Miami Beach: Receded, Revised, and Reaffirmed
On September 18, 2008, the Supreme Court of Florida released its third opinion in Strand v. Escambia County, 992 So. 2d 150 (Fla. 2008), reh’g denied, (Fla. Nov. 19, 2008), and the long-awaited decisions in City of Parker v. State, 992 So. 2d 171 (Fla. 2008), and Bay County v. Town of Cedar Grove, 992 So. 2d 164 (Fla. 2008). These cases1 upheld the principles established in 1980 in the landmark case of State v. Miami Beach Redevelopment Agency, 392 So. 2d 875 (Fla. 1980).2 The decisions in all three cases are fundamental to the ability of local governments in Florida to access critical capital markets and to finance, build, and equip a multitude of capital improvements and basic facilities such as schools, city halls, courthouses, fire stations, and other buildings serving vitally important government functions. All three cases involve tax-increment financing3 and community redevelopment.4 While each case had its own nuances, there was one common issue central to all three cases. That issue was whether local governments may issue tax-increment financing bonds without holding a referendum pursuant to art. VII, §12 of the Florida Constitution, which requires, among other things, bonds “payable from ad valorem taxation” to be approved by a vote of the electors. In each case, the court validated the tax-increment financing bonds and upheld the decision in Miami Beach.
The Precursor: Miami Beach
To understand the court’s decisions in Strand, Parker, and Cedar Grove, it is necessary to examine the origin, development, and application of the court’s previous decisions, culminating in Miami Beach. Over the past 75 years, the court has developed a clear, undisturbed bright-line principle that a bond or similar debt obligation is subject to the referendum requirement only where it directly or indirectly obligates the local government to exercise its taxing powers.5 Local governments in Florida have relied on this clear bright-line principle in negotiating and developing carefully crafted financing vehicles.
The bright-line principle was established in 1933 in State v. City of Miami, 152 So. 6 (Fla. 1933), in which the court recognized that bonds or similar debt obligations, which are not payable from ad valorem taxes, do not constitute a debt of the local government obligating the local government to levy or collect ad valorem taxes.6 The court further developed this principle in Seaboard Air Line Railroad Co. v. Peters, 43 So. 2d 448 (Fla. 1949), when it held bonds payable solely from a special fund, into which operating revenues and ad valorem taxes were deposited, did not violate the referendum requirement because the bondholders could not compel ad valorem taxation. Subsequently, in Town of Medley v. State, 162 So. 2d 257, 258 (Fla. 1964), the court again confirmed the constitutionality of using ad valorem taxes as long as the power to tax was itself not pledged, and reiterated that the referendum requirement encompassed only bonds or certificates of indebtedness that directly obligate the ad valorem taxing power.
In 1968, the Florida Constitution was substantially revised. The 1968 constitutional revision amended the referendum requirement by expanding the class of debt instruments subject to the referendum, but it did not disturb the line of authority stretching from City of Miami to Town of Medley. In fact, one of the principal drafters of the new constitution commented, “[e]xcept for the fact that the new constitution limits local bonding to capital projects, the new constitution offers the same basic provision as did the 1885 Constitution after 1930.”7 Because the referendum requirement remains similar in this regard, the court continued to apply the bright-line principle. For instance, 10 years after the constitutional revision, the court recognized there was no prohibition against a local government using ad valorem tax revenues when it was required to compute and set aside a prescribed amount, when available, for a discrete purpose.8
The court’s development and application of the bright-line principle continued with its decision in Miami Beach, which applied the principle to a tax-increment financing transaction in the relatively new context of community redevelopment.9 Miami Beach held that “what is critical to the constitutionality of the bonds is that. . . a bondholder would have no right. . . to compel by judicial action the levy of ad valorem taxation.”10 In a tax-increment financing transaction, the court held that the only obligation of the local government “is to appropriate a sum equal to any tax increment generated in a particular year from the ordinary, general levy of ad valorem taxes otherwise made in the city and county that year.”11 Miami Beach, following the bright-line principle, validated the issuance of tax-increment financing bonds by a community redevelopment agency without requiring a referendum. Following Miami Beach, the court has continued to uphold the bright-line principle and the use of ad valorem tax revenues to pay debt service without a referendum.12
The bright-line principle developed in 1933 and consistently applied through today practically protects taxpayers’ interests while also providing local governments access to necessary capital. When analyzing the substance of a transaction proposed by a government with the power to tax, the court has consistently held the critical constitutional question in determining whether the referendum requirement applies is: Does the transaction directly or indirectly obligate the government to impose taxes in order to support its debt obligations? Stated more precisely, can a holder of that debt compel the government to exercise its taxing powers?
