Reform for Special Districts in Kentucky Summary of HB-1 Adopted During the 2013 Session of the Kentucky General Assembly

Matthew C. Smith, Attorney At Law

If you are engaged in the public sector in Kentucky, you have likely heard about the passage of HB-1 during the 2013 Session of the Kentucky General Assembly. The Bill was intended to provide greater transparency to special districts, or “special purpose governmental entities” as they are referred to in the Bill. The Bill was approved by a vote of 38-0 in the Senate and 98-0 in the House and signed by Governor Steve Beshear on March 21, 2013. Rarely do you see such agreement between the House and Senate. Given the uniformity, additional reform for special districts may be on the horizon in future legislative sessions.

This article is intended to give an overview of the major areas of reform included in the 114-page text of HB-1. This article will first define the “special purpose governmental entities” that are the subject of HB-1 and will then summarize the eight areas of changes in store for these entities; namely: (i) a new online registration system; (ii) new reporting forms; (iii) new penalties for failure to comply; (iv) new auditing standards; (v) new dissolution provisions; (vi) new code of ethics requirements; (vii) new budget adoption and publication requirements; and (vii) new additional procedures for enacting or increasing fees or taxes.

What is a Special Purpose Governmental Entity?

The Bill defines a special purpose governmental entity as any entity created or authorized by statute which (i) exercises less than statewide jurisdiction; (ii) exists for the purpose of providing one or a limited number of services or functions; (iii) 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 or county in which it operates; and (iv) has independent authority to generate public funds, or may receive and expend public funds or grants from the state, city or county, or from any other special purpose governmental entity. This definition is intended to capture all districts formerly known as special districts. Examples of special purpose governmental entities include, but are not limited to: rescue squad taxing districts, emergency service boards, ambulance districts, water districts, fire districts, air pollution control boards, economic development districts, local hotel and motel associations, library districts, extension districts, airport boards, area planning commissions, sanitation districts, health districts, community action agencies, transit authorities, tourist and convention centers, riverport authorities; regional park authorities, park boards, and flood control districts. Specifically excluded from the definition of a special purpose governmental entity are: cities, counties, school districts, private entities, any entity whose budget and financial information are integrated with and included as part of the city or county in which it operates, and any incorporated entity that provides utility services, is member-owned, and has a governing body whose voting members are all elected by the membership of the entity.

What changes are in store for Special Purpose Governmental Entities?

1. New Online Registration. The Bill requires the Department of Local Government (“DLG”) to establish an online central registration system for reporting by special purpose governmental entities on or before March 4, 2014. The online system is to be available to the general public by October 1, 2014. For each fiscal period beginning on or after July 1, 2014, all special purpose governmental entities will be required to submit reports through the new online registration system and after such date the current method of special district reporting is for the most part repealed1. To defray the cost of the online system, the Bill requires special purpose governmental entities to pay an annual fee ranging from $25 for entities with gross revenue less than $100,000, to $500 for entities with annual revenue of $500,000 or greater. Each special purpose governmental entity must register with the DLG prior to December 31, 2013.

2. New Reporting Forms. The DLG is required to develop new online reporting forms. The Bill outlines the information that is to be submitted in the new online reporting forms. The information to be reported upon is categorized as administrative information and financial information. The administrative information includes: (i) the names, addresses, terms and appointments of board members; (ii) the fiscal year of the special purpose governmental entity, the statutes under which it was created, the date of establishment, and the identity of the establishing entity and the statutes under which the entity operates; (iii) the mailing address, telephone number and, if applicable, the website address of the entity; (iv) the operational boundaries and service areas of the entity and the services provided by the special district; (v) a listing of all taxes, fees or other charges imposed and collected by the entity including the rates or amounts charged for the reporting period and the statutory authority for the levy of the tax, fee or charge; (vi) the primary contact of the entity for purposes of communications with the DLG; (vii) the code of ethics that applies to the entity and whether the entity has adopted additional ethics provisions; (viii) a listing of the federal, state and local government entities that have oversight authority over the entity or to which the entity submits reports; and (ix) any other related administrative information required by the DLG. The financial information that is required to be reported upon includes: (i) the most recently adopted budget of the entity; (ii) after the close of each fiscal year, a comparison of the budget to the actual revenues and expenditures for each fiscal year; (iii) completed audits or attestation engagements; and (iv) other financial oversight reports or information required by the DLG. The DLG is to establish and maintain an online list of the due dates for the filing of such reports.

