Can a South Dakota municipality issue revenue bonds to build a multi-use auditorium that includes a city liquor store, a youth hall, and a permanent space exclusively for the local American Legion post?
Plain-English summary
A South Dakota municipality wanted to build a one-story auditorium and pay for it with revenue bonds. The proposed building had four parts: a main auditorium for public meetings, a youth and teenage recreation hall, leased space for the municipal liquor store, and exclusive club rooms for the local American Legion post. The city asked the AG (1) whether revenue bonds could finance that mix, and (2) which of three statutes governed the bond procedure.
The AG took the proposal piece by piece. The main auditorium and the youth recreation hall were clearly public-purpose uses, easy yes on both. The municipal liquor store inclusion was also fine: two prior AGR opinions (1937-38 and 1943-44) had already held that a city could purchase a building for the municipal liquor store, and a 1947-48 opinion approved locating the store in a portion of city hall. Putting it in a portion of the new auditorium was a comparable use.
The American Legion exclusive space was the problem. The AG cited a thick line of authority across multiple states, including Kingman v. City of Brockton (Massachusetts, 1891, dedicating a portion of a city-built memorial hall to a GAR post as long as it existed was unconstitutional), Powell v. Thomas (South Carolina, 1949, exclusive second-floor use by an American Legion post was unconstitutional even though the Legion had contributed $50,000 toward construction), and Darby v. Otterman (Kansas, 1927, a twenty-year lease of part of a public building to the Veterans of Foreign Wars was unconstitutional). The rule the cases articulated: a city cannot constitutionally surrender exclusive use or control of any portion of a public building to a private group, no matter how worthy the group is.
The AG considered and rejected the argument that revenue-bond financing changes the analysis. Revenue from a building constructed with revenue bonds is still public money, just placed in a special fund. The constitutional public-purpose limit applies the same way to revenue-bond projects as to general-obligation projects.
So the AG's answer to question one was a qualified yes. The city could build the auditorium with revenue bonds and could include the liquor store and the youth hall. The exclusive American Legion space had to come out of the design. The AG suggested an alternative: build an extra room not earmarked for any particular group, then rent it on a short-term basis to any worthwhile community organization, including the Legion, on terms set by the governing body.
On question two, the AG concluded that SDC 1960 Supp. 45.24B (which originated in Chapter 246 of the 1951 Session Laws and authorized revenue bonds specifically for auditoriums) was the controlling procedure. SDC 45.24 and Chapter 148 of the 1964 Session Laws did not fit the factual situation as well. The opinion also flagged SDC 1960 Supp. 65.0719 through 65.0721, which authorized a surcharge on auditorium admissions to create an Auditorium Building Fund. The Fund could not be used to retire the construction bonds, but could be used for later remodeling or equipment.
Currency note
This opinion was issued in 1968. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The SDC statutes cited (SDC 45.24, SDC 45.24B, SDC 65.0719-65.0721) and the 1964 Session Law have been recodified into the current SDCL Title 9 (Municipal Government). Modern revenue-bond authority for municipal public-purpose buildings is found primarily in SDCL chapter 9-54 and related provisions. Anyone planning a present-day mixed-use municipal building with revenue bonds should consult current SDCL provisions, bond counsel, and recent case law on the public-purpose doctrine.
What the opinion meant at the time
For the proposing municipality, the opinion required redesigning the building before issuing bonds. The American Legion exclusive space had to be removed. The other three components, the main auditorium, the youth hall, and the municipal liquor store, could stay. A non-dedicated extra room could be added if the city wanted future flexibility, but no organization could be guaranteed long-term exclusive control of any portion.
For bond counsel and underwriters, the opinion confirmed that revenue-bond proceeds carry the same public-purpose constraints as general-obligation proceeds, despite the structural differences (revenue from the building service, debt outside the constitutional debt limit). Treating revenue bonds as constitutional-purpose-free was unsafe.
For the local American Legion post hoping for permanent quarters in the new building, the opinion was a polite no. Even a Legion contribution toward construction, as in the Powell v. Thomas case, would not buy exclusive rights to a portion of the public building. The Legion could still rent the building's spaces on a short-term, open-to-all basis, on the same terms available to other community groups.
For city governing bodies considering similar mixed-use projects, the opinion's general framework was usable. Public-purpose uses (auditorium, youth recreation, municipal liquor store as a city-operated revenue facility) were fine. Exclusive long-term private occupancy was not. The line was drawn at exclusivity and duration, not at the worthiness of the proposed occupant.
