Request By:
Mr. Patrick Abell
General Counsel
Kentucky Development Finance Authority
Capital Plaza Tower
Frankfort, Kentucky 40601
Opinion
Opinion By: David L. Armstrong, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
The Kentucky Development Finance Authority, at the request of the City of Louisville (KRS 103.210), proposes an Industrial Revenue Bond issue, not to exceed $180,000,000, principal, pursuant to KRS 103.200 to 103.285, and KRS 58.410 to 58.440, for the financing of the construction and equipping of airport facilities at Standiford Field in Louisville, Kentucky. The proceeds of the Bonds will be loaned to the United Parcel Service of America, Inc., the "Company", pursuant to a loan agreement between the Authority and the Company. The Bonds will be payable solely from payments required to be made by the Company under the Loan Agreement, except to the extent payable from Bond proceeds. The project will consist of the construction and installation of an approximately 950,875 square foot major air package hub building and related facilities, including additional aircraft ramps, aircraft hangars and major ground support facilities. According to documents filed with the Authority, the Company expects the project, when operational in three years, to produce from 2,300 to 2,800 permanent jobs, most of which will be available to entry-level personnel. The increase in the local wage base is expected to be approximately $20,400,000 per annum initially; and the indirect economic impact is expected to be approximately $44,610,000 per annum initially.
The Bonds will be issued on a long-term basis as term bonds. In order to achieve the lowest available average interest cost on the Bonds, the Authority proposes to issue the Bonds as variable rate demand Bonds, accompanied by "put" features and remarketing arrangements.
The request for an opinion is based upon: (1) variable rate features which differ somewhat from the variable rate structure approved in OAG 84-257; and (2) your presenting additional arguments and authorities in support of the use of variable rates for bonds other than pollution control bonds.
In your letter you explained at some length the technical implications of issuing the Bonds as variable rate demand Bonds:
"Bonds with such features have been issued previously under the Act. The interest rate on the Bonds will be established by the Authority, by resolution, at a maximum rate in accordance with the Act and while the Bonds are outstanding the interest rate thereon for any period will be such lesser rate as is determined periodically, in accordance with the procedures described in the documentation contained in Exhibit No. 1, so that the interest rate on the Bonds will continuously reflect then-current market yields for comparable securities. The holders of the bonds will have the option, exercisable periodically, based upon the method of interest rate determination applicable to the Bonds, to require that the Bonds be repurchased at 100% of the principal amount thereof plus accrued interest to the date of purchase ("Puts"). Any such Puts of Bonds will be to a remarketing agent, appointed by the Authority (see Exhibit No. 1 ) for purchase of Bonds at a price equal to the par value thereof and accrued interest to date of purchase. It will be one of the functions of the remarketing agent promptly to remarket any Bonds which are Put and to cause the proceeds of such sale upon remarketing to be applied to pay the prior Bondholder who Put the Bonds for purchase. The Authority will have absolutely no liability for the purchase of Bonds which are Put.
"The Company, which has a high credit status, will be obligated to pay to the Trustee for the Bonds amounts sufficient to meet principal and interest on the Bonds, and to pay for the Put Bonds in the event remarketing of same is not achieved in time to make such payments. The remarketing agent will be a major investing banking firm with wide experience in marketing such obligations and which, in the judgment of the Authority, has the expertise to perform all the functions of remarketing agent noted herein. The Authority will retain the right, with the consent of the Company, to remove and replace the remarketing agent at any time for any reason. Because of the variable rate provisions, it is expected that the Put Bonds will be readily remarketed since the interest rate on the Bonds will be adjusted periodically to current market conditions.
"The interest rate on the Bonds may be either (i) a Daily Rate, (ii) a Variable Rate, (iii) a Fixed Rate or (iv) a 7% Annual Rate, in each case as determined pursuant to the procedures and rules set forth in Exhibit No. 1. When the Bonds are to bear interest at a Daily Rate, a Variable Rate or a Fixed Rate, that rate will be determined by the remarketing agent, taking into account prevailing market conditions and yield on obligations of credit quality and maturity comparable to the Bonds. Alternatively, the interest rate will be a rate based on certain indices.
"As previously noted, the Bonds will be issued on long-term obligations. However, because of the variable rate provisions and the Put provisions, the Bonds are expected to sell as short-term obligations with consequently much lower interest rates. This is because the Bondholder is assured that he may Put the Bonds to the remarketing agent for purchase and obtain payment of the par amount and accrued interest. The Authority and the Company are able to keep the Bonds outstanding by reason of the variable rate provision which adjusts the interest rate to current market conditions and permits the remarketing of the Bonds at par. The Company assumes all risk of having to pay more to cover any higher interest rate (subject to the maximum rate) that may be needed in order to remarket the bonds at par and to actually purchase the Put Bonds if not remarketed. The Authority has no financial obligations of any nature in this regard.