3. Penalties for Failure to Comply. The Bill sets forth penalties for the failure to submit information in a timely manner and for submitting noncompliant information. The DLG will notify the entity within thirty (30) days after the due date and provide the entity with thirty (30) days from the date of the notice to submit the required information. The notice will also state that the failure to submit the required information will result (i) in any funds due the entity from any agency or branch of state government being withheld until the information is submitted; (ii) that there will be a publication of a notice of noncompliance in a newspaper having general circulation in the area at the expense of the entity; and (iii) that failure to submit may result in the Auditor of Public Accounts performing an audit or special examination of the entity at the expense of the entity. Any resident or property owner of the service area of the special purpose governmental entity may bring an action in Circuit Court to enforce compliance, and at the discretion of the Circuit Court, recover attorney fees and court costs.

4. Auditing Standards. The Bill sets forth the auditing standards and financial statements that are to apply to special purpose governmental entities for fiscal periods beginning on or after July 1, 2014. Entities with annual receipts and expenditures of less than $100,000 are required to prepare an annual financial statement, and to contract for an attestation engagement once every four years. Entities with annual receipts and expenditures between $100,000 and $500,000 are required to prepare an annual financial statement, and to contract for an independent audit once every four years. Entities with annual receipts and expenditures equal to or greater than $500,000 are required to prepare an annual financial statement and to contract for an independent audit once every year. The Bill requires independent audits to conform to: (1) generally accepted governmental auditing or attestation standards, which means those standards for audits or attestations of governmental organizations, programs, activities, and functions issued by the Comptroller General of the United States; (2) general accepted auditing or attestation standards, which means the standards for all audits or attestations promulgated by the American Institute of Certified Public Accountants; and (3) any additional procedures and reporting requirements as may be required by the Auditor of Public Accounts. The independent audit is to be completed no later than twelve months following the close of the fiscal year. If the special purpose governmental entity is required by another provision of law to audit its funds more frequently or more stringently than required by the Bill, the entity is required to comply with the provisions of that law and shall also comply with the requirements of the Bill.

5. Dissolution of Special Purpose Governmental Entities. In addition, the Bill allows for the dissolution of special purpose governmental entities by the DLG, the special purpose governmental entity or by the entity that established the special purpose governmental entity (i.e. the city or county that established the special purpose governmental entity). The DLG may administratively dissolve a special purpose governmental entity that: (i) has taken no action for two or more years; (ii) has not had a quorum of governing board members for two or more years; (iii) fails to register with the DLG; or (iv) fails to furnish the required reporting information for two or more consecutive years. The entity that established the special purpose governmental entity may administratively dissolve a special purpose governmental entity by the adoption of an ordinance by an affirmative vote of two-thirds of the governing body of the establishing entity. If the establishing entity votes to initiate a dissolution it would then have to hold a public hearing and present its dissolution plan. The dissolution plan is to include how the necessary governmental services provided by the entity will be provided upon dissolution or a statement that the services are no longer needed; a plan for satisfaction of any outstanding obligations; and a plan for the orderly transfer of all assets of the entity. The establishing entity would then vote within sixty (60) days after the public hearing to determine whether to approve or disapprove of the dissolution. The dissolution may be approved by an affirmative vote of two-thirds of the governing body of the establishing entity.

6. Code of Ethics. The Bill also provides that the special purpose governmental entity is subject to the code of ethics of the establishing entity in which the special purpose governmental entity’s principal business office is located. If there is no establishing entity, the special purpose governmental entity shall be subject to the code of ethics of the county in which the special purpose governmental entity’s principal business office is located. Board members, officers and employees of special purpose governmental entities are not required to file financial disclosure statements for their services or reemployment under the code of ethics of the establishing entity. The Bill provides that a special purpose governmental entity may adopt ethics that are more stringent than the establishing entities code of ethics, but in such an event the special purpose governmental entity is required to file and deliver its code of ethics to the DLG. Any subsequent amendments to the code of ethics would also have to be delivered to the DLG within 21 days of adoption.

