Request By:
Hon. William W. Davis
Harper, Ferguson & Davis
310 West Liberty Street
Louisville, Kentucky 40202
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
Industrial Revenue Bonds to be issued by the Kentucky Development Finance Authority, pursuant to KRS 154.040(13), KRS 103.200 through KRS 103.285, are the subject of your request for an opinion. Specifically, the proposed industrial revenue bond issue by KDFA will be for the benefit of Liquid Transporters, Inc., a Kentucky corporation, which desires to finance certain new equipment at four different Kentucky locations pursuant to KRS 154.040(13) and KRS 103.200 et seq.
You have written that the bonds will not constitute a debt or financial obligation of KDFA or the Commonwealth, and will be payable solely from payments to be made by the company under a loan agreement between KDFA and the company. You emphasize that as is typically the case in industrial revenue bond financing, KDFA, as the issuer of the bonds, will be acting only as a financing conduit.
We concluded in OAG 83-131, that under KRS 42.420, any proposed Industrial Revenue Bonds to be issued by KDFA must be submitted to the Office for Investment and Debt Management for review and approval prior to the issuance of such debt. Mr. James Ramsey had pointed out that in connection with Industrial Revenue Bonds issued by KDFA, no General Fund appropriation for debt service is contemplated.
In seeking a clarification of OAG 83-131, you raise questions. The general question concerns to what extent may the Division of Investment and Debt Management review and approve of "private purpose" industrial revenue bonds? Specifically, you ask if it is the responsibility of DIDM to apply to industrial revenue bonds the same rules it applies to "public purpose" revenue bonds of the Commonwealth or its agencies, payable from general state revenues, future general fund appropriations.
As a refinement toward more specificity in connection with your question, you point out that the Finance and Administration Cabinet has promulgated 200 KAR 14:030, which purports to require all state agencies intending to issue "debt" to obtain the review and approval of DIDM according to a certain "Debt Issuance Procedure," which is obtainable from DIDM. 200 KAR 14:030 was published in the Administrative Register. However, the "Debt Issuance Procedure" was not published. It was incorporated by reference in 200 KAR 14:030. The regulation reads:
"RELATES TO: KRS 42.420
PURSUANT TO: KRS 13.082
NECESSITY AND FUNCTION: KRS 42.420 requires the Division of Investment and Debt Management to review and approve the issuance of debt by all state agencies with authority to issue bonds. This regulation will establish procedures for consistent and timely review by the Division of Investment and Debt Management of proposals for debt issuance by state agencies.
Section 1. Each state agency, authority, board, commission, corporation, or other entity of the Commonwealth that intends to issue debt shall obtain the review and approval of the Division of Investment and Debt Management, according to Debt Issuance Procedures established by the Division of Investment and Debt Management, as approved by the Secretary of the Finance and Administration Cabinet and dated April, 1983, which procedures are hereby adopted, incorporated, and made a part hereof by reference, the same as if copied verbatim herein. Copies may be obtained from the Division of Investment and Debt Management, Capitol Annex, Frankfort, Kentucky 40601. (9 Ky.R. 1264; eff. 6-1-83.)"
Specifically, you point out that the unpublished document, "Debt Issuance Procedure," requires, inter alia, information regarding a rating agency presentation, competitive bidding of all advisers, consultants, trustees, underwriters and bond counsel, and a determination that the proposed bond issue has been legally authorized and/or determined feasible in a biennial budget. The first paragraph of the "Debt Issuance Procedure," under "purpose," states that "This procedure is intended to provide coordination, accountability, and oversight pursuant to KRS 42.420. The DIDM will initiate the process required to issue bonds, notes or other forms of borrowing on behalf of the commissions, corporations, authorities, or boards who have had debt authorized by the General Assembly either through the biennial budget or statute." Your contention is that the Debt Issuance Procedure was intended to apply to those state or state agency financings which fall within the restrictions of KRS 56.870(1), which requires either the adoption of a specific bond-authorizing act by the General Assembly or bond authorization in a biennial joint budget resolution, subject to the "independently produced revenues" exemption of KRS 56.870(3).
