Request By:
Mr. Spencer E. Harper, Jr.
Harper, Ferguson & Davis
310 West Liberty Street
Louisville, Kentucky 40202
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
As specialists in the field of bond counsel, you expressed your opinion to Mr. Jesse L. Riley, Attorney for Russellville No. 1 Water District, regarding the legal ability of that water district to be merged into (acquired by) South Logan Water Association, Inc., a Kentucky nonprofit corporation under KRS Chapter 273. That corporation is a water utility subject to the jurisdiction of the Public Service Commission of Kentucky. See KRS 278.010(5)(a) and KRS 278.012. Also see KRS 74.012 and 74.361, as to the interchangeability of water districts and water associations created under KRS Chapters 74 and 273 respectively. Both the water district and the water association are subject to regulations by the Public Service Commission.
In your letter of January 28, 1982, to Mr. Jesse Riley, you expressed the opinion that, pursuant to KRS 74.361(9) and (10), the Public Service Commission possesses legal authority to order mergers of water districts and water associations following proper proceedings before that body. You further noted in your opinion letter that any outstanding bond obligations issued by the water district, secured by the revenues of the water system of the district, following such a merger would, pursuant to the express provisions of KRS 74.363, continue to be amortized by the levy of rates and charges "over the same area . . . . in accordance with the laws under which the bonds (of the water district) were issued until all bonded obligations of the old district have been retired. " It was thus your opinion that KRS 74.361(9) and (10) and KRS 74.363 authorize the Public Service Commission of Kentucky, after appropriate proceedings, to order the merger of water districts and water associations and preserve the rights of bondholders of water districts to the security originally granted to bondholders, i.e., the right to have rates and charges continue to be levied in a particular district.
The Water Revenue Bonds of Russellville No. 1 Water District, amounting to approximately $80,000, were purchased by the predecessor agency of the United States Department of Housing and Urban Development in 1965. The Atlanta office of HUD has raised questions regarding the proposed merger of the Russellville No. 1 Water District and South Logan Water Association, Inc., which you responded to in your opinion letter to Jesse Riley. The federal employees are also looking for "economic justification" of the proposal, which you feel would be implicit in the proposed proceedings of the Public Service Commission.
You are asking this office to review the letter opinion to Mr. Riley, as mentioned above, and issue a formal opinion of this office as to whether or not we agree with your legal conclusions.
Specifically, Russellville No. 1 Water District constructed a water distribution system with the proceeds of certain Waterworks System Revenue Bonds issued on July 1, 1965, bearing interest at the rate of 3 3/4%. The Waterworks System Revenue Bonds were purchased by the federal government. It is presently proposed that the assets and liabilities of Russellville No. 1 Water District be acquired in some manner by the South Logan Water Association, Inc., and that the water district in effect be merged into the water association.
First, KRS 74.361(1) lays out clearly the legislative policy that mergers of water districts in Kentucky will tend to eliminate wasteful duplication of costs and will result in better management, greater economies, and better service to the general public.
KRS 74.361 reads in part:
"(9) Using the authority of this section the utility regulatory commission can also cause mergers of water associations into water associations or mergers of water associations into water districts. (Emphasis added).
"(10) Nothing contained herein shall be construed to prohibit or limit in any respect the acquisition by water utilities subject to the jurisdiction of the commission or by municipally owned water utilities of the assets of water districts or water associations or the merger of water districts or water associations and water utilities subject to the jurisdiction of the commission or municipally owned water utilities."
Here it is proposed to merge a water district into a water association. We agree with your view that it can be legally accomplished. When looking at KRS 74.361 as a whole, it is our opinion that the statute permits mergers of water districts into water associations, as well as mergers of water associations into water districts, which are all subject to the regulatory authority of the Public Service Commission. In City of Owensboro v. Noffsinger, Ky., 280 S.W.2d 517 (1955) 519, Judge Cammack for the court wrote:
"The court should look to the letter and spirit of the statute, viewing it as a whole; and should look also to the circumstances under which it was enacted."
Note again the emphasis upon legislative policy in KRS 74.361(1), seeking greater economies and better services in furnishing water to the general public. However, in a merger, that is left to the Public Service Commission in the context of expert testimony.
We also note that the statutes, KRS 74.361 and 74.363 are in conformity with the spirit of § 19, Kentucky Constitution, which prohibits any law impairing the obligation of contracts. See Adams v. Greene, 182 Ky. 504, 206 S.W. 759 (1918), holding that under § 19, "impairment" and "change" are equivalent terms. In that regard, KRS 74.361 reads in part:
"(5) Outstanding obligations of any water district merged in accordance with the provisions of this section which are secured by the right to levy an assessment as provided by KRS 74.130 to 74.230, inclusive, or secured by a pledge of the income and revenues of the systems operated by any such merged water district, shall continue to be retired from such moneys and funds as shall be collected from the users of facilities operated by such merged water districts in the original water district area in accordance with the terms and provisions of the enabling laws and the authorizing resolutions or indentures under which the outstanding obligations were issued until all such obligations have been retired.
"(6) In any order ordering the merger of water districts, the utility regulatory commission shall make such additional orders as may be required in connection with the schedule of rates, rentals and charges for services rendered to be levied by the water district which remains in existence following such merger, having due regard to contractual commitments made and entered into by the constituent merged water districts in connection with the issuance of obligations by such districts.
"(7) Upon the effective date of any merger of water districts, the water commissions of the merged water districts shall continue to serve as water commissioners for the remainder of the terms for which they were appointed, and, following the expiration of the terms of such water commissioners, the appropriate county judge executive or county judges/executive shall appoint and reappoint water commissioners to manage the business and affairs of the resultant water district, in the manner provided by KRS 74.020.
As you say, KRS 74.363 provides a statutory guidance as to the treatment of bond obligations, issued by a water district secured by the revenue of a water system, following a merger of such water district. That statute provides that the resulting district shall take over all the assets and legal liabilities of the water districts joining in the merger. Bonded obligations of any district secured by the right to levy an assessment as provided by KRS 74.130 through 74.230 or secured by the revenue of the systems operated by the district shall continue to be retired or a sinking fund for such purpose created from the tax assessments or revenue from the system operated by the district from funds collected over the same area by the new board of commissioners in accordance with the laws under which the bonds were issued until all bonded obligations of the old district have been retired.
CONCLUSION
We agree, for the foregoing reasons, with your view that the pertinent statutes mentioned permit the merger of the water district into the water association.