Request By:
Department for Local Government
Opinion
Opinion By: Albert B. Chandler III, Attorney General; Vanessa L. Armstrong, Assistant Attorney General
Opinion of the Attorney General
I. Introduction
A number of requests for an Attorney General Opinion have been submitted concerning appropriations by local governments to nonprofit organizations. Such appropriations would come from both city and county governments alike. This opinion does not address those requests specifically. Rather, this opinion should serve as guidance to those governmental entities when they consider appropriating funds earmarked for such organizations.
In rendering this opinion, the Attorney General generally discusses the constitutionality of such expenditures. It must be kept in mind that in addressing the constitutionality of the proposed governmental appropriations only the courts are authorized to make a final, authoritative determination of this precise issue. However, pursuant to KRS 15.020 and 40 KAR 1:020, Section 3, the Office of the Attorney General may render an opinion in this matter.
II. Analysis
A. Section 179 of the Kentucky Constitution
When examining the issue of whether a city or county governmental entity may appropriate monies earmarked for nonprofit organizations, Section 179 of the Kentucky Constitution must be considered. Ky. Const. Section 179 provides, in part:
§ 179. Political subdivision not to become stockholder in corporation, or appropriate money or lend credit to any person, except for roads or state capitol.-- The General Assembly shall not authorize any county, or subdivision thereof, city, town or incorporated district, to . . . appropriate money for . . . any corporation, association or individual, except for the purpose of constructing or maintaining bridges, turnpike roads, or gravel roads; . . .
The primary purpose for this provision is to prohibit public funds from being diverted for private use. Louisville Municipal Housing Commission v. Public Housing Administration, Ky., 261 S.W.2d 286 (1953). As Justice Bert T. Combs noted:
"There was a time when the state was allowed to subscribe, and did subscribe, to the capital stock of various quasi public improvement companies and loaned or gave its credits to such. It was to prevent a repetition of that practice by the state that [section 177] was enacted." It is apparent that section 179 was enacted in order to place upon local governmental units the same general restrictions imposed upon the Commonwealth itself by section 177. The purpose behind both sections was to prevent local and state tax revenues from being diverted from normal governmental channels.
Id., 261 S.W.2d at 288. See also Louisville Bd. of Ins. Agents v. Jefferson County Bd. of Ed., Ky. App., 309 S.W.2d 40, 41 (1957) ("These constitutional provisions were added to the fundamental law of the state to prevent the investment of public funds in private enterprises. . ."). Thus, the question becomes whether public monies are being diverted for private use when local governments appropriate funds to nonprofit organizations.
B. Public Purpose
The Office of the Attorney General has consistently taken the position that governmental appropriations must be for a "public purpose. " This axiom derives from the Constitutional mandate that "taxes shall be levied and collected for public purposes only. . . ." Ky. Const. § 171; See also Industrial Develop. Auth. v. Eastern Ky. Reg. Pl. Com'n, Ky. 332 S.W.2d 274, 276 (1960) ("Obviously if money is appropriated out of the treasury it must be measured by the same test as that by which it is raised by taxation and put into the treasury" ). This is also consistent with an early pronouncement by Kentucky courts that Section 179 requires appropriations to be for a public purpose. See Board of Trustees of House of Reform v. City of Lexington, Ky., 65 S.W. 350, 352 (1901); Carman v. Hickman County, Ky., 215 S.W. 408 (1919).
When examining whether or not a purpose is a "public purpose" the "test [is] not who receives the money, but the character of the use for which it is expended. " Kentucky Bldg. Commission v. Effron, Ky., 220 S.W.2d 837 (1949); see also Hager v. Kentucky Children's Home Society, Ky., 83 S.W. 605, 608 (1904) ("it does not matter whether the agency through which it is dispensed is public or not; that the appropriation is not made for the agency, but for the object which it serves; the test is in the end, not in the means").
