Request By:
Mr. Ronald M. Sullivan
Attorney at Law
P.O. Box 727
100 St. Ann Building
Owensboro, Kentucky 42302-0727
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
The purpose of your letter was to request our opinion on two subjects. The first question deals with the power of the Owensboro-Daviess County Hospital Board of Managers to borrow money to finance a hospital construction project. The second question deals with the power of the Owensboro-Daviess County Hospital Board of Managers in investing the surplus funds of the hospital.
Because of the history and complexity of the questions, we quote rather fully from your background letter as follows:
"For background information the legal status of Owensboro-Daviess County Hospital was approved by Kentucky's highest court in
Booth v. City of Owensboro, Ky., 118 S.W.2d 684 (1938) and
Booth v. City of Owensboro, Ky., 122 S.W.2d 111 (1938). Since 1938 there has existed two separate legal entities, Owensboro-Daviess County Hospital, a nonprofit, nonstock corporation and the Board of Managers of Owensboro-Daviess County Hospital, a joint political subdivision created by the City of Owensboro and Daviess County, Kentucky. The corporation owns the real estate upon which the hospital is operated and it issued the bonds to finance construction and additions to the physical plant. Its purpose is to serve as a legal entity through which the hospital may finance expansions and overcome the constitutional restrictions on its debt limits.
"Our question deals with the activities of the Board of Managers, not the corporation. The hospital is about to embark on a $20 million expansion and renovation project. Its objective and plan is to pay for the expansion and renovation from current income. It is possible that during the course of the expansion and renovation construction costs may periodically exceed the hospital's ability to pay them from current income and surplus funds. Several local financial institutions are willing to extend to the Board of Managers a line of credit of some $4.5 million. At the present time the hospital's gross income approaches $40 million per annum, and it has operated in the black for many years. Each year there has been a net income from operations and even a greater availability of cash because of depreciation."
The first question is whether or not the Board of Managers of the Owensboro-Daviess County Hospital is a municipality within the meaning of § 157 of the Kentucky Constitution.
The Board of Managers has actually operated the hospital since 1938. The Owensboro-Daviess County Hospital was originally created in 1938, to accommodate patients of Daviess County and the City of Owensboro, as a nonstock, nonprofit corporation. The affairs of the corporation were to be conducted by a board of nine directors, seven of which were to be appointed by the county and city governments. The County Judge and Mayor of Owensboro are ex officio members of the corporate board. The Articles of Incorporation were amended in 1974, raising the maximum authorized indebtedness of the hospital to $7,500,000. The corporation can incur no indebtedness except upon a majority vote of the Board of Directors. In
Booth v. City of Owensboro, 274 Ky. 325, 118 S.W.2d 684 (1938), the City of Owensboro and Daviess County proposed to enter a contract, lease and option in order to finance the construction of the City-County hospital. The hospital corporation would hold the title to the hospital and then lease it back, under a revenue bond issue, to the city and county, which two governments would pay an annual rental to fund the bond issue. The actual operation of the hospital would be in a Board of Hospital Managers, which board would be identical in membership with the Hospital Corporation Board of Directors.
The Court, in Booth v. City of Owensboro, above, was of the opinion that the city and county could join in the operation and maintenance of a hospital. But the court said that the city-county had no authority to take a private corporation or individuals into partnership in conducting such public enterprise. Thus the city and county could not delegate its responsibility to persons who are not responsible to the people.
In 1938 the City of Owensboro and the Fiscal Court of Daviess County executed a supplemental contract, lease and option along the basic lines suggested in the lawsuit. In addition, the supplemental contract provided that the actual operation of the hospital properties by the city and county, as lessee, shall be by a Board of Hospital Managers, which shall be identical in membership with the hospital corporate Board of Directors. This is the same as the proposed Board of Hospital Managers in Booth v. City of Owensboro. A point of judicial disapproval in the Booth case was that the proposed Board of Directors of the Hospital Corporation consisted of three (3) representatives of the county, three (3) of the city, but three (3) of the German American School Association, a private corporation or three citizens chosen by it. However, the Articles of Incorporation of the Owensboro-Daviess County Hospital in December, 1938, established a Board of Directors as follows: one director is the county judge; one director is the mayor of the City of Owensboro. The remaining seven (7) members of the corporate Board of Directors are selected as follows: the county judge, with consent of Daviess Fiscal Court, selects three (3) members. The mayor, with consent of the Board of Commissioners, selects three (3) members. A ninth member is selected by the county judge with consent of the Fiscal Court of Daviess County and by the mayor with consent of the Board of Commissioners of Owensboro.
It is our view that the December 1938 Articles of Incorporation of the Hospital Corporation and the Supplemental Contract, Lease and Option of December, 1938, were in compliance with the mandate of the Court of Appeals in Booth v. City of Owensboro, above. The total membership of the Board of Managers are persons in city and county government or appointed by the city and county governing bodies.
It is our opinion that the Board of Managers is not a municipality under the terms of § 157 of the Kentucky Constitution. The Board of Managers are intended as agents of the county, but they are not the city nor county within the strict meaning of § 157. It is not a taxing district.
In the case of
Sawyer v. Jefferson County Fiscal Court, Ky., 438 S.W.2d 531 (1969), cited by you in support of characterizing the Board of Managers as a municipality under § 157, Constitution, the statutes expressly permitted the fiscal court to create a "County Public Improvements Finance Board", which had the authority to pledge to the payment of its debts appropriations required to be made to it by fiscal court in "future years from the proceeds of general tax revenues." (Emphasis added). Thus the "second personality" of the county was permitted by statute to pledge county general tax revenues for future years, in violation of § 157. In addition, KRS 66.550 designated the County Improvement Board as an independent "body corporate and politic." (Emphasis added). We note that the contractual creation of the Board of Managers of the subject hospital has no such statutory or comparable status. They, the Board of Managers, are agents of a kind for the city and county, but they are not perfectly manageable agents unless the city and county intended to retain ultimate control over the hospital.