7. Budget/Other Requirements. The Bill requires a special purpose governmental entity to adopt an annual budget prior to the start of the fiscal year to which the budget applies. The Bill provides that no money shall be expended from any source except as provided in the adopted budget. The Bill also requires that within sixty (60) days after the close of each fiscal year, a special purpose governmental entity must publish in its legal newspaper the location where the adopted budget, financial statements and most recent audit report may be examined by the public.

8. Procedure for Increasing Fees or Taxes. Effective as of January 1, 20142, HB-1 requires new procedures that apply to a special purpose governmental entity in relation to establishing or increasing taxes or fees levied by the entity. A “fee” is defined in HB-1 as “any user charge, rental fee, assessment, fee, schedule of rates, or tax other than an ad valorem tax, imposed by a special purpose government entity”3. HB-1 provides that any special purpose governmental entity that (i) adopts a new fee or ad valorem tax; (ii) increases the rate at which an existing fee or tax, other than an ad valorem tax, is imposed; or (iii) adopts an ad valorem tax rate, shall report the fee or tax to the governing body of the city or county in which the largest number of citizens served by the entity reside. The report is for informational purposes only and the governing body shall not have the authority to adjust, amend or veto the fee or tax under HB-1; unless it previously held such authority prior to the adoption of HB-1. The report by the special purpose governmental entity is required to be in writing and must be submitted to the governing body at least thirty (30) days before the date the fee or tax goes into effect. There must also be a presentation of testimony by the special purpose governmental entity relating to the fee or tax at an open, regularly scheduled meeting of the governing body at least 10 days prior to the date the fee or tax will be effective. The governing body is required to include in its public notifications of the meeting that the fee or tax will be presented at the meeting. In addition, HB-1 also amends KRS 132.023 to change the location of the public hearing for a special purpose governmental entity that intends to increase an ad valorem tax over the compensating rate. The new amendments require the special purpose governmental entity to conduct the public hearing in the meeting place of the governing body of the city or county where the largest number of citizens served by the special purpose governmental district reside.

Matthew C. Smith
Attorney At Law
msmith@zslaw.com

1For fiscal periods beginning on or after July 1, 2014, the following prior methods of special district reporting are repealed:  KRS 65.065(1) (submission of budgets);  KRS 65.065(2)(3)(4) (standard for financial audits); KRS 65.070(1)(a) (submission of a summary of district information); KRS 65.070(1)(b) (summary financial statements of the district); and  KRS 65.070(1)(c) (publication of financial statements).

2The requirements outlined in this section would have been effective 90 days after the adoption of HB-1. However, HB-54 amended HB-1 to delay the implementation of the requirements of this section until January 1, 2014.

3 HB 192 adopted during the 2014 session of the Kentucky General Assembly excluded a number of fees from the requirements of HB-1. HB 192 contained an emergency clause and is made effective January 1, 2014. The types of fees excluded are: rental fees; fees established by contractual arrangement; admission fees; charges to recover costs incurred by a special purpose governmental entity for the connection, restoration, relocation, or discontinuation of any service requested by any person; any penalty, interest, sanction, or other charge imposed by a special purpose governmental entity for a failure to pay a charge or fee, or for the violation, breach or failure to pay or perform as agreed pursuant to a contractual agreement; amounts charged to customers or contractual partners for nonessential services provided on a voluntary basis; fees or charges authorized under federal law that pursuant to federal law may not be regulated by the Commonwealth or local governments within the Commonwealth; purchased water or sewage treatment adjustments, as authorized by KRS 278.015, made by a special purpose governmental entity as a direct result of a rate increase by its wholesale water supplier or wholesale sewage treatment provider; any new fee or fee increase for which a special purpose governmental entity must obtain prior approval from the Public Service Commission pursuant to KRS Chapter 278; or other charges or fees imposed by a special purpose governmental entity for the provision of any service that is also available on the open market.

Disclaimer: The above outline is a summary of the key provisions of HB-1. It serves only as an aid to the reader and does not constitute legal advice. Readers should consult with qualified counsel for assistance with the implementation of HB-1. Should you have any questions regarding the impacts of HB-1 on your organization, please contact Ziegler & Schneider, P.S.C for additional information.