Request By:
Dr. Constantine W. Curris
President
Murray State University
Murray, Kentucky 42071
Opinion
Opinion By: Steven L. Beshear, Attorney General; Robert L. Chenoweth, Deputy Attorney General
In April of this year you forwarded to Attorney General Beshear materials regarding a transaction between the Murray State Board of Regents and the Murray State University Foundation. This transaction was in the nature of an official agreement whereby the Foundation would take over the operation of the University Bookstore. At the time of receipt of the materials relating to this matter, the State Auditor of Public Accounts had forwarded to the University certain excerpts from a draft audit report on Murray State University. These excerpts indicated that the State Auditor was of the opinion the transfer of the University Bookstore from Murray State University to the Foundation was contrary to statutory authority. University legal counsel proceeded to prepare a response to the State Auditor's position regarding the transfer. A copy of that response was forwarded to this Office for review. In the latter part of May, by telephone conversation with the Murray State University Office of Legal Counsel, it was explained that you desired this Office to consider your April letter as a formal request for an advisory opinion on the legal propriety of the University Bookstore transaction. In the middle of June, this Office received a document entitled the "Official Position of the Auditor of Public Accounts" regarding the Murray State University audit. After a thorough review and analysis of all of the materials received pertinent to the transaction between the Murray State University Board of Regents and the Murray State University Foundation, in light of the statutory provisions involved, it is the advisory opinion of the Office of the Attorney General that no violations of law have occurred.
In order to understand the bases for our conclusion, a brief additional recitation of some material facts will be of assistance. As you well know, in April, 1979, the Murray State University Board of Regents decided that the overall objectives of the University could best be accomplished by a transfer of the University Bookstore to the Murray State University Foundation, a nonprofit corporation whose sole purpose is to aid and assist Murray State University. The University Bookstore had been occupying space leased for it by the Foundation. It had been anticipated that the Bookstore would be operated in the new student union facility upon completion of that facility, which we understand will be around November of this year.
Furthermore, as you know, as President of both Murray State University and the Murray State University Foundation, in September a year ago a contract (Agreement) was entered into between Murray State University and the Murray State University Foundation. The Bookstore operations, not ownership as such, were transferred to the Murray State University Foundation. Under the contract, Murray State University retained title to the inventory but for and in consideration of the premises set forth and promises made in the contract, the Foundation was to be permitted to use the Bookstore inventory for the continued operation of the Bookstore under specific restrictions designed to protect the interest of Murray State University as set forth in the contract.
The State Auditor has taken exception to the transaction executed in the September 15, 1979 agreement. The Auditor believes the Murray State University Board of Regents does not have the power to effectuate the transfer of the Bookstore operations to the Murray State University Foundation. The Auditor is also of the opinion the transfer is in violation of KRS 41.070 regarding the depositing of money into the State Treasury. This Office, as indicated above, respectfully disagrees with these positions maintained by the Auditor.
The broad powers of the Board of Regents of Murray State University are set out in KRS 164.350, which reads in full as follows:
"The government of each of the state universities and colleges is vested in its respective board of regents. Each board of regents, when its members have been appointed and qualified, shall constitute a body corporate, with the usual corporate powers, and with all immunities, rights, privileges and franchises usually attaching to the governing bodies of educational institutions. Each board may:
(1) Receive grants of money and expend the same for the use and benefit of the university or college;
(2) Adopt bylaws, rules and regulations for the government of its members, officers, agents and employes, and enforce obedience to such rules;
(3) Require such reports from the president, officers, faculty and employes as it deems necessary and proper from time to time;
(4) Determine the number of divisions, departments, bureaus, offices and agencies needed for the successful conduct of the affairs of the university or college; and
(5) Grant diplomas and confer degrees upon the recommendation of the president and faculty. "
The first question to address, then, is whether the Murray State University Board of Regents can enter into a contract with another corporate entity for the purpose of running the University Bookstore. We believe when the issue is properly viewed in this manner, it is undoubtedly correct to conclude such a contractual business agreement is well within the Board's powers. KRS 164.350 states that the board of regents is to have "the usual corporate powers," which would include the power to contract and to be contracted with. KRS 164.350 further provides that the board may "receive grants of money and expend the same for the use and benefit of the university. . . ."
