Request By:
Mr. Vic Hellard, Jr.
Director
Legislative Research Commission
Capitol Building
Frankfort, Kentucky 40601
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Robert L. Chenoweth, Assistant Deputy Attorney General and Chief Counsel
You have asked the Office of the Attorney General to respond to two questions relative to university foundations which have arisen from confusion concerning two bills enacted by the 1982 session of the General Assembly, House Bill 622 and Senate Bill 243. The two questions presented were stated by you as follows:
"(1) Do the universities have a choice as to whether the provisions of House Bill 622 apply to their affiliated corporations? Specifically, Sections 14 and 15, as well as Section 4(8) and Section 5, address the operations of affiliated corporations. Are these provisions mandatory or do they only apply if the universities elect to perform under the provisions of HB 622 (per Section 3)?
"(2) Foundations (affiliated corporations) may hold several types of funds, including student fees, government grants and contracts, sales and service income, as well as private gifts and endowments. (These accounts are defined by the American Institute of Certified Public Accountants, which is the accounting guide used by the universities and will be required by the Department of Finance pursuant to House Bill 622.)
"It is my understanding that Section 30(31) of Senate Bill 243 includes all these funds except private funds as described in KRS 41.290, and, therefore, KRS 41.070 would apply to all these funds except private monies. Is this correct in your opinion?"
In respond to your first question, we have answered this issue in another recently rendered opinion to you, OAG 82-520. We concluded in that opinion "The state universities are at liberty to elect all, some of or none of the provisions of House Bill 622." In view of this previously reached conclusion, we believe the state universities do have a choice as to whether or not to organize an affiliated corporation pursuant to KRS Chapter 273 to be subject to the provisions of House Bill 622. KRS 164A.560(1) provides that state universities may elect to perform in accordance with the provisions of House Bill 622, as codified, regarding various matters, including "affiliated corporations."
As to your second question, you seem to equate university foundations with affiliated corporations. We do not believe the terms, let alone the entities, are synonymous. By definition in House Bill 622, at what is now KRS 164A.550(3), "Affiliated corporation" is defined as "a corporate entity which is not a public agency and which is organized pursuant to the provisions of KRS Chapter 273 over which an institution exercises effective control, by means of appointments to its board of directors, and which could not exist or effectively operate in the absence of substantial assistance from an institution." Another part of House Bill 622 (Section 14), codified as KRS 164A.610, addresses the organization and operation of affiliated corporations as follows:
"(1) An institution may organize and operate one (1) or more affiliated corporations to assist it in carrying out its programs, missions or other functions. A qualified firm of certified public accountants experienced in the auditing of colleges and universities and their affiliated corporations shall be engaged to conduct an annual examination of the corporation's financial statements in accord with generally accepted auditing standards for the purpose of rendering an independent opinion thereon and preparing a report of findings and recommendations concerning appropriate accounting controls and compliance with applicable statutes. The affiliated corporation shall adhere to the principles of accounting and purchasing used by the institution with which it is affiliated.
"(2) The affiliated corporation shall provide the institution with an accounting at least quarterly, of all income and expenditures of said corporation in connection with contracts or grants with entities external to the institution and the corporation, for the conduct of research or other projects carried out, in whole or in part, through the use of institutional facilities or personnel.
"(3) The affiliated corporation shall pay to, or for the benefit of, the institution any and all funds received by it from any person, corporation, association or government agency external to the institution and the affiliated corporation as reimbursement for indirect expenses incurred by the institution in carrying out research or furnishing other goods or services, deducting from such payments only the expenses attributable to the procurement and performance of research grants and contracts and other contracts for the provision of such goods and services and such sums as may be essential to meet contractual obligations incurred at the request of the institution's governing board."
In contrast, Section 14 of Senate Bill 243 created a new section of KRS Chapter 42, now KRS 42.540, which references with particularity the state universities respective foundations. These foundations are listed as examples of a "nonprofit fiduciary holding funds for the benefit of any form of state organization."
