Commonwealth of Kentucky Supreme Court of Kentucky Case No

COMMONWEALTH OF KENTUCKY SUPREME COURT OF KENTUCKY CASE NO. 2017-SC-647

COMMONWEALTH OF KENTUCKY ex rel. ANDY BESHEAR, ATTORNEY GENERAL APPELLANT v. On Appeal from Franklin Circuit Court, Division II Civil Action No. 17-CI-673

MATTHEW G. BEVIN, in his official capacity as Governor of the Commonwealth of Kentucky; HAL HEINER, in his official capacity as Secretary of the Kentucky Education and Workforce Development Cabinet APPELLEES

BRIEF FOR APPELLANT

Andy Beshear Laura Tipton Attorney General Matt James La Tasha Buckner Taylor Payne Assistant Deputy Attorney General Assistant Attorneys General Travis Mayo Office of the Attorney General Executive Director, Office of Civil and Capitol Building, Suite 118 Environmental Law 700 Capitol Avenue Frankfort, Kentucky 40601-3449 Telephone No. (502) 696-5300

CERTIFICATE OF SERVICE

I hereby certify that a true and correct copy of this brief was served this 27th day of April 2018, by hand-delivery and electronic mail, upon the following: M. Stephen Pitt, S. Chad Meredith, Office of the Governor, 700 Capitol Avenue, Suite 101, Frankfort, Kentucky 40601; and by U.S. Mail to Bridget Papalia, 300 Sower Blvd., Frankfort, Kentucky 40601; Honorable Thomas D. Wingate, Franklin Circuit Judge, 222 St. Clair Street, Frankfort, Kentucky 40601; and Kentucky Court of Appeals, Attn: Clerk, 360 Democrat Drive, Frankfort, Kentucky 40601. I further certify that the record has not been removed from the Clerk’s Office.

______Andy Beshear Attorney General INTRODUCTION

This case involves the Governor’s violation of the Kentucky Constitution,

Kentucky statutes, and Kentucky Supreme Court precedent by suspending statutes and rewriting law in a reorganization of statutorily created, independent education boards.

The Appellant, the Commonwealth of Kentucky ex rel. Andy Beshear, Attorney General, asks this Court to reverse the Trial Court’s decision, to declare the Governor’s actions illegal, to declare Executive Order 2017-364 unconstitutional and void ab initio, and to provide needed guidance on any reorganization power under KRS 12.028.

STATEMENT CONCERNING ORAL ARGUMENT

This Court has already determined that this case is of great and immediate public importance when it granted the Attorney General’s motion to transfer the appeal. The

Attorney General is ready and willing to present oral argument if this Court deems it beneficial.

STATEMENT OF POINTS AND AUTHORITIES

INTRODUCTION………………………………………………………………………………..i

STATEMENT CONCERNING ORAL ARGUMENT………………………………………...ii

STATEMENT OF POINTS AND AUTHORITIES…………………………………………...iii

STATEMENT OF THE CASE ...………………………………………………………………..1

Executive Order 2017-364………………………………………………………………...1

Beshear v. Haydon Bridge Co., 304 S.W.3d 682 (Ky. 2010)………………………………1

Rose v. Council for Better Educ., 790 S.W.2d 186 (Ky. 1989)……………………………2

I. The Kentucky Constitution Places Matters Of Public Education In The Sole Province Of The General Assembly.…………………………………………….2

Keeling v. Commonwealth, 381 SW3d 248 (Ky. 2012)…………………………...2

KY. CONST. § 183…………………………………………………………………..2

KY. CONST. § 185………………………………………………………………….2

KY. CONST. § 186………………………………………………………………….2

Prowse v. Bd. of Educ. for Christian Cnty., 120 S.W. 307 (Ky. 1909)…………2-3

Commonwealth v. Griffen, 105 S.W.2d 1063 (Ky. 1937)………………………….3

Talbott v. Kentucky State Bd. of Educ., 52 S.W.2d 727 (Ky. 1932)……………….3

Calvert Inv’s., Inc. v. Louisville and Jefferson Cnty. Metro. Sewer Dist., 805 S.W.2d 133 (Ky. 1991)…………………………………………………………….3

Rose v. Council for Better Educ., 790 S.W.2d 186 (Ky. 1989)…………………3-4

II. The General Assembly Meets Its Constitutional Mandate By Creating, Structuring, And Providing Authority To Independent Education Boards.....4

Rose v. Council for Better Educ., 790 S.W.2d 186 (Ky. 1989)……………………4

1990 Ky. Acts ch. 476……………………………………………………………..4

KRS 156.029………………………………………………………………………4

iii

KRS 156.040………………………………………………………………………4

KRS 161.028………………………………………………………………………4

KRS 164.011………………………………………………………………………4

KRS 158.648………………………………………………………………………4

KRS 158.794………………………………………………………………………4

KRS 158.6452……………………………………………………………………..4

KRS 158.6453……………………………………………………………………..4

A. The KBE was Created with the Independent Authority to Manage Common Schools.………………………………………………………...5

KRS 156.029………………………………………………………………5

KRS 156.035………………………………………………………………5

KRS 156.070………………………………………………………………5

KRS 156.040………………………………………………………………5

KRS 156.148………………………………………………………………6

B. The EPSB was Created to Independently Determine Qualifications and Discipline for Educators...... 6

KRS 161.028…………………………………………………………….6-7

KRS 161.120………………………………………………………………6

KRS 161.017…………………………………………………………….6-7

C. The CPE was Created to Independently Manage Postsecondary Education. ………………………………………………………………..7

KRS 164.011…………………………………………………………….7-8

KRS 164.020………………………………………………………………7

D. The Council for Gifted and Talented Education was Created as an Independent Board to Advise on Matters Related to Gifted and Talented Students. ……………………………………………………….8

KRS 158.648…………………………………………………………….8-9

E. The Grant Steering Committee has Independent Authority to Advise the KBE and the Kentucky Department of Education. ………………..9

KRS 158.794…………………………………………………………...9-10

KRS 158.792…………………………………………………………...... 9

F. The Curriculum Council was Created as an Independent Council to Advise KBE. …………………………………………………………….10

KRS 158.6452……………………………………………………………10

G. The Standards Committee was Created as Independent Committee to Review Procedural Aspects of Other Committees. …………………...11

2017 Ky. Acts ch. 156 § 3………………………………………………...11

KRS 158.6453……………………………………………………………11

III. The Governor’s Executive Order Suspended, Altered, and Rewrote The Statutes Enacted By General Assembly. ……………………………….…11

Executive Order 2017-334 …………………………………………………...11-12

Executive Order 2017-364 …………………………………………………...12-13

IV. The Attorney General Sought A Declaratory Judgment That The Governor’s Unlawful Suspension And Rewriting Of Laws Were Unconstitutional.…...... 13

KRS 12.028………………………………………………………………………14

Rose v. Council for Better Educ., 790 S.W.2d 186 (Ky. 1989)……………………14

V. The Attorney General Appealed The Trial Court’s Decision. ………………..14

VI. The General Assembly Did Not Confirm Executive Order 2017-364. …….....14

Executive Order 2017-364……………………………………………………….14

KRS 12.028….…………………………………………………………………...14

STANDARD OF REVIEW……………………………………………………………………..14

Executive Order 2017-364……………………………………………………………….14

KRS 12.028………………………………………………………………………………14

Pearson ex rel. Trent v. Nat’l Feeding Sys., Inc., 90 S.W.3d 46 (Ky. 2002)………………15

Caniff v. CSX Transp., Inc., 438 S.W.3d 368 (Ky. 2014)……………….………………..15

ARGUMENT……………………………………………………………………………………15

KRS 12.028………………………………………………………………………………15

I. The Trial Court Erred By Holding The Governor May Suspend Statutes. ….15

Fletcher v. Commonwealth, 163 S.W.3d 852 (Ky. 2005)……………………..15-16

Baker v. Fletcher, 204 S.W.3d 589 (Ky. 2006)……………………………….15-16

Beshear v. Haydon Bridge Co., 304 S.W.3d 682 (Ky. 2010)…………………15-16

Legislative Research Comm’n by and through Prather v. Brown, 664 S.W.2d 907 (Ky. 1984)………………………………………………16

A. The Kentucky Constitution and Supreme Court Precedent Forbid the Governor From Suspending Statutes. …………………………………16

KY. CONST. § 15………………………………………………………….16

Fletcher v. Commonwealth, 163 S.W.3d 852 (Ky. 2005)……………..16-17

Baker v. Fletcher, 204 S.W.3d 589 (Ky. 2006)……………………….16-17

Beshear v. Haydon Bridge Co., 304 S.W.3d 682 (Ky. 2010)……………..17

Executive Order 2017-364……………………………………………….17

B. LRC v. Brown Does Not Hold that a Governor May Suspend Statutes During a Reorganization. ………………………………………………17

Legislative Research Comm’n by and through Prather v. Brown, 664 S.W.2d 907 (Ky. 1984)……………………………………....18

KRS 12.028………………………………………………………………18

KY. CONST. § 15………………………………………………………….18

II. The Trial Court Erred In Holding the Governor Did Not Unlawfully Rewrite and Create Law. ………………………………………………………………...19

KY. CONST. § 27………………………………………………………19-20

KY. CONST. § 28………………………………………………………19-20

KY. CONST. § 29………………………………………………………19-20

KY. CONST. § 60……………………………………………………....19-20

Commonwealth, Cabinet for Health and Family Serv. v. Chauvin, 316 S.W.3d 279, (Ky. 2010)……………...... 19

Fletcher v. Commonwealth, 163 S.W.3d 852 (Ky. 2005)………………...19

Executive Order 2017-364……………………………………………….19

KRS 156.029……………………………………………………………..21

KRS 156.040……………………………………………………………..21

KRS 158.6452……………………………………………………………21

KRS 158.6453……………………………………………………………21

KRS 158.648……………………………………………………………..21

KRS 158.794……………………………………………………………..21

KRS 161.028……………………………………………………………..21

KRS 161.120……………………………………………………………..21

KRS 164.011……………………………………………………………..21

Vandertoll v. Commonwealth, 110 S.W.3d 789 (Ky. 2003)………………21

KRS 446.010……………………………………………………………..21

KY. CONST. § 81………………………………………………………….21

III. The Trial Court Erred When It Held KRS 12.028 Delegated To The Governor The Authority To Suspend Law. ………………………………………………21

vii

Executive Order 2017-364……………………………………………………….21

KRS 12.028…………………………………………………………………...21-22

A. The Legislature May Not Delegate the Authority to Suspend Law.....22

KY. CONST. § 28………………………………………………………22-23

Board of Trs. of Judicial Form Re. Sys. v. Att’y Gen. of the Commonwealth of Ky., 132 S.W.3d 770, 781 (Ky. 2003)………...22

KY. CONST. § 15………………………………………………………22-24

KRS 12.028………………………………………………………………22

Legislative Research Comm’n by and through Prather v. Brown, 664 S.W.2d 907 (Ky. 1984)……………………………………....23

Adams v. Commonwealth, Civil Action No. 13-CI-423 (Franklin Cir. Ct. Sep. 3, 2013)………………………………………………….23-24

B. KRS 12.028 Does Not Expressly Delegate Authority to Suspend Law. ……………………………………………………………………..25

Board of Trs. of Judicial Form Re. Sys. v. Att’y Gen. of the Commonwealth of Ky., 132 S.W.3d 770, 781 (Ky. 2003)……….25

Baker v. Commonwealth, 2007 WL 3037718, at *34, No. 2005-CA- 001588-MR (Ky. App. Oct. 19, 2007)…………………………...25

KRS 12.028…………………………………………………………..25-26

KY. CONST. § 15………………………………………………………….25

Revenue Cabinet v. O’Daniel 153 S.W.3d 815, 819 (Ky. 2005)………...25

KRS 446.080……………………………………………………………..25

Commonwealth v. Plowman, 86 S.W.3d 47 (Ky. 2002)…….…………...25

Commonwealth v. Harrelson, 14 S.W.3d 541, 546 (Ky. 2000) ……..25-26

Whitman v. American Trucking Ass’ns, 531 U.S. 457 (2001)…………...26

C. If KRS 12.028 Did Delegate This Authority, it Does Not Set Forth Standards to Control the Governor’s Discretion, and Therefore Violates the Nondelegation Doctrine. ………………………………….26

viii

Legislative Research Comm’n by and through Prather v. Brown, 664 S.W.2d 907 (Ky. 1984)……………………………………...26

Board of Trs. of Judicial Form Re. Sys. v. Att’y Gen. of the Commonwealth of Ky., 132 S.W.3d 770, 781 (Ky. 2003)……….26

Fletcher v. Commonwealth, 163 S.W.3d 852 (Ky. 2005)……………26-27

KRS 12.028…………………………………………………………..27-28

Diemer v. Commonwealth, Transp. Cab., Dept. of Highways, 786 S.W.2d 861 (Ky. 1990)……………………………………...27

IV. The Trial Court Erred By Finding that KRS 12.028 Applies to the Education Boards. …………………………………………………………………………..28

KY. CONST. § 183………………………………………………………………...28

Rose v. Council for Better Educ., 790 S.W.2d 186 (Ky. 1989)……………………28

A. The Governor’s Reorganization Violates the Separation of Powers Mandated by Section 183 of the Kentucky Constitution. ……………..28

Rose v. Council for Better Educ., 790 S.W.2d 186 (Ky. 1989)……….28-29

KY. CONST. § 183………………………………………………………...28

Executive Order 2017-364……………………………………………….29

KRS 12.028………………………………………………………………29

B. The Legislative Framework Creating the Education Boards Provides for Their Independence from the Governor’s Political Control. …….30

KRS 156.029……………………………………………………………..30

KRS 156.040……………………………………………………………..30

KRS 158.6452………………………………………………………...30-31

KRS 158.6453……………………………………………………………30

KRS 153.648………………………………………………………….30-31

KRS 158.794………………………………………………………….30-31

KRS 161.028……………………………………………………………..30

KRS 161.120……………………………………………………………..30

KRS 164.011……………………………………………………………..30

Commonwealth ex rel. Beshear v. Commonwealth Office of the Governor ex rel. Bevin, 498 S.W.3d 355 (Ky. 2016)…………………….30-31

KRS 61.645………………………………………………………………31

Voeteler v. Fields, 23 S.W.2d 588 (Ky. 1923)…………………….……...31

Vandertoll v. Commonwealth, 110 S.W.3d 789 (Ky. 2003)……………..31

KRS 63.080………………………………………………………………31

Executive Order 2017-364……………………………………………….32

KRS 12.028………………………………………………………………32

C. KRS Chapter 12, Itself, Removes the Education Boards From the Governor’s Political Control. ………………………………………….32

KRS 12.028………………………………………………………………32

Pearce v. Univ. of Louisville, by and through its Bd. of Trustees, 448 S.W.3d 746 (Ky. 2014)………………………………………32

KRS 12.295…………………………………………………………...32-33

D. EPSB is a Quasi-Judicial Board and the Governor’s Purging of Its Members Violates the Separation of Powers. …………………………33

KRS 161.120………………………………………………………….33-34

Sangster v. Ky. Bd. of Med. Licensure, 454 S.W.3d 854 (Ky. 2014)……..33

Quatkemeyer v. Ky. Bd. of Med. Licensure, 506 Fed. Appx. 342 (6th Cir. 2012)……………………………………………………33

KRS 161.017……………………………………………………………..34

KRS 161.028……………………………………………………………..34

In re Maze, 85 S.W.3d 599, 600 (Ky. 2002)……………………………....34

Humphrey’s Ex’r v. United States, 295 U.S. 602 (1935)………………….34

Bowers v. Pennsylvania Labor Relations Bd., 167 A.2d 480 (Pa. 1961)……………………………………………………..34-35

CONCLUSION…………………………………………………………………………………35

STATEMENT OF THE CASE

This case involves Governor Matthew G. Bevin’s violation of the Kentucky

Constitution, state statutes, and this Court’s precedent when he issued Executive Order

2017-364. Through the Order, Governor Bevin purged, recreated and/or substantially altered seven (7) statutorily independent education boards (“Education Boards”). (R. at

39-55.) To accomplish this task, the Governor unlawfully suspended and rewrote at least nine (9) duly enacted statutes that the General Assembly crafted to meet its constitutional mandate of providing for an efficient system of common schools. (Id.)

The Franklin Circuit Court (“Trial Court”) struck down part of the Executive

Order. (R. at 515) (Exhibit A to the Appendix). It correctly held that the Governor unlawfully suspended and rewrote a state statute to alter the teacher disciplinary process under the Education Professional Standards Board. (R. at 521.) However, the Trial Court erred when it did not apply the same reasoning to Governor Bevin’s other actions, and ruled – for the first time by any Kentucky court – that the General Assembly delegated its constitutional authority to suspend and even “make” law to the Governor. (R. at 518-19.)

In doing so, the Trial Court failed to consider binding precedent, including Beshear v.

Haydon Bridge Co., 304 S.W.3d 682, 693 (Ky. 2010), where this Court stated that “a

Governor does not have the authority under the Constitution of Kentucky to suspend the operation of any statute and that such actions are unconstitutional and void ab initio.”

Finally, despite finding a delegation of the General Assembly’s constitutional power to suspend law under Section 15 of the Kentucky Constitution, the Trial Court failed to analyze whether such a delegation violates Kentucky’s strict separation of powers and/or the non-delegation doctrine, and whether it impermissibly encroached

1 upon the General Assembly, which, under Kentucky’s Constitution, has the “sole obligation” to implement and maintain a system of common schools. (R. at 515-23.) See

Rose v. Council for Better Educ., 790 S.W.2d 186, 215-16 (Ky. 1989). This Court should overturn the Trial Court’s November 22, 2017, Opinion and Order.

I. The Kentucky Constitution Places Matters Of Public Education In The Sole Province Of The General Assembly.

Any analysis of a reorganization of education boards must begin with the acknowledgment that the Kentucky Constitution places them under the control of the legislature. “The Kentucky Constitution establishes a government of three branches, among which powers are divided to achieve a system of checks and balances.” Keeling v. Commonwealth, 381 SW3d 248, 255 (Ky. 2012). By clear, direct, and unambiguous language, the Kentucky Constitution placed the Commonwealth’s education system under the Legislative Branch. Section 183 of the Kentucky Constitution states:

The General Assembly shall, by appropriate legislation, provide for an efficient system of common schools throughout the State.

(Emphasis added). The fact that the Constitution places public education under the control of the Legislative Branch is reinforced in Sections 185 and 186, wherein the framers again assigned to the General Assembly the power to direct the investment of the common school fund’s interest and distribute the common school fund among the school districts. KY. CONST. §§ 185 and 186.

Since the adoption of our current Constitution, the Commonwealth’s highest

Court has consistently recognized the mandate of Section 183, i.e., that the General

Assembly controls Kentucky’s education system. As early as 1909, the Court held that

“Section 183 of the Constitution requires the General Assembly to provide by

2 appropriate legislation an efficient system of common schools throughout the state.”

Prowse v. Bd. of Educ. for Christian Cnty., 120 S.W. 307, 308 (Ky. 1909) (emphasis added). See Commonwealth v. Griffen, 105 S.W.2d 1063, 1065 (Ky. 1937). The Court further found that the General Assembly has the sole discretion over common schools.

See Prowse, 120 S.W. at 308; Talbott v. Kentucky State Bd. of Educ., 52 S.W.2d 727, 730

(Ky. 1932); Griffen, 105 S.W.2d at 1065. As such, entities created by the General

Assembly, such as school districts, are “created . . . and exist only as a means for the state to carry out the General Assembly’s constitutional duty to ‘provide for an efficient system of common schools throughout the state.’” Calvert Inv’s., Inc. v. Louisville and

Jefferson Cnty. Metro. Sewer Dist., 805 S.W.2d 133, 138 (Ky. 1991).

In the seminal constitutional decision addressing public education, the Kentucky

Supreme Court reaffirmed that Kentucky’s system of education is the “sole obligation” of the General Assembly. Rose, 790 S.W.2d at 215-16. In Rose, the Court ruled that it is

“clear and unequivocal” that the General Assembly – and not the Governor or the

Executive Branch – must “create,” “maintain,” and “implement” this system:

First, it is the obligation, the sole obligation, of the General Assembly to provide for a system of common schools in Kentucky. The obligation to so provide is clear and unequivocal and is, in effect, a constitutional mandate. Next, the school system must be provided throughout the entire state, with no area (or its children) being omitted. The creation, implementation and maintenance of the school system must be achieved by appropriate legislation. Finally, the system must be an efficient one.

Id. at 205 (emphasis added).

The Court provided a detailed list of criteria defining what an “efficient” system of common schools resembles, and required continuous “monitor[ing] by the General

Assembly to assure that they operate with no waste, no duplication, no mismanagement,

3 and with no political influence.” Id. at 213 (emphasis added). The Court concluded that, with regard to education, “the ultimate control remains with the General Assembly.” Id. at 215-16.

II. The General Assembly Meets Its Constitutional Mandate By Creating, Structuring, And Providing Authority To Independent Education Boards.

After Rose, the General Assembly had to begin anew in meeting its constitutional mandate and its “sole obligation” to provide for an efficient system of common schools.

It first passed the Kentucky Education Reform Act (“KERA”). See 1990 Ky. Acts ch.

476)). This and subsequent legislative action show a specific intent to meet the mandate by creating and providing authority to specialized and independent education boards.

The General Assembly created the seven Education Boards subjected to the

Governor’s reorganization to carry out its constitutional duty to provide for an efficient system of common schools. To adhere to Rose, the General Assembly enacted statutes to ensure the boards were both independent and shielded from political control. The General

Assembly established detailed criteria for appointment, set mandatory terms for board members, and staggered those terms. See, e.g., KRS 156.029; 156.040; 161.028; 164.011;

158.648; 158.794; 158.6452; 158.6453. These protections limited the influence of the

Governor, allowing board members to exercise independent judgment. The General

Assembly enacted further mechanisms to assure that the legislature – not the Governor – maintained control, such as requiring specific cause for the removal of any board member, requiring appointments to be made from nominating committees, requiring confirmation of members to pass through both chambers of the legislature, and attaching boards to the Department of Education. See e.g., KRS 164.011; 161.028; 158.794;

158.648; 158.6452.

