Request By:
Jonathan Miller, State Treasurer and KAPT Chairman
Opinion
Opinion By: Albert B. Chandler III, Attorney General; Jennifer L. Carrico, Assistant Attorney General
Opinion of the Attorney General
The Kentucky prepaid tuition program enacted by the 2000 General Assembly in House Bill 180 is a state program that permits purchasers of Prepaid Contracts to obtain the fund's guarantee of tuition payment when the purchaser's qualified beneficiary attends either a Kentucky or out-of-state post-secondary institution. The actual fund, Kentucky Postsecondary Education Prepaid Trust Fund ("KAPT" or "fund"), performs the important governmental function of encouraging students to attend college by helping them meet tuition expenses and protecting them from increasing tuition costs. KAPT is administered by an agency of the Commonwealth and is subject to extensive government control, oversight, and regulation. These factors make KAPT a "public instrumentality" of the Commonwealth of Kentucky for purposes of the Securities Act of 1933, Securities Exchange Act of 1934, and Trust Indenture Act of 1939.
KAPT is a public instrumentality of the Commonwealth for this purpose because it is administered by a public agency within the Kentucky Department of the Treasury. Upon establishing the prepaid tuition program, the General Assembly created an office to administer KAPT called the Tuition Account Program Office within the Treasury Department. Ky. Rev. Stat. § 41.025. Specifically, KRS 41.025 states:
"The Tuition Account Program Office is hereby established within the Office of the State Treasurer for the purpose of implementing and administering the prepaid tuition account program established in KRS 164A.700 to 164A.709."
Ky. Rev. Stat. § 41.025 (Baldwin 2001). According to this statute, the Tuition Account Program Office is an administrative office of the Treasury Department, and therefore it is a public agency of the Commonwealth of Kentucky.
The Tuition Account Program Office also meets the definition of a public agency as set forth by the
Kentucky Court of Appeals in Kentucky Central Life Insurance Co. v. Park Broadcasting of Kentucky, Inc, Ky. App., 913 S.W.2d 330 (1996). According to that case, a "public agency" may be identified based on the following factors:
1. Whether the entity is performing a governmental function;
2. Presence of substantial governmental control over its day to day operations;
3. Nature of the government's financial involvement with the entity; and
4. Status of the entity's employees.
Id. citing
Consolidated Edison Company of New York, Inc. v. Insurance Dept. of the State of New York, 532 N.Y.S. 2d 186 (N.Y.Sup.Ct. 1988).
According to these criteria, the Tuition Accounting Program Office is a public agency. The office clearly provides a substantial and important governmental service to the people of Kentucky. The express purpose of the prepaid tuition program is to (1) provide affordable access to participating educational institutions for qualified beneficiaries; and (2) provide students and their parents economic protection against rising tuition costs. Ky. Rev. Stat. § 164A.701(2)(a),(b) (Baldwin 2001). Providing students affordable access to post-secondary institutions and protecting them from increasing tuition costs helps educate Kentuckians, and "education is perhaps the most important function of state and local governments."
Brown v. Bd. of Educ., 347 U.S. 483, 493 (1954). In
Kentucky Center for the Arts v. Berns, Ky., 801 S.W.2d 327 (1991), the Kentucky Supreme Court said that an entity is a state agency when it "is carrying out a function integral to state government. "
The U.S. Court of Appeals for the Sixth Circuit reached the same conclusion when it considered a Michigan program similar to KAPT:
"We think it is obvious that encouraging higher education by helping provide the means for attendance at Michigan's public colleges and universities - the basic function for which the education trust was established by the Michigan legislature - is at least as much a "public function" as building and operating bridges and tunnels."
State of Michigan v. U.S., 40 F.3d 817, 825 (1994). See also
Withers v. University of Kentucky, Ky., 939 S.W.2d 340 (1997).
The Tuition Account Program Office is subject to day-to day control and oversight by the Commonwealth of Kentucky. Under KRS 164A.701(3), the office and facilities of the State Treasurer are "used and employed" in the administration of the fund. Id. The day to day responsibilities of the Office of the State Treasurer in administering KAPT include employing staff, keeping records, transferring funds, managing accounts and other investments, and safekeeping securities. Id. The Office of the Treasurer has the additional responsibility of marketing the contracts jointly with the Kentucky Higher Education Assistance Authority. Ky. Rev. Stat. § 164A.701(3).
The Commonwealth also is involved extensively in the financial operation of the program. The assets of KAPT are deemed "public funds of the Commonwealth." Ky. Rev. Stat. § 164A.701(4). The funds are to be invested by the board in any instrument, obligation, security or property that constitutes a legal investment of public funds. Id. KAPT funds also may be pooled with any other eligible investment of the Commonwealth. Id. Accordingly, they are subject to the statutory protections of state and public funds set forth in KRS 45.131, and all constraints on the investment of public funds under Kentucky law. Finally, the board of directors of the fund is required to submit a report on the fund's financial condition to the Legislative Research Commission on an annual basis. Ky. Rev. Stat. § 164A.701(3).
