Request By:
Hon. Vic Hellard, Jr.
Director
Legislative Research Commission
The Capitol
Frankfort, Kentucky 40601
Opinion
Opinion By: Frederic J. Cowan, Attorney General; Nathan Goldman, Assistant Attorney General
In your letter to the Attorney General, you state that the Kentucky Development Finance Authority ("KDFA") intends to issue bonds for its loan program without the approval of the General Assembly. You cite two provisions, KRS 56.870(1) and 307 KAR 1:010, which you believe prohibit this. You ask for our opinion.
KRS 56.870(1) requires approval by the General Assembly of any bond issue. Subsection (3) of the statute exempts from this approval provision:
the financing of any project in any case where the project for which financing is proposed is certified by the governor . . . to be of such type as to independently produce revenues sufficient to fully meet debt service on such financing so that no appropriation of state general funds will be required.
KDFA was created pursuant to KRS 154.005 - 154.180. Its powers are set out in KRS 154.041. Basically, it may "[m]ake grants, loans, and investments," KRS 154.041(3) and "[b]orrow money and issue bonds and notes to finance part or all of the costs of a project," KRS 154.041(5). As we understand it, KDFA lends money to businesses for specific projects or else it issues bonds to finance a specific project. These bonds are repaid from the lease payments of the benefited business. Consequently, no general funds are involved and no General Assembly approval is necessary for their issuance. See, for example, OAG 83-453.
The bond issue contemplated here differs from the typical KDFA transaction because it will not finance a specific project. Rather, it will generate a pool of funds to be lent to qualified businesses for various projects. KDFA intends to use its current proceeds from past loans to leverage this bond issue.
You contend that such leveraged use would necessitate General Assembly approval because the current proceeds are a result of loans made pursuant to two previous bond issues: a $50,000,000 issue in 1982 and a $5,000,000 issue in 1986. The debt service for these two issues is provided through a biennial General Fund appropriation. Both issues were approved by the General Assembly. You state as follows:
The loans made from the proceeds of the two issues are pledged as security to the bondholders, and, in the event of default, the loan portfolio would be assigned to the bondholders who would then receive the loan payments, and no agency receipts would be available to service the new debt.
We have been informed that only the 1982 issue is involved in the proposed transaction. That issue of $50,000,000 was issued as State Property and Buildings Commission Revenue Bonds Project No. 34 ("Project No. 34"). The Commission, acting as lessor, then leased the proceeds to KDFA and the Commerce Cabinet as lessees. The lease is for renewable two-year terms. The lessees are responsible for making lease payments to the Commission. The lessees have covenanted and agreed in the lease to seek an appropriation from the General Assembly every two years sufficient to pay the lease payments to the Commission. See, Section 9.01 of the Lease Agreement, and Page 8 of the Official Statement for Project No. 34. The General Assembly, of course, is not legally bound to make such an appropriation and there is no assurance to the bondholders that such an appropriation will be made. If the appropriation is not made, the Commission may not be able to pay the principal and interest on the bonds. Official Statement, pp. 8 - 9.
The funds which KDFA proposes to use for the bond issue are repayments of loans to businesses made from the $50,000,000 it was loaned by the Commission. These repayments must be deposited in the Facilities Establishment Fund (the "Fund"), which was created by KDFA. They can then be used to make other loans.
According to the documentation for Project No. 34, the bondholders of Project No. 34 bonds have no claim whatsoever against any monies in the Fund, program loans, income derived from investment of monies in the Fund or repayments in respect of program loans. See, the Official Statement for Project No. 34, p. 9; the Lease Agreement, Section 9.02; the Indenture of Trust, Subsections 203, 402 and 502. Moneys in the Fund may be used only to make program loans. See, Section 8.03 of the Lease Agreement and Section 402 of the Indenture of Trust.
Based on the foregoing analysis of the nature of the funds available to KDFA to be used as debt service for the proposed bond issue, we do not believe that KRS 56.870(1) is involved. Rather, subsection (3) of that statute would exempt this issue from the need for legislative approval.
It is a general principle of statutory construction that the words of a statute are to be given their usual, ordinary and everyday meaning.
Gateway Construction Co. v. Wallbaum, Ky., 356 S.W.2d 247 (1961). The term "appropriation of state general funds", as used in KRS 56.870(3), in its ordinary sense refers to a positive act of the General Assembly in allocating funds from the State Treasury. See, e.g.,
Miller v. Sturgill, 304 Ky. 823, 202 S.W.2d 632, 634 (1947). Since no appropriation has been made or needs to be made for the proposed bonds, no legislative approval is necessary.