A. The KBE was Created with the Independent Authority to Manage Common Schools.

Under KERA, the General Assembly first created what is now known as the

Kentucky Board of Education (“KBE”), and ensured its independence by designating it a

“a public body corporate and politic.” KRS 156.029(1); KRS 156.035(1). The General

Assembly then mandated that the KBE – not the Governor – “shall” have the authority to manage and control all common or public schools in Kentucky and all programs operated in such schools. KRS 156.029; KRS 156.070(1). The KBE prescribes regulations, courses of study, and curriculums, as necessary for the efficient management and operation of the common schools. KRS 156.070(4). The KBE also implements federal law appropriating and apportioning funds to the state, and provides for the proper apportionment and disbursement of any funds it receives in accordance with federal and state law. KRS 156.035(2).

The General Assembly provided for the KBE’s mandatory structure, stating it

“shall” consist of eleven (11) members appointed by the Governor and confirmed by the

Senate. KRS 156.029(1) (emphasis added). It shielded KBE’s members from political influence by creating mandatory terms, requiring that members “shall” serve four (4) year terms. KRS 156.029(1). KRS 156.029 and 156.040 provide specific requirements for board membership. Additionally, under KRS 156.029(2) and 156.040(3), appointments to the KBE “shall be made without reference to occupation, political affiliation, or similar consideration.” (Emphasis added).

The KBE is also independent in its operations. The KBE – not the Governor – selects the Commissioner of Education to head the Department of Education, and the

Commissioner hires staff and administers our system of common schools. KRS

156.148(1).

B. The EPSB was Created to Independently Determine Qualifications and Discipline for Educators.

Through KERA, the General Assembly also created the Education Professional

Standards Board (“EPSB”) as a “public body corporate and politic[.]” KRS 161.028(1).

Among other duties, the EPSB establishes standards and requirements for obtaining and maintaining a teaching certificate, takes disciplinary action against public education employees, and issues orders as necessary in administrative actions before it. KRS

161.028(1)(a), (f) and (x).

The EPSB conducts administrative hearings in accordance with KRS Chapter 13B before taking disciplinary action regarding any certificate it issues, after denying an application for a certificate, or, if requested, after issuing a written admonishment. KRS

161.120(5)(a)(1.- 3.). Teachers are permitted to seek judicial review in Franklin Circuit

Court in accordance with KRS Chapter 13B. KRS 161.120(12). The EPSB may also take emergency action with respect to a certificate. KRS 161.120(6).

The EPSB recruits, selects, and employs its own executive director, who is responsible for day-to-day operations of the Board. KRS 161.028(1)(n); KRS 161.017(1).

The executive director then creates the organizational structure and personnel policies for board approval, appoints all staff, prepares annual reports, carries out the board’s policy and program directives, prepares and submits a biennial budget for approval, and performs other duties assigned by law. KRS 161.017(1). The executive director has access to all records of educational personnel to conduct an investigation related to disciplinary actions against certified employees. KRS 161.017(4). As part of any

6 investigation, the executive director may issue subpoenas relevant to disciplinary cases.

KRS 161.017(5).

The General Assembly established the mandatory structure of the EPSB, stating that it “shall” be composed of seventeen (17) members. KRS 161.028(2)(a) (emphasis added). The General Assembly further limited the Governor’s appointment power, requiring that appointees “shall” meet certain criteria.1 KRS 161.028(2)(a) (emphasis added).

C. The CPE was Created to Independently Manage Postsecondary Education.

In 1992, the General Assembly created the Council on Postsecondary Education

(“CPE”), making it “an agency, instrumentality, and political subdivision of the

Commonwealth and a public body corporate and politic having all powers, duties, and responsibilities as are provided to it by law[.]” KRS 164.011. Among its many duties, the

CPE determines the tuition and qualifications for admission to the state postsecondary educational system. KRS 164.020(8). Additionally, the CPE defines and approves “the offering of all postsecondary education technical, associate, baccalaureate, graduate and professional degree, certificate, or diploma programs in the public postsecondary education institutions.” KRS 164.020(15).

The General Assembly provided for the CPE’s mandatory structure, stating it

“shall” be comprised of thirteen (13) citizen members appointed by the Governor, a full-

1This detailed criteria is set out in KRS 161.028(2)(a) as follows: Nine (9) members who shall be teachers representative of elementary, middle or junior high, secondary, special education, and secondary vocational classrooms; Two (2) members who shall be school administrators, one (1) of whom shall be a school principal; One (1) member representative of local boards of education; and Three (3) members representative of postsecondary institutions, two (2) of whom shall be deans of colleges of education at public universities and one (1) of whom shall be the chief academic officer of an independent non-for- profit college or university.

7 time faculty member employed at a state institution of postsecondary education, a full- time student enrolled at a state institution of postsecondary education, and the commissioner of education. KRS 164.011(1), (3), and (4) (emphasis added). The General

Assembly further ensured the CPE’s independence by creating mandatory terms for its members, requiring that each citizen member “shall serve a term of six (6) years unless removed … for cause[.]” KRS 164.011(6) (emphasis added).2

D. The Council for Gifted and Talented Education was Created as an Independent Board to Advise the KBE on Matters Related to Gifted and Talented Students.

In 1998, the General Assembly created the State Advisory Council for Gifted and

Talented Education (“Council for Gifted and Talented”). The General Assembly provided the Council for Gifted and Talented with authority to “make recommendations regarding the provisions of services for gifted and talented students in Kentucky’s education system.” KRS 158.648(1).

In KRS 158.648(1)(a), the General Assembly established the mandatory structure of the Council for Gifted and Talented, stating it “shall be” composed of nineteen (19) members (emphasis added). The General Assembly then provided the Council independence by mandating that members “shall” serve mandatory three (3) year terms, which must be staggered, meaning no Governor can appoint the entire Council at one time. KRS 158.648(1)(c) (emphasis added).

2 The General Assembly further limited the Governor’s appointment power in a number of ways. First, in making appointments, the Governor “shall . . . assure equal representation of the two (2) sexes, inasmuch as possible; assure no less than proportional representation of the two (2) leading political parties of the Commonwealth based on the state’s voter registration; and assure that appointments reflect the minority racial composition of the Commonwealth.” KRS 164.011. Second, the Governor “shall” assure that no more than three (3) voting members reside in any one (1) judicial district of the Kentucky Supreme Court as of the date of appointment. Id.

Under KRS 158.648(1)(a), the Governor’s appointees to the Council for Gifted and Talented “shall” represent various constituencies.3 The General Assembly attached the Council for Gifted and Talented to the Department of Education for administrative purposes, which is under the control of the independent KBE, and not the Governor. KRS

158.648(1).

E. The Grant Steering Committee has Independent Authority to Advise the KBE and the Kentucky Department of Education.

The General Assembly created the Reading Diagnostic and Intervention Grant

Steering Committee (“Grant Steering Committee”) to “advis[e] the Kentucky Board of

Education and the Department of Education concerning the implementation and administration of the reading diagnostic and intervention fund[.]” KRS 158.794. That fund was “created to help teachers and library media specialists improve the reading skills of struggling readers in the primary program.” KRS 158.792(2).

Pursuant to KRS 158.794(2), the General Assembly provided independence for the Grant Steering Committee by creating mandatory terms, stating “[e]ach member of the committee … shall serve for a term of three years. . . .” (emphasis added), which are staggered so that no Governor can make all appointments at the same time.

3 Four (4) members shall be teachers within local school districts representing elementary, middle, and high school levels with at least one (1) full-time teacher of gifted and talented students and one (1) full-time teacher who teaches in a regular classroom; four (4) members shall be parents of students in local school districts, including two (2) parents of students identified as gifted and talented and at least one (1) who serves or has served on a school council; three (3) members shall be from postsecondary education institutions, including one (1) from an independent college or university; One (1) member shall be a superintendent of a local school district; two (2) members shall be principals, including one (1) from an elementary or middle school and one (1) from a high school; two (2) members shall be coordinators of gifted and talented programs and services in local school districts; one (1) member shall be a local board of education member; one (1) member shall represent the visual and performing arts; and one (1) member shall be appointed from the private business sector. KRS 158.648.

Under KRS 158.794(1), the Committee “shall be” composed of sixteen (16) members, including thirteen (13) gubernatorial appointees. (Emphasis added).

Appointees to the Committee must meet certain statutory criteria, which include: four (4) primary program teachers with a specialty or background in reading and literacy; four (4) university or college professors with a specialty or background in reading and literacy representing universities; one (1) elementary school principal; one (1) certified library media specialist; and three (3) individuals from the state at large with an interest in reading and literacy. KRS 158.794(1)(a)-(e). The General Assembly attached the

Committee to the Department of Education, which the independent KBE oversees. KRS

158.794(5).

F. The Curriculum Council was Created as an Independent Council to Advise KBE.

The General Assembly created the School Curriculum, Assessment and

Accountability Council (“Curriculum Council”) to “study, review, and make recommendations concerning Kentucky’s system of setting academic standards, assessing learning, identifying academic competencies and deficiencies of individual students, holding schools accountable for learning, and assisting schools to improve their performance.” KRS 158.6452(1). Under KRS 158.6452(2), the Curriculum Council

“shall” be composed of ten (10) members, including three (3) members appointed by the

Governor; three (3) members of the Senate appointed by the Senate President; three (3) members of the House of Representatives appointed by the Speaker of the House of

Representatives; and the commissioner of education.” (Emphasis added).

G. The Standards Committee was Created as an Independent Committee to Review Procedural Aspects of Other Committees.

In the 2017 legislative session, the General Assembly created the Standards and

Assessments Process Review Committee (“Standards Committee”). See 2017 Ky. Acts ch. 156 § 3. The Standards Committee reviews the procedural aspects of the review process undertaken by four (4) standards and assessments review and development committees, also created by legislation. Id. The Standards Committee is tasked specifically with ensuring the review process is an open and transparent process that permits all Kentuckians to participate. KRS 158.6453(2)(g)(1).

Under KRS 158.6453(2)(f), as amended, the General Assembly stated that the

Standards Committee “shall” be composed of ten (10) members, including three (3) members appointed by the Governor; three (3) members of the Senate appointed by the

Senate President; three (3) members of the House of Representatives appointed by the

Speaker of the House of Representatives; and the commissioner of education.” (Emphasis added).

III. The Governor’s Executive Order Suspended, Altered, And Rewrote Statutes Enacted By The General Assembly.

On June 2, 2017, Governor Bevin issued Executive Order 2017-334. (R. at 9.)

The Order unlawfully abolished, purged and or altered each Education Board. (Id.) On

June 7, 2012, the Attorney General communicated to the Governor that his Order was unconstitutional and asked the Governor to rescind the Order.4 (Id.) In response, on June

4 See Brad Bowman, “Beshear demands Bevin rescind order abolishing and reorganizing education boards,” THE STATE JOURNAL, June 7, 2017 (available at http://www.state-journal.com/2017/06/07/beshear- demands-bevin-rescind-order-abolishing-and-reorganizing-education-boards/) (last visited on Aug. 20, 2017).

16, Governor Bevin issued Executive Order 2017-364 (“Executive Order”). (R. at 8; see also “Executive Order,” attached as Exhibit B to the Appendix). The Executive Order rescinded and superseded Order 2017-334. (Executive Order, ¶ I.) However, the

Executive Order did not cure the Governor’s unlawful actions; it still suspended and rewrote Kentucky law, and still invaded the sole obligation of the General Assembly to maintain a system of common schools. (R. at 8.)

In particular, the Executive Order abolished and recreated the EPSB, the Council for Gifted and Talented Education, the Grant Steering Committee, and the Curriculum

Council, purging their members and allowing the Governor to appoint the entire membership of those boards. (Executive Order, ¶¶ XVIII, XXV, XXXII, XXXVII,

XLVIII.) The ability to both purge and fully reappoint the boards provided the Governor the direct “political influence” that the legislative framework and the Rose decision prohibit.

The Order further rewrote the laws mandating the membership structure and member qualifications of the Education Boards, by reducing or adding members, removing and adding different criteria for appointees, and removing nomination and confirmation processes designed to limit the Governor’s influence. (Id., at ¶¶ VIII, IX, X,

XIII, XIV, XXI, XXIV, XXVI, XXXIV, XXXIX, XLIV.) Furthermore, the Governor created law to allow himself to appoint chairs and vice chairs of certain boards and remove board members for missing meetings. (Id., at ¶ XXVII, XXXI, XXXVI, XLI,

XLVII.)

The reorganization of the EPSB best demonstrates the severity of the Governor’s actions. Through the Executive Order, the Governor abolished the independent, quasi-

12 judicial board, and rewrote the law to provide himself – rather than the EPSB – the power to appoint the Executive Director, who carries out investigations on behalf of the EPSB.

(Id., at ¶ XXVII.) He also altered the confirmation process to exclude the House of

Representatives from confirming appointees to the EPSB. (Id., at ¶ XXVI.) He also limited the statutory authority of the EPSB to require the Board to gain approval from the

KBE before passing regulations. (Id., at ¶ XXX.) Finally, the Governor rewrote law to require teachers and administrators to appeal final disciplinary orders first to the KBE, rather than directly to the Franklin Circuit Court. (Id., at ¶ XXIX.)

IV. The Attorney General Sought A Declaratory Judgment That The Governor’s Unlawful Suspension And Rewriting Of Laws Were Unconstitutional.

The Commonwealth filed the underlying Complaint on June 20, 2017, challenging the Executive Order. (R. at 3.) The Kentucky Education Association

(“KEA”) intervened as Plaintiffs. (R. at 181-84.) The parties filed cross-motions for summary judgment. (R. at 77-109, 270-77, 278-315.)5 The Court heard argument on

September 27, 2017. (R. at 318.)

On November 22, 2017, the Trial Court issued its Opinion and Order, finding the

Governor violated the Kentucky Constitution by writing new law that changed the review process for disciplinary actions under the EPSB. (R. at 521.) The Trial Court ruled that the Governor “does not have the power to create new laws, which violates the Kentucky

Constitution.” (Id.) However, the Trial Court determined that the other actions of the

Governor – which also suspended and wrote new law – were lawful. (R. at 522.)

To reach its conclusion, the Trial Court found that the General Assembly delegated its constitutional power to suspend statutes to the Governor under KRS 12.028.

5 The Trial Court converted Defendants’ Motion to Dismiss to a Motion for Summary Judgment.

(R. at 518.) This is the first ruling by any Kentucky court that the power to suspend law under Section 15 of the Kentucky Constitution – part of the Bill of Rights – may be delegated. The Trial Court never addressed that the Governor’s abolishing, purging, recreating and altering the statutorily independent Education Boards required him to not only suspend the law, but to actually rewrite the law. (R. at 515-523.) Nor did the Trial

Court address or analyze the Rose decision or apply the non-delegation doctrine to the unlimited discretion claimed by the Governor. (Id.)

V. The Attorney General Appealed The Trial Court’s Decision.

The Attorney General filed a timely notice of appeal on December 4, 2017. (R. at

513.) On the following day, the Attorney General moved to transfer and advance consideration of this case. On February 2, 2018, this Court granted the Attorney

General’s Motion to Transfer.

VI. The General Assembly Did Not Confirm Executive Order 2017-364.

The General Assembly adjourned sine die on April 14, 2018 without confirming

Executive Order 2017-364. As a result, ninety-days after adjournment sine die, the organization of the Education Boards reverts to its status prior to the issuance of

Executive Order 2017-364. See KRS 12.028(5).

STANDARD OF REVIEW

The facts are not in dispute: the Governor issued Executive Order 2017-364 pursuant to KRS 12.028, and abolished, purged, recreated and altered the Education

Boards. This appeal rests on the purely legal question of whether the Governor may suspend and rewrite law, and reorganize statutorily independent education boards that fall

14 within the “sole authority” of the General Assembly. The Attorney General requests that this Court reverse the Trial Court’s Order that permitted these unlawful actions.

On appeal, “[t]he standard of review . . . of a summary judgment is whether the circuit judge correctly found that there were no issues as to any material fact and that the moving party was entitled to a judgment as a matter of law.” Pearson ex rel. Trent v.

Nat’l Feeding Sys., Inc., 90 S.W.3d 46, 49 (Ky. 2002). As no facts are in dispute in an order partially granting and denying cross motions for summary judgment, review is de novo. Caniff v. CSX Transp., Inc., 438 S.W.3d 368, 372 (Ky. 2014).

ARGUMENT

The Trial Court erred by holding the Governor may suspend and rewrite statutes.

It erred by failing to apply the separation of powers doctrine, which prohibits the

Governor from asserting control over the Education Boards. The Trial Court finally erred when it failed to analyze whether KRS 12.028 sets forth “an intelligible principle” to which the Governor must conform. Based on these errors, independently and collectively, the Trial Court’s Opinion and Order should be overturned.

I. The Trial Court Erred By Holding The Governor May Suspend Statutes.

The Trial Court’s holding that the Governor may suspend duly-enacted law conflicts with the Kentucky Constitution and established precedent of this Court. The

Kentucky Constitution prohibits the suspension of laws by any branch of government other than the legislature. This Court has acknowledged that constitutional prohibition and ruled repeatedly that the governor simply cannot suspend state statutes in Fletcher v.

Commonwealth, Baker v. Fletcher, and Beshear v. Haydon Bridge Co.

The Trial Court ignored this binding precedent, instead holding that Legislative

Research Comm’n by and through Prather v. Brown, 664 S.W.2d 907 (Ky. 1984) (“LRC v. Brown”) found that the General Assembly delegated to the Governor the authority to suspend statutes under KRS 12.028. It did not. Yet, even if it had, Fletcher, Baker and

Beshear followed that decision and would control. This Court should enforce the

Constitution and follow its prior decisions to reverse the Trial Court’s erroneous holding.

A. The Kentucky Constitution and Supreme Court Precedent Forbid the Governor from Suspending Statutes.

Entitled “laws to be suspended only by the General Assembly,” KY. CONST. § 15 expressly provides that “no power to suspend laws shall be exercised unless by the

General Assembly or its authority.” This Court definitively and repeatedly has held that a

Governor does not have the authority to suspend statutes, and doing so is unconstitutional and void ab initio. Fletcher v. Commonwealth, 163 S.W.3d 852 (Ky. 2005). This Court stated that:

Since this provision is a part of the Bill of Rights, the Governor could not suspend statutes even if he possessed “emergency” or “inherent” powers under Sections 69 and 81. . . . The suspension of statutes by a Governor is also antithetical to the constitutional duty to “take care that the laws be faithfully executed.” A fortiori, the suspension of any statutes by the Governor[] . . . was unconstitutional and invalid ab initio.”

Id. at 872. (internal citations omitted).

Twice since Fletcher, this Court has reiterated that a Governor simply cannot suspend statutes. In Baker v. Fletcher, 204 S.W.3d 589 (Ky. 2006), the Court cited and quoted Fletcher v. Commonwealth to again stress that the Governor is not empowered to suspend statutes. Id. at 593. It noted that Section 15, like the majority of the Kentucky

Bill of Rights, “was originally designed to reflect the will of the framers to prevent the

16 suspension of duly-enacted laws by any entity other than the constitutionally-elected legislative body, a power the British government had ruthlessly exercised over the colonies.” Id. at 592.

Then, most recently, in Beshear v. Haydon Bridge Co., 304 S.W.3d 682 (Ky.

2010), this Court directly and definitively stated: “a Governor does not have the authority under the Constitution of Kentucky to suspend the operation of any statute and that such actions are unconstitutional and void ab initio.” Id. at 693 (first emphasis added).

Fletcher, Baker and Beshear are controlling.

Here, the Governor conceded at least three (3) times below that his Executive

Order suspends statutes found in KRS Chapters 156, 158, 161 and 164. He stated: “[t]he reorganization at issue here arguably does suspend at least parts of statutes governing the affected boards”; “the reorganization order creates a variance with the statutes”; and

“[t]here is no question that the reorganization order provides different structures for those boards and commissions than the statutes” that govern them. (R. at 94, 102)

(emphasis added).

Fletcher, Baker and Haydon Bridge are dispositive: The Governor may not suspend statutes. This Court should reverse the Trial Court.

B. LRC v. Brown Does Not Hold that a Governor May Suspend Statutes During a Reorganization.

Instead of applying Fletcher, Baker and Haydon Bridge, the Trial Court found:

“As the Kentucky Supreme Court previously held in [LRC v.] Brown, the legislature clearly intended to delegate to the Governor the authority to suspend laws to reorganize administrative agencies.” (R. at 520.) This is not the holding of LRC v. Brown. Neither

17 the word “suspension” nor any mention of Section 15 of the Kentucky Constitution appears in the decision.

In LRC v. Brown, this Court addressed the constitutionality of statutes enacted in

1982 providing additional authority to the Legislative Research Commission (“LRC”) during breaks between legislative sessions, including the power to approve or veto a reorganization by the Governor. 664 S.W.2d at 909. This Court framed the issue before it as: “(1) can the General Assembly delegate its authority to legislate to the LRC[?]” Id. at

914.

The Court answered with a resounding “No.” Id. at 915. The Court expressly stated that “the General Assembly cannot delegate its power to make a law.” Id. The

Court held it can, instead, only “establish standards for administration and delegate authority to implement a law.” Id. The Court clarified this distinction as meaning the

General Assembly cannot delegate “the exercise of discretion as to what the law shall be.” Id.

The Court therefore only addressed the reorganization statute in the context of determining whether the General Assembly could grant veto power to the LRC. Id. at

930. It never considered a governor’s suspension of statutes, and never analyzed Section

15 of the Constitution. Those issues were simply not raised.

To read KRS 12.028 as a delegation of authority to suspend law cannot be supported by LRC v. Brown, and is in direct conflict with KY. CONST. §15. Even if it had,

LRC v. Brown would have been overruled by Fletcher, Beshear, and Haydon Bridge.

This Court should reverse the Trial Court’s decision and find that KRS 12.028 does not, and cannot, delegate the authority to suspend statutes.

