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 have a question concerning the functions of the Office for Investment and Debt management within the Department of Finance. See KRS 42.400, 42.410, and 42.420.
KRS 42.420 reads:
All other provisions of the Kentucky Revised Statutes notwithstanding, all state agencies and all individuals, agencies, authorities, boards, cabinets, commissions, corporations, or other entities of, or representing the Commonwealth with the authority to issue bonds, shall submit all proposed bond issues, bond anticipation notes, or interim debt financing to the office for investment and debt management for review and approval prior to issuance of such debt.
Consider this language of KRS 42.420: "All state agencies and all . . . agencies . . . of, or representing the Commonwealth with the authority to issue bonds, shall submit all proposed bond issues . . . or interim debt financing to the office for investment and debt management for review and approval prior to issuance of such debt." In OAG 81-242 (written to you, as Director of the Office for Investment and Debt Management), we ruled that the Office for Investment and Debt Management is empowered to review and approve all proposed debt issues of all state agencies and of all entities issuing debt under the name of the Commonwealth, and debt issues of all corporations created by the state and acting for the state, including the Kentucky Housing Corporation.
The Office for Investment and Debt Management began functioning January 12, 1981, and since that date, has been involved in the review, approval and marketing of all state bond issues sold. However, the Office has had no formal review and approval guidelines that it has followed. The purpose of your letter is to outline two alternative review and approval procedures being considered by your Office and to request that we provide your office with direction so that you will fulfill the legal provisions of KRS 42.420.
Basically, you propose a "checklist" to be used by your office in reviewing a bond issue and the establishment of guidelines to be used in determining whether your office should approve or disapprove of a particular bond issue. Additionally, you propose an appeal procedure for those issues not approved by your office under the proposed guidelines.
Your office proposes to divide the review process into the following levels: Level IAdministrative ReviewLevel IITechnical Review
The breakdown of the two proposed levels of review read as follows:
1. Administrative Review (Level I) - This level of review requires the least financial, legal, and other professional expertise on the part of your office and therefore depends heavily upon the expertise of the issuer's professionals. Briefly, the office would review:
* Statutory Authority of Issuer - Does the issuer have the statutory authority to issue the proposed debt?
* Statutory Authority for the Issue - Is the issue authorized by the statutes of the Commonwealth?
* Timing of the Sale - Does the proposed sale date conflict with any other issues of the state? Is the date prudent considering other similar issues being proposed?
* Method of Sale - Is the method of sale (competitive or negotiated) prudent based on the prevailing practices?
* Documentation - Are all required documents present and on file? Such documentation would include:
Office Statements
Bond Indenture or Resolution
Trust Agreement (if applicable)
Non-Arbitrage Certificate
Bond Counsel Opinion
Lease Agreement (if applicable)
10B(5) Certificate of bond counsel as to federal tax exemption
Opinion in Pending or Threatened Litigation
* Official Statement - Does it misrepresent the position of the state in the transaction? Does it clearly state whether the issue is/is not a debt of the Commonwealth?
* Legal Opinions - Are they unqualified? Does the opinion of bond counsel clearly state that the debt is legally issued and that interest is exempt from federal income taxes and state taxes?
2. Technical Review (Level II) - This level requires a substantial amount of financial expertise but continues to depend upon the issuer's other professionals for expertise in their respective areas. In addition to the review undertaken in Level I, the office would review:
* Financing Structrure - Is the financing structure (size, maturities, call feature, security, flow of funds, etc.) prudent in light of the prevailing industry practices and market conditions?
* Timing of Issue - Is the timing of the issue consistent with the forecasted direction of interest rates?
* Adequacy of Proceeds - Are the projected proceeds from the sale of the issue sufficient to meet the issuer's objectives?
* Adequacy of Revenues - Are the revenues to be utilized to pay the principal and interest of the debt adequate for that purpose? Are the projections of revenue reasonable?
* Documentation - Are all the required documents adequate? Do they contain provisions normally associated with similar issues?
You have written that, with your current staff capabilities, you have the expertise to perform the levels of review no. (1) and/or no. (2), above stated. You say that it would be your intent to pursue the development of procedures necessary to perform levels (1) and (2) above, if, by our opinion, we inform you that by so doing you would be in compliance with KRS 42.420.
KRS 42.410, outlining duties of your office, was amended in the 1982 session, effective July 15, 1982. It reads:
(1) The office for investment and debt management established in KRS 42.400 shall, subject to the provisions of KRS 41.020 to 41.390, have and perform functions and duties as follows:
(a) The analysis and management of short and long-term cash flow requirements.
(b) The maximization of the return on state investments given the cash flow and liquidity requirements.
(c) The coordination and monitoring of cash needs relative to investment and debt activity.
(d) The development of a long-term debt plan including criteria for the issuance of debt and an evaluation of how much total state debt is justified.