The Carman Court opined that it is "extremely difficult to define with accuracy what is a public purpose for which money collected by taxation may be appropriated, although there is, of course, no difficulty in ruling that taxes cannot be appropriated for other than public purposes." Carman, 215 S.W. at 411. The Court further stated:
It is also true that many objects for which money may be appropriated are so clearly public in nature as that there could not well be any difference of opinion on the subject, such, for example, as public schools, public health, and public charities. On the other hand, there are many other enterprises helpful to the public in the community in which they are located, and that contribute very largely to the development and progress of the state, that are so purely private in their nature as not to admit of any doubt about the matter.
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It is not, however, necessary that the whole body of the contributing public shall be directly the recipients of the benefits or advantages accruing from the establishment of the object in aid of which public funds may be set apart. It will be sufficient if it should be of such a character as that it promotes the general welfare and prosperity of the people who are taxed to sustain it.
Id. Additionally, in addressing the "public purpose" concept, the Attorney General has previously relied on McQuillian, Municipal Corporations (3rd Ed. 1995). This treatise addresses the issue of "public purpose" as follows:
All appropriations or expenditures of public money by municipalities and indebtedness created by them, must be for a public and corporate purpose, as distinguished from private purpose, at least, unless the powers of the particular municipality in regard thereto have been enlarged by the legislature, which is itself limited in its power to authorize expenditures or indebtedness for other than public purposes?
Furthermore, the fact that a municipality is expressly authorized to expend a certain sum without specification as to the purpose of the expenditure does not authorize it to expend funds for other than a public purpose . . . Moreover the public purposes for which cities may incur liabilities are not restricted to those for which precedent can be found, but the test is whether the work is required for the general good of all the inhabitants of the city. Further, it is not essential that the entire community, or even a considerable portion of it, should directly enjoy or participate in an improvement in order to make it a public one. Generally, a public purpose has for its objective the promotion of the public health, safety, morals, general welfare, security, prosperity, and contentment of all, or at least a substantial part of, the inhabitants or residents. Otherwise stated, the test of a public purpose should be whether the expenditure confers a direct benefit of reasonably general character to a significant part of the public, as distinguished from a remote or theoretical benefit. . .
What is a public municipal purpose cannot be precisely defined, since it changes to meet new developments and conditions of the times. Indeed, it has been recognized that "public purpose" should be broadly construed to comport with the changing conditions of modern life.
McQuillin Municipal Corporations (3rd ed. 1995), Vol. 15, § 39.19, pp. 38-39.
In light of the foregoing, when deciding whether the appropriation will be for a public purpose, the governmental units should examine whether the receiving organizations provide services that will be for the general good and welfare of their citizens. "It is well settled that a private agency may be utilized as the pipe-line through which a public expenditure is made, the test being not who receives the money, but the character of the use for which it is expended. " Effron, 220 S.W.2d at 837.
C. Connection and Control
The Office of the Attorney General has taken the position that public funding must also meet the "connection and control" test. OAG 78-205, 78-516, 79-67, 83-366. The Attorney General has opined:
In McQuillin Municipal Corp. (3d Ed.), Vol 15, Section 39.19, the author further states that municipality has no power, unless expressly conferred by constitutional provision, charter or statute, to donate municipal funds for private purposes to any individual or company not under the control of the city and having no connection with it.
OAG 79-67 (emphasis added). The Office has construed this provision to require that appropriations made to such organizations be earmarked and used for a public purpose and subjected to proper budgeting documentation and approval. However, this latter requirement is not expressly mandated by the case law. In fact, one court stated that no such control is necessary, "if [the fiscal court] was satisfied that the management would be as faithful and beneficent without its control as with it, and would contribute as much to the welfare [of the public]." Jefferson County v. Jefferson County Fiscal Court, Ky.App., 299 S.W. 209, 210 (1927).
