Client Alerts
March 28, 2013

Are you a Special Purpose Governmental Entity subject to regulation under House Bill 1?

Stites & Harbison Client Alert, March 28, 2013

The Kentucky Auditor of Public Accounts recently described the current legal framework governing special districts as “a muddled morass of more than 50 chapters of law and more than 1,000 individual statutes (some of which are a century old), bizarre classifications, uncertain responsibilities, confusing mandates and the absence of meaningful tools to compel compliance.” See Ghost Government: A Report on Special Districts in Kentucky. To address this confusion and increase transparency, Governor Beshear signed House Bill 1 into law last week. The Bill creates a new KRS Chapter 65A to impose reporting, auditing, and other requirements on entities defined as “special purpose governmental entities” (SPGEs). The Bill endeavors to serve as a one-size-fits-all solution applicable to an array of Kentucky’s special districts, governmental entities, quasi-governmental entities, and other entities that may not have traditionally considered themselves as “special districts” or governmental entities at all. SPGEs not complying with the new law may face tough enforcement measures, including withholding of funding, dissolution, and citizen lawsuits.

House Bill 1 imposes transparency, financial, and ethical obligations on SPGEs. Its key provisions include the following:

Definition of “SPGE.” In addition to amending a number of statutes to designate certain entities as SPGEs—like industrial taxing districts, emergency services boards, and hospital districts—House Bill 1 defines an SPGE as any entity that:

  1. Exercises less than statewide jurisdiction;
  2. Exists for the purpose of providing one (1) or a limited number of services or functions;
  3. Is governed by a board, council, commission, committee, authority, or corporation with policy-making authority that is separate from the state and the governing body of the city, county, or cities and counties in which it operates; and
  4. [Either:]
    • Has the independent authority to generate public funds; or
    • May receive and expend public funds, grants, awards, or appropriations from the state, from any agency, or authority of the state, from a city or county, or from any other special purpose governmental entity.

House Bill 1 specifically provides that Kentucky nonprofit corporations and entities formed under any other Kentucky law may constitute SPGEs—thus extending the law’s scope beyond the realm of traditional special districts and governmental entities.

House Bill 1, however, excludes from the definition of SPGEs: cities, counties, entities that have their budget and financial information integrated with a city or county, school districts, certain utility service entities, and “private entities.” The definition of “private entities” includes entities that only derive public funds from contracts with cities, counties, or SPGEs, but not entities (i) created by cities or counties that perform certain types of public services or (ii) that have their governing bodies appointed by cities or counties. The exclusion of entities falling within the latter two categories from the definition of “private entities” again broadens House Bill 1’s scope of potential application to entities not always considered governmental.

Transparency Requirements. House Bill 1 requires all SPGEs to register with the Department for Local Government (DGL) by December 31, 2013. Beginning July 1, 2014, SPGEs will be required to annually submit information to the DGL for posting on a public registry. Information required to be submitted includes: citations to Kentucky statutes allowing for the SPGE’s creation and governing the SPGE, contact information, “a listing of all taxes, fees, or charges imposed or collected . . . including the rates or amounts charged for the reporting period and the statutory authority for the levy of the tax, fee, or charge,” a code of ethics, a “listing of all federal, state, and local governmental entities that have oversight authority,” a budget, a comparison of expenditures to budget, a certification of a completed audit, and “other financial oversight reports or information required by the DGL.”

A failure to submit the required information could result in withholding of state funding, publication of a newspaper notice, an audit by the Auditor of Public Accounts, dissolution, or a lawsuit initiated by a resident or property owner in the SPGE’s “service area.” What constitutes an SPGE’s “service area” is not defined.

Fee or Rate Increase Procedures. All SPGEs are required to report any “fee” or tax impositions or increases at city or county governing body meetings. A “fee” is defined broadly as “any user charge, rental fee, assessment, fee, schedule of rates, or tax, other than an ad valorum tax imposed by a[n SPGE] .”

Budgeting and Auditing Requirements. Beginning July 1, 2014, all SPGEs are required to adopt an annual budget. SPGEs will be prohibited from making expenditures “from any source except as provided in the adopted budget,” with no explicit exceptions provided for emergencies or new funding sources that may not have been included in the adopted budget. Also, SPGEs crossing certain revenue or expenditure thresholds will be required to prepare financial statements and have audits performed at certain intervals. All budgets, financial statements, and audit reports will be public documents.

Dissolution Procedures. House Bill 1 establishes procedures by which SPGEs may be dissolved. Among these provisions is a grant of authority to county governments to dissolve certain SPGEs operating in the county, even if the county government did not create the SPGE.

Ethics Code Requirements. Under House Bill 1, each SPGE will become subject to the code of ethics adopted by the entity that established the SPGE or the county in which the SPGE’s principal office is located. SPGEs have discretion to adopt a “more stringent” code of ethics if they desire.

Because House Bill 1 imposes a one-size-fits-all solution, its reach may be broad and its application to individual SPGEs governed by various other Kentucky statutory schemes may be challenging. If you have any questions about the law and its potential impacts on your business or entity, please contact us.

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