Could a Kentucky county make a short-term loan to a startup as an economic development incentive?

Plain-English summary

Kentucky's Attorney General said McCracken County Fiscal Court appeared to have authority to offer a short-term loan to a startup as an economic development incentive if the loan served a legitimate public purpose. The conclusion was qualified. The opinion did not examine the proposed loan's method, the nature or extent of its public purpose, or the private benefits to the borrower.

The AG traced a line of Kentucky decisions allowing public spending with a valid public purpose, even when private businesses also benefited. Its central local-government example was a city-financed industrial park upheld under Section 179 of the Kentucky Constitution. The AG applied that public-purpose reasoning to the county's question, while leaving the proposed transaction's facts unresolved.

Currency note

This opinion was issued in 2008. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: Did the AG approve McCracken County's proposed loan?
A: No specific transaction was approved. The AG said the county appeared to have authority to offer a short-term loan for a legitimate public purpose, but did not examine whether this proposed loan met that condition or how it would be made.

Q: Did a private business benefit automatically defeat a public-purpose loan?
A: The opinion relied on Kentucky decisions that permitted incidental private benefits where public funds served a valid public purpose. It did not measure the private benefit in McCracken County's proposal.

Q: What did the opinion leave undecided?
A: The AG expressly declined to review the method for making the loan, the nature or extent of its public purpose, and the additional private benefits to the borrower.

Background and statutory framework

The county attorney asked whether a fiscal court could grant a short-term loan from general funds to a local startup. Section 179 of the Kentucky Constitution limits local governments' loans of credit, and Section 3 restricts exclusive public privileges. The AG read these provisions alongside Kentucky decisions concerning economic-development spending. The opinion discussed the Local Industrial Development Act and cases applying the public-purpose principle to state incentives and a municipal industrial park. It concluded only that county authority appeared to exist when a legitimate public purpose was present.

Citations and references

• Ky. Const. § 179 and Ky. Const. § 3: constitutional provisions discussed by the AG.
• KRS 154.50 et seq.: industrial-development legislation discussed in the opinion.
• Dannheiser v. City of Henderson, 4 S.W.3d 542 (Ky. 1999): local industrial-park decision used in the public-purpose analysis.

Source

• Landing page: https://kdla.access.preservica.com/uncategorized/IO_2188dc77-8c17-424b-8468-53bf6d5256f7/
• Original PDF: https://kdla.access.preservica.com/download/file/IO_2188dc77-8c17-424b-8468-53bf6d5256f7

Original opinion text

OAG 08-006

July 28, 2008

Subject: The authority of a county fiscal court to grant a short-term loan from its general funds to a local start-up business as an economic development in- centive.

Requested by: Daniel Y. Boaz, McCracken County Attorney

Written by: Tad Thomas, Assistant Deputy Attorney General

Syllabus: The Office of the Attorney General has been asked to render an opinion as to whether the McCracken County Fiscal Court can permissibly grant a short- term loan to a local start-up business as an economic development incentive under existing Kentucky law.

Statutes construed: Kentucky Constitution § 3 and § 179; KRS 154.50 et seq.

OAGs cited:

Opinion of the Attorney General

Ky. Const. § 179, which applies directly to local governments, states:

The General Assembly shall not authorize any county or subdivision thereof, city, town or in- corporated district, to become a stockholder in any company, association or corporation, or to OAG 08-006
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obtain or appropriate money for, or to loan its credit to, any corporation, association or indi- vidual, except for the purpose of constructing or maintaining bridges, turnpike roads, or gravel roads: Provided, If any municipal corpo- ration shall offer to the Commonwealth any property or money for locating or building a Capitol, and the Commonwealth accepts such offer, the corporation may comply with the of- fer.

This section would prohibit the county from lending credit to a com-

pany.

Ky. Const. § 179 should be read along with Section 3, and its

broader prohibition that applies to the state as well as local govern-

ments, including counties. Ky. Const. § 3 provides:

All men, when they form a social compact, are equal; and no grant of exclusive, separate pub- lic emoluments or privileges shall be made to any man or set of men, except in consideration of public services; but no property shall be ex- empt from taxation except as provided in this Constitution, and every grant of a franchise, privilege or exemption, shall remain subject to revocation, alteration or amendment.

