limitation.

The general rule is simple. No town may incur or be subject to a net debt in excess of two percent of the market value of the town's taxable property.⁴¹ So, in a basic sense, to determine your debt limit, find the market value of the town's taxable property, multiply it by .02, and then subtract other "qualifying" debts to find how much room you have left under the debt limit. For example, suppose that the market value of a town's taxable property is $50,000,000. Two percent of that is $1,000,000. Suppose that the town's other outstanding "qualifying" (and we'll get to that in a minute) debt is $100,000. The town has $900.000 left under its debt limit.

How do you find the market value of the town's taxable property? The county auditor will have that information. They can usually punch it up on a computer in a couple minutes.

The statute says that a town's "net debt" cannot exceed two percent of the market value of the town's taxable property. There are a handful of things to keep in mind when considering net debt.

First, net debt is not gross debt. Net debt means gross debt (all the town's outstanding obligations) minus the amount of the current year revenues available to cover payment of those debts.⁴²

Second, less obvious, the legislature has torturously defined net debt so that a lot of debts don't count. When considering whether a town has exceeded its debt limit, you need to check the statute and exclude those types of debt that the legislature has excluded. Examples would be debts incurred for a public convenience (say, a waterworks) that are to be repaid by income produced by that convenience, debts incurred for heat, electrical, or power systems that produce revenues, or debts that are to be repaid by certain types of special assessments.⁴³

Third, as a general rule you include all the principal but exclude all the future interest of the obligations when computing net debt.⁴⁴

Fourth, if an obligation exceeds the debt limit it is void but not necessarily in its entirety; it is only void to the excess over the debt limitation.⁴⁵ For example, if a town's debt limit was $100,000 and it currently had a net debt of $80,000, a new debt of $25,000 would not be entirely void, but only void as to the last $5,000.

Fifth and finally, a practical point. Most towns do not carry very much debt. It's unusual for a town to exceed--or even get significantly close to--its debt limit. A town of modest means--say one with $10,000,000 in market value of its taxable property--still has a sizeable $200,000 debt limit. So, while the debt limit must always be kept in mind and checked, as a practical matter it usually doesn't prevent a town from borrowing what it needs.

Section 275.27-Levy Limit or Tax Rate Limit for Towns?

There is a statute that, by its terms at least, suggests that there may be a levy limit or tax rate limit for towns. This statute--§ 275.27--is a troublesome one, and we need to discuss it.

We've just discussed the debt limitation. That's a limitation on the total amount of debt that a governmental entity can carry. There are other ways of limiting taxes and government expenditures. One is a tax rate limitation. That limits the municipality to a maximum tax rate, or to a cap on how much it can increase its tax rate from year to year. Sometimes a tax rate limitation is not as effective as a levy limitation. A tax rate limitation only takes into account a part of the equation--the tax rate, not the property against which the rate is applied. At least theoretically a tax rate can be dramatically increased with no increase in taxation because a dramatic drop in property values offsets the increased tax rate. Conversely, a small increase in the tax rate can result in a dramatic increase in property taxes if land values skyrocket. Because a tax rate limitation only addresses part of the taxation equation, many states have imposed levy limitations. A levy limitation usually sets a maximum percentage--six percent is fairly common--beyond which the levy cannot be increased from one year to the next.⁴⁶

In Minnesota, counties and certain cities have levy limitations.⁴⁷ Sections 275.70-.74 set out levy limitations that apply to "local government units," but that term only includes counties, statutory cities, and home rule charter cities with populations greater than 2,500.⁴⁸ Towns are not "local government units" for purposes of that statute and therefore it would appear that there is no levy limit for a town.

But we then have to consider a strange and archaic statute, § 275.27.

Section 275.27 has been in the statute books since at least 1866, and as far back as 1880 courts were commenting about how poorly worded it was.⁴⁹ Section 275.27 has some very convoluted language⁵⁰ but if I can try to put it in English, I think a fair translation is this: Unless some other law provides to the contrary, a town board cannot incur a debt for any year if that debt would require that "a rate of taxes higher than the maximum prescribed by law" be imposed during that year.

That, by its terms, is a prohibition against exceeding a tax rate limitation. It prohibits, by its terms, supervisors from incurring a debt that would require that the town's tax rate be "higher than the maximum prescribed by law."

That's all simple enough. So what's the problem? The problem is that there is no maximum tax rate for towns. The electors at the annual meeting set the amount they want to see raised as taxes, and can pick any amount they like. The electors do not set-nor do the supervisors levy-any rate of tax. Tax rates aren't relevant in the town setting, there is no tax rate imposed, and there are no tax rate limitations.

So how can § 275.27 prohibit a town from exceeding its (non-existent) tax rate limitation?

The question is of more than purely intellectual interest. If a supervisor violates § 275.27, the "budget-busting" debt is void as against the town, but not as against the supervisor, who becomes personally responsible for the debt and can be forced to pay it out of his or her own pocket.⁵¹ So if a court finds that this statute applies to towns and interprets it to find a violation by supervisors, the supervisors are going to have to personally pay the debt that was incurred.

You can argue that this statute should not apply to towns. The statute applies to debts that require a town to "levy a rate of taxes higher than the maximum prescribed by law." There is no maximum tax rate prescribed by law for towns. Therefore, the argument goes, the statute cannot apply to towns.

You can argue to the contrary that the statute applies to towns. It expressly says that it applies to towns. Because it expressly says that, you have to interpret the statute in a way to give it some meaning in the town context. The statute should be interpreted, in the town setting (or so the argument would go), to mean that supervisors cannot incur a debt that would exceed the maximum amount of tax that can be levied for the given year, that is, the amount authorized by the electors. Section 365.431 says that the town tax cannot exceed the amount voted to be raised at the annual meeting. In other words, while it is meaningless to talk about a tax rate limitation that applies to a town, it is not meaningless to talk about an upper limit on the amount of tax that a town can raise or spend-the town tax cannot exceed the amount approved by the electors. If the supervisors cause a greater amount of tax to be raised (without elector approval), the argument would conclude, they should be personally responsible for the debt that necessitated that.

I think the first argument is the stronger of the two. The second argument essentially begs for a levy limitation for towns, but it's hard to reconcile that with the fact that the legislature excluded towns from levy limitations when it passed §§ 275.70-.74. Moreover, the inclusion of towns in § 275.27 can probably be explained by history. Up until approximately twenty years ago, towns were subject to tax rate limitations.⁵² As a result, up until then, § 275.27 made sense because a town could incur debt in a manner that could cause it to exceed its tax rate limitation. The town tax rate limitations were then repealed and, apparently, the legislature forgot about amending § 275.27 to delete the reference to towns. That history is an additional reason for concluding that § 275.27 should not--despite its explicit reference to towns--apply to towns.

Having said that, if I were a supervisor, § 275.27 would make me reluctant to vote in favor of any debt that might exceed the amount authorized by the electors for that year, and I would see that the minutes reflected my dissent from any such vote unless I was convinced that a statute allowed the board to incur debt beyond the amount voted by the electors to be raised during that year.⁵³ That's perhaps a good thing, because it reinforces the general rule of § 365.431 (town must not spend more than electors approve).

