COMMONWEALTH OF KENTUCKY
OFFICE OF THE GOVERNOR
DEPARTMENT FOR LOCAL GOVERNMENT
01 SLDO 011
IN THE MATTER OF:
COUNTY OF WARREN, KENTUCKY
INTER-MODAL TRANSPORTATION AUTHORITY, INC.
FIRST MORTGAGE REVENUE BONDS AND NOTES
ONE OR MORE SERIES
JOEY ROBERTS APPELLANT
WARREN COUNTY and
AUTHORITY, INC. APPELLEES
* * *
Comes the Appellant, Joey Roberts, through counsel, and pursuant to the authority of KRS 13B.110, and files these exceptions to the Findings and Recommendations of the Referee appointed by the Chairman of the County Debt Commission, Hon. Paul E. Patton, to hear the appeal of Appellant Joey Roberts of the decision of the State Local Debt Officer (SLDO) approving a $25 million bond issue.
Appellant Joey Roberts (Roberts) respectfully requests that the County Debt Commission reject the findings and recommendations of the Referee, and instead find and determine, on the basis of substantial evidence in the record taken as a whole, that the State Local Debt Officer erred in approving the bond issue and that said bond issue does not conform to the statutory criteria.1
The Referee s Findings and Recommendations should be rejected in whole and the appeal sustained because the Referee failed to issue necessary and adequate findings of fact as required by KRS 13B.110 and Kentucky Constitution Section 2; because the Recommendation of the Referee is contrary to the weight of the evidence in the record considered as a whole and is thus arbitrary, capricious, and otherwise inconsistent with law; because the Referee committed clear error in failing to properly assign the burden of proof with respect to the appeal of the State Local Debt Officer s decision; because the Referee s Findings and Recommendations ignored substantial evidence in the record demonstrating that the county would be exposed to significant adverse financial liability for the payment of principal and interest obligations on the bond issue if the project terminated at Phase I; and because the Referee recommended approval of the lease agreement notwithstanding the failure of the State Local Debt Officer to have reviewed and approved the lease agreement.
This case is on appeal from the decision of the State Local Debt Officer (hereinafter SLDO) of May 14, 2001 approving a request by Warren County, Kentucky for the issuance of notes and bonds to finance the construction of an airport and industrial park known as the Inter-Modal Commerce Distribution Center and Industrial Park. (Hereinafter Transpark ). By Petition dated March 30, 2001, Warren County petitioned the State Local Debt Officer for approval of issuance of up to $25 million dollars in Inter-Modal Transportation Authority, Inc. First Mortgage Revenue Bonds and Notes to provide permanent and interim financing for an Inter-Modal Commerce and Distribution Center and Industrial Park. Warren County created and incorporated the Warren County Inter-Modal Transportation Authority, Inc, (ITA) as an agency and instrumentality of Warren County to acquire, develop and finance the Inter-Modal Park, and proposed that the project would be managed and the bonds and/or notes would be issued by ITA. (Hereinafter Petition For Approval ).
The decision was appealed to the County Debt Commission by Joey Roberts, a property owner and taxpayer in Warren County, within the time limit provided by KRS 66.310(4). A hearing was convened and presided over on July 19 and 20 in Frankfort, Kentucky, by Hon. J. Patrick Abell, a Hearing Officer appointed by the County Debt Commission (hereinafter Commission ) to hear and make recommendations concerning the case.
As contemplated by statute and pursuant to the discretion accorded by Ky. Rev. Stat. Chapter 13B, the Hearing Officer directed the simultaneous filing of post-hearing briefs by the parties.
By written decision issued on September 17, 2001 but bearing a postmark of September 18, 2001 from the Frankfort, Kentucky post office, Referee J. Patrick Abell issued Findings and Recommendations upholding the decision of the State Local Debt Officer and recommending that the proposed financial plan for the issuance of these bonds, including the lease agreement to be entered into by Warren County, be approved.
The County Debt Commission has jurisdiction over the proposed plan for issuance of up to $25 million dollars in Inter-Modal Transportation Authority, Inc. First Mortgage Revenue Bonds and Notes[.] 2
KRS Chapter 13B.110 governs the filing of exceptions from a recommended order of a hearing officer. The Findings and Recommendations of the Referee constitute a Recommended Order under KRS 13B.110, and thus are subject to the filing of exceptions under KRS 13B.110(4), which provides that:
A copy of the hearing officer s recommended order
shall also be sent to each party in the hearing and
each party shall have fifteen (15) days from the date
the recommended order is mailed within which to
file exceptions to the recommendations with the
agency head. Transmittal of a recommended order
may be sent by regular mail to the last known
address of the party.
The Referee s Findings and Recommendations bears a date of September 17, 2001, with a metered date of Sep 17 01. The stamp of the United States Post Office indicating the actual date of mailing, however, is Sep 18 2001.
Utilizing either September 17th or 18th as the date from which the fifteen (15) day period for filing exceptions is calculated, these exceptions are timely filed and properly served.