"In this era of high interest rates (particularly currently where long-term fixed interest rates on tax-exempt bonds are not much lower than the rates on comparable taxable bonds, whereas short-term interest rates on tax-exempt obligations are substantially lower than interest rates on short-term taxable obligations), the proposed system of issuing long-term bonds with variable interest rates and Put arrangements, to obtain the equivalent of short-term interest rates, is very popular throughout the nation and is necessary for use in Kentucky in order to permit it to compete with other states to achieve economic development and job creation."
Your question is whether the Authority may lawfully issue variable rate industrial revenue bonds with put and remarketing features, as you described, under KRS 103.200 to 103.285, as amended in 1984, and under KRS 58.410 to 58.440.
THE VARIABLE RATE QUESTION
We concluded, in OAG 84-257, concerning a hospital revenue bond issue, that KRS Chapter 103 and KRS 58.430 permit an agreed fluctuating or variable rate of interest.
KRS 103.200(2), in defining "bonds", provides that, "As used in KRS 103.200 to 103.285, "bonds" or "negotiable bonds" means bonds, notes, bond anticipation notes or any other obligations for the payment of money issued by a city, county or other authority pursuant to KRS 103.200 to 103.285 and for pollution control facilities shall also include commercial paper bonds and variable rate bonds. " (Emphasis added). The grammatical context may suggest that variable rate bonds apply only to pollution control facilities bonds. KRS 103.220(1) provides in part that the bonds may be issued to bear interest at a rate fixed by the governing body of the issuer. In addition, KRS 58.430 reads:
"From and after March 9, 1970, notwithstanding any other acts or laws of other import which may presently prevail, wherever the same may be found in the Kentucky Revised Statutes as of such date, it shall be lawful for public bodies to establish, agree and bind themselves to pay interest upon their public obligations at any rate or rates which may be determined upon by the governing bodies of the respective public bodies which are the issuers thereof; but subject, nevertheless, to such approvals as may now or hereafter be applicable thereto according to law."
When the entire group of statutes, 103.200 to 103.285, is read in its entirety, and considering the history and economic purpose (KRS 103.210) of the issuance of such industrial revenue bonds, and considering KRS 58.430, the narrow restriction of variable rate bonds to pollution control bonds does not make sense. If such restriction had been intended, such parochial use of the variable rate bond would be unreasonable and arbitrary, and would be in violation of § 2, Kentucky Constitution. The test of constitutionality is whether KRS Chapter 103 is unreasonable or arbitrary, in light of § 2, Kentucky Constitution. Moore v. Ward, Ky., 377 S.W.2d 881 (1964). In the judicial system, there exists a presumption in favor of the constitutionality of legislation. The courts, in deference to legislative bodies, which must be presumed to have acted within the scope of their powers, will not strike down a statute unless its violation of the constitution is clear, complete and unequivocal. Sasaki v. Commonwealth, Ky., 485 S.W.2d 897 (1972). Thus statutes, where possible, should be construed to be constitutional. Wethington v. Commonwealth, Ky.App., 549 S.W.2d 530 (1977).
If the variable rate feature in KRS Chapter 103 was intended under a literal reading to apply only to pollution control bonds, such interpretation would lead to an absurdity. City of Louisville v. Helman, Ky., 253 S.W.2d 598 (1952). An interpretation of a statute which leads to an absurd result must be avoided. City of Covington v. Sohio Petroleum Company, Ky., 279 S.W.2d 746 (1955).
Further, such narrow construction (variable rate applying only to pollution control bonds) would violate § 59, item 21, Kentucky Constitution, which prohibits special legislation relating to the regulation of the rate of interest. See Linton v. Fulton Building and Loan Association, 262 Ky. 198, 90 S.W.2d 22 (1936). The purpose of § 59, Constitution, is to prevent favoritism and discrimination, and to insure equality under law. Department of Finance v. Dishman, 298 Ky. 545, 183 S.W.2d 540 (1944). In Kentucky Mountain Coal Company v. Witt, Ky., 358 S.W.2d 517 (1962), Judge Cullen, for the court, wrote this at page 518:
"In construing a statute the courts will consider the purpose which the statute is intended to accomplish. City of Louisville v. Helman, Ky., 253 S.W.2d 598. And the courts will not give a strict literal construction to a statute where to do so would lead to an absurd or unreasonable conclusion. Com. of Ky., Dept. of Highways v. Wilkins, Ky., 320 S.W.2d 125."