It would make sense to have the legislature consider whether § 275.27 still applies to towns and, if so, in what fashion. It currently creates uncertainty about what obligations supervisors have, and exposes them to personal financial responsibility if they misunderstand their duties under what is a very unclear statute.

Section 471.69--Limits on Anticipating Revenues

There's an important debt limitation statute which, frankly, I was never aware of until I began preparing this paper. I've been practicing town law for almost a decade now, and never previously heard or read about it.

It is § 471.69. It applies to all towns except those whose mineral net tax capacity exceeds 25 % of the net tax capacity of the town's real property. The actual language of the section is only vaguely reminiscent of English, sort of like the way that a Chihuahua only reminds you of a dog.⁵⁴ If you keep in mind that the statute focuses on the situation where a town is anticipating the arrival of its levy money, I think it is easier to understand. With that scenario in mind, a rough but fair translation of the statute is as follows. A town may incur debt anticipating that its levy will be collected, but must limit those debts (until the collected amounts arrive) to a maximum amount; the maximum amount is the average of the town's tax collections over the past three years, plus ten percent.

Suppose a town levied and collected taxes of $100,000 for three straight years. Then, the electors at the annual meeting voted to raise $250,000 because a new town hall/fire station is needed for an estimated $150,000. When January 1st of the following year rolls around, can the board let a contract for $150,000 to build the structures? As I read it, § 471.69 would limit the board to incurring a maximum debt of $110,000 in anticipation of that year's tax collections. It could not incur more than $1 10,000 payable out of that year's anticipated tax collections, at least not until the tax collections arrived. However, in my opinion, this statute only applies when the board is spending money against the anticipated tax collection in the particular year--it would not by its terms prevent a board from borrowing money payable from sources other than the anticipated tax collections in the year of the debt. For example, let's say that our hypothetical board pays the $150,000 contract in mid-January using (A) a $1 10,000 certificate of indebtedness payable out of the current year's anticipated tax collections and (B) a $40,000 certificate of indebtedness payable out of a tax that will be levied in the following year. In that example, $150,000 of debt has been incurred, but only $1 10,000 in anticipation of the current year's tax collections, which would be within the limit imposed by § 471.69 in the hypothetical circumstances we are using.

Limitations on the Time for Repayment

We've touched on this already, but one potentially significant limitation deals not with the amount of the debt but, instead, the amount of time in which the debt must be repaid.

Many town-funding devices--certificates of indebtedness in particular--must be repaid within five years.⁵⁵ Bonds usually must be redeemed or mature in thirty years, although some can go as long as forty years.⁵⁶

An interesting question--and one for which I have no certain answer--is whether certificates of indebtedness (bank loans) could be structured with balloon payments to get around the five-year repayment requirement. For example, suppose a town borrowed $100,000, and agreed to pay it off with four annual payments of $10,000 and a final payment of $60,000 in the fifth year (we're ignoring interest for the sake of simplicity). Then, suppose in the fifth year, with $60,000 owing on the certificate of indebtedness, the town borrowed $60,000 under a new certificate of indebtedness, used it to pay off the balloon, and agreed to pay off the new certificate at $12,000 per year for the next five years. Would that be appropriate? It might be challenged as a blatant attempt to get around the five-year limit for certificates of indebtedness. But, even conceding that it was, is there anything really wrong about it? The statutory requirements were met, the original certificate of indebtedness was repaid in five years as required, and the new certificate was validly issued.

A judge faced with a challenge to the hypothetical in the previous paragraph might be tempted to uphold the financing scheme. But it could be a question of degree. If a town had taken out a $500,000 certificate of indebtedness and planned to pay it off at $10,000 principal increments for four years and then refinance the balloon of $460,000 by a new certificate of indebtedness, I suspect a judge would be less sympathetic, more likely to consider it an impermissible attempt to avoid the statutory restrictions, and be inclined to say it was invalid.

Section Three:
Certificates of Indebtedness-Elector Approval and General Process

Let's focus now almost entirely on certificates of indebtedness, in the (oversimplified) sense in which we are using the term--the papers that a town signs to borrow money from a bank. What in general is the process when a town wants to borrow money via a certificate of indebtedness from a bank? Usually, the process is governed primarily by § 366.095, subd. 1.⁵⁷

Several years ago, Troy Gilchrist drafted an excellent worksheet for towns issuing certificates of indebtedness and, to a large extent, what follows is a reworking ("reworking" being a more pleasant term than "plagiarism") of Troy's worksheet.

The board will need legal advice. Get an attorney involved. Also, talk to a representative of your town's bank ahead of time and find out generally if they are likely to lend the money, what sort of resolutions, paperwork, and other documentation they will need, what the terms will be (particularly the payment period, and the principal and interest amounts), what they understand about the tax implications, and how long it is likely to take to close the loan.⁵⁸ You'll probably want to talk with an accountant or tax attorney about any federal and state tax questions that may arise.

The board needs to assure itself that the town has the power to perform the project for which the money is being borrowed, that the project has a public purpose, and that the town has the power to issue the certificate of indebtedness (borrow the money). This has been described above.

The board needs to satisfy itself that the town will not exceed its debt limitation by incurring the debt, and that it is in compliance with the other potentially applicable debt limitation statutes (general town law, § 275.27, and § 471.69) discussed above. Keep in mind that if a town follows the proper procedures here, its certificates of indebtedness can legitimately result in an increased levy.

Once those steps are done, the next fundamental question is whether the loan is one that the board can make without elector approval, or whether the electors need to be given the opportunity to vote on the loan.

The key question there is whether the amount of the certificates to be issued (the amount of the loan to be taken) exceeds ¼ of 1% of the town's market value.⁵⁹ That, for mathematically challenged Norwegians like myself, works out to $2,500 for every $1,000,000 of the town's market value. Note that while the debt limitation (§ 475.53) refers to "the market value of the town's taxable property" this statute (§ 366.095, subd. 1) refers to the "market value of the town." Those are apparently two different things, because the market value of the town would presumably include taxable and non-taxable property while the market value of the town's taxable property only includes taxable property. It probably won't make a practical difference in most situations, but keep in mind the different market values that apply under each statute.

If the amount of the certificates to be issued (the amount of money to be borrowed) is less than ¼ of 1% of the town's market value, the board can issue the certificate (borrow the money) without elector involvement or elector approval. For example, let's say that a town has a market value of $50,000,000. The town board could issue certificates (take a loan) to the amount of ¼ of 1% of the town's market value, or $125,000 (.0025 x $50,000,000), without having to get the electors involved. The voters would not have to approve the debt. It follows that the electors also do not have to approve the levy increase. By giving the supervisors the power to incur this "small" loan without elector approval, the legislature created an exception to the general rule that supervisors cannot levy more than what the electors approved.