There exists a long line of published decisions pertaining to the

use of public funds for economic development and the alleged consti-

tutional violations stemming therefrom. In 1960, KRS § 154.50 et seq.,

was challenged as violating Sections 3 and 177 of the Kentucky Consti-

tution in Industrial Develop. Authority et al. v. Eastern Kentucky Re-
OAG 08-006
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gional Planning Comm’n, 332 S.W.2d 274 (Ky. 1960). Section 177 pro-

hibits the giving of credit by the Commonwealth much as Section 179

restricts local governments. Commonly referred to as the Local Indus-

trial Development Act it established the Industrial Development Fi-

nance Authority as an agency independent of the executive branch of

state government to oversee economic development loans. The Au-

thority was to promulgate regulations to determine eligibility for loans,

accept applications from local development agencies and hold hear-

ings and examinations as necessary to determine whether the public

purpose of the Act would be accomplished by granting loans to appli-

cants. The Court found that if an appropriation or incentive to a pri-

vate enterprise was done for a “public purpose,” it would withstand

constitutional review.

In the present instance, KRS 154.005 clearly sets out the legislative determination that the purpose of the Act is to promote the health, safety, morals, right to gainful employment, business opportunities and general welfare of Kentuckians and recites that the Authority ‘shall exist and operate for the public purpose of alleviating unemployment and furthering the utilization of natural and man-made resources by the promotion and development of indus- trial and manufacturing enterprises in local communities of the Commonwealth.’ The con- summation of these objects shall be ‘public purposes for which public money may be spent.’

Industrial Development Authority, supra, pp. 276-277.
OAG 08-006
Page 4

While the decision does not apply directly to the question posed

by McCracken County, this decision is informative as to its tested legal-

ity on the right of local industrial authorities formed pursuant to KRS §

154.50-316 to offer public incentives to private businesses for the pur-

pose of economic growth. In addition, the reasoning in this case

formed the basis for the cases that followed by establishing the public

policy exception.

Several years later the Court analyzed the constitutional implica-

tions of the Commonwealth’s incentive package in the eventually suc-

cessful attempt to lure Toyota to build an $800 million plant in Scott

County. Hayes v. State Property and Buildings Commission, 731 S.W.2d

797 (Ky. 1987). Suit for declaratory judgment was filed upon an-

nouncement of the package and the court was asked to determine

whether, inter alia, the deal violated Sections 3 and 177 of the Ken-

tucky Constitution. Again, Section 177 prohibits the giving of credit by

the Commonwealth much as Section 179 restricts local governments.

The Court in Hayes, relying on its holding in Industrial Development,

held that the incentive package was permissible “as long as the expen-

diture of public money has as its purpose, the effectuation of a valid

public purpose.” Id. at 799.

The public purpose exception was then extended to Section 179

in Dannheiser v. City of Henderson, 4 S.W.3d 542 (Ky. 1999). There,
OAG 08-006
Page 5

John Dannheiser filed suit against the City of Henderson after it used

public funds to develop an industrial park which competed with two in-

dustrial parks he had developed privately. Lots in the new park devel-

oped by the city were being sold at a substantially lower cost than

those in Dannheiser’s parks. The court noted that the provisions of

Section 179 were enacted to place the same restrictions on local gov-

ernment that were imposed on the Commonwealth by Section 177. It

then extended the reasoning and rule set forth in Hays and found that

the City’s use of funds for the project constituted a public purpose.

Thus, the use was permissible under Section 179.

The most recent Kentucky authority in this long line of decisions applying the public policy ex- ception is Hayes v. State Property and Build- ings Comm., supra. Hayes followed the public purpose exceptions to the restrictions of Sec- tions 177 previously established in several cases and determined that the Act of the Gen- eral Assembly was constitutionally sound be- cause of its underlying public purpose. Hayes cited Industrial Development Authority and Kentucky Live Stock Breeders’ Assn. v. Hager, 120 Ky. 125, 85 S.W. 738 (1905), as well as Dy- che, supra, which held that relief of unemploy- ment was a public purpose pursuant to an analysis of Section 179.

The public purpose that provided constitutional validity in the Hayes case is identical to the public purpose in the City of Henderson case.
The only difference is that the Hayes case ap- plied to a very large project that had obvious state-wide implication, the Henderson case ap- plies to local activities. The City’s sole purpose OAG 08-006
Page 6

in developing the corporate park was to foster economic development by attempting to retain existing industry as well as to attract new in- dustry to its local community. The incidental benefits provided to private industry are per- missible under Kentucky law as noted in Indus- trial Development Authority and Hayes.

Dannheiser, supra, p. 546.

CONCLUSION

Based on this line of decisions by the Commonwealth’s highest

Court and the well recognized public purpose exception, it does appear

that McCracken County Fiscal Court has the authority under Kentucky

law to offer a grant of a short term loan to a start-up business if done

for a legitimate public purpose. This opinion does not review or com-

ment on the method in which this loan is granted, nor does it examine

the nature or extent of the public purpose involved in McCracken

County’s proposed loan or the additional private benefits bestowed on

the borrower.

JACK CONWAY
ATTORNEY GENERAL

Tad Thomas
Assistant Deputy Attorney General