You will note that in OAG 80-333, we pointed out that, on the basis of cases cited therein, it was our opinion that when §§ 157 and 158 of the Kentucky Constitution are read together, the restrictions of those sections are to be applied to a unit of government constituting a "municipality" and a "taxing unit" at the same time. Those designated categories must co-exist in order for the restrictions to apply. See
Skidmore v. City of Elizabethtown, Ky., 291 S.W.2d 3 (1956);
Bell v. Board of Education of Barren County Sch. Dist., Ky., 343 S.W.2d 804 (1961) 806;
Payne v. City of Covington, 276 Ky. 380, 123 S.W.2d 1045 (1938); and
Griffin v. Clay County, 304 Ky. 592, 201 S.W.2d 733 (1947) 736. Thus we ruled in OAG 80-333 that an airport board created by Lexington-Fayette Urban County Government under KRS Chapter 183 was not a municipality under §§ 157 and 158, Kentucky Constitution. Here the Board of Managers is not a taxing district; thus it is not a municipality under §§ 157 and 158 of the Constitution.
The next question concerns the authority of the Board of Managers to borrow money to finance the proposed hospital construction project.
The key to that question lies within the terms of the Supplemental Contract, Lease and Option of 1938. That instrument, executed by the City of Owensboro and Daviess County, expressly provides in part:
"WHEREAS, the terms of management and control of said hospital property by said County and City have not been provided for and it is deemed advisable that such terms of management and control be set out before said bonds are issued by the Hospital,
"NOW, THEREFORE, in consideration of said Hospital bonds being issued and purchased and in consideration of mutual promise and obligations herein, the parties hereto agree as follows:
"(1) The actual operation of the hospital properties by the City and County, as lessee, shall be through a Board of Hospital Managers. . . ."
The literal language of the contract document suggests that the powers of the Board of Hospital Managers are limited to the "operation" of the hospital. The question arises as to what was meant by the phrase "operation of the hospital properties."
The case of
People v. Hill, 18 Misc. 2d 352, 192 N.Y.S.2d 342 (1959) 344, cites Webster's Dictionary in defining the word "operate". That word was defined as "to effect, to produce, to accomplish, to set or keep in operation of activity, to superintend." This definition of "operate" was given in Kronholtz v. Connecticut State Bd. of Ex. in Optometry, 21 Com.Sup. 332, 154 A.2d 619 (1959) 624: "To put into, or to continue in, operation or activity; to manage; to conduct; to carry out or through . . ."
Since the function of the Board of Managers is to keep the hospital in operation, it is our opinion that the general function of operating the hospital by strong implication permits the Board of Managers to borrow money to finance a hospital construction project, provided that it in no way attempts to create a county or city obligation in violation of the restrictions of §§ 157 and 158 of the Kentucky Constitution. See
Payne v. Covington, 276 Ky. 380, 123 S.W.2d 1045 (1938), 122 A.L.R. 321. See also
Sawyer v. Jefferson County Fiscal Court, Ky., 438 S.W.2d 531 (1969).
The Hospital Corporation could acquire the newly constructed facility and lease it back to the city and county, as was done in Booth v. City of Owensboro, provided the rentals are only on a one (1) year basis at a time, and assuming the city and county annual budgets are sufficient to pay the new rentals.
Your second major question was stated by you as follows:
"The second question we have deals with investment of excess and surplus funds by the Board of Managers of Owensboro-Daviess County Hospital. For the past ten years the hospital has had excess and surplus funds to be invested in order to earn income, all of which ultimately is used for hospital purposes including expansion and renovation of capital improvements. The hospital's policy has been to try to obtain the highest return on all funds to be invested. As a result the hospital now has money invested with Boston, New York, Los Angeles and St. Louis banks. In each instance the out of state institution bid a higher rate than was bid by local banks. Sometimes the difference was within one-fourth (1/4) of a percentage point.
"The hospital Board of Managers includes the Mayor, the County Judge and seven (7) persons appointed by them who serve seven (7) year term which are staggered. The Board of Managers would like to support the local banking and lending institutions if it did not cost the hospital appreciably in loss of income. The question is whether the hospital Board (of managers) would be at liberty to accept a bid for the investment of hospital funds made by a local banking institution which was lower in return than the bid of a 'foreign' banking institution without violating the law or any legal or fiduciary responsibility that the Board of Managers might have."
As relates to the investment of excess or suplus funds of the hospital by the Board of Managers, in order to earn interest income for ultimate hospital expenditure, it is our opinion that the Board of Managers should be required to measure their fiduciary responsibilities to the hospital and city and county governments involved in terms of the investment guidelines of KRS 386.020, 386.030, and 386.040. See also KRS 66.480. Thus the Board of Managers, who are really agents of the hospital and city and county governments, may invest such surplus funds in the same manner as fiduciaries and trustees are permitted. KRS 386.030(1)(d) provides:
"(d) Invest their funds in real estate mortgage notes, bonds and other interest-bearing or dividend-paying securities (including securities of any open-end or closed-end management type investment company or investment trust registered under the federal investment company act of 1940) which would be regarded by prudent businessmen as a safe investment."
We are not aware of any statute explicitly requiring the Board of Managers to procure in every instance the highest return available. It is our opinion that the Board can exercise its sound discretion in making prudent and safe investments of such excess money, even though an investment in a local banking institution might at the time pay a lower rate of interest than that paid by some foreign banking institution.
In