An interesting question is how often a board can take out this "small" type of loan (less than ¼ of 1% of market value) without giving electors an opportunity to vote. Could the board, under the hypothetical facts in the previous paragraph, take out ten $100,000 loans over the course of the year (assuming that the debt limit was sufficient) and never seek voter approval for the $1,000,000 of total debt? The best answer I have is that it appears they could from a legal standpoint (it probably would be political suicide), again assuming that the overall debt limit was obeyed. On the other hand, it seems clear that the board could not artificially "break down" loans for a single project simply to avoid getting elector approval. For example, if ¼ of 1% of the town's market value was $125,000, a board could not avoid the need for elector approval of a $400,000 project by "breaking it down" to four separate $100,000 loans. That would impermissibly circumvent the electors' right to approve a certificate of indebtedness in excess of ¼ of 1% of market value.

If the amount of the certificates to be issued (the amount of the loan to be taken) is more than ¼ of 1% of the town's market value, the board must get the electors involved or, more precisely, give the electors the opportunity to become involved. How is that done?

The first step in that process is a resolution that sets out the board's decision to issue the certificates. That resolution is needed whether or not the electors get involved, and should be one of the first steps in the process. Troy Gilchrist has suggested, and I agree, that the resolution should contain a number of items including at least the following:

1. The amount to be borrowed.⁶⁰
2. The purpose for which the debt is to be incurred.⁶¹
3. The statute or statutes which authorize the expenditure.
4. A statement that the certificate must be repaid within five years.⁶²
5. A statement that the certificate will be issued on the terms and in the manner determined by the town board.⁶³
6. A statement that there will be a tax levy certified to the county auditor in the amount of the principal and interest⁶⁴ and an additional five percent in excess of the principal and interest.⁶⁵
7. A statement of the amount that will be levied in each of the five years.⁶⁶
8. A statement that if a debt service fund or account does not exist, the town will establish one, and that the taxes collected to repay the obligation will be appropriated to that fund and may only be used to pay the obligation or repay advances transferred from other funds.⁶⁷
9. A direction to the town clerk that the clerk should, at the appropriate time, obtain a certificate from the counts, auditor indicating that the obligation has been entered in the county tax register and that the tax levy for it has been made.⁶⁸

If the amount of the certificate (the amount of the loan) exceeds ¼ of 1% of the town's market value, the board must notify the electors of the opportunity to become involved. This is done by publishing the resolution. The resolution must be published at least once in a newspaper of general circulation in the town.⁶⁹

There is then a ten-day period during which a petition may be submitted asking for an election on the proposed resolution.⁷⁰ The petition must be signed by a number of town voters equal to at least ten percent of the voters at the last regular town election.⁷¹ It must be filed with the town clerk.⁷² It must be filed within ten days after the date of the publication of the resolution.⁷³ During the ten-day period, of course, the board cannot issue the certificate (make the loan).⁷⁴

The publication of the resolution should--and probably must--contain a concise but understandable explanation of the voters' right to submit a petition asking for a vote, and the time frame for doing that. A statement containing the information in the previous paragraph should generally suffice.

If a sufficient petition is filed in a timely manner the board cannot issue the certificate (make the loan) unless an election is held and a majority vote in favor of the resolution.⁷⁵ If the petition is filed, the board can chose between continuing to pursue the loan (with the cost and delay of an election) or abandoning the plan.

If an election is required, it apparently should be conducted, to the extent possible, in the same manner as a bond election.⁷⁶ You will want to get an attorney involved in the conduct of the election. The ballot language should be carefully considered and chosen, depending on the particular circumstances. There should be a clear statement asking whether the board should be authorized to issue the certificate of indebtedness (make the loan) in the amount and upon the essential terms indicated. The ballot must contain an explanation of the amount that would be levied in the first year if the issuance is authorized.⁷⁷ It must contain a statement indicating the maximum amount of the increased levy as a percentage of the town's market value to give the electors some perspective on the impact of the levy on the town's tax base.⁷⁸ The following language must appear on the ballot in boldface type: "BY VOTING 'YES' ON THIS BALLOT QUESTION YOU ARE VOTING FOR A PROPERTY TAX INCREASE."⁷⁹

The vote is decided by a simple majority.⁸⁰ If the question fails it cannot be re-submitted until at least 180 days after the election and, if the question fails a second time, it cannot be re-submitted until one year after the second election.⁸¹ If the question fails and the board determines that it is not worth pursuing the question further, a resolution to that effect rescinding all action taken toward the issuance of the certificates is recommended.⁸²

If (A) no notice to the voters is required because the amount is less than ¼ of 1% of the town's market value or (B) notice is required and given but no timely petition is filed, or (C) a timely petition is filed and the vote is in favor of the resolution, the resolution becomes finalized and the board can turn to the steps needed to issue the certificate (make the loan). The key to understanding the steps that follow is that they are geared to seeing that the levy is set so that tax collections produce sufficient annual income to pay off the debt.

Prior to the time that the certificates issue (the money is borrowed), the clerk must file with the county auditor a certified copy of a resolution levying a direct general ad valorem tax upon all the town's taxable property.⁸³ The resolution must identify the term of the obligation and the amount of the yearly levies--the yearly levies must be computed so that if collected in full the levies would pay off the principal, interest, and at least an additional five percent.⁸⁴ The resolution must also irrevocably appropriate the taxes levied to the town's debt service fund, a special debt service fund, or an account created for the purpose.⁸⁵ If carefully drawn, the original resolution should be able to serve as this resolution, although presumably a supplemental resolution can issue so long as it tracks all the important terms of the initial resolution.

The auditor levies the amount specified for each year on the tax rolls, and the tax collected must be used only for payment of the obligation.⁸⁶ Significantly--both to protect the town and the holder of the certificate--the levy for paying the certificate is irrevocable, unless it is paid in advance in whole or part.⁸⁷ The auditor gives the clerk the auditor's certificate showing that the levy has been put in place.⁸⁸ Once that is done, the certificate of indebtedness can be issued (the money can be borrowed).

If, during the course of the "payback" period, the amount levied is insufficient for the yearly principal, interest, and "extra" five percent, the town is required to levy additional taxes to cover the shortfall.⁸⁹ If instead there are surplus funds that allow the certificate to be repaid earlier, a shorter "payback" time can be arranged with the county auditor.⁹⁰ The town treasurer must account for the receipt and disbursements of monies appropriated to the fund to repay the obligations.⁹¹

That's the basic procedure. An individual bank or individual county auditor might have additional or somewhat different requirements, so it is a good idea to coordinate the process with them in advance as far as practicable.

Section Four.
Other Debt-Incurring Devices

We've concentrated mainly on certificates of indebtedness (to borrow money from banks, primarily) and to a lesser extent on bonds. But we shouldn't close without touching on other devices by which towns can incur debt or attend to financing. This is going to be very much a summary. Most of these devices could be the subject of an entire article--warrants are especially baffling--and I'm just going to mention a number of the devices without going into them in great depth.

