Request By:
Mr. Grant G. Satterly
Financial Investment Advisor
Division of Investment and
Debt Management
Office for Policy and Management
Department of Finance
Capitol Annex
Frankfort, Kentucky 40601
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
Your office requests the opinion of this office as to the legality of the State Investment Commission's entering into a financial transaction known as a "reverse repurchase agreement. " You say the transaction is nothing more than the state's selling an investment that it holds (such as treasury bills) for a specified number of days with the condition that the state shall repurchase that security at the end of the specified term. The purpose of such a transaction, you say, is to generate cash to take advantage of higher yielding shortterm investments without being forced to give up ultimate ownership of a desirable asset.
As we pointed out in OAG 82-29, the State Investment Commission, pursuant to KRS 41.380(2), has the authority, whenever in its opinion the cash in the state treasury is in excess of the amount required to meet current expenditures under normal payment schedules, to invest any and all of said "excess cash" in United States Treasury Bills or certificates of indebtedness or any other United States government security which will mature within one (1) year from the date of investment. Such purchases may include "repurchase agreements", involving United State Treasury Bills. Such agreements involve the state's purchase of United States Treasury Bills from a financial institution with an agreement that the financial institution will repurchase the Treasury Bills at some definite, future date, not to exceed one (1) year from date of investment. However, such investments must be carefully tailored to meet precisely normal payment schedules of state obligations.
Now you are suggesting the "reverse repurchase agreement" , whereby the state investment commission would be selling an investment that it holds (such as Treasury Bills) for a specified number of days, with the condition that the state shall repurchase that security at the end of the specified term. You have informed us that what is contemplated for sale by the Commission is direct obligations of the United States Government or any of its agencies, which obligations would include Treasury Bills, Treasury notes, etc. This would not include such securities held under a repurchase agreement, and would involve those securities normally held in your regular portfolio of investments.
In addition, the sale of such securities by the State Investment Commission would contemplate a holding in the purchaser from one (1) to sixty (60) days. The Commission, in such sale, would agree to repurchase the securities within 60 days or less, as specified.
The sales would be for cash, which can be invested in higher yielding short-term investments, without having to give up ultimate ownership of a desirable asset.
The sale, under the "reverse repurchase agreement" , would involve the current market value of the security on the day of sale. At the end of the specified term of holding, the state would repurchase the security at the identical market value price, plus the agreed upon interest rate (set by current market conditions).
Since the proposed "reverse repurchase agreements" contemplate the use of "excess" funds (in excess of the amount required to meet current state expenditures under normal payment schedules) within the time limits of KRS 41.380(2), it is our opinion that such agreements would be valid and permissible on the part of the State Investment Commission. Though the term "reverse repurchase agreement" is not found in that total terminology in the statutes, the language of KRS 41.380 and 386.020(1)(1) is broad enough to cover this temporary sale of the securities, since the temporary sale does not negate the basic "investment" posture of the Commission in holding the securities involved in this procedure. In
Newbolt v. Board of Ed. of Berea Indep. School Dist., Ky., 409 S.W.2d 513 (1966) 514, the court wrote this about a strict, literal construction of a statute:
It is an established rule of statute construction that the courts will consider the purpose which the statute is intended to accomplish and will not give a strict, literal construction to the statute if it would lead to an unreasonable or absurd conclusion.
Moreover, the authority to engage in the "reverse repurchase agreement" is implicit in the express power of investment.
Judge Baird, in Long v. Mayo, 271 KY. 192, 111 S.W.2d 633 (1937) 637, wrote this as to implied powers:
It is an accepted rule recognized often by this court that not only those powers expressly granted by the statute, but such powers as are necessarily or fairly implied in, or incident to, the accomplishment of the things which are expressly authorized to be done.
The obvious purpose of KRS 41.380 and 386.020 is to derive the maximum possible under marketing conditions from the investment of the state money. That is precisely what our construction aims at.