CITY OF IDAHO FALLS v. FUHRIMAN

BURDICK, Justice.

Jared Fuhriman, mayor of the city of Idaho Falls, appeals the district court's order confirming the validity of a power sales agreement (PSA), and related creditworthiness agreement (CA), pursuant to the Judicial Confirmation Law.1 Both agreements are between Idaho Falls's municipal electric utility Idaho Falls Power (IFP) and the United States of America, Department of Energy, acting by-and-through the Bonneville Power Administration (BPA). Fuhriman argues that the district court erred in finding that the city of Idaho Falls (Idaho Falls) could incur public liability by entering into the seventeen-year PSA without first submitting the PSA to a public vote. Fuhriman argues that the obligations incurred by Idaho Falls under the PSA are ordinary, but not necessary, expenses under Article VIII, § 3 of the Idaho Constitution.2

I. FACTUAL AND PROCEDURAL BACKGROUND

Idaho Falls owns and operates a municipal electric utility, IFP, which provides electricity to customers located within the established service area. IFP owns two hydroelectric generation facilities, but these only generate approximately 10% of IFP's electricity needs, and Idaho Falls currently purchases the remainder of its electricity from BPA under a power purchase agreement that expires on September 30, 2011.

To replace the power purchase agreement that is set to expire, Idaho Falls intends to begin purchasing electricity from BPA pursuant to the PSA beginning October 1, 2011. The PSA creates an obligation for Idaho Falls to purchase power and energy from BPA, and for BPA to sell power and energy to Idaho Falls, for a seventeen-year term commencing on October 1, 2011. These obligations are firm unless an "uncontrollable force" precludes performance. Under the PSA, Idaho Falls will purchase "Slice"3 and "Block"4 products from BPA. BPA requires customers purchasing the "Slice" product to execute a creditworthiness agreement. The CA provides that, upon the occurrence of certain events, Idaho Falls may be required to post cash or a letter of credit to secure its payment obligations under the PSA.

Idaho Falls filed a petition under Idaho's Judicial Confirmation Law, I.C. § 7-1301, et seq., on March 19, 2009, requesting a determination that Idaho Falls's obligations under the PSA are "ordinary and necessary expenses" under Article VIII, § 3, of the Idaho Constitution, and a determination that the CA did not create any new or additional obligation for Idaho Falls. On April 17, 2009, Fuhriman filed an answer in opposition arguing that, under this Court's holding in City of Boise v. Frazier, 143 Idaho 1, 137 P.3d 388 (2006), the obligations incurred under the PSA lack the requisite urgency needed to be considered necessary. Following a hearing on May 7, 2009, the district court issued its order on June 15, 2009, holding that any obligations incurred pursuant to the PSA are ordinary and necessary.

On July 14, 2009, Fuhriman filed a timely notice of appeal pursuant to I.C. § 7-1309. On August 10, 2009, Idaho Falls filed a motion for expedited hearing pursuant to Idaho Appellate Rule 44, and this Court granted the motion on September 2, 2009.

II. STANDARD OF REVIEW

This Court aptly summarized the applicable standard of review in Frazier, as follows: "[t]his Court defers to the factual findings of the district court unless those findings are clearly erroneous. This Court exercises free review of the district court's application of the relevant law to the facts. Constitutional issues are questions of law over which we also exercise free review." 143 Idaho at 2, 137 P.3d at 389 (internal citations omitted).

III. ANALYSIS

Cities in Idaho are generally barred from incurring debts or liabilities, in excess of the income and revenue provided for debts and liabilities in such year, unless they first conduct an election and secure voter approval of the proposed expenditure, as provided in Article VIII, § 3 of the Idaho Constitution.5 Frazier, 143 Idaho at 2, 137 P.3d at 389. There is, however, one relevant exception known as the "proviso clause" wherein no public vote is required if the expenditures constitute "ordinary and necessary expense[s] authorized by the general laws of the state." Id. at 3, 137 P.3d at 390 (quotation omitted).

Here, the district court initially expressed uncertainty as to whether the PSA should properly be considered as the incurring of an "indebtedness or liability" under the Idaho Constitution, as "a contract to buy power in the future is simply a promise to continue to pay for a municipal budgetary item in the future." The district court nevertheless recognized that it is "within the realm of reason" that Idaho Falls is incurring a new liability by entering into the PSA,6 so the court analyzed the PSA and CA. The district court found that the CA is merely a security agreement, imposing no additional indebtedness or liabilities on Idaho Falls, and found that the liability incurred under the PSA constitutes an ordinary and necessary expense under the proviso clause.

A. The Development of Article VIII, § 3 of the Idaho Constitution

In Frazier, this Court summarized the development of Article VIII, § 3 of the Idaho Constitution as follows:

143 Idaho at 3-4, 137 P.3d at 390-91.

B. The liability incurred under the PSA is not "necessary" under the proviso clause of Article VIII, § 3 of the Idaho Constitution.