Installment Contracts and Contracts for Deed. A town can buy personal property under an installment contract and real property (land and buildings) under a contract for deed, but both types of transactions are subject to limitations. First, the seller's remedy for nonpayment is limited to recovery of the property; in other words, the seller can take the property back but cannot pursue the town for any deficit or any other relief.⁹² Second, if the property being purchased (real or personal) exceeds 0.24177 percent⁹³ of the market value of the town there must be a resolution, publication, and opportunity for an election, very much like that described in the previous section about certificates of indebtedness. The key difference is that no irrevocable levy needs to be made to "secure" the payments because, as noted, the seller's remedy is limited to taking back the property (which serves as the seller's security).⁹⁴

Leases. We need to break this down into (1) "pure" leases and (2) leases with an option to buy. Section 465.71 governs leases with an option to buy. It applies to all leases with an option to buy personal property, and to leases with an option to buy real property (land and buildings) if the total contract amount is less than $1,000,000. It prohibits a town from entering into any such lease unless the town has the right to terminate the agreement at the end of any fiscal year. That really accomplishes two things. It lets the electors "cancel" the agreement by not voting any money for it, and it discourages any prudent seller or vendor from charging unrealistically low yearly rents in the-hope (which may never materialize) of a large "option" payment at the end of the agreement. Lease/purchase agreements that meet these statutory requirements are not considered "debt" for any statutory purposes, do not count as "net debt" for the debt limitation, and there is no need to seek the electors' approval.⁹⁵ I find no statute covering a "pure" or "true" lease, in other words one with no option to buy. Case law exists to say that if the obligation to pay rent only arises at set intervals (e.g., month to month) and if the obligation to pay may never come to pass (e.g., the property may become untenable), no debt is created until the given payment (e.g., monthly payment) is due; in other words, under those circumstances you would not add together all the possible future rent payments to determine debt.⁹⁶

Assessments. Certain major town projects can be financed by levying assessments, but that is a huge topic well beyond the scope of this paper.

Revenue Bonds. Under some circumstances, revenue bonds can be issued. These are bonds which are paid not by general tax dollars but by the revenues produced by the item that was built, acquired, or improved (e.g., a municipal power plant).

Subordinate Service Districts. Under certain circumstances, towns can create subordinate service districts under Chapter 365A. A subordinate service district can be established for a defined geographical area in the township where residents are receiving or will receive town services or benefits (1) that are not received in other areas of the town or (2) that are received at a significantly higher level than in other areas of the town. A good example is where residents in a platted area of the town want black topped roads. Road maintenance is a general town benefit, but an area that gets black topped roads may be receiving benefits at a higher level than elsewhere in the town. A subordinate service district can be created so that the residents within that area pay an additional tax to reflect the higher level of services received. The procedures for this are in Chapter 365A of the Minnesota Statutes. If a proposed project will benefit only a certain portion of the township, establishing a subordinate service district allows you to tax only the residents in the district for that service.

Contracts or Loans from Government Entities. Under § 471.64 a town may purchase, lease or otherwise acquire equipment, supplies, materials, or other property (including real property) from the state or federal government (or any of its agencies or subdivisions) "without regard to statutory ... provisions. " Pretty clearly the statute excuses any need to comply with the bidding laws when contracting with another governmental unit. Would it excuse compliance with the laws regarding incurring debt? That's not altogether clear.

Section 471.65, subdivision one, says that towns can accept loans or advances of money from the state or federal government for energy conservation investments and for planning public works projects, and that towns can make agreements to repay those loans without submitting the proposal to a vote of the people. The debt incurred apparently counts against a town's debt limitation--that at least is implied, because subdivision two of the statute specifically says that a loan of this type to a city will not count against the city's debt limitation (and never mentions towns).

Section 465.73 contains some elaborate provisions regarding loans from funds granted to rural electrical cooperative organizations and backed by the Farmers Home Administration. Towns are allowed to borrow up to $250,000 from such entities for "constructing, repairing, or acquiring town halls, fire halls, or fire or rescue equipment." The amount borrowed is not part of the town's net debt for purposes of its debt limitation. No election is required to make the loan.

Bank Loans. We've talked at length above about how a town can borrow money through the device of a certificate of indebtedness, and I've encouraged you for simplicity's sake to think of a certificate of indebtedness as a type of bank loan. But a certificate of indebtedness is not a "true" bank loan. It has features and characteristics that set it apart from the loans that you and I might get at a bank.

Can't a town just march down to the bank and get a bank loan? You can make an argument that it should be allowed to do that. Towns have the authority⁹⁷ to enter into any contract necessary to exercise a legitimate town power. If a town has the power to under-take a legitimate town project, shouldn't it also have the power to enter into any contract (a loan) necessary to finance that project?

I don't think so. Under that logic, a town board could take a loan for any amount within the town's debt limitation without the need for elector approval. The legislature has said that towns can raise money through bonds and certificates of indebtedness, and then has specifically said that in certain situations (most situations) there will or may be a need for elector approval. In other words, the legislature has specifically granted--and then limited--a town board's ability to issue bonds and certificates of indebtedness. The idea that the legislature would then somehow implicitly allow a town to go to the bank and take out a loan doesn't fit with that scheme. There are so many specific statutes minutely regulating a town's ability to incur debt that it is hard to believe that the legislature endorses an "anything goes" attitude to bank loans. Other governmental units, with the possible exception of school districts,⁹⁸ are allowed to issue certificates of indebtedness and other funding devices,⁹⁹ but have no express grant of power to take out bank loans. Perhaps more important as a practical matter, the state auditor's view is that towns should be required to identify a specific statute authorizing the debt device that they have used, and there is no statute that says towns can take bank loans.

Towns can and have gone out and taken bank loans. The propriety of that is questionable, and using certificates of indebtedness or bonds, for all their red tape and transactional disadvantages, puts the town on a sounder footing.

Lines of Credit. I'm informed that some towns use what they call "warrants" to essentially maintain a system where their depository bank will "cover" any overdrafts on the town's account, and the bank will then be repaid when future tax dollars are received by the town and deposited into the account. That's essentially a line of credit arrangement.

As a purely practical matter--without addressing the legal implications--I think a line of credit is a useful thing for a town to have. Most businesses have a line of credit to help with cash flow problems, they are handy features, they protect against any embarrassment and inconvenience from inadvertently bouncing checks, and they give some flexibility when cash flow becomes a problem. Banks incur no undue risk by extending a line of credit to towns.

Unfortunately, as a legal matter, I have to caution against establishing a line of credit. There is no statute that authorizes towns to have lines of credit. The legislature has passed a statute allowing school districts to have lines of credit,¹⁰⁰ but not any similar statute for towns. In light of that (and in connection with the comments above about loans), my opinion is that while it is a close question towns probably do not have power to establish lines of credit.

The Association might want to consider approaching the legislature for a statute that would allow towns to carry modest lines of credit. There is precedent for that because school districts have such a statute. To prevent abuse, restrictions similar to those applicable to school districts-a limit on credit to an amount equal to a percentage of the town's average monthly operating expenses during the previous year and a requirement that no credit advanced can be "carried"--for more than 45 days--could be considered. It might be a useful financial tool for towns to have.

"Warrants". The concept of "warrants" in the context of town law absolutely baffles me. So let's close up this paper with some really convoluted, confusing stuff. Go out with a whimper instead of a bang.

