JAMES ISLAND PUBLIC SERVICE

DISTRICT,

v.

CITY OF CHARLESTON, SOUTH

CAROLINA,

No. 00-1910

and

ANDREW C. SMITH, treasurer of

Charleston County, in his official

capacity; TOWN OF FOLLY BEACH;

PEGGY MOSELEY, auditor of

Charleston County, in her official

capacity; WILLIAM O. THOMAS, JR.,

Appeal from the United States District Court

for the District of South Carolina, at Charleston.

Falcon B. Hawkins, Senior District Judge.

(CA-96-3557-2-11)

Argued: April 4, 2001

Decided: May 7, 2001

Before WILLIAMS, MICHAEL, and MOTZ, Circuit Judges.

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Affirmed by published opinion. Judge Motz wrote the opinion, in

which Judge Williams and Judge Michael joined.

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ARGUED: William B. Regan, REGAN, CANTWELL & STENT,

Charleston, South Carolina, for Appellant. Trent Marrs Kernodle,

Kernodle, Root & Coleman, Charleston, South Carolina, for

Appellee. ON BRIEF: Frances I. Cantwell, Carl W. Stent, REGAN,

CANTWELL & STENT, Charleston, South Carolina, for Appellant.

_________________________________________________________________

DIANA GRIBBON MOTZ, Circuit Judge:

The James Island Public Service District, which provides fire pro-

tection services to rural areas in South Carolina, seeks protection

under § 306(D) of the Consolidated Farm and Rural Development

Act, 7 U.S.C. § 1926(b) (1994), against certain actions taken by the

City of Charleston. The district court found the District entitled to this

protection. We affirm.

I.

Congress enacted the Agricultural Act of 1961 in part to provide

insured loans to sparsely populated rural communities for a variety of

otherwise unaffordable services and improvements. See S. Rep. No.

566 (1961), reprinted in 1961 U.S.C.C.A.N. 2243, 2305-06. One por-

tion of the Act, formerly known as the Farmers Home Administration

Act (FmHA), but renamed the Consolidated Farm and Rural Develop-

ment Act in 1972, authorizes federal loans to non-profit local associa-

tions to provide water service and other "essential community

facilities" to farmers and other rural residents. 7 U.S.C. § 1926(a).

As a condition of accepting these loans, Congress has always

required that:

2

7 U.S.C. § 1926(b).

The very same year in which Congress originally enacted this leg-

islation, the South Carolina legislature created the James Island Public

Service District ("James Island" or "the District") to provide various

services, including fire protection, to rural residents. See 1961 S.C.

Act No. 498. In order to purchase and maintain fire-fighting equip-

ment and facilities, James Island, since its inception, has obtained

loans from the federal government by selling bonds first to the FmHA

and then to its successor, the Rural Development Association (RDA).

During this period, from 1961 to the present, the City of Charleston

has, at various times, annexed portions of James Island as it is gener-

ally empowered to do under South Carolina law. See S.C. Code Ann.

§ 5-3-310 (Law. Co-op. Supp. 1998). After annexation, the City his-

torically has provided services, including fire protection services, to

those areas formerly served by James Island. In addition, after annex-

ation, the City has taxed the former James Island residents, just as it

taxes all of its residents. Prior to annexation, these taxpayers would

have paid taxes to James Island, which used a portion of these taxes

to pay down its federal debt to the RDA and operate and maintain its

fire department.

In 1996, after a spate of annexations by the City, James Island filed

this action in federal court seeking declaratory and injunctive relief.

James Island alleged that by providing fire service and diverting tax

monies away from James Island, the City violated 7 U.S.C. § 1926(b).

The district court granted James Island's motion for summary judg-

ment and issued the requested declaration and a permanent injunction,

prohibiting the City from curtailing fire service and directing the City

to allocate to James Island "a portion of tax revenues from the

annexed properties to cover both the debt service taxes and the oper-

ating expenses/taxes of the James Island Public Service District Fire

Service."1 This appeal followed.

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1 This ruling does not conflict with St. Andrews Public Service District

v. Moseley, 475 S.E.2d 750 (S.C. 1996), which simply decided that, as

3

II.

The United States Constitution authorizes Congress to "lay and col-

lect Taxes, Duties, Imposts and Excises, to pay the Debts and provide

for the common Defence and general Welfare of the United States."

