Request By:
Mr. C. B. Embry, Jr.
Ohio County Judge Executive
Courthouse
Hartford, Kentucky 42347
Opinion
Opinion By: David L. Armstrong, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
Ohio County has a problem in connection with its road program. The problem centers around the adequate financing of road improvement needed in your county.
The Daviess County Fiscal Court, you noted, set up a public improvement corporation last year to enable them to enter into a five-year repayment program involving county road improvement in Daviess County.
You request our opinion as to the following question:
"Before going ahead with this project, I would like your opinion in regard to this matter. Is there any reason at this time that the Ohio County Fiscal Court cannot set up a public improvement corporation so that a repayment program can be entered into with a local bank for a road improvement project or projects for our county roads, with the understanding that the loan would be paid back over a five-year period. Our plan would be along the same actions taken by the Daviess County Fiscal Court."
As you know, § 157 of the Kentucky Constitution provides in part that:
"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."
The manifest purpose of § 157 was to inaugurate and perpetuate the "pay-as-you-go" plan of government in the local branches of government and to prevent fiscal authorities invested with the power to appropriate public moneys from incurring obligations in excess of the income and revenue, actually provided for by levy or otherwise, in the absence of the necessary constitutional vote.
Payne v. City of Covington, 276 Ky. 380, 123 S.W.2d 1045 (1938) 1047. See maximum indebtedness of counties in § 158, Kentucky Constitution.
As you said, the Daviess Fiscal Court established a Daviess County Public Improvement Corporation, pursuant to KRS 273.167, et seq., as a nonstock, nonprofit corporation, to act solely as an agency or instrumentality of the county of Daviess and its fiscal court as the governing body in the financing, by the corporation, of public improvements which the fiscal court may from time to time undertake. The directors of the solely governmental corporation are composed of the county judge and other members of the fiscal court who are incumbents in office at all times. The Articles of Incorporation make it clear that the financial undertakings of the corporation shall in no way bind the county or fiscal court. Note the general powers of the corporation in KRS 273.171. Subsection (8) of that statute explicitly provides that the corporation may make contracts and incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds, and other obligations, and secure any of its obligations by mortgage or pledge of all or any of its property, franchises and income.
It is our understanding that the Daviess County arrangement was simply that the public corporation executed its note to the lending bank, with a fixed rate of interest, the repayment of the bank loan to be made from the Daviess County General Fund and Road Budget with no increase in taxes.
Let us assume that the Daviess note instrument or allied loan documents contain the explicit premise that the loan undertaking of the public corporation shall not in any manner be deemed or construed to be binding upon Daviess County, Kentucky, or upon the fiscal court thereof, notwithstanding the corporation is dedicated to a repayment of the note and interest from available funds of the General and Road Fund Budget of Daviess County, stretching over a five-year period. Under those assumptions, it is our opinion that such debt created would not be a debt of the county, as envisioned by §§ 157 and 158 of the Kentucky Constitution.
In this situation, as we understand it, there is no security or lien to fall back on. It is purely a matter of faith in the corporation that it will do its best to carry out the agreement, and within the frame of available county revenue over the life of the loan.
We are of the opinion that, if the Ohio County Fiscal Court establishes a public corporation of the precise kind that Daviess County did, and if it engages in a bank loan for road improvement of the kind and nature assumed above, and with the appropriate loan document language just mentioned, such debt would not constitute a debt of the county or fiscal court, as envisioned in §§ 157 and 158 of the Constitution. For the sake of keeping the faith of the lender intact, such loan should be for a reasonable period and should involve careful calculations concerning the availability of repayment funds from your county budget. We understand from your letter that no bond issue will be involved, and that only a simple note transaction is anticipated. See KRS 273.171(8).
Since your contemplated loan would be unsecured, you should carefully note the limitations upon loans extended by a state chartered bank in KRS 287.280(1). That subsection requires good collateral security where the loan exceeds twenty percent (20%) of its capital stock actually paid in and its actual amount of surplus. In the event the lender is a national bank, you should carefully check with the bank and its legal counsel as to any applicable federal restrictions in connection with unsecured loans.
You must understand the serious and delicate nature of this kind of financing within the framework of the utter necessity for perpetuating the good name of the county, as a part of the Commonwealth, in the world of finance. As we said, such proposed debt would not be constitutionally a debt of the county or of the fiscal court. It would be a social-moral debt and a debt of the governmental corporation (Chapter 273). Yet, in this situation, the corporation would have no visible or tangible assets. We can only suggest that you proceed with great caution in assuring yourselves as individual members of the fiscal court that the loan is well within the range of orderly repayment. Otherwise, fiscal tragedy can ensue. An unsecured note, in its raw essence, is a statement of "I promise you."