March 31, 1994
Ms. Linda K. Ain, Esq.
Lexington-Fayette Urban County Government
Department of Law
200 East Main Street
Lexington, Kentucky 40507
Re: Collateralization Requirement - KRS 66.480/41.240(4).
Dear Ms. Ain:
By letter of November 11, 1992, you asked that this office provide an opinion regarding the requirement of collateralization under KRS 66.480. Your letter indicated that an audit report of the State Auditor, for the 1992 Sheriff's Quietus, included a comment that all deposits, not just "collected" funds, are subject to the collateralization requirements of KRS 66.480.
In our view, the full amount of "deposits" made pursuant to KRS 66.480, exceeding the amount insured by an agency of the United States government, not just "collected funds," are to be "collateralized" as called for by KRS 66.480(1)(d). Discussion follows.
KRS 66.480 (1)(d)
KRS 66.480(1)(d) provides that a local governmental unit or political subdivision may invest and reinvest money subject to its control and jurisdiction in:
Interest-bearing deposits in national or state banks chartered in Kentucky and insured by an agency of the government of the United States up to the amount so insured, and in larger amounts, providing such bank shall pledge as security, obligations as permitted by KRS 41.240(4), having a current quoted market value at least equal to any uninsured deposits. No municipality, county, school district, other unit of local government, political subdivision, or county official shall make any investment which would jeopardize the tax-exempt status of any outstanding obligation of such unit of local government[.]
The requirement, in the provision quoted above, that certain obligations be pledged as security or "collateral" for uninsured deposits, is the source of "collateralization" under KRS 66.480 referred to in your letter.
Audit Comment, Fayette County Sheriff's 1991 Tax Settlement
A report of the Auditor of Public Accounts, upon audit examination of the Lexington-Fayette Urban County Government Sheriff's Settlement for 1991 taxes, contained the following comment and recommendation:
Pledges Of Security Were Insufficient And Should Be Increased.
During the month of December 1991, tax deposits for seven days ranged from $3,266,456 to $8,220,844, which was in excess of the $2,000,000 of pledged securities and Federal Deposit Insurance Corporation coverage of $100,000. This is in violation of KRS 66.480 which requires deposits in excess of legally insured amounts to be covered by pledges of securities. We recommend that pledges of securities be obtained in amounts that fully collateralize deposits.
Lexington-Fayette Urban County Finance Department View
Your letter to this office indicates that:
The Lexington-Fayette Urban County Government Department of Finance has researched various banking regulations and accounting standards and has concluded that the policy of collateralizing only "collected" funds is consistent with banking regulations and safeguarding government assets. The Department of Finance has presented their research to the State Auditor's Office, however, the State Auditor's Office did not change the audit comment.
Statutory Language Controls Over Banking Regulations, Etc.
In our view, KRS 66.480(1)(d), quoted above, establishes a statutory requirement (as distinguished from "policy" under "various banking regulations and accounting standards") that deposits of local governmental monies in institutions specified in such provision, exceeding the amount insured by an agency of the government of the United States, must be "collateralized" by a pledge of obligations, as permitted by KRS 41.240(4), "having a current quoted market value at least equal to any uninsured deposits."
We believe the plain words of KRS 66.480 require, in substance, "collateralization," of the full amount of the deposits of a local governmental unit in a subject institution, to the extent such deposits exceed the amount insured by an agency of the United States government. Words used in the statutes are to be interpreted in accordance with their common and everyday meanings. See KRS 446.015. The common and everyday meaning of the term "deposits," as used in KRS 66.480 with regard to "uninsured deposits," in our view, refers to the total value of such "deposits," which includes items that have not yet been "collected" by the institution in which a deposit has been made given check processing or clearance time.
Your letter indicates that the Urban County's Department of Finance has "researched various banking regulations and accounting standards" and concluded that "the policy of collateralizing only 'collected' funds is consistent with banking regulations and safeguarding of public assets."
We believe, however, that the concern expressed in the audit report cannot be properly answered by resort to "various banking regulations and accounting standards publications." Instead, the concern must be answered by interpretation of the words used in KRS 66.480. Such words must be interpreted in accordance with their common and everyday meanings. KRS 446.015. "Deposits," in common and everyday meaning, means the full amount of "deposits," not just that portion of deposits that have been "collected" at any given time.
Attachments mentioned in your letter apparently did not accompany your letter when it was received by this office. We obtained a copy of what appears to be the pertinent part of the audit report mentioned in your letter, but did not have other materials that might have been intended to accompany your letter to this office. If, despite the views expressed here, you believe we should consider points made in such attachments, would you kindly forward them to us together with any explanation that might be appropriate in view of this response.
We apologize for the lengthy delay in responding to your request.
Gerard R. Gerhard
Assistant Attorney General