You also contend that if a company is not legally required to competitively bid the industrial building facilities it is acquiring from industrial revenue bond proceeds, by what rationale may it be required by DIDM to competitively bid its costs of issuance of the bonds? You assume the competitive bidding procedure of the regulation was initiated for the purpose of saving money for the Commonwealth. You add that no money is saved by competitively bidding the costs of issuance of a private purpose industrial revenue bond issue through KDFA.
You mention 200 KAR 14:030, which adopts by reference the regulations found in the "Debt Issuance Procedure" document. The document was not published in the Administrative Register. See KRS 13.085, relating to the publication, hearing, and review of administrative regulations. See also KRS 13.096. It might be argued that the "adoption by reference" technique would require an express statutory provision. Our appellate courts, to our knowledge, have not passed upon that precise question. It might also be argued that 200 KAR 14:030 is sufficiently descriptive when considering the language of the cover regulation, and considering the total process undergone in publishing the cover regulation, as to constitute substantial compliance with KRS 13.085. In any event, we have reservations about the practice; however, it is a question for the courts. We do believe the General Assembly should address the point by considering an amendment of KRS 13.085, which would resolve any question about the use of adoption by reference.
Next, let us proceed to your overhanging question as to the extent of the review and approval of revenue bonds by the Division of Investment and Management, pursuant to KRS 42.420, and specifically whether there are restrictions upon such review and approval as relates to industrial revenue bonds issued by state agencies, where the expenditure of state monies, under the Constitution, statutes and contract, is not contemplated.
Under KRS 103.230(2), the proposed bonds will be payable solely from the revenue derived from the "building." See KRS 103.200, dealing with definitions of "building." See also KRS 154.040(13). As stated in KRS 103.230(2), the bonds will not constitute an indebtedness of the Commonwealth and will be payable solely from payments to be made by the company under a loan agreement between KDFA and the company. The funding of such bonds out of state monies is not anticipated.
Of course what you refer to as "private purpose" industrial revenue bonds has been approved by statute as constituting a public purpose, ultimately, by way of promoting the economic development of the Commonwealth. See KRS 103.210 and Industrial Develop. Auth. v. Eastern Ky. Reg. Pl. Com'n., 332 S.W.2d 274 (1960) 276.
At most, the issuer of the bonds has an obligation of good faith to the bondholders and a fidelity to the terms of the bond documents. This obligation is in the area of morality and the practicalities of political and economic reality.
KRS 42.420, in rather broad language, requires the review and approval of all revenue bond issues of a state agency, including the proposed bond issue. However, we must consider carefully KRS 42.410, relating to specific duties of the Office for Investment and Debt Management, in order to arrive at a basic statement relative to the extent of such review and approval function as specifically applied to the proposed bond issue.
When considering that KRS 42.410 is intensely concerned with that office's analysis and calculations in terms of budget and cash flow requirements, and is concerned with the actual funding of state debt in the constitutional and statutory sense, it is our opinion that the review and approval function in the subject case should be restricted to these factors: (1) a determination that the proposed bonds are in reasonable conformity with the general legislative policy expressed in KRS Chapters 103 and 154; and (2) the evaluation of revenue projections relative to the proposed bond issue [see KRS 42.410(1)(e)], including a reasonable determination of the fiscal or financial soundness of the company.
It is our opinion that in a revenue bond issue of this category, the DIDM has no authority to require by regulations a rating agency presentation, competitive bidding of all advisers, consultants, trustees, underwriters and bond counsel and a determination that the proposed bond issue has been legally authorized by and/or determined feasible in a biennial budget. We agree that KRS 56.870 was intended to embrace actual state fiscal obligations, which statute is inapplicable to your situation. See also KRS 56.873 (bond ratings) and OAG 80-591. In addition, the requiring of competitive bidding on bond costs is designed to save the state money. In this situation no state money is involved. As the Court of Appeals, in Kentucky Title Co. v. Hail, 219 Ky. 256, 292, S.W. 817 (1927) 821, said, "The law will not force any one to do a vain and useless thing." The court, in County Board of Education v. Fiscal Court, 221 Ky. 106, 298 S.W. 185 (1927) 187, pointed out that "It will not be presumed that the Legislature did a vain or foolish thing."