Accountability for such appropriations while not necessarily mandated by the case law is certainly a sensible requirement. In addressing similar appropriations in light of Ky. Const. Section 179, the Kentucky courts have found such appropriations constitutional in part because governmental units have exercised some control and accountability over the expenditures. See, e.g., Hager v. Kentucky Children's Home Society, Ky., 83.S.W. 605 (1904); O'Bryan v. City of Louisville, Ky., 382 S.W.2d 386, 189 (1964) (funding was "subject always to the advice, approval, and direction of the city"). Thus, accountability appears to be a criterion considered when determining whether an appropriation is for a public purpose. Further, accountability is a safeguard that insures public funds are being used for the intended public purpose. As the Hager Court cautioned, when abuses of such appropriations occur, the people can rectify and control this problem for "they have reserved to themselves that power over their representatives in matters of legislation." 83 S.W. at 610.
III. Home Rule
The General Assembly enacted statutes which have been commonly referred to as Home Rule acts. See, e.g. , KRS 67.083 et seq. In KRS Chapter 67, the General Assembly defined the duties of the fiscal court. It also identified certain expenditures to be included in its annual budget. KRS 68.240. It has been suggested that the fiscal court is authorized to appropriate funds for those organizations, which provide services of a public nature, so long as the services rendered are consistent with those duties set forth in the Home Rule act.
While the Home Rule act empowers counties to appropriate funds for specific governmental functions, it is the constitution of this state which is supreme. Fiscal Court of Jefferson County v. City of Louisville, Ky., 559 S.W.2d 478 (1977). There, the Supreme Court of Kentucky examined the constitutionality of the Home Rule act, which had given county fiscal courts essentially carte blanche authority to administer county government to the same extent as if the General Assembly had expressly granted and delegated to the fiscal courts all the authority that is within the power of the General Assembly. The Court found that the grant of authority was overly broad. In reaching its decision, the Court observed that:
[The constitution] is ordained and established by the people. . . . All legislation must conform to the principles established by the constitution . When an act of the legislature is appropriately challenged in the courts as not conforming to the constitutional mandate, this court has only one duty 'to lay the article of the constitution which is invoked beside the statute which is challenged and to decide whether the latter squares with the former.' . . . [The Court's] function is to 'ascertain and declare whether the legislation is in accordance with or in contravention of the provisions of the constitution.'
Id. 559 S.W.2d at 481; see also OAG 68-534 ("unless the power to [appropriate public funds for private use] has been expressly designated by the Legislature within constitutional authorization , the municipality has no power to donate money . . . or otherwise aid a private corporation.") (emphasis added). Thus, the appropriations outlined in the Home Rule act may be perfectly lawful as long as they are consistent with Section 179 of the Kentucky Constitution. See , Section II(A), (B), and (C), infra . Yet, when defining a "public purpose, " Kentucky courts show great deference to the Legislature's definition. See Industrial Develop. Auth., 332 S.W.2d at 276. There, the Court observed:
Who is to determine what is a 'public purpose' ? The legislature is given this primary duty . . . . 'This determination of what constitutes a public purpose is primarily a matter for legislative discretion * * * which is not disturbed by the courts so long as it has a reasonable basis.'
Id. (citation omitted). Thus, the Home Rule act provides guidance to the governmental units, when they determine whether a specific appropriation is for a "public purpose. " But in the end, Section 179 of the Kentucky Constitution and cases interpreting this provision govern.
IV. Conclusion
Section 179 of the Kentucky Constitution is designed to protect the public funds from being diverted for private use. Nevertheless, as Justice Ed. C. O'Rear eloquently reasoned:
Whatever doubts may be existing concerning the constitutionality of the act[s] in question must, under familiar and wise rules of construction, be resolved in favor of its constitutionality. And especially should this be so when such construction tends to support a highly beneficent object, well worthy of the care and attention that government has given it.
Board of Trustees of House of Reform, 65 S.W. at 353. It is for the local governmental units to determine if the appropriation is for a public purpose. This Office is, therefore, of the opinion that appropriations, which are earmarked and used for a public purpose, are a lawful use of public funds and are consistent with Section 179 of the Kentucky Constitution.