II. The Trial Court Erred By Holding The Governor Did Not Unlawfully Rewrite And Create Law.

The Kentucky Constitution also prohibits a Governor from rewriting existing law to create new law. KY. CONST. §§ 27, 28, 29, and 60. This Court has confirmed that “[t]he legislature has the exclusive authority to enact substantive law.” Commonwealth, Cabinet for Health and Family Serv. v. Chauvin, 316 S.W.3d 279, 284-85 (Ky. 2010). See also

Fletcher, 163 S.W.3d at 869 (“Section 69 does not vest the Governor with legislative powers, which are specifically reserved by Sections 28 and 29 solely to the legislative department.”)

Here, the Trial Court appropriately held that the Governor “does not have the power to create new laws, which violates the Kentucky Constitution.” (R. at 521).

Accordingly, it found the Governor’s rewriting of the teacher disciplinary review proceedings under the EPSB to be an unconstitutional creation of new laws. However, the Trial Court failed to apply that same holding to the rest of the Executive Order, where the Governor suspended and then rewrote at least nine (9) statutes. (R. at 515.)

Ultimately, the Trial Court overlooked how the Governor substituted his discretion for that of the General Assembly.

The Governor has admitted that his “reorganization order creates a variance with the statutes,” and “[t]here is no question that the reorganization order provides different structures for those boards and commissions than the statutes” that govern them. (R. at

94, 121.) For instance, the Governor created new law providing himself the new power to remove all members of the Education Boards. (Executive Order, ¶ LII.) He similarly rewrote state statute to remove EPSB’s power to appoint its own executive director, and instead, gave himself the power of appointment. (Executive Order, ¶ XXVII.) These

“rewrites” change not only the wording of the statutes, but directly contradict the decision and will of the legislature, defeating its express purpose that the Education Boards act and operate independently.

The Governor also unquestionably created law when he rewrote the statutes governing the size, terms, qualifications and appointment criteria of the Education

Boards. Duly enacted statutes, passed after public hearings and upon a vote of the

General Assembly, set these requirements. But the Governor’s “rewrites” changed and contradict these requirements. They ended statutorily provided mandatory terms for members by allowing the Governor to purge the boards. They took the power to hire and control executive directors away from the Education Boards and gave it to the Governor.

Where the duly enacted statutes specify board size, the Governor rewrote the statutes to change that size. Where they set forth the qualifications of board members and the criteria from which they are to be appointed, the Governor rewrote the statutes to alter the qualifications and criteria. In short, the Governor rewrote law intended to limit the limit his control of who and how many members to appoint, and what control the Governor has over those members after appointment.

These are substantive changes to duly enacted state statutes, whereby the

Governor suspended law, then substituted his discretion for that of the legislature for what that law should be. In doing so, the Governor enacted “new law” in violation of

Sections 27, 28, 29, and 60 of the Kentucky Constitution.

Not only did the Governor create new law by suspending and rewriting existing law, but by doing so, he violated those statutes. In particular, he violated eleven provisions in nine statutes that use the word “shall” to establish the mandatory structure,

20 appointment criteria, appointment limitations, and duties for the Education Boards. See

KRS 156.029, 156.040, 158.6452, 158.6453, 158.648, 158.794; 161.028; 161.120 and

164.011. He also removed board members prior to the expiration of their statutorily mandated terms.

The rules of statutory construction prevent the Governor, or anyone else, from disregarding the word “shall” as used by the General Assembly. In common or ordinary parlance, and in its ordinary signification, the term shall is a word of command and . . . must be given compulsory meaning. . . . Shall means shall.” Vandertoll v.

Commonwealth, 110 S.W.3d at 795-96 (Ky. 2003) (internal citations omitted) (emphasis added). Indeed, the General Assembly codified this compulsory meaning, stating

“‘[s]hall’ is mandatory” when written in state law. KRS 446.010(39) (emphasis added).

Thus, not only has the Governor violated the separation of powers doctrine, but he has violated the specific statutes governing the Education Boards themselves, and failed to faithfully execute the law as required by Section 81 of the Kentucky Constitution.

By rewriting statutes, the Governor created law and violated the Kentucky

Constitution by exercising a power exclusively reserved for the legislature. As a result, he altered the structure, makeup, authority and appointment and nomination processes of the

Education Boards to a degree that they no longer reflect the intent of the legislature. The

Court should reverse the Trial Court.

III. The Trial Court Erred When It Held KRS 12.028 Delegated The Authority To Suspend Law To The Governor.

The Trial Court – and the Governor – acknowledge that the Governor suspended statutes and created new law under the Executive Order. (R. at 91, 102, 515-23.) Yet, the

Trial Court held that KRS 12.028 delegated the constitutional authority to suspend

21 statutes to the Governor. (R. at 518.) It cannot. Even if it could, KRS 12.028 contains no such delegation. And if it did, KRS 12.028 would still violate the nondelegation doctrine.

A. The Legislature May Not Delegate the Authority to Suspend Law.

Kentucky’s doctrine of separation of powers is considered one of the strictest in the nation because our Constitution specifically precludes one branch of our government from delegating its constitutional power to another branch. KY. CONST. § 28. When the

Kentucky Constitution specifically reserves a power to one branch of government, that power may not be delegated to another branch. Board of Trs. of Judicial Form Re. Sys. v.

Att’y Gen. of the Commonwealth of Ky., 132 S.W.3d 770, 781 (Ky. 2003).

Section 15 of the Kentucky Constitution specifically reserves the power to suspend statutes solely to the General Assembly. This reservation is unsurprising, as the power to suspend law is just as “legislative” as the power to make law. This Court has recognized “that the Constitution vests the legislative power exclusively in Congress, and under the doctrine of separation of powers, Congress must exercise that power rather than delegate it to the executive or judicial branches.” Id. Courts recognize that Kentucky holds our legislature to a higher standard because our Constitution, as noted above, explicitly forbids any delegation of legislative powers assigned under the Constitution.

Id. at 782.

The Governor’s entire argument rests on his claim of “absolute authority” under

KRS 12.028. He argued that KRS 12.028 not only gives him the power to suspend statutes, but to rewrite them. (R. at 94, 102.) But, as noted above, the power to suspend law cannot be delegated because it was reserved solely to the General Assembly. See

KY. CONST. § 15; Board of Trs. of Judicial Form Re. Sys., 132 S.W.3d at 781. Nor can

22 the power to rewrite law be delegated, as “the General Assembly cannot delegate its power to make a law.” LRC v. Brown, 664 S.W.2d at 915.

Moreover, this Court has ruled that the General Assembly cannot delegate “the exercise of discretion as to what the law shall be.” Id. Here, the Governor has not only exercised, but fully substituted his discretion for that of the General Assembly. By suspending the law, he changed the law from being what the General Assembly mandated that it “shall” be.6 By rewriting these mandates, he fully substituted his discretion for that of the General Assembly as to what the law shall be. As such, his action violated KY.

CONST. §§ 15 and 28.

The Trial Court failed to appreciate the difference between a delegation of the authority to implement a law and the Governor’s suspension and rewriting of the law when it misapplied an Opinion and Order of the Franklin Circuit Court. (R. at 519.)

However, the difference is critical. In Adams v. Commonwealth, the Franklin Circuit

Court held KRS 12.028 allowed the Governor the authority to “create” new offices. Civil

Action No. 13-CI-423, at *7 (Franklin Cir. Ct. Sep. 3, 2013) (attached as Exhibit C to the

Appendix). There, Governor Steven L. Beshear had the authority to create “Kynect.” Id., at *1. The Court determined this was an appropriate exercise of KRS 12.028. Id. at *5 &

6. However, it couched its holding in important terms, stating, “[U]nless the Governor’s decision violates a provision of the Kentucky Constitution, this Court must uphold the

Executive Order.” Id., at *7.

Adams is distinguishable from the situation at hand. Foremost, Adams dealt with a delegation to implement law, not a delegation to suspend law. The difference is

6 As discussed in Argument, § II, supra, the Governor suspended eleven provisions in nine statutes that contain the mandatory term “shall.”

23 critical. In Adams, the Governor created a new office for the purpose of implementing federal law. He did not suspend and rewrite any existing law to create Kynect.

Conversely, here, Governor Bevin abolished statutorily created Education Boards, purged their members, recreated the Boards, appointed their entire memberships, and moved certain powers from the boards to the Governor. To accomplish this, Governor Bevin admits he suspended and rewrote duly enacted statutes. (R. at 94, 102.)

Furthermore, in Adams, Governor Beshear did not substitute his discretion for that of the General Assembly to create Kynect because the General Assembly had not enacted law to implement the ACA. Unlike Adams, here, Governor Bevin substituted his will for that of the General Assembly, thereby subverting the intent of the legislature and increasing his authority and political influence over the system of common schools.

Notably, because Governor Beshear’s creation of Kynect did not suspend or rewrite law, in Adams, the Court did not need to address the nondelegation doctrine. The Trial Court was misplaced in its reliance on Adams.

The law is clear: the General Assembly’s constitutional power to suspend law found under Section 15 of the Kentucky Constitution cannot be delegated. The Governor concedes that he suspended law – a constitutional power reserved for the legislature. He did not simply implement a law, as Governor Beshear did in Adams. As a result, that prior opinion cannot support the Trial Court’s holding with Section 15 of the Kentucky

Constitution and Kentucky’s strict doctrine of separation of powers. This Court should reverse the Trial Court’s Order.

B. KRS 12.028 Does Not Expressly Delegate Authority to Suspend Law.

Delegations of power must be express. Board of Trs. of Judicial Form Re. Sys.,

132 S.W.3d at 781. Kentucky courts recognize a “strong stance against vague delegations” of power. Id. at 781-82, 784. Authority must be “clearly delegated,” and a court cannot expand that authority beyond what the General Assembly expressly delegated. Baker v. Commonwealth, 2007 WL 3037718, at *34 (Ky. App. Oct. 19, 2007)

(attached as Exhibit D to the Appendix).

KRS 12.028 does not contain any language expressly delegating the constitutional authority to suspend statutes to the Governor. It does not contain the word “delegate” and never mentions Section 15 of the Kentucky Constitution or the authority to suspend statutes. Instead, it speaks only to “a temporary change in the state government organizational structure” that “may include the creation, alteration or abolition of any organizational unit or administrative body and the transfer of functions, personnel, funds, equipment, facilities, and records from one (1) organizational unit or administrative body to another.” KRS 12.028(1)-(2). To read this statute as authorizing the Governor to suspend statutes is find a delegation of constitutional authority by implication. This is not a permissible interpretation under Kentucky law.

Furthermore, this interpretation cannot be supported by the rules of statutory construction. Those rules command that an interpretation of a statute begin with the plain language. Revenue Cabinet v. O’Daniel 153 S.W.3d 815, 819 (Ky. 2005); KRS

446.080(4). This means, “statutes must be given a literal interpretation unless they are ambiguous and if the words are not ambiguous, no statutory construction is required.”

Commonwealth v. Plowman, 86 S.W.3d 47, 49 (Ky. 2002). A court is “not at liberty to

25 add or subtract from the legislative enactment or discovery meanings not reasonably ascertainable from the language used.” Commonwealth v. Harrelson, 14 S.W.3d 541, 546

(Ky. 2000). To find that KRS 12.028 delegates authority to suspend statutes requires addition to the enactment beyond its plain language.

Additionally, the United States Supreme Court has ruled that statutes like KRS

12.028 cannot be read to undo, avoid, or ignore specific statutory schemes. In Whitman v.

American Trucking Ass’ns, 531 U.S. 457 (2001), the United States Supreme Court stated that “Congress. . . does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions—it does not, one might say, hide elephants in mouseholes.”

Id. at 468.

In other words, if the General Assembly intended to delegate its exclusive constitutional power to suspend and enact law, it was required to state so expressly. It did not. Similarly, if the General Assembly was intending to give the Governor the power to wholly undo a legislative scheme implemented to maintain an efficient system of common schools, it would have made that expressly clear.

C. If the Legislature Intended KRS 12.028 to Delegate Its Constitutional Authority, it Did Not Set Forth an Intelligible Principle to Control the Governor’s Discretion.

While “the General Assembly cannot delegate its power to make a law[,]” LRC v.

Brown, 664 S.W.2d at 915, it can delegate the power to implement a law. Board of Trs. of

Judicial Form Re. Sys., 132 S.W.3d at 781. “To be lawful, [the delegation] must not include the exercise of discretion as to what the law shall be . . . [and] must have standards controlling the exercise of administrative discretion.” Id. See also Fletcher, 163

S.W.3d at 862 (“while the General Assembly cannot delegate its power to make law, it

26 can make a law that delegates the power to determine some fact or state of things upon which the law makes its own action depend—so long as the law establishes policies and standards governing the exercise of that delegation[]”) (citation omitted). Here, KRS

12.028 has no controlling standards guiding the exercise of the Governor’s discretion.

Instead, it has only three (3) adjectives – “economy, efficiency and improved administration[.]” KRS 12.028(1)-(2), (4).

In Diemer v. Commonwealth, Transp. Cabinet, Dep’t. of Highways, 786 S.W.2d

861 (Ky. 1990), this Court ruled that the General Assembly unlawfully abdicated its legislative power when it allowed certain decisions to be made in the “sound discretion” of the Secretary of Transportation. Id. at 866. Specifically, the General Assembly attempted to give the Transportation Secretary the discretion to determine whether or not an area was “urban” in the context of granting or denying billboard advertising permits under the Kentucky Billboard Act. Id. at 862. The Court stressed that the strength of

Kentucky’s non-delegation doctrine requires a legislative delegation to be “complete on its face, leaving to regulatory authority administrative rather than policy decisions.” Id at

865. The Court held that the statute was an unconstitutional delegation of legislative power because it granted discretion without sufficient standards controlling the

Secretary’s discretion. Id. at 865-66.

Just as the General Assembly could not give the Transportation Secretary the discretion to define the term “urban,” it cannot give the Governor the discretion to define

“economy,” “efficiency,” or “improved administration.” The adjectives are not sufficient controlling standards. KRS 12.028 contains absolutely no standards, much less sufficiently controlling ones. As interpreted by the Governor – and now the Trial Court –

KRS 12.028 constitutes an unlawful abdication of the General Assembly’s legislative power. Under it, the Governor may suspend the operation of law and substitute his discretion to rewrite that law simply by stating that doing so will be more efficient.

The Trial Court did not properly analyze the nondelegation doctrine’s application to KRS 12.028. Doing so leads to the inescapable conclusion that KRS 12.028 does not set forth an intelligible principle to limit the Governor’s discretion.

IV. The Trial Court Erred By Finding That KRS 12.028 Applies To The Education Boards.

The Kentucky Constitution treats public education uniquely. The system of common schools is a creature of the legislature and its maintenance is reserved exclusively to the legislature. KY. CONST. § 183; Rose, 790 S.W.3d at 215-16. This distinction is made in our Constitution to limit the political influence in our system of common schools. Id. at 205. The Governor cannot reorganize statutorily independent

Education Boards to exert his political influence. To do so, invades the sole obligation of the General Assembly to provide, implement and maintain our public education system.

A. The Governor’s Purported Reorganization Violates the Separation of Powers Mandated by Section 183 of the Kentucky Constitution.

The Kentucky Constitution bestows upon the General Assembly – and the

General Assembly alone – the responsibility to create, manage and operate the common school system in the Commonwealth of Kentucky. Id. Section 183 of the Kentucky

Constitution provides that: “the General Assembly shall, by appropriate legislation, provide for an efficient system of common schools throughout the State.” This Court has concluded that Section 183 is a constitutional mandate that “it is the obligation, the sole obligation, of the General Assembly to provide for a system of common schools in

Kentucky.” Id. (emphasis added). Our Constitution – and this Court – have make it clear: matters of public education are reserved for the Legislature – not the Governor.

The Governor ignored this separation of power when he issued Executive Order

2017-364. The Executive Order usurps the “sole obligation” of the General Assembly to provide for the system of common schools. The Governor admits as much, stating his action is an attempt to create a more efficient common school system. (Executive Order, at p. 1.) His attempt alone violates the separation of powers. Ultimately, even if this

Court were to accept that KRS 12.028 allows the Governor the authority he claims, his use of that authority to abolish, recreate and alter the Education Boards violates

Kentucky’s strict doctrine of separation of powers.

This is especially the case since, under Governor Bevin’s expansive view of KRS

12.028, his power to reorganize boards has no limits. He could repopulate the boards with individuals he knows will advance certain educational ideologies and policies. He could remove members who failed to comply with his agenda through endless “reorganizations for efficiency.” In this way, he essentially could make decisions regarding programs and curricula in the common schools. For example, Executive Order 2017-364 gives the

Governor unprecedented power over the Education Boards. It allowed him to:

 appoint every member to each board he abolished,  appoint all of these members, all at the same time,  appoint members pursuant to new criteria he created, without nomination processes or full confirmation proceedings by both houses of the legislature,  appoint and control the executive director to oversee the operations of the EPSB,  appoint the chairs and vice chairs of the boards he abolished, and  remove board members – without process – for missing meetings.

B. The Legislative Framework Creating the Education Boards Provides for Their Independence from the Governor’s Political Control.

The Governor’s claim of authority is not only repugnant to the Constitution, but also inconsistent with the legislative framework that creates and governs the Education

Boards. Through a comprehensive legislative scheme, the General Assembly expressed its intent for these boards to remain apolitical, independent, and secluded from too much executive control. See KRS 156.029, 156.040, 158.6452, 158.6453, 158.648, 158.794;

161.028; 161.120 and 164.011. It did so to meet the constitutional mandate that it create an efficient system, one with no political influence. See Rose, 790 S.W.2d at 213. If the

Governor’s reorganization power under KRS 12.028 gives him the power to unilaterally abolish the Education Boards, the statutory protections are rendered meaningless. It is illogical to assume the legislature would simultaneously allow the Governor to remove all board members at the same time and reappoint entirely new boards – thereby circumventing the statutes setting those staggered terms – through a reorganization.

Importantly, the KBE, the EPSB and the CPE each were created as “corporate bodies” that exercise corporate powers. See KRS 156.035(1); KRS 161.028; KRS

164.020. Such a designation by the General Assembly evidences their intended independence. See Commonwealth ex rel. Beshear v. Commonwealth Office of the

Governor ex rel. Bevin, 498 S.W.3d 355, 380 (Ky. 2016) (holding that the legislature’s creation of university boards as “bodies corporate, with the usual corporate powers” indicated the intent to remove the boards from the Governor’s control). By retaining corporate status, these boards are more “akin to municipal or public corporations, having

30 a separate existence from the main body of government, although retaining many of the government’s characteristics . . . .” 7 Id.

Moreover, the General Assembly has limited the Governor’s role with respect to the Education Boards to one of an appointment authority. (See supra, at 5-11). Indeed, various statutes significantly limit even that role. First, the members of both the Council for Gifted and Talented and the Grant Steering Committee serve staggered terms to limit the executive branch’s appointment authority, and guard against the potential for any one

Governor to ‘”stack the board.” Additionally, the General Assembly requires the

Governor to adhere to strict criteria when appointing members to each independent education board. (See supra, at. 5-11).

Furthermore, the General Assembly did not grant the Governor any specific removal authority over these Education Boards. Importantly, Kentucky law recognizes that “the power of removal is not incident to the power of appointment . . . .” Voeteler v.

Fields, 23 S.W.2d 588, 589 (Ky. 1923). Additionally, the Legislature established the

Council for Gifted and Talented, the Grant Steering Committee, and the Curriculum

Council so that their members “shall” serve mandatory terms. See KRS 158.648; KRS

158.794; KRS 158.6452. As discussed earlier, the term “shall” is mandatory and compulsory. Vandertoll, 110 S.W.3d at 295-96. By setting mandatory terms by statute,

KRS 63.080 prevents the Governor from removing members of the Boards without cause.

Thus, the General Assembly intended for the Governor’s role to be limited to one of appointment, a role he has greatly surpassed through Executive Order 2017-364.

7The Governor’s actions raise practical concerns, as well. As corporations with attendant corporate powers, these boards may be sued and enter into contracts. KRS 61.645(2). Abolishing the KBE, the EPSB and the CPE throws existing contracts into a state of uncertainty.

Additionally, as discussed in Rose the Court noted that the General Assembly could choose to delegate any of its duties to provide for an efficient system of common schools “to institutions such as the local boards of education[.]” 790 S.W.2d at 216. In doing so, however, “the General Assembly must provide a mechanism to assure that the ultimate control remains with the General Assembly . . . .” Id. If the Governor has the ability through KRS 12.028 to abolish and alter the Education Boards established to assist the General Assembly in carrying out its obligation to provide for an efficient system of common schools, then ultimate control does not remain with the General Assembly. As a result, the Governor’s use of KRS 12.028 to abolish, recreate and alter Education Boards violates Rose and the strong separation of powers under the Kentucky Constitution.

C. KRS Chapter 12, Itself, Removes the Education Boards from the Governor’s Political Control.

The Court must interpret KRS 12.028 in the context of other laws enacted by the

General Assembly, in particular, other laws within KRS Chapter 12, to interpret the legislative scheme. Pearce v. Univ. of Louisville, by and through its Bd. of Trustees, 448

S.W.3d 746, 749 (Ky. 2014) (citation omitted). KRS Chapter 12 is titled “Administrative

Organization.” KRS 12.028 speaks generally to governmental units that the Governor may reorganize. However, KRS 12.295, specifically states,

“The following organizational units and administrative bodies shall be governed by their respective substantive chapters as set out below: . . .

(2) Council on Postsecondary Education under KRS Chapter 164;

(3) Department of Education under KRS Chapters 156, 157, 158, 161, 163, and 167;

(4) Education Professional Standards Board under KRS Chapter 161; [and]

(5) Kentucky Board of Education under KRS Chapters 156 and 157 . . . .”

KRS 12.295 exempts the Education Boards from the Governor’s reorganization powers.

It provides that the CPE, EPSB, the KBE, and the boards attached to the Department of

Education are each governed by their respective enabling statutes, rather than any provision found in KRS Chapter 12, specifically KRS 12.028.

