Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
As Director of the Office for Investment and Debt Management, Department of Finance, Commonwealth of Kentucky, you request our opinion concerning several sections of the Kentucky statutes pertinent to the issuance of revenue bonds.
The Kentucky Housing Corporation at its April 23, 1981, meeting passed a resolution authorizing the Executive Director of the KHC to cause the creation of a "child" corporation for the issuance of housing construction loan notes and revenue bonds and thus serving as a vehicle for qualifying for mortgage financing under the United States Housing Act of 1937. 42 U.S.C.A. § 1437a (definitions), in subsection (6) defines the term "public housing agency" as meaning "any state, county, municipality, or other governmental entity or public body (or agency or instrumentality thereof) which is authorized to engage in or assist in the development or operation of low-income housing. Of course the KHC is a "public housing agency" as defined in 42 U.S.C.A. § 1437a. The proposed new corporation is intended to fit the definition of an "agency or instrumentality PHA", as stated in 24 CFR § 811.102(b): A not-for-profit private or public organization that is authorized to engage in or assist in the development or operation of low-income housing and that has the relationship to a parent entity PHA required by this subpart. " (Emphasis added). The comment by those voting favorably on the resolution was that the notes and bonds of the child corporation would be subject to the approval of the KHC. However, we note that in 24 CFR § 811.105(a), the federal approval of such a child corporation requires, inter alia, that the new agency or corporation be " properly created pursuant to state law as a not-for-profit entity. " (Emphasis added).
Question No. 1:
"(a) The legality of the Kentucky Housing Corporation or any other statutorily created entity to create a duplicate or similar entity with the authority to issue revenue bonds.
"(b) If the action in (a) is within the statutory limits of the entity, are the debt ceiling limitations imposed on the parent entity applicable to subentity?"
The KHC is a de jure political subdivision of the Commonwealth of Kentucky. KRS 198A.015 and 198A.030 (1) and (2).
A political subdivision has only those powers which are expressly conferred upon it by the General Assembly; and its implied power is limited to the authority reasonably necessary to execute or discharge its express duties. Hogge v. Rowan Fiscal Court, 313 Ky. 387, 231 S.W.2d 8 (1950). The Supreme Court of Kentucky, in Fiscal Court v. City of Louisville, Ky., 559 S.W.2d 478 (1977), restricted the judicial rule concerning powers delegated to a political subdivision by holding that " all power exercised by the fiscal court must be expressly delegated to it by statute. " (Emphasis added). The court, to emphasize the point, wrote that the General Assembly in granting governmental powers to a county " must do so with the precision of a rifle shot and not with the casualness of a shotgun blast. " (Emphasis added). Elsewhere the court said: " The thoughtful, purposeful and deliberate delegation of a known power is required of the General Assembly. " (Emphasis added).
We have examined KRS Chapter 198A, relating to the Kentucky Housing Corporation. See especially KRS 198A.020, 198A.030, and 198A.040 (corporate powers). There is nothing in that chapter expressly or impliedly suggesting this proposed power of creating another housing corporation. In our opinion, there is serious doubt as to whether the KHC has the power to create the proposed new housing corporation. All of its expressly enumerated powers relate to the financing of low-income housing by KHC, not to some other corporation created by its officers.
Concerning the debt ceiling limitation question, as the coordinating entity for debt planning in the executive branch of Kentucky state government, you are concerned over future implications of revenue bond issues, quantum-wise. There is no strict financial obligation of the state government as relates to revenue bonds. Revenue bonds do not constitute an indebtedness of the Commonwealth. See §§ 49, 50 and 171, Kentucky Constitution; and Turnpike Authority of Kentucky v. Wall, Ky., 336 S.W.2d 551 (1960). However, in terms of the state's future issue of government obligation and revenue bonds and the future various financial dealings of the state and its political subdivisions, the state must now think of its good faith to bondholders. A multiplicity of loan defaults in a financial crisis would bring on the question of the state's ability to live up to its good faith to the bondholders. You also point out that debt control is vital when considering the competition among revenue government bonds of the state and municipalities. Thus, as you suggest, the amount of revenue bond financing has reached a critical stage. The good credit image of Kentucky must be maintained; and that underlying consideration undoubtedly is at the root of the present $ 700 million revenue bond maximum, as relates to KHC. See KRS 198A.090(1). The KHC presently has almost exhausted its $ 700 million limit of bonds.
