Request By:
Requested by:
John Kennedy Hamilton, Kentucky State Treasurer
Opinion
Opinion By: Albert B. Chandler III, Attorney General; Scott White, Assistant Deputy Attorney General
Subject: Proposed food stamp electronic benefit transfer contract
Written by: Scott White, Assistant Deputy Attorney General
Syllabus: 1. As a general rule, the Secretary of Finance can issue an RFP, reject all bids for the contract and approve the contract under KRS 45A.300(3).
2. The EBT provider selected by the CFT must be a state depository as required by KRS 41.070(1).
3. Services to be provided via an EBT mechanism are likely to require the use of the procurement procedures set out in KRS Chapter 45A and Chapter 41.
Statutes construed: 15.125(1); 45A.300(3); 45A.045(4); 45A.070; 45A.165; 45A.080; 45A.090; 45A.095; 45A.035(2)(f); 41.070(1); 41.220.
Opinion of the Attorney General
We have been asked three questions by John Kennedy Hamilton, the Kentucky State Treasurer - a constitutional officer. These arise as a result of the development of an Electronic Benefit Transfer (EBT) system for the distribution of food stamp benefits in the Commonwealth. The Cabinet for Families and children (CFT), with the consent of the Secretary of the Finance Cabinet (the Secretary), has indicated its intent to enter into a contract with Citibank. This contract was negotiated by the Southern Alliance of States (SAS), of which Kentucky is a participant. Citibank is not a designated Kentucky depository bank. Citibank is the EBT vendor chosen by the SAS.
This opinion is rendered pursuant to KRS 15.125(1). We will address each in turn.
I. Although KRS 45A.095 may authorize non-competitive contract awards in certain situations, there appears to be competition for this service. Banking services have been competitively bid in Kentucky previously.
Could the Finance and Administration Cabinet issue an RFP and if the pricing proposals are higher than the SAS proposed contract, reject all bids and enter into the SAS contract?
The response to this question is simple. The answer is "yes."
It is clear from the comments provided by the Kentucky Bankers Association (KBA) that competition for this contract may well exist from Kentucky financial institutions. Additionally, it is well-known that other non-Kentucky based entities like Citibank are interested in competing for this contract. 1 As such, the Finance Cabinet has the authority to issue a request for proposals (RFP) on the food stamp EBT contract. Such an RFP may well disclose that a more efficient and inexpensive source exists to provide this service. ( see, KRS 45A.070(3) "Best Value"; and, 45A.080(1)(a), (2) and (5) [new bidding award criteria on 'Best Value']). Therefore, the Secretary has the power to issue an RFP for this contract. 2
The Finance Cabinet claims that it has the power to approve the Citibank contract as a "cooperative purchase" under KRS 45A.300(3). This statute provides:
Nothing in this code shall limit or restrict any public purchasing unit from entering into an agreement, independent of the requirements of KRS 45A.045(4) and KRS 45A.070 to 45A.165, with any other public purchasing unit or foreign purchasing activity for the cooperative use of supplies or services.
Of course, whether or not an RFP is issued, the Secretary can enter into such a cooperative agreement due to the "Nothing in this [Model Procurement] Code. . ." language employed by the Legislature. That is, if the proposed cooperative contract meets the requirements of the statute, then the Secretary is not bound by the RFP requirements of KRS 45A.080 (or, if all bids exceed available funds, KRS 45A.090, or if sole source, KRS 45A.095). Therefore, to specifically answer the question posed, the Secretary of finance has the power to issue an RFP, reject all bids ( see, KRS 45A.035(2)(f)) and approve the SAS contract between CFC and Citibank.
In short, the issuance of an RFP, and rejection of all bids thereunder, does not effect the authority of the Secretary to still approve a cooperative agreement under KRS 45A.300(3). As will be seen in our response to question (2), we believe that the EBT provider will be providing banking services as envisioned by KRS 41.070(1). Given the fact that there are other interested parties in this contract, we believe that the best practice would be to bid this contract under Chapter 45A. - particularly where there exists a possibility that this system may be expanded to include other state financial activity. (Comments of CFT General Counsel, William K. Moore, Jr.).
II. Do you concur with the categorization [by CFT and the Finance Cabinet] of the SAS/EBT system as vendor payments?
Again, the answer is simple. It is "No." Moreover, the Finance Cabinet agrees. In the materials provided to us, Finance states that the SAS/EBT system is "not actually a 'vendor payment,'" but states that the system "works" like a vendor payment. Irrespective of what the payment is called - a vendor payment or a payment issued from a state depository - the critical issue to be determined is whether this service (EBT) must be performed by a state depository institution. We believe the answer is found in KRS 41.070(1).