The Initial Strand Decision
On September 6, 2007, the court issued its first opinion in Strand, unanimously reversing Miami Beach and also receding from State v. School Board of Sarasota County, 561 So. 2d 549 (Fla. 1990), a decision heavily relied upon for billions of dollars in government financing. The court held that, because Escambia County’s proposed bonds might be payable from ad valorem tax revenues, the bonds were “payable from ad valorem taxation” and, thus, triggered the constitutional referendum requirement. The decision was particularly surprising because the parties had not argued or briefed reversal of Miami Beach, under which a pledge of tax-increment funds was merely a pledge of available funds, not a pledge of ad valorem taxing power. The decision shocked the public finance markets and caused a number of Florida local governments and school districts to halt current financings. The events that occurred over the next year were unprecedented, culminating in the court’s withdrawal of its initial opinion in Strand and the ultimate reaffirmation of its decisions in Miami Beach and School Board of Sarasota County.
After the initial opinion in Strand, the court made key decisions and allowances signaling its recognition of the enormous backlash against and potentially widespread consequences of its decision. As word of the initial Strand opinion quickly spread, the court was immediately inundated with speaking motions and briefs in support of a rehearing from school boards, municipalities, and counties across the state. The court ultimately allowed a select few (the Florida League of Cities, the Florida Redevelopment Association, the Florida Association of Counties, the Florida School Boards Association, and the attorney general) to appear as amici curiae and granted leave for additional argument in support of rehearing and on the consequences of the court’s decision. The court also took the extraordinary action of granting oral argument on rehearing. On September 28, 2007, after receiving more than 20 motions, briefs, and responses, the court issued a revised opinion removing all references to School Board of Sarasota County and removing any retroactive application of its decision to recede from Miami Beach. This calmed the school districts and the financial markets. The only issue left open for oral arguments was the future of tax-increment financing.
On October 9, 2007, the court heard oral arguments on rehearing, focusing heavily on the Florida Constitution, interpretations of its language, and the court’s precedent. Participants asked the court to narrow its revised opinion to the facts in Strand, allowing Miami Beach to remain good law and thereby reserving judgment on tax-increment financing for a community redevelopment case, such as Parker and Cedar Grove, which were then being briefed on an expedited schedule. In both of those cases, the municipalities employed traditional community redevelopment financing under the Community Redevelopment Act, relying on the unquestioned (until Strand) constitutionality of issuing tax-increment revenue bonds without referendum approval. Days after the oral argument on rehearing in Strand, briefs in Parker and Cedar Grove were filed arguing for withdrawal of Strand and reaffirmation of Miami Beach. On February 7, 2008, the court heard oral argument in Parker and Cedar Grove. The timeliness of Parker and Cedar Grove gave those local governments the unique opportunity to distinguish Strand and to answer questions or clarify points the court had raised during the October 9th oral argument. On September 18, 2008, the court issued its three decisions, withdrawing the revised Strand opinion, upholding Miami Beach, and validating the bonds in Strand, Parker, and Cedar Grove based upon the validity of Miami Beach.
The Three Cases: Strand, Parker, and CedarGrove
In Strand, the Supreme Court validated Escambia County’s proposed tax-increment financing bonds to finance a road-widening project. In authorizing the issuance of the bonds, the county relied on its home rule powers, and not the Community Redevelopment Act. The authorizing bond documents in Strand clearly stated that no bondholder could compel the exercise of the ad valorem taxing power of the county or any other governmental entity, including the state. The court held that tax-increment financing bonds are not payable from ad valorem taxation, and, therefore, the county was not required to hold a voter referendum pursuant to art. VII, §12 of the Florida Constitution. In so holding, the court found the tax-increment financing mechanism used in Strand was indistinguishable from the tax-increment financing mechanism approved in Miami Beach.
