Request By:
Mr. Franklin P. Hays
Rubin & Hays
Suite 300 Fireside Building
209 South Fifth Street
Louisville, Kentucky 40202
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
Your request for an opinion of this office relates to the applicability of KRS 56.873 (bond rating requirements) to certain University Housing System Revenue Bonds.
THE STATUTE
KRS 56.873 reads:
"Each proposed revenue bond shall be rated by Moody's Investors Service, Inc. or an equivalent bond rating agency. No revenue bond issued may be sold that does not receive a Moody's rating of at least A or the equivalent rating by another qualified bond rating agency. (Enact. Acts 1980, ch. 96, § 4, effective July 15, 1980.)"
THE SPECIFIC QUESTION
The specific question is whether or not KRS 56.873 applies to Housing Revenue Bonds of Northern Kentucky University, where such financing is of the type as to independently produce revenues sufficient to fully meet debt service, so that no appropriation of state general funds will ever be required for such purpose; and no legal liability can ever attach to the subject state agency or the Commonwealth in respect to such financing.
You contend in your "Memorandum of Legal Authorities and Argument" that the statute, KRS 56.873, has no applicability to any such self-liquidating financing by such university for these reasons: (1) Such revenue bonds do not constitute an obligation, either direct or indirect, of the university, but are payable solely and only from private sources (the housing fees paid by students); and (2) no appropriation of state general funds will or can ever be required to pay the interest on or the principal of such bonds.
NORTHERN KENTUCKY UNIVERSITY
The university, through its Board of Regents, is authorized to erect buildings for university purposes under statutes set forth in KRS Chapter 162, financed by the issuance of school building revenue bonds. See KRS 162.350. KRS 162.360 contains the explicit statement that the governing body of such institution erecting a building or buildings shall by resolution provide that the revenue bonds shall be payable solely from the revenues of such building or buildings or from the revenues of any other building or building theretofore or as may be thereafter erected and used in connection with the institution for educational purposes. KRS 162.380 provides that the bonds issued under the authority of KRS 162.350 "shall be obligations only of the governing body of the institution, payable as to both principal and interest from the revenues pledged for that purpose. In no event shall they be considered a debt for which the credit of the state is pledged. "
Neither the university nor the Commonwealth shall be pecuniarily liable in any manner for the payment of such bonds under those statutory sections. They are payable solely from the revenues of school buildings generated by students.
As we pointed out in OAG 80-591, copy enclosed, dealing with this question you raise in principle, but as relates to industrial development bonds issued by the Kentucky Pollution Abatement Authority and the Kentucky Development Finance Authority, the constitutionality of revenue bonds in Kentucky is well settled. See
Faulconer v. City of Danville, Ky., 232 S.W.2d 80 (1950); and
White v. City of Hickman, Ky., 415 S.W.2d 379 (1967) 381.
In your situation the governing body of the institution has an obligation of good faith to the bondholders, but there is no financial obligation of the university, or governing body, or the Commonwealth. See §§ 49 and 50, Kentucky Constitution; and
Turnpike Authority of Kentucky v. Wall, Ky., 336 S.W.2d 551 (1960).
CENTRAL PURPOSE OF THE ACT INVOLVING KRS 56.873
In OAG 80-591, referred to above, in concluding that KRS 56.873 does not apply to pollution control and industrial development revenue bond issues of KPAA and KDFA, we noted that the central purpose of the Act (Ch. 96, 1980) is to provide for General Assembly approval of bond and interim financing where state general fund appropriations are necessary to retire such bonds or financing. The title of the act, containing the words, "state fiscal obligations," and other language in the bill clearly attest to that central purpose. KRS 56.870(2) (Ch. 96, 1980, § 1), provides that "The biennial appropriation act and budget report shall also establish a ceiling for revenue bonds which require a "general fund appropriation to retire. " (Emphasis added).
It is our view that "fiscal obligations of the state" and "general fund appropriations" refer to general fund appropriations of the General Assembly involving funds (tax revenues) to be paid out of the state treasury. Black's Law Dictionary, at page 764, defines "fiscal" as "pertaining to the public treasury or revenue . . ." Thus the act in question of which KRS 56.873 is a part (Ch. 96, 1980) concerns legislative approval where the payment of revenue bonds will require general fund appropriations by the General Assembly of public money to be withdrawn from the state treasury pursuant to § 230 of the Kentucky Constitution and KRS 41.110. Those two sections provide that no money shall be drawn from the state treasury, except in pursuance of appropriations made by law. The court said in
Ferguson v. Oates, Ky., 314 S.W.2d 518 (1958) 521, that ". . . the purpose of those constitutional and statutory provisions was to prevent the expenditure of the state's money without the consent of the legislature."
Section 6.02 of the Resolution of the Board of Regents of Northern Kentucky University provides that revenues derived from student rentals and other occupancy charges, and revenues derived from pledged student activity fees, shall be collected and deposited in the Revenue Fund. Under Section 6.03 of the Resolution, from and after the issuance of any bonds pursuant to the Resolution, all revenues from the Housing System shall be deposited to the credit of a special fund known as the "Northern Kentucky University Housing System Revenue Fund." Such revenue fund shall be in the custody of the treasurer of the board, so long as there shall be any outstanding bonds, in the Treasury of the Commonwealth as a trust and agency account as provided in KRS 45.140. Under KRS 45.140(2), a trust and agency account in the state treasury may include fees for board and room and student activities in state institutions. Each state biennial budget contains a section labeled "Trust and Agency Funds", which is designed to implement KRS 45.140. Section 6.04 of the NKU Resolution contains provisions for moving such housing bond revenues from the state treasury to trustee of the Sinking Fund, in order to establish the orderly payment of principal and interest on the bonds, as required by the bond documents.
We said in OAG 73-173, copy enclosed that: (1) State universities are mandatorily required by KRS 41.070 to promptly transfer housing bond revenues into the state treasury; (2) The appropriation by trust and agency accounts in the State Budget is an "appropriation" as defined by KRS 45.010(1) and (2) and as required by § 230 of the Kentucky Institution; (3) The exclusion of bond project revenues by KRS 41.110 was designed to accommodate KRS 45.140 (trust and agency accounts), since such accounts do not require allotments.
CONCLUSION
Thus, even though the housing bond revenues are required to go into the state treasury, subject to payment out to the Trustee for Sinking Fund purposes, it is our opinion that KRS 56.873 has no application to these University Housing Revenue Bonds, since the act (Ch. 96, 1980) requires legislative approval only where state general fund expenditures are involved. Here the housing bonds involve a trust and agency account in the state treasury as a result of student rentals and other student fees. The legislature, however, in enacting the subject act (Ch. 96, 1980) made the legislative approval expressly conditioned around "general fund appropriations" , which relate to tax revenues.
It is also our opinion that because of the nature of these housing bonds, their statutory characteristics, the fact that no pecuniary liability of the University or Commonwealth is involved, and the fact that such bonds are payable only from a private source, i.e., student rental and other fees, the basic principle analyzed and the conclusion drawn therefrom in OAG 80-591 applies equally here. And as you point out, KRS 56.870(3) explicitly excepts from the application of the act the financing of any project which is of such type as to independently produce revenues sufficient to fully meet debt service, such that "no appropriation of state general funds" will be required. We think the Housing Bonds came within the exception provisions.