In addition to the problem concerning KHC's authority to create such a child corporation, it is our opinion that any bonds issued through such a device would be subject to the $ 700 million debt ceiling limitation. While we can appreciate KHC's desire to find a way to construct these additional housing units in Kentucky (and we hope that a legal method can be found to do so), it was the clear intent of the Kentucky General Assembly by passing KRS 198A.090(1) to place a maximum $ 700 million limit on the total bonding capacity of KHC.
It is contended that the creation of such a child corporation is authorized by KRS 58.180. In KRS 58.180(1)(a) it is stated that as used therein, the term "public project" shall have the same meaning as ascribed to such term by KRS 58.010. KRS 58.180(2) provides that a governmental agency (municipal corporations and political subdivisions) may create a nonprofit chapter 273 corporation to acquire and finance any "public project" which may be undertaken by such governmental agency. The term "public projects" in KRS 58.010 includes dwelling units for rental. KRS 58.180 provides that legal title to properties acquired or constructed shall be in the Chapter 273 corporation until the bonds are paid off, at which time the legal title shall vest in the governmental agency. Thus KRS 58.180 does not in any manner authorize KHC to create a child corporation to carry on KHC's housing function. In addition, regardless of the meaning of KRS 58.180, it in no way authorizes a departure from the bond ceiling limitations of KRS 198A.090(1) ($ 700 million).
Finally, it is argued that KRS 56.870, providing for legislative approval of state fiscal obligations, would cure everything as concerns a child corporation. KRS 56.870 requires that all revenue bonds and anticipation notes of central state agencies or instrumentalities, must, before issuance and sale, be approved by the General Assembly in a regular or special session. Such approval shall be evidenced by the adoption by the General Assembly of the biennial budget report and the biennial appropriation act which shall specify the purposes for such financing. KRS 56.870(3) reads:
"(3) The provisions of subsection (1) of this section shall not be applicable to the financing of any project in any case where the project for which financing is proposed is certified by the governor, as hereinafter provided, to be of such type as to independently produce revenues sufficient to fully meet debt service on such financing so that no appropriation of state general funds will be required. Such certification shall be made in writing by the secretary of finance to the statutory head of the issuing agency or authority with a copy to the governor and the Legislative Research Commission. (Enact. Acts 1980, ch. 96 § 1, effective July 15, 1980)."
Thus under KRS 56.870(3), the legislative approval of a fiscal obligation is not necessary where the governor certifies that no appropriation of state money is necessary to finance the particular debt service. However, in any case where the General Assembly has authorized a debt ceiling or a specific appropriation for debt service for a particular agency, authority, board, cabinet, or other entity of the Commonwealth, the issuance and sale of definitive bonds or temporary bonds or notes necessary and sufficient to attain such debt ceiling or a specific appropriation for debt service shall be exempt from the provisions of KRS 56.870 to 56.874, relating to General Assembly approval of state fiscal obligations. KRS 56.871. This is the situation with KHC, which has a specific debt ceiling of $ 700 million. Because in our opinion any bonds issued by such a child corporation must be considered as falling within this debt ceiling, KRS 56.870(3) would be inapplicable.
The second question relates to KRS 42.420, which reads:
" All other provisions of the Kentucky Revised Statutes notwithstanding, all state agencies and all individuals, agencies, authorities, boards, cabinets, commissions, corporations, or other entities of, or representing the Commonwealth with the authority to issue bonds, shall submit all proposed bond issues, bond anticipation notes, or interim debt financing to the office for investment and debt management for review and approval prior to issuance of such debt. " (Emphasis added).
The KHC has questioned the applicability of the statute to their debt issues.
The Office for Investment and Debt Management was created in the 1980 session of the legislature. KRS 42.400. Its duties are outlined in KRS 42.410, as follows:
"The office for investment and debt management established in KRS 42.400 shall, subject to the provisions of KRS 41.020 to 41.390, have and perform functions and duties as follows:
"(1) The analysis and management of short and long-term cash flow requirements.
"(2) The maximization of the return on state investments given the cash flow and liquidity requirements.
"(3) The coordination and monitoring of cash needs relative to investment and debt activity.
"(4) The development of a long-term debt plan including criteria for the issuance of debt and an evaluation of how much total state debt is justified.