In Frazier, this Court considered whether the City of Boise could incur long-term indebtedness in financing an expansion of the City's airport parking facilities without first submitting the project to a vote. 143 Idaho at 2, 137 P.3d at 389. This Court, in holding that the project did not fit within the proviso clause, wrote that "in order for an expenditure to qualify as `necessary' under the proviso clause of Article VIII, § 3 there must exist a necessity for making the expenditure at or during such year." 143 Idaho at 5, 137 P.3d at 392 (emphasis added). "The required urgency can result from a number of possible causes, such as threats to public safety, the need for repairs, maintenance, or preservation of existing property, or a legal obligation to make the expenditure without delay." Id. at 6-7, 137 P.3d at 393-94 (internal citations omitted).

Applying the Frazier analysis to the facts of this case, the liability that Idaho Falls is incurring under the PSA cannot reasonably be said to be "necessary" as there is no reason the liability had to be incurred in the year in which the contract was signed. The purchase of electricity under the PSA will not commence until October 1, 2011, and will continue for seventeen years thereafter. Clearly there was no urgency which required that the agreement be entered into "during such year" that it was entered into as ample time existed during which Idaho Falls could have submitted this proposed contract to its taxpayers for a confirmatory vote.

Idaho Falls makes the argument that Frazier is not properly read as imposing a bright-line rule that in order for an expenditure to be "necessary" it must be urgent, but this is inconsistent with the plain reading of Frazier. Idaho Falls urges this Court to distinguish Frazier and limit the necessity-requires-urgency analysis to cases involving large capital projects, such as the expansion of an airport parking garage, and not to apply the analysis to cases of extraordinary indebtedness or liabilities that arise in the ordinary administration of local government affairs, such as repairs, maintenance, city employees' salaries, etc.7

In support of its argument, Idaho Falls cites statements made by Delegate William Claggett at Idaho's Constitutional Convention when he was proposing the proviso clause, where he distinguished between extraordinary expenses that arise in the ordinary administration of affairs, and special indebtedness which does not. See I.W. Hart, Proceedings and Debates of the Constitutional Convention of Idaho, 588-89 (1912). Idaho Falls argues that Claggett's statements indicate that Claggett, and the other framers of Idaho's Constitution, intended for the proviso clause to make an exception for indebtedness and liabilities where the "character" of that debt can fairly be classified as "the type of debt that arises under the ordinary administration of local government affairs" whether or not an element of urgency is present.8 Idaho Falls appears to advocate a "know it when we see it" factual inquiry for determining whether liabilities or indebtedness incurred by counties or municipalities are "ordinary and necessary." We shall not stray from the principle of stare decisis without an exceptionally compelling reason to do so, particularly where doing so would be a move to embrace ambiguity over order.

It is also argued that Idaho Falls—acting through IFP—having chosen to provide electricity to their constituents, has an obligation to continue to provide sufficient electricity to meet their constituents' needs. Assuming, arguendo, that this is true, this merely means that IFP's expenditures to obtain adequate electricity for its customers on a short term basis is "necessary" under the proviso clause. In Bannock County v. C. Bunting & Co., this Court found Bannock County's expenditures for the provision of a temporary jail were ordinary and necessary. 4 Idaho 156, 37 P. 277 (1894) overruled in part on other grounds by Veatch v. City of Moscow, 18 Idaho 313, 109 P. 722 (1910). However, we went on to clarify that, although Bannock County was obligated to provide a facility to act as a jail, "such rooms must be temporarily provided, at as little expense as is consistent with providing suitable quarters, until the question can be submitted to the people." Id. at 168, 37 P. at 281. In accordance with this reasoning Idaho Falls must obtain electricity on a temporary basis unless and until a long-term agreement is confirmed by two-thirds of its qualified electors.

Idaho Falls argues that purchasing power on an annual, or monthly, basis would subject the City to significant market risk and price volatility. This is likely true; however, this does not mean that Idaho Falls may incur a long-term liability for a short term need, absent a confirmatory vote. As this Court stated in Frazier:

143 Idaho at 5, 137 P.3d at 392 (quoting Williams v. City of Emmett, 51 Idaho 500, 505, 6 P.2d 475, 476 (1931)). If the purchase price of electricity under the PSA is preferable to the rates, factoring in potential market volatility, available under short term contracts it is all the more likely that the qualified electors would vote to confirm the PSA.

Therefore, we hold that, under our precedent in Frazier, the PSA is not "necessary" under the meaning of Article VIII, § 3 of the Idaho Constitution, and does not fit within the proviso clause.

