OAG 94-2

January 7, 1994

Kenneth F. Harper

State Representative

Committee For Program Review And Investigations

Capitol Building

Frankfort, Kentucky 40601

Dear Representative Harper:

This letter responds to your recent questions regarding KACo and its affiliated programs.

Your first question is:

Is the KRT Insurance Company, Inc., a violation of KRS 304.3-080(1) because it was formed as a result of an interlocal agreement between Marshall County and Pendleton County, and the funding was derived from issuance of revenue bonds from these counties?

KRS 304.3-080(1) states:

No certificate of authority or license to transact any kind of insurance business in this state shall be issued, renewed or continued in effect to any domestic, foreign, or alien insurance company or other insurance entity which is owned, or financially controlled in whole or in part by any state of the United States, or by a foreign government or by any political subdivision of either, or which is an agency of such state, government or political subdivision, unless such company or entity was so owned, controlled or constituted prior to January 1, 1957, and was authorized to do business in this state on or prior to January 1, 1957.

As we stated in OAG 94-1, the invocation of the interlocal cooperation act does not permit Pendleton and Marshall Counties to create a trust which in turn owns stock in a corporation. The statute that you have cited provides the converse of that proposition: an insurance company cannot be owned by a county. However, the statute merely prohibits the insurance commissioner from issuing a certificate of authority to such a company; it does not prohibit the conduct of business by the company if it has been licensed by the Department of Insurance. Therefore it is not a violation for the company to conduct insurance business within the scope of its license. That license could be subject to revocation, however, under KRS 304.3-190 if the Department of Insurance determines that the license should not have been issued in the first place.

Your second question is:

The Management Review conducted by the Auditor of Public Accounts on KACo and related programs, the counties that issued the bonds to finance KALF and KRT may be liable for their repayment. If there is a bond default or large claims, is there any possibility that Marshall and Pendleton Counties could be liable to the bondholders, the letter of credit bank or for any claims. If all the legally available funds for the project are exhausted, what would be the liabilities of the two counties?

The bonds in question, at least regarding KRT, were revenue bonds rather than general obligation bonds. "The term 'revenue bonds' is a descriptive qualification indicating that the instruments are payable solely from a revenue producing public project." Dalton v. State Property and Buildings Commission, Ky., 304 S.W.2d 342, 352 (1957). A more descriptive definition is provided in 64 AmJur2d, Public Securities and Obligations � 420:

Generally speaking, revenue bonds are bonds issued by a state or a political subdivision in connection with the construction, maintenance, or operation of some enterprise or project, such as a publicly owned or operated utility, a bridge, or a dormitory for a state university, etc. The statutes under which the bonds are issued, and the terms and conditions in the bonds themselves, state clearly that they are payable solely from the income, revenue, or proceeds of the enterprise or project to acquire, build, or operate which they were issued. Hence, they are bonds payable from a special fund, are not the general obligations of the issuing public body, and are not payable from its general resources raised by taxation.

Revenue bonds are not subject to constitutional limitations on public indebtedness. Rivers v. City of Owensboro, Ky., 287 S.W.2d 151 (1956).

The bond statement for the KRT bonds clearly denominates the bonds as "Revenue Bonds, Series 1990." On page 1 of the attachment to the statement this provision appears:

The Bonds are not general obligations of KRT but are limited obligations, payable from (i) payments to be made to KRT by the Company under the Surplus Note and Stock Repurchase Agreement described below, . . . and (ii) amounts deposited to the credit of the funds and accounts held by the Trustee . . . .

It is our understanding that all the KACo bonds were issued as revenue bonds.

The classification of these bonds as revenue bonds is significant because the issuing agency is protected from general liability on the bonds. Thus, even if a court were to construe the KRT bonds as having been issued by Pendleton and Marshall Counties rather than by the trust, the counties still would not be liable on the bonds except to the limited extent of the funds available from sources specified in the bond statement. Therefore, based on what we know of the transactions in question, we do not foresee any substantial likelihood that the counties will be held liable on the bonds.

We appreciate the assistance of the Legislative Research Commission in furnishing us with written materials that provide the factual background for this opinion. Because the KRT bond issue was a complex undertaking, we have no way of ascertaining whether there are additional documents or facts that could affect the conclusions we have reached. Our opinion is, of course, based on the situation as it has been presented to us; a definitive answer to the questions can be provided only through court action.


Chris Gorman

Attorney General

Ross T. Carter

Assistant Attorney General