"(5) The evaluation of revenue projections relative to proposed revenue bond issues.
"(6) The responsibility for liaison with the general assembly on all investment and debt matters, including, but not limited to new bond issues, the status of state debt, and the status of state investments.
"(7) All other functions of the department relative to state investment and debt management including, but not limited to, the making of debt service payments, the sale of bonds, and staff assistance to the state property and buildings commission and the state investment commission."
In reading KRS 42.410 and 42.420 together, in pari materia, it can be seen that the legislative intent was to establish a centralized entity in the Finance Department to evaluate, review and approve all proposed anticipation notes and bond issues of all state agencies and all agencies, commissions, corporations, or other entities of or " representing the Commonwealth. " (Emphasis added).
It was pointed out in LRC Research Report No. 180 that "Most state bonds have been issued by the Turnpike Authority of Kentucky, The State Property and Buildings Commission, the Kentucky Housing Corporation and the eight state universities." The outstanding bonds of state authorities totaled, according to that report, nearly $ 2.9 billion at the end of fiscal year 1980.
The Office for Investment and Debt Management under KRS 42.410 and 42.420 has numerous duties regarding debt issuance and management. Although state revenue bonds do not constitute an indebtedness of the Commonwealth under the statutes and constitution, we are informed that most debt service on such bonds are paid from general state revenues. The state, as a practical matter, cannot allow revenue bonds of the state authorities to default. The "failure of such bonds would severely impair Kentucky's ability to borrow and would result in greatly increased costs for future bond issues. " (LRC Research Report No. 180).
In enacting H.B. 71 (KRS 42.400, 42.410 and 42.420), the General Assembly's intentions emerged from a context of financial austerity and the need for fine tuning of the state's revenues and debt issues by a state centralized agency. The state budget concept is designed to conform to a pay-as-you-go concept. See §§ 49, 50, and 171, Kentucky Constitution; and Russell v. County Board of Education, 247 Ky. 703, 57 S.W.2d 681 (1933) 684.
The term "to represent" was interpreted in Gabby v. Roberts, 237 Ky. 230, 35 S.W.2d 284 (1931) 285. The court wrote that "to represent", in its ordinary usage, must be understood to mean "a standing in the place, or supplying the place, or performing the duties, or exercising the rights, of the party represented; to speak or act with authority on behalf of another.
When KRS 42.420 is read with KRS 42.410, which latter statute stresses state debt and investments, it is our opinion that KRS 42.420 requires that all of the proposed debt issues of all central state agencies and of all individuals, commissions, or corporations of or acting for the state, be reviewed and approved by the Office for Investment and Debt Management prior to issuance. Thus KRS 42.420 applies to all state agencies issuing revenue bonds and anticipation notes, to all debt issuing entities which issue debt in the name of the state, and to all corporations created by the state which issue revenue bonds and anticipation notes. The duties of the Office for Investment and Debt Management include: the duty to develop a long-term debt plan, including criteria for the issuance of debt and an evaluation of how much total state debt is justified. Such central function cannot be carried out unless the Office of Investment and Debt Management reviews all proposed "state issues", as interpreted above. In essence KRS 42.420 embraces all agencies or instrumentalities of central state government.
It is our opinion that KRS 42.420 (approval of debt issues by Office of Investment and Debt Management) applies to the Kentucky Housing Corporation, since it performs a public function, not for itself, but for the Commonwealth. See KRS 198A.015, 198A.030 and 198A.040. While it has a certain autonomy, it is not pure autonomy. As a political subdivision, it is considered by the General Assembly as a part of state government. See KRS 198A.090(4), requiring that bonds or notes issued by the KHC be submitted to the State Property & Buildings Commission for approval.
Thus KHC, as a state political subdivision, cannot proceed under the umbrella of the state's credit image and not be subject to state controls. A different construction would defy logic and would establish a potential for financial state grief in the years ahead. Thus any entity representing the Commonwealth, i.e., performing a function for the state government, would come under KRS 42.420. Cities and counties would not, since a similar approval procedure is provided in KRS 66.045 and 66.310, involving the State Local Finance Officer. We do not believe that KRS 42.420 was intended to be duplicative.
A third question concerns the term of a legislative authorization to issue debt. KRS 56.870 provides that the legislative approval of revenue bond issues of the state may take the form of the biennial budget.