For municipal liquor store managers, the opinion confirmed that placing the store inside a public auditorium was a constitutionally legitimate use. The liquor store was a city-operated facility, not a private one, and prior AGR opinions had already approved similar combinations.
Common questions
Q: Could the city instead grant the American Legion a short-term renewable lease, say one year at a time?
A: The AG's recommended alternative was to construct an extra room with no dedicated occupant, and then rent it on a short-time basis to any worthwhile organization. A short-term renewable lease that did not lock the city in over the long run and was available on the same terms to other groups might satisfy that framework. A lease specifically reserving the space for the Legion alone, even renewable, would have crossed back into the prohibited exclusivity zone.
Q: What if the American Legion paid for its portion of the building outright?
A: The Powell v. Thomas case from South Carolina was the direct answer: even when the Legion donated $50,000 toward construction, the exclusive-use arrangement was still unconstitutional. A private group cannot purchase a permanent interest in a public building. The Legion was free to donate to public projects, but a donation does not convert into property rights.
Q: Did revenue-bond financing avoid the public-purpose limit?
A: No. The AG cited State ex rel. Beck v. City of York (Nebraska) and Hallbrueger v. City of St. Louis (Missouri) for the rule that revenue bond proceeds and rentals are public money, even when placed in a special fund pledged for the bond service. The constitutional public-purpose limit applied just the same.
Q: Could the municipal liquor store occupy a portion of the building?
A: Yes. Prior AGR opinions (1937-38 AGR 342, 1943-44 AGR 327, 1947-48 AGR 256) had already approved municipalities buying buildings for the liquor store and locating it in city hall. Including it as a designated portion of the auditorium was a comparable approved use.
Q: Did the youth recreation hall raise the same private-use concern?
A: The AG specifically said no, "as long as it is open to all of the youth of the community." The youth hall was a public-purpose use because it was open to the youth of the community generally, not reserved for a specific private organization.
Q: Which statute set the revenue-bond procedure for the auditorium?
A: SDC 1960 Supp. 45.24B, which originated in Chapter 246 of the 1951 Session Laws and was specifically designed for auditorium revenue bonds. The general SDC 45.24 revenue-bond provisions and Chapter 148 of the 1964 Session Laws did not fit the auditorium factual situation as well.
Q: What is the Auditorium Building Fund mentioned in SDC 65.0719-65.0721?
A: A separate fund built from a surcharge that the city could impose on admissions to the auditorium. The fund could not be used to pay off the original revenue bonds, but it could be used for later remodeling and equipment purchases. It is a long-term capital reserve for the facility, kept separate from the bond service account.
Q: Could a later council reconvene and add exclusive Legion space after the building was built?
A: The AG noted that "if after a municipal building is constructed for a legal purpose such is used for an unlawful purpose, the courts are open for proper proceedings to prevent such illegal use." So even a post-construction private-exclusive-use arrangement would be vulnerable to legal challenge.
Background and statutory framework
South Dakota's Constitution, Article XI, Section 2, required that taxes be levied and collected only for public purposes. By the 1960s, the South Dakota Supreme Court had decided several revenue-bond cases (Gross v. City of Bowdle, State College Development Association v. Nissen, Mattet v. City of Yankton, Boe v. Foss) holding that revenue bonds did not count against the constitutional debt limit. That created a technical distinction: revenue bonds were not "debt" in the constitutional sense, but the revenue produced by the bonded facility was still public money.
The AG embraced the more conservative reading: the constitutional public-purpose limit applied to revenue-bond projects too, citing State ex rel. Beck v. City of York (Nebraska) and Hallbrueger v. City of St. Louis for the proposition that revenue-bond proceeds remained public funds. So the city could not do indirectly through revenue bonds what it could not do directly with general-obligation bonds.
The cross-state case law on exclusive-use leases to private organizations was unusually well-developed. Kingman v. City of Brockton (Massachusetts, 1891), Powell v. Thomas (South Carolina, 1949), Darby v. Otterman (Kansas, 1927), and several other cases all converged on the same rule: dedicating exclusive use of a portion of a public building to a private organization (a GAR post, an American Legion post, a Veterans of Foreign Wars post) is unconstitutional. The Powell v. Thomas case was particularly pointed because the Legion in that case had contributed $50,000 to the building, and the court still found the exclusive-use arrangement unconstitutional.