The Referee s Findings and Recommendations should be rejected in whole and the appeal of Appellant Joey Roberts sustained for these reasons: (1) the Referee s Findings and Recommendations failed to include necessary and adequate findings of fact as required by KRS 13B.110 and Kentucky Constitution Section 2 and to respond to the legal arguments presented by Appellants that the State Local Debt Officer s decision approving the bond issue was in error, (2) the Recommendation of the Referee to uphold the approval of the bond issue and lease agreement by the State Local Debt Officer is contrary to the weight of the evidence in the record considered as a whole and is thus arbitrary, capricious, and otherwise inconsistent with law; (3) the Referee committed clear error in failing to properly assign the burden of proof with respect to the appeal of the State Local Debt Officer s decision; (4) the Referee s Findings and Recommendations ignored substantial evidence in the record demonstrating that the county would be exposed to significant adverse financial liability for the payment of principal and interest obligations on the bond issue if the project terminated at Phase I, or if the project is viewed as a unitary airport-industrial park project.
The Appellant s Post-Hearing Brief presented uncontroverted evidence that, using the bond proponents own data, if the project ended at Phase I, inadequate funds would be available and Warren County would be liable for the deficit at a level that would exceed all available county revenues. The financing plan for the Transpark hangs by a slender thread, and Appellants demonstrated conclusively that the thread would not bear the weight of the financial demands of development of the industrial park and retirement of the debt.
Rather than addressing the Appellants legal arguments and making basic findings of fact and conclusions of law relative to those arguments, the Referee ignored the arguments in arriving at a conclusion that the SLDO decision should be upheld.
In so doing, the Referee violated Appellants procedural due process rights and produced a recommendation that is quintessentially arbitrary and capricious, and inconsistent with law.
I. THE REFEREE S RECOMMENDATION SHOULD BE REJECTED FOR FAILURE TO PROVIDE SUFFICIENT FINDINGS OF FACT
TO DEMONSTRATE THAT ALL EVIDENCE IN THE RECORD WAS CONSIDERED AND EVALUATED IN MAKING THE RECOMMENDATION
KRS 13B.110(1) provides that the recommended order, which must include his findings of fact, conclusion of law, and recommended disposition of the hearing[.] The statutory direction to include findings of fact and the conclusion of law reflects a codification of the bedrock procedural due process principles that bound the decisionmaking of an administrative agency and provide a reviewing tribunal and court with sufficient basis to determine that, based on substantial evidence in the record as a whole, the decision is not arbitrary, capricious, or inconsistent with law. Kentucky courts have long noted that on review of agency action, the question is whether the agency has acted in an arbitrary manner, based on assessment of three factors: whether the agency acted within the constraints of its statutory powers, whether the party was afforded procedural due process, and whether the agency s action is supported by substantial evidence. American Beauty Homes Corporation v. Louisville and Jefferson County Planning and Zoning Commission, Ky. App. 379 S.W.2d 450, 456 (1964).
The Referee s decision is wanting in basic findings of fact and in any analysis or discussion evidencing that the Referee read, considered and passed on the legal arguments raised and evidence adduced in opposition to the bond issue and lease agreement. Instead, juxtaposing the four-volume record and the post-hearing brief of Appellants against the scant few pages of findings and conclusion provided by the Referee, it is as if the Referee had not read the Appellants post-hearing brief nor considered the evidence adduced and synthesized in that brief.
The requisite elements of procedural due process in administrative hearings are: a hearing, the taking and weighing of the evidence, a finding of fact based on an evaluation of the evidence and conclusions supported by substantial evidence. Secretary, Labor Cabinet v. Bosten Gear, Inc., Ky., 25 S.W.3d 130, 134 (2000), citing Kaelin v. City of Louisville, Ky., 643 S.W.2d 590, 591 (1982). Findings of fact are essential to support the orders of administrative agencies, at least where the order issued by the agency rests upon a factual determination. Pearl v. Marshall, Ky., 491 S.W.2d 837, 839 (1973). Without specific findings of fact it is difficult, if not impossible, upon review to determine whether the administrative agency has acted arbitrarily or within its powers. Id. at 839.
As reflected below, the Referee failed to weigh all of the evidence, and to issue findings of fact based on evaluation of all of the evidence. Instead of weighing conflicting evidence and making findings of basic facts, the Referee instead ignored much of the evidence in the record and found only the ultimate facts, thus preventing the County Debt Commission or any reviewing court from determining whether the recommendation to uphold the SLDO decision
rests on substantial evidence in the record taken as a whole.
The Referee s Findings and Recommendations comprise eleven (11) pages. The Introduction, consisting of six of the eleven pages, provides, without the first citation to a hearing transcript that comprises four volumes, a characterization of some of the testimony presented at the hearing.
Pages seven and eight address Preliminary Matters. After acknowledging the jurisdiction of the County Debt Commission and State Local Debt Officer over the bond issue and lease agreement, the Referee sidestepped the allocation of the burden of proof.
Pages eight through eleven contain the Findings and Recommendation.
What is remarkable about the Referee s decision is the complete lack of any consideration of or response to the many legal arguments raised by Appellant.
a. The Referee Failed To Demonstrate Consideration Of
Appellant s Argument Concerning the Failure of the State Local Debt Officer to Approve The Lease Agreement
Appellant presented argument, supported by appropriate reference to the evidence in the record, that the State Local Debt Officer decision was flawed because the decision of the SLDO failed to rule on Warren County s request for approval to enter into the Contract, Lease and Option Agreement. The unrebutted evidence demonstrated that the State Local Debt Officer s decision failed to make a finding approving or disapproving the request by Warren County for authorization to enter into a contract, lease and option agreement.