We do not question the fact that the Board of Regents' statutory right to contract might be breached by entering a contract beyond the scope statutorily intended. However, a highlighting of portions of the agreement in question dispels any such notion in this case. The Board of Regents transferred the operation of University Bookstore to the Foundation. The University plainly retained title to the Bookstore business and ownership of the Bookstore inventory. Operational use of the inventory was transferred to the Foundation. In return, the Foundation is required under the agreement to maintain at all times "an inventory equal in value to that made available to it upon the signing of this agreement. . . ." Agreement at 2a and d. The Foundation agreed to never transfer the operation of the Bookstore to another other than back to Murray State University or its successors or assigns. Agreement at 2b. Further, and quite critically, the agreement provides at 3f as follows:
"That the ownership of the inventory, together with such inventory account funds as are mentioned in this instrument, is to remain with Murray State University; any transfer of same to Murray State University Foundation is mutually understood and agreed to be a transfer of control and beneficial use only." (Emphasis ours.)
One last important requirement set out in the agreement is that the Foundation for the duration of the agreement agreed to "not amend the Foundation's Articles of Incorporation so as to add any objective, purpose, or power other than one which would directly aid or assist Murray State University. . . ." Agreement at 2c. The Articles of Incorporation state:
"The said corporation is to be a non-profit organzation, with no capital stock and from which no private, pecuniary profit shall ever be derived by any officer or other person except such compensation as may be allowed for services actually rendered. The income of the corporation shall be devoted solely to its educational objectives." Article Ii, Literary paragrpah 2.
"The purpose of this corporation shall be to do and perform all things necessary for development, growth, expansion, progress, the accomplishment of educational objectives, the development of the physical plant, the improvement of the faculty, and aid to the student body and alumni of Murray State Teachers College, (or by what other name the said college may be called.)" Article IV.
We believe the above-referred-to agreement provisions support our conclusion that the Board of Regents has simply entered into a transaction with its service foundation to operate the University Bookstore. Title to and accountability for the inventory remains with the Board of Regents. There has been no disposition of the inventory or Bookstore business but only an arm's-length transaction with the Foundation whose sole reason for being is to aid and enhance and further the welfare of the University. The University has not donated or given away any property. The Foundation is required to operate the Bookstore for the "use and benefit" of the University.
Thus, we are of the opinion the Board of Regents has legally exercised its corporate powers under KRS 164.350 by entering into a contractual agreement with the unique, limited purpose Murray State University Foundation for the operational control of its Bookstore. The University has retained the ownership and ultimate legal rights to the Bookstore inventory and business as such.
There was also raised by the Auditor an issue regarding the legal propriety of the transfer of a sum of money held in an inventory account in addition to the transfer of the beneficial use of the Bookstore inventory itself. The claim on this point was that the transfer of this money amounted to an improper disposition of profits in violation of KRS 41.070.
KRS 41.070, in essence, provides that "state money or money for which the state is responsible" is to be deposited, with limited exceptions, "promptly into the state treasury. " It must first be understood that the Bookstore inventory itself is not money and that as to the inventory, as property for resale to students, KRS 41.070 is inapplicable. As for the transfer of $40,613.35, this sum of money was maintained in an "inventory account" in order to retain sufficient funds to enable the Bookstore to replenish its inventory and for operating capital in general. Under the agreement, the Board of Regents transferred this sum of money to the Foundation for the specific and limited purpose of purchasing inventory. In that the University could have expended all of this account money for inventory immediately prior to the transfer of the operational use of the Bookstore to the Foundation, we do not see how the transfer of the inventory account money as inventory runs afoul of KRS 41.070. The Auditor believes this sum of money was to be considered profits, but we cannot under the total scheme of things see how this money may be properly so labeled. Just as we are of the opinion the Board of Regents properly transferred the operation of the University Bookstore, we believe the inventory account was properly transferred to the Foundation for the sole beneficial use of the University.
We trust the above explains our view of the transaction brought into question by the State Auditor of Public Accounts. The transfer of the operation of a university bookstore involved in the transaction is unique and no parallels are known by which to measure its legality. Nevertheless, under the total circumstances involved and the existence of the particular characteristics and limitations of the agreement between the two parties, this Office is of the opinion that this transaction has violated no state statutes. A copy of this opinion will be forwarded to the State Auditor's Office.