Opinion ID: 1576271
Heading Depth: 2
Heading Rank: 1

Heading: A Lending of Credit

Text: The present legislation offers as the reason this transfer is not a donation that it will be paid for by incremental taxes. But if we accept the proposition that Toyota is going to pay for the property through future taxes, the state has surely lent the money in the meantime. It is a lending of credit because, as stated in the previous section, technically there is supposed to be no other security for the bondholders except the state's promise to provide for payment of debt service in biennial appropriations from the general fund. For each two-year period, as well as future periods, it is the credit of the Commonwealth, and nothing else, to which the bondholder must look for payment. The bond issuer, State Property and Buildings Commission, has neither proprietary nor possessory interest in the project or the project site. Thus, unlike previous bond issues, the issuing agency, the State Property and Buildings Commission, is a mere conduit, but not a stakeholder. Toyota Corporation is the stakeholder but it has no obligation to generate funds for bond service; not even an obligation to generate incremental taxes. If it fails to generate incremental taxes, Toyota has no obligation unless and until it elects to convey the entire project site to some third party. At that time, for the first time, it will be required to make up the calculable difference, if any, between the total of incremental tax revenues accruing since the time the property was conveyed to Toyota and the agreed $35,000,000 value of the property. This hypothetical contingent liability supplies no security for the bonds. The reasonable expectation that the Commonwealth will see to the payment of the bonds is the only security, or there is no security. In past cases there has been, theoretically, a state owned project generating an identified source of revenue to pay off the bonds, even though appropriations from the state treasury provide the debt service. Here, the Act provides no source of revenue for the money that will be used to repay the bonded indebtedness. For debt service purposes it is irrelevant whether incremental taxes are ever collected. The obligation to pay the bonds has no connection to the incremental taxes which the state hopes to generate by the Toyota Project. The incremental taxes are not even credited against the rent. The Commonwealth's credit is all that stands behind the bonds. There is no escape from the fact that SB 361 and the Finance Agreement between the Commerce Cabinet and the State Property and Buildings Commission represent to the buying public that the state has arranged to pay the debt service on the bonds from the general fund. This representation is either a lending of the state's credit or a misrepresentation, and we will not designate it the latter. In McGuffey v. Hall, Ky., 557 S.W.2d 401 (1977), we declared unconstitutional an arrangement whereby the state established a Claimant's Compensation Fund to pay medical negligence claims against private health care providers. Although payment of claims would be funded entirely by assessments against members of the fund, because the enabling legislation provided that state money could be temporarily advanced, if necessary, if a shortage should occur in the money available in the fund to pay claims, we held this was an unconstitutional pledge of the state's credit. We held that the prohibition against the pledge of credit aspect of Constitution § 177 does not hinge on whether the legislation achieves a public purpose when the pledge benefits private individuals. The legislation was written to achieve the availability of medical care, a public purpose comparable to promoting employment which is the avowed purpose of SB 361. In McGuffey v. Hall , we said: It [§ 177] is a `clincher,' making certain that if perchance some court might hold a contingent or secondary liability not to be a `debt' under Const. § 50, it would nevertheless fall under the interdict of Const. § 177. Id. at 411. In the present situation where the entire project will be owned by a private corporation, the constitutional prohibition against pledging the state's credit for the benefit of a private corporation is not avoided by the budget appropriation device, because the only security for payments on the bonds for the current biennium, as well as in futuro, is the state's credit. As we held in McGuffey , although § 177 does not prohibit using the state's credit to back the financial integrity of one of its own agencies, it prohibits legislation to do so for any private person, even temporarily, and even though it serves a public purpose. I have already discussed why the future incremental tax concept in SB 361 does not satisfy any payment obligation on Toyota's part. But if we adopt the opposite premise, then the fact that conveyance occurs at the inception of the financing triggers the prohibition against temporary lending of credit to a private individual or corporation as declared unconstitutional in McGuffey v. Hall, supra . Any way one chooses to view the matter, the incremental tax concept does not suffice to circumvent § 177.