With the above distinction in mind, we believe there are actually two parts to your second question. The first part is whether funds, other than private funds and contributions, received by an affiliated corporation are subject to the provisions of KRS 41.070. We believe the answer to this question is in the affirmative tempered by the provisions of House Bill 622 relative to the receiving of funds if elected by a state university. That is, if the state university has elected to ". . . receive, deposit, collect, retain, invest, disburse and account for all funds received or due from any source . . .," [KRS 164A.560(2)], then the receipts of an affiliated corporation to that university would no longer be required to be deposited in the state treasury.
The second part of your second question goes to looking at the university foundations. We do not believe the foundation of a state university (a nonprofit fiduciary holding funds for the benefit of any form of state organization) is required under KRS 41.070, as amended, to deposit monies received by it in the state treasury. "State funds" or "public funds" has been defined in KRS 446.010(31), Section 30 of Senate Bill 243, as follows:
(31) "State funds" or "public funds" means sums actually received in cash or negotiable instruments from all sources unless otherwise described by any state agency, state-owned corporation, university, department, cabinet, fiduciary for the benefit of any form of state organization, authority, board, bureau, interstate compact, commission, conference, council, office or any other form or organization whether or not the money has ever been paid into the treasury and whether or not the money is still in the treasury if the money is controlled by any form of state organization, except for those funds the management of which is to be reported to the legislative research commission pursuant to Sections 16, 17, and 19 of this Act;
It is acknowledged that a university foundation is a "fiduciary for the benefit of any form of state organization." Irrespective of this fact, while some funds received by a foundation would fit this general definition of public or state funds for the purposes of KRS 41.070 and the depositing of money in a state depository, we believe that foundation funds are actually "private funds" rather than public. KRS 41.070, amended in Section 31 of Senate Bill 243, still begins, in subsection (1) "Unless otherwise expressly provided by law, . . ." KRS 41.290 exempts from the requirement of depositing with the state treasury "private funds" available to the governing boards of state universities. If state university foundation money were not to be considered "private funds" for depository purposes, then Section 14 of Senate Bill 243, now KRS 42.540, would make little sense. This statute reads:
Notwithstanding KRS 41.290, every nonprofit fiduciary holding funds for the benefit of any form of state organization including but not limited to Eastern Kentucky University, Kentucky State University, Morehead State University, Murray State University, Northern Kentucky University, University of Kentucky, University of Louisville, Western Kentucky University, the state fair board, and the Kentucky department of energy shall make a report according to generally accepted accounting principles of all money received and disbursed during each fiscal year, on or before the 15th of July, showing receipts, expenditures, depositories, rates of interest paid by depositories, investments, and rates of return in investments to the state investment commission. Such fiduciaries include, but are not limited to Eastern Kentucky University Foundation; Kentucky State University Foundation, Inc.; Morehead State University Foundation, Inc.; Morehead Alumi Foundation, Inc.; Eagle Athletic Foundation, Inc.; Murray State University Foundation; Northern Kentucky University Foundation, Inc.; University of Kentucky Research Foundation; University of Kentucky Athletics Association; The Fund for the Advancement of Education and Research in the University of Kentucky Medical Center; Health Care Collection Service, Inc.; McDowell Cancer Network, Inc.; University of Kentucky-Business Partnership Foundation, Inc.; Kentucky Medical Services Foundation, Inc.; University of Louisville Foundation, Inc.; University of Louisville Hospital, Inc.; University of Louisville Institute of Industrial Research, Inc.; University of Louisville Medical School Fund, Inc.; The College Heights Foundation; KFEC Research and Development Foundation, Inc.; Kentucky Export Resources Authority, Inc. and all similar nonprofit fiduciaries for the benefit of any form of state organization and their successors. (Emphasis supplied) .
This statute is saying that although state university foundations do not have to deposit their funds per KRS 41.290, the foundations nevertheless are going to be required to make a report of all the money it has received showing "receipts, expenditures, depositories, rates of interest paid by depositories, investments, and rates of return in investments." (Emphasis supplied) . If a university foundation was required to deposit its money in a state depository, then this part of the reporting requirement would be meaningless.
We trust the above will be of assistance regarding the construction and application of House Bill 622 and Senate Bill 243.