The AG's recommended alternative drew on the established principle that a city can build a building larger than its immediate needs and rent out the excess to private individuals or groups, so long as the rental does not interfere with the building's public use. The key distinction the cases drew was between (a) renting unused capacity on a short-term basis on equal terms to anyone who wanted it (allowed) and (b) dedicating a specific portion to a specific private group on a long-term basis (not allowed).
On the bond-procedure question, three South Dakota statutes were candidates. SDC 45.24 was the general municipal revenue-bond statute. Chapter 148 of the 1964 Session Laws was a more recent enactment. SDC 1960 Supp. 45.24B, dating from 1951, was the auditorium-specific statute. The AG read the auditorium-specific statute as the controlling procedural framework for this kind of project.
The SDC 1960 Supp. 65.0719 through 65.0721 admission-surcharge provisions were a related but separate funding mechanism, designed to build up a long-term Auditorium Building Fund for future remodeling and equipment, but not for retiring the original construction bonds.
Citations and references
Statutes:
- SDC 1960 Supp. 45.24B (revenue bonds specifically for municipal auditoriums; originated in Chapter 246 of the Session Laws of 1951)
- SDC 45.24 and amendments (general municipal revenue bond authority)
- Chapter 148 of the Session Laws of 1964 (revenue bond statute)
- SDC 1960 Supp. 65.0719 through 65.0721 (admission surcharge for Auditorium Building Fund)
- S.D. Const., Art. XI, Sec. 2 (public-purpose limit on taxes)
Cases:
- City and County of Denver v. Hallett, 34 Colo 393, 83 P 1066 (multi-use building can qualify as auditorium)
- Gross v. City of Bowdle, 44 SD 132, 182 NW 629 (revenue bonds outside constitutional debt limit)
- State College Development Association v. Nissen, 66 SD 287, 281 NW 907
- Mattet v. City of Yankton, 71 SD 435, 25 NW 2d 460
- Boe v. Foss, 76 SD 295, 77 NW 2d
- State ex rel. Beck v. City of York, 164 Neb. 223, 82 NW 2d 267 (rentals from revenue-bond facility are public money)
- Hallbrueger v. City of St. Louis, 302 MO 573, 262 SW 379
- City of Boston v. The Merchants National Bank of Boston, 154 NE 2d 702 (auditorium as public purpose)
- Smith v. City of Raton, 18 NM 613, 140 P 109
- Caldwell v. City of Great Falls, 157 P 2d 1013
- Kingman v. City of Brockton, 153 Mass. 259, 26 NE 998 (dedication to GAR post unconstitutional)
- Powell v. Thomas, 52 SE 2d 782 (exclusive Legion use unconstitutional even with Legion contribution)
- Darby v. Otterman, 122 Kan 603, 262 P 903 (twenty-year VFW lease unconstitutional)
- Electric Theatre Co. v. Darby, 123 Kan 225, 254 P 1035
- State ex rel. Griffith v. City of Independence, 123 Kan 766, 256 P 799
- Village of Moyle Springs v. Aurora Mfg. Co., 82 Ida 337, 353 P 2d 767
- McClelland v. Mayor etc. of Wilmington, 159 A 2d 596
- City of West Palm Beach v. State, 113 So 2d 374
- Opinion to the Governor, 76 RI 365, 70 A 2d 817
- Borman v. Bd. of Education, 360 Ill 535, 196 NE 464 (legislature cannot confer bond authority for illegal purpose)
Prior AG opinions referenced:
- 1937-38 AGR 342 (city may purchase building for municipal liquor store)
- 1943-44 AGR 327 (same)
- 1947-48 AGR 256 (municipal liquor store in city hall)
- 1953-54 AGR 48 (city may not donate land to American Legion for post home)
- AG opinion dated March 7, 1966 (Lyle P. Sage, Miner County)
- AG opinion dated April 6, 1966 (Rolland G. Jones, Moody County)
Source
Original opinion text
Municipalities. Municipality may construct an auditorium and finance its construction through revenue bonds. The proposal to construct cannot provide that a portion of the premises will be set aside for the exclusive use of a private patriotic organization.
You have requested an official opinion based upon the following factual situation:
"Municipality 'X' desires to build a one story auditorium. It is contemplated that such will be partitioned off and portions of the structure used as follows: A portion of the premises will be rented to the American Legion for its exclusive use as club rooms; a portion will be rented to the municipal liquor store; a portion will be used as a teenage or youth meeting and recreation hall; the remainder will be the auditorium for the conduct of public meetings and the like. The governing body desires to finance such construction and equipment of structure through the issuance of revenue bonds."