U.S. Const. art. I, § 8, cl. 1. "Incident to this power, Congress may

attach conditions on the receipt of federal funds, and has repeatedly

employed the power `to further broad policy objectives by condition-

ing receipt of federal moneys upon compliance by the recipient with

federal statutory and administrative directives.'" South Dakota v.

Dole, 483 U.S. 203, 206 (1987) (quoting Fullilove v. Klutznick, 448

U.S. 448, 474 (1980)).

Although broad, the congressional spending power has limits. Fed-

eral expenditures must (1) benefit the general welfare, and the condi-

tions imposed on their receipt must be (2) unambiguous, (3)

"reasonably related to the purpose of the expenditure," and (4) cannot

violate "any independent constitutional prohibition." New York v.

United States, 505 U.S. 144, 171-72 (1992); see also Dole, 483 U.S.

at 207-08. Further, "in some circumstances the financial inducement

[to comply with a condition attached to funds] offered by Congress

might be so coercive as to pass the point at which pressure turns into

compulsion." Id. at 211 (internal quotation marks omitted).

Unquestionably, and unquestioned by the City, the RDA funds pro-

vided to James Island benefit the general welfare, and § 1926(b)

imposes conditions on South Carolina and its political subdivisions

that are unambiguous and reasonably related to the purpose of the

RDA loans. Thus, the first three restrictions on Congress's power

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a matter of state law, when a city annexes property of a special purpose

district that property does not remain in the district for purposes of taxa-

tion. See id. at 753. James Island does not suggest to the contrary. Fur-

thermore, contrary to suggestions by the City, James Island does not seek

to interfere with the City's annexations or "to evade the annexation laws

of South Carolina." Brief of Appellant at 10. Nor did the district court

in any way "requir[e] that South Carolina alter its laws relating to munic-

ipal boundaries." Id. at 16. James Island has never challenged the annex-

ations themselves or the state law governing annexation, and the district

court issued no ruling interfering with either.

4

under the Spending Clause have been met. Moreover, as in Dole, the

"conditional grant of federal money" at issue here cannot be held "un-

constitutional [coercion] simply by reason of its success in achieving

the congressional objective." Id. Indeed, the City does not suggest that

§ 1926 transgresses Dole's "coercion" limitation.

The City argues, however, that the fourth restriction -- forbidding

violation of "any independent constitutional prohibition" -- has not

been met. Specifically, the City contends that the State did not "con-

sent" to the conditions of § 1926(b), and thus the statute's application

violates the Tenth Amendment.2 This claim ignores the fundamental

precept that the "Tenth Amendment itself does not act as a constitu-

tional bar [to Congress's spending power]; rather, the fourth restric-

tion [on Congress's spending power] stands for the more general

proposition that Congress may not induce the states to engage in

activities that would themselves be unconstitutional." Kansas v.

United States, 214 F.3d 1196, 1199 (10th Cir. 2000) (emphasis

added). See also New York, 505 U.S. at 173 ("Because the [federal

expenditure] is supported by affirmative constitutional grants of

power to Congress [under the Spending Clause], it is not inconsistent

with the Tenth Amendment."); Dole, 483 U.S. at 210 ("[A] perceived

Tenth Amendment limitation on congressional regulation of state

affairs did not concomitantly limit the range of conditions legiti-

mately placed on federal grants . . . . Instead, we think that the [fourth

restriction] stands for the unexceptionable proposition that the [spend-

ing] power may not be used to induce States to engage in activities

that would themselves be unconstitutional . . . .[F]or example, a grant

of federal funds conditioned on invidiously discriminatory state

action. . . .").

Although the Tenth Amendment does not independently invalidate

the conditions of a federal spending program, a state receiving federal

funds must "voluntarily and knowingly accept[ ]" those conditions.

See Pennhurst State Sch. & Hosp. v. Halderman, 451 U.S. 1, 17

(1981) ("[L]egislation enacted pursuant to the spending power is

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2 The Tenth Amendment states:"The powers not delegated to the

United States by the Constitution, nor prohibited by it to the States, are

reserved to the States respectively, or to the people." U.S. Const. amend.

X.

5

much in the nature of a contract: in return for federal funds, the States

agree to comply with federally imposed conditions. The legitimacy of

Congress' power to legislate under the spending power thus rests on

whether the State voluntarily and knowingly accepts the terms of the

`contract.'").

Courts usually cite the Supreme Court's language in Pennhurst in

the context of determining whether a federal spending program unam-

biguously notifies the fund recipient of the attached conditions, thus

allowing for voluntary and knowing acceptance. See, e.g., Bell Atl.

