[1996/oagheade.htm]

OAG 96-4

January 17, 1996

Subject: Prevailing Wage

Written By: Diane Schuler Fleming

Requested By: Frank H. McCartney

Syllabus: A nonprofit corporation, created pursuant to KRS 58.180, to act as the instrumentality of the county in the financing of public projects, may be exempt from paying the prevailing wage on public works projects if it is proven to be a mere alter ego of the county.

OAGs Cited: OAG 86-73; OAG 76-638

Statutes Construed: KRS 337.505; 337.010(3)(d); 337.010(3)(e); KRS 58.180

Constitutional Provisions cited: Kentucky Constitution �158

OPINION OF THE ATTORNEY GENERAL

The following question has been presented:

Is a project proposed by the Fleming County, Kentucky Public Properties Corporation subject to paying the prevailing wage rates pursuant to KRS 337.505 to 337. 550?

I.

The Fleming County, Kentucky Public Properties Corporation

The Fleming County, Kentucky Public Properties Corporation is a nonprofit, no-stock corporation for the performance of public, civic and governmental purposes. (See, Article I of the Articles of Incorporation.) The corporation is organized exclusively to cooperate with, and to act on behalf of, at the direction of and as the agency, instrumentality and constituted authority of, the County in the development and financing of public projects undertaken by the County. The corporation's Board of Directors is comprised solely of the seven members of the Fiscal Court of the County. (See, Article VII of the Articles of Incorporation.) It is the corporation's position that it is merely an alter ego of Fleming County, organized to enable the county to incur debt beyond the period of one year.

II.

County Public Works Projects

County governments engage in a number of public works projects each year, the cost of which can be substantial. An important factor in the calculation of the budget for a public works project is whether or not prevailing wage rates must be paid. The General Assembly has enacted a series of statutes setting guidelines for the payment of the prevailing wage.

A. Statutory Provisions and the Kentucky Constitution

In Kentucky, when a public authority contracts with laborers to complete a public works project, the laborers must be paid the prevailing wage as set forth in KRS 337.505. A public authority is defined as:

[a]ny officer, board, or commission of this state, or any political subdivision or department thereof in the state, or any institution supported in whole or in part by public funds, including publicly-owned or controlled corporations, authorized by law to enter into any contract for the construction of public works and any nonprofit corporation funded to act as an agency and instrumentality of the government agency in connection with the construction of public building facilities.

KRS 337.010(3)(d).

The legislature defined public works in KRS 337.010(3)(e). Not only does this statute enumerate several examples of public works projects, but perhaps more importantly, it grants specific exemptions. It states:

`Public works' includes all buildings, roads, streets, alleys, sewers, ditches, sewage disposal plants, waterworks, and all other structures or work except for buildings constructed as institutions of learning constructed under contract with any public authority. However, the provisions of this section shall not apply to construction conducted by a city, county, urban-county government, or school district unless such construction is financed with fifty percent (50%) or more of state funds.

Read together, these sections compel a public authority to pay the prevailing wage for all public works projects, except buildings constructed as institutions of learning, or any construction conducted by a local government or school district, unless such projects are financed with fifty percent or more of state funds.

Therefore, if a county enters into a contract to build a prison, for example, the county will not have to pay the laborers the prevailing wage, unless it is financed with fifty percent or more of state funds. However, it should be noted that the Kentucky Constitution places specific limits on the amount of indebtedness that a county can incur. Section 158 states in relevant part:

Cities, towns, counties, and taxing districts shall not incur indebtedness to an amount exceeding the following maximum percentages on the value of the taxable property therein, to be estimated by the last assessment previous to the incurring of the indebtedness: Cities having a population of fifteen thousand or more, ten percent (10%); cities having a population of less than fifteen thousand but not less than three thousand, five percent (5%); cities having a population of less than three thousand, three percent (3%); and counties and taxing districts, two percent (2%), unless in case of emergency, the public health or safety should so require. . . .

To avoid violation of this provision, a county can create a nonprofit corporation, such as the Fleming County, Kentucky Public Properties Corporation, to enter into contracts on its behalf and incur debt.

B. The Use of Nonprofit Corporations to Finance

A Public Project Undertaken By A County

In 1976 the General Assembly enacted KRS 58.180, entitled “Creation of nonprofit corporation to act as an instrumentality of governmental agency in the financing of public projects.” These corporations enable a county to engage in a public works project even if the cost would exceed the constitutional limit. Specifically, such corporations are authorized to issue bonds, notes or other obligations on behalf of the county provided that upon their retirement or discharge, title to the public project will vest in the county. KRS 58.180(2). More importantly, the debt does not accrue to the county, but rather to the corporation itself.