In such situation you have asked the following questions:
"1. In the event the electorate approve the issuance of revenue bonds for the construction and equipment of the proposed auditorium for the multiple uses as above described, would the revenue bonds, if issued in compliance with statute, be legal?
"2. In case the answer to question 1 is 'yes', which statute governs the procedure to be followed issuing such revenue bonds: SDC 45.24, and acts amendatory thereof, SDC 1960 Supp. 43.24B or Chapter 148 of the Session Laws of 1964?"
You seem to have some concern as to whether the proposed multiple use of structure can qualify as an "auditorium." It is my opinion that the case of City and County of Denver v. Hallett, 34 Colo 393, 83 P 1066 is controlling. The court was presented with the legality of constructing a multiple-use building. Said the Court:
"If the primary object of a building is to provide a place for public meetings, the building itself may properly be designated an auditorium, although other portions of it are devoted to other uses than that of an auditorium in the strict sense of the term."
If the proposed auditorium portion of such proposed structure is its dominant feature, the reason that such building is being constructed, then it is my opinion it can qualify as an auditorium, even though certain portions of such structure will house other meeting rooms, and the city liquor store.
Our Constitution (Art. XI, Sec. 2) provides that taxes shall be levied and collected for public purposes only. Is the proposed construction for a public purpose? It might be argued that inasmuch as this structure is to be financed from the revenue it produces, and as such bonds are not within the constitutional debt limits (see Gross v. City of Bowdle, 44 SD 132, 182 NW 629, State College Development Association v. Nissen, 66 SD 287, 281 NW 907; Mattet v. City of Yankton, 71 SD 435, 25 NW 2d 460, and Boe v. Foss, 76 SD 295, 77 NW 2d) that such moneys do not represent taxation or public moneys, and this constitutional provision does not apply. In State ex rel. Beck v. City of York, 164 Neb. 223, 82 NW 2d 267 it was definitely held that rentals collected upon a facility constructed by the issuance of revenue bonds is public moneys, although placed into a special fund and pledged to be used for a special purpose. Likewise in Hallbrueger v. City of St. Louis, 302 MO 573, 262 SW 379 it was held that this limitation upon the use of public moneys raised by taxes is a principle inherent in the nature of a free government, it is my opinion that the limitation applies. However, the weight of authority is that the construction of an auditorium is for public purposes, and is constitutionally proper. See City of Boston v. The Merchants Nat. Bank of Boston (Mass 1958) 154 NE 2d 702 and the cases cited therein.
There can be no question that a municipality may lawfully erect a building which is larger than its present municipal needs, and in view of the future, and when so constructed the portions not needed for the present may be rented or offered for the gratuitous use of private persons and organizations. Likewise, it is well settled that a city cannot erect a building when the primary purpose of its erection is to rent such to a private person. However, after a building is constructed for a lawful, public purpose, a portion of it may be rented and an income gained, and so long as such does not interfere with the building's use for the public purpose such rental, even to a private business is not illegal. It is also settled that while primarily the determination that such construction was dominated by a public purpose, such question in reality is a legal question and subject to review by the courts. It is also settled that if after a municipal building is constructed for a legal purpose such is used for an unlawful purpose, the courts are open for proper proceedings to prevent such illegal use. Cases supporting these rules are:
City of Boston v. The Merchants National Bank of Boston, supra.
Hallbrueger v. City of St. Louis, supra
Smith v. City of Raton, 18 NM 613, 140 P 109
Caldwell v. City of Great Falls (Mont 1945) 157 P 2d 1013.
In applying such principles to the proposed use of the proposed structures, it is my opinion that no one could successfully contend that the usage as an auditorium or the usage of a portion of the building for a teenage or youth meeting hall, as long as it is open to all of the youth of the community, does not constitute a public purpose.
This office has previously held (1937-38 AGR 342, and 1943-44 AGR 327) that a city may purchase a building for the municipal liquor store. In 1947-48 AGR 256 this office held that the municipal liquor store could be located in a portion of the city hall. Its inclusion in the proposed auditorium would be legal and constitute a public purpose.
The only proposed usage, and that which presents the most serious problem, is the proposal that a portion of the proposed auditorium be rented to or placed under the exclusive control of the local American Legion Post.