KRS 56.870(3) also uses the words:
. . . the financing of any project in any case where the project for which financing is proposed is certified by the governor . . . to be of such type as to independently produce revenues sufficient to fully meet debt service on such financing. . . .
The word "project" is not defined in Chapter 56. The word "project" is defined in KRS 154.010(6) as relates to KDFA. It is defined there as:
. . . an endeavor approved by the cabinet for economic development and related to industrial, manufacturing, mining, mining reclamation for economic development, commercial, health care, or agricultural enterprise . . .
"Endeavor" is defined by Webster's Third New International Dictionary as "a serious determined effort."
If a project as referred to in KRS 56.870(3) has the same meaning as project as defined in KRS 154.010(6), then KRS 56.870(3) would be broad enough to encompass the proposed bond issue. There is some historical support for this interpretation since at least one previous issue did not specifically identify a particular project but made a pool of funds available for various entities to draw on. That issue was the KDFA Variable Rate Demand Revenue Bonds (Pooled Loan Program), 1985 Series A ("1985 Hospital Pool" ).
You also ask whether 307 KAR 1:010 would prohibit this issuance. That is a regulation which was promulgated by the Economic Development Cabinet concerning KDFA. Section 3 of that regulation states:
Moneys in the Facilities Establishment Fund may never be transferred to any other unit of government of the Commonwealth and may never be used or applied, directly or indirectly, for any purpose except the making of program loans.
The regulation prohibits the indirect use of this money for any purpose except making program loans. It does not prohibit the use of this money for the indirect making of program loans. Consequently, we cannot say that the regulation is violated.
Furthermore, the agency which promulgated the regulation is interpreting it as permitting this transaction. The construction by an administrative agency of one of its own regulations is entitled to great weight in determining the meaning of the regulation.
J.B. Blanton Co. v. Lowe, Ky., 415 S.W.2d 376 (1967).
You have, by subsequent letter, also raised the question of the effect of certain language in the Statutory Final Enacted Budget Memorandum (the "Budget Memo").
KRS 48.300(2) states that prior to the passage of a budget bill, the appropriations committees of the General Assembly shall prepare a Budget Memo. The purpose of the Budget Memo is to:
. . . enumerate the changes made by the appropriations committees in a branch budget recommendation, and shall explain such changes in detail sufficient to convey the intent of the appropriations committees.
Following this Budget Memo, the General Assembly must pass a budget bill. This was done in 1988 by passage of House Bill 516. See, Appendices to KRS Chapter 47.
In
Armstrong v. Collins, Ky., 709 S.W.2d 437 (1986), the Kentucky Supreme Court held that a budget bill may repeal, suspend or modify substantive existing statutes. However, KRS 48.310(2) states:
No budget bill shall contain language which exempts the budget bill or any appropriation or the use thereof from the operation of a statute. Any language in a budget bill in violation of this section shall be null and void.
The Budget Memo, on the other hand, does not have the same power as the budget bill to affect statutes. In OAG 84-314, we questioned whether the Budget Memo could mandate any action by an executive branch agency.
The language that you refer to in the 1988 Budget Memo is found at page 53 and states:
The Branch Budget recommends continuation of current loan programs plus the new bond authority for $5 million per year for incentive loans. The General Assembly provides continuation of current loan programs without new bond authority.
The $5 million per year sought by KDFA would have required legislative approval pursuant to KRS 56.870(1). It could be argued that the Budget Memo evidenced an intent to deny KDFA only the authority to issue those bonds which required General Assembly approval. We cannot see how the referred-to language in the Budget Memo could affect the proposed issue which does not need General Assembly approval.
However, if an ambiguity does exist, KRS 48.500 provides a procedure for interpretation. That statute states that if a question arises as to the meaning of an item in the budget bill, then the Secretary of the Finance and Administration Cabinet must make a decision in conformance with the Budget Memo and transmit that decision to the Interim Joint Committee on Appropriations and Revenue. If the Committee disagrees with the decision, the Secretary may not implement his decision unless (1) he complies with the objections of the Committee or (2) the Committee is informed in writing that the decision will be implemented regardless of the Committee's objection. This statute has been held constitutional.
LRC v. Brown, Ky., 664 S.W.2d 907 (1984). We would recommend that this procedure be followed to resolve any question concerning the Budget Memo.
In conclusion, based on the facts as presented to us, we are of the opinion that, in answer to your specific questions, KDFA may issue the proposed bonds without legislative approval pursuant to KRS 56.870(3).