There is no doubt that there is something known as a "warrant" and that some governmental entities use warrants as payment devices. For example, counties in Minnesota have power to issue warrants and use them as a device to pay claims.¹⁰¹

There's also no doubt that there are numerous statutes that refer to and apparently recognize a town's ability to issue warrants. For example, § 471.69 (which we've discussed in detail) refers to a town's "warrants and orders."¹⁰² Another statute forbids a county treasurer from purchasing town warrants at a discount.¹⁰³ There is a statute that describes the procedure for issuing a duplicate town warrant when an original town warrant has been lost.¹⁰⁴ These statutes leave no doubt that the legislature contemplated something known as a town warrant.

But there is no statute that describes what a town warrant is.

In a general sense, legal dictionaries define "warrants" as commands by the governing body to the treasurer to pay claims out of the municipal treasury.¹⁰⁵ But in town law in Minnesota, that's called an "order," not a "warrant."¹⁰⁶ The town treasurer is to pay any "order," and the order is to be drawn so that it becomes a check on the town's depository bank and can then be received in payment of the town's obligations like any bank check.¹⁰⁷ Orders that are not paid on a timely basis collect interest.¹⁰⁸ So the checks that the treasurer writes to pay bills out of the town's bank account are technically "orders," not warrants.

So what is a town warrant? Over time cases and statutes have used the term "warrant" in contexts where it might mean any number of different things. At times, warrants have been described in a way that makes it seem they were essentially a loan from the municipality to another.¹⁰⁹ At times, warrants are characterized more like checks drawn upon the municipal treasury.¹¹⁰ While it might amount to the same thing, other cases characterize warrants as promissory notes or negotiable paper.¹¹¹ But still other cases say that town warrants--without describing precisely what they are--are not negotiable.¹¹² Other times, warrants are apparently conceptualized more or less as bonds.¹¹³ Still other sources characterize warrants as being mere promises to pay, if and when funds are on hand for payment from the municipal treasury.¹¹⁴ Other sources seem to indicate that " warrants " and "orders " mean the same thing.¹¹⁵

So what is a town warrant? No statute defines it. With two very minor exceptions,¹¹⁶ no statute expressly says that towns can issue warrants. No statute says what a town warrant is supposed to say, look like, or describe how it should be issued.

There are a series of ancient attorney general opinions that appear to equate "warrants" with the orders that towns issue (in the form of checks drawn on depository banks under § 367.18 in payment of ongoing town debts). These opinions seem to indicate that the attorney general believes that towns can issue warrants, anytime after January 1st of a given year, in anticipation of taxes that will be collected during that year (i.e., raised by the electors the year before), but subject to two limitations--(l) that the amounts of warrants issued do not exceed the limits in § 471.69¹¹⁷ and (2) that the amounts of warrants issued must not exceed the amount approved by the electors for that year's taxes.¹¹⁸

In 1922, the attorney general opined that towns could issue warrants in anticipation of the collection of taxes.¹¹⁹ In 1934 the attorney general said that if a town didn't have the money to pay for an election it could issue warrants for the expenses, in anticipation of the collection of taxes, and could pay for those warrants when tax collections were received.¹²⁰ In 1947 the attorney general said that a town could issue orders or warrants to build a fire hall, that warrants could be issued with payment deferred until the following year when the taxes were collected, and that the person who accepted the warrant could chose between waiting a year for payment or seeing if a bank would buy the warrant immediately.¹²¹ The next year, the attorney general said that a town could not borrow money from a bank and issue warrants to "cover" the loan.¹²² In 1951, the attorney general said (essentially contradicting the 1947 opinion) that a town could not issue warrants in 1951 in anticipation of the taxes that might be levied in 1952, and would have to wait until the taxes were levied and in the process of being collected before issuing anticipation warrants.¹²³

In 1952 the attorney general purported to reconsider the issue and supercede all prior inconsistent opinions.¹²⁴ He equated warrants-which he never defined or described-with orders under § 367.18. As such, he believed towns had power to issue warrants, just as they had power to issue orders. He believed that towns could, after January 1st of any year, issue warrants in anticipation of taxes that were voted the year before and would be collected during the current year, but that the total amount of the warrants would be limited (1) by § 471.69 and (2) by the amount authorized by the electors at the annual election (or in a special meeting thereafter).

In 1962, the attorney general again equated warrants with town orders under § 367.18, and held that because the statute said that orders had to be paid in the order received, a town and a bank could not agree to delay the payment of warrants to use warrants as security for a three year loan.¹²⁵

So, again, what is a "warrant?" I don't think these attorney general opinions help much. Is a warrant an order drawn on the town's depository bank? If so, it is a check under § 367.18. How do you issue checks on your depository bank account in anticipation of the tax collections for that year unless the bank agrees to lend you the money to cover the checks? Does a town have the implied power, under § 471.69, to borrow money from a bank (limited as in § 471.69) in anticipation of the taxes to be collected during that year, and can the town then write checks on the bank account against the money lent and deposited into the account? I frankly cannot figure it out, and invite someone to take up this subject at a subsequent seminar and explain all the ins and outs of warrants as funding devices.

All that I am comfortable saying about warrants in the town context is (1) I don't know what they are (2) 1 don't know how a town issues them (if "issue" is the right word in the first place), (3) I'm not sure how a town can use them, and (4) after a town issues them I'm not sure what the town's rights or obligations might be with regard to them. How's that for helpful? The fact is I can't give any intelligent legal advice about warrants other than saying that I'd stay away from them until someone offers a cogent explanation of what they are.

Conclusion

I hope this gives you a good starting place for considering issues about incurring debt and borrowing money. I want to emphasize that this can be a very complicated area, this paper only provides an overview, and you should not confuse it with legal advice-get an attorney involved in your project from the start.

Let me close with three suggestions.

I think it would be very useful for some attorney to tackle the task of defining just exactly what warrants are, how they can be used, and how one goes about properly using them.

I think the Association should consider approaching the legislature about clarifying § 275.27. It isn't clear whether it applies to towns. If it does, it is not clear what it means in the context of town supervisors and their duties. This uncertainty is particularly unfortunate because if a supervisor guesses wrong about what it means that supervisor might have to pay for the cost of a project out of his or her own pocket.

Finally, I think the Association should consider approaching the legislature and asking for a statute enabling towns to carry lines of credit at their depository banks, similar to what school districts now enjoy.

* * *

TOWN OF WATERTOWN

CERTIFICATE OF INDEBTEDNESS OF 1997

$53,000.00

The Town of Watertown, Minnesota, a duly organized and existing municipal corporation in Carver County, Minnesota (Town) acknowledges itself to be indebted and for value received hereby promises to pay to the First American Bank, N.A., 301 Territorial St. East, Watertown, Minnesota, or its assigns, the principal sum of Fifty-Three Thousand Dollars ($53,000.00) on December 31st in the years and installment amounts as follows:

YEARS	PRINCIPAL	INTEREST
1998	$10,600.00	$3,047.50
1999	$10,600.00	$2,438.00
2000	$10,600.00	$1,828.50
2001	$10,600.00	$1,219.00
2002	$10,600.00	$ 609.50

with interest thereon from January 1, 1998 thereof at the annual rate of 5.75% per annum payable on December 31st of each year, commencing December 31, 1998 for the prompt and full payment of such principal and interest as the same respectively becomes due.