The Referee failed to respond to the legal argument or to otherwise address this fundamental failure in the SLDO decision, yet the Referee Recommendation included a recommendation that the proposed financial plan for the issuance of these bonds, including the lease agreement to be entered into by Warren County, be approved. Referee Findings and Recommendations, at p. 11.
Warren County s submittal to the SLDO proposed to obligate itself, and any other participating cities and counties, to a Contract, Lease and Option agreement by which the participating local governments commit the fisc of that unit of government to any revenue shortfalls below the amount needed to cover the debt service on the bonds and notes. In the March 30, 2001 Petition for Approval, Warren County requested approval of the issuance of the Bonds and Notes, including Bond Anticipation Notes, and an authorization for the County to enter into a Contract, Lease and Option. The May 14, 2001 SLDO Decision approved the form of the proposed financial plan for the issuance of a principal amount not to exceed $25,000,000 of Inter-Modal Transportation Authority, Inc. First Mortgage Revenue Bonds and Notes, one or more Series, but did not grant the requested authorization for the County to enter into the lease, contract and option agreement. There is no evidence in the record that the terms and conditions of the lease agreement were reviewed and approved. The record reflects that no other counties or cities were parties to this bond approval request, nor that the financial conditions of those counties and cities would support their participation. Yet the business and finance plan, the SLDO and the Referee assumed, for purposes of allocating only 30% of the liability to Warren County, that all other participants were involved. For this reason alone, as argued further below, the decision must be vacated and remanded.
b. The Referee Failed To Consider Evidence Indicating
That As Much As 100% Of The Liability For Any Deficit
Would Fall On Warren County
The Referee s conclusion that the financial condition and prospects for Warren County do warrant a reasonable expectation that the bonds can be paid off without seriously restricting other expenditures of the county rests on the referee s determination that Warren County s lease arrangement with the Inter-Modal Transportation Authority obligates it to cover 30% of any debt service shortfall that might occur. Findings and Recommendations at. 10. The Referee noted that Judge Buchanon testified that Warren County and several adjacent counties and nearby municipalities were to entered into an inter-local corporation agreement whereby they would be responsible for various percentages of the shortfall Warren County s percentage being 30%. Id. at 4.
The Referee completely sidesteps the Appellants argument that since none of the other units of government whose participation and assumption of proportionate percentages of shortfall liability under the lease is assumed in the business and financial plan, were parties to the
Warren county request for approval, nor had submitted appropriate requests for approval to enter into lease agreements under KRS 66.310(2), that the financing plan had to be evaluated considering the exposure of Warren County without factoring in the assumption of a percentage of the risk by other governmental entities. Even though Judge Buchanon acknowledged that it is possible that Warren county could be responsible for 100% of the deficit, T. Vol. 1 p. 71, the Referee assumed a maximum County liability of 30% despite unrebutted evidence that none of the other units of government have accepted legal liability for a proportionate share of the debt service costs through the lease obligation.
The Referee failed completely to address this flaw and the possibility, acknowledged by County Judge Executive Buchanon that up to 100% of the liability for any deficiency could fall on Warren County if the other units of government opted out. Instead, the Referee assumed that the maximum liability of the county was 30% of the deficiency, Findings and Recommendations at p. 4, a finding contradicted by the evidence and materially affecting the validity of the ultimate conclusion by the Referee that the bond approval would not materially affect the other financial obligations of the county.
c. The Referee Failed To Evaluate Or Respond To
Appellants Argument Demonstrating That The Interest
And Principal Obligations Could Not Be Met Under The
Business And Finance Plan Without Seriously Restricting
Other Expenditures Of The County
Appellants challenged the business and finance plan as failing to meet the statutory criteria of demonstrating that the interest and principal obligations of the bond can be met without seriously restricting other expenditures of the county. Appellant argued that the business and finance plan rests on a series of assumptions that are untested, unproven and unrealistic, resulting in a certainty of a shortfall if the project terminates at the end of Phase I and a probability that such liability will accrue in future years due to delays, costs and contingencies that are neither assessed nor accounted for in the plans.
The sum total of the Referee s analysis of the record regarding whether the financial condition and prospects of the county [ ] warrant a reasonable expectation that principal and interest maturities can be met when due without seriously restricting other expenditures , is found on page 10 of the Findings and Recommendations and states that:
i. Roberts did not present evidence as to what county
services or expenditures would need to be curtailed in the
event revenues from this project are insufficient to advertise
the bond issue[,]
ii. Warren County maintains a $10 million account balance;
iii. Warren County s lease arrangement . . . obligates it to cover
30% of any debt service shortfall that might occur;
iv. [U]nder current market conditions, the bond issue would
require $1 million per year in debt service payments beginning
with the sixth year after the bonds were sold, the first five
years interest payments being capitalized.
Initially, it is not Appellant s burden to identify specific services or expenditures that would have to be curtailed; only that the business and financing plan did not warrant a reasonable expectation of retiring the debt without seriously restricting such other expenditures. Having declined to impose a burden of proof formally, the Referee improperly imposed the burden of proof and risk of non-persuasion on Appellant to produce specific evidence of curtailed services and expenditures that is nowhere required by law.
Concerning the county s financial condition, the Referee made a finding that the county maintains a significant account balance . . . i.e. $10 million[.] The Referee failed to consider all of the evidence in that regard, which reflects that the county fund balance has ranged from six to ten million dollars. . Vol. 1. p. 31. The Referee failed to explain the use of the $10 million, high end figure in light of the fluctuation in county account balance over a two-year period.