D. EPSB is a Quasi-Judicial Board and the Governor’s Purging of Its Members Violates the Separation of Powers Doctrine.

The EPSB is a quasi-judicial body that exercises judicial power. See KRS

161.120. By abolishing the EPSB, removing its members, and recreating it, the Governor has invaded the judicial powers delegated to the Board.

In Sangster v. Ky. Bd. of Med. Licensure, this Court held that the members of the

Kentucky Board of Medical Licensure exercised the requisite adjudicatory functioning to be considered a quasi-judicial body. 454 S.W.3d 854, 859 (Ky. 2014) (quoting

Quatkemeyer v. Ky. Bd. of Med. Licensure, 506 Fed. Appx. 342, 346 (6th Cir. 2012)).

The Court noted that the Board “exercises authority over medical practitioners in

Kentucky and has authority to issue subpoenas, conduct various levels of inquiries, make findings and issue different orders.” Id.

The EPSB possesses similar judicial powers and performs duties similar to those of the Kentucky Board of Medical Licensure. The legislature authorized the EPSB to hold administrative hearings in accordance with KRS Chapter 13B. See KRS

161.120(5)(a). Hearings may be conducted before the full Board or a panel of three (3) members of the Board. See KRS 161.120(5)(b). The EPSB is authorized to take emergency action against certificate holders. See KRS 161.120(6). Investigations on behalf of the EPSB are carried out by the Executive Director, who has the power to

33 access records of education personnel and may issue subpoenas for the attendance of witnesses and production of documents. See KRS 161.017(4) and (5). The EPSB may ultimately enter final orders taking disciplinary action against education personnel, and may take emergency judicial action in some cases. See KRS 161.028(1).

The Governor’s abolishment of the EPSB and removal of its members denigrates the public’s trust in its independence, fairness, impartiality and objectivity, each of which must attend the exercise of judicial power in the American form of government. See In re

Maze, 85 S.W.3d 599, 600 (Ky. 2002). The Governor’s argument for such power would permit him to abolish EPSB if he disagreed with a decision it made in a disciplinary proceeding. Effectively, the Governor could control whether or not certified employees of the school system face disciplinary action.

Both federal and state jurisdictions have encountered similar situations and ruled against such coercive influence by the executive branch. In Humphrey’s Ex’r v. United

States, 295 U.S. 602, 627-29 (1935), the United States Supreme Court held that the

President’s removal of a member from a quasi-judicial body, the Federal Trade

Commission, violated the separation of powers between the executive and the judicial.

The Court determined that the Commission “was created by Congress as a means of carrying into operation legislative and judicial powers” and is therefore an agency of the legislative and judicial branches, and independent of the executive department. Id. at 629.

Relying in part on Humprey’s Ex’r, in Bowers v. Pennsylvania Labor Relations

Bd., the Supreme Court of Pennsylvania similarly held that its Governor’s removal of a member of the state labor relations board violated the separation of powers., 167 A.2d

480 (Pa. 1961). Specifically, the court held that just as the Governor could not remove

34 judges of the courts of record, the Governor may not remove members of a board that exercises judicial power. Id. at 487. The determinant for such a separation of powers, the court held, “depends upon the character of the powers exercisable by the appointee[,]” rather than specific inclusion within the branch of government. Id.

Here, the Governor’s removal of the members of the EPSB violates the doctrine of separation of powers mandated by the Kentucky Constitution. Although the members of the EPSB are not within the judicial branch of government, our legislature has delegated it powers characterized as judicial. By exercising those powers, the EPSB members are not subject to removal from office through a reorganization and without cause by the Governor.

CONCLUSION

Appellant respectfully asks this Court to reverse the November 22, 2017,

Amended Opinion and Order of the Franklin Circuit Court and to remand this case to the

Franklin Circuit Court with instructions to (1) enter a judgment as a matter of law in favor of the Appellant, and (2) to declare Executive Order 2017-364 null and void. By doing so, this Court will uphold state constitutional and statutory law, restore the balance and separation of powers in the Commonwealth, and fulfill the intent of the General

Assembly.

Respectfully submitted,

ANDY BESHEAR ATTORNEY GENERAL La Tasha Buckner Assistant Deputy Attorney General S. Travis Mayo, Executive Director Office of Civil & Environmental Law Laura Tipton Matt James Taylor Payne Assistant Attorneys General Office of the Attorney General Capitol Building, Suite 118 700 Capitol Avenue Frankfort, Kentucky 40601-3449 (502) 696-5300

APPENDIX

November 22, 2017, Opinion and Order …………..….………………………….Exhibit A

Executive Order 2017-364………………………………………..……………....Exhibit B

Adams v. Commonwealth, Civil Action No. 13-CI-423 (Franklin Cir. Ct. Sep. 3, 2013)…….….…………………………………..……...Exhibit C

Baker v. Commonwealth, 2007 WL 3037718, No. 2005-CA-001588-MR (Ky. App. Oct. 19, 2007)..………………………………..……………………….Exhibit D

EXHIBIT A

EXHIBIT B

EXHIBIT C

EXHIBIT D

Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718

In summary, we find that Baker's right to the claimed 2007 WL 3037718 retirement health care benefit is statutory and inviolable, Only the Westlaw citation is currently available. that Baker did not waive that right, and that the Systems' Unpublished opinion. See KY ST policy is void because it violates provisions of Kentucky RCP Rule 76.28(4) before citing. Revised Statutes (KRS) Chapter 13A. Therefore, we reverse. Court of Appeals of Kentucky.

James M. BAKER, Appellant v. FACTS COMMONWEALTH of Kentucky, Kentucky Baker retired from his employment with the Legislative Retirement Systems and Board of Trustees Research Commission after more than 27 years of of Kentucky Retirement Systems, Appellees. service to the state. He immediately re-entered full-time state employment as general counsel to the Kentucky No. 2005–CA–001588–MR. Teacher's Retirement Systems (KTRS). Consequently, | Baker simultaneously enjoyed the benefits of his Oct. 19, 2007. retirement from state government and the benefits of his Appeal from Franklin Circuit Court, Action No. 01–CI– employment by state government. In common parlance, 01664; Robert G. Johnson, Judge. he was a “double-dipper.” 2

Attorneys and Law Firms Baker's double set of benefits included eligibility for group health insurance offered both through the Systems and Donald Duff, Frankfort, KY, for appellant. through KTRS. He was also entitled to a separate specific Brown Sharp, II, Frankfort, KY, for appellees. contribution from each of these entities toward payment of his health insurance premium. Each such contribution Before ACREE and VANMETER, Judges; KNOPF, is referred to in statute as a “state contribution.” 3 For 1 Senior Judge. each of the years 1991 to 1995, the state contributions to which Baker was entitled were more than sufficient to fully pay the premium for the health insurance coverage option OPINION AND ORDER Baker selected. ACREE, Judge. During these five years, Baker coordinated his available *1 This is an appeal from a judgment of the Franklin state contributions by means of “cross-referencing” the Circuit Court affirming a decision by the Board of benefits entitlements. “Cross-referencing” is a practice Trustees of the Kentucky Retirement Systems. The applicable in group insurance plans to indicate that Systems found that James Baker, a state retiree who multiple benefits sources will contribute to the payment had returned to state employment, was not entitled as a of a single insurance premium. Cross-referencing often retiree to payment in full from the Systems of the monthly occurs when a husband and wife both work for the contribution toward his health insurance premiums, same employer. However, cross-referencing with one's self because he was also receiving a similar contribution from occurs when one employee is entitled to contributions his new employer. from two independent sources, as is the case before us.

At its core, this case pits Baker's right to a specified Prior to 1996, regardless of whether a state employee retirement health care benefit against the Systems' cross-referenced, he forfeited any amount of state policy ostensibly created to administer those benefits. contribution that exceeded the premium for the coverage Its resolution requires us to examine issues of Kentucky option he selected. And so it was with Baker. When Baker administrative law and statutory construction. Some are cross-referenced prior to 1996, he forfeited the excess issues of first impression in Kentucky. of the total of the two contributions beyond the lower

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 1 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 cost of his premium. However, an amendment to the previously asked, Martin was unaware of any policy group health insurance plan made it possible for each affecting how Baker could coordinate his two premium state employee, including Baker, to make full use of the payment sources. state contribution, including the amount that exceeded the employee's premium. That amendment, effective in 1996, A representative of the Systems would later testify, allowed state employees, for the first time, to participate however, that Martin should have known of a in a medical Flexible Spending Account, or FSA. longstanding, unwritten, Personnel Cabinet policy that required a double-dipper's employer to pay its full state *2 Medical FSAs are creatures of federal statute, contribution, as required by KRS 18A.225(2)(h), before authorized as part of the Internal Revenue Code, Title 26 the Systems paid any portion of its state contribution United States Code (U.S.C.) § 125. Such accounts provide obligation. The Systems would then pay only the balance tax savings to employees whose employers establish remaining necessary to fully fund the premium selected, cafeteria plans that include a written plan document not to exceed the state contribution rate for that year. and an established “flexible spending account.” Under This unwritten policy was created when the combination this system, each employee estimates his out-of-pocket of the two state contributions exceeding the cost of the medical expenses for the upcoming year. Each pay period, premium was forfeited. The policy was obviously for the by payroll deduction, the employer deducts a pro rata benefit of the agencies rather than the retiree since it portion of this annual estimate from the employee's gross primarily determined which agency was entitled to retain income and deposits the amount into the FSA. When the the forfeited amount. Under this policy, the Systems employee incurs a medical expense not covered by his always retained the unused and forfeited amount. No insurance, he submits a receipt to the FSA administrator agency ever considered how adding an FSA program to who reimburses the employee from the FSA. employee benefits would affect the policy, or vice versa.

Kentucky's legislature authorized FSAs in 1990 when *3 The legislature imposed upon the Personnel Cabinet it enacted KRS 18A.227, entitled “Flexible benefits the responsibility for developing an FSA program for plan for employees and retirees.” Its title indicates the eligible employees. KRS 18A.227(2). The Cabinet was not legislature's intent that FSAs be available to state retirees. prohibited from developing a program that would have Unfortunately, the legislature's desire was thwarted excluded excess state contributions as a source for funding because the federal law authorizing FSAs requires that an employee's FSA account. But it did not do so. The “all participants are employees[.]” 26 U.S.C. § 125(d) program the Cabinet developed specifically authorized (1)(a). Baker, however, was both a retiree and an an employee to direct the excess state contributions, employee. Therefore, he could participate in the state's previously forfeited, into his own FSA account. (R. 174, FSA program. 177).

The possibility of benefiting from the new FSA program Unaware of what Martin allegedly should have known, caused Baker to more closely consider the manner and believing he had informed himself as fully as possible, in which he cross-referenced his two health insurance Baker decided on a health insurance coverage option for premium funding sources. During the open enrollment himself and his family, for 1996, that cost $245.92 per period in November 1995, he contacted an insurance month. Because he was entitled to $175.50 per month (the coordinator at the System's offices in Frankfort and asked state contribution rate for 1996) from each of his premium if there were any policies or procedures affecting the payment sources for a total of $351.00, he planned to have manner in which his two premium payment sources could the difference, $105.08, deposited into his FSA. be coordinated. He also asked the same question of a representative of Plan Source, the state's health insurance All parties understood throughout this case, and this purchasing alliance. Both representatives told him they Court does not question, that FSAs cannot be funded knew of no applicable policies. from retirement benefits. This led Baker to ensure that the only funding source for his FSA was by payroll deduction Baker then met with the KTRS Payroll Officer, Annie out of the gross pay he received from his employer, Martin (Martin). Just as with the representatives Baker KTRS. He accomplished this by carefully completing the

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 2 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 required human resources paperwork both at KTRS and were provided for that purpose. With Martin's assistance, the Systems. however, Baker indicated his intent to “cross-reference with self,” and identified the other payment source as The actual insurance application process required “KERS” (that is, the Kentucky Employees' Retirement Baker to indicate his intent to cross-reference on System), by writing those words near the blanks provided two separate enrollment forms provided by the health for spousal cross-referencing. plan administrator, Plan Source. He completed the first form, entitled “Employee Enrollment Application,” Consistent with Baker's desire to have the Systems pay his with Martin's assistance. The forms anticipated the insurance retirement benefit in full first, Payroll Officer circumstance of spouses cross-referencing with one Martin made notations in the margin of the form as another and had blanks on the form for that purpose. follows: However, owing apparently to the infrequency with which “cross-referencing with self” occurred, no similar blanks 245.92 70.42

175.50 KERS –175.50 KTRS

70.42 –105.08

administer the FSA program. The form had a line to be Nothing in the record contradicts the interpretation given completed for the “Cost of Health Insurance Plan.” Baker by all parties to these figures. Martin first wrote Baker's filled in that line with the figure “$70.42,” indicating the monthly premium payment due of $245.92. Then, Martin amount remaining to be paid by KTRS after the Systems indicated Baker's intent that the state contribution from paid $175.50 toward the $245.92 premium. The balance, the Systems (identified by Martin as “KERS”), in the $105.08, was identified on the form as Baker's “monthly amount of $175.50, was to be paid in full toward the employer contribution to the Medical [Flexible] Spending insurance premium first, leaving a balance due on the Account.” premium of $70.42. The next column shows the balance of $70.42 being paid by the KTRS state contribution of On December 8, Martin met with a representative of $175.50. The excess of the KTRS state contribution was FEBCO to complete the paperwork necessary to ensure then available to be paid, lawfully, into Baker's FSA. that KTRS transmitted $105.08 to FEBCO each month Baker signed the form on November 20, 1995, and Martin to be deposited in the FSA on Baker's behalf. Despite all signed it the following day. Martin filed copies of this of these efforts, this was not how Baker's health insurance form with KTRS, and sent copies to Plan Source and the premium and FSA were funded. Systems. 4 *4 Baker also completed a second enrollment form, Beginning in January 1996, the two agencies, KTRS and this one with the Systems, entitled “Retiree Enrollment the Systems, applied Baker's benefits in a completely Application.” He indicated on this form his intent to uncoordinated fashion. KTRS followed Baker's and “cross-reference with self” and identified KTRS as the Martin's allocation figures and paid $70.42 to Plan Source other source of premium payment. He signed and dated toward the $245.92 premium, followed by a $105.08 this form on November 20, 1995, as well. Copies were sent payment to FEBCO for Baker's FSA. The Systems, to Plan Source and KTRS. however, did not pay the full $175.50 contribution. Instead, the Systems paid only $70.42 to Plan Source On December 7, Baker completed a second form provided toward Baker's premium and retained $105.08 of Baker's by KTRS, designed to “[d]etermine if you are eligible monthly entitlement in its own coffers. When Plan Source for an Employer Contribution toward your Medical combined the payments actually received from KTRS and Spending Account.” The form was created by Flexible the Systems, it had only $140.84 per month to pay toward Employee Benefits Company, Inc. (FEBCO), the flexible Baker's $245.92 monthly premium. This left the premium spending account firm chosen by the Personnel Cabinet to payment short $105.08 each month.

We would be remiss if we did not pause at this juncture System's Deputy Commissioner of Operations who said, and note that this dispute never would have arisen if in pertinent part: the Systems had simply paid to Plan Source the $175.50 contribution in full toward Baker's health insurance The [Systems'] policy for cross-referencing medical premium. Whether the Systems considered its payment insurance premiums is: “The employer contribution to have been prior or subsequent to KTRS' payment toward medical insurance premium shall be applied of $70.42 is irrelevant. The key point here is that none prior to determination of the amount to be paid by the of the Systems' contribution would have funded Baker's [Systems'] Insurance Fund.” ... FSA. Consequently, there could have been no assertion, This is a final administrative decision concerning despite the Systems' counsel's continued insistence, that this matter. Accordingly, you are entitled to an retirement funds were used to fund an FSA in violation of administrative hearing, if you desire, in order to contest 5 26 U.S.C. § 125. This, unfortunately, did not occur. this decision pursuant to KRS 61.645(16)(a) and 13B.

Initially, Baker and KTRS were unaware that the Systems After an unsuccessful second attempt to resolve the was paying Plan Source only $70.42 toward Baker's issue without invoking the adjudicatory power of the premium. It was August 1996 before Plan Source finally Systems, Baker did timely request an administrative informed Martin at KTRS that Baker's account was hearing pursuant to KRS Chapter 13B, and the Systems' $735.66 6 in arrears for the months since January of that adjudicatory authority was engaged. year. 7

*5 Martin attempted to solve the problem, at least PROCEDURAL HISTORY for subsequent months. Without Baker's consent, she increased the amount KTRS paid toward the premium Baker's Petition alleged that the Systems had reduced from $70.42 to $175.50 to cover the Systems' $105 .08 his retirement benefits, specifically his health insurance payment shortfall. This fully paid the $245.92 premium. premium benefits, contrary to plain legislative mandate Unfortunately, this also meant that KTRS was paying that nothing toward Baker's FSA. Martin, who admitted The premium required to provide hospital and medical she was herself confused, informed Baker of these benefits [to retiree-participants in the Kentucky Group developments and what it meant for him. Health Insurance Plan] shall be paid in full from the 9 Because funding of any federally-regulated FSA program insurance fund for all recipients of a retirement is calculated on an annual basis, the balance of payments allowance from [the Kentucky Employees Retirement to fund Baker's FSA for the rest of 1996 had to be paid System] where such recipient ... had two hundred and by someone. See also, KRS 18A.228(4)(“Once an option forty (240) months or more of service upon retirement [to fund a flexible spending account] is chosen, it shall not [which included Baker]. be changed until the end of the period for which election is made....”). Consequently, to use Baker's language, he KRS 61.702(3)(1995)(emphasis supplied), recodified, began “making an additional involuntary payment of using the same language, as KRS 61.702(3)(a) 5. $105.08 to FEBCO” from his pay for the five remaining Furthermore, Baker claimed that this right was part of an inviolable contract of which he was a beneficiary, then months of 1996 for a total of $525.40. 8 Baker failed to cited the Systems to the appropriate authority. understand why this had happened. His search for an explanation was unavailing. *6 It is hereby declared that in consideration of the contributions Baker wrote to the Systems on October 11, 1996, by the members [of the Kentucky requesting “assistance in resolving a problem which has Employees Retirement System] developed relating to the payment of my health insurance and in further consideration of premium.” The prompt response came by letter from the benefits received by the state from the member's employment, KRS

61.510 to 61.705 shall, except [for legislators and former legislators (2) The Insurance Fund shall pay the remainder of who commit felonies], constitute the premium not to exceed the amount that would be an inviolable contract of the paid under KRS 61.702. Commonwealth, and the benefits Signed: Pamala S. Johnson Adopted: 12–29–95 provided therein shall ... not be After a fair period of discovery, a hearing was conducted subject to reduction or impairment by on September 19, 1997, before Michael Head, an alteration, amendment, or repeal. administrative hearing officer from the Office of the KRS 61.692(emphasis supplied); see also Jones v. Board Kentucky Attorney General, Division of Administrative of Trustees of Kentucky Retirement Systems, 910 S.W.2d Hearings. The Systems was represented by legal counsel, 710, 713 (Ky.1995). as was Baker. The parties presented their cases in seven and one-half hours of testimony. Post-hearing briefs were The Systems' Response to Baker's Petition denied his filed by both parties. claim. The substance of the denial was that all agencies participating in the Kentucky Group Health Insurance On February 13, 1998, after nearly five months Plan, including the Systems and KTRS, as well as their considering the record, the hearing officer issued a participating retirees and employees, are required to 23–page Findings of Fact, Conclusions of Law and abide by the Personnel Cabinet's policies and procedures Recommendation (Recommended Order) in favor of for administering the plan. According to the Systems, Baker. In summary, the hearing officer found that among these policies and procedures was the Cabinet's Baker's right to payment by the Systems of the full state unwritten policy requiring a double-dipper's employer contribution toward his health insurance premium was to pay first toward his premium, thereby reducing the created by statute, KRS 61.702(3)(1995), and constituted Systems' obligation to an amount equal to the remaining an inviolable contract between Baker and the state. KRS balance of the premium. 61.692. He also found that Baker did not waive that right, but gave timely notice to the Systems of his demand The Systems claimed that Baker's rights were also subject that the full contribution be paid in accordance with to the Systems' written policy. This policy was created on the statute. Finally, the hearing officer concluded as a December 29, 1995, eleven days after the Systems' receipt matter of law that the Systems lacked the authority to of a copy of Baker's Employee Enrollment Application affect Baker's right by internal policy, either written or containing Martin's figures for allocating Baker's state unwritten, or otherwise. contributions. It states in its entirety: *7 As a remedy, the hearing officer recommended that the Systems pay into Baker's FSA an amount equal to that which it failed to pay for the years 1996 to 1998, and to KENTUCKY RETIREMENT award all future benefits to Baker without diminishment SYSTEMS POLICY ON PAYMENT OF by the Systems' invalid cross-referencing policy. CROSS–REFERENCE INSURANCE The Systems transmitted the hearing officer's The Kentucky Retirement Systems, by authority recommendation to Baker by unsigned letter dated the of KRS 61.645, established the following POLICY same day as the recommendation, February 13, 1998. effective January 1, 1996, concerning amounts paid The language of the letter is somewhat curious, stating from the Insurance Fund on medical insurance cross- that the “Board of Trustees ... has seen fit to offer you referenced with medical insurance obtained through a fifteen (15) days from your receipt of this notice to file any participating employer: exceptions.” (emphasis added). We are not sure what the (1) The employer contribution toward the medical Systems believed the Board had seen fit to do for Baker. insurance premium shall be applied prior to First, the Recommended Order was overwhelmingly determination of the amount to be paid by the in Baker's favor. Second, and more significantly, the Insurance Fund. legislature, not the Board, had already granted Baker the

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 5 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 right to file exceptions. KRS 13B.110(4). By this letter, the that recommendation. The two men decided to reject the Systems only mis informed Baker as to his rights. hearing officer's recommendation in toto.