That statute provides:
Unless otherwise expressly provided by law, no receipts from any source of state money or money for which the state is responsible shall be held, used, or deposited in any personal or special bank account, temporarily or otherwise, by any agent or employee of any budget unit, to meet expenditures or for any other purpose. All receipts of any character of any budget unit, all revenue collected for the state, and all public money and dues to the state shall be deposited in state depositories in the most prompt and cost-efficient manner available. However in the case of state departments or agencies located outside Frankfort, and all state institutions, the Finance and Administration Cabinet may permit temporary deposits to be made to the accounts maintained by the agency, department, or institution in a bank which has been designated as a depository for state funds for a period not to exceed thirty (30) days, and may require that the money be forwarded to the State Treasury at the time and in the manner and form prescribed by the cabinet. Nothing in this section shall be construed as authorizing any representative of any agency, department, or institution to enforce or cash, even for the purpose of a deposit, any check or other instrument of value payable to the Commonwealth or any agency thereof.
We have been provided, by the CFT and the Finance Cabinet, with a preliminary proposal of the mechanism by which the food stamp EBT would operate. ( See, Flowchart, attached as Appendix 1). It has also been stressed to us that this mechanism is not final, and subject to change.
We believe any funds paid directly to a food stamp merchant by the EBT provider is within the scope of KRS 41.070(1), and must therefore be provided by a state depository bank. 3 It is clear that dollars paid to merchants under the food stamp program, although federal in source, can be characterized as "money for which the state is responsible." KRS 41.070(1). A state is responsible for the federal dollars sent into that state for food stamps. 7 U.S.C. § 2020(a) "The state agency of each participating state shall assume responsiblity for the certification of applicant households and for the issuance of coupons and the control and accountability thereof."; and, 7 U.S.C. § 2016(i). See, also, 7 CFR Ch. II, 274.12 "EBT issuance system approval standards," 275.1, 276.1 and 276.2. These federal regulations clearly place the risk of loss of federal funds sent into the state for food stamps on the state. Id., in passim; and, See, e.g., "State agencies shall be responsible for preventing losses or shortages of Federal funds in the issuance of benefits to households participating in the [Food Stamp] program. FCS shall strictly hold state agencies liable for all losses, thefts and unaccounted shortages that occur during issuance . . ." 7 CFR Ch. II, § 276.1(a)(2)]. In short, the state remains ultimately responsible for the proper accounting and administration of the food stamp dollars sent into the state by the Federal government.
As such, whether or not these federal dollars are ever "deposited" into a state account does not obviate the fact that the state, here Kentucky, is "responsible" for those dollars. Due to this responsibility, and the fact that these federal dollars are indeed "public money, " [KRS 41.070(1)] then the EBT provider must be a state depository. 4 For this reason, until Citibank becomes a designated state depository (see Footnotes 3 and 4), the CFT may not enter into the proposed SAS EBT contract.
III. If Finance approves the SAS contract for the issuance of food stamp benefits, can other state payments which are currently under the State Banking Contract be awarded without competitive bids, such as AFDC, Unemployment Insurance and state payroll?
As you know, AFDC was repealed, and, in its place, the K-TAP program has been developed. Unlike food stamp dollars, this program receives both federal and state dollars, and Unemployment Insurance and state payroll are wholly funded by the State. These funds are appropriated by the Kentucky General Assembly, and are currently deposited in the State depository. Because of this, state deposits will be drawn upon and a state depository will need to be the provider. With this restriction, any such contract to make these payments with an EBT mechanism will likely need to go through the procurement procedure of KRS Chapter 45A.
The Kentucky Revised Statutes related to state depository services are not reflective of current EBT technology which is rapidly evolving. The potential uses of this technology could impact billions of dollars as well as new risks and liabilities for which the state does not currently have exposure. Thus, we believe this technology as well as its consequences, must be carefully studied as the state takes advantage of these new opportunities.
IV. Conclusion
To summarize:
1. As a general rule, the Secretary of Finance can issue an RFP, reject all bids for the contract and approve the contract under KRS 45A.300(3).
2. The EBT provider selected by the CFT must be a state depository as required by KRS 41.070(1).
3. Services to be provided via an EBT mechanism are likely to require the use of the procurement procedures set out in KRS Chapter 45A and Chapter 41.
Footnotes
Footnotes