1.2.3 Scope of Debt Limit – When Does the Debt Limit Apply?

1.2.3 Scope of Debt Limit – When Does the Debt Limit Apply?

THE DEBT LIMIT APPLIES ONLY TO SPECIFIED PUBLIC AGENCIES. Article XVI, Section 18 of the California Constitution applies to cities (including charter cities), counties, and school districts (including community college districts). It does not apply to other local agencies such as joint exercise of powers agencies (JPAs), or special districts, although special district statutes may include their own limitations. A similar constitutional provision, Article XVI, Section 1, applies to the State of California. Courts have viewed the governing principles of the local agency and state debt limitations as the same, so cases interpreting one are authority for the interpretation of the other.

THE DEBT LIMIT APPLIES TO SOME ARRANGEMENTS NOT ORDINARILY THOUGHT OF AS DEBT. The actual terms used in Article XVI, Section 18, “indebtedness” and “liability,” are quite broad and include many things not ordinarily thought of as debt: employment, service, and construction contracts; purchase agreements; performance guarantees; and letter of credit reimbursement obligations. In practice, therefore, the avoidance of debt limit constraints has been based primarily on judicial determinations that under certain conditions the debt limit does not apply (commonly, if not always accurately, referred to as “exceptions” or “judicially created exceptions”).

PUBLIC AGENCIES MUST DETERMINE WHETHER THE CONSTITUTIONAL DEBT LIMIT APPLIES. To determine whether the debt financing arrangement under consideration might pose a problem under the debt limit for the public agency involved in the transaction, ask the following:

1. Is the public agency subject to the debt limit?
   
   
2. If so, does or may the transaction obligate the public agency to make payments out of the revenues of a future fiscal year?
   
   
3. If so, does the transaction fit into one of the “debt limit exceptions” described below?