This Certificate of Indebtedness is issued pursuant to a resolution adopted by the Town Board of the Town of Watertown on December 30, 1997 (Resolution) for the purpose of Providing money to finance a Town Maintenance Truck, and the principal thereof and interest hereon are payable from the proceeds of ad valorem tax levy on all of the taxable property in the Town set forth in said resolution. The full faith and credit of the Town are irrevocably pledged for payment of this Certificate of Indebtedness.

The Town Board has designated the Certificate of Indebtedness as "qualified tax-exempt obligations" within the meaning of Section 265(b)(3) of the Internal Revenue Code of 1986, as amended (Code relating to disallowance of interest expense for financial institutions and within the ten million dollar limit allowed by the Code for the calendar year of issue).

It is hereby certified, recited, covenanted, and agreed that all acts, conditions and things required by the Constitution and the laws of the State of Minnesota to be done, to exist, to happen and to be performed preliminarily to and in issuance of this Certificate of Indebtedness in order to make it a valid and binding obligation of the Town of Watertown in accordance with its terms, have been done, do exist, have happened and have been performed as so required, and that the issuance of this Certificate of Indebtedness does not cause the indebtedness of the Town to exceed any Constitutional or Statutory limitation of indebtedness.

IN WITNESS WHEREOF, the Town of Watertown, Carver County, Minnesota, by its Board, has caused this Certificate of Indebtedness to be executed on its behalf by a manual signature of the Chairman and the Town Clerk and has caused this Certificate of Indebtedness to be dated as the date set forth above.