The statute actually measures the fifteen-day period, *8 At the same meeting, the Committee engaged in a not from Baker's receipt of the notice, but “from “review of the record in its entirety” of two other hearings. the date the recommended order is mailed [.]” KRS In each of these, the hearing officer recommended denying 13B.110(4)(emphasis supplied). In other words, the the claims and the Committee of two voted to accept the Systems told Baker he had more time to file exceptions recommendation. It is likely the Committee spent less time than the law allowed. This sounds generous at first blush, deliberating these cases, and understandably so. but “an administrative agency cannot enlarge statutorily prescribed time frames[.]” Curtis v. Belden Electronic Wire All of this work was accomplished in the span of not quite and Cable, a Div. of Cooper Industries, 760 S.W.2d 97, one hour. 99 (Ky.App.1988). Furthermore, before being overruled in 2004 by Rapier v. Philpot, 130 S.W.3d 560 (Ky.2004), On May 12, 1998, the Systems sent an Order to missing the deadline for filing such exceptions could result Baker indicating that the Committee rejected the hearing in termination of the claim. Swatzell v. Commonwealth of officer's recommendation in its entirety. Ostensibly acting Kentucky Natural Resources and Environmental Protection on behalf of the Board, the Committee Chairman signed, Cabinet, 962 S.W.2d 866, 869 (Ky.1998)(Failure to file filed and served the decision in the form of a Final Order exceptions results in termination of claim), overruled by that the Chairman represented as the Committee's work. Rapier at 564. When the unnamed author at the Systems Examination of that Committee Order reveals that very sent the letter to Baker, Swatzell was still good law. little of it can be legitimately claimed as deriving from the Therefore, if Baker had been lulled into inaction by Committee's original efforts. the Systems' letter, he would have been precluded from seeking judicial review of any portion of the Board's final The Committee's decision is captioned: “Board of order that did not differ from the recommended order. Id. Trustees Report and Order.” The introductory paragraph of the Committee Order sets forth the same perfunctory As the procedural history goes, however, both parties information about the time, place and manner of timely filed exceptions. Baker merely took exception to the hearing as contained in the hearing officer's the hearing officer's recommended method of remedy. recommendation. Thereafter, the entire Committee Order Not surprisingly, the Systems took exception to the entire is taken, word-for-word, from the Systems' Post–Hearing recommended order. The Systems' specific exceptions Brief. were few but amounted largely to its general demand that “the Board of Trustees of Kentucky Retirement The similarities between the Systems' brief and the Systems must reject in whole as being clearly erroneous the Committee Order are not merely coincidental. Not only Hearing Officer's Findings of Fact, Conclusions of Law are the words the same, but the two documents share and Recommendation.” the identical font and format, paragraph structure, and typographical and grammatical errors. 11 In fairness, we On April 27, 1998, the Systems' Administrative Appeals do note that two and one-half sentences of the twenty-five Committee met to consider the exceptions filed in Baker's page Committee Order are new, but those sentences are 10 case and in two others. Only two members were present. inconsequential to the decision. 12 The Committee Order's The meeting started at 9:11 AM and ended at 10:05 “Conclusions of Law” are even sequentially identical to AM. First, the Committee approved the minutes of the the numbered Arguments from the Systems' Post–Hearing previous meeting, then went into closed session during Brief. 13 It takes no more than the most rudimentary which it “studied the record of James Baker ... in knowledge of computer word processing to understand its entirety.” At that time, the record in Baker's case that the Systems' brief and the Committee Order share the consisted of nearly seven and one-half hours of videotaped same base document, created originally as an electronic testimony, nearly 400 pages of documents, lengthy post- file, on the same word processing system. hearing briefs filed by each party, the hearing officer's 23–page recommendation, and the parties' exceptions to

When Baker received the Committee Order, he appealed (Ky.App.2006)(courts presume public officers perform it to Franklin Circuit Court. In June 2000, that court the duties entrusted to them by law in good faith). If we affirmed the Committee's decision. are mistaken in that presumption, that is a matter to be determined and addressed by the Board of Trustees itself. Baker then sought review for the first time in this Court. We issued an opinion vacating and remanding the case The Board Order is captioned identically to the because the Board had delegated its power to enter a final Committee Order reviewed in Baker I, that is, “Board order to a committee in violation of KRS 13B.030(1). 14 of Trustees Report and Order.” With the exception of See Baker v. Kentucky Retirement Systems, 50 S.W.3d 770, the signature line, it is identical to the Committee Order, 773 (Ky.App.2001)(hereafter, Baker I ). Having decided which, as we indicated supra, is in its body, identical to the the case on that narrow issue, we expressed no opinion Systems' Post–Hearing Brief. The Board order is clearly regarding the merits of the other issues Baker raised. another spawn of that original electronic word processing file that gave birth likewise to its kindred, the Systems' Nevertheless, we gave the Systems very clear instruction Post–Hearing Brief and the Committee Order. on remand. We pointed out that the “entire Board [of Trustees], collectively, is the agency head responsible for Just as he had appealed the Committee Order, Baker entry of a final order.” Id. “[A]ll actions taken by the appealed this identical Board Order to the Franklin Board shall be taken by affirmative vote of a majority Circuit Court. Again, the circuit court affirmed this order, of the trustees present, subject to the requirement that holding that: (1) the Board's Order complied with the those present constitute a quorum.” Id. (Footnote citation statutory requirements of KRS 13B.120; (2) the Board's omitted). We noted that “the final order of the Board need decision was supported by substantial evidence and was only be signed by the chairperson,” but we made it clear not arbitrary; and (3) the Systems' policy did not violate that the chairperson's signature alone was sufficient only KRS Chapter 13A nor did it exceed its authority or impair “so long as the signature reflects the decision of a majority any benefits to which Baker was entitled. of the Board.” Id. We “remanded to the Franklin Circuit Court with directions to remand the matter to the Board Baker appeals to this Court for a second time. We have for entry of a final order consistent with this opinion.” grouped his arguments in the following three categories. Baker I became final on September 21, 2001. Id. ◼ The Board Order is not supported by substantial evidence and its rejection of the hearing *9 The record before us now gives virtually no indication officer's findings of fact, conclusions of law and that the nine-member Board followed our clear direction. 15 More to the point, nothing in the record indicates “the recommendation was arbitrary; entire Board, collectively,” ever knew about this case. There is simply a three-and-one-half year recordless ◼ By adopting the Systems' Post–Hearing Brief as its gap between the Systems' notification to Baker of the Final Order, the Board failed to comply with KRS Committee Order he appealed in Baker I, and the Order 13B.120(1) and undermined the purpose of KRS signed only by Board of Trustees Chairman, Randy J. 16 Overstreet, on November 15, 2001 (Board Order). There Chapter 13B; are no indicia in the Board Order or the record suggesting ◼ The Systems' cross-referencing policy is void because that the Board of Trustees actually participated in its it was an internal policy, was not promulgated issuance. The Chairman's signature does not indicate that as a regulation as required by Chapter 13A, and he signed it at the direction of the Board or after Board completely lacked statutory or regulatory authority action by majority vote. There are no minutes of the Board 17 of Trustees indicating a vote on this order. Nor does this for its issuance. order indicate anywhere in its body that it is the decision *10 Only the first of these arguments challenges the of the Board of Trustees. We shall presume however, weight of the evidence or disputes any facts. despite the absence of typical hallmarks indicating Board action, that the Board Order was issued with Board approval. Hutson v. Commonwealth, 215 S.W.3d 708, 716

For Baker's remaining legal arguments, the Systems predictably turns to American Beauty Homes Corp. v. STANDARD OF REVIEW Louisville and Jefferson County Planning and Zoning Commission, 379 S.W.2d 450 (Ky.1964) as its touchstone. Substantial Evidence However, in view of the Supreme Court's decision in Hilltop Basic Resources, Inc. v. County of Boone, 180 The Systems urges that we focus our attention on the S.W.3d 464 (Ky.2005), and given that KRS Chapter 13B Board's fact-finding, stating that “Baker's case is subject to applies to this case, we believe it is time to review and the substantial evidence standard of review.” (Appellee's clarify the applicability of the “extraordinarily powerful Brief, p. 12 fn.16). In general terms, this standard holds case” of American Beauty Homes. Kuprion v. Fitzgerald, that if there is any evidence of substance to support 888 S.W.2d 679, 689 (Ky.1994). the agency action, the reviewing court must defer to the agency decision because such action could not be arbitrary. Borkowski v. Commonwealth, 139 S.W.3d 531, 533 (Ky.App.2004)( “If there is any substantial evidence American Beauty Homes to support the decision of the administrative agency, it *11 American Beauty Homes was a zoning case that has cannot be found to be arbitrary and will be sustained.” had impact far beyond its original limited scope. The “root Internal quotation marks omitted .). of the trouble ” in American Beauty Homes was whether the Legislature could “impose on the court a nonjudicial This standard is a powerful weapon in any administrative administrative function ” by means of KRS 100.057, agency's arsenal since it puts review of an agency's decision a statute captioned “Appeal to courts from decision at least on a par with appellate review of a jury verdict. of commission on question of approving adjustments.” Compare, Lewis v. Bledsoe Surface Min. Co., 798 S.W.2d American Beauty Homes, 379 S.W.2d at 453 (emphasis 459, 461 (Ky.1990)(reversal not justified unless jury in original). The case was decided at a time when our verdict is “palpably or flagrantly against the evidence.” administrative law was a mass of “uncorrelated legislative Internal quotation marks omitted), with McManus v. attempts to designate specific considerations controlling Kentucky Retirement Systems, 124 S.W.3d 454, 458 the scope of judicial review[.]” Id. at 457. Some would say (Ky.App.2003)(reversal not justified unless evidence is that is still the state of affairs in Kentucky administrative “so compelling that no reasonable person could have law. failed to be persuaded by it.”); see also, Kentucky State Racing Commission v. Fuller, 481 S.W.2d 298, 308–09 The general standard of review drawn from American (Ky.1972)(comparing role of administrative fact-finder to Beauty Homes has become an axiom: “In the final analysis that of jury; the case should be read with the caveat that all of these issues may be reduced to the ultimate question the members of the State Racing Commission actually sat of whether the action taken by the administrative agency as the tribunal in this administrative adjudication and did was arbitrary.” Id. This self-evident general rule is so all- not delegate the fact-finding, including the opportunity to encompassing that it applies to appellate review of all assess witness demeanor, to a hearing officer.). manner of administrative action, whether it be a review of a zoning determination as in American Beauty Homes However, “[s]ubstantial evidence is only important when itself, a worker's compensation claim, a Board of Claims the award of the board is attacked as being insufficiently award, or any other appeal from any administrative grounded upon evidence.” Stovall v. Collett, 671 S.W.2d agency. Nothing in this opinion changes that general rule. 256, 257 (Ky.App.1984). As noted, only one of Baker's However, when attention is given to the specific language arguments challenges the sufficiency of any evidence. And of American Beauty Homes, we see how limited the case the only finding of fact rejected by the Board was whether is, in fact. the Systems received notice as to how Baker intended to cross-reference the two state contributions. Consequently, The court in American Beauty Homes clearly and narrowly we will review that single finding to see if it is supported stated that the decision “concerns the scope of review by substantial evidence. under KRS 100.057 [and of] appeals taken under KRS 100.085.” Id. at 456, 458 (emphasis supplied). The

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 8 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 court focused on the fact that these statutes represent the legislature's delegation of its own legislative power. “A Mixed Bag of Legislative, American Beauty Homes, then, establishes the principle Executive, and Judicial Functions” that the separation of powers doctrine will not allow any “court to substitute its independent judgment on the facts Just as with the circumscribed nature of American Beauty for that of an administrative agency” which the legislature Homes, it is neither a new, nor should it be a surprising, has “designated to carry out a legislative policy by the concept that we must first determine the function being exercise of discretionary judgment in a specialized field performed by an administrative agency before applying a [thereby] performing a nonjudicial function.” Id. at 458– standard of review. In Bourbon County Bd. of Adjustment 59, 458 (emphasis supplied). The case is thus perfectly v. Currans, 873 S.W.2d 836 (Ky.App.1994), we indicated suited to serve as the standard for reviewing the exercise that what might be arbitrary action in one context might of “a delegation of legislative power to an administrative not be so in another, even within the same agency. agency [,] exercised in conformity with a legislative policy This is because Kentucky's various administrative bodies and in a discretionary manner in the light of prevailing local “perform a mixed bag of legislative, executive, and judicial conditions.” Id. at 455 (emphasis supplied). That is, to functions[,]” id. at 838, and for that reason zoning matters. Some of its principles certainly will apply to many agency actions. Yet we must guard against relying it is most helpful to determine the on American Beauty Homes out of habit or convenience. function performed by the body in order to determine the appropriate We do not present the circumscribed nature of American standard of review; that is to Beauty Homes as a new concept. Almost immediately say, one should look not only at after the case was rendered, we were warned to resist the nature of the body, [footnote the judicial reflex of “relying on American Beauty Homes omitted] but more particularly to without reference to the subsequent opinions by th[e the act performed by it. Was it a Commonwealth's highest] court that have eroded the legislative, executive, or judicial act? holding in American Beauty Homes.” Brady v. Pettit, Ultimately, it is the act or function 586 S.W .2d 29, 31 (Ky.1979). “The first indication that performed and not the nature of the this court was not wholly committed to American Beauty body which dictates the standard of Homes ... came in Kilburn v. Colwell, Ky., 396 S.W.2d 803 review. (1965),” in which the court reviewed a city's termination of Id. a police officer's employment. Id. Two years after Kilburn, the Supreme Court made it clear that “American Beauty This first step in the review process is not merely Homes is limited to zoning and other administrative acts perfunctory. At least three substantive characteristics and held not to be applicable to” an agency's adjudication distinguish a review of an agency's adjudicative acts from of a public employee's contract of employment. Brady a review of its non-adjudicative acts. Each significantly at 31, citing Osborne v. Bullitt County Bd. of Ed., 415 impacts the standard of review. S.W.2d 607, 610 (Ky.1967)( “We no longer think that the principles enunciated in American Beauty Homes should be extended to the problems herein involved.”). By 1979, it was inarguable that “American Beauty Homes now applies Distinguishing Review of an Agency's Non– only to zoning matters and matters of like nature.” Brady Adjudicative or Legislative Acts from at 31. Review of an Agency's Adjudicative Acts

*12 Then, if resort to American Beauty Homes is not the The first distinguishing characteristic is the focus of first proper step in our review of an agency's actions, what appellate inquiry. Review of an agency's non-adjudicative is? The answer is that before we can apply any standard or legislative acts is “concerned primarily with the product of review to an any act of any administrative agency, we and not with the motive or method which produced it.” must decide what function the agency is performing. National–Southwire Aluminum Co. v. Big Rivers Elec. Corp., 785 S.W.2d 503, 515 (Ky.App.1990)(emphasis

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 9 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 supplied), quoted with approval in Hilltop Basic Resources, with vast powers, they must accredit Inc. v. County of Boone, 180 S.W.3d 464, 469 (Ky.2005). themselves by acting in accordance The “product” of such non-adjudicative acts is simply with the cherished judicial tradition the agency's manifestation of its legislative prerogative in embodying the basic concepts of fair deciding “[g]eneral policy-based controversies [.]” Hilltop play. at 470; see also City of Louisville v. McDonald, 470 S.W.2d 173, 177–78 (Ky.1971)(“when the local legislative Morgan v. U.S., 304 U.S. 1, 22, 58 S.Ct. 773, 778 (1938)(all body undertakes ... to enact a generally applicable emphasis supplied), cited in Osborne v. Bullitt County Bd. zoning regulation, the facts to be considered do not of Ed., 415 S.W.2d 607, 611 (Ky.1967). And so, it is relate as such to a particular individual [.]” Emphasis essential to distinguish an agency's non-adjudicative acts supplied.). Therefore, when an agency exercises its from its adjudicative acts so that we properly direct our legislative authority, “[t]he ‘right to an impartial tribunal’ focus. The focus of our review of an agency's adjudicative is nowhere to be found[,]” Hilltop at 469, and “the acts is on the process. concept of what is ‘arbitrary’ is much more narrowly constricted[.]” Trimble Fiscal Court v. Snyder, 866 S.W.2d The second distinguishing characteristic is that, in its 124, 125 (Ky.App.1993). Admittedly then, our review of exercise of adjudicatory authority, an agency often an agency's non-adjudicative or legislative act is oriented functions in dual capacities—as an advocate and as the to the result of the act and not to the process. adjudicator. Expressed another way, the agency judges the merits of its own lawyer's case against the other party. This *13 By contrast, when an agency enters a final order causes concern among many that the agency head cannot adjudicating an individual's rights, we most certainly engage in the detached and independent adjudication do focus on “the motive and method which produced which is expected in our understanding of due process. it.” National–Southwire, supra, at 515. Our Supreme Court recently held that all of Kentucky's “adjudications, A biased decision-maker is constitutionally unacceptable, whether judicial or administrative ” are protected by due and our system of justice “has always endeavored to process guarantees “whereby Kentucky citizens may be prevent even the probability of unfairness.” Withrow v. assured of fundamentally fair and unbiased procedures.” Larkin, 421 U.S. 35, 47, 95 S.Ct. 1456 (1975) (citation Commonwealth Natural Resources and Environmental and internal quotation marks omitted). In terms of Protection Cabinet v. Kentec Coal Co., Inc., 177 S.W.3d probability, the odds for bias are greater when the 718, 724 (Ky.2005)(emphasis supplied). Kentucky thus adjudicator heads the agency appearing as a party before embraces the concept long ago enunciated by the it than when that is not the case. See, e.g., Morongo United States Supreme Court that, in the exercise of its Band of Mission Indians v. State Water Resources Control adjudicative authority, an administrative agency is not Bd., 153 Cal.App.4th 202, 214, 62 Cal.Rptr.3d 492, 500 excused from adhering to the same basic principles of due (2007)(“Human nature being what it is, the temptation is process we expect of any court. simply too great for the ... Board members, consciously or unconsciously, to give greater weight to [the Board's The maintenance of proper attorney's] arguments by virtue of the fact she also acted standards on the part of as their legal advisor[.]”). administrative agencies in the performance of their quasijudicial *14 While Kentucky is among the jurisdictions holding functions is of the highest that concepts of due process are flexible enough to importance and in no way cripples countenance the dual roles, Commonwealth, Cabinet for or embarrasses the exercise of Human Resources, Dept. of Health Services v. Kanter, 898 their appropriate authority. On the S.W.2d 508, 512–13 (Ky.App.1995), our highest court also contrary, it is in their manifest long ago recognized that these dual roles do increase the interest. For, as we said at the outset, risk of bias. The Court specifically cautioned that the dual if these multiplying agencies deemed nature of an agency's functions demands that reviewing to be necessary in our complex courts guard against a deteriorating vigilance. society are to serve the purposes for which they are created and endowed

of delegation of governmental power to administrative The anomaly in procedure which agencies[,]” our former Court of Appeals lamented that permits ... an administrative “[t]he assertion, ‘Ours is a government of laws and body, to serve in the [mult]iple not of men’ became hackneyed in the early days of capacity of [party] and judge the Republic, and ... is no longer accepted by all as a makes it vitally necessary that in truism[.]” Goodpaster v. Foster, 296 Ky. 614, 178 S.W.2d reviewing administrative decisions 29, 31 (1944). Three decades later, a Kentucky law school courts zealously examine the record professor was still motivated to write: with the view to protecting the fundamental rights of the parties, *15 As any lawyer who has practiced before an lest the rule against arbitrariness administrative agency knows, however, ours has and oppressiveness become a mere become, to a significant degree, “a government of men shibboleth. [Review] must not be and not of laws.” [footnote omitted] The “men” referred permitted to degenerate into a mock to are those nameless bureaucrats at every level of ceremony. The least that the courts government whose discretionary domain now includes can do is to hold high the torch of practically every aspect of American life. “fair play” which the highest court of our land has made the guiding Edward H. Ziegler, Jr., Legitimizing the Administrative light of administrative justice. State: The Judicial Development of the Nondelegation Doctrine in Kentucky, 4 N. KY. L.REV. 87, 90 (1977), Osborne v. Bullitt County Bd. of Ed., 415 S.W.2d 607, 611 citing generally C. Horsky, The Washington Lawyer (Ky.1967), citing Morgan v. U.S., 304 U.S. 1, 22, 58 S.Ct. (1952). 773 (1938). Fortunately, we have outgrown that pessimism. “Ours While we are vigilant, we are also mindful of “a is a government of laws and not of men” remains our presumption of honesty and integrity in those serving credo. We no longer defend this statement as a mere as adjudicators[,]” Withrow at 47, and so we reject the “assertion” embraced only by some as truth. It is the notion “that the combination of ... functions necessarily irrefutable foundation upon which our government is set. creates an unconstitutional risk of bias in administrative And we must not consider it otherwise, for “there is adjudication[.]” Id. at 46–47 (emphasis supplied), cited in danger in a departure from th[is] fundamental doctrine Board of Ed. of Pulaski County v. Burkett, 525 S.W.2d 747, [.]” Id. It “is not a fair-weather or timid assurance[,]” but 747 (Ky.1975). We tolerate the increased risk of bias as a represents “a profound attitude of fairness between man matter of policy and because administrative adjudication and man, and more particularly between the individual expedites resolution of certain controversies. “But neither and government[.]” Joint Anti–Fascist Refugee Committee wisdom of policy nor demands of expediency, nor both, v. McGrath, 341 U.S. 123, 162, 71 S.Ct. 624, 643 should be allowed to lead the courts away from basic (1951)(Frankfurter, J., concurring). And so, it is essential, constitutional processes, or sound judicial construction of when an agency adjudicates the merits of its own case, that statutory authority” to which the agency is also bound. we ensure every decision rests upon the firm foundation of Bloemer v. Turner, 281 Ky. 832, 137 S.W.2d 387, 390 the law, and not upon the conscious or unconscious bias (1939). Thus, we have rightfully refused to abdicate our of men and women. responsibility to remain “alert to the possibilities of bias that may lurk in the way particular procedures actually The third characteristic distinguishing review of an work in practice.” Withrow at 54; see also LaGrange agency's adjudicative acts from that of its non- City Council v. Hall Bros. Co. of Oldham County, Inc., 3 adjudicative acts involves the comparative influence of S.W.3d 765, 770–71 (Ky.App.1999). Although, we must specific constitutional considerations. Hilltop recognized admit that there was a time when our judiciary appeared that when a court reviews a decision by an administrative overwhelmed by the power of administrative agencies. agency in its exercise of a legislative function, it must

