If a city is going to build something like a water main extension and pay for it with special assessment bonds, does the city council have to pass a separate appropriation ordinance to spend the bond proceeds? Or can the bond authorization itself be the spending authority?
Plain-English summary
The City of Vermillion was preparing its 1969 budget and ran into a procedural question. Under SDC 1960 Supp. 45.1402, the city's governing body had to appropriate money for all lawful municipal expenses and liabilities. Under SDC 1960 Supp. 45.1405, no city contract could be made and no expense could be incurred unless an appropriation had previously been made (or unless the governing body had been authorized to issue bonds for a specific purpose).
But Vermillion was also planning to finance some public improvements (extensions of water mains and sewer mains, street improvements) by levying special assessments against the benefiting properties and then issuing assessment bonds to be paid back from those assessments. The bond authority lived in SDC 1960 Supp. 45.2114, which let the governing body issue negotiable bonds by ordinance or resolution "without a vote of the electors," in an amount up to the entire cost of the improvement.
The question for the AG: did the city have to run the special assessment bond proceeds through a separate appropriation ordinance before spending them on the improvement? Or did the bond authorization itself authorize the spending?
The AG went with bond-authorization-equals-spending-authority. The general appropriation provisions (45.1402, 45.1404, 45.1405) were the default rule. But 45.1405 itself contained an exception for situations where "the governing body authorized to issue bonds for a specific purpose." Special assessment bonds were authorized by statute (45.2114) for a specific purpose (the improvement being financed). The bond ordinance or resolution adopted under 45.2114 (with its required hearings and procedures) substituted for the appropriation ordinance.
The opinion also addressed 45.1404's separate exception for "the proceeds of any bond issue authorized by the electors of the municipality." That exception did not technically reach special assessment bonds, because those bonds were authorized by statute and council action without a vote. But the broader appropriation-exception in 45.1405 covered the situation directly.
So the city of Vermillion could plan to issue special assessment bonds for its 1969 improvement projects and spend the proceeds on the improvements without piling on a separate appropriation ordinance.
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. South Dakota's municipal special assessment and bond statutes have been substantially recodified into modern SDCL Title 9 (Municipal Government), particularly chapters 9-43 (special assessments) and 9-26 (municipal bonds). Cities considering special assessment bond financing today should consult current SDCL provisions and bond counsel rather than relying on the 1960 SDC sections cited here.
What the opinion meant at the time
For city finance officers preparing municipal budgets, the opinion meant special assessment bond financing did not need a parallel appropriation ordinance for the spending side. The bond ordinance and the project authorization were the legal record of the spending decision. The city's audit trail still needed to show that bond proceeds were spent on the specific improvement the bonds had financed, but a separate appropriation ordinance was unnecessary belt-and-suspenders.
For city attorneys advising on improvement projects, the opinion meant focusing the legal review on the bond ordinance, the special assessment proceedings, and the construction contract. The appropriation ordinance question could be checked off.
For city councils, the opinion simplified the procedural sequence for funding improvements through special assessments: hold the assessment hearing, pass the assessment ordinance, pass the bond ordinance, sell the bonds, spend the proceeds. No separate appropriation step was required between the bond sale and the spending.
For property owners facing special assessments, the opinion had no direct effect on their rights to notice and hearing, which were governed by the assessment proceedings (not the appropriation ordinance). The substantive protections lived on the assessment side, not the appropriation side.
Common questions
Q: What was the difference between a special assessment bond and a general obligation bond?
A: A general obligation bond was backed by the city's full faith and credit (and by ad valorem taxing power) and required voter approval. A special assessment bond was backed by the special assessments levied against the benefiting properties and did not require voter approval (45.2114 expressly said "without a vote of the electors"). The repayment came from the assessments, not from general municipal revenues.
Q: Could the city use bond proceeds for purposes other than the improvement they were issued to finance?
A: No. The bond ordinance had to identify the specific purpose, and the proceeds had to be applied to that purpose. SDC 45.1405's exception applied only when the governing body was "authorized to issue bonds for a specific purpose." Diverting proceeds to other uses would have violated the bond authorization and could have triggered bondholder remedies.
Q: Did the same rule apply to assessment certificates (rather than assessment bonds)?
A: SDC 45.2114 said the bond issuance was "in lieu of issuing assessment certificates." Both were assessment-funded instruments; the bond was the more transferable form. The opinion's reasoning would have applied to certificate financing too, because the underlying assessment proceeding was the same.
