Request By:
Mr. James R. Ramsey
Director
Division of Investment and
Debt Management
Office for Policy and Management
Department of Finance
Capitol Annex
Frankfort, Kentucky 40601
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
You indicated in your letter that, pursuant to KRS 41.380(2), the State Investment Commission invests cash, in the State Treasury in excess of the amount required to meet current expenditures, in United States Treasury Bills and in collateralized bank certificates of deposit (as allowable per OAG 81-353) which certificates mature within one (1) year from the date of investment. The Commonwealth also utilizes an investment instrument known as a "repurchase agreement. " That investment instrument, you say, is consistent with investing in Treasury Bills, since the State Investment Commission is purchasing United States Treasury Bills from a financial institution with an agreement that the financial institution will repurchase these Treasury Bills at some futher date.
Since around 1973, the Commonwealth has been using one-day repurchase agreements. Thus any cash in the state's general depository checking account at the end of the day is used to purchase Treasury Bills from a financial institution. Those Treasury Bills are then sold back to the financial institution the next day. Since 1973, the state has occasionally used general fund cash to invest in repurchase agreements with maturities greater than one day (known as "term repurchase agreements"). In general, the longer the maturity of an investment, the greater the yield. In addition, for investment maturities of less than 14 days, the state has no other allowable opportunities (for example, very short-term commercial paper is not an eligible instrument). In addition, as relates to investments in certificates of deposit, we pointed out in OAG 81-353, written to Senator Bunning, that 12 U.S.C. § 1821(a)(2)(A) provides that the maximum insurance per state account in an insured bank in the state cannot exceed $100,000 per account. Thus the investment of only $1,000,000 of Kentucky funds would involve distributing such money in the (10) insured Kentucky banks; The impracticality of that situation is at once apparent.
Your Division of Investment and Debt Management has been working for 8 months to develop a sophisticated cash forecasting computer software model that will allow you to predict, with a high degree of accuracy, the state's cash inflows and outflows. The implementation of this model will allow your division to better time your investments to mature as cash is needed for expenditure purposes. The procedures of investment with "General Fund" monies outlined above have been with the concurrence of the State Treasurer.
You would like to be able to utilize this investment alternative to help maximize the return on the "state's other funds" invested by the State Investment Commission. You are not referring to the exception of KRS 41.380(4), relating to funds that are specifically provided by law to be invested by some other officer or agency of state government.
Thus you seek our opinion as to whether or not term repurchase agreements (of Treasury Bills) with maturities of greater than one day, are eligible investments for use by the State Investment Commission in the investment of excess cash in the following funds held by the Treasurer of the Commonwealth of Kentucky:
Transportation FundCapital Construction FundAgency Receipt FundTrust and Revolving FundSpecial Deposit Trust FundBond Redemption and Interest FundBond Turnpike Authority Fund
KRS 41.380 reads:
"(1) There shall be a state investment commission composed of the governor, the state treasurer, the secretary of the development cabinet, and the secretary of the department of finance. The commission shall have authority to and may invest any and all surplus funds of the state in direct obligations of the United States government, or of the Commonwealth of Kentucky. All such investments shall be obligations that will mature within five (5) years from the date of investment.
"(2) The commission shall also have authority and may, whenever in its opinion the cash in the state treasury is in excess of the amount required to meet current expenditures, invest any and all of said excess cash in United States treasury bills or certificates of indebtedness or any other United States government security which will mature within one (1) year from the date of investment.
"(3) Interest earned from investments made pursuant to this section shall accrue to the credit of the general expenditure fund, except that interest from investments of excess cash in the road fund shall be credited to the road fund and interest from investments of excess cash in the game and fish fund shall be credited to the game and fish fund, and interest earned from the investment of funds accumulated solely by means of contributions and gifts shall not be diverted to any purpose other than that stipulated by the donor, when such donor shall have designated the use to which such interest shall be placed.
"(4) The authority granted by this section to the state investment commission shall not extend to any funds that are specifically provided by law to be invested by some other officer or agency of the state government. "
You have indicated that by March 1, 1982, you will have a computer system which will intergrate rates of investment return with the concept of normal payment schedules relating to state contractual obligations. It is vital in this context to understand that "excess state money" simply means state money that is not needed, for a particular period of time, to pay completed expenditure demands on the state treasury. Another way of putting it is that the excess funds are those funds in excess of the amount required to meet current state expenditures under normal payment schedules. KRS 41.380(2).
It is our opinion that the State Investment Commission has the authority under KRS 41.380(2) to invest "excess cash", as defined in the statute, in term repurchase agreements involving United States Treasury Bills. Such agreements, in reality, involve the state's purchase of United States Treasury Bills from a financial institution with an agreement that the financial institution will repurchase the Treasury Bills at some definite future date, not to exceed one (1) year from date of investment. However, such investments must be carefully tailored to meet precisely normal payment schedules of state obligations.
It is further our opinion that the State Investment Commission, within the above guidelines, may invest such "excess cash", involving any of the above budgetary funds mentioned earlier herein, in the term repurchase agreement type of investment. This position is buttressed by the fact that subsection (3) specifically mentions the application of the investment authority in subsection (2) to the general fund, the road fund and the fish and game fund. However, such enumerated funds were not intended to be all inclusive. The key to subsection (3) of KRS 41.380 is that interest earned from investments of excess cash involving any fund of the state, and not excepted by subsection (4), shall accrue to the credit of the general fund, except in the cases of the use of road fund and the game and fish fund. In subsection (2) the statement is that the commission may invest "excess cash in the state treasury. " (Emphasis added). That of itself indicates any state fund not excepted under subsection (4).
Of course, subsection (4) of KRS 41.380 contains the caveat that the investment authority contained in subsection (2) shall not extend to any funds that are specifically provided by law to be invested by some other officer or agency of state government.
In addition, KRS 386.020(1)(1) reads as follows:
"(1) Any fiduciary holding funds for loan or investment may invest them in:
* * *
"(1) United States government securities or United States government agency securities the payment of the principal and interest on which the full faith and credit of the United States is pledged, said investments being made under the terms of a repurchase agreement between the fiduciary and any state or national bank whose main office is in this state, including itself, if such fiduciary is a bank."
Thus KRS 386.010(1)(1) expressly authorizes the State Investment Commission, which is a "fiduciary" as defined in KRS 386.010(1), to invest in United States Treasury Bills through repurchase agreements entered into between the State and any state or national bank whose main office is in Kentucky. See Bowman v. Commonwealth, Ky., 438 S.W.2d 488 (1969).
No insurance or collateralization are involved here, since in the purchase of a United States Treasury Bill the full faith and credit of the United States is pledged.
In our interpretation of KRS 41.380, as relates to investments in United States Treasury Bills, we are guided by the principle expressed so aptly in Henry v. Commonwealth, 312 Ky. 491, 228 S.W.2d 32 (1950), by Judge Stanley, in which he wrote for the Court that "In the construction of any statute the whole of it and the purpose of all of it are to be considered."