Request By:
Mr. Martin W. Johnson
Marshall County Attorney
Courthouse, P.O. Box 172
Benton, Kentucky 42025
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
You request our opinion as to the legality of a proposed lease purchase agreement to be executed by the Marshall Fiscal Court as the lessee. Your letter reads in part:
"The Marshall County Fiscal Court has been approached with regard to entering into a lease purchase agreement for a piece of equipment, the total cost of which is $93,731.00. The proposal is for the County to lease this unit for a period of five (5) years with the monthly rental payments to be calculated in an amount sufficient to retire the indebtedness plus interest costs calculated at 75% of the prime rate.
"I have not dealt with such an arrangement in the past and since this is a substantial sum of money, I felt that I should inquire as to the legality of such an arrangement, if there are proper arrangements for governmental agencies and if there are not, in your opinion could such an arrangement be entered into by a governmental agency, if the contract or lease provided for its absolute termination upon the County giving notice and the total rentals in any one (1) year did not exceed the County's debt limitation."
CONSTITUTIONAL DEBT RESTRICTIONS
No county is authorized to become indebted, in any manner or for any purpose, to an amount exceeding, in any year, the income and revenue available to the county for such year, without the assent of two-thirds of the voters thereof, voting at an election to be held for that purpose. Section 157, Kentucky Constitution. In addition, counties are held to a maximum indebtedness of two percent (2%) of the value of taxable property therein. Section 158, Kentucky Constitution. The exception lies in case of an emergency, where the public health or safety should so require.
The Constitution of Kentucky requires a pay-as-you-go plan for counties and other political subdivisions, as described in Meyers v. City of Louisville, 310 Ky. 348, 220 S.W.2d 852 (1949) 854:
"This very definitely fixed policy of 'pay-as-you-go' means that obligations cannot be created to be paid out of revenues to be collected after the termination of the fiscal year, or, in other words, that the debt must run concurrently with the current revenues else there will be a contravention of the limit provision. See also 38 Am.Jur., Municipal Corporations, Sec. 445."
KRS 68.110(1) provides that the fiscal court shall not in any year expend any money in excess of the amount annually levied and collected for that year or levied, collected or appropriated for any special purpose.
ESSENTIAL AND COMPULSORY GOVERNMENTAL EXPENSES AS A CONSTITUTIONAL EXCEPTION
The Court of Appeals, in Fulton County Fiscal Court v. Southern Bell Tel. & Tel. Co., 285 Ky. 17, 146 S.W.2d 15 (1940), pointed out an importation of an exception into §§ 157 and 158 of the Constitution. The exception consists of obligations for essential governmental services and functions. The court wrote this at page 24:
" The purpose of the limitations is to protect the people from improvident contracts, voluntarily assumed, and it is not thought they refer to expenses of government, which are compulsory obligations cast upon the local unit. If it were otherwise, the 'fundamental safeguards and bulwarks of organized society' would be destroyed." (Emphasis added).
In short, the court held in Fulton County Fiscal Court v. Southern Bell, above, that the incurrence of debt for essential and compulsory governmental purposes is valid though the results exceed the limitations; but payment must be made out of funds raised within the tax limitations of § 157, Kentucky Constitution. See Randolph v. Shelby County, 257 Ky. 297, 77 S.W.2d 961 (1935). The Court of Appeals, in Russell County Fiscal Court v. Russell County, 246 Ky. 529, 55 S.W.2d 337 (1932), observed that expense incurred for essential governmental purposes, if not paid by current revenues, must be carried over into the succeeding year and calculated as part of the expenses to be met that year out of that year's income. However, the revenue provided for and collected for any particular year must first take care of all such necessary governmental expenses, and, when that is done, all other expenses that are not absolutely necessary governmental expenses should be dispensed with if there is not sufficient revenue for incurring them. Hackley v. Carter County, 267 Ky. 250, 101 S.W.2d 928 (1937) 929.
Examples of "essential governmental expenses" are as follows: salaries of county officials and employees; expense of holding county elections; and the expense of maintaining the county hospital.
The equipment to be leased, as you have told us, is for the county road department. Under KRS 178.080 and 178.115, the initial decision as to the construction or altering of any particular county road by the county is not a mandatory function. To the contrary, such road decision is left to the sound discretion of the fiscal court, which body can determine whether or not a proposed project is deemed by that body to be in the best interest of the county so as to constitute the necessity for such road. Prather v. Fulton County, Ky., 336 S.W.2d 339 (1960). The "necessity for a road" arises in the context of the county's condemnation proceedings, once the fiscal court determines that such road construction is in the public interest.
A residual question here is whether the lease expense for the county road equipment is a necessary governmental expense.
In the case of Lankford v. Burton, 167 Ky. 445, 180 S.W. 784 (1915), the Marion County Fiscal Court attempted to appropriate $7,000 for work on a certain county road (anticipating contractual obligation), which $7,000 was in excess of the available county revenue for that year. The court, in holding the appropriation in violation of § 157, Constitution, and in meeting the contention that the road expenditure was a necessary governmental expense, wrote this at page 785:
"The distinction therein is clearly pointed out between obligations voluntarily assumed by the county and compulsory obligations cast upon it by operation of law.
"In this case there was no compulsion; the fiscal court voluntarily undertook to appropriate more money for road purposes than was authorized by that year. And although they may have been actuated by considerations looking to the public good, there was no such compulsory obligation as authorized a defiance of the plain provisions of section 157."
Since we are unaware of any statutes making the establishment or construction of particular roads a county obligation by operation of law, we believe that such road equipment expense is not a necessary and compulsory governmental expense. See also Randolph v. Shelby County, 257 Ky. 297, 77 S.W.2d 961 (1935) 964.
CONCLUSION
Since the leasing of the road equipment would not involve an essential and compulsory governmental service or function, and if the lease contract involves an assumption by the county of a total debt of lease payments aggregating the sum of $93,731, and such sum exceeds the income and revenue available to the county for the particular year in which the lease is executed, the contract would violate § 157 of the Kentucky Constitution in the absence of a requisite vote of the people.
In the event that such lease would involve a lease for only one year, which could at the option of fiscal court be renewed from year to year (the county only being obligated for one year at a time), and assuming that the county has currently available revenue to cover the first year's rental (and has available the current revenue to cover any subsequent one year renewal), and assuming the limit of § 158 is met, then § 157 of the constitution would not be violated.