Q: What if the assessment proceeding turned out to be defective?
A: A defect in the assessment proceeding could affect the validity of the assessments themselves (and therefore the bondholders' security). The bond's status as a spending authorization would not cure an underlying assessment defect. The opinion addressed the appropriation question, not the assessment validity question.
Q: Did the city still need to adopt an annual budget under 45.1402?
A: Yes. The general appropriation requirement remained in place for the rest of the city's operations. The opinion only addressed whether special assessment bond proceeds had to flow through that budget process. Other municipal revenues and expenditures still needed appropriation.
Q: What if the city wanted to combine assessment financing with general obligation borrowing for the same project?
A: That was permissible if both authorities lined up, but each piece needed its own statutory hook. The general obligation portion would have required voter approval and could have been covered by 45.1404's exception for voter-authorized bonds. The assessment portion would have been covered by the analysis in this opinion.
Background and statutory framework
South Dakota's municipal budget law in the 1960s required cities to operate within a structured appropriation process. SDC 1960 Supp. 45.1402 was the basic appropriation power. SDC 1960 Supp. 45.1404 fixed the timing and form of the appropriation ordinance, with an exception for bond proceeds authorized by the electors. SDC 1960 Supp. 45.1405 prohibited contracts and expenses unless an appropriation had previously been made, again with exceptions for bond-authorized spending.
The exception structure in 45.1405 was the key. By recognizing that bond authorizations could substitute for appropriation ordinances, the statute saved cities from having to layer parallel ordinances when the bond issuance itself was the formal legislative decision to spend. The legislature's design assumption was that the bond ordinance, with its required findings and procedures, gave the public and the council the same scrutiny that an appropriation ordinance would have provided.
SDC 1960 Supp. 45.2114 was the special assessment bond authority. It allowed the governing body to issue negotiable bonds by ordinance or resolution in an amount up to the entire cost of the improvement, sold at not less than par with accrued interest. Special assessment bonds were distinct from general obligation bonds in that they did not require voter approval and were backed by the assessments rather than the general city revenues.
The AG's reading was a sensible reconciliation. The general appropriation framework set the default; the bond exception accommodated the legislative judgment that bond authorizations were a complete legislative act for the proceeds they authorized.
Citations and references
Statutes:
- SDC 1960 Supp. 45.1402 (general appropriation power for municipal expenses and liabilities)
- SDC 1960 Supp. 45.1404 (timing and form of appropriation ordinance; voter-authorized bond exception)
- SDC 1960 Supp. 45.1405 (contracts and expenses require prior appropriation; bond-authorization exception)
- SDC 1960 Supp. 45.2114 (special assessment bonds; ordinance or resolution issuance; not exceeding cost; sold at not less than par)
Source
Original opinion text
Bonds. Proceeds of Special Assessment Bonds may be expended without additional appropriation ordinance.
You have requested an opinion based upon the following factual situation:
"The City of Vermillion, looking forward to establishment of its 1969 budget has a problem on which it desires an opinion. Section 45.1402 of the 1960 Supplement provides in part that the governing body of a municipality shall appropriate such sums of money as may be deemed necessary to meet all lawful expenses and liabilities of the municipality. Does this include expenditures to be made for the construction of public improvements, such as extensions of water mains, sewer mains, and street improvements for which special assessments are to be levied and their costs are to be raised from the sale of assessment bonds under Section 45.2114?"
SDC 1960 Supp. 45.1404 reads in part as follows:
"..., except that the governing body may expend the proceeds of any bond issue authorized by the electors of the municipality..."
The above is an exception to the appropriation ordinance requirements and does not directly relate to special assessment bonds, since such bonds are not authorized by the electors but are authorized by statute after certain procedures and hearings are followed.
SDC 1960 Supp. 45.1405 reads in part as follows:
"Except as otherwise provided, no contract shall be made by the governing body of any municipality and no expenses shall be incurred by any department or any officer thereof, whether ordered by the governing body or not, unless an appropriation shall have been previously made concerning such expense, or the governing body authorized to issue bonds for a specific purpose..."
SDC 1960 Supp. 45.2114 reads in part as follows:
"The governing body, in lieu of issuing assessment certificates, may provide by ordinance or resolution for the issuance of negotiable bonds without a vote of the electors in an amount not exceeding the entire cost of the improvement and sell the same at not less than par with accrued interest..."
It is my opinion that the proceeds from special assessment bonds may be expended by a municipality without any additional appropriation ordinance.