In recognizing the importance of stability in the law, the court in Strand affirmed its commitment to the doctrine of stare decisis. The court applied its traditional stare decisis analysis and found: 1) the decision in Miami Beach had not been proven unworkable due to reliance on an impractical legal fiction; 2) local governments’ reliance on Miami Beach was widespread and receding from its holding would cause serious disruption to government entities; and 3) no changes had occurred since Miami Beach affecting that decision. The court also distinguished the facts in Strand from those found in County of Volusia v. State, 417 So. 2d 968 (Fla. 1982). In County of Volusia, the court denied validation of the bonds for failure to comply with the referendum requirement of art. VII, §12 of the Florida Constitution. The court held that Volusia County’s pledge of all legally available non-ad valorem revenues, coupled with a covenant to do all things necessary to continue receiving such revenues, had the effect of requiring an increase in ad valorem taxation, which triggered the referendum requirement. The court found that, unlike County of Volusia, the county in Strand did not make any covenants that would have a substantial impact on the future exercise of the county’s ad valorem taxing power. Finally, the court held that Escambia County was authorized to issue tax-increment financing bonds pursuant to its home rule powers granted in F.S. §125.01, and was not required to comply with the Community Redevelopment Act. The court cited to its approval of a similar tax-increment financing issuance structure in Penn v. Florida Defense Finance & Accounting Service Center Authority, 623 So. 2d 459 (Fla. 1993).
In both Parker and Cedar Grove, the court validated the tax-increment financing bonds proposed to finance capital projects identified in a redevelopment area created pursuant to the Community Redevelopment Act. The authorizing bond documents in both cases clearly stated that no bondholder could compel the exercise of the ad valorem taxing power of the local government or any other governmental entity, including the state. The court held that the voter referendum provision of art. VII, §12 of the Florida Constitution did not apply because the tax-increment financing bonds proposed by the local governments were not payable from ad valorem taxation. Following its decision in Strand, the court held the tax-increment financing mechanisms in Parker and Cedar Grove conformed to the tax-increment financing mechanism approved in Miami Beach.
The decisions in Strand, Parker, and Cedar Grove upheld the constitutionality of the bright-line principle and gave foundational support to the decision in Miami Beach. The principle distinguishes between a pledge to exercise the power of taxation, which requires a referendum, and the simple expenditure of ad valorem taxes, which does not. In all three cases, the decisions were supported by a narrow majority.13 Additionally, in each case, the dissenting justices issued lengthy opinions arguing to reinstate the September 2007 decision in Strand. The dissenting opinions argue, among other things, that a local government is authorized to issue tax-increment financing bonds, but may do so only after such issuance has been approved by a referendum of the electorate. The dissenters argue that art. VII, §12 of the Florida Constitution is triggered when a local government issues bonds that not only pledge the ad valorem taxing power, but also pledge any proceeds of ad valorem taxes. However, the dissenters were unable to persuade a majority of the court, which resulted in the court’s upholding of its longstanding interpretation of art. VII, §12 of the Florida Constitution.
Tax Increment Financing After Strand, Parker, and Cedar Grove
The decisions in these three cases allow issuance of tax-increment financing bonds to accomplish community redevelopment under the Community Redevelopment Act and through the exercise of home rule powers, all without voter approval. In all three cases, the court applied its traditional bright-line principle in interpreting the referendum requirement of art. VII, §12; that is, a bond or similar debt obligation is subject to the referendum requirement only where it directly or indirectly obligates the local government to exercise its taxing powers. In other words, the referendum requirement applies only when a holder of that debt can compel the local government to exercise its taxing powers.