IV. CONCLUSION

We hold that the PSA constitutes a liability exceeding the income and revenue provided for it in the year in which it was incurred, did not receive the assent of two-thirds of the qualified voting electorate, and did not fit into the exception to this requirement under the proviso clause. Therefore, we reverse the district court's confirmation of the validity of the PSA.

Chief Justice EISMANN and Justice HORTON concur.

J. JONES, J., dissenting.

I dissent because I am unable to agree with the Court's conclusion that article VIII, section 3 requires a vote of the people for contracts providing necessary supplies to carry on an on-going and long-standing municipal service. The framers of the Idaho Constitution were practical people. Their words and deeds indicate a dichotomy between new programs or construction, which were to require a vote of the people, and support of existing governmental functions, which were to be exempt from a vote by virtue of the Proviso Clause. As we observed in Asson v. City of Burley, 105 Idaho 432, 670 P.2d 839 (1983), that dichotomy has long been recognized in our decisions. It makes sense and should continue to be observed.

The concept I advance is by no means revolutionary. It plays a part in our everyday life. For example, when the family is considering the acquisition of a household pet, the decision must be made with deliberation and care. All of the pros and cons need to be carefully weighed before taking on the obligations attendant with a pet. After all, there will be much involved in the continuing feeding and care of the animal. Once the pet is acquired, the attendant and anticipated long-term obligations kick in. There is no longer the need for careful deliberation with regard to whether to continue to buy the food for the pet. Continued care and maintenance of the pet is an incidental part of the initial decision.

As another example, if a municipality is considering the acquisition of a large and expensive piece of equipment that requires ongoing outlays for fuel and maintenance, the crucial decision to be made by the voters is whether to make the initial purchase. If the voters approve the acquisition, they obviously approve of making the subsequent outlays necessary to keep the equipment operating. That is the situation before us in this case. The record does not disclose how or by whom the decision was made to establish a municipal power generating facility for the City of Idaho Falls. Regardless, that decision appears to have been made over a century ago and, when that decision was made, it was obvious that the City undertook to supply electrical power to its inhabitants and to acquire outside supplies when the production facilities did not provide adequate electric power to them. It was certainly contemplated that generation of power and acquisition of power supplies to fulfill the needs of its citizens was required in the ordinary course of business to fulfill the initial obligation undertaken by the municipality.

When the delegates to the Idaho Constitutional Convention were debating article VIII, section 3, Judge William Claggett, the convention president, proposed the Proviso Clause out of concern that, without it, article VIII, section 3, "would prohibit the issuance of county scrip to pay the ordinary indebtedness absolutely imposed upon the county as provided by law, in case there should be any heavy expenses ... exceeding the current revenues of that year," observing that article VIII, section 3 was "intended to apply to special indebtedness." I.W. HART, PROCEEDINGS AND DEBATES OF THE CONSTITUTIONAL CONVENTION OF IDAHO 587 (1912).9 While the Legislature has not imposed an absolute duty upon municipalities to provide electrical power to their inhabitants, it has provided municipalities the authority to do so. See I.C. § 50-325. Once a municipality exercises that authority and constructs a power facility to supply the electric needs of its citizens, it certainly has undertaken a responsibility to continue that service in the manner most advantageous to its customers.

Judge Claggett went on to say:

Id. at 588. What he was saying is that sometimes ordinary expenses, as contemplated in his proviso, would reach an extraordinary level that would have to be met to carry out the ordinary function of the government and that such expenses should not have to be put to a vote. Again, he referred to special indebtedness as that which would require a vote under article VIII, section 3.

The cases decided since statehood have generally been decided in keeping with the comments made by Judge Claggett. That is, this Court has generally required new projects and construction to be first presented to the voters for approval under article VIII, section 3, but has declined to do so for on-going functions, maintenance, reconstruction, refurbishing, and the like. Noting that early cases took a narrow view of the Proviso Clause, the Asson Court divided the decisions into two categories:

105 Idaho at 441-42, 670 P.2d at 848-49 (emphasis in original) (footnote omitted).

Interestingly enough, the Asson case involved power supply contracts. In that case, a group of citizens brought a petition for a writ of prohibition against five cities that entered into an agreement with the Washington Public Power Supply System (WPPSS) for future supplies of electrical power to be provided by a planned nuclear power plant project. 105 Idaho at 434, 670 P.2d at 841. Each of the five cities relied on outside electrical power in order to service its citizens. Id. The parties, in essence, entered into two agreements. Id. at 435, 670 P.2d at 842. The first agreement was for power from the first three phases of the project. Id. The second was for power from phases four and five of the project. Id. Under the latter agreement, the cities agreed to pay a portion of the costs of development and construction of two nuclear power plants in exchange for a credit for the purchase of future power generated by the plants. Id. The cities relied on the fact that they were specifically authorized by Idaho Code section 50-342 to contract with the federal government for the purchase and disposal of electric power. Id.

