Klein v. Flanery
| Citation | 439 S.W.3d 107 |
| Decision Date | 19 June 2014 |
| Docket Number | Nos. 2012–SC–000071–DG,2012–SC–000197–DG.,s. 2012–SC–000071–DG |
| Court | United States State Supreme Court (Kentucky) |
| Parties | Ervin KLEIN, et al., Appellants v. Lori Hudson FLANERY, In Her Official Capacity As the Secretary of the Finance and Administration Cabinet, et al., Appellees and Louisville Soccer Alliance, Inc., et al., Appellants v. Steven L. Beshear, In His Official Capacity As The Governor Of Kentucky, et al., Appellees. |
Mark David Guilfoyle, H. Edward O'Daniel, Jr., Thomas James Banaszynski, Oliver H. Barber, Jr., for Appellants.
Mark Stephen Pitt, Christopher Wilson Brooker, for Appellees.
The 2008–2010 biennial budget bill (HB 406, 2008 Ky. Acts, ch. 127) provided, among many other things, for the transfer to the state's General Fund of more than $10 million from various funds created within the Department of Housing, Buildings and Construction (HBC) and the transfer of $700,000 from the fund dedicated to the Department of Charitable Gaming (DCG). Both HBC and DCG are agencies within the Public Protection Cabinet. In separate actions brought before the Franklin Circuit Court, licensed building contractors Ervin Klein, Thomas Rechtin, Eddie Noel, and David Miles (collectively “Klein” or the “Klein appellants”), and licensed non-profit organizations Louisville Soccer Alliance, Inc., and the Catholic Conference of Kentucky (collectively “Soccer Alliance” or the “Soccer Alliance appellants”)1 sought declarations to the effect that the respective transfers violated various provisions of the Kentucky Constitution. They also sought injunctive relief prohibiting the transfers and, in Soccer Alliance's case, injunctive relief compelling the refund of allegedly unlawful licensing fees. Both plaintiff groups sued the Secretary of the Finance and Administration Cabinet and the State Budget Director in their respective official capacities. Additionally, Klein named the Commissioner of the Department of Housing, Buildings and Construction, and Soccer Alliance named the Governor, the State Treasurer, and the Secretary of the Public Protection Cabinet. For purposes of this Opinion, we refer to the defendants in both cases as the “Commonwealth.”
Both cases were resolved by summary judgment. In Klein the trial court ruled that the 2008–2010 budget bill's transfer of agency funds to the General Fund was lawful and thus dismissed Klein's claims, but in Soccer Alliance the trial court held that the transfer in effect transformed a lawful regulatory fee into an unlawful tax, a tax violative of sections 51 and 180 of the Kentucky Constitution. Separate panels of the Court of Appeals affirmed the result in Klein and reversed in Soccer Alliance. Both panels held that the challenged transfers did not run afoul of the asserted constitutional restrictions on the General Assembly's authority to tax and to regulate. We granted motions for discretionary review in both cases to consider Klein's and Soccer Alliance's contentions that the fund transfers amount to a surreptitious tax. Because the two cases raise similar issues, we have consolidated them for consideration in this single opinion, and for reasons addressed herein we affirm.
With H.B. 44 (1978 Ky. Acts, ch. 117), the 1978 General Assembly created “a department of buildings, housing and construction.” The Department's organization and duties are provided for in Kentucky Revised Statutes (KRS) Chapter 198B. The Department was tasked at its inception with the promulgation of “a mandatory uniform state building code,” and has since then been responsible for revising the code and enforcing it. The enforcement regime includes the licensing of building contractors, such as the Klein appellants, and the oversight, through permits and inspections, of building construction and the installation of such major building components as plumbing systems; electrical systems; heating, ventilation, and air conditioning systems; and fire protection sprinkler systems. At least a dozen funds have been created within the Department dedicated to different aspects of its mission, the source of virtually all of which are the licensing, permit, and inspection, fees the various subagencies collect as well as fines imposed for building code violations. See, e.g., KRS 198B.095 (); KRS 198B.650 –198B.689 ().
Following the 1992 constitutional amendment legalizing charitable gaming in Kentucky (Ky. Const. § 226 ), the 1994 General Assembly created the Division (now Department) of Charitable Gaming to oversee such gaming and to ensure that it serves legitimately charitable purposes and not commercial or illegal ones. 1994 Ky. Acts, ch. 66 (H.B.206), now codified at KRS 238.500 –238.995. The Department carries out its duties largely through a system of licenses, inspections, and audits, and its activities are funded through the “charitable gaming regulatory account,” the sources of which include fines imposed by the Department and a fee imposed on all charitable gaming, including that carried on by the Soccer Alliance appellants. The fee is a percentage of gross receipts from charitable gaming in Kentucky, with the percentage to be periodically adjusted so that the amounts collected by the Department stay roughly in line with its necessary expenses. KRS 238.570.
The two cases now before us involving these agencies have their genesis in then newly-elected Governor Beshear's January 2008 Executive Order (08–011) requiring the state's executive offices and agencies “to immediately reduce costs” in an effort to address what the Governor referred to as “a projected General Fund budget shortfall” of hundreds of millions of dollars. The Executive Order purported to revise certain appropriations to the state's executive agencies to amounts less than had been appropriated by the General Assembly for the 2007–2008 fiscal year, and in that way to reduce General Fund expenses. And in order to increase General Fund income, the Order also transferred to the General Fund certain amounts from specified agency accounts not financed through the General Fund. Pursuant to the Executive Order, $700,000 was thus transferred from DCG's regulatory account, and a total of $6,495,200 was transferred from a dozen funds within HBC.
Not long thereafter the General Assembly enacted the 2008–2010 biennial budget,2 which ratified the Governor's Order as follows:
The Klein appellants brought their suit challenging the HBC transfers on June 25, 2008, and the Soccer Alliance appellants filed their challenge to the DCG transfer on July 23, 2008. In broad terms, both sets of appellants contend that regulatory fees, such as those the agencies collected here, may only be used by the collecting agency for regulatory purposes and that their transfer, in any amount, to the General Fund for general revenue purposes has the effect of converting them, at least to the extent of the transfer, to taxes, taxes that violate both procedural prerequisites and substantive limitations imposed by our Constitution. The Commonwealth concedes a basic distinction between regulatory fees and taxes and agrees that in general such fees may only be used for the regulatory purposes for which they were collected, but it maintains that no constitutional violation occurs when fees incidentally collected in excess of the agency's regulatory expenses are transferred to the General Fund. In the Commonwealth's view, transfer of such incidental excesses, or surpluses, is all that took place in these cases, and thus, it contends that the challenged transfers did not amount to taxes and were lawful.
The two Court of Appeals panels that reviewed these cases agreed with the Commonwealth. The Klein panel opined that because “the primary purpose of the legislation imposing the fees paid to the HBC is to regulate the trades governed by the HBC ... even if the transfer to the General Fund produced a revenue for the public, it does not become a tax.” Similarly, reversing the trial court's judgment in Soccer Alliance, another panel held that Klein and Soccer Alliance take issue with those conclusions on a number of grounds, each of which we address in turn.
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