Under Parker and Cedar Grove, there is little doubt that a local government may use tax-increment financing under the Community Redevelopment Act. Both decisions upheld the use of tax-increment financing within the confines of the Community Redevelopment Act. The immediate result of these decisions is to allow counties and municipalities to resume redevelopment projects that were put on hold when the initial Strand opinion was released in September 2007. Additionally, any local government that complies with the Community Redevelopment Act may issue new debt obligations using a tax-increment financing mechanism. On the other hand, the holding in Strand may ultimately prove more tenuous than that in Parker and Cedar Grove because the local government in Strand operated outside the context of the Community Redevelopment Act. In Strand, the court expanded the use of tax-increment financing to debt obligations issued under the home rule powers of a local government, without following the procedures of the Community Redevelopment Act.
In the future, local governments must exercise caution when combining broad home rule powers with tax-increment financing outside the provisions of the Community Redevelopment Act. While the act is not the only mechanism to effectuate redevelopment, it does embody extraordinary protections to allow for tax-increment financing in harmony with the referendum requirement.14 Absent the protections of the Community Redevelopment Act, a local government must be careful not to push the reasoning of the bright-line principle too far by attempting to do indirectly what the local government is not authorized to do directly. The court has, on a number of occasions, found that a local government has exceeded the boundaries of the bright-line principle. For example, the court in County of Volusia held the referendum requirement applied where there is a substantial impact on the taxing power because a local government pledges all legally available non-ad valorem sources of revenue, while covenanting to maintain programs entitling it to receive the various revenues.15 Similarly, the referendum requirement applies where a contractual nonsubstitution clause deprives a government of budgetary flexibility and would inevitably force it to spend ad valorem tax dollars under the contract.16 Further, if the bond covenants of a special hospital district legally obligate the district to levy ad valorem taxes to provide the funds necessary to operate the hospital, the referendum requirement applies because the district indirectly obligated itself to exercise its tax powers.17
Conclusion
The decisions in Strand, Parker, and Cedar Grove upheld the bright-line principle established 75 years ago. According to the court, a local government is able to issue tax-increment financing bonds under the statutory authority of the Community Redevelopment Act and under the authority of a local government’s home rule powers. When issuing tax-increment financing bonds under a local government’s home rule powers, the local government should be cautious to ensure it does not inadvertently pledge its ad valorem taxing powers by attempting to do indirectly what the local government is not authorized to do directly. It should be kept in mind that Miami Beach, Strand, Parker, and Cedar Grove were not unanimous decisions and were each accompanied by dissenting opinions vigorously arguing for a fundamentally different interpretation of art. VII, §12 of the Florida Constitution.
If a majority of the court were to adopt the central theme of the dissenting opinions, then any debt obligation that could potentially be paid from ad valorem tax revenues would be subject to the same referendum requirement currently applicable only to debt obligations directly pledging the power to levy taxes, an interpretation that would effectively undermine a powerful and effective tool to provide much needed infrastructure in the state. While the court has routinely rejected the dissenters’ interpretation of art. VII, §12 of the Florida Constitution, if local governments do not exercise caution in developing tax-increment financing mechanisms under their home rule powers, they risk pushing the reasoning of the bright-line principle to its breaking point, which could result in a significant retreat from Strand by a future court or a legislative intrusion into the home rule powers of local governments.
1 Bryant Miller Olive, P.A., represented the Florida League of Cities as amicus curiae in Strand and represented the City of Parker and the Town of Cedar Grove at trial and on appeal. The authors of this article contributed to the briefs filed in these cases.
2 Bryant Miller Olive, P.A., represented the Miami Beach Redevelopment Agency at trial and on appeal.
3 Tax-increment financing is a measure of the amount of money that the local government puts into a trust fund to which bondholders may look for payment. The measure derives from increases in taxable value within a designated area, but the money itself can come from any source, and often does. In other words, the funds are measured by the ad valorem tax revenues attributable to increased taxable values, but they are not required to be appropriated from ad valorem taxes. For a more detailed discussion of tax-increment financing, see Harry M. Hipler, Tax Increment Financing in Florida: A Tool for Local Government Revitalization, Renewal, and Redevelopment, 81 Fla. Bar. J. 66 (Aug. 2007).
