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