(e) The evaluation of revenue projections relative to proposed revenue bond issues.
(f) The responsibility for liaison with the general assembly on all investment and debt matters, including, but not limited to, new bond issues, the status of state debt, and the status of state investments.
(g) All other functions of the department relative to state investment and debt management including, but not limited to, the making of debt service payments, the sale of bonds, and staff assistance to the state property and buildings commission and the state investment commission.
(2) The office for investment and debt management shall render monthly written reports concerning the performance of each investment to the state investment commission.
(3) Nothing in this section shall authorize any act inconsistent with the authority granted the state investment commission by Sections 6 and 11 of this Act.
KRS 42.410 reflects the connected subjects of "investment" and "debt management". Of course your office cannot engage in any act inconsistent with the powers of the State Investment Commission as reflected in KRS 42.500 and 42.525. KRS 42.410(1)(c) permits you to coordinate and monitor "cash needs relative to investment and debt activity." (Emphasis added). KRS 42.410(1)(d) provides that your Investment and Debt Management Office has the authority to develop a long-term debt plan "including criteria for the issuance of debt and an evaluation of how much total state debt is justified." (Emphasis added). KRS 42.410(1)(e) authorizes your office to evaluate "revenue projections relative to proposed bond issues. " (Emphasis added). KRS 42.410(1)(f) gives you the responsibility for liaison with the General Assembly on all investment and debt matters, including, but not limited to, "new bond issues, the status of state debt, and the status of state investments." (Emphasis added). KRS 42.410(1)(g) makes your office responsible for all other functions of the Department of Finance relative to state investment and debt management including, but not limited to, the making of debt service payments, the sale of bonds, and staff assistance to the State Property and Buildings Commission and the State Investment Commission.
It is our view that KRS 42.410 and 42.420 outline the basic function of your office in connection with debt management and "state" bond issues, as defined earlier herein. Clearly KRS 42.410(1)(d) gives your office the authority to develop criteria for the issuance of debt. KRS 42.420 gives your office the express power of reviewing and approving all state bond issues. The powers of your office are limited to those expressly conferred by statute or which exist by necessary and fair implication. Blue Boar Cafeteria Co. v. Hackett, 312 Ky. 288, 227 S.W.2d 199 (1950) 201.
It is our opinion that the review and approval procedures you have outlined under (1) Administrative Review and (2) Technical Review, above, are in reasonable conformity with your range of authority as outlined in KRS 42.410 and 42.420. However, as concerns a certain item under Level I (Administrative Review), above, you have written:
"Method of Sale - Is the method of sale (competitive or negotiated) prudent based upon the prevailing practices?"
It is our opinion that the criterion should be stated more precisely to provide that the method of sale must in any event adhere to the statutory authorization for a particular type of state bond issue. For example, KRS 175.500(1) authorizes the Turnpike Authority to sell its revenue bonds in such manner, either at public or private sale, and for such price as it may determine will best effect the purposes of sale, and for such price as it may determine will best effect the purposes of KRS Chapter 175, etc. On the other hand, KRS 177.800, relating to certain general obligation bonds of the Commonwealth for highways and parks issued and sold by the State Property and Buildings Commission, required that the bonds be sold at one sale or from time to time as funds are required for the identified purposes. It further required that "Each sale shall be upon sealed purchase bids which shall be publicly opened and considered after solicitation," etc. See method of sale of revenue bonds under KRS 58.040. That statute provides that "The bonds shall be sold in such manner and upon such terms as the governmental agency deems best, . . ." However, in Haney v. City of Somerset, Ky., 530 S.W.2d 377 (1975), the Court of Appeals held that a city could not sell its revenue bonds at a negotiated private sale rather than a publicly advertised competitive sale. The court based its decision on the general policy expressed in KRS 424.360. That statute reads:
No sale of general obligation bonds or revenue bonds of any governmental unit or political subdivision, or agency thereof, shall be made except upon newspaper advertisements for bids, published for the publication area constituted by the political subdivision or government unit and published to afford statewide notice. If the bonds are in principal amount of fifty thousand dolars ($50,000) or more, an advertisement for bids shall also be published in a publication having general circulation among bond-buyers.
Thus the court in Haney v. City of Somerset held in effect that unless there is a statutory exemption of the requirements set out in KRS 424.360, bonds of governmental units must be sold at a publicly advertised competitive sale. The court noted that the general policy now contained in KRS 424.360 has been the subject of exceptions by act of the legislature, specifically as applies to the Capital Plaza Authority, the Turnpike Authority, and the County Turnpike Authority, all of which are authorized by specific legislative enactment to sell revenue bonds either at public or private sale. See Eagle v. City of Corbin, 275 Ky. 808, 122 S.W.2d 798 (1938), strictly applying the principle of advertised public sale.