Request By:
Mr. W. Bruce Lunsford
Development Cabinet
Office of the Secretary
Capital Plaza Tower
Frankfort, Kentucky 40601
Opinion
Opinion By: STEVEN L. BESHEAR, ATTORNEY GENERAL; Charles W. Runyan, Assistant Deputy Attorney General
House Bill 462 was enacted in the 1980 session. It will become effective on July 15, 1980. The bill amends KRS 103.200 and 103.210, relating to industrial buildings for cities and counties. Section 2 amends KRS 103.210 by emphas, ng that the legislative purpose in providing for the issuing of revenue bonds by a county or city for industrial buildings, as defined in KRS 103.200, is to " promote the economic development of the Commonwealth. " (Emphasis added). That section also permits action by the governing body of the Kentucky Industrial Development Finance Authority to issue such bonds upon request by the legislative body of the city or fiscal court.
Among other changes, the bill extends the use of the "loan agreement" type financing to all industrial projects. Section 2, in amending KRS 103.210, expressly provides that the issuer of bonds may acquire the industrial building and lease it to a corporation or may use a "loan agreement" in the financing arrangement. Section 3 creates a new section in KRS Chapter 103 in providing that any city or county for the purpose of financing an industrial building may issue negotiable revenue bonds under one of the following methods: (a) Loan the proceeds from the sale of such bonds to any person to finance the building; (b) Sell the building to any person; or (c) Lease the building. Provisions for security of the issuer of bonds are stated.
Section 179 of the Kentucky Constitution provides:
"The General Assembly shall not authorize any county or subdivision thereof, city, town or incorporated district, to become a stockholder in any company, association or corporation, or to obtain or appropriate money for, or to loan its credit to, any corporation, association or individual, except for the purpose of constructing or maintaining bridges, turnpike roads, or gravel roads: Provided, If any municipal corporation shall offer to the Commonwealth any property or money for locating or building a Capitol, and the Commonwealth accepts such offer, the corporation may comply with the offer."
Your question is whether the loan agreement method could be deemed to violate Section 177 of the Constitution. Section 177 of the Constitution contains a similar prohibition concerning the Commonwealth lending its credit to any corporation, person, political subdivision, etc.
Under KRS 103.230(2) the bonds are payable solely from the revenue derived from the building, and this shall not constitute a debt of the city or county within the meaning of the constitution. See Sections 157 and 158, Kentucky Constitution.
The courts have left the matter of declaring public purpose to the General Assembly. The court observed in
Industrial Develop. Auth. v. Eastern Ky. Reg. Pl. Com'n, Ky., 332 S.W.2d 274 (1960) 276, that "The determination of what constitutes a public purpose is primarily a matter for legislative discretion. . . . which is not disturbed by the courts so long as it has a reasonable basis." Thus relief of unemployment and encouragement of industry have been accepted as public purposes. See
Faulconer v. City of Danville, 313 Ky. 468, 232 S.W.2d 80 (1950).
Let us examine the practical realities of the loan method. The money loaned is the money from the proceeds of the bond sale. The loan in no way involves the use of tax revenues, either city, county or state. Thus we see no meaningful distinction between the issuer of the bonds acquiring the property and leasing the building to a corporation and the issuer of the bonds merely lending the bond sale money to a corporation or person to finance the acquisition or construction of the building by such corporation or person.
The appellate court, in dealing with industrial building revenue bonds, has experienced no hesitation in upholding the constitutionality of the bonds in the context of considering Sections 177 and 179 of the Constitution. In fact, the court, in Faulconer v. Danville, above, wrote at page 84, in response to a contention that such bonds violate Section 179, this:
"We think the foregoing consideration, that the venture does not involve the use of tax revenues, presently or in the future, answers this suggestion. It is expressly stated in the statute, ordinance and bonds, that they do not constitute an obligation of the city. Nor is there any lending of credit in other form. There is only the lending of the city's name and its commitment to render the described services and to lease the property for a consideration, which is so valuable that the city is acquiring and will have title to property, unencumbered by a mortgage or lien, of the value of $ 300,000. The public treasury cannot be opened under the present statute, ordinance or contracts. The city's hand collects and dispenses the rents. It becomes a trustee but not a creditor or guarantor. "
The case of
Industrial Develop. Auth. v. Eastern Ky. Reg. Pl. Com'n, Ky., 332 S.W.2d 274 (1960), involved the statutory authority of the Industrial Development Finance Authority to make loans to a local development agency when it has determined that a particular industrial building project has accomplished or will accomplish the public purposes of the act [see KRS 154.080]. In answer to the contention that Section 177 of the Constitution was violated, the court said this at page 278:
"The transactions the Authority would be empowered to make under the Act would involve only a loan of state funds. In such a case, the Authority would not be giving or pledging or lending the credit of the state, because the Authority would not be undertaking to become a surety on, or guarantor of the payment of, any bonds or other obligations in which the state's money was invested. It would be in the position of a creditor rather than in that of a debtor, which last-mentioned situation arises upon a pledge or loan of credit. See Fairbank v. Stratton, 14 Ill.2d 307, 152 N.E.2d 569."
However, in the instant situation there is no lending of city, county or state funds in the constitutional sense [tax revenues] . Only bond sale funds are involved.
It is our opinion that the loan method to be used by a city, county, or K.I.D.F.A., in financing industrial buildings does not violate the anti-lending of credit provisions of Sections 177 and 179 of the Kentucky Constitution. As we said above, no loan of government tax revenues is involved. Faulconer v. City of Danville, above. The money loaned comes purely from the bond sale. The bonds are payable solely from the revenues of the building; and the governmental issuers of bonds do not create a constitutional indebtedness. At most, the issuer of the bonds has an obligation of good faith to the bondholders and a fidelity to the terms of the bond documents.