With respect to the third finding, the Referee concluded that the maximum liability of the county for any deficit would be 30%, despite (as argued above) overwhelming and uncontroverted evidence that no interlocal agreements obligating other counties and cities to share any liability had been executed and that Warren County could be liable for as much as 100% of the shortfall for any year.
The last observation upon which the Referee grounded his conclusion was that the debt service on the bond would approximate $1 million per year. Without more, the Appellant believes that the record reflects that the bond issue should not have been approved, since even assuming that the total risks to Warren County are only $1 million per year, that amount is 1/10 of its total account balance being dedicated to a long-term debt and making those funds unavailable for government functions. That additional liability would, in any fair sense of the word, seriously restrict other expenditures.
The Referee ignored completely Appellants argument that using either the phased approach that Warren County concocted after-the-fact to make the business and finance plan appear less speculative, or the unitary approach actually represented in the business and finance plan, the bond and note approval failed to meet the statutory criteria. No response is provided to the unrebutted argument that, using the ITA s own figures, if the project ends at Phase I as defined by the ITA, it will create a liability that exceeds the county s account balance. No response is given to the alternative argument that, if in fact the Phase I concept was a post hoc rationalization imposed on a unitary project after SLDO approval, in order to avoid the speculative nature of the airpark component, the SLDO decision was arbitrary and contrary to law for failing to consider the environmental costs, delays and numerous contingencies associated with the project that may affect the ability to service the debt and in turn adversely impact the county and existing creditors.
1. The Referee Ignored Unrebutted Evidence That
If The Project Ended At Phase I A Substantial Impact
To Warren County Would be Incurred
The Business and Finance Plan January 2001 submitted in support of the request for approval by Warren County, included a Business Plan Overview, a Market and Operations Analysis, Forecasted Financial Statements and Projected Financial Statements. On appeal of the SLDO decision, Roberts argued that the business and finance plan rested on an unsteady foundation, being dependent on future unpledged and uncertain federal and state grants; failing to consider the impact of environmental constraints associated with the proposed site on the project timetable and costs; and being grounded in a shaky assumption of a future stream of revenue amounting to $17 million ($17,390,000) to be derived from the net proceeds from the sale of the existing Bowling Green-Warren County Regional Airport and construction of a new airport. Appellant alleged that the project viability with and without the airport, upon which the ability of the County to pay obligations on the bonds without affecting the county s general financial status, was inadequately demonstrated and inadequately assessed in the decision.
In response to the challenge to the reasonableness of the assumptions in the Business and Finance Plan relative to the disposition of the current airport and development and funding of the new airport, the ITA asserted that the proposed Transpark Project was a phased project and that this bond and note issuance and lease agreement are unrelated to the airport but were instead to fund Phase I of the project, being acquisition of 2000 acres and development of 240 of those acres for sale. According to the ITA Response to Appeal the project:
is to be constructed in phases or stages, so as to allow
the County to determine whether to undertake the
development of subsequent Phases based on the
success of prior Phases[.]
Response to Appeal at p.8.
Even though, as Appellant demonstrated in the Post-Hearing Brief,
the business plan reflects plainly that the project was presented to the SLDO as a unitary business park and airport project; see Business Plan Overview, pp. 1-2; Market and Operations Analysis at p. 1, and the proposition that the Transpark project business and finance plan is based on a phased approach gives every appearance of being a post hoc rationalization intended to rehabilitate the bond approval decision by sidestepping the significant problems with the projected revenue stream in the later years of the project, Appellant accepted for the sake of argument that the project was to be phased and reevaluated at the end of Phase I. 3 Appellant demonstrated that, based on the evidence in the documentation offered by the ITA, and granting the County and ITA every benefit of the doubt, if the project terminates at the end of Phase I the county (and any other participating governmental entities) will face significant shortfalls in revenue relative to expenses, thus materially and adversely affecting the financial status of the county.
The Referee completely ignored and failed to respond to this argument.
The ITA indicated that job creation as the criteria that will be used at the end of Phase I to determine whether to move to Phase II. (T. III p. 121). Assuming that the project does not, during Phase I, generate the jobs according to projections, and according to the criteria the decision is made not to develop Phase II, Appellant demonstrated that there would be a substantial revenue shortfall and liability to the participating counties including Warren County. Using the numbers supplied by the ITA and accepting at face value the assumptions and projections of the Business and Finance Plan, a substantial shortfall of $11,885,000 relative to expenditures at the end of Phase I of the Project if the project ends at that point, yet there is no capacity in the plan to address this possibility.
Assuming for the purposes of argument the continued existence of a $10 million dollar county fund balance, the deficit at the end of FY 2003 swamps that fund balance, obviously effecting a serious restriction of other county expenditures and adversely affecting existing creditors interests in the continued solvency of the county.4
The Referee glossed over this unrebutted argument and evidence reflecting that by end of FY 2003 (the end of Phase I) a shortfall of $11,885,000 relative to expenditures will exist if the Project ends at Phase I , instead leaping from the date of approval of the bonds and notes to year six, noting that the interest on the bonds is capitalized for the first five years.
