Wilson v. Kentucky Transp. Cabinet

• Decision Date: 29 September 1994
• Docket Number: No. 93-SC-360-TG,93-SC-360-TG
• Citation: 884 S.W.2d 641
• Parties: Noel D. WILSON, a resident taxpayer bringing this complaint individually and on behalf of all Kentucky taxpayers resident in Kentucky, Appellant, v. KENTUCKY TRANSPORTATION CABINET and Kentucky Turnpike Authority, Appellees, and Landrum & Shouse, Special Amicus Curiae, appointed by Supreme Court pursuant to CR 14.03, Special Amicus Curiae.
• Court: United States State Supreme Court — District of Kentucky

Page 641

884 S.W.2d 641

Noel D. WILSON, a resident taxpayer bringing this complaint

individually and on behalf of all Kentucky

taxpayers resident in Kentucky, Appellant, v. KENTUCKY TRANSPORTATION CABINET and Kentucky Turnpike

Authority, Appellees,

and

Landrum & Shouse, Special Amicus Curiae, appointed by

Supreme Court pursuant to CR 14.03, Special Amicus Curiae.

No. 93-SC-360-TG.

Supreme Court of Kentucky.

Sept. 29, 1994.

Julius Rather, Lexington, for appellant.

Charles S. Cassis, C. Edward Glasscock, Stephen R. Schmidt, Brown, Todd & Heyburn, Louisville, James Park, Jr., Lexington, for appellee.

Cecil F. Dunn, Lexington, John H. Burrus, Landrum, Shouse & Patterson, Lexington, special amicus curiae Landrum & Shouse.

WINTERSHEIMER, Justice.

This appeal is from a judgment of the circuit court which dismissed a declaratory judgment action which had sought a determination as to the constitutional validity of Economic Development Road Revenue bonds authorized pursuant to House Bills 799 and 929 enacted by the 1990 Kentucky General Assembly.

The specific question is whether the bonds are legal debt obligations of the Commonwealth within the meaning of Sections 49 and 50 of the Constitution. We believe the bonds do not represent a debt of the Commonwealth because neither the full faith and credit, nor the taxing authority of the Commonwealth is pledged to the payment of the principal or interest of the bonds. Neither the Commonwealth, nor the Authority is obligated to pay this bond issue, or the interest thereon, except from the revenues the Authority derives from the rental payments under the serial lease or from other revenues of the system. The funds to pay the bondholders arise from a biennial appropriation which is subject to the determination of the General Assembly in each biennium. The General Assembly has the absolute option of either making the appropriation for the serial lease payments or declining to do so. The risk of loss is squarely on the bondholders.

No one is misled. The bond purchaser has the opportunity to review the prospectus which is labeled "Plaintiff's Exhibit 2" in the circuit court, which proclaims in bold, black print, which is the largest on the page, that the bond issue is "Not an obligation of the Government and that the full faith and credit of the Commonwealth is not pledged for repayment." The specimen copy of the bond certificate itself, which was labeled "Plaintiff's Exhibit 1" in the circuit court announces in bold capital letters which are the largest on the page that the Economic Development Road Revenue Bond (Revitalization Projects) Series 1990 is not a pledge of the full faith and credit of the Commonwealth and is not a debt of the Commonwealth. The evidence is uncontroverted that neither the full faith and credit of the Commonwealth, nor the taxing authority of the Commonwealth is pledged to the repayment of any part of the bond issue.

The facts were stipulated by the parties in the circuit court. Under the statutory system, no direct revenue will be generated from the use of the roads enumerated in HB 929, once the expenditure and improvements contemplated by KRS Chapter 175 and House Bills 799 and 929 have been made other than as set forth in KRS 175.470(8). The road bonds issued are to be used for road construction, reconstruction and relocation projects and are secured by income and revenue derived from the Turnpike Authority's lease of road projects to the Transportation Cabinet. The Authority, acting pursuant to statute, leased to the Cabinet, the improvement, construction and reconstruction to be paid by the bonds. The total indenture exceeds $500 million dollars. The issuance of these bonds was not approved by the voters of the Commonwealth. The serial lease payment from the Cabinet is the only source of funds through which the bonds will be retired. The Turnpike Authority closed the sale of $307,820,000 of bonds on October 18, 1990. This case involves only the unsold part of the authorized bond issue. The term of the lease is for two years except for the first term which expired June 30, 1992. The leases are to be renewed automatically each biennium unless written notification of termination is received prior to the end of the current biennium. The bonds oblige the Authority to make principal and interest payments to the bondholders.

