Request By:
Daniel Y. Boaz, McCracken County Attorney
Opinion
Opinion By: JACK CONWAY, ATTORNEY GENERAL; Tad Thomas, Assistant Deputy Attorney General
Opinion of the Attorney General
Ky. Const. § 179, which applies directly to local governments, states:
The General Assembly shall not authorize any county or subdivision thereof, city, town or incorporated district, to become a stockholder in any company, association or corporation, or to obtain or appropriate money for, or to loan its credit to, any corporation, association or individual, except for the purpose of constructing or maintaining bridges, turnpike roads, or gravel roads: Provided, If any municipal corporation shall offer to the Commonwealth any property or money for locating or building a Capitol, and the Commonwealth accepts such offer, the corporation may comply with the offer.
This section would prohibit the county from lending credit to a company.
Ky. Const. § 179 should be read along with Section 3, and its broader prohibition that applies to the state as well as local governments, including counties. Ky. Const. § 3 provides:
All men, when they form a social compact, are equal; and no grant of exclusive, separate public emoluments or privileges shall be made to any man or set of men, except in consideration of public services; but no property shall be exempt from taxation except as provided in this Constitution, and every grant of a franchise, privilege or exemption, shall remain subject to revocation, alteration or amendment.
There exists a long line of published decisions pertaining to the use of public funds for economic development and the alleged constitutional violations stemming therefrom. In 1960, KRS § 154.50 et seq., was challenged as violating Sections 3 and 177 of the Kentucky Constitution in Industrial Develop. Authority et al. v. Eastern Kentucky Regional Planning Comm'n, 332 S.W.2d 274 (Ky. 1960). Section 177 prohibits the giving of credit by the Commonwealth much as Section 179 restricts local governments. Commonly referred to as the Local Industrial Development Act it established the Industrial Development Finance Authority as an agency independent of the executive branch of state government to oversee economic development loans. The Authority was to promulgate regulations to determine eligibility for loans, accept applications from local development agencies and hold hearings and examinations as necessary to determine whether the public purpose of the Act would be accomplished by granting loans to applicants. The Court found that if an appropriation or incentive to a private enterprise was done for a "public purpose, " it would withstand constitutional review.
In the present instance, KRS 154.005 clearly sets out the legislative determination that the purpose of the Act is to promote the health, safety, morals, right to gainful employment, business opportunities and general welfare of Kentuckians and recites that the Authority 'shall exist and operate for the public purpose of alleviating unemployment and furthering the utilization of natural and man-made resources by the promotion and development of industrial and manufacturing enterprises in local communities of the Commonwealth.' The consummation of these objects shall be 'public purposes for which public money may be spent.'
Industrial Development Authority, supra, pp. 276-277.
While the decision does not apply directly to the question posed by McCracken County, this decision is informative as to its tested legality on the right of local industrial authorities formed pursuant to KRS § 154.50-316 to offer public incentives to private businesses for the purpose of economic growth. In addition, the reasoning in this case formed the basis for the cases that followed by establishing the public policy exception.
Several years later the Court analyzed the constitutional implications of the Commonwealth's incentive package in the eventually successful attempt to lure Toyota to build an $ 800 million plant in Scott County. Hayes v. State Property and Buildings Commission, 731 S.W.2d 797 (Ky. 1987). Suit for declaratory judgment was filed upon announcement of the package and the court was asked to determine whether, inter alia, the deal violated Sections 3 and 177 of the Kentucky Constitution. Again, Section 177 prohibits the giving of credit by the Commonwealth much as Section 179 restricts local governments. The Court in Hayes, relying on its holding in Industrial Development, held that the incentive package was permissible "as long as the expenditure of public money has as its purpose, the effectuation of a valid public purpose. " Id. at 799.
The public purpose exception was then extended to Section 179 in Dannheiser v. City of Henderson, 4 S.W.3d 542 (Ky. 1999). There, John Dannheiser filed suit against the City of Henderson after it used public funds to develop an industrial park which competed with two industrial parks he had developed privately. Lots in the new park developed by the city were being sold at a substantially lower cost than those in Dannheiser's parks. The court noted that the provisions of Section 179 were enacted to place the same restrictions on local government that were imposed on the Commonwealth by Section 177. It then extended the reasoning and rule set forth in Hays and found that the City's use of funds for the project constituted a public purpose. Thus, the use was permissible under Section 179.
The most recent Kentucky authority in this long line of decisions applying the public policy exception is Hayes v. State Property and Buildings Comm., supra. Hayes followed the public purpose exceptions to the restrictions of Sections 177 previously established in several cases and determined that the Act of the General Assembly was constitutionally sound because of its underlying public purpose. Hayes cited Industrial Development Authority and Kentucky Live Stock Breeders' Assn. v. Hager, 120 Ky. 125, 85 S.W. 738 (1905), as well as Dyche, supra, which held that relief of unemployment was a public purpose pursuant to an analysis of Section 179.
The public purpose that provided constitutional validity in the Hayes case is identical to the public purpose in the City of Henderson case. The only difference is that the Hayes case applied to a very large project that had obvious state-wide implication, the Henderson case applies to local activities. The City's sole purpose in developing the corporate park was to foster economic development by attempting to retain existing industry as well as to attract new industry to its local community. The incidental benefits provided to private industry are permissible under Kentucky law as noted in Industrial Development Authority and Hayes.
Dannheiser, supra, p. 546.
CONCLUSION
Based on this line of decisions by the Commonwealth's highest Court and the well recognized public purpose exception, it does appear that McCracken County Fiscal Court has the authority under Kentucky law to offer a grant of a short term loan to a start-up business if done for a legitimate public purpose. This opinion does not review or comment on the method in which this loan is granted, nor does it examine the nature or extent of the public purpose involved in McCracken County's proposed loan or the additional private benefits bestowed on the borrower.