What the Referee completely ignored is that the project might never get to the sixth year. Appellant argued, and presented substantial evidence, that the phased approach provided no protection against overextending the county fiscally, since the project cannot end at Phase I without causing serious harm to the County s finances and ability to incur other debt. Nor did the Referee rebut the weight of evidence in the record establishes that such an adverse effect will occur. Assuming that the project ends at Phase I, the record reflects that a FY 2003 shortfall of as much as $11 million dollar will have to be met by Warren County, a county with a current fund balance of roughly $10 million dollars as of the end of the last fiscal year and which has had substantially lower balances in the late 1990s. (T-1, pp. 30-1). There is little question that the proposed business plan poses a threat of seriously restricting other expenditures by the county, and the failure of the Referee to address the argument and the uncontroverted evidence makes the Findings and Recommendations inadequate.
2. The Referee Failed To Consider And Weigh
Evidence That The Business and Finance Plan
Is Unitary, Rather Than Phase, And That The
Plan Is Too Speculative To Justify Approval
Appellant presented factual and legal arguments that the business and finance plan rested on a series of assumptions that are untested, unproven and unrealistic, giving rise to a probability that liability will accrue to the county in future years due to delays, costs and contingencies that are neither assessed nor accounted for in the plans, and that such liability will seriously restricting other expenditures of the county, in light of the commitment and representation by the County that there will be no new taxes to support the retirement of the bond and lease obligations.
Appellant demonstrated that if the Project is phased, and the project ends at Phase I, a deficit of $11,885,000 relative to expenditures at the end of FY 2003 would exist that would be the responsibility of the county.
Alternatively, Appellant demonstrated that, accepting the representations of the Business Plan Overview and Business and Finance Plan, that the project is a unitary business park/airport project, the SLDO decision was in error for failing to independently scrutinize the key assumptions underlying the proposed business plan, thereby precluding a defensible finding that the debt service can be met without seriously restricting other county expenditures, and eroding any basis for a finding that the best interests of residents and creditors would be served by approval.
The evidence reflects that there are several weaknesses of the business and finance plan, any of which should have caused the SLDO to reject the proposed lease agreement and bond/note issue, and that the Referee ignored the evidence and Appellant s arguments.
Appellant demonstrated that the plan understates the costs and time involved in land acquisition, thus compromising the ability to retire the debt service without county support because the ability to retire the debt service is contingent on the stream of income from the assumed sale of developed land at a rate of 90 acres during FY 2003, and 60 acres each year thereafter. The Referee failed entirely to address this evidence and argument, instead apparently relying on the assumption that the $10 million dollars in account balance would be adequate to cover the debt service on the bond (and ignoring, as argued above, the potential 100% liability of the county for such debt).
Appellant argued that it was inappropriate to include in the stream of projected revenues proposed taxes to be imposed by Bowling Green after annexation of the Transpark by the City, since the annexation has not occurred. (T-1, p.34). The Referee did not respond to this argument or address the lack of consideration of this contingency in the approval of the bonds and notes.
Appellant argued that it was inappropriate to project that by FY 2003, the acquisition of the 2000 acres and development for industrial use of 240 acres will have been completed, and 90 of those acres will have been sold since the land is not currently zoned to support industrial use. The Referee completely ignored Appellants argument that it is arbitrary and capricious for the SLDO to approve a request for bond or note issuance or related lease, where the viability of a financing plan for debt service is in whole or in part dependent on independent future actions by legislative or administrative bodies such as a zoning or planning commission, unless the plan demonstrated that the debt can be serviced in the contingency that those events might not come to pass.
Appellant argued that the proposed Business Plan should have demonstrated viability without relying on the $18 million in speculative future state or federal grants. The Referee did not address the inclusion of these speculative income streams and the viability of the plan absent the infusion of government funds.
The Referee likewise failed to consider and assess the unrebutted evidence that the environmental constraints and costs associated with the project, might materially affect the costs and viability of the project. There is little question but that environmental concerns have much to do with the ability of the county to pay the principal and interest obligations on the bond issue without adverse effect on the county s financial situation. The financing plan relies entirely on the revenues from sale of the developed land to pay the bond obligations without raising local taxes or using general county revenues. Costs associated with mitigation necessitated by the sensitivity of groundwater in this karstified region to contamination, will impose cost and time constraints on the project, and are directly material to the ability of this project to be implemented. The Hearing Officer erred in failing to allow evidence on these matters and to consider the environmental costs in determining whether the proposed financing plan was realistic and feasible. The Referee likewise failed to assess and weigh the evidence regarding the costs and delays associated with the project and the potential impact on retiring a debt service dependent largely on developing and selling development land, instead relying on an irrelevant fact that Warren county produced evidence that industrial sites have been developed on the Karst topography typical of that found under the proposed site to be financed by this bond issue. Appellants argued and the evidence shows that the environmental constraints associated with the site and the environmental impacts of the project and necessary mitigation have a direct bearing on the project feasibility, and in turn on the ability of the county to retire the debt without cost to the county and its taxpayers. It was error to fail to allow (the SLDO precluded such evidence from being introduced) or to consider (the Referee failed to weigh and evaluate the evidence indicating higher costs and delays) evidence relating to these matters in deciding to approve the bond issue.
