Request By:
Honorable David K. Karem
State Senator
2439 Ransdell Avenue
Louisville, Kentucky 40204
Opinion
Opinion By: David L. Armstrong, Attorney General; Kevin M. Noland, General Counsel
Recently, you submitted a written inquiry to our office as to the legal validity of Senate Bill 107, which you sponsored during the 1986 General Assembly.
Specifically, you State that S.B. 107 was intended to State that S.B. 107 was intended to address the problems that had existed with the previous tax increment financing legislation. Those problems were manifested in Miller v. Covington Development Authority, Ky., 539 S.W.2d 1 (1976), in which the Kentucky Supreme Court found the Tax Increment Act unconstitutional. S.B. 107 was intended to correct the constitutional infirmities of the Tax Increment Act.
The Tax Increment Act, KRS 99.750 - 99.770, was enacted by the 1974 General Assembly, and its fundamental provision was that any taxing district, including a school district, may contract to "release" to the Local Development Authority, for a period of up to 25 years, not less than 50% or more than 95% of all ad valorem tax revenues received from a development or project area in excess of those received from the same area in the last year before its establishment. In Miller, the Court held that the Tax Increment Act violated the Kentucky Constitution § 184 requirement that money collected for the purposes of education in the common school district not be spent for any other purpose, even though the tax increments would be money which the schools would not have otherwise had. Miller, supra, at page 5.
It appears that this problem has been resolved by S.B. 107, which shall become effective July 15, 1986. S.B. 107 repeals the old provisions of the Tax Increment Act and replaces them with a new section of KRS Chapter 99. In Section 1, the definitional section of S.B. 107, "taxing district" is defined to mean " . . . a county, a city of the first or second class or urban county government which encompasses all or part of a development area or a special district having the power to levy ad valorem taxes in all or any part of the development area, but shall not mean a school district. " (Emphasis added).
This definition of "taxing district" has the effect of exempting money collected for the purposes of education in the public school system from the provisions of the Act. As a result, the objections of the Miller Court to the Tax Increment Act based upon Kentucky Constitution § 184 have been remedied by S.B. 107.
Another problem the Miller Court identified within the Tax Increment Act was the pledge of ad valorem taxes which was, in effect, permitted by the Act. In Miller, this pledge or obligation was held to be a prohibited debt under Ky. Constitution § 157.
It appears that the constitutional invalidity of the Tax Increment Act under Kentucky Constitution Section 157, as recognized by the Miller Court, has been remedied by S.B. 107, as Section 4 of S.B. 107 provides:
"Each taxing district is authorized to execute a contract of release with any such agency in acknowledgment of benefits to be derived by it from the project, and in order to promote the public purposes of said taxing district. Any contract signed for the release of increments shall be made on the basis of automatic year to year renewals, for a period not to exceed twenty-five (25) years, with the option to discontinue upon sixty (60) days' notice before the end of any annual termination date of the contract. In lieu of such automatic renewals, a contract for a longer term of years may be entered into if approved by two-thirds (2/3) of the voters voting on the question within the taxing district executing the contract in accordance with the provisions of Constitution Section 157." (Emphasis added).
Section 4, as quoted above, permits each taxing district to terminate a contractual arrangement under S.B. 107 with an agency at the end of each one year period. In effect, the contemplated contractual arrangement would involve a series of one year contracts. This language of Section 4 of S.B. 107 appears to remedy the problems the Miller Court found with the former Tax Increment Act under Section 157 of the Kentucky Constitution, as S.B. 107 does not involve a taxing district incurring an obligation greater than one year in duration, so that there is no possibility for becoming indebted to an amount exceeding the income and revenue provided for in any year.
In conclusion, S.B. 107, which repeals the Tax Increment Act, KRS 99.750 - 99.765, and provides new sections of KRS Chapter 99, has remedied the constitutional problems under Kentucky Constitution § § 157 and 184 that the Kentucky Supreme Court in Miller v. Covington Development Authority, Ky., 539 S.W.2d 1 (1976), found with the Tax Increment Act. This was accomplished in S.B. 107 by exempting school districts from the scope of application of the Bill and by permitting termination by a taxing district on a year-to-year basis of a contractual arrangement with an agency under the provisions of S.B. 107.
We hope this adequately responds to your inquiry.