Request By:
Mr. James S. Secrest
Allen County Attorney
Box 35
210 W. Main Street
Scottsville, Kentucky 42164
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
Your letter presents a financial problem relating to the Allen County War Memorial Hospital. The hospital is owned and operated by Allen County, Kentucky, it having been originally established in 1952 pursuant to KRS 216.010 et seq., since repealed.
The hospital now faces a "cash flow" crisis. NKC, Incorporated, a professional management organization, has recommended that the hospital borrow $375,000 from the two local banks to alleviate this problem.
Question No. 1:
"Can Allen County as owner and operator of the Allen County War Memorial Hospital borrow from the local banks the sum of $375,000 to be repaid over 7 years at 8% interest per annum without contravening the provisions of § 157 of the Kentucky Constitution?
Section 157 of the Kentucky Constitution reads in part:
"No county, city, town, taxing district, or other municipality, shall be authorized or permitted to become indebted, in any manner or for any purpose, to an amount exceeding, in any year, the income and revenue provided for such year, without the assent of two-thirds of the voters thereof, voting at an election to be held for that purpose; and any indebtedness contracted in violation of this section shall be void. " (Emphasis added).
The landmark case of Payne v. Covington, 276 Ky. 380, 123 S.W.2d 1045 (1938), held that the constitutional limit on county and municipal indebtedness is mandatory, and leaves no discretion to legislators, judges or administrative officials. Sections 157 and 158 (imposing a flat maximum indebtedness of 2% of the value of taxable property for counties) are self-executing and require no implementing legislation. Payne v. Covington, supra.
At this juncture, it is important to note that the future revenues envisioned in § 157 relate only to such future revenues as can be exacted in the form of taxes. Skidmore v. City of Elizabethtown, Ky., 291 S.W.2d 3 (1956). The court, in Bell v. Board of Education of Barren County School Dist., Ky., 343 S.W.2d 804 (1961), reiterated the rule that the construction of the phrase "income and revenue provided for such year" has been that it means that which the particular taxing district has actually provided for in reasonable and good faith anticipation of collecting." (Emphasis added).
Thus if the proposed loan cannot be completely funded out of tax revenues available in the accounting year in which the loan is made, the loan would be void, without a vote of the people, as required by § 157. That would be true even if the debt were within the limits set by § 158.
Question No. 2:
"Can patient revenues be included as 'Income and Revenue' within the meaning of § 157?"
The answer is "no". See Skidmore v. Elizabethtown, supra.
Question No. 3:
"If the answer to question no. 1 is 'no', can we fund this debt by a judicially validated bond issue of the type or similar to the bond issue for $27,365.40, approved in the Fulton County case, Fulton County Fiscal Court v. Southern Bell Tel. & Tel. Co., 285 Ky. 17, 146 S.W.2d 15 (1940)?"
We must first note that the payment of expenses of the usual and current administration of government, i. e., compulsory obligations of government arising out of statutory law, are not within the prohibitive range of § 157 of the Constitution. However, the operation of a hospital by the county is not mandatory. Therefore, this proposed debt relating to the hospital falls within the operative provisions of §§ 157 and 158, Constitution.
The Fulton County case involved a long and complex history of a floating county debt and certain bond issues and refunding which are not germane to the proposed hospital debt.
This non-compulsory type of debt can be validated by submitting it to a vote of the people under § 157, Constitution. The necessary affirmative vote required by § 157 will validate such an obligation either with government obligation bond financing or without any bond issue. See Shaw v. Fiscal Court, 288 Ky. 215, 155 S.W.2d 856 (1941).
You ask about the Carroll County financing. We suggest you take up the question of financing under KRS 58.180 with bond counsel.
Question No. 5:
"If the answer to all the above is 'no' what in the hell are we going to do other than float a general obligation bond issue, or create a hospital district? "
As we mentioned above, an affirmative vote of the people under the terms of § 157, alone, with or without bonds, will validate the proposed debt if it exceeds the available tax revenues for the particular year, and assuming that the limits of § 158 are observed. That would involve a simple bank loan or loans for that total amount voted on by the people in your county. If you found that unworkable, then the county could issue general obligation bonds. We suggest that, if bonds become necessary after the vote, you consult with bond counsel on such proposed issue. See KRS 66.210, 66.220, and 66.310. See also Randolph v. Shelby County, 257 Ky. 297, 77 S.W.2d 961 (1934).
On the question of financing through the device of a hospital district and a district tax, see KRS 216.317 and Dunn v. Marshall County Hosp. Dist., Ky., 543 S.W.2d 767 (1976).