1.2.4.4 Special Fund Exception

PREMISE – A debt obligation may be eligible for this exception to the constitutional debt limit if debt service is payable solely from a special fund (including future fiscal year revenues) without the need to spend the public agency’s general fund or general revenues.

LEGAL REQUIREMENTS – The debt obligation must be payable out of a special fund established by the public agency and there must be a “nexus” between the purpose for the debt and the special fund from which the limited obligation is payable. For example, debt incurred to finance water system improvements, payable solely from the revenues of the water utility enterprise, would meet the “nexus” requirement. In contrast, debt incurred to finance general city capital improvements or power system improvements payable from water utility enterprise revenues would not. It is not necessary, however, for the source of repayment to be limited to revenues generated by the financed facilities; all revenues of an enterprise may be dedicated to the repayment of debt incurred for the benefit of the enterprise. The public agency cannot be obligated to make any payments from future fiscal year general fund income or revenues, and the exception may not apply if the special fund includes traditional general fund revenues (e.g., tax revenues) or if a newly established special fund redirects revenues that would otherwise have flowed to the general fund.

CAVEATS AND QUALIFICATIONS – “Nexus” determinations are often challenging. Further, if the enterprise is not self sustaining such that any amounts paid from the special fund would be back filled from the general fund, an obligation payable from the revenues of the enterprise may not qualify for treatment as a “special fund.”46

COMMON APPLICATIONS IN THE PUBLIC FINANCE CONTEXT – The Special Fund Exception is available for revenue bonds payable out of the revenues of a municipal enterprise. See Section 3.3.6, Enterprise Fund Debt Obligations. The exception is also available for project financings (financings where debt service is payable solely from the revenues generated by financed facilities) and provides the constitutional debt limit exception applicable to conduit revenue bond issues. (See Section 3.3.9, Conduit Revenue Bonds)

Leading cases include City of Oxnard v. Dale, 45 Cal. 2d 729 (1945) (revenue bonds to finance sewer system improvements that were to be payable from “revenues of the entire sewer system” were held to qualify for the Special Fund Exception); Palm Springs v. Ringwald, 52 Cal. 2d 620 (1959) (bonds to provide parking improvements that would be payable from parking revenues and sales and use tax revenues did not qualify for the exception because sales and use taxes constituted general funds of the city); and City of Redondo Beach v. Taxpayers, Property Owners, et al., 54 Cal. 2d 126 (1960) (harbor revenues and dedicated tidelands trust revenues were special fund revenues, but sales, use, and license tax revenues “attributable to the construction of the harbor project” did not qualify for the exception because sales, use, and license tax revenues are ordinarily general revenues of a city the assertion of a nexus between the harbor improvements sought to be financed and the general sales, use, and license tax revenues to be pledged was too speculative).