My predecessor in office in an opinion reported in 1953-54 AGR 48 held that a municipality could not donate city owned land to the American Legion for the construction thereon of a post home. In two recent opinions dealing with the leasing of city owned property I have outlined the law relative to the lease of such property to private individuals and entities. See my opinion of March 7, 1966 to Lyle P. Sage, State's Attorney of Miner County, and the opinion of April 6, 1966 to Rolland G. Jones, State's Attorney of Moody County. It is apparent that the law requires that before such leases can be considered legal, such leases must not interfere with the right of the general public to use such premises.
While there is conflict, there is substantial authority to the effect that it is improper to grant an exclusive use or control of either the whole or a portion of a public building to a strictly private group of citizens.
Kingman v. City of Brockton, 153 Mass. 259, 26 NE 998, 11 LRA 123 (1891). (Setting aside a portion of a city constructed memorial hall for the use of a GAR Post so long as it existed as an organization is unconstitutional.)
Powell v. Thomas (SC 1949) 52 SE 2d 782. (Granting second floor of a public building to the exclusive use of the American Legion post was unconstitutional.)
Darby v. Otterman, 122 Kan 603, 262 P 903 (Leasing portion of a public building to Veterans of Foreign Wars for a twenty year term is unconstitutional.)
Electric Theatre Co. v. Darby, 123 Kan 225, 254 P 1035,
State ex rel. Griffith v. City of Independence, 123 Kan 766, 256 P 799.
Powell v. Thomas (SC 1949), supra is an interesting case illustrative of this principle. It also added an interesting feature that the American Legion Post donated some $50,000 for the construction of the public building in question, and the contention was made that it in fact had paid for the construction of the space it was to occupy. Said the court in its opinion, that such usage was unconstitutional, as it authorized the expenditure of public moneys for a private organization:
"We do not discount the high ideals and principles fostered by this organization (the American Legion) or the worthy objectives sought to be attained, but the fact remains that it is not a public body which may be supported or aided by the levy of county taxes…
"If the arrangement contemplates that the American Legion, by reason of its contribution shall have vested interest in the building in the nature of the ownership of the second floor, or an exclusive right to its use, we would then have a joint venture between a governmental agency and a private organization. In this connection see Smith v. Robertson, supra (210 SC 99, 41 SE 2d 631.)"
The cases above quoted applied the rule in cases where the public building was funded by general obligation bonds. Does the same rule apply in those cases where revenue bonds are used? It is my opinion that the rule is the same. See the following decisions:
State ex rel. Beck v. City of York, 164 Neb. 223, 82 NW 2d 267;
Village of Moyle Springs v. Aurora Mfg. Co., 82 Ida 337, 353 P 2d 767;
McClelland v. Mayor etc. of Wilmington (Del 1960) 159 A 2d 596;
City of West Palm Beach v. State (Fla 1959) 113 So 2d 374;
Opinion to the Governor, 76 RI 365, 70 A 2d 817.
It is interesting to note that in Borman v. Bd. of Education, 360 Ill 535, 196 NE 464, 99 ALR 1029 the court held that the legislature cannot confer upon a municipality the power to issue bonds for an illegal purpose, or for the purpose of paying a debt not incurred by the exercise of some authorized corporate function or purpose.
In view of these decisions it is my opinion that the inclusion of an exclusive right or a long term rental of a portion of the proposed auditorium to the American Legion is an unconstitutional usage of such building. I would suggest that this feature be omitted from the proposed building.
I should caution you, however, that there would be nothing wrong in constructing an extra room in such building with the view that such be reserved for future needs of the city, in which case, such room could be rented by the governing body of either the facility itself or the city to any worthwhile group or organization of the community. Such rental should be open to all, on a short time basis, and at all times subject to the rules, regulations and control of the governing body.
Question No. 2 asks what statutes furnish the proper procedure for the issuance of such revenue bonds?
It seems apparent after reading Chapter 148 of the Session Laws of 1964 and SDC 45.24, and acts amendatory thereof, that the factual situation you have outlined does not comply with the purposes and intent of such statutes. However, SDC 1960 Supp. 45.24B, which originated in Chapter 246 of the Session Laws of 1951, provides for the issuance of revenue bonds for auditorium. It is, in my opinion the controlling statute and should furnish the procedure for such revenue bond issuance.
Your attention is called to the provisions of SDC 1960 Supp. 65.0719 through 65.0721. These statutes authorize a surcharge on the admission charged for the use of such auditorium for the purpose of creating an Auditorium Building Fund. You will notice that the moneys accumulated in such funds cannot be used to retire the revenue bonds issued for the construction and furnishing of such auditorium, but such may be used for remodeling or furnishing equipment in the future for such auditorium.