Request By:
Mr. Paul F. Fauri
General Counsel
Department for Human Resources
Frankfort, Kentucky
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
You say it has been the practice of the Department for Human Resources to provide advance payments or start-up payments when essential to maintain an effective service delivery network. The DHR uses various contractors to provide services to clients (for example: CETA, nutrition services, aging services, and weatherization). The DHR has indicated to you as General Counsel that the service providers with whom the Department contracts do not have and/or cannot practically obtain sufficient cash reserves to meet the operating costs associated with the providing of services sought by the Commonwealth. In addition, they say that the time involved in processing payments to reimburse costs after the fact could place severe, unwarranted, and insurmountable financial burdens on DHR's service providers. Thus the DHR staff people indicate that advancing funds serves the best interests of the state when it is necessary to maintain the delivery of federal and/or state funded services through existing local, regional, or state-wide agencies. The DHR staff people say that all contracts which the department will be negotiating with provision for advance payment or start-up payment will contain language to the effect that the contractor will hold funds advanced and will not make "final effective disbursement" of such funds until services have in fact been rendered.
In OAG 79-448, we outlined the essential problem in connection with paying out state money to state employees and officers and contractors furnishing services to the state. Statutory law and §§ 3 and 171 of the Kentucky Constitution indeed mandate the payment of state money only after the services have been rendered or performed. See KRS 44.010 (pay claims when due) and 46.340 and
Ray v. Woodruff, 168 Ky. 563, 182 S.W. 662 (1916) 664, and
Webster County v. Vaughn, Ky., 365 S.W.2d 109 (1963) 110. The elementary and ultimate point is that state money can only be spent for a "public purpose", not a "private" one. Thus either goods must be furnished to the state government or services for the state government must be actually rendered before the state's money can be used to finally pay for such. See
Batesville Casket Co. v. Fields, 288 Ky. 104, 155 S.W.2d 743 (1941), which clearly recognized the payment after-the-fact.
We have previously written that where the state's money remains in the hands of officials or employees of state government and the money is not finally and effectively paid out until the services are performed, such an arrangement is valid under the constitutional sections 3 and 171. See OAG 79-532 and 80-38.
Thus where it is contemplated that state money must be turned over or advanced to private or corporate contractors before contractual services are actually rendered, and the state officials engaging in the contracts determine in good faith that such advancements are necessary in point of time and the ultimate rendering of the services sought, it is our opinion that such advancements may be constitutional under these conditions: (1) The contract must expressly provide that the responsible contractor will not make final effective disbursement of the advanced state funds until the contractual services have in fact been rendered. (2) In order to protect the state treasury, the contractor must execute a suitable bond or procure an insurance contract providing for full repayment to the state where advanced money has been disbursed without reflecting the concomitant contractual services to be rendered. In this manner the spirit and underlying reasoning of §§ 3 and 171 can be carefully preserved.