Request By:
Mr. J. Gary Bale
Attorney
Office of Legal Services
Kentucky Department of Education
Capital Plaza Tower
Frankfort, Kentucky 40601
Opinion
Opinion By: David L. Armstrong, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
On behalf of the State Board of Education, and concerning local school board deposits in a bank, you request a formal opinion of this office as to the types of collateral which may be pledged in support of a bond of a depository bank under KRS 160.570.
Specifically, you have written, 702 KAR 3:090 currently limits such collateral to United States Government Bonds and/or Kentucky School Building Revenue Bonds.
Your question is whether such regulation may be properly amended to allow additional collateral, involving federal government agency obligations, such as obligations of Federal Farm Credit Banks, the Federal National Mortgage Association, and the Federal Home Loan Bank.
KRS 13A.100 requires that administrative regulations be consistent with applicable statutes if they are to be legally effective. See also KRS 13A.140(2), requiring that the regulation be consistent with any statute authorizing or controlling its issuance. KRS 13A.120(1) (h) and (i) prohibit an administrative body from promulgating administrative regulations on any matter not clearly authorized by statute; and which modify a statute or its intent.
The Supreme Court of Kentucky, in Kentucky Ass'n, Etc. v. Jefferson County Medical Society, Ky., 549 S.W.2d 817 (1977) at page 821, in holding that an administrative regulation went well beyond the powers granted to the Board of Chiropractic Examiners by KRS 312.075, wrote this:
"As such, it is legislative in nature and in violation of Sections 27 and 28 of the Kentucky Constitution. In
Henry v. Parrish, 307 Ky. 559, 211 S.W.2d 418 (1948), we recognized that the power to make regulations is not the power to legislate in the true sense, and the statute which is being administered may not be altered by the exercise of a power to make regulations thereunder. Regulations are valid only as subordinate rules and when found to be within the framework of the policy defined by the legislature."
At this point we must examine the parent statute in order to evaluate 702 KAR 3:090. KRS 160.570 deals with a board of education's appointment of a financial institution as its depository and the execution of a bond, by the depository, for the faithful performance of its duties. Subsection (2) of KRS 160.570 reads in part:
"(2) The depository selected shall, before entering upon its duties, execute bond for the faithful performance of its duties, to be approved by the local board of education and the state board of education. The bond shall be guaranteed by at least five (5) solvent personal sureties whose solvency must exceed the amount of the bond, or by a surety company authorized to do business in this state, or through the execution of a collateral bond consistent with the general banking laws of the state and the bonding laws applying to the safeguarding of state funds." (Emphasis added).
Your question relates only to the collateral bond mentioned in KRS 160.570(2), and which provides that such collateral bond must be consistent with the general banking laws of Kentucky and the Kentucky bonding laws applying to the safeguarding of state funds.
KRS 41.240 concerns the pledge of securities by a state depository receiving state funds. Subsection (4) of that statute reads:
"(4) Only the following securities may be accepted by the state treasurer as collateral under this section:
"(a) Bonds, notes, or other obligations of or guaranteed by the United States, or those for which the credit of the United States is pledged for the payment of the principal and interest thereof, and any bonds, notes, debentures or any other obligations or securities issued or guaranteed by any federal governmental agency, presently or in the future established by an Act of Congress, as amended or supplemented from time to time;
"(b) Obligations of the Commonwealth of Kentucky including revenue bonds issued by its statutory authorities, commissions or agencies;
"(c) Revenue bonds issued by educational institutions of the Commonwealth of Kentucky as authorized by KRS 162.340 to 162.380;
"(d) Obligations of any city of the first, second, and third classes of the Commonwealth of Kentucky, or any county, for the payment of principal and interest on which the full faith and credit of the issuing body is pledged;
"(e) School improvement bonds issued in accordance with the authority granted under KRS 162.080 to 162.100; and
"(f) School building revenue bonds issued in accordance with the authority granted under KRS 162.120 to 162.300, provided that the issuance of such bonds is approved by the state board of education. "
In the earlier form of KRS 41.240, i.e., § 4693, Carroll's Kentucky Statutes, the statute explicitly required banks, as depositories of state money, to execute a surety bond to the Commonwealth, guaranteeing that the depository will pay over to the state, when demanded, all money deposited with it by the State Treasurer. The current law apparently supplants the old bond provision with a document indicating specific securities to be considered as pledged collateral as a guarantee of the proper safe keeping of deposits and withdrawal. Banks refer to a "safe keeping receipt", which shows with particularity the pledged securities as collateral against the state deposits. The State Treasurer retains a copy of the "safe keeping receipts" on file. The practical effect of a depository bond, with surety or collateral, is accomplished under KRS 41.240, and thus its listing of acceptable securities as collateral must be used to determine the legitimacy of 702 KAR 3:090 and the legitimacy of the securities, as collateral, you are asking about.
A Federal Farm Credit Bank is an instrumentality of the United States. 12 U.S.C. § 2121. However, the United States is not liable on its obligations. 12 U.S.C. § 2155.
The Federal National Mortgage Association is a government-sponsored private corporation. 12 U.S.C. § 1716b and § 1717. Its obligations are not guaranteed by the United States and do not constitute a debt or obligation of the United States. 12 U.S.C. § 1719.
The Federal Home Loan Bank is an instrumentality of the United States. 12 U.S.C. § 1431. However, its obligations are not obligations of the United States, nor are they guaranteed by the United States. 12 U.S.C. § 1435.
CONCLUSIONS
(1) 702 KAR 3:090 could be amended to lawfully provide that obligations of a Federal Farm Credit Bank, the Federal National Mortgage Association, and the Federal Home Loan Bank could be used as collateral as security for the depository bond mentioned in KRS 160.570. KRS 41.240(4)(a) permits as collateral obligations or securities issued or guaranteed by any federal governmental agency. Thus the addition of the obligations of those agencies to the regulation would be consistent with KRS 41.240. Further, the obligations of such agencies are consistent with the implications of KRS 287.100, relating to investment of bank funds, and KRS 287.330, relating to the pledging of bank assets as collateral security for government deposits. Also see KRS 386.020, 386.030 and 386.050, relating to authorized investments for banks.
(2) The provision in 702 KAR 3:090 that depository bonds may be collateralized with United States Government Bonds and/or Kentucky School Building Revenue Bonds is explicitly authorized by KRS 41.240(4)(a) and (f). The use of United States Government Bonds and Kentucky School Building Revenue Bonds as collateral would be consistent with KRS 287.100(7)(a) and (c) and KRS 287.330.
(3) The key to amending the present regulation, relating to depository bond collateral, and the expanding of the present regulation, is found in KRS 41.240(4), KRS 287.100 and KRS 287.330.