Therefore, through the enactment of KRS 58.180, the legislature has made it possible for a county to engage in expensive public works projects without violating the state constitution. Pursuant to this statute, a county can create a nonprofit corporation, which acting as the agency and instrumentality of the county can contract for public works projects. This is exactly what Fleming County did when it created the Fleming County, Kentucky Public Properties Corporation.

III.

Analysis

We have been presented the question of whether or not a hospital renovation contract for the Fleming County, Kentucky Public Properties Corporation is subject to the prevailing wage rates set forth in KRS 337.505 et. seq. When analyzing a statute and applying it to a given set of facts, care should be taken not to do so in a vacuum. Rather, it should be read in context with any other applicable statues. In addition, a review of the legislative history of the statute and interpretation by the courts is often instructive. In the present case, it is important to consider the interplay between KRS 58.180 and legislation on the prevailing wage, and juxtapose it with the courts' decisions.

When KRS 58.180 was enacted in 1976, all public authorities, including counties, were required to pay the prevailing wage. Shortly thereafter, OAG 76-638 was issued which determined that the Elizabethtown Public Properties Holding Company, Inc., did not meet the definition of a “public authority” and thus was exempt from paying the prevailing wage. (The definition of a public authority did not encompass nonprofit corporations at that time.) The debate over who was required to pay the prevailing wage began to heat up.

The next meeting of the legislature in 1978 saw the passage of an amendment to KRS 337.010(3)(d). The definition of a “public authority” was extended to include non-profit corporations funded to act as an agency or instrumentality of a governmental agency. This effectively closed the loophole created by KRS 58.180 and OAG 76-638. Thus, all counties and any nonprofit corporations formed to act on their behalf would be required to pay prevailing wage rates on all public works projects.

In the early 1980s, the courts entered the arena in an effort to determine who should be required to pay the prevailing wage. Their reasoning is both instructive and determinative of the case at hand. The first case of note is Hardin Memorial Hospital, Inc. v. Land, Ky.App., 645 S.W.2d 711 (1983).

In 1980 the Hardin Fiscal Court approved the creation of a nonprofit corporation to run Hardin Memorial Hospital. The fifteen members of the hospital board became the board of directors. A lease was entered into whereby the corporation would manage the hospital and pay the Fiscal Court rent in the amount of one dollar per year. The County owned the land on which the hospital was built and the Fiscal Court had ultimate control of the hospital. It could remove the hospital's directors at will, and appoint members of the hospital's board of trustees as it saw fit. In sum, the County was in complete control.

When the hospital decided to begin a major renovation project, it took the position that it was not a “public authority” as defined by the statutes in effect at that time, and therefore, did not have to pay the prevailing wage. The Court of Appeals carefully examined the facts and the applicable legislation. It noted that in 1978 the definition of “public authority” in KRS 337.010(3)(d) was amended to include “any non-profit corporation funded to act as an agency and instrumentality of the government agency in connection with the construction of public building facilities . . . .” This it said would have the effect of closing a commonly used loophole to avoid paying the prevailing wage. Id, at 714. Hardin Memorial Hospital, Inc., fit squarely within the definition of a public agency.

Following an examination of the company's Articles of Incorporation, the Court stated its opinion that the corporation was merely an alter ego of the Hardin Fiscal Court, a conduit through which it still retained full ownership of the property and management of the hospital itself. Id. This being the case, the Court held that the corporation should be treated the same as the county. Therefore, because the law at the time of this decision required a county to pay the prevailing wage on public works, Hardin Memorial Hospital, Inc. was ordered to pay prevailing wage rates.

In 1982, prior to the final decision in the Hardin Memorial Hospital case, the General Assembly amended KRS 337.010(3)(e), adding the following language:

However, the provisions of this section shall not apply to construction conducted by a city, county, urban-county government, or school district unless such construction is financed with fifty percent (50%) or more of state funds.

Once again the playing field had changed, and now a county was exempt from paying the prevailing wage, subject to the financing requirement. Shortly thereafter, the Court of Appeals rendered another decision regarding the interpretation and application of the prevailing wage laws in Louisville Water Company v. Wells, Ky.App., 664 S.W.2d 525 (1984).

The Louisville Water Company failed to pay the prevailing wage for its projects because it took the position that as a public authority and agency of the city, it was exempt pursuant to KRS 337.010(3)(e). The water company was wholly owned by the city and its management board was appointed by the mayor and elected city officials. Clearly it was both a “public authority” and a “public works.” The question before the court was whether or not the term “city,” as used in KRS 337.010(3)(e), includes agencies or municipally-owned corporations such as the Louisville Water Company.