The Referee failed entirely to address the evidence reflecting that the Business Plan upon which decision approving the bond issuance was based, rests in substantial part on the assumption of the new airport construction, and of a stream of revenue amounting to $17 million ($17,390,000) to be derived from the net proceeds from the sale of the existing Bowling Green-Warren County Regional Airport, (which is proposed to occur after the completion of a new airport that will open in fiscal year 2007), both of which are extremely speculative. The Appellant demonstrated that the project viability with and without the airport, and the effect on the ability of the County to pay obligations on the bonds without affecting the county s general financial status, was inadequately assessed in the proposed project business and finance plan and in the decision to approve the bonds and notes. The Referee completely ignored this evidence and argument in his recommendation.
II. THE REFEREE S CONCLUSION THAT THE BEST INTERESTS OF THE CREDITORS AND PUBLIC OF WARREN COUNTY ARE SERVED BY THE BOND ISSUE IS ARBITRARY AND INCONSISTENT WITH LAW
Appellant argued that the assumption of significant liability for servicing the debt through the lease payments might adversely affect the ability of the County to meet that indebtedness while satisfying other current fiscal obligations, thus making the approval of the bonds and notes inconsistent with the best interests of existing creditors.
Ignoring evidence contained in the record indicating that the deficit could adversely affect existing creditors, the Referee concluded [t]here is no evidence that would indicate this project jeopardizes payments to existing creditors, and it should be noted that no creditor appeared in opposition to the bond issue.
This conclusion misstates the applicable legal standard, which is that the bond issue be in the best interests of both the county issuing the bonds and a majority of its creditors[.] Appellant was not required to demonstrate that payments to existing creditors would be jeopardized.
Similarly, the Referee and State Local Debt Officer are required to make the finding of best interests with respect to creditors of the county irrespective of the participation in the hearing or appeal of any existing creditor. The reliance by the Referee on the absence of creditors as evidence of the best interests of a majority of existing creditors being served, is quintessentially arbitrary and inconsistent with law, and taints the decision in a fatal manner. Silence or non-participation cannot lawfully or properly be construed as assent.
With respect to the interests of the county, Appellants argued that the determination of whether the approval of the County s request is in the best interests of Warren county and its citizens is one requiring a consideration in absolute terms of whether the effects of a proposed county indebtedness are positive, and in relative terms, whether the proposed indebtedness and risks are positive in relation to other actions that could be taken to achieve the goals of jobs and wages.
Appellants argued that the Second Finding of the SLDO that the proposed financing plan for the issuance of the Bonds and Notes for the Project will serve the best interest of the County [,] rested on nothing more than a conclusory statement by the Hearing Officer that the county believed that the issuance of the bonds and notes will serve the best interests of the taxpayers, citizens and inhabitants of the county, and that the State Local Debt Officer concurs with the County that the proposed financing plan for the issuance of the Bonds and Notes are for the public, is a public project for a public purpose, and appears in the best interest of the County.
Appellant argued that the conclusory assertion of the SLDO, without identifying the factual bases for the assertion, and without consideration and resolution of conflicting testimony regarding whether the Project and the bond issue to support the project is in the best interests of the county, was legally insufficient.
The Referee found that the evidence that the bond issue is in the best interest of Warren County and its creditors to be persuasive, relying on:
i. County Judge Buchanon s testimony that there was a
need for new jobs because of closing of the Fruit of the
Loom factory, curtailment of employment opportunities at
Eaton Corporation, and job loss due to bank mergers; and
ii. That Judge Buchanon believed that with the Transpark
project Warren County had enabled itself to compete on a different level for industrial development[.]
Completely missing from the analysis of the best interests is any indication of the legal standard applied by the Referee. Missing as well is any analysis of or response to the evidence presented by Appellant that the best interests of the county were not served by approval of the bond issue (a) because the proposed development might create costs and impacts that are negative for the community and (b) because no comparative assessment had been made to show that, among possible government interventions in economic development affairs, this proposal to incur liability was best.
As to the first point, the uncontested testimony of Dr. Meyer reflects that the proposed development may create costs and impacts for the larger community that are negative. The possibility of incremental increases in infrastructure impacts to roads, and costs of extending essential fire, police and medical services, may not be covered by the 20% of increased revenue. (T-II, p. 8). The increase in property values associated with the new development may cause lowering of values elsewhere due to relocation of existing jobs within Warren County. (T-II, p. 40). The Referee failed to assess the anticipated benefits and costs to the county in any meaningful manner, choosing instead to effectively delegate the statutory judgment of what is in the county s best interests to the County Judge.
Concerning the second point, Appellant argued and the Referee ignored the argument that the SLDO and Referee could not, and the County Debt Commission cannot, find that the best interests of the county are served by the County agreement to expose county taxpayers and residents to liability on this project, without also considering alternatives that would meet the stated objectives without incurring such liability.
The proof showed that no assessment was made of the alternative of construction of additional amenities at the existing airport. The relative costs and benefits of constructing a tower at the existing airport were not evaluated. (T-1, p. 83). The relative costs and benefits, in terms of money invested from the community, in acquisition of land around the existing airport in order to extend the runways was not considered. (T-1, p. 83). The relative costs and benefits of acquisition of land around the airport to support additional safety amenities were not considered in any official study. (T-1, p. 84). In short, ITA President Cherry admitted that it was fair to state that there has been no . . . formal alternatives analysis of the costs and benefits of expanding the existing airport to meet the same specifications of the proposed replacement airport. (T-III, p. 87).