The citizens petitioned for the writ of prohibition when phases four and five of the project were terminated in 1982. Id. at 436, 670 P.2d at 843. Under the agreement, the cities were required to pay a proportionate share of $2.25 billion in bonds that were already issued to finance phases four and five. Id. The citizens alleged that the cities should be prohibited from making payment on the bonds because the construction and purchase agreements violated article VIII, section 3 of the Idaho Constitution. Id. at 437, 670 P.2d at 844. In determining whether the expenditure under the agreements was ordinary and necessary for the purpose of article VIII, section 3, the Court noted that "[c]omparison of ... earlier cases reveals one clear distinction between those expenses held to be ordinary and necessary and those held not to be: new construction or the purchase of new equipment or facilities as opposed to repair, partial replacement or reconditioning of existing facilities." Id. at 441-42, 670 P.2d at 848-49 (emphasis in original). Based on this view, the Court held that financing the construction of a new nuclear power plant was not ordinary and that the phase four and five agreement was void because it violated article VIII, section 3.

As for the agreement concerning phases one, two, and three, we noted that "the two sets of agreements are sufficiently different to make much of our holding not applicable even by analogy to the earlier agreements, which we perceive to be in the nature of power purchase contracts more than long-term debt obligations." Id. at 443, 670 P.2d at 850 (emphasis added). The Court's closing sentence indicates that it viewed power purchase contracts as being within the Proviso Clause, or outside the coverage of article VIII, section 3. It must be acknowledged that this latter issue was not before the Court for decision but, as mentioned above, it necessarily follows from the dichotomy which was established at the Constitutional Convention and which has since been observed by this Court.

Neither Frazier nor its underpinning decision, Dunbar, requires a different conclusion. In Dunbar the Court stated that to be exempt from the voting requirement under article VIII, section 3, an expenditure must not only be ordinary but that "there must exist a necessity for making the expenditure at or during such year." 5 Idaho at 412, 49 P. at 411. However, the Court went on to conclude that the "building of a bridge and the payment of scalp bounties are not ordinary, but extraordinary, expenses." Id. at 413, 49 P. 409. Finding that the expenditure was not ordinary, the Court had no need to rule upon the necessity prong, rendering as dicta the Court's observation in that regard. The Frazier Court's reliance on Dunbar for determining the necessity provision, therefore, is on rather infirm ground. Id. at 414, 49 P. at 411. Nevertheless, the Frazier Court merely followed the long-standing dichotomy between new construction, on the one hand, and maintenance of an existing project, on the other. The expensive new parking garage in Frazier was clearly not exempt under the Proviso Clause and, therefore, a vote was required under article VIII, section 3. And, it should be noted that the expenditures in Dunbar consisted of a new construction project and a new program for paying a bounty on rabbit scalps, placing the case on the voting requirement side of the dichotomy along with Frazier.

Although, as pointed out above, the constitutional framers did not contemplate the urgency aspect that the Dunbar Court mentioned in passing, the type of contract at issue here does required a certain amount of urgency on the part of the municipality, as the district court observed:

The main contract at issue required a participation decision to be made by the municipal utility by a date certain (November 1, 2009) for the rate period of 2011-214. Supplemental power supply opportunities also required action by the municipality on relatively short notice. It is not a question of whether the City of Idaho Falls could choose to purchase the supplemental power that these contracts would provide, because the City long ago undertook the responsibility to purchase and supply the necessary supplemental power, regardless of the timing or cost. The question presented was whether the City was going to purchase the power at the best available cost for the benefit of its customers. To require a vote to determine whether the City would choose the lower-cost wholesale contract, as opposed to picking up the necessary supplemental power at a higher cost as the need for the power became critical, would offend the concepts advanced by Judge Claggett in support of adoption of the Proviso Clause.

In order to obtain the benefit of advance purchases and fulfill its obligation to its citizens, the City must enter into an agreement or agreements for the purchase of power well in advance of the budget year in which that power will be consumed. In entering into such agreements, the City is providing for the basic electrical needs of it citizenry, as it has done since the turn of the last century. To hold that the City should be required to subject itself to the whims of the market, to risk greatly increasing the cost, and potentially deprive its citizens of a basic necessity, flies in the face of the framers' intent that the Proviso Clause allow for the normal administration of government functions. Indeed, the Legislature has specifically authorized cities to enter into power purchase contracts (I.C. § 50-342) and to enter into joint ownership arrangements for power projects (I.C. § 50-342A). With regard to the latter provision, the Legislature declared:

The agreements in question here are, in Judge Claggett's words, "extraordinary expenses in the ordinary administration of affairs... the ordinary general indebtedness which is incurred in the way of administration of county affairs." Accordingly, because the contract at issue here falls within the Proviso Clause, I would affirm the ruling of the district court.

Justice Pro Tem KIDWELL concurs.