The Court agreed that the Louisville Water Company was an agency of the city but could not find that it was a “city” within the meaning of KRS 337.010(3)(e). In dicta it explained:

Cities and counties perform some of their governmental and proprietary functions through boards and agencies. These boards and agencies are frequently separate corporations or bodies-politic. Each has its own power to sue and be sued and to function separately from the parent. Agencies, government-owned corporations, and boards provide a method of local governments to operate proprietary functions as businesses and to delegate the management to experts. They may also be used to cushion the politicians from the public in governmental or proprietary activities. The fact remains, however, that the bodies exist and operate independently from the city or county in many ways.

Id. at 526.

The court distinguished the Hardin Memorial Hospital case by stating that although it believed an alter ego relationship existed, it did not determine that the hospital corporation was a “county.” Therefore, the Louisville Water Company was required to pay the prevailing wage for its public works projects. (See also, OAG 86-73 which determined that the Lexington-Fayette Urban County Airport Board is not exempt from paying the prevailing wage because it is not a city, county or urban county government.)

Returning to the issue presented by Fleming County, the Kentucky Labor Cabinet takes the position that because the corporation is not a “county” within the meaning of KRS 337.010(3)(e), it is not exempt from the prevailing wage requirement. In our view, their interpretation of the Louisville Water Company case is too narrow. While we do not disagree with the Court of Appeal's decision in the Louisville Water Company case, we do not think it is dispositive of the present question.

Our review of the prevailing wage legislation reveals a series of amendments concerning the definition of a public authority and the enumeration of exemptions to paying prevailing wage rates on public works projects. Since 1982, the legislature has specifically exempted counties from paying the prevailing wage. This is clear and unequivocal.

Analyzing the applicability of the prevailing wage statutes to nonprofit corporations created pursuant to KRS 58.180, however, is more difficult. These corporations were specifically added to the definition of “public authority” by an amendment in 1976, thus requiring them to pay the prevailing wage. Yet, a blanket rule, requiring all such corporations to pay the prevailing wage because they cannot qualify as a “county,” appears contrary to the very purpose and nature of KRS 58.180 itself.

The General Assembly enacted KRS 58.180 to provide a way for the counties to engage in public works projects without incurring debt themselves, or violating the Kentucky Constitution. Creatures of necessity, these corporations enable the counties to complete expensive public works projects. More importantly, for our purposes, the statute gives the counties a choice in style of management.

KRS 58.180(4) states:

Any governmental agency creating a corporation pursuant to this section to act for and on behalf of, and as the agency and instrumentality of, such governmental agency in the acquisition and financing of a public project or projects shall, at all times either (i) exercise organizational control over such corporation by creating the corporation pursuant to this section, and retain authority at any and all times to alter or change the structure, organization, programs or activities of the corporation, including the power to terminate existence of the corporation, subject to any limitation on the impairment of contracts entered into by such corporation, or shall (ii) exercise supervisory control over such corporation as may be deemed proper by the governmental agency in the administration of the corporation's activities as a constituted authority of such governmental agency . . . .

These differing styles of management have important implications. Where as in the case of the Louisville Water Company, the corporation operates as a separate and district entity, it is an example of “supervisory control.” Such a corporation could not properly be defined as the “city.” These corporations can easily be distinguished from the situations where a county or governmental agency is exercising a form of “organizational control.”

The Fleming County, Kentucky Public Properties Corporation is an example of “organizational control.” The sole purpose of this nonprofit corporation is to act as the agency and instrumentality of the county in the development and financing of public projects. Furthermore, a review of the Articles of Incorporation indicates that the Fiscal Court members are in complete control of the corporation, and they may dissolve it at any time. (See, Article II, Articles of Incorporation.)The Fleming County corporation, like Hardin Memorial Hospital, Inc., serves merely as a conduit through which the county conducts the business of public works projects.

IV.

Conclusion

The Fleming County, Kentucky Public Properties Corporation is a mere alter ego of the county, and as such should be accorded the county's exemption to paying the prevailing wage on public works projects. This is consistent with the legislative intent and case law of our state.

In summary:

(1.) A public authority must pay the prevailing wage on all public works projects except:

a) buildings constructed as institutions of learning; or

b) any construction conducted by a local government or school district, unless such projects are financed by fifty percent or more of state funds;

(2.) When a county, pursuant to KRS 58.180, creates a nonprofit corporation to act as its instrumentality in the financing of public projects, said corporation will be given the county's exemption from paying the prevailing wage provided:

a) it meets the aforesaid financing requirement; and

b) the corporation is merely an alter ego of the county - a necessary conduit through which the county conducts its business.

Such a determination must be made on a case-by-case basis. Where, as here, a nonprofit corporation can demonstrate that the county has retained control, that is, has the authority to alter or change the corporate structure or its plans, and ultimately to terminate the corporation's existence, it should be treated as the alter ego of the county and granted an exemption to the prevailing wage statute.

A. B. CHANDLER III

ATTORNEY GENERAL

Diane Schuler Fleming

Assistant Attorney General