On pages 99-100 of H.B. 931, (1980 Acts, Ch. 109, p. 244) under Part V, Capital Construction Fund, the legislature approved $ 50 million of Economic Development Bonds for each year of the current biennium. On Page 19 of H.B. 931 (1980) (1980 Acts, Ch. 109, p. 216) we find this appropriation under "Development:" "Included in the above appropriation is $ 4,245,000 in fiscal year 1981-82 for debt service payments on the Economic Development Project Bonds." That debt service money was designed to accommodate up to a $ 50 million bond issue.
On Page 91 of H.B. 931 (1980 Acts, Ch. 109, p. 241) we find this: "There is hereby authorized in the Transportation Fund a bond fund authorization of up to $ 150,000,000 in fiscal year 1980-81 and $ 150,000,000 in fiscal year 1981-82 for the constructing and rehabilitating of roads, along with the related costs, in the Kentucky primary road system. The related debt service payments or lease payments to the Kentucky Turnpike Authority, as appropriate, may be expended from funds appropriated to the Transportation Fund."
Due to conditions in the municipal bond market during the past year, none of these bonds have been issued to date. It may prove inadvisable economically to issue them before June 30, 1981. You ask whether, if these bonds are not issued and sold before June 30, 1981, the bonds can be issued and sold in the second year of the current biennium.
The two $ 50 million bond authorizations for Economic Development projects were included in Part V of the 1980 Budget Act, "Capital Construction Fund." See 1980 Acts, Ch. 109, pages 242 and 244. At page 253 of the Acts, it is stated that "In the event that any authorized capital construction and/or equipment purchase projects are cancelled, it is the intent of the General Assembly that any appropriated debt service for those same projects shall remain unallotted and lapse to the General Fund surplus."
Also pertinent is the following language found on page 254 of the 1980 Acts, Ch. 109:
"Included in the above appropriation is a $ 50,000,000 Economic Development bond authorization for each fiscal year. This funding is recommended for projects that are associated with economic development and will be identified during the 1980-82 biennium by the Secretary of the Development Cabinet. Examples of projects that may be included are riverports, parks, economic development, energy development and tourism. No bonds may be issued for these projects in the absence of prior consultation with the Capital Construction and Equipment Purchase Oversight Committee."
It is our opinion that the Economic Development Bonds may be issued and sold anytime during the present biennium. The above language indicates that the bonds are available for issuance during the 1980-82 biennium after projects are specifically identified. Further, the debt financing, i.e., the authorized bonds may, if not sold during the current biennium, ride over into the next biennium, except that the legislature can kill it by not appropriating the necessary debt service at the next available session of the legislature. If the bonds are sold during the current biennium, then they ride over into the next biennium for any necessary debt financing. Under the constitutional mandate as to proscription against impairment of contractual obligation (§ 19, Ky. Const.), where the bonds are sold during the biennium, there is a contractual commitment to the bondholders that appropriations for any necessary debt service be provided.
Concerning the Transportation Fund bond authorization mentioned above, it is likewise our opinion that such bonds may be issued anytime during the 1980-82 biennium. This conclusion is based upon the language found on page 241 of the 1980 Acts, Ch. 109:
"The Transportation Fund shall consist of all the state revenues realized from fees, taxes, and license fees levied for state road purposes authorized by law, and any additional or other revenues, grants, or funds, including any amount which may be received from Federal aid, bond funds, General Funds appropriated, or any other sources pursuant to the provisions of KRS 177.080, made available for the construction or reconstruction of public roads or for any other of the activities administered by the Department of Transportation. Such receipts and revenues, and unappropriated surplus, together with any balance as of June 30, 1980, shall constitute the Transportation Fund for the fiscal years 1980-81 and 1981-82 respectively."
In other words, the Transportation Fund is made up of a lump sum appropriation which can be spent during the current biennium. Unlike most other budget units, any surplus left at the end of fiscal year 1980-81 does not lapse to the General Fund, but rather is carried forward into fiscal year 1981-82.
Next, you ask whether a debt issuance authorization contained in an appropriations act may be carried forward to another biennium.
We have just answered that above. That is, a debt issuance authorization goes forward unless the General Assembly fails to appropriate debt service or rescinds authorization for the project.