Md, Inc. v. MCI WorldCom, Inc., 240 F.3d 279, 292 (4th Cir. 2001)

("Congress' grant to States of conditional funds is `in the nature of a

contract,' the legitimacy of which `rests on whether the State volun-

tarily and knowingly accepts the terms.' Pennhurst I, 451 U.S. at 17

. . . . By insisting that Congress speak with a clear voice, we enable

the States to exercise their choice knowingly, cognizant of the conse-

quences of their acceptance from Congress of a gift or gratuity.").

Although there is no suggestion in this case that the conditions set

forth in § 1926(b) are anything but clear, the City seems to argue that

South Carolina refused to "agree" or "consent" to those conditions.

The City apparently maintains that South Carolina did not agree or

consent to the conditions imposed by § 1926(b) because the State

assertedly did not authorize James Island to issue and sell general

obligation bonds -- those paid and secured by general James Island

taxes -- to the federal government to receive RDA loans. Rather,

according to the City, the State only authorized James Island to issue

revenue bonds -- those paid and secured by fees for fire protection

-- to obtain loans from the RDA.3 This argument must fail in light

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3 Throughout this litigation the City has attempted to distinguish gen-

eral obligation bonds from revenue bonds on the basis that a reduction

in the James Island service district area would not endanger the income

source available to repay general obligation bonds as it would for reve-

nue bonds. This distinction is mistaken. Just as removing fee-paying cus-

tomers from a district's boundaries injures its ability to repay bonds

secured by those fees, so too does removing tax-paying residents from

the district's boundaries injure its ability to repay general obligation

bonds secured by those taxes. Depending on the kind of bond, James

Island would either have to raise the remaining residents' service fees or

their taxes to meet its debt obligations.

6

of express provisions in the South Carolina Constitution, the South

Carolina Code, and the James Island enabling act. 4

It is undisputed that the Constitution of South Carolina specifically

provides special purpose districts, like James Island, with the power

to incur bonded general obligation debt. See S.C. Const. art. X,

§ 14(2)(a). Moreover, the South Carolina General Assembly has

directed that special purpose districts may sell"[s]uch bonds . . . at

private sale to the United States of America or any agency or depart-

ment thereof." S.C. Code Ann. § 11-27-90(b) (Law. Co-op. 1976).

See also S.C. Code Ann. § 6-11-490 (Law. Co-op. 1976) ("If, in order

to provide for the cost of any improvements, it is necessary that gen-

eral obligation bonds be issued the county board shall be empowered

at any time to authorize the applicable commission to issue general

obligation bonds of the special purpose district."). Furthermore, in

creating the James Island district, the South Carolina legislature

expressly authorized it to issue and sell general obligation bonds to

the United States. See 1961 S.C. Act No. 498, §§ 11, 13, 14 (James

Island enabling act).

Not only has the South Carolina General Assembly granted special

purpose districts, like James Island, the power to obtain loans from

the RDA, it has also prohibited municipalities, like the City, from tak-

ing actions that impinge on the districts' ability to pay the RDA loans

or on the protections afforded the districts under§ 1926(b). Section

6-11-250 of the South Carolina Code states:

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4 It may be that James Island's mere "acceptance of the funds triggers

coverage under" § 1926(b). See United States Dept. of Transp. v. Para-

lyzed Veterans of Am., 477 U.S. 597, 605 (1986). We do not address that

question because James Island does not advance such a contention and

because in this case, as explained in text, the State did far more than

merely accept funds; in its constitution and statutes (and in practice), it

clearily signaled its acceptance of and consent to the conditions attached

to the RDA funds set forth in § 1926(b).

7

S.C. Code Ann. § 6-11-250 (Law. Co-op. 1976). Section 5-3-312(5)

adds that:

S.C. Code Ann. § 5-3-312(5) (Law. Co-op. Supp. 1998) (emphasis

added). Thus, South Carolina has acknowledged the limits set by

§ 1926(b) and has clearly agreed to bind itself and its political subdi-

visions (including cities) to the obligations attendant to an RDA loan,

specifically including the obligation under § 1926(b) to insure that the

"service provided or made available through any such [district] shall

not be curtailed or limited by inclusion of the area served by such

[district] within the boundaries of any municipal corporation or other

public body." 7 U.S.C. § 1926(b).