TOWN OF WATERTOWN

Dated January 1, 1998

_____________________________

Mike Dressen, Town Board Chairman

_____________________________

Kenneth Quaas, Town Clerk

===========================================================

¹ We'll only look briefly at these questions for a couple reasons. First, to cover these items in detail would require a complete article. Second, the topic of town powers is a separate topic at this year's program.
²E.g., Minn. Const. Art. 12 § 3; Great Northern Bridge Co. v. Town of Finlayson, 133 Minn. 270, 158 N.W. 392, 393 (1916).
³ See, State Bank of Barnum v. Town of Goodland, 109 Minn. 28, 122 N.W. 468 (1909).
⁴See, Op. Minn. Atty. Gen. 434A-6.
⁵ Minn. Const. Art. 10 § 1.
⁶ E.g., Burns v. Essling, 156 Minn. 171, 194 N.W. 404 (1923).
⁷ Minn. Stat. § 475.52, subd. 4.
⁸ Id. The statutory language, to my mind, leaves it unclear whether a town could issue bonds to improve a nursing home or home for the aged that was not owned by the town. I suspect a town would have to own those facilities before expending public funds to improve them but the statute leaves that somewhat uncertain.
⁹ Id. Note that the statute says that bonds can issue for the "acquisition" of this type of equipment; the statute does not say that bonds can issue for the "maintenance" or "improvement" of that type of equipment. Presumably bonds are not authorized for those purposes.
¹⁰ Id.
¹¹ Minn. Stat. § 475.52, subd. 6.
¹² Id. See also, Minn. Stat. § 475.58, subd. 2, and § 475.67.
¹³ Minn. Ch. 429. The details of that chapter and the bonds that can be issued pursuant to it go far beyond the scope of this paper. In general, it sets out complicated procedures by which towns can issue bonds for certain public improvements including streets, sidewalks, gutters, curbs, street lights, street drainage, trees along streets, storm and sanitary sewer systems, water works, playgrounds, recreational facilities, abatement of nuisances, draining and filling wetlands, and constructing and maintaining retaining walls.
¹⁴ Minn. Stat. § 444.075.
¹⁵ Minn. Stat. § 471.15.
¹⁶ Minn. Stat. § 366.095, subd. 2.
¹⁷ Having said that, bear in mind that our "working definition" is an oversimplification. There is no statute that expressly says, "A town can borrow money from a bank." There is a statute (§ 366.095) that says a town can issue a certificate of indebtedness. A certificate of indebtedness can be structured so that a town is using it to borrow money from a bank. Therefore, you can use a certificate of indebtedness as a device to get the equivalent of a bank loan. But certificates of indebtedness are not "garden variety" loans. If you or I borrow money, the bank gives us papers to sign saying that we will pay off our loan or else. The certificate of indebtedness usually assumes the form of the town giving the bank a piece of paper saying that it will be indebted to the bank (or the person to whom the bank sells the paper) in the amount and on the terms specified. The certificate of indebtedness can assume forms quite different from standard loan documents. For example, under § 475.754, if a town treasury is tapped due to a natural disaster or public emergency, the town is authorized to issue what are known as emergency certificates of indebtedness. Those certificates of indebtedness (1) are to mature within three years, (2) may not bear interest in excess of the amount prescribed for bonds, (3) must be in a form prescribed by the state auditor and the commissioner of commerce, and (4) are to be issued with or without advertising for bids. That resembles a bond issue more than a bank loan. Similarly, 471.75, subd. 4, applies to towns that have more than 50% of their tax capacity in unmined iron ore, and contains special requirements for any certificates of indebtedness, including (1) the selling of the certificates in anticipation of the collection of taxes, (2) a definite due date on each certificate, (3) a requirement that the certificates be negotiable and bear interest at or below six percent, and (4) issuance in amounts of $25 each or multiples thereof. Again, those are more like bonds than loan papers. The point is, I have tried to keep things reasonably simple by considering the situation where a certificate of indebtedness is used to accomplish what is in essence a loan from a bank and, for purposes of trying to keep things from getting too convoluted, we will equate a certificate of indebtedness and a bank loan--but keep in mind that they really are two different things.
¹⁸ Minn. Stat. § 366.095, subd. 1.
¹⁹ In the following sections of the paper we will discuss exceptions and qualifications such as the town's debt limit and the potential involvement of the electors depending upon the amount of the loan.
²⁰ Let's note a few things here to avoid bogging down the casual reader who doesn't read footnotes. While 366.095 is the primary statute regarding certificates of indebtedness there are some other statutory provisions that authorize certificates of indebtedness. Minn. Stat. § 368.01, subd. 23, gives an "urban" town power to issue certificates of indebtedness to purchase fire, police, ambulance, and street equipment. Special rules regarding certificates of indebtedness apply in some instances to towns in which more than 50% of the net tax capacity consists of unmined iron ore. Minn. Stat. §§ 471.71-.83 (see especially § 471.75). Section 475.754 allows a town to issue emergency certificates of indebtedness if a natural disaster or public emergency results in extraordinary expenditures and if the town's current budget cannot cover those expenditures.
²¹ At least, so one theory goes. The contrary argument, which is more fully discussed later, is that a town can use a certificate of indebtedness to retire a debt over a period of time longer than five years by structuring the loan so that there is a large balloon payment at the end of five years. Then, the argument goes, you refinance at the end of five years by taking out a second certificate of indebtedness which pays off the first (including the balloon) and refinances the balloon over the next five year period.
²²To maintain at least a semblance of focus, we're going to stick with certificates of indebtedness and bonds here (and mostly just certificates of indebtedness). However, those who are curious about other funding devices can skip ahead to the last section where they are briefly discussed.
²³Minn. Stat. § 365.07.
²⁴Minn. Stat. § 365.09.
²⁵ Of course, the electors at the annual meeting in March are setting the budget for the next year. For example, the electors at the March 2000 meeting set the budget for 2001. This leads at times to hopeless and nearly metaphysical confusion which we will try to avoid.
²⁶Minn. Stat. § 365.10, subd. 4.
²⁷ Minn. Stat. § 365.431.
²⁸ Minn. Stat. § 365.43, subd. 1.
²⁹ Minn. Stat. § 365.10, subd. 18, allows a town to maintain a capital reserve fund if the electors authorize it.
³⁰ Minn. Stat. § 366.04.
³¹Minn. Stat. § 366.01, subd. 1.
³² Minn. Stat. § 367.16, subd. l.
³³ Minn. Stat. § 366.19.
³⁴ Minn. Stat. § 367.18.
³⁵Minn. Stat. §§ 365.02 (3); 365.025, subd. 1.
³⁶Minn. Stat. § 365.02 (2).
³⁷Section 365.025 goes even further and says that a town board may enter into any contract necessary or desirable to use any town power "notwithstanding any other law." That obviously strengthens the argument.
³⁸Minn. Stat. §§ 365.43, 365.431.
³⁹Minn. Stat. §§ 365.43, subd. 1; 365.52, subd. 1.
⁴⁰ Minn. Stat. § 475.58, subd. 1.
⁴¹ Minn. Stat. § 475.53, subd. 1.
⁴² The statement I've made is something of a simplification. The statute says that net debt means "the amount remaining after deducting from [the town's] gross debt, the amount of current revenues which are applicable within the current fiscal year to the payment of any debt" and excluding those items that do not count as "net debt." Minn. Stat. § 475.5 1, subd. 4.
⁴³Minn. Stat. § 475.51, subd. 4.
⁴⁴Finlayson v. Vaughn, 54 Minn. 331, 56 N.W. 49 (1893).
⁴⁵E.g., Schmitz v. Zeh, 91 Minn. 290, 97 N.W. 1049 (1904).
⁴⁶A good discussion of the various types of limitations, the history that led to each, and the reasons for each is found in Gelfand, "Seeking Local Government Financial Integrity Through Debt Ceilings, Tax Limitations, and Expenditure Limits," 63 Minn. L. Rev. 545 (1979).
⁴⁷Minn. Stat. § 275.70-.74.
⁴⁸Minn. Stat. § 275.70, subd. 3.
⁴⁹Johnston v. County of Becker, 27 Minn. 64, 67, 6 N.W. 411 (1880).
⁵⁰ And since I'm going to paraphrase it, it makes sense to set it out here for the curious. "It shall be unlawful for the authorities of any county, town, city, or school district, unless expressly authorized by law, to contract any debt or incur any pecuniary liability for the payment of either the principal or the interest of which, during the current or any subsequent year, it shall be necessary to levy a rate of taxes higher than the maximum prescribed by law. Every such contract shall be null and void in regard to any obligation sought to be imposed upon such corporation; but every officer, agent, or member thereof who participates in or authorizes the making of the contract shall be individually liable for its performance. Every such officer or agent who is present when such contract is made or authorized shall be deemed to participate in or authorize the making thereof, as the case may be, unless the officer or agent enter or cause to be entered a dissent therefrom in the records of such corporation." Minn. Stat. § 275.27.
⁵¹Minn. Stat. § 275.27.