On the rule as to strict literal interpretation and the avoidance of such literalism, within the context of the purpose of the legislation, see also Kentucky Region Eight v. Commonwealth, Ky., 507 S.W.2d 489 (1974) 491; and Newbolt v. Board of Education of Berea Ind. Sch. Dist., Ky., 409 S.W.2d 513 (1966) 514.
Here, it is clear that the purpose of this bond legislation is outlined in KRS 103.210 in the unmistakable language stressing the promotion of economic development of the Commonwealth and the concomitant rate of interest the bonds are to bear. That overall purpose encompasses the concept that the lowest available average interest cost on the bonds should be obtained.
Chapter 122, 1984 session, contains amendments of KRS Chapter 103, and carried a preamble to the effect that statutory authority for previous issues of commercial paper bonds and variable rate bonds by cities and counties pursuant to KRS 103.200 to 103.285 is thereby ratified, approved and confirmed. While a statutory preamble is not considered an essential part of a legislative act, it may be resorted to in interpretation only when there is ambiguity in the statute. Louisville Memorial Gardens v. Carpenter, Ky., 261 S.W.2d 627 (1953).
KRS 103.210(1) contains the provision for a "maximum rate of interest" the bonds are to bear. Implicit in that concept of "maximum rate" (see KRS 103.220(1)) is any lesser rate, including a variable rate and accompanying Repurchasing and Remarketing Agreements to accommodate varying market conditions. The point is that no statute in Chapter 103 pegs interest at a fixed and unchangeable rate, taking into account a maximum rate.
KRS 58.430, as a specific statute on public bond interest rates, clearly authorizes the issuers of the bonds to bind themselves to pay interest at any rate or rates determined by the issuer. That was obviously designed to provide the issuers with rates competitive with other states and to give the issuer the flexibility of staying abreast of developing market conditions as to interest rates. In such manner, the lowest available average interest cost on the bonds may be obtained. In the case of industrial development bonds issued under KRS Chapter 103, this flexible policy is more compelling because of the proprietary nature of such transactions, and the fact that the issuers act as conduits, having no liability as to bond payments. See Faulconer v. City of Danville, 313 Ky. 468, 232 S.W.2d 80 (1950). Constitutional restrictions as to local governmental debt do not apply. Cf. § 157, Kentucky Constitution. Here the bonds will be payable solely from payments required to be made by the company under the Loan Agreement, except to the extent payable from the bond proceeds. So here it is a matter of following the statutory procedure. In Faulconer v. City of Danville, above, the court observed that public purpose reaches its broadest extent under the view that economic welfare is one of the main concerns of the city, state and federal governments.
The proprietary function embraces voluntarily assumed local functions, mainly for a city's own purposes and benefit, or those which are ordinarily exercised by private persons, and are not within the police powers.
Various cases reflect that so long as the basic standard of nonliability of the governmental issuer was assured, virtually any commercial form specified by statute or reasonably implied from the statute was acceptable in the issuance of such bonds. Variable rate bonds were issued for years, and the General Assembly specifically recognized and approved such bonds when it adopted Chapter 122 of the 1984 Acts. See Gregory v. Lewisport, Ky., 399 S.W.2d 133 (1963); Bennett v. Mayfield, Ky., 323 S.W.2d 573 (1959); and White v. City of Hickman, Ky., 415 S.W.2d 379 (1967).
KRS 103.220(1) provides in part that the bonds may be issued to bear interest at a rate fixed by the governing body of the issuer. This is broad enough, when reading the entire statute, to encompass variable rates. The statute, relating to pollution control facilities, provides that at the time of issuance of variable rate bonds, the governing body of the issuer may designate individuals or institutions who in the sole judgment of the governing body have financial market expertise to serve as agent for the issuer for establishing and changing from time to time while such variable rate bonds remain outstanding the rate of interest to be borne by and the price to be paid for the bonds. This obviously must be expanded to apply to industrial revenue bonds, specifically, to the proposed Airport Facilities Revenue Bonds.
CONCLUSION
For the above reasons, it is our opinion that the Authority may lawfully issue variable rate bonds with Put and Remarketing features, as described in your letter, under KRS 103.200 to 103.285, as amended by Chapter 122, 1984 Session, and KRS 58.430.