During World War II, after a “trend of ... two or balance[ ] the need to ensure fair three decades [that] raised serious and difficult questions and nonarbitrary treatment ... with

the equally compelling need to came from the pen of the great ... avoid undue infringement upon the Thomas Jefferson[.] legislative or nonjudicial aspects of the process or function of such Sibert v. Garrett, 197 Ky. 17, 246 S.W. 455, 457 (1922). bodies. In essence and summary, constitutional considerations Hilltop at 469–70. In constitutional terms, the Court require that judicial review of an exercise of legislative was balancing Kentucky Constitution § 2, prohibiting authority delegated by our General Assembly is government exercise of arbitrary power, with Kentucky substantially the same as our review of an exercise of Constitution § 28, prohibiting the judiciary from legislative authority retained by our General Assembly. exercising power belonging to the legislative branch. Conversely, appellate review of an agency's exercise of See also Raney v. Stovall, 361 S.W.2d 518, 522 adjudicative authority is far less concerned—perhaps (Ky.1962)(“[W]hile the courts will jealously guard its not concerned at all—with the “need to avoid undue [sic] powers and jurisdictions, they will be careful not to infringement upon the legislative” branch. Id. at 469–70. infringe upon the powers, prerogatives and jurisdictions of the legislative department .” Quotation marks and citation In fact, to the extent consideration of the separation omitted). of powers doctrine is implicated, the violator—if there is one—is the legislative branch. When the legislature Fortunately, “[t]he concept of constitutional due process enacts a law directing that a particular claim against in administrative hearings is flexible.” Danville–Boyle the Commonwealth be adjudicated before a particular County Planning and Zoning Com'n v. Prall, 840 S.W.2d state agency, it does so under claim of authority found 205, 207 (Ky.1992). This flexibility leaves reviewing in Ky. Const. § 231. But that constitutional provision courts free to grant only “such procedural protections only allows the legislature to direct “in what courts as the particular situation may demand.” Hilltop at 568– suits may be brought against the Commonwealth.” Ky. 69, quoting Kentucky Cent. Life Ins. Co. v. Stephens, Const. § 231 (emphasis supplied); see also Ky. Const. § 897 S.W.2d 583, 590 (Ky.1995). Due process flexibility, 14 (captioned, “Right of judicial remedy for injury ...”; combined with principles of comity, allowed the Court in emphasis supplied). It is only by the doctrine of comity Hilltop to tip the scales against Ky. Const. § 2, and in favor that the judicial branch accepts and even embraces of Ky. Const. § 28, resulting in the ruling that “[t]he ‘right such legislation. 18 Consequently, a court reviewing an to an impartial tribunal’ ..., as it is commonly conceived agency's exercise of adjudicatory authority need not be within the judicial context, cannot be guaranteed (nor need concerned that it will run afoul of the separation of powers it be) in the administrative or legislative setting.” Hilltop doctrine. See City of Greenup v. Public Service Com'n, 182 at 469 (emphasis supplied). S.W.3d 535, 539 (Ky.App.2005)( “[I]t is a judicial function finally to decide the limits of the statutory power of an *16 We should not be surprised that the court in Hilltop administrative agency.”). weighed constitutional considerations in favor of Section 28 which, together with Section 27, embodies the “cardinal Therefore, our review of administrative adjudications principle of our republican form of government and properly involves only one side of the scales balanced in one that is among the most emphatically cherished and Hilltop; that is, the side holding Ky. Const. § 2 and “the guarded principles in our Constitution.” Prater v. Com., need to ensure fair and nonarbitrary treatment” of the 82 S.W.3d 898, 901 (Ky.2002) (citations and internal parties. Hilltop at 469. quotation marks omitted). Hilltop, by the clarity with which it defined the parameters Perhaps no state ... has of due process in a legislative context, has returned a Constitution whose language American Beauty Homes to its proper context. Both cases more emphatically separates and review “zoning determinations [which] are purely the perpetuates what might be responsibility and function of the legislative branch of termed the American tripod form government [.]” Hilltop, 180 S.W.3d at 467. Hilltop makes of government than does our it entirely clear that the process due a party affected by Constitution, which history tells us

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 12 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 an agency's exercise of an administrative 19 or legislative (c) Without support of substantial evidence on the function is very different from the process she is due whole record; when the agency is performing a judicial function. Id., passim, at 468–70. Therefore, while Hilltop and American (d) Arbitrary, capricious, or characterized by abuse of Beauty Homes are perfectly appropriate as measures of discretion; the standard for reviewing zoning determinations, neither case is the best guide to appellate review of an agency's (e) Based on an ex parte communication which exercise of a judicial function. For that, we have sufficient substantially prejudiced the rights of any party and case law, but equally important with regard to the case likely affected the outcome of the hearing; before us, we have KRS Chapter 13B. (f) Prejudiced by a failure of the person conducting a proceeding to be disqualified pursuant to KRS 13B.040(2); or Review of Administrative Adjudications under KRS Chapter 13B (g) Deficient as otherwise provided by law.

*17 The concern for fundamentally fair and impartial KRS 13B.150(2). administrative adjudications was addressed by our legislature just more than a decade ago. The Albert Jones Applying the proper standard of review requires our Act of 1994 (codified as KRS Chapter 13B and effective reflection on this statute, and the judicial interpretations in 1996) created comprehensive and uniform procedural of Chapter 13B, along with the administrative common safeguards for “any type of formal adjudicatory law that preceded it. We now apply that standard to proceeding conducted by an agency as required or Baker's arguments. permitted by statute or regulation to adjudicate the legal rights, duties, privileges, or immunities of a named person.” KRS 13B.010(2); see also KRS 13B.020(1)( “This LACK OF SUBSTANTIAL chapter creates only procedural rights[.]”). The Act is EVIDENTIARY SUPPORT not applicable to all state agencies, but provides for a fair number of exemptions including the conduct of Baker first argues that the Board “made factual legislative proceedings of the type addressed in American determinations contrary to the trier of fact” that are not Beauty Homes and Hilltop. KRS 13B.020(2)(f). None of supported by substantial evidence. As noted, there is only the exemptions are applicable to this case. Therefore, this one factual issue that the Board resolved in a manner statutory standard of review applies. contradictory to the hearing officer. That fact is whether Baker gave notice to the Systems of his expectation that The Act codified much of Kentucky administrative the Systems would comply with KRS 61.702(3)(1995) and common law. While our state agencies and even our courts coordinate the cross-referencing allocations of his state have often foregone citation to the Act and opted instead contributions that he requested. The hearing officer found for reference to case law, and particularly to American as fact that he did. The Board found that he did not. We Beauty Homes, it is most proper to apply KRS 13B.150. believe the Board's finding to that effect is not supported by substantial evidence. The court shall not substitute its judgment for that of the agency as to the weight of the evidence on questions of fact. The court may affirm the final order or it may reverse the final order, in whole or in part, and remand The Significance of Baker's Notice to the Systems the case for further proceedings if it finds the agency's *18 As is evident from an exchange at the beginning final order is: of the hearing, both the Systems and Baker believed this (a) In violation of constitutional or statutory fact to be crucial to their respective cases. Baker's counsel provisions; began the hearing by explaining to the hearing officer that, during the discovery phase, he requested that the (b) In excess of the statutory authority of the agency; Systems produce a copy of the “Employee Enrollment

Application” it received from KTRS Payroll Officer to obey this statute since his goal of combining his Martin. The Systems responded by producing a copy that contributions to pay his entire premium was being met. strangely did not contain Martin's figures in the margin. For years prior to 1996, he effectively waived the right to At the hearing, Baker's counsel requested that the System's compel the Systems to pay his premium in full. At least counsel produce the original from which that copy was that is one of the Systems' arguments, and we have no made. reason to question it.

Hearing Officer: Are you saying that is pertinent to this However, when the state adopted an FSA plan for its issue? employees, Baker became eligible to divert a portion of the KTRS contribution to his FSA. The Systems' obligation Baker's Counsel: Yes, sir. to pay Baker's premium “in full” thereby became more Hearing Officer: Do you have something that has the significant to Baker. If the Systems complied with the original markings on it? statute and paid his premium in full 20 , Baker could direct a portion of the KTRS contribution to his FSA. Baker's Counsel: Yes, sir. *19 But Baker had established a certain “course of Hearing Officer: Okay. dealing”—to use the Systems' language—in previously Systems' Counsel: Well, the issue is that that is what failing to object to the Systems' payment of only part we received from [KTRS] with illegible scratchings of the state contribution. To effectuate a change, so the in the lower right hand corner. That is the notice we argument goes, he needed to notify the Systems. The only received that they were going to take some different notification Baker gave was the allocation figures written action on Mr. Baker's cross-referencing. by Martin on the “Employee Enrollment Application” sent to the Systems. The hearing officer considered this The Systems claims Baker's failure to notify it of the document sufficient notice. manner in which he desired to coordinate his benefits is a complete defense to any alleged right Baker may have to the Systems' payment of the full contribution rate. By The Hearing Officer's Finding of Evidence Tampering his prior course of dealing, claims the Systems, Baker waived the right to an allocation of the state contribution When the hearing officer examined the original different from that to which he previously acquiesced. To application produced at Baker's counsel's urging during the extent this defense is valid, it is necessary that we the hearing, the hearing officer himself introduced this determine Baker's prior cross-referencing practices, and version of the form into the record as Exhibit 22. The then determine whether substantial evidence supports the reason is obvious. It is irrefutable, and in fact the Board Board's finding that Baker did not give notice to the does not attempt to refute, that someone created this Systems. version of the form by cutting and taping together copies of a previous generation of the form, or forms, resulting in a copy on which Martin's figures could not be read. That spliced and taped, and partially unreadable, version of the Baker's Course of Dealing Prior to 1996 form was then copied and produced to Baker's counsel We begin by identifying an irrefutable fact of this case: during discovery. Baker is the beneficiary of an inviolable right to have the Systems insurance fund pay his insurance premium in full. The hearing officer made the following findings of fact KRS 61.692; KRS 61.701(2); KRS 61.702(3)(1995); see regarding this document, based on his examination of the also, Jones v. Board of Trustees of Kentucky Retirement evidence and his observation of the witnesses, including Systems, 910 S.W.2d 710, 712 (Ky.1995). From 1991 to their demeanor. 1996, the Systems disregarded this mandate and paid only 37. The hearing officer introduced into the record at the the balance remaining after Baker's employer, KTRS, hearing the original copy of the Employee Form sent paid its full state contribution rate toward the premium. Baker never raised an objection to the System's failure

by Martin to the Systems which was retained in the Hatter testified that she never received any Systems' file for Baker. [Hearing Exhibit, “HE”, 22] communication from Martin regarding Baker's cross- referencing and that she received the “Employee 38. Martin's hand-written figures regarding allocation Enrollment Application” in the spliced and taped and of premium payments between KTRS and the partially unreadable condition in which it was presented System[s] (KERS) do not appear at the bottom at the hearing. margin of the copy in the Systems' files. However, the bottom section of Baker's form is taped on. This The hearing officer obviously believed that someone at taped-on bottom section has barely discernible marks the Systems, if not Hatter, did receive the form in the in the margin where Martin's hand-writing appeared. fully readable condition in which Martin testified she sent it. Relying in part upon the witnesses' demeanors, he 39. Martin said she would never send a copy of Baker's found as fact that “the Systems received a copy of Baker's Employee Form to the Systems in this condition. Employee Form with figures showing Baker intended the She said she had the ability to make a reduced copy Systems to pay first.” He then concluded as a matter of of the legal size form, or to make a full-sized copy, law that “[t]his is sufficient notice from KTRS, even if and it would be too much trouble to cut and paste not intended as such by Martin, that Baker and KTRS a form together. In fact, Martin brought with her intended the Systems to pay first.” to the hearing Baker's KTRS file which contained a full-sized photocopy of Baker's Employee Form. [Hearing Exhibit] 21. On this photocopy, Martin's figures in the margin are clearly legible. The Board's Finding that Baker Failed to Give the Systems Notice 40. The hearing officer finds that the photocopy of Baker's Employee Form in the Systems' files (HE 22) If the Board had adopted the hearing officer's finding which was received December 18, 1995, was altered by that Baker gave notice to the Systems, it would have someone within the Systems to remove any indication been acknowledging that someone under its authority had of the payment allocation figures hand-written by tampered with the evidence. 22 Notably, the Board did Martin. not contradict the hearing officer's finding of evidence tampering itself and, in fact, ignored it. The Board simply Recommended Order, Record (R.) 394–95 (footnotes and stated that Hatter had received Exhibit 22, the tampered citations to the record omitted; emphasis supplied). document, “with the cut and attached bottom” just as it was presented at the hearing. Then the Board criticized In the process of finding as fact that this document Martin's conduct. “was altered by someone within the Systems,” the hearing officer was required to assess the credibility of two witnesses whose testimony directly contradicted one Martin's conduct was contrary to established Personnel another. One was Martin, whose testimony the hearing Cabinet cross-reference procedures and contrary to her officer summarized and we have set forth, supra. on [sic] prior course of dealing in the administration of payment of Baker's health insurance premiums.... *20 The other was the Systems' employee, Lela Hatter. Ms. Martin had a duty to place Baker on notice Hatter was allowed to testify first, out of traditional that the action he proposed was contrary to cross- order, because she was not feeling well at the time of the reference procedures. Ms. Martin never gave notice to hearing and wanted to go home as soon as she could. [the Systems] that she was deviating from established Observation of her videotape testimony shows that, in cross-reference procedures, nor that she was altering her contrast to Martin's relaxed testimony, Hatter appears course of dealing with [the Systems]. nervous, uncomfortable and uncertain, particularly when (R. 456–57). The Board then concluded that “Baker testifying about how she received the form, changing her never gave notice to [the Systems] that he was changing testimony, then changing it back again. 21 his course of dealing.” (R.491). The Board did not explain why it found Hatter's testimony more credible than Martin's, nor did it give any other

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 15 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 reason for rejecting the hearing officer's conclusions on in the record fairly detracts from its weight.” Internal this issue. The Systems apparently believes no explanation quotation marks omitted). is necessary, simply urging this Court to find that the substantial evidence standard is satisfied because the Section (1) of KRS 13B.120 requires the Board to Board Order and Hatter's testimony are consistent on this “consider the record including the recommended order point. [.]” (Emphasis supplied). Consistent with the chapter, the Board has even adopted a regulation requiring that any *21 If we were to simply review the final order and, upon “final order of the board shall be based on substantial finding some measure of evidentiary support in the record, evidence appearing in the record as a whole [.]” 105 KAR affirm on the basis of substantial evidence, we would 1:215 Section 8. Consequently, the Board is not free to be failing in our duty. Such a sciolistic approach would review only the evidence presented and reach its own suffice only if the rule were that where there is any evidence independent result, utterly disregarding the reasoning, to support a finding, that finding cannot be challenged. observations and opinions of the hearing officer. This is not the rule and we will not make it so. Com., Revenue Cabinet v. South Hopkins Coal Co., 734 S.W.2d When an agency head adopts the hearing 476, 479 (Ky.App.1987)(“ ‘Substantial evidence’ is not officer's recommendation, it is self-evident that the simply some evidence or even a great deal of evidence[.]”); recommendation received appropriate consideration. see also Young v. L.A. Davidson, Inc., 463 S.W.2d 924, 926 (Ky.1971)(“[M]isuse of the fact-finding power by the However, when an agency head rejects the hearing officer's board arrogates to that administrative body a policy- recommendation, there is no way for a reviewing court to making function which it should not have[.]”). know whether due consideration was given to reasons and factors supporting that rejection. We believe it is necessary for the agency head to add to the record by articulating non-arbitrary reasons for such rejection. This specific Appellate Review of Agency Head's Rejection directive is implicit in the language of KRS 13B.120(3), as of Hearing Officer's Recommendation interpreted by our Supreme Court. For his part, Baker urges adoption of a more sophisticated rule of review that he believes applies when the agency *22 If the Board exercises its lawful prerogative of head deviates from the recommendation of the hearing rejecting the hearing officer's findings of fact, KRS officer. Citizens Bank of Marshfield, Missouri v. FDIC, 13B.120(3) explicitly requires the agency head to “include 718 F.2d 1440, 1444 (8th Cir.1983)(“a slightly different separate statements of findings of fact and conclusions of rule applies when the administrative agency rejects the law.” Our Supreme Court interpreted this to mean more findings” of the hearing officer; emphasis supplied); see than simply identifying what testimony the Board believes also, Brock v. L.E. Myers Co., 818 F.2d 1270, 1277 (6th conflicted with the hearing officer's fact-finding. Cir.1987)(administrative agency must explain grounds for rejection of hearing officer's recommendation). In Herndon v. Herndon, 139 S.W.3d 822 (Ky.2004) a unanimous court “took pains to point out that ‘[i]f the Baker advances the argument that the Board cannot reject agency head deviates from the recommended order, it a hearing officer's recommendation, including his fact- must make separate findings of fact and conclusions of finding, without first articulating non-arbitrary reasons law for any deviation from the recommended order.’ “ Id. for doing so. We find merit in this argument. at 825 (emphasis supplied), quoting Rapier v. Philpot, 130 S.W.3d 560, 563 (Ky.2004), citing KRS 13B.120(3). We believe our statutes and case law require us to recognize that an agency head's failure to Lest the “pains”-taking of our Supreme Court be articulate its rationale for rejecting the hearing officer's misinterpreted as a mere repetition of the statutory recommendation is a factor in our review. See, e.g., requirements, the court emphasized a “difference between Kentucky Bd. of Nursing v. Ward, 890 S.W.2d 641, 643 KRS 13B cases and cases governed by the civil (Ky.App.1994)(“In determining whether the evidence is rules.” Id. That difference is “the breadth of discretion substantial, the court must take into account whatever possessed respectively by the agency head [acting on

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 16 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 the recommendation of a hearing officer under KRS (Ky.1969) (citation omitted), it is the hearing officer 13B.030] or the trial judge [acting on the recommendation and not the agency head who is the expert in the of a commissioner under CR 53.06].” Id. The Supreme kind of fact-finding necessary to an agency adjudication. Court indicated there are strictures on an agency head's Hearing officers develop this expertise through training discretion where, “[b ]y contrast, a trial judge acting on and experience that is rarely, if ever, possessed by a Commissioner's report pursuant to CR 53.06 has the agency board members. In fact, the legislature specifically broadest possible discretion with respect to the action that exempts board members from the requirement of may be taken.” Id. (emphasis supplied). obtaining any education in adjudicating controversies that come before them. KRS 13B.030(3). The contrasting degree of discretion is not readily revealed by simply comparing the respective rules and statutes. On the other hand, since 1994 the legislature has required Both CR 53.06 and KRS 13B.120(2) give the respective that Kentucky's Office of the Attorney General, Division final decision-maker the power to accept, reject or remand of Administrative Hearings, be responsible for hearing the recommendation. Both CR 52.01 and KRS 13B.120(3) officer training and for “maintaining a pool of hearing say that the final decision-maker must render written officers for assignment to the individual agencies at their findings of fact and conclusions of law. Yet Herndon request, for the conduct of administrative hearings.” KRS unmistakably intended to identify a degree of deference 15.111(2)(a), (c). Legislatively mandated training includes owed by an agency head to the hearing officer that does both initial training (a minimum of 18 classroom hours) not exist between a trial judge and a commissioner. Such a and continuing education (a minimum of 6 classroom rule of deference has been adopted in other jurisdictions, hours annually) in a variety of disciplines focusing primarily to recognize the superior ability of the hearing on administrative law and procedure. KRS 13B.030(3), officer to determine demeanor-based facts. See, e.g., (4); 40 Kentucky Administrative Regulations (KAR) McEwen v. Tennessee Dept. of Safety, 173 S.W.3d 815, 5:010. Training includes everything from the substantive 824 (Tenn.Ct.App.2005); Brock v. L.E. Myers Co., High statutory law of specific agencies to enhancing the hearing Voltage Div., 818 F.2d 1270, 1277 (6th Cir.1987); see officer's ability to determine witness credibility. On the also, Community Clinic, Inc. v. Department of Health and latter topic alone, courses cover “judging demeanor Mental Hygiene, 922 A.2d 607, 619 (Md.App.2007). and forthrightness of witnesses, appearance and body language; [s]exual, racial and cultural bias, and prejudice; We believe the basis for the deference alluded to and [j]udging common sense of answers, consistency, in Herndon is the agency head's lack of adjudicatory context and flow.” 40 KAR 5:010 Section 3(1)(c). experience and expertise relative to that of the hearing officer. A further comparison of the two systems is No doubt the legislature's intent in requiring this level of illustrative. qualification was to better serve the agency head and the public, but ultimately it was to best serve justice. Without When we undertake appellate review of a circuit judge's question, it is the hearing officer who provides the agency decision that has been aided by a commissioner's head with the adjudicatory experience and expertise it report, we appropriately presume that the adjudicatory would otherwise lack. This is undoubtedly the reason experience and expertise of the circuit judge is at least more than sixty (60) government agencies and boards 23 equal to that of the commissioner. On the other hand, “delegate the fact-finding role to a hearing officer [.]” when we examine the statutes and regulations governing Herndon v. Herndon, 139 S.W.3d 822, 826 (Ky.2004). the conduct of administrative hearings, we are struck by the fact that it is the hearing officer, and not the agency We do not intend to suggest that this Board, or any agency head, who is possessed of superior adjudicatory experience head, is prohibited from rejecting a hearing officer's and expertise. recommendation, including his fact-finding. Upon due consideration of the entire record, an agency head enjoys *23 While “[c]ourts often advert to the expertness, special the prerogative of making factual findings independent of, competence, specialized knowledge, or experience of the and even contrary to, those of the hearing officer. KRS administrative agency” when engaged in a legislative 13B.120(2). Despite the politicization of the appointment function, Graybeal v. McNevin, 439 S.W.2d 323, 326 process, the individuals comprising the various agency

