Request By:
Mr. William E. Mitchell
Attorney at Law
South Main Street
Dixon, Kentucky 42409
Opinion
Opinion By: Robert F. Stephens, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
You are the attorney for the City of Clay, Webster County, Kentucky, a fifth class city. You enclosed a letter directed to Mr. Willis G. Moremen, Executive Vice President of the Kentucky Bankers Association. In that letter Commissioner Williams stated that it had come to the attention of the Department of Banking that some banks may be making loans in violation of KRS 287.290(3) as well as under KRS 68.320 and KRS 160.540.
The Farmers Bank of Clay, Kentucky, has been lending money to the City of Clay from time to time, not for the purpose of paying current expenses, but for certain capital expenditures, such as fire trucks, and in a more recent instance, for the purpose of purchasing and remodeling a building. These expenditures have been paid in installments by the city from different sources of revenue. You request an opinion as to whether or not the city's policy of borrowing money in this manner is prohibited by KRS 68.320 and 68.540.
KRS 287.290(3) is an exception to the maximum debt restriction of persons to banks, which maximum debt restrictions are established in KRS 287.280. As we said, one of the exceptions to the maximum-debt-to-banks statute is obligations of Kentucky counties and school districts incurred through borrowing in anticipation of the current year's tax receipts as authorized by KRS 68.320 and KRS 160.540. Commissioner Williams has interpreted KRS 287.290(3) to include any loan extended to a county, city, or school district, and that the statute means that such loans must be repaid during that fiscal year with current tax receipts.
Section 157 of the Kentucky Constitution provides that no county, city, town, taxing district, or other municipality, shall be authorized or permitted to become indebted, in any manner or for any purpose, to an amount exceeding, in any year, the income and revenue provided for such year, without the assent of 2/3 of the voters thereof, voting at an election to be held for that purpose. Section 158 of the Constitution places a restriction on the indebtedness of cities, the maximum indebtedness of a city of the 5th class not to exceed 3% of the value of the taxable property therein, except for emergency, etc. Under the authority of Section 157 of the Constitution, KRS 92.360(2) provides that the legislative body of any city of the second to sixth class shall not, in any year, expend any money in excess of the amount levied and collected for that year. KRS 66.070 provides that if, in any year, the legislative body of any city of the fourth, fifth, or sixth class deems it necessary to incur any indebtedness that cannot be paid without exceeding the income and revenue provided for the city for that year, it shall give notice of an election by the voters of the city to determine whether the indebtedness shall be incurred.
It is our opinion that, without a vote of the people, any loan made to the city must not exceed, when considering the total financial obligations of the city for the particular fiscal year, the anticipated current revenue of the city for that fiscal year. Otherwise, Section 157 of the Constitution, and related statutes, will be violated, since we assume such loans were not approved by the vote of the people. In
Meyers v. City of Louisville, 310 Ky. 348, 220 S.W.2d 852 (1949) 854, Justice Latimer wrote for the court, in referring to Section 157 of the Kentucky Constitution, that "This very definitely fixed policy of 'pay-as-you-go' means that obligations cannot be created to be paid out of revenues to be collected after the termination of the fiscal year, or, in other words, that the debt must run concurrently with the current revenues else there will be a contravention of the limit provision. See also 38 Am.Jur., Municipal Corporations, Sec. 445."
If the fire trucks are purchased on a lease-purchase basis [that is, when so many rentals are paid on the truck then the title will be transferred to the city] and if the city would only obligate itself in renting the equipment for one year, subject to renewals one year at a time, and if the annual installments on the truck can be paid from current revenues within the fiscal year in which the loan is made, then the loan would be legal under Section 157, Constitution. In connection with the loan to remodel a building, if the aggregate loan amount cannot be paid by receipts during the fiscal year from current revenues, then such loan would be illegal under Section 157 of the Constitution without a vote of the people. Likewise, if the city has borrowed from the bank the total amount of money necessary to pay for the fire trucks [aggregate purchase price], and if such loan cannot be repaid from current tax receipts for that fiscal year, then § 157 of the Constitution, and related statutes, would be violated. The court has held that a contract to pay an annual rental for a period of years is a creation of indebtedness for the aggregate amount of rentals in the year in which the contract is made. Thus the aggregate financial commitment is the key in measuring the applicability of § 157 of the
Constitution. Kenton County Fiscal Court v. Richards, 291 Ky. 132, 163 S.W.2d 302 (1942) 303.
We agree with Commissioner Williams of the Banking Department that KRS 287.290(3) is broad enough to embrace loans made to cities by banks in anticipation of revenue for that fiscal year. This simply means that if a city borrows money from a bank in anticipation of revenue for that fiscal year, and the loan does not exceed, when considering total financial obligations of the city for the particular fiscal year, the anticipated current revenue of the city for that fiscal year, the loan comes under the exception of KRS 287.290(3). It may be noted that there is no statute mandating that money borrowed in anticipation of current revenues be repaid during the fiscal year in question. The Constitution [Section 157] provides only that no city can become indebted in a particular fiscal year to an amount exceeding, in that year, the income and revenue provided for such year, without a vote of the people.