Request By:
Mr. Wayne T. Rutherford
Pike County Judge/Executive
Courthouse
Pikeville, Kentucky
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
You request an opinion on the financing of certain county projects.
Your letter reads:
"The county desires to enter into financing arrangements with regard to its road program, including new roads, a new county garage (and the site thereof), new road and blacktop equipment, new county maintenance equipment, and even new county bridges.
"The county desires advice as to how this program may be financed so that the county may have all of such items initially and pay for same in annual installments over a number of years.
The county has already created a County Building Commission under KRS 67.450. May that Commission be used under KRS 67.450-555 to issue bonds to finance any or all of the desired projects, and/or will it be necessary for the county to create a new holding corporation under KRS 273 and/or KRS 58.010 to finance any of such projects?
If and to the extent that any of such project cannot be financed through either of those methods, are there any other methods available to the county whereby such projects can be financed?
Will any of the permissible financing methods require the approval of such financing at a general election?"
We shall respond to your request in terms of the major projects the fiscal court may have in mind.
A NEW COUNTY GARAGE
The County Buildings Commission may construct a new county garage pursuant to KRS 67.450 to 67.550. The Commission's authority is narrowly restricted to the construction, remodeling or improving of county buildings and necessary appurtenances. Such a building may be funded by revenue bonds payable solely from revenue derived from the building, as provided in KRS 67.520, and would not constitute an indebtedness of the County Buildings Commission within the meaning of Sections 157 and 158 of the Kentucky Constitution. KRS 67.505 expressly provides that there shall be a statutory mortgage lien upon the buildings and appurtenances in favor of the holder of the bonds and coupons. While the courts have never specifically passed on the constitutionality of KRS 67.450, et seq. , it is probably too late to test the legislation. In
Wayne Public Library Board of Trustees v. Wayne County Fiscal Court, Ky., 572 S.W.2d 858 (1978) 859, the court wrote that "It is an ancient and pragmatic principle of law that when acts have been long accepted as constitutional and important rights have been based thereon, the courts may refuse to further consider their constitutionality." This is especially true as relates to bond issues and the constitutional rule that no law may impair the obligation of contract. See Section 19, Kentucky Constitution, and Article 1, Section 10, United States Constitution.
Even before the advent of the major revenue bond legislation, the courts approved the "holding company" concept. That plan is that a non-stock, non-profit corporation may be created to acquire the site and construct the county garage, and then lease it to the county for one year, with an option to renew the lease, from year to year, until the rentals are sufficient to retire the holding company bonds, at which time the corporation or holding company conveys the property to the county. See
Turnpike v. Wall, Ky., 336 S.W.2d 551 (1960);
Warren County Fiscal Court v. Warren County Tuberculosis Sanitorium Corp., Ky., 272 S.W.2d 331 (1954); and
Sizemore v. Clay County, 268 Ky. 712, 105 S.W.2d 841 (1937) [a courthouse].
Under KRS 66.310(2), the issuance of bonds by the holding company, under a lease-option arrangement, must be approved by the State Local Finance Officer at a publicly advertised hearing. If approved by such officer, such approval would be virtually the same as an approval of a circuit court, and if not appealed, the approval would be final. See KRS 66.310(7).
Of course a county may issue its general obligation bonds to fund the construction of county buildings, but the requirements of Sections 157 and 158 of the Constitution and KRS 66.280, et seq. , must be observed. This includes a 2/3 vote of the people under Section 157, Kentucky Constitution, where the debt cannot be funded out of current revenues.
NEW COUNTY ROAD CONSTRUCTION AND MAINTENANCE EQUIPMENT
The holding corporation concept may be applied to movable equipment which could be mortgaged as security for bondholders, and which could be leased by the holding corporation to the county on an annual lease-option basis. Cf.
State Property & Buildings Commission v. Hays, Ky., 346 S.W.2d 3 (1961), where the legislation empowered the commission to purchase voting machines from proceeds of bonds payable out of revenues to be derived from leasing the machines to the various counties [one year leases, renewable etc.]. Over a certain period the county would get the title to the machines. However, the court struck part of the legislation down for the reason the legislation provided that the budget of a county failing to provide for the rental payments would be disapproved by the State Local Finance Officer. The court said in effect that such budget requirement converted the rental payments into a debt, in terms of Section 157 of the Constitution.
ROADS AND BRIDGES
We assume the fiscal court has in mind the construction and reconstruction of county roads and bridges.
Under Section 157a of the Kentucky Constitution, any county may be permitted to incur an indebtedness in any amount fixed by the county, not in excess of 5% of the value of taxable property therein, for public road purposes in the particular county, provided that such additional indebtedness is submitted to the voters of the county for their ratification or rejection at a special election held for that purpose. And when any such indebtedness is incurred by the county, the county may levy, in addition to the tax rate allowed under Section 157 of the Constitution of Kentucky, an amount not exceeding twenty cents (20 ) on the one hundred dollars ($100) of the assessed valuation of the county for the purpose of paying the interest on the debt and providing a sinking fund for the payment of the indebtedness. See KRS 178.210. The court held in
Defoe v. Perry County, 293 Ky. 487, 169 S.W.2d 309 (1943) that road and bridge bonds may be issued under either Section 157 or 157a of the Kentucky Constitution. In
Bird v. Asher, 170 Ky. 726, 186 S.W. 663 (1916) 666, the court observed that "It is immaterial how many different issues of bonds authorized by the vote of the people there may be outstanding at the same time, provided, always, that the total of these outstanding bonds does not at any time exceed in the aggregate an amount that can be paid by the 20-cent tax levy alone." The voting on road bonds may be at a special election, which is one of the four exceptions to the "November election" mentioned in Section 148 of the
Kentucky Constitution. Ginsburg v. Giles, 254 Ky. 720, 72 S.W.2d 438 (1934) 439.