4 See Fla. Stat. Ch. 163, Part III.
5 See, e.g., State v. City of Sunrise, 354 So. 2d 1206, 1209 (Fla. 1978); Nohrr v. Brevard County Ed. Facilities Auth., 247 So. 2d 304, 309 (Fla. 1971); State v. Tampa Sports Auth., 188 So. 2d 795, 797-98 (Fla. 1966); State v. Monroe County, 81 So. 2d 522, 523 (Fla. 1955); State v. City of Miami, 72 So. 2d 655, 656 (Fla. 1954); State v. City of Jacksonville, 53 So. 2d 306, 308 (Fla. 1951); State v. City of Key West, 14 So. 2d 707, 708 (Fla. 1943); State v. Dade County, 200 So. 848, 849 (Fla. 1941); State v. City of Hollywood, 179 So. 721, 723-24 (Fla. 1938); Flint v. Duval County, 170 So. 587, 597-98 (Fla. 1936).
6 State v. City of Miami, 152 So. at 9 (Fla. 1933).
7 Fla. Const. art. VII, §12, Commentary by Talbot “Sandy” D’Alemberte, 26A Fla. Stat. Ann. §101 (1995) (emphasis added); see State v. Orange County, 281 So. 2d 310, 312 (Fla. 1973) (1968 constitutional revision did not abrogate Town of Medley).
8 Tucker v. Underdown, 356 So. 2d 251, 254 (Fla. 1978).
9 The decision in Miami Beach joined Florida with the vast majority of jurisdictions around the country that have upheld tax-increment financing. See Okla. City Urban Renewal Auth. v. Med. Tech & Research Auth. of Okla., 4 P.3d 677, 687 n. 42 (Okla. 2000) (collecting cases).
10 Miami Beach, 392 So. 2d at 898-99.
11 Id.
12 See Panama City Beach Comm. Redev. Agency v. State, 831 So. 2d 662 (Fla. 2002); State v. City of Daytona Beach, 484 So. 2d 1214 (Fla. 1986); Holloway v. Lakeland Downtown Dev. Auth., 417 So. 2d 963 (Fla. 1982); see also State v. Inland Prot. Fin. Corp., 699 So. 2d 1352, 1357 (Fla. 1997) (holding bonds did not violate art. VII, §11, because no bondholder could initiate judicial action to levy taxes in satisfaction of the debt represented by the bonds); State v. Fla. Dev. Fin. Corp., 650 So. 2d 14, 18 (Fla. 1995) (holding state bonds did not violate art. VII, §10, because “bondholders clearly cannot compel a levy of taxes to pay the bond obligations”).
13 The majority in Strand, Parker, and Cedar Grove include Justices Wells, Anstead, Pariente, and Cantero.
14 The most important protection found in the Community Redevelopment Act is the requirement that the local government create a separate legal entity that both 1) controls the tax-increment funds, and 2) lacks ad valorem taxing power. This requirement makes it clear that the power to compel the levy of ad valorem taxes is not given to the bondholder because the separate legal entity holding the tax-increment funds has no taxing power.
15 County of Volusia v. State, 417 So. 2d 968 (Fla. 1982).
16 Frankenmuth Mut. Ins. Co. v. Magaha, 769 So. 2d 1012, 1025-26 (Fla. 2000).
17 State v. Halifax Hosp. Dist., 159 So. 2d 231, 232 (Fla. 1963).
Robert C. Reid is a shareholder in Bryant Miller Olive, P.A., where he practices in the areas of public finance transactions and state and federal taxation. He received his J.D. in 1976 from the University of Memphis School of Law and LL.M. in taxation in 1985 from the University of Florida.
Jason M. Breth is an associate with Bryant Miller Olive, P.A., where he practices in the fields of public finance and state and local government law. He graduated from Florida State University College of Law with high honors and was a member of law review and Order of the Coif.
This column is submitted on behalf of the City, County and Local Government Section, Grant Williams Alley, chair, and Jewel W. Cole, editor.