ITA President Cherry also acknowledged that no study had been commissioned concerning the costs and benefits of providing comparable improvements to existing industrial parks rather than constructing a new industrial park, (T-III, p. 130), or of preparing an area for industrial development by securing an area-wide rezoning but allowing the private sector to assume development costs. (T-III, p. 130).
Judge Buchanon acknowledged that the county had not undertaken a formalized assessment of whether the investment of $25,000,000 of bond revenues elsewhere in the community could produce jobs and wages comparable to those proposed for the Transpark. (T-1, p. 43).
Absent a comparative analysis of other alternatives that would satisfy the goals of the project, including enhancement of the existing airport, enhancement of existing industrial parks, or other investments in job enhancement and creation, Appellant argued that the finding that the best interests of the public are served by the proposed project rests on an inadequate foundation.
The Referee completely ignored the evidence that the impact on the county might be negative rather than positive in an economic sense. So too, the Referee failed to respond to legal argument as to the proper construction of the best interests test, and chose instead to defer to the County Judge the determination of wherein lie the interests of the County.
This conclusion failed to consider and make requisite findings of basic facts to support the conclusion, and failed to independently ascertain whether the best interests of the county and existing creditors is served.
With respect to the Appellant s assertion that the best interests of the county s creditors are not served by these potential shortfalls, the Referee asserted on page 10 that [t]here is no evidence that would indicate this project jeopardizes payments to existing creditors[.] In fact there was unrebutted evidence showing that if the project ended at Phase I a substantial shortfall would exist and would jeopardizes the best interests of existing creditors.
With respect to the Appellant s argument that the decision as to whether the best interests of the county are served by approval of the bond issue and lease cannot be determined without considering alternatives that might better advance the goals of the project and protect the public interest without exposing the taxpayers, citizens and current creditors of the County to additional risks associated with new indebtedness, the Referee completely failed to respond to the legal argument that the best interests test was a comparative one, instead resting his conclusion on the testimony of the County Judge Executive that there was a need to create new employment opportunities to offset recent job losses.
The selective recitation of evidence to support generalized conclusions is not a surrogate for a reasoned recommendation containing findings of fact supported by substantial evidence in the record as a whole. The Referee s decision is in violation of KRS Chapter 13B.110 and the Kentucky Constitution, and must be rejected in lieu of independent review by the County Debt Commission of the evidence and arguments of the parties.
III. THE REFEREE COMMITTED CLEAR ERROR IN FAILING TO PROPERLY ASSIGN THE BURDEN OF PROOF WITH RESPECT TO THE APPEAL OF THE STATE LOCAL DEBT OFFICER S DECISION
KRS 66.310 provides both the procedures and the standards by which a State Local Debt Officer must review a request by a county for approval of a proposed bond and note issuance or lease agreement relative to such bonds and notes. In relevant part, the statute provides that:
The state local debt officer shall hold a hearing for the
purpose of determining whether any issue of bonds
submitted to him for approval should be approved or
disapproved. The state local debt officer shall withhold
his approval if he believes the financial condition and
prospects of the county do not warrant a reasonable ex-
pectation that interest and principal maturities can be met
when due without seriously restricting other expenditures
of the county; if in his discretion, the issue of bonds will
not serve the best interests of both the county issuing the
bonds and a majority of its creditors; or if it appears that
the bonds or the issuance thereof will be invalid.
The statute further provides for an automatic scheduling of a public hearing on all county requests pursuant to KRS 66.310(1) or (2), and outlines the requirements for public notice and the hearing, at which [a]ny party having a material interest shall have an opportunity to be heard and to present evidence.
The statute further directs that [t]he state local debt officer shall make a record of the proceedings of the hearing and shall prepare a written decision approving or disapproving the issuance of the proposed bonds. KRS 66.310(4).
KRS 66.310 provides for Commission disposition of appeals from rulings of the state local debt officer, noting that:
The commission, upon the basis of the record prepared by the state local debt officer, and of any additional evidence which may be introduced, shall pass upon the decision of the state local debt officer.
Neither KRS 66.310 nor KRS. 66.300 indicate the standard of review by which the Commission is to pass upon the decision of the state local debt officer. The Hearing Officer indicated that the hearing is de novo, and Appellant accepted that standard of review of the SLDO decision.
With respect to the burden of production and persuasion, KRS Chapter 13B, acknowledged by all parties to govern the conduct of the hearing on appeal of the SLDO decision, controls with respect to the allocation of the burden of proof. KRS 13B.090(7) provides that:
In all administrative hearings, unless otherwise provided by statute or federal law, the party proposing the agency take action or grant a benefit has the burden to show the propriety of the agency action or entitlement to the benefit sought. The agency has the burden to show the propriety of a penalty imposed or the removal of a benefit previously granted. The party asserting an affirmative defense has the burden to establish that defense. The party with the burden of proof on any issue has the burden of going forward and the ultimate burden of persuasion as to that issue. The ultimate burden of persuasion in all administrative hearings is met by a preponderance of evidence in the record. Failure to meet the burden of proof is grounds for a recommended order from the hearing officer.
In this instance, the party seeking approval of a lease, bonds and notes is the County, and the burden of demonstrating the propriety of the action of the SLDO should rest with the County and ITA, not with Appellant.
The Hearing Officer indicated in a pretrial order that the burden would rest with the Appellant. Appellant challenged that proposed allocation of the burden as resting on the misapplication of KRS 66.310(5).