The counties in the last several decades apparently have very rarely used that method of financing [Section 157a, Const.].
The county could appropriate any part of state aid funds (fuels excise tax revenue) and any part of its regular county ad valorem tax to the payment of such bonds, provided the total bond issues outstanding do not exceed the 20-cent tax levy. In connection with state fuels excise taxes revenue for county road aid, see OAG 80-252, copy enclosed. A county indebtedness created under Section 157a of the Constitution is not subject to the two percent (2%) limitation in Section 158, Constitution. In addition, as we said, the construction and repairing of county roads and bridges is a purpose for which indebtedness may be incurred under Section 157 as well as under Section 157a of the Constitution. However, Section 157 indebtedness requires a two-thirds (2/3) vote, while a Section 157a indebtedness requires only a simple majority vote. See
Bird v. Wilson, 171 Ky. 807, 188 S.W. 899 (1916); and
Gatton v. Fiscal Court of Daviess County, 169 Ky. 425, 184 S.W. 1 (1916).
See KRS 178.170, as amended in 1980, relating to voting on bonds for county roads and bridges. KRS 58.430, by its express language, repealed the interest ceiling provisions of this section. Also see KRS 178.210, relating to the implementation of Section 157a.
It is our opinion that the above methods of financing roads and bridges, i.e., under Sections 157 and 157a, Constitution, may include road equipment of various kinds necessary for the county road program.
Unfortunately, we find no statutory law for counties comparable to the state turnpike authority legislation. The latter authorizes the commission to take title to state highway projects, issue revenue bonds, and then lease such highways to the Bureau of Highways on a lease-option basis for two years at a time. In this manner the Bureau of Highways, Department of Transportation, can pay off the bonds with a combination of the collected tolls and the Highway Fund of the biennial budget. See
Turnpike Authority v. Wall, Ky., 336 S.W.2d 551 (1960), holding that the legislature can authorize the commitment of revenues anticipated during the biennium for which its appropriations are to be budgeted.
As concerns the application of the holding company concept to road and bridge building, the common thread in the old cases is that a lien of mortgage bonds is involved. See, for example,
Scott County Bd. of Education v. McMillen, 270 Ky. 483, 109 S.W.2d 1201 (1937).
KRS 58.180(1)(a) permits any public project, as defined in KRS 58.010(1), to be financed under the holding company plan. Such projects could include sewers, water systems, streets, public ways, sidewalks etc. Under that section the nonprofit corporation's bonds may be secured by a pledge of all revenues derived from the operation of such public project.
It is our opinion that the holding company concept may be validly applied to county road and bridge building, reconstruction, and repair, pursuant to KRS 58.180. Under that plan the nonprofit corporation, acting as the agency and instrumentality of the county, issues the revenue bonds, constructs the project and leases the project to the county for one year, subject to automatic renewal for a sufficient period to pay off the bonds and interest, unless the county at the end of any year elects not to renew the lease. When the bonds and interest are fully paid, the county recovers full title to the facilities. The annual rental would be funded by available tax revenues out of the current budget (this could be available general fund or road fund money).
Although apparently no foreclosable lien will be involved, and no security interest can be granted to bondholders on a public road or bridge project, and although the county has only a moral obligation to renew the lease, it is our opinion that the principle of the holding company concept, clearly established in our law, would apply to county roads and bridges. The cases have established the premise that public project revenue may actually consist of available tax revenues out of the governmental unit's current budget. In this manner the county does no violence to §§ 157 and 158 of the Constitution. See
Turnpike Authority of Kentucky v. Wall, Ky., 336 S.W.2d 551 (1960). In
Preston v. Clements, 313 Ky. 479, 232 S.W.2d 85 (1950), involving the court approved state revenue bonds issued to erect the Capitol Annex, the court, at page 90, wrote that "The legislature is not legally bound to make appropriations to continue the payment of rentals, even though such appropriations can be made within the constitutional limits of annual indebtedness. " (Emphasis added). Thus the court's mental reservations, in
Anderson v. Wayne County, 310 Ky. 597, 221 S.W.2d 429 (1949), concerning fictionalizing the "project revenue concept" and suggesting by dictum that it might be improper thereafter to pledge revenues from any project that did not truly produce or generate revenues, were indeed laid to rest in Preston v. Clements, above, and Turnpike Authority v. Wall, above. The dictum conceivably arose out of the court's momentary forgetting the fact that rentals paid by tax revenues out of a current budget simply do not violate §§ 157 and 158 of the Constitution. See
Martin County v. Cassidy, 307 Ky. 728, 212 S.W.2d 281 (1948) page 283, headnote 3.
The renewable lease feature (of the one year lease) was specifically upheld in Turnpike v. Wall, above, page 556.
Under KRS 66.310, the state local finance officer must approve such bonds. Such approval ordinarily would indicate that the state government has determined the project to be proper and involves a reasonable expectation of repayment by the county.
Although we can find no case dealing with the holding company concept as applied to county roads, we are inclined to believe the courts will uphold it, even in spite of the fact that it lacks the elements of a foreclosable lien or other security.