Request By:
Mr. William Carl Fust
Rubin & Hays
Second Floor North
First Trust Centre
200 South Fifth Street
Louisville, Kentucky 40202
Opinion
Opinion By: David L. Armstrong, Attorney General; Nathan Goldman, Assistant Attorney General
In your letter you ask whether a local school district may make a contractually binding obligation with a local government and the Kentucky School Facilities Construction Commission to permit the interception of certain undisbursed funds payable by the state Department of Education to be paid directly to a payee bank for payment of debt service on school bonds issued by such local government if the local school district fails to make any rental payment when due.
As we understand the facts that you have presented, the Frankfort Independent School District wishes to construct an addition and do renovation to a school building. The City of Frankfort will issue revenue bonds for the entire cost of the project. By having the city issue the bonds rather than the Commission, they may qualify as tax exempt obligations pursuant to Section 265(b)(3) of the Internal Revenue Code of 1986. The Commission would agree to pay a portion of the debt service on the bonds by entering into a Participation Agreement with the local school district, which, in OAG 86-50 we opined, was permitted.
Your question concerns whether a local school district can agree to the interception and transfer of undisbursed funds due it from the state Department of Education, in the event the local school district does not make its payments.
In regard to the bonds issued by the Commission, KRS 157.627(5) allows the Commission to request that the state Department of Education "withhold from the board of education [the local school district] a sufficient portion of any undisbursed funds then held or set aside or allocated to it, and to request that the department transfer the required amount thereof to the commission for the account of the board of education. " There is no similar statute granting a city, as issuer, the same power. You contend that the local school district may, by contract, grant this power.
KRS 160.160 states, in part: "Each board of education shall be a body politic and corporate with perpetual succession. It may . . . make contracts . . . and do all things necessary to accomplish the purposes for which it is created." KRS 160.290(1) states, in part: "Each board shall have control and management of all school funds. . . ."
KRS 157.010 states, in part: "The school fund shall consist of the fund dedicated by the constitution and laws of this Commonwealth for the purpose of sustaining a system of common schools therein. The annual resources of the fund shall consist of: . . . (6) Such sums as are appropriated by the general assembly in aid of the common schools." Funds appropriated by the legislature become a part of the common school fund.
Board of Education of Calloway County v. Talbott, 261 Ky. 66, 86 S.W.2d 1059 (1935). Thus, the local school district has an interest in all funds appropriated to it by the state although as yet undisbursed.
Given that fact, it is our opinion that a local school district may contract to allow funds held for the local district by the state Department of Education to be transferred as directed, assuming all statutory and constitutional requirements relative to the use of those funds, if any, have been met.