Request By:
Danny E. Darnall, Esq.
128 Broadway
P.O. Box 561
Brandenburg, Kentucky 40108
Opinion
Opinion By: Steven L. Beshear, Attorney General; Thomas R. Emerson, Assistant Attorney General
This is in reply to your letter concerning the use of money in a sinking fund. The city of Irvington has general obligation bonds pursuant to which there remains the sum of $104,000.00 to be redeemed. The bond sinking fund has in it the sum of $86,325.00 due to the large amounts of interest earned. It appears that the amount of money in the sinking fund will soon reach the $104,000.00 needed to pay off the bonds outstanding within the next few years.
You ask whether the city may use the interest income derived from the balance in the sinking fund for other needs of the city.
Section 159 of the Kentucky Constitution provides as follows:
Whenever any city, town, county, taxing district or other municipality is authorized to contract an indebtedness, it shall be required, at the same time, to provide for the collection of an annual tax sufficient to pay the interest on said indebtdness, and pay the interest on said indebtedness, and to create a sinking fund for the payment of the principal thereof, within not more than forty years from the time of contracting the same."
In
Herd v. City of Middlesboro, 266 Ky. 488, 99 S.W.2d 458, 460 (1936), the court said in part as follows:
"Section 159 of the Constitution provides that whenever an indebtedness is contracted by a city it must provide for the collection of an annual tax sufficient to pay the interest on such indebtedness, and to create a sinking fund for the payment of the principal within not more than 40 years from the time the debt is contracted. This section of the Constitution applies to any indebtedness contracted by the city which is transmutted
In connection with the earning of interest on the money in the sinking fund the court in
E. T. Lewis Co. v. City of Winchester, 140 Ky. 244, 130 S.W. 1094, 1095 (1910), said in part:
". . . Manifestly it was not the intention of the framers of the Constitution to require that more taxes should be collected from the people than necessary to meet the principal and the interest. It is not required that the city should collect taxes and place the amount in its sinking fund without making any attempt to increase the aggregate of the sinking fund by investing the money held for the purpose of paying the bonds. The city is authorized to do what any prudent man would do with his own money under the circumstances; that is, to invest it in some safe way, which will produce an annual interest, and thus increase the sinking fund from year to year, and thereby lessen the burden of the taxpayer. . ."
See also
Parker v. City of Corbin, 149 Ky. 603, 149 S.W. 970 (1912).
As to sinking funds generally we direct your attention to 81A C.J.S. States § 260 where the following appears:
"Under constitution or statute, provision may be made for the creation of sinking funds for the payment of principal or interest of state bonds. Such a fund, when created, constitutes a trust fund, which it is the duty of the state to conserve and keep available as may be required, and which may be employed as authorized by law.
A sinking fund may be used only for the purposes for which it was created, and statutes providing for the transfer of money in the fund to the state general fund have been held invalid."
The court in
Cross of Malta Building Corporation v. Straub, Or., 476 P.2d 921, 924 (1970), said in part as follows relative to sinking funds and interest:
"We have already oberved that the earnings derived from the investment of the proceeds of the bonds pending the loan of these proceeds to the veterans becomes a part of the dedicated fund. This is the case even if the earnings on the invested proceeds exceed the amount necessary to pay the interest on the bonds. If, in the foregoing circumstances, the surplus earned becomes a part of the dedicated fund, we see no reason why the surplus earned by the investment in veterans' loans should not also be regarded as adhering to and becoming a part of the dedicated fund."
Sinking funds are explained in McQuillin Municipal Corporations (3rd Ed.), Vol. 15, § 43.133 as follows:
"A sinking fund is a sum set apart out of current net revenue to meet a present obligation which has not yet matured but which will mature at some stated future date. Constitutional or statutory provisions often require that provision be made for an annual tax to create a sinking fund. Such provisions are generally held mandatory, and compliance therewith may be compelled . . ."
* * *
"The legal title to a sinking fund is in the municipality, which has the right to manage and invest it, sue for its collection, and defend for the bondholders against any attempted depletion of the funds. However, such legal title is held in trust for the bondholders, who acquire, as to the fund, vested rights which may not be impaired by subsequent legislation."
See also
Hays v. Isaacs, 275 Ky. 26, 120 S.W.2d 737, 738 (1938).
In 64 C.J.S. Municipal Corporations § 1953, it is stated that while the city has the legal title to money raised for a sinking fund, together with the right to collect, manage and protect it, such legal title is held in trust for the bondholders. Furthermore, in 64 C.J.S. Municipal Corporations § 1957 the following appears:
"Any funds collected by the municipality applicable to the payment of the bonds and vouchers, together with interest earned on such funds, even though the rate of interest, under the statute, exceeds the rate of interest which the bonds bear, are trust funds, for which the municipality must account, for the benefit of the holders of bonds issued against such funds, including the payment of interest on the bonds. . ."
In conclusion, it is our opinion that a city may not use the interest earned on money in a sinking fund for municipal purposes other than those for which the sinking fund was created.