⁵²For a discussion of the confusing and contradictory tax limitations applicable to towns in the late 1960s--and hey, seriously, you really should get out more if you find yourself interested in that--read Minn. Op. Atty. Gen. 519-0 (3/14/67). In a basic sense, towns were subject to a mill rate (a mill is 1/10th of one cent so, for example, a rate of 17 mills would represent a 1.7% tax rate) that varied depending on the size and value of the town. See, Minn. Stat. § 275.09 (repealed 1983) and § 275.10 (repealed 1979).
⁵³One last note about this troublesome statute. The statute says that supervisors cannot incur a debt that would result in a rate of taxes higher than the maximum rate "unless expressly authorized by law." But a problem with the language of the statute is this--"expressly authorized by law" to do what? To incur the debt itself or to exceed the tax limitation? One could argue that the supervisors can "bust the budget" under this statute so long as the expenditure is one that is authorized by law. There is dictum in State v. Neisen, 173 Minn. 350, 217 N.W. 371, 372 (1928) to that effect. The court wrote in dictum that the hazard the statute guarded against was making contracts that were not authorized or recognized by law. That dictum is almost certainly incorrect, because the purpose of the statute is to require government officials to make authorized contracts that do not exceed the tax rate limitations. E.g., Johnston v. County of Becker, 27 Minn. 64, 6 N.W. 411 (1880); Rogers v. LeSueur County, 57 Minn. 434, 59 N.W. 488 (1894); Sutton v. Board of Education of City of Duluth, 197 Minn. 125, 266 N.W. 447 (1936).
⁵⁴The actual language of the pertinent portion of the statute says that no "town shall contract any debt or issue any warrant or order in any calendar year in anticipation of the collection of taxes levied or to be levied for that year in excess of the average amount actually received in tax collections on the levy for the three previous calendar years plus ten percent..." Minn. Stat. § 471.69. You could argue that this statute literally only places restrictions on a town's ability to anticipate revenues and does not actually authorize a town to anticipate revenues, but I think that's an overly restrictive reading.
⁵⁵ Minn. Stat. § 366.095, subd. 1.
⁵⁶Minn. Stat. 475.54, subd. 1.
⁵⁷Remember, as discussed earlier, there are other sources of power for issuing certificates of indebtedness, such as emergency certificates of indebtedness under § 475.754 or certificates of indebtedness issued by a town whose net tax capacity is in large part mineral tax capacity under §§ 471.71-.83.
⁵⁸I'm told that most banks are eager to lend money to towns, for three principal reasons. One is favorable interest income treatment. Another is that the town cannot declare bankruptcy. Finally, security for the loan--tax dollars raised--is strong.
⁵⁹Minn. Stat. § 366.095, subd. 1.
⁶⁰Minn. Stat. § 475.57. The provisions of Minn. Stat. §§ 475.51-.76 have to be considered when issuing certificates of indebtedness. That is because those statutes--which deal specifically with bonds--are applicable to "obligations," which, as defined at Minn. Stat. § 475.5 1, subd. 3, would cover most certificates of indebtedness. Also, Section 366.095 provides that a tax levy to pay the principal and, interest of certificates of indebtedness is to be made as in the case of bonds.
⁶¹Minn. Stat. § 366.095, subd. 1.
⁶²Id.
⁶³Id.
⁶⁴Id. The statute requires that a tax levy shall be made to pay the principal and interest on the certificates as in the case of bonds so, once again, we see an inter-relationship between § 366.095 and the laws regarding bonds in Chapter 475.
⁶⁵Minn. Stat. § 475.61, subd. 1.
⁶⁶Id.
⁶⁷Minn. Stat. §§ 475.61, subds. 1 & 4; 475.65.
⁶⁸Minn. Stat. § 475.61, subd. 2.
⁶⁹Minn. Stat. § 366.095, subd. 1.
⁷⁰Id.
⁷¹Id.
⁷²Id.
⁷³Id. Keep in mind that in counting days you exclude the first day (the date of publication) and include the last day (the tenth day after the date of publication) unless the last day falls upon a Saturday, Sunday, or legal holiday, in which case you count the next day that is not a Saturday, Sunday, or legal holiday. Minn. Stat. § 645.151. Troy Gilchrist suggests, and I think it usually would be a good idea, to add an extra day to the period, set out that day as the last date for filing the petition, put that date in the publication of the resolution, and state that the petition must be filed with the clerk on or before 5:00 p.m. on that date.
⁷⁴Minn. Stat. § 366.095, subd. 1.
⁷⁵Id.
⁷⁶See, Minn. Stat. §§ 475.58, subd. 1; 205.10.
⁷⁷Minn. Stat. § 275.61.
⁷⁸Id.
⁷⁹Minn. Stat. § 275.60.
⁸⁰Minn. Stat. § 366.905, subd. 1.
⁸¹Minn. Stat. § 475.58, subd. la.
⁸²Again, credit where it is due--this is Troy Gilchrist's suggestion and, as usual, a good one.
⁸³Minn. Stat. § 475.61, subd. 1.
⁸⁴Id.
⁸⁵Id.
⁸⁶Minn. Stat. § 475.61, subd. 2 & 4.
⁸⁷Minn. Stat. § 475.61, subd. 3.
⁸⁸Minn. Stat. § 475.61, subd. 2.
⁸⁹Id.
⁹⁰Minn. Stat. § 475.61, subd. 3.
⁹¹Minn. Stat. § 475.65.
⁹²Minn. Stat. § 365.025, subd. 2.
⁹³That's very nearly ¼ of 1%, the "threshold" for certificates of indebtedness. Why such a strange number--0.24177 percent rather than 0.25 percent--is something I don't have an answer for. I suspect it is based more on history than logic.
⁹⁴Minn. Stat. § 365.025, subd. 4.
⁹⁵Minn. Stat. § 465.71.
⁹⁶Ambrozich v. City of Eveleth, 200 Minn. 473, 274 N.W. 635 (1937).
⁹⁷Minn. Stat. §§ 365.02(3); 365.025, subd. 1.
⁹⁸See, Minn. Stat. § 123B. 12(a), which says that if a school district has insufficient funds to pay its obligations it may "enter into agreements with banks" to take school district orders, which I suppose you might interpret as allowing a school district to take bank loans. The amount of the "loan," if that's what it is, is nonetheless limited by § 471.69 to the average of the three previous years' collections plus ten percent.
⁹⁹A school district can borrow money through "negotiable tax anticipation certificates of indebtedness" and "aid anticipation certificates of indebtedness," the later of which are certificates issued on the "security" of the likely state and federal aid that will come to the school district. Minn. Stat. § 126C.52 & .53. A city can issue certificates of indebtedness in anticipation of tax collections, Minn. Stat, § 412.261, and for certain equipment. Minn. Stat. § 412.301. A city can issue what are known as "capital notes" for certain fund-raising purposes. Minn. Stat. § 410.32.
¹⁰⁰Minn. Stat. § 123B.12(b) allows a school district, subject to the limitations in § 471.69, to enter into a line of credit agreement at a financial institution provided that (1) all advances are repaid in full within 45 days and (2) the amount of credit advanced cannot exceed more than 95% of the average monthly operating expenses in the previous fiscal year.
¹⁰¹Minn. Stat. §§ 385.13; 385.31.
¹⁰²Minn. Stat. § 471.69. It says no "town shall . . . issue any warrant or order in any calendar year in anticipation of the collection of taxes levied or to be levied for that year" etc. That obviously contemplates something known as a town warrant (or order).
¹⁰³Minn. Stat. § 385.28.
¹⁰⁴Minn. Stat. § 471.415.
¹⁰⁵Black's Law Dictionary 1421 (5th ed. 1979).
¹⁰⁶Minn. Stat. § 366.01, subd. 1.
¹⁰⁷Minn. Stat. § 367.18. It reads: "Accounts audited and allowed, and the amount of any account voted or to be allowed, at any town meeting, shall be paid by the town treasurer, on the order of the town board, signed by the chair and countersigned by the clerk. Each order shall be drawn so that when signed by the treasurer in an appropriate place it becomes a check on the town depository. The order shall be received in payment of town taxes of the town."
¹⁰⁸Minn. Stat. § 367.19.
¹⁰⁹Judd v. City of St. Cloud, 198 Minn. 5 90, 272 N. W. 577 (1937).
¹¹⁰Minn. Stat. § 427.12 says that a city's warrant is a check. I find two Minnesota cases that, in my view, conceptualize warrants as checks drawn on municipal treasuries. Zalesky v. Consolidated School District No. 21, 175 Minn. 166, 220 N.W. 428 (1928); Board of Commissioners of Ramsey County v. Elmund, 94 Minn. 196, 102 N.W. 719 (1905).
¹¹¹First National Bank v. School District No. 15, -- Minn. -- 217 N.W. 366 (1928).
¹¹²Farmers National Bank of Hutchinson v. Johnson, -- Minn. -- , 233 N.W. 236 (1930); Kalman v. County of Grant, 167 Minn. 459, 209 N.W. 638 (1926).
¹¹³Strubble v. Nelson, 211 Minn. 610, 15 N.W.2d 101 (1944).
¹¹⁴56 Am. Jur. 2d, "Municipal Corporations," § 633 (1971).
¹¹⁵Minn. Stat. §§ 471.414; 471.69. Remember, when the board commands the treasurer to pay a claim out of the town treasury it is an "order" rather than a "warrant," at least according to Minn. Stat. § 366.01, subd. 1.
¹¹⁶Minn. Stat. § 18.333 authorizes a town clerk, in some circumstances, to issue a warrant to a person who cuts down Mahonia or barberry bushes. Minn. Stat. § 18.81 requires a town clerk to issue warrants to pay the count for weed destruction if the town fails to destroy the weeds. Other than that, I don't find any statute expressly saying that a town can issue warrants.
¹¹⁷Again, that statute says that the warrants or orders are to be limited to the average of the tax collections for the three previous years plus ten percent.
¹¹⁸Minn. Stat. §§ 365.43-.431. Great Northern Bridge Co. v. Town of Finlayson, 133 Minn. 270, 158 NW. 392, 393 (1916) (where the court in dictum said that if the board expended more than had been raised by the electors the expenditure may be illegal),
¹¹⁹Minn. Op. Arty. Gen. No. 145, (3/21/22).
¹²⁰Minn. Op. Atty. Gen. No. 397 (5/23/34).
¹²¹Minn. Op. Atty. Gen. 442-B-6 (3/25/47).
¹²²Minn. Op. Arty. Gen. 476-a-3 (11/10/48).
¹²³Minn. Op. Atty. Gen. 442-B-6 (7/26/5 1).
¹²⁴Minn. Op. Atty. Gen. 107a-1 (8/19/52).
¹²⁵Minn. Op. Atty. Gen. 442b-6 (4/27/62).

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