Rather than ruling on the burden of proof (going forward and persuasion), the Hearing Officer sidestepped this requisite legal finding, holding that:
Although one could contend that it is the appellant
requesting the County Debt Commission to take
action, Warren County has indicated that the burden
of proof in this matter is irrelevant and that the proof
brought by and on behalf of it is so persuasive that it
would prevail, even it (sic) the burden were on it.
The Hearing Officer agrees that the evidence introduced in
support of the bond issue is so persuasive with respect
to the issues raised by Roberts that even if the burden
of proof were on Warren County and the Inter-Modal
Transportation Authority, the final decision reached in this
matter would remain unchanged.
Thus, rather than acknowledge the error in proposing to apply KRS 66.310(5) and properly allocating the burden to Warren County and the Inter-Modal Transportation Authority, the Referee failed to allocate the burden of going forward and of persuasion. Given the questionable validity of the recommendation in light of the abject failure of the Referee to address the arguments presented by Appellant, the proper allocation of the burden of proof
is essential to proper consideration of the case.
The allocation of the burden of proof is essential to administrative and judicial review of the propriety of the SLDO s action and the Referee s recommendation. For as the Court has noted, [t]he principle of substantial evidence, . . . applies to the party having the burden of proof. Without allocating the burden of proof, it is impossible to determine who bears the burden of production and persuasion by providing substantial evidence to justify a decision in his favor.
For the reasons stated above, the burden of proof rests with the project and bond issue proponents seeking the benefit of the State Local Debt Officer s approval. Having failed to meet that burden of showing that the bond issue and lease will not, under certain plausible conditions, adversely affect the county s ability to or that the bond issue is in the best interest of the public, the SLDO decision should be reversed.
In the film Field of Dreams, Kevin Costner hears a voice directing if you build it, he will come. He plows under a cornfield and spends all of his time, energy and savings constructing a baseball field in the middle of an Iowa cornfield. Through the magic of Hollywood, Shoeless Joe Jackson and other baseball stars now deceased, including Costner s movie father, arrive to play ball on the Field of Dreams.
Costner s character, by plowing under the corn crop, caused a default on the farm mortgage and avoided foreclosure only because people came to watch the ballplayers.
In this day and age, no community can afford to assume responsibility for a field of dreams. Any proposal to assume liability that will be paid with public monies should be, and must be, scrutinized to assure that the public and existing creditors of the county will be fully protected, and that the project is grounded in sound and realistic assumptions.
The Referee failed to provide sufficient findings of fact and recommendations grounded in substantial evidence in the record taken as a whole, that the proposed bond and notes will be retired without material adverse effect on the county and its creditors, and for want of satisfaction of the statutory criteria, the Appellant respectfully requests that the Commission reject the Referee s Findings and Recommendations and instead find and determine that the decision of the State Local Debt Officer approving the issuance of the bonds and notes should be reversed for want of compliance with KRS 66.310(2), and for any other relief to which Appellant may appear entitled.
Kentucky Resources Council, Inc.
P.O. Box 1070
Frankfort, Kentucky 40601
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing APPELLANTS EXCEPTIONS TO REFEREE S FINDINGS AND RECOMMENDATIONS was served by hand delivery on Hon. J. Patrick Abell, Hearing Officer, Tourism Development Cabinet, 500 Mero Street, Capital Plaza Tower, Room 1209, Frankfort, KY 40601, and hand delivery on Governor Paul Patton, State Capitol, Frankfort, Kentucky 40601, and by hand delivery on the State Local Debt Officer, Eugene L. Kiser, Department for Local Government, 1024 Capital Center Drive, Suite 340 Frankfort, Kentucky 40601, and by first class mail on Frank Chuppe, Esq., PNC Plaza, 500 West Jefferson Street, Louisville, KY 40202-2898; Charles E. English, Sr., Esq., David Anderson, Esq. and Whayne C. Priest, Jr., Esq., 1101 College Street, P.O. Box 770 Bowling Green, KY 42102-0770, and Stephen Catron, Esq., P.O. Box 1220, 918 State Street, Bowling Green, KY 42102-1220, fax 270-842-4720, this 2nd day of October, 2001.
1 The transcript of the two-day hearing, conducted on July 19 and 20, 2001, consists of four volumes identified as Volumes I, II, III and IV. References to the transcript will be identified as T (Volume) and (page).
2 While the Referee, at the conclusion of the two-day hearing, raised a question as to whether the Commission had jurisdiction to approve the bond issue in question, the Referee s Findings and Recommendations determined that the state local debt officer and County Debt Commission do have jurisdiction over the particular bond issue being proposed. Appellant s Post-Hearing Brief demonstrates clearly that jurisdiction does exist over the bond issue in question.
3 County Judge-Executive Buchanon described Phase 1 of the project as including [t]he purchase of up to 2,000 acres of real estate, infrastructure development, industrial development of 240 acres of land. (T-1, p. 44). Included also in Phase 1 is the purchasing of the portion of land that the airport may be located. (T-1 p. 45). Mr. Callahan testified that phase one would be the expenditures for the first fiscal year 2002 and 2003. (T-IV, p. 99).
4 The Appellant s Post Hearing Brief at pp. 22-34, outlines why this shortfall will occur at the end of FY 2003, and demonstrates, using the ITA and County s own numbers and assumptions, why the approval by the SLDO was inappropriate.