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Financial Procedure FAQ 6
What is "debt" within the meaning
of Article XI, sec. 3(2) and 3(3) of the Wisconsin Constitution, which
limits municipal borrowing and other debt?
Article XI, sec. 3(2), Wis. Const.,
states in relevant part that no city or village "may become indebted in
an amount that exceeds an allowable percentage of the taxable property
located therein equalized for state purposes as provided by the
legislature. In all cases the allowable percentage shall be 5 percent
except as specified in pars. (a) and (b)." Section 3(3) requires any
village incurring indebtedness under art. XI, sec. 3(2), to collect,
before or at the time of doing so, a direct annual tax sufficient to pay
the interest on the debt as it falls due and also to pay and discharge
the principal of the debt within 20 years from the time the debt was
contracted. Section 67.03(1), Wis. Stats., mirrors art. XI, sec. 3(2).
Wis. Const., and provides that in municipalities the "aggregate amount
of indebtedness, including existing indebtedness, of any municipality
shall not exceed 5 percent of the value of the taxable property located
in the municipality as equalized for state purposes …."
In City of Hartford v. Kirley,
172 Wis.2d 191, 493 N.W.2d 45 (1992), the Wisconsin Supreme Court
recognized that there are several indicia of debt in the constitutional
sense:
First, debt is an
undertaking to pay money or its equivalent. Thus, the fact that a
municipality must certainly provide some municipal service does not
create a present debt, even though it will require the expenditure of
money. Second, debt is a voluntary undertaking …. Third, debt must be
certain in amount. Fourth, it must be an absolute undertaking; if the
municipality may avoid its obligation or if there remain conditions
precedent to it, there is no indebtedness . . . . Fifth, it must be an
undertaking enforceable by the creditor against the municipality or its
assets.
493 N.W.2d at 51, n. 13 (quoting William
J. Kiernan, Jr., Wisconsin Municipal Indebtedness: Part 1: The Power to
Become Indebted and its Limits, 1964 Wis.L.Rev. 173, 197).
As the Wisconsin Supreme Court has
explained in its decisions interpreting art. XI, sec. 3(2), the
constitutional debt limitation "is intended to prevent the creation of
excessive municipal debt and to protect taxpayers from the consequent
oppression of burdensome, if not ruinous taxation. It seeks to impose
the burden of debt repayment upon those who create the obligations, not
upon future generations." City of Hartford, 493 N.W.2d at 51; Dieck v. Unified School District of Antigo, 165 Wis.2d 458, 477 N.W.2d 613, 618 (1991).
In Dieck, the Wisconsin Supreme
Court stated that the test for indebtedness in art. XI, secs. 3(2) and
(3), is "not whether the municipal body unit will probably pay or
whether the municipal body would be foolish not to pay. The test is
whether the municipal body is under an obligation to pay and the
creditor has a right to enforce payment against the municipal body or
its assets." No indebtedness is incurred "where payments are to be made
solely at the government's option." 477 N.W.2d at 618 (quoting State ex rel. Thomson v. Giessel,
271 Wis. 15, 40, 72 N.W.2d 577 (1955)). Therefore, "debt" within the
meaning of art. XI, secs. 3(2) and (3) not only includes direct
indebtedness by municipal borrowing but also indirect obligations like
guaranteeing repayment of a commercial loan to a non-profit organization
or other third party. See League Opinion Debts 287