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 17 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 heads are appointed to serve ostensibly because of their particular personal expertise in the field regulated by The need for the agency head to articulate its rationale the agency. The agency head certainly may, and should for rejecting demeanor-based findings, such as the one when appropriate, draw upon that expertise to articulate we address here, is especially keen. Other courts have legitimate bases upon which to reject a hearing officer's called “the problem of ignoring the ‘credibility’ findings recommendation. 24 We simply deem it appropriate of the initial hearing officer[,]” Scarborough v. Cherokee and necessary to require the agency head to offer an Enterprises, 816 S.W.2d 876, 877 (Ark.1991), “a special explanation when it does so. problem of administrative review.” Slusher v. NLRB, 432 F.3d 715, 727 (7th Cir.2005). *24 However, “on matters which the [hearing officer], having heard the evidence and seen the witnesses, is We have concluded that when an agency head rejects any best qualified to decide, the agency should be reluctant finding or recommendation of a hearing officer pursuant to disturb his findings unless error is clearly shown.” to KRS 13B.120(2), and fails to make its non-arbitrary Universal Camera Corp. v. N.L.R.B., 340 U.S. 474, 494 rationale for such rejection a part of the final order, as in (1951). Where the agency overcomes that reluctance and the case sub judice, it risks a determination both that the “rejects the fact-finding of a [hearing officer], on appellate final order is not supported by substantial evidence and review, courts are entitled to expect, at a minimum, that that it is arbitrary. the agency will provide a rational exposition of how other facts or circumstances justify its course of action.” 2 Am.Jur.2d Administrative Law § 365. The Board's Finding that Baker Failed to Give Appropriate Notice to the Systems Upon appellate review, we are required to look at is Not Supported by Substantial Evidence “the whole record,” KRS 13B.150(2)(c); see also KRS 13B.130(1)-(10). For purposes of our review under *25 We have previously said that “[i]n determining Chapter 13B, the hearing officer's recommendation whether the evidence is substantial, the court must take (including his findings of fact) is as much a part of the into account whatever in the record fairly detracts from record as the evidence put before the hearing officer, and its weight.” Kentucky Bd. of Nursing v. Ward, 890 we must consider his views in deciding whether the Board S.W.2d 641, 643 (Ky.App.1994)(internal quotation marks Order is supported by substantial evidence. Universal omitted), quoting Willbanks v. Secretary of Health & Camera Corp. v. N.L.R.B., 340 U.S. 474, 493 (1951)(“[A]n Human Services, 847 F.2d 301 (6th Cir.1988), quoting examiner's [hearing officer's] report is as much a part of the Universal Camera at 488. In this case, there are at least record as the complaint or the testimony.”). Similarly, the three factors that detract from the substantiality of the agency head's rationale for rejecting the hearing officer's evidence upon which the Board relies in finding that the recommendation, if one is given, is also part of that whole Systems never received Baker's notification. record we must consider. If no non-arbitrary rationale is given, that too is a factor we must consider. First, unlike the hearing officer, the Board was not in a position to observe the demeanor of the witnesses Expecting the agency head to articulate its rationale and assess their credibility. Of course, this is always for departing from the recommendation does not erode the case when an agency head delegates its fact-finding the substantial evidence rule of review. Because we are duty. Consequently, we would expect this to be a factor already required to give due regard to the hearing officer's only in cases in which a demeanor-based finding plays recommendation, KRS 13B.150(2)(c); KRS 13B.130(7), an important role, such as the one before us. As the the agency head's explanation for any departure from it, United States Supreme Court put it, “evidence supporting if not arbitrary, will only serve to strengthen the validity a conclusion may be less substantial when an impartial, of the final order. To give both the recommendation and experienced examiner [in our case, the hearing officer,] the rationale for its rejection “this significance does not who has observed the witnesses and lived with the case has seem to us materially more difficult than to heed the drawn conclusions different from the Board's than when other factors which in sum determine whether evidence is he has reached the same conclusion.” Universal Camera at ‘substantial.’ “ Universal Camera, supra, at 496–97. 469.

form she sent on Baker's behalf to the Systems was not The prevailing view on an agency head's deference to the tampered document produced during discovery and at demeanor-based factfinding by a hearing officer has been the hearing. Further, the Board had to reject the notion articulated often and variously, but in general conformity that anyone at the agency it headed, and specifically Ms. with Ward v. N.L.R.B., 462 F.2d 8 (5th Cir.1972). Hatter, tampered with the document. It had to vest in the testimony of its own agency's employee the entire weight The preeminence of the [hearing of the issue. In the absence of the Board's rationale for officer's] conclusions regarding doing so, such obvious cherry-picking of the evidence, testimonial probity does not amount contrary to the disinterested finding of the hearing officer, to an inflexible rule that either the based on the testimony of a disinterested witness, has the Board or a reviewing court must strong appearance of arbitrariness. Such an appearance invariably defer to his decision, is brought into sharper resolution by the fact that the thereby effectively nullifying either Board's substituted finding on this point was a literal administrative or judicial review. parroting of this witness's employer's brief. But when the Board second- guesses the [hearing officer] and The third factor has to do with motivation. The Board's gives credence to testimony which finding that it never received notice requires acceptance of he has found—either expressly or the inference that a person other than “someone within by implication—to be inherently the Systems” had a reason to tamper with Baker's form. untrustworthy, the substantiality of Martin had no reason to tamper with the form. To do that evidence is tenuous at best. so would have served neither her nor her employer any purpose. In fact, sending a form illegible in any way would Ward at 12, citing N.L.R.B. v. Walton Mnfg. Co., have been contrary to her purpose, possibly necessitating 369 U.S. 404, 408, 82 S.Ct. 853, 855, 7 L.Ed.2d that she repeat her effort. We can conceive of no other 829, 832 (1962); see also Brock v. L.E. Myers Co., motivation for any person or entity to tamper with the High Voltage Div., 818 F.2d 1270, 1277 (6th Cir.1987); form than that provided by the hearing officer. More McEwen v. Tennessee Dept. of Safety, 173 S.W.3d importantly, the Board offers no alternative explanation, 815, 824 (Tenn.Ct.App.2005)(Where “credibility plays rational or otherwise. a pivotal role, then the hearing officer's ... credibility determinations are entitled to substantial deference.”); We have fully considered the record as a whole and Department of Health and Mental Hygiene v. Shrieves, conclude that the Board's finding that Baker did not 641 A.2d 899, 908–09 (Md.App.1994)(Hearing officer's give notice to the Systems of his allocation of state “findings based on the demeanor of witnesses are entitled contributions, to which he was lawfully entitled, is not to substantial deference and can be rejected by the supported by substantial evidence and is arbitrary. agency only if it gives strong reasons for doing so[.]”); Ritland v. Arizona State Bd. Of Medical Examiners, Nevertheless, Baker's notice to the Systems of his desired 140 P.3d 970, 974 (Ariz.App.2006)(“Board's decision coordination of benefits is irrelevant if the Systems' policy must reflect its factual support for rejecting [hearing is sustainable under KRS Chapter 13A as a matter of officer's] credibility findings.”). This is an appropriate and law. Before addressing that issue, however, we must turn necessary consideration when any agency head decides to to Baker's second argument and determine whether the reject findings of fact of the same hearing officer to whom Board's adoption of the System's Brief as its final order the agency head entrusted its delegation of responsibility was proper under KRS Chapter 13B. for determining facts.

*26 While the first factor focuses on the witnesses' believability, the second focuses on the witnesses' ADOPTION OF THE SYSTEMS' relationship to the Board. To reach the finding of fact BRIEF AS THE BOARD ORDER at issue in this case—that Baker never sent the Systems proper notice—the Board had to totally discount the Baker's second argument opens upon an erroneous apparently disinterested testimony of Martin that the premise. He claims that Chapter 13B includes “an

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 19 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 administrative hearing procedure that removes total compensation and unemployment compensation claims control of in house decision making by a state agency and are exempted from Chapter 13B, KRS 13B.020(3)(e) vests that responsibility in an independent professionally 1.a., (3)(i) 1.a., the fact-finding determination under that managed quasi judicial authority[.]” While this statement chapter very closely reflects the method prescribed for is more accurate with regard to some administrative unemployment claims. KRS 13B.120(2), (3) (“agency adjudications than others, Chapter 13B most certainly is head may accept ... or it may reject or modify ... the not designed to do this. See, e.g., KRS 13B.030(1)(“An recommended order [and] include separate statements of agency head may not ... delegate the power to issue a final findings of fact and conclusions of law.”). order[.]”). Baker nevertheless correctly makes the point that KRS *27 We have noted in the past, with varying degrees of 13B.120 places the duty squarely on the agency head to emphasis, as well as in this opinion, that administrative prepare a final order. See also KRS 13B.030(1). He argues adjudications vary widely in their process. That variety that the Board breached this duty because “the Board's was specifically addressed with regard to the subject counsel became the decision maker” when the “Board of of Baker's second argument—an agency head's duty of Trustees essentially adopted the [Systems'] Post–Hearing independent fact-finding—in Burch v. Taylor Drug Store, Brief as its Report and Order.” (Appellants Brief, pp. 14, Inc., 965 S.W.2d 830 (Ky.App.1998). 16).

[I]n many administrative agencies, there is a single We cannot imagine a more complete appropriation of the finder of fact who hears and weighs evidence, makes intellectual work product of another than occurred here factual findings and applies the facts to the law.... For when the Board adopted the Systems' brief as its final example, workers' compensation procedure (at least order. But for the fact that the Systems obviously agreed prior to 1996) functions much in the same manner to have the Board appropriate its work, this case would as the courts.... [A]n Administrative Law Judge (ALJ) represent the essence of plagiarism. But does it constitute conducts a hearing, makes findings of fact, conclusions reversible error? Ultimately, we think not. of law and determines the amount of the award, if any. On appeal, the Workers' Compensation Board sits *28 The question fairly stated is, “To what extent may as a true appellate body. The Board cannot consider an agency head incorporate the work of others, and more additional evidence, or second-guess the findings made particularly, the work of the parties before it, as its final by the ALJ .... order in a Chapter 13B adjudication?”

However, the approach to fact-finding in Undoubtedly, claimants whose personal rights are being unemployment insurance cases is substantially adjudicated by a state agency are entitled to a decision that different.... The referee conducts a hearing, receiving is the product of independent, deliberative consideration testimony from witnesses and reviewing documentary by the members of the agency head. Yet even before evidence. The referee then issues findings of fact, adoption of Chapter 13B, we “held that agency decisions conclusions of law and final order[. A]n aggrieved party may be based on the work of hearing officers.” Robinson may appeal to the full Commission. v. Kentucky Health Facilities, 600 S.W.2d 491, 492 [A]ll appeals to the Commission may be heard upon ... (Ky.App.1980). Clearly, the entire concept of utilizing the evidence and exhibits introduced before the referee. hearing officers under KRS 13B.030(1) anticipates that Thus, while the Commission generally does not hear the agency head conducting independent deliberations evidence directly from witnesses, it has the authority and fact-finding will rely on, and routinely appropriate, to enter independent findings of fact. Necessarily, such the work product of another, namely the hearing officer. authority allows the Commission to judge the weight of the evidence and the credibility of witnesses and to Does it make a difference when the work being disagree with the conclusion reached by the referee. appropriated was offered by a party to the administrative proceeding? While this aspect of the question is one of first Burch at 833–34 (emphasis supplied; internal quotation impression in Kentucky, we believe that an agency head's marks and citations omitted). While both workers' fact-finding under Chapter 13B is sufficiently comparable

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 20 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 to the fact-finding of a trial court under CR 52.01 to justify application of the principles developed in the latter *29 Emphasizing the importance of independent fact- context. finding, Forness itself addressed the analogous roles of a trial court and an administrator as fact-finder. An early consideration of the question in a judicial context is found in Callahan v. Callahan, 579 S.W.2d 385 We stress this matter because of the grave importance (Ky.App.1979), where we once claimed “[t]he appellate of fact-finding. The correct finding ... of the facts ... is courts of this state have universally condemned the fully as important as the application of the correct legal practice of adopting findings of fact prepared by [a party's] rules to the facts as found. An impeccably “right” legal counsel ... because of the problems such findings present rule applied to the “wrong” facts yields a decision which upon appellate review.” Id. at 387. However, a few years is as faulty as one which results from the application later, the Supreme Court corrected us. of the “wrong” legal rule to the “right” facts. The latter type of error, indeed, can be corrected on appeal. We do not condemn this practice But the former is not subject to such correction unless (of permitting attorneys to draft the appellant overcomes the heavy burden of showing findings of fact and conclusions of that the findings of fact are “clearly erroneous”. Chief law) in instances where the court is Justice Hughes once remarked, “An unscrupulous utilizing the services of the attorney administrator might be tempted to say ‘Let me find the only in order to complete the facts for the people of my country, and I care little who physical task of drafting the record. lays down the general principles.’ “ [citation omitted]. However, ... [o ]ur concern ... is That comment should be extended to include facts that the trial court does not abdicate found without due care as well as unscrupulous fact- its fact-finding and decision-making finding; for such lack of due care is less likely to reveal responsibility [.] itself than lack of scruples, which, we trust, seldom exists. And Chief Justice Hughes' comment is just as Bingham v. Bingham, 628 S.W.2d 628, 629 applicable to the careless fact-finding of a judge as to (Ky.1982)(emphasis supplied); see also Mansfield v. that of an administrative officer. The judiciary properly Voedisch, 672 S.W.2d 678, 681 (Ky.App.1984). In holds administrative officers to high standards in the Bingham, the Supreme Court engaged in a “[c]areful discharge of the fact-finding function. The judiciary scrutiny of the record” and determined that “the should at least measure up to the same standards. court was thoroughly familiar with the proceedings and facts[,] prudently examined the proposed findings and Forness at 942 (citations omitted). 25 conclusions and made several additions and corrections to reflect his decision in the case.” Id. (emphasis supplied). Very quickly taking our cue from Bingham's interpretation Consequently, the Supreme Court determined the trial of Forness, this Court decided Stafford v. Board of Educ. court had not abdicated its role in the case before it. of Casey County, 642 S.W.2d 596 (Ky.App.1982). In Stafford, the trial court had both parties prepare findings But Bingham did seem to establish a bright line of fact “and then adopted verbatim the set of findings and rule for distinguishing between the trial court's conclusions which more closely reflected his thoughts[.]” impermissible abdication of its fact-finding responsibility We said, and its permissible adoption of persuasive language. Distinguishing U.S. v. Forness, 125 F.2d 928 (2nd Such a practice is not proper, as the Cir.1942) from the case before it, the Supreme Court in trial court should have either made Bingham pointed to the fact that in Forness there was a an oral statement as to his findings “verbatim or mechanical adoption of proposed findings of and conclusions for the benefit of fact[.]” Bingham at 629. The Forness court thus concluded counsel in completing the physical that the trial court did abdicate such responsibility. See task of drafting the finding of fact Forness at 942 (“[W]e lose the benefit of the judge's and conclusion of law or in some own consideration [when] the findings proposed by the other manner retained control of the defendants [a]re mechanically adopted[.]”). decision making process. (See, for

example, Bingham v. Bingham, Ky., written by an advocate who likely lacks the specialized 628 S.W.2d 628 (1982).... training required of the hearing officer. See 40 KAR 5:010 Section 3(1)(h)(Required hearing officer training Stafford at 598 (emphasis supplied). In Prater v. Cabinet in “Decision writing”); 40 KAR 5:010 Section 3(2)(g) for Human Resources, Com. of Ky., 954 S.W.2d 954 (“Findings and evidence”); 40 KAR 5:010 Section 3(2) (Ky.1997), the Supreme Court again disabused us of an (h)1.(“The recommended order and writing for judicial erroneous belief. This time it was our erroneous belief that review”; “The nature, scope and function of findings and Bingham had given us a bright line rule. conclusions under KRS 13B.110”). Determining what or whose work to appropriate is a decision left to the agency In Prater, the appellant counted on the existence of the head. ostensible bright line rule. He claimed “the trial court failed to make independent findings of fact[.]” Prater Unlike plagiarism though, where the main risk is being at 956. As proof he demonstrated that “the trial court discovered, the greater gamble in appropriating the legal adopted the Cabinet's proposed findings of fact without work of another is the potential for embracing inferior correction or change.” Id. While the Supreme Court work and claiming it as one's own. Determining whether agreed the adoption was verbatim, it did not agree that this the work appropriated by an agency head is inferior as a is proof of the trial judge's abdication of his fact-finding matter of law is a decision left to the reviewing judiciary. responsibility, specifically holding that it “is not error for the trial court to adopt findings of fact which were merely Having thus warned even ourselves about the risks of drafted by someone else.” Id. appropriating the work of others, we pass on the following bit of advice to trial judges and agency heads alike. We *30 Given our review of the case law, we believe have offered this advice before, Brunson, supra, at 175 fn. Kentucky stands with the United States Supreme Court 1, having borrowed the words, with attribution, from the on this issue. Even where a party's work is “adopted United States Supreme Court in United States v. El Paso verbatim[, t]hose findings, though not the product of the Natural Gas Co., supra, which credited the quote to Judge workings of the [trial] judge's mind, are formally his; they J. Skelly Wright of the Court of Appeals for the District are not to be rejected out-of-hand[.]” U.S. v. El Paso of Columbia. Natural Gas Co., 376 U.S. 651, 656, 84 S.Ct. 1044, 12 L.Ed.2d 12 (1964), quoted in Brunson v. Brunson, 569 [We] suggest to you strongly that S.W.2d 173, 175 (Ky.App.1978); see Bingham at 630 (“[I]n you avoid as far as you possibly the absence of a showing that the trial judge clearly can simply signing what some lawyer abused his discretion and delegated his decision-making puts under your nose. These lawyers, responsibility[, his findings] are not to be easily rejected.”). and properly so, in their zeal and And so it is also with the fact-finding of an agency head. advocacy and their enthusiasm are going to state the case for their side Findings of fact “drawn with the insight of a disinterested in these findings as strongly as they mind are, however, more helpful to the appellate court.” possibly can. When these findings Id. (emphasis supplied). And, of course, it is just as much get to the courts of appeals they in the interest of the agency head, with the assistance of the won't be worth the paper they are hearing officer to whom it lawfully delegated fact-finding written on as far as assisting the authority, KRS 13B.030(1), to draw its own findings of court of appeals in determining why fact. the judge decided the case.

And yet, an agency head, in the lawful exercise of its own *31 Brunson at 175 fn. 1 (internal quotations and wisdom and discretion, remains free to jettison the hearing citations omitted). officer's recommendation, and the training and experience in fact-finding that goes with it. KRS 13B.120(2); KRS In summary, we hold that the Board's adoption of 13B.030(3), (4). The agency head is also free to replace substantial portions of the Systems' brief does not, in that recommendation with language from a brief designed itself, establish that the agency head abdicated its fact- for an entirely different purpose, see Bingham at 630, and finding responsibility. Therefore, Baker's argument that

