Request By:
Lee Troutwine
Commissioner
Department of local Government
Capital Plaza Tower
Frankfort, Kentucky 40601
Opinion
Opinion By: Frederic J. Cowan, Attorney General; Thomas R. Emerson, Assistant Attorney General
Your letter asks whether the city council or the municipal utility commission has the authority to engage an accounting firm to audit the operations of the municipal utility commission.
KRS 91A.040, relative to the annual municipal audit, provides in part in subsection (1), that, "Each city of the first through fifth class shall, after the close of each fiscal year, cause each fund of the city to be audited by the Auditor of Public Accounts or a certified public accountant. "
While KRS 96.350 in part authorizes a city of the fourth class to operate a waterworks and sewage system, there is no specific statutory authorization for the creation of a governing board to operate those particular utility services. The Court, however, in the case of Keathley v. Town of Martin, Ky., 246 S.W.2d 152 (1951), held that even though there is no statutory authority for the creation of such a commission, a city has the legal authority to set up an administrative board to operate the utility services in question. Note also that while the city may create such a utility commission, it may, at its discretion, abolish the commission it has created provided its existence was not made a part of the contract between the city and the utility bond holders. See City of Elizabethtown v. Cralle, Ky., 317 S.W.2d 184 (1958). In addition, we are enclosing copies of OAG 68-549, OAG 73-527, OAG 77-694 and OAG 78-662, all of which at least in part deal with the creation of utility commissions by the enactment of an ordinance.
In the situation with which you are concerned the city evidently enacted ordinances pursuant to the judicial authority mentioned above. The ordinances are supposed to constitute contracts between the city and the bond holders. There is no mention or allegation by the two sides relative to the abolishment of the utility commission. Nobody is even questioning that the utility commission is subject to an annual audit. The issue is whether the city or the utility commission arranges for the audit and selects the accountants to perform that audit.
Neither the city nor the utility commission makes reference to KRS 91A.040(1) relative to an audit of each fund of the city. While the courts have authorized the creation of a municipal utility commission to operate water and sewer services, the board or commission created by the city is not a separate corporate body, independent of the city, but an agency of the city. See OAG 82-218, copy enclosed, at page three.
Section 21 of Ordinance 417 provides in part that the "City will cause an audit of the financial affairs of the Project to be prepared by an independent public accountant or by a state auditing official." Section 27 of that same ordinance, which the utility commission cites as support for its position, provides that "all duties to be performed, including the fixing of rates and charges for the commodity sold and services rendered by the Project, shall be performed by said Utility Commission to the greatest extent permitted by law."
Section 27 never specifically refers to an audit and it does limit the utility commission's authority to the "extent permitted by law." Ordinance 282 merely requires an annual audit with no provisions as to who makes the necessary arrangements.
One of the purposes for a somewhat independent utility commission is undoubtedly to remove it from politics and political considerations. While the existence of a utility commission can be made part of the terms of the contract between the city and the utility bond holders, it is difficult to see how the commission's integrity, efficiency and latitude to operate the utility services will be compromised by the city's selection of the accountants to perform the required annual audit. This would be so even if KRS 91A.040 did not exist. After considering the provisions of KRS 91A.040 and the sections of what appear to be the applicable ordinances, it would be our opinion that the city should arrange for and select the accountants to perform the required annual audit of the municipal utility commission.