Wilson argues that the bonds are sold to fund improvements on specific nonrevenue-producing already-existing state highways. He claims that they are debts within Sections 49 and 50 of the Kentucky Constitution and are, therefore, prohibited because there was no vote of the people. He contends that the Commonwealth's indebtedness will increase so that the Commonwealth's credit will be impaired and the taxpayers of generations to come will be obligated to pay off this indebtedness. At the trial level, the special amicus brief favored dismissal of the suit because the Supreme Court had refused to issue a temporary injunction which would have prohibited the sale of the bonds in 1990. The special amicus indicated that the decision had in effect decided the case. The circuit court determined that the decision of the Supreme Court provided an inescapable conclusion that the bond issue complained of passed constitutional muster and must be upheld.

On appeal, the special amicus argues that the bond legislation authorizing the sale of bonds to fund improvements on nonrevenue-producing already-existing state roads amounts to creation of debts of the Commonwealth which violates Kentucky Constitution Sections 49 and 50. The special amicus maintains that the mechanism provided by the statute is a sham and in spite of the statements that the term of the lease is not beyond the biennium, the reality is that the lease is renewable and the General Assembly will continue to allow it to be renewed, that the roads themselves produce no revenue to retire the bonds and that future years and generations are saddled with accumulated debt in violation of the spirit of the Kentucky Constitution. He contends that the previous cases decided by this Court are distinguishable because none of them resolve the specific issue of the creation of a constitutionally prohibited debt by the use of the financing system and that there is a practical certainty that future legislatures have no choice but to appropriate the money to retire the bonds. We find these arguments to be without merit.

The question of whether the bond legislation authorizing the sale of revenue bonds to fund improvements which are allegedly nonrevenue producing creates a legal debt of the Commonwealth within the prohibition of Kentucky Constitution §§ 49 and 50 was decided in Blythe v. Transportation Cabinet, Ky., 660 S.W.2d 668 (1983), as well as Turnpike Authority of Kentucky v. Wall, Ky., 336 S.W.2d 551 (1960). The attempt to distinguish these cases on the basis that they did not involve "nonrevenue producing" and already-existing state roads is unconvincing. The revenue producing character that is presented here and in the previous cases is the revenue produced by the payments from the biennial appropriations of the General Assembly and not the revenues which the tolls on the roads might produce. There were no tolls involved in Blythe, supra, and in Wall, supra, the tolls were never represented to be sufficient to pay the lease payments.

The contentions that debt was created because the project did not produce a special revenue fund and was for highways already owned, was expressly rejected by this Court in Blythe.

Similar arguments were raised in Hayes v. State Property and Buildings Comn., Ky., 731 S.W.2d 797 (1987), where it was argued that as a practical matter, a future General Assembly would be unable to refuse to appropriate funds for the retirement of revenue bonds. Hayes, supra, correctly recognized that the relevant revenues were the lease payments and that this risk of default was assumed by the bondholders.

The argument that the General Assembly must renew the renewable leases and that this makes the revenue bonds into a general obligation bond within the meaning of the constitution is unpersuasive. It has long been held in Kentucky that serial leases automatically renewable, unless cancelled, do not create a long-term obligation and therefore are not legal debts within the meaning of the constitution. Davis v. Board of Education of City of Newport, 260 Ky. 294, 83 S.W.2d 34 (1935), held that a serial lease arrangement did not create long-term indebtedness of the Board of Education within a similar constitutional limitation because the Board had reserved the option to continue the lease but was under no obligation to do so. That case involved serial lease provisions which automatically renewed for one-year periods up to a total of 30 years. Hayes, supra, stated in part that the incurrence of an obligation under a lease or financing agreement which extends only through a single year and which depends solely on the decision of future legislatures did not violate Sections 49 and 50 of the Kentucky Constitution.

The argument that the practical consequences produce some kind of constitutional general obligation is without merit. We recognize that constitutional provisions prohibit the creation of more than $500,000 in legal debt without the approval by a referendum or the passage of a tax to amortize the debts. The bonds in this case create no legally enforceable debt and consequently do not fall within those provisions. The risk of renewal and ultimate payment falls to the holders of the bonds who can only hope that future legislators will appropriate biennial lease payments. There is no enforceable legal obligation and no debt within the meaning of the Constitution because the General Assembly has no obligation to appropriate the lease payments; general revenues are not pledged to pay outstanding sums and the Commonwealth has no legal obligation to levy taxes to...