In sum, the Tuition Account Program Office is a public agency of the Commonwealth because it is a statutory office of the Department of the Treasury. The office also meets the definition of a public agency under Kentucky law because it performs an important governmental function and is subject to government control and oversight of its day to day operations and financial condition. Because the actual fund is administered by this public agency, KAPT is by definition a "public instrumentality" of the Commonwealth of Kentucky.
In fact, KAPT meets the description of a "public instrumentality" provided in Kentucky case law. In
Maynard & Child, Inc. v. Shearer, Ky.App., 290 S.W.2d 790 (1955), the Kentucky Court of Appeals found that the Officers' Association of Ft. Knox, Kentucky was a "public instrumentality" of the federal government. The court based its holding on the fact that the officers' club performed an important governmental function by "providing an officers' mess and various other recreational services." Id. at 793. Additionally, the club was "subject to the control of the commanding officer of an Army post and managed by Army officers." Id.
Like the officers' club in Maynard , KAPT performs the important governmental function of promoting higher education and is subject to control and oversight by the Department of the Treasury and General Assembly. It is governed by a board of directors comprised of several government officers in their official capacity, including the secretary of the Finance Cabinet, the secretary of the Revenue Cabinet, the president of the Council on Postsecondary Education, and the chair of the Association of Kentucky Independent Colleges and Universities, or their designees. Ky. Rev. Stat. § 164A.703(1). Altogether, there are eleven members of the board who are not compensated for their service. Id. The board of directors is responsible for promulgating administrative regulations, entering into contractual agreements, developing procedures and guidelines for the prepaid contracts, and procuring insurance and actuarial services for the fund. Ky. Rev. Stat. § 164A.704. As described above, the General Assembly retains strict oversight of the fund by requiring the board to make an annual report to the Legislative Research Commission detailing the fund's financial condition. Ky. Rev. Stat. § 164A.704(8). The public function served by the fund and the Commonwealth's extensive oversight and control are important attributes of a "public instrumentality" of state government. See
Michigan v. U.S., 40 F.3d 817 (6th Cir.1994) (Michigan education trust is a public instrumentality because its board is appointed by governor and makes contracts on behalf of the state);
United States v. Michigan, 851 F.2d 803 806 (6th Cir. 1988) (federal credit unions are federal instrumentalities because they perform an important governmental function and are federally regulated and supervised);
Edelen v. County of Nelson, Ky.App., 723 S.W.2d 887 (1987) (cities and counties are instrumentalities of state government because they serve as arms of the state government in the local administration of various state functions).
The actual fund under the prepaid tuition program is created by statute, exempt from state and local taxes, and is not considered an investment company, security, or annuity under Kentucky law. Courts consider these factors important elements of a "public instrumentality" of state or federal government. For example, in
United States v. Michigan, 851 F.2d 803 (6th Cir. 1988), the court held that federal credit unions are instrumentalities of the federal government because, in addition to the factors described above, they are exempt from state taxation. See also
Hughes v. Good Samaritan Hospital, Ky.App., 158 S.W.2d 159 (1942) (public corporations are the instrumentalities of the state because they are founded and owned by it in the public interest, supported by public funds, and governed by managers deriving their authority from the state);
Leavell v. Western Kentucky Asylum for the Insane, Ct.App., 91 S.W. 671 (1906) (eleemosynary institutions are instrumentalities of state government because they are created by the state and "aid in the performance of governmental duty").
These specific attributes confirm the legislature's pronouncement that KAPT is an "instrumentality of the Commonwealth." Ky. Rev. Stat. § 164A.701(1) ("There hereby is created an instrumentality of the Commonwealth to be known as the "Commonwealth Postsecondary Education Prepaid Tuition Trust Fund . . . ."). In Maynard , the War Department pronounced Army officers' clubs integral parts of the military establishment and "wholly owned government instrumentalities . . . ." Maynard, 290 S.W.2d at 793. The Kentucky Court of Appeals stated that this pronouncement "is entitled to be given weight," and held the clubs to be "instrumentalities" of the United States. See also
United States v. Michigan, 851 F.2d 803 (6th Cir. 1988) ("because of evidence that Congress believes they are federal instrumentalities, we hold that federal credit unions are federal instrumentalities. ").
Thus, KAPT contains the necessary elements that comprise a public instrumentality of state government under Kentucky law. The fund serves the important public purpose of encouraging students to attend Kentucky's colleges and universities and protecting them from rising tuition costs. KAPT is created by statute and is subject to extensive governmental control of its day to day and financial operations. The fund is administered by a state agency and is monitored by the General Assembly. Accordingly, it is the opinion of the Office of the Attorney General that the Kentucky Postsecondary Education Prepaid Trust Fund is a public instrumentality of the Commonwealth of Kentucky for purposes of the Securities Act of 1933, Securities Exchange Act of 1934, and Trust Indenture Act of 1939.