The City, however, insists that South Carolina has empowered spe-

cial purpose districts to obtain RDA loans solely by the issuance of

revenue bonds, and not by the issuance of general obligation bonds.

This argument is based on the second clause of § 6-11-250, which

states that a district can avail itself of federal loans, "and may issue

revenue bonds pledging the income from any such system in liquida-

tion of any loan made as aforesaid by the United States Government."

S.C. Code Ann. § 6-11-250 (emphasis added). According to the City,

this clause should be read as a restriction, permitting special purpose

districts to issue and sell only revenue bonds (and not general obliga-

tion bonds) to obtain federal loans.

8

But the language of § 6-11-250's second clause is not restrictive.

Rather, it is permissive and adds to the first clause: a district can avail

itself of federal loans "and may issue revenue bonds." S.C. Code Ann.

§ 6-11-250 (emphasis added). That language does not at all limit

James Island's authority to "avail itself of any provision for loans to

construct . . . fire protection systems . . . from the United States Gov-

ernment," S.C. Code Ann. § 6-11-250, or to sell general obligation

bonds to the United States, S.C. Code Ann. § 11-27-90(b).

The history of the revenue bond clause confirms that, rather than

limiting special purpose districts, it provides them with an added, per-

missive power. The South Carolina General Assembly initially

enacted that provision in 1934, see 1934 S.C. Act No. 734, § 8, in the

wake of a 1933 statute that first empowered municipalities to issue

revenue bonds. 1933 S.C. Act No. 299, 38 Stat. at Large 411. The

1933 act was passed in part as a response to the effects of the Great

Depression. City of Spartanburg v. Blalock, 75 S.E.2d 361, 365 (S.C.

1953). Because at that time many taxpayers were reluctant "to further

burden themselves by the issuance of general obligation bonds," and

because general obligation bonds were often "cumbersome and time

consuming," a "comparatively new method of financing was adopted

whereby bonds issued for public projects would be secured solely by

the revenue to be derived from that project undertaken." Id. Pressing

economic difficulties led the South Carolina legislature to enact the

revenue bond statutes "with little or no effort made toward harmoniz-

ing or integrating the proposed legislation with existing statutes," id.,

including those permitting municipalities to issue general obligation

bonds. Given this context, we cannot read the permissively written

second clause of § 6-11-250 as a prohibition on the traditional power

of political subdivisions to issue general obligation bonds. Rather, the

clause merely constitutes an attempt to clarify that political subdivi-

sions can also employ revenue bonds, a "comparatively new method

of financing," to secure federal loans.

We note that the established state practice entirely accords with this

conclusion. James Island has obtained RDA loans by issuing general

obligation bonds since at least 1980. Moreover, the District files

annual audits and reports with the State, specifying that it "issues

General Obligation Bonds to provide funds for the acquisition and

construction of major capital facilities" and that "[a]ll of the general

9

obligation bonds are held by the" RDA. Neither the State of South

Carolina nor Charleston County, in which James Island is located, has

ever suggested that in doing so James Island has acted ultra vires.

In sum, we hold that South Carolina empowered James Island to

issue general obligation bonds to obtain RDA loans, and thus agreed

to the conditions unambiguously set forth in 7 U.S.C. § 1926(b). As

such, § 1926(b) constitutes a valid exercise of Congress's spending

power, and thus does not violate the Tenth Amendment.

III.

For the foregoing reasons, the judgment of the district court is

AFFIRMED.5

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5 The City's fallback argument, that it can only be enjoined from taking

the portion of taxes that the District used to service its RDA debt and not

the taxes allocable to the District's provision of fire service more gener-

ally, is meritless. Section 1926(b) protects from curtailment or limitation

not only the ability of James Island to pay its federal debt, but also the

"service provided" by the District. 7 U.S.C. § 1926(b) (emphasis added).

Thus, § 1926(b) safeguards James Island's"ability to repay its federal

loan and to provide low per[ ]user cost to its customers." Bell Arthur

Water Corp. v. Greenville Utils. Comm'n, 173 F.3d 517, 524 (4th Cir.

1999). "[B]oth of these goals depend on economies of scale and maxim-

ization of [the district's] entire customer base, and can only be accom-

plished by treating the protection as applicable to the entire service area

rather than merely the increments improved by the loan." Id. See also

North Alamo Water Supply Corp. v. City of San Juan , 90 F.3d 910, 915

(5th Cir. 1996).

10

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