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 22 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 the Board committed reversible error by failing to make its own findings of fact in violation of KRS 13B.120(1) must The Systems' Policy is an Administrative Regulation fail. Whether administrative action constitutes a “regulation” does not depend on the label the agency attaches to THE ILLEGALITY OF THE SYSTEM'S it, such as policy or procedure, but whether it fits the CROSS–REFERENCING POLICY definition of KRS 13A.010(2). KRS 13A.010(2) defines “administrative regulation” 26 expansively as Even though we found that Baker gave sufficient notice to the Systems, he will not prevail on appeal unless the Systems' cross-referencing policy is unenforceable. each statement of general applicability promulgated Baker's final argument is that this policy lacks underlying by an administrative body that implements, interprets, authority and violates various provisions of Chapter 13A. or prescribes law or policy, or describes the To properly address this argument and apply Chapter organization, procedure, or practice requirements of 13A, we must identify the circumstances about which any administrative body. there is no controversy. *32 KRS 13A.010(2). 27 An administrative regulation is effective only after it is “adopted.” KRS 13A.010(3). Baker's rights as a retiree were established by the General See GTE v. Revenue Cabinet, Com. of Ky., 889 S.W.2d Assembly in KRS 61.510, et seq. and are contractual and 788, 792 (Ky.1994)(Agency actions not excepted inviolable. KRS 61.692; see also Jones v. Board of Trustees from the definition of “administrative regulation” of Kentucky Retirement Systems, 910 S.W.2d 710, 713 and not adopted “constitute a technical violation of (Ky.1995). Those rights included the Systems' obligation KRS 13A.010(2).”). If an administrative regulation to pay Baker's monthly health insurance premium for 1996 is not adopted, it does not have the effect of in full, not to exceed the monthly state contribution rate law. Commonwealth, Bd. of Examiners of Psychology for that year of $175.50. See KRS 61.702(3)(1995). The v. Funk, 84 S.W.3d 92, 98 (Ky.App.2002)(“An legislature provided that such right shall “not be subject administrative agency may promulgate administrative to reduction or impairment by alteration, amendment, or regulations, and such regulations, if ‘duly adopted and repeal.” KRS 61.692. properly filed have the full effect of law.’ “; emphasis supplied), quoting United Sign, Ltd. v. Commonwealth, Equally clear is the fact that the Systems' policy—a policy 44 S.W.3d 794, 798 (Ky.App.2000). applicable to all retirees—reduced or impaired Baker's The legislature, in its wisdom, understood that an right by withholding $105.08 of its $175.50 monthly administrative agency would be hamstrung if it could state contribution obligation. The Systems claims it was only act by promulgating and adopting an administrative authorized to do so by: (1) an unwritten Personnel regulation for every action it needed to take. 28 So that Cabinet policy dating back at least as far as 1981; (2) a an agency could operate internally, the legislature carved written Systems policy issued December 29, 1995; and (3) out five specific categories of agency action and excepted the policy-making authority delegated by the legislature them from the definition of administrative regulation. pursuant to KRS 61.645(9)(a), (b), and (g) to the Systems' KRS 13A.010(2)(a)-(e). Such agency actions need not be General Manager, Pamala Johnson. adopted to be effective. Because the last two exceptions have no possible applicability to this case, we will describe Because the proper role of an administrative agency is to only the first three. They are regulate, the first question we must answer is whether the Systems' policy is an “administrative regulation,” and, if it is not, does it qualify as a exception, as defined by KRS ◼ “Statements concerning only the internal 13A.010(2). For the purpose of answering this question, management of an administrative body and not we focus on the Systems' December 29, 1995, written affecting private rights or procedures available to the policy. public” KRS 13A.010(2)(a)

a more narrowly focused issue to obtain binding advice ◼ “Intradepartmental memoranda not in conflict about their particular situation.”). with KRS 13A.130” KRS 13A.010(2)(c) On the other hand, the legislature has authorized ◼ “Declaratory rulings” KRS 13A.010(2)(b) Kentucky agencies other than the Board of Nursing The Systems' policy does not fall within the first exception to render “advisory opinions” which we perceive to be for two reasons: (1) it is not a “[s]tatement concerning only synonymous with “declaratory rulings.” See, e.g., KRS the internal management of [the] administrative body” 6.666(4)(Legislative Ethics Commission); KRS 11A.110 and (2) it did “affect[ ] private rights” of Baker and all (Executive Branch Ethics Commission); KRS 121.120(1) retirees similarly situated. KRS 13A.010(1)(a). A proper (f)(Kentucky Registry of Election Finance); KRS example of this category of exception would be a policy 216B.040(3)(e)(Cabinet for Health and Family Services); stating whether a Systems' employee could listen to music KRS 224.20–515(1)(Small Business Stationary Source at his or her workstation. Compliance Advisory Panel of the Environmental and Public Protection Cabinet); KRS 311A.040 (Kentucky We also conclude that the policy does not fall within the Board of Emergency Medical Services). next exception listed: an “[i]ntradepartmental memoranda not in conflict with KRS 13A.130.” KRS 13A.010(2) Despite the fact that the legislature has declined to (c). We need go no further than to say that the specifically grant the Systems the authority to issue either Systems' policy was intended to apply to all persons declaratory rulings or advisory opinions, the Systems who retired from employment with Kentucky state claims the policy was authorized by KRS 61.645(9). A government. By definition, these persons were not description of that authority is appropriate. “intradepartmental” personnel. Even if the policy applied only intradepartmentally, the policy does not satisfy the A search of Kentucky statutes will not reveal a second part of the exception (not conflicting with KRS grant of agency authority more broadly worded than 13A.130(1)) because it modifies or limits a statute—KRS that contained in KRS 61.645(9)(g). The legislature 61 .702(3)(1995), now KRS 61.702(3)(a) 5. A proper empowered the Board to “do all things, take all example of this category of exception would be the health actions, and promulgate all administrative regulations, not benefits plan available intradepartmentally to all Systems inconsistent with the provisions of KRS 61.515 to 61.705.” employees. KRS 61.645(9)(g)(emphasis supplied). A strict and literal interpretation of this statute would authorize the Systems The third listed exception, declaratory rulings, requires to exercise every power that did not undermine its mission. closer examination. However, we conclude that the That is different from granting it only so much authority Systems' policy was not a “[d]eclaratory ruling.” KRS as is necessary to carry out its mission. However, such 29 13A.010(2)(b). a strict and literal interpretation would not promote the legislative purpose, and we do not believe the legislature's *33 Declaratory rulings, per se, have been authorized choice of the double-negative phrase, “not inconsistent by the legislature to only one Kentucky agency—the with,” was intended to grant more power than would have Board of Nursing. KRS 314.105. While Chapter 13A been granted if the more appropriate phrase, “consistent does not provide a definition for the term, the meaning with,” had been used. Therefore, for purposes of statutory ascribed to it by the legislature in KRS 314.105 is interpretation, we ascribe the same, more restrictive, consistent with our understanding of how that term is meaning to both of these phrases. to be interpreted in KRS 13A.010(2)(b). A “declaratory ruling” is an interpretation by an administrative agency Yet the Systems also claims, and its Board held, that the of “the applicability to any person, property, or state legislature has granted broad policy-making authority to of facts of a statute, administrative regulation, decision, its general manager under KRS 61.645(9)(a) and (b). order, or other written statement of law or policy within the jurisdiction of the board.” KRS 314.105(1); see also, *34 As chief administrative officer Baltimore City Bd. of School Com'rs v. City Neighbors, of the Board, Ms. [Pamala] Johnson 929 A.2d 113, 136 (Md.2007)(“[T]he declaratory ruling is in a policy making position as procedure was meant to enable persons concerned with authorized by statute and she is not

prohibited from issuing an opinion or administrative decision on behalf However broad Ms. Johnson's or the Board's power of the Board. may appear, it is always subject to “Kentucky's strong stance against vague delegations” of power referred to (Board Order, Conclusions of Law ¶ 4). The specific as the “nondelegation doctrine.” Board of Trustees of provisions the Board relies upon state: Judicial Form Retirement System v. Attorney General of the Commonwealth of Kentucky, 132 S.W.3d 770, 781– The board of trustees shall appoint 82, 784 (Ky.2003)(describing at length the “nondelegation or contract for the services of an doctrine” in Kentucky). This doctrine compels us to executive director [who] shall be the strictly limit an agency's authority to that clearly delegated chief administrative officer of the and no more. board [who is] deemed to be in a policy-making position[.] Our common law has long adhered to the doctrine that KRS 61.645(9)(a) and (b). the powers of administrative agencies “are limited to those conferred expressly by statute or which exist by necessary The Systems and its Board misunderstand the statute's and fair implication.... But these implications are never primary purpose in designating Ms. Johnson's position extended beyond fair and reasonable inferences.” Blue a “policy-making” position. KRS 61.645(9)(a) and (b) Boar Cafeteria Co. v. Hackett, 312 Ky. 288, 227 S.W.2d do not constitute a blanket grant to Ms. Johnson 199, 201 (Ky.1950). “Powers not conferred are just as of boundless authority to set policy. Designation of plainly prohibited as those which are expressly forbidden Ms. Johnson as a policymaker has more to do with [.]” Louisville and Jefferson County Planning Commission her compensation and liability than with any grant of v. Schmidt, 83 S.W.3d 449, 460 fn.14 (Ky.2001), quoting authority. See KRS 61.645(9)(b) and KRS 18A.175; see, Allen v. Hollingsworth, 246 Ky. 812, 56 S.W.2d 530, 532 e.g., Cabinet for Families and Children v. Cummings, 163 (1933). Because the legislature did not delegate to the S.W.3d 425, 431, 435 (Ky.2005)( “Legislature did not Systems the authority to render declaratory rulings or intend for policy makers and managers to be individually advisory opinions, it is prohibited from doing so, either liable under the [Whistleblower] Act.... Commonwealth through the Board or pursuant to any authority presumed or its agencies are per se liable for the acts of a policy by Ms. Johnson as the Board's chief administrative officer. maker or manager in violation of the statute.”); compare Heggen v. Lee, 284 F.3d 675, 683 (6th Cir.2002)(To *35 Furthermore, the Board has not treated the policy it some degree, even “a ‘football coach’ is a policymaker”; promulgated as a declaratory ruling or advisory opinion. applying Kentucky law). One important feature of either is that its validity is not to be challenged in a Chapter 13B hearing, but is immediately “[W]hether a particular official has ‘final policymaking subject to judicial review. See KRS 314.105(5), supra, (“A authority’ is a question of state law[,]” City of St. declaratory ruling of the board may be appealed to the Louis v. Praprotnik, 485 U.S. 112, 123, 108 S.Ct. Circuit Court[.]”); and KRS § 311 A.040(5), supra, (“An 915, 924 (1988)(emphasis removed), citing Pembaur advisory opinion of the board may be appealed to the v. City of Cincinnati, 475 U.S. 469, 483, 106 S.Ct. Circuit Court[.]”). Inconsistent with immediate judicial 1292, 1300 (1986), and this Court is responsible for review, the Systems required Baker to challenge the policy answering that question. We do not doubt that Ms. in a Chapter 13B hearing. Johnson has certain authority. Her “office has all the indicia of a ‘policy-making,’ government position which We therefore conclude that the Systems' policy was not a vests its holder with discretionary power, considerable declaratory ruling as that term is used in KRS 13A.010(2) responsibility, confidence and supervisory authority.” (b). Garrard County Fiscal Court v. Layton, 840 S.W.2d 208, 210 (Ky.App.1992). What it does not do, is exempt There is but one conclusion. The Systems' policy the office or officeholder from the safeguards we have constituted an administrative regulation, never adopted, established to protect citizens such as Baker from the and therefore ineffective. Vincent v. Conn, 593 S.W.2d arbitrary exercise of that policy-making authority. 99, 100, 101 (Ky.App.1979)(“[P]olicy of the Bureau

© 2018 Thomson Reuters. No claim to original U.S. Government Works. 25 Baker v. Com., Not Reported in S.W.3d (2007) 2007 WL 3037718 for Social Insurance ... amounts to a regulation[, but] internal policy such as is before this Court, is void. KRS was not promulgated as required by KRS 13.085 [now 13A.100;KRS 13A.120;KRS 13A.130. KRS 13A.100], has no effect, KRS 13.085(1) [now KRS 13A.100(2) ], and therefore cannot be used as an independent basis for denying benefits.”). The question The Systems' Policy is Void remains whether the policy, now determined to be an unadopted administrative regulation, is enforceable as law *36 The Systems' policy on cross-referencing violates nonetheless. all three of these provisions and “is null, void, and unenforceable.” KRS 13A.130(2). Franklin v. Natural Resources and Environmental Protection Cabinet, 799 Administrative Agency Action S.W.2d 1, 3 (Ky.1990)(Agency action “modifies and Subject to Safeguards Against Abuse vitiates the statute, rendering the regulation ‘null, void and unenforceable’ as set out in KRS 13A.120(2).”). Kentucky embraces the concept that the legislature's Because the Systems failed to adopt this policy as a delegation of power is valid only to the extent it does regulation, it is already suspect. White v. Checkholders, not run counter to established “safeguards against abuse Inc., 996 S.W.2d 496, 498 (Ky.1999)(“Court limits the and injustice.” Butler v. United Cerebral Palsy of Northern deference shown to informal agency interpretations that Ky., Inc., 352 S.W.2d 203, 208 (Ky.1961)(Adopting the have been arrived at without rulemaking or an adversarial “safeguards” approach and rejecting the “standards” proceeding.”). However, because it essentially creates new approach as “mumbo-jumbo.”); see also, Kentucky law and usurps the authority of the legislature by limiting Commission on Human Rights v. Barbour, 587 S.W.2d 849, KRS 61.702(3)(1995), it is entirely invalid. Hagan v. 850–51 (Ky.App.1979) (Butler “placed Kentucky in the Farris, 807 S .W.2d 488, 490 (Ky.1991)(“KRS 13A.130 forefront of states adopting the ‘safeguards' test[.]”). Since prohibits an administrative body from modifying an Butler, our courts have applied the safeguards analysis administrative regulation by internal policy or another after the fact to remedy abuses of agency authority. form of action.”); see also Linkous v. Darch, 323 S.W.2d 850, 852 (Ky.1959)(Agency “may not by rule or In 1984, the legislature wisely enacted Chapter 13A to regulation ... limit the terms of a legislative enactment.”); establish preventive safeguards 30 . Three statutes in that Revenue Cabinet v. Humana, Inc., 998 S.W.2d 494, chapter are of particular relevance here. They are KRS 495–96 (Ky.App.1998)(KRS Chapter 13A “sets limits 13A.100, KRS 13A.120 and KRS 13A.130. These statutes, upon the discretionary interpretive powers of agencies indeed all of the statutes of KRS Chapter 13A, were by forbidding certain actions by internal policy or designed to prevent administrative agencies from abusing memorandum.”). their authority. Should any agency fail to abide by these preventive safeguards, it is the judiciary's role to remedy Not giving up however, the Systems' asserts that the the failure. voiding of its policy does not affect the fact that Baker failed to satisfy his burden of proving “the propriety of KRS 13A.100, KRS 13A.120 and KRS 13A.130, his scheme for cross-referencing.” We believe the language read together and in the context of the definition of KRS 61.702(3)(1995) sufficiently does exactly that by of “administrative regulation” contained in KRS requiring the Systems to pay its state contribution “in 13A.010(2), require the adoption of a regulation every full.” If we doubted that Baker's interpretation was correct time an agency desires to give legal effect to its issuance and the Systems' wrong, our review of the legislative of any “statement of general applicability” or any “other history of “cross-referencing” put that doubt to rest. form of action” that the agency intends to impact any group of individuals other than that agency's own Prior to 1998, no mention is made in statute or regulation personnel. Any agency's attempt to modify or vitiate, limit to cross-referencing. But in that year, the legislature or expand, any statute or administrative regulation, or amended a portion of KRS 61.702 to implement the to expand or limit a right guaranteed by any regulation, Systems' policy with regard to a retiree who cross- statute, or the state or federal Constitution using an references with his spouse. The amended statute states that where there is:

its judgment the welfare of the cross-referencing of insurance Commonwealth so demands. premiums, the employer's contribution for the working 2004 Ky. Acts ch. 33 (H.B.290) § 5, codified as KRS member or spouse shall be 61.702(8)(d). applied toward the premium, and the Kentucky Retirement Systems The Legislature's incorporation into law of the essence insurance fund shall pay the of the Systems' cross-referencing policy, subsequent to balance, not to exceed the monthly the relevant time-period, has no retroactive effect on contribution Baker. KRS 446.080(3)(“No statute shall be construed to be retroactive, unless expressly so declared.”). It does, 1998 Ky. Acts ch. 105 (H.B.234) § 20, codified as KRS however, indicate that the Systems' policy was inconsistent 61.702(3)(a) 4. with the law prior to 1998 for “whenever a statute is amended, courts must presume that the Legislature In 2002, the legislature solved this problem of “benefits intended to effect a change in the law.” Brown v. Sammons, double-dipping” in a completely different way by adding 743 S.W.2d 23, 24 (Ky.1988); see also Butler v. Groce, the following language to KRS 18A.225: 880 S.W.2d 547, 550 (Ky.1994)(Lambert, C.J., dissenting) (“courts must presume that the amendment of a statute Any employee who is eligible for was intended to change the law.”), citing Whitley County and elects to participate in the Bd. of Ed. v. Meadors, 444 S.W.2d 890, 891 (Ky.1969)(“the state health insurance program as presumption is that the legislature, by the amendment, a retiree, ... shall not be eligible to intended to change the law.”) and Blackburn v. Maxwell receive the state health insurance Co., 305 S.W.2d 112, 115 (Ky.1957)(“We are compelled contribution toward health care to assume that the Legislature had a purpose in mind in coverage as a result of any other specifically changing the statute as it did-that the changes employment for which there is a were intentional and not fortuitous.”). That change in the public employer contribution. law reflected a shift in the law from Baker's correct, pre– *37 2002 Kentucky Laws Ch. 352 (H.B.846) § 1, codified 1998, interpretation to the Systems' then erroneous view as KRS 18A.255(13), and recodified as KRS 18A.225(12). of the law as embodied in its void policy. But the change This eliminated the problem that the Systems' internal in the law occurred too late to affect Baker's rights in 1995 policy sought to address. and 1996.

In 2004, Kentucky's legislature amended KRS 61.702 We summarize the Systems' attempt to implement law again. This time the legislation affected members of the by internal policy as follows. First, the Systems lacked retirement system whose participation began after July 1, statutory authority in 1995 to limit Baker's inviolable 2003. Among other things, it deprives participants of the contract rights expressed in KRS 61 .702(3)(1995). inviolable nature of the retirees' health insurance benefits. Second, the policy the Systems promulgated is invalid because it was never “adopted” as an “administrative The benefits of this subsection regulation” as required by KRS 13A.100, and as those provided to a member whose terms are defined in KRS 13A.010(2) and (3). If the policy participation begins on or after July had been adopted, it would have violated KRS 13A.120(2) 1, 2003, shall not be considered as (i) because it sought to “modify or vitiate a statute benefits protected by the inviolable [KRS 61.702(3)(1995) ] or its intent.” Finally, the cross- contract provisions of KRS 61.692, referencing policy is an “internal policy, memorandum or 16.652, and 78.852. The General other form of action” that attempts to modify or limit Assembly reserves the right to KRS 61.702(3)(1995), in violation of KRS 13A.130. suspend or reduce the benefits conferred in this subsection if in

That understanding of the rule ignores the proper role of the judiciary. The courts are not redistributors of wealth. DAMAGES The courts address injustice and enforce rights, or at least *38 Baker was entitled to the Systems' payment of the strive to do so. The movement of dollars from party to state contribution toward his health insurance premium party is merely a by-product of the judiciary's work. In our “in full.” The Systems failed to make that payment. application of the rule of de minimus non curat lex, the sum This led to a shortfall in the payment of Baker's health of money has never been the primary consideration. insurance premium. If KTRS had not unilaterally chosen to stop funding Baker's FSA in order to pay the balance Our review of the rule in Kentucky shows that cases of his premium, Baker would have had to do so. Because with sums in controversy as paltry as $6.00 have been KTRS stopped paying into the FSA in order to pay the addressed and reversed. Wagers v. Sizemore, 222 Ky. balance of the premium the Systems failed to pay, Baker 306, 300 S.W. 918, 919 (1927)($69.59 in today's dollars). was forced to reach into his own pocket to fund the FSA Where the rule has not been applied, it is because a legal for the remainder of 1996 in the amount of $525.40. principle or substantial right was at stake, making the issue anything but “trifling.” The only cases with which The Systems' counsel described Baker's claim for damages the law in Kentucky will not concern itself are those where as follows: “Baker is requesting KRS to give him a dollar both the amount of money at stake and the legal principle for dollar reimbursement for money he contributed into involved, if any, are trifling. a flexible spending account.” (R.366). We believe this is a correct assessment of Baker's claim and a correct *39 In Clark v. Mason, 264 Ky 793, 117 S.W.2d 993, statement of Baker's measure of damages. We will order 997 (1938), the sum of $16 was at stake on appeal; that the Systems to pay to Baker the sum of $525.40, a sum would be about $241 dollars today. The case illustrates the more representative of principle than of principal. correct interpretation of the doctrine in Kentucky.

Baker is not entitled to recover the sum of $735.56 claimed This general “de minimis” rule is thus announced [that]: as an arrearage accruing during the first seven months of Where the only impropriety in the judgment or decree is 1996 when the Systems paid only $70.42 per month toward a trifling error in the amount of the recovery which might his premium. According to the record, that sum was never have been corrected in the court below, the appellate demanded of Baker and he never paid it. court will usually apply the maxim, “de minimis non curat lex,” and refuse to reverse the judgment or decree Nor is Baker entitled to be paid anything as compensation on that account. for years after 1996. He elected not to participate in the FSA program. Therefore, he cannot be said to have been .... damaged by having to pay it. Effectively, he waives this claim. The question is necessarily governed by the discretion of the court, and where equity and justice demand it, a judgment will be reversed, even though the amount in controversy is insignificant. Inapplicability of the Rule of De Minimus Non Curat Lex Clark, 117 S.W.2d at 296(emphasis supplied). The small sum of money in controversy in this case could quite easily have camouflaged its significance. And so we Kentucky courts have uniformly refused to apply the rule deem it necessary to address the rule of de minimus non in cases such as Wagers, supra, where substantial rights curat lex. are at stake. In such cases, “because of their involvement of matters other than that of merely a small amount The rule translates from the Latin as “The law erroneously adjudged, the application of the rule is held to does not concern itself with trifles.” BLACK'S LAW be improper because of its working material prejudice to DICTIONARY (8th ed.2004), de minimis non curat lex such substantial rights involved.” Id. at 297. (Westlaw through September 2007). But the “trifles” to which the rule refers are not the dollars involved in a case.

matter, and this is particularly so when the injustice comes In the case sub judice, the rights of a former public servant, a retiree from state employment, are at stake. at the hands of the government. In “consideration of benefits received by the state from” that public servant, no lesser institution than the General Assembly of the Commonwealth of Kentucky granted CONCLUSION and guaranteed those rights by statute in the form of an inviolable contract, never to be reduced or impaired. KRS *40 The Kentucky Retirement Systems, by means 61.692. Applying the rule of de minimus non curat lex of a void internal policy that never had the effect would not only disparage that right, it would dishonor of law, wrongfully reduced James Baker's inviolable the commitment of a co-equal branch of our government. contractual right to have the Systems pay the full state And so it would be improper to apply the rule in this case. contribution rate toward his health insurance resulting in Baker's suffering monetary damages in the amount The significance of this case is reflected in the of $525.40. The Board's rejection of the hearing officer's stubbornness with which each party strived to prevail. Recommended Order was not supported by substantial There was never more money at stake than a few hundred, evidence, was arbitrary and was contrary to law. For these perhaps a few thousand, dollars. What then would cause reasons, we REVERSE. Baker, a lawyer, to hire another lawyer to pursue his case for more than a decade? What would cause the Systems, IT IS HEREBY ORDERED: an agency of state government that manages total assets 1. That the Order of the Franklin Circuit Court affirming exceeding $15,000,000,000, 31 to utilize such substantial the Board of Trustees' Report and Order is REVERSED resources resisting Baker's claim to such a small amount and REMANDED with instructions to order the Board to of money? A cynic would call it trite, but the answer is reinstate the Recommended Order of the hearing officer obvious. This is a case about rights and principles, power with modifications consistent with this opinion. and authority.

2. That the Systems pay to James M. Baker the sum of We are, in fact, grateful that the sum of money in $525.40. controversy is minimal, for the issue at stake is great. Our system of government is premised upon the concept that all authority originates with our citizens. When the proper exercise of that authority is displaced by the abuse of VANMETER, Judge; KNOPF, Senior Judge, concur in power, it is the judiciary's duty to remedy it, no matter how result only. few dollars are involved, for the abuse of power feeds upon itself and will inevitably do greater harm if left unchecked. All Citations The rule of de minimus non curat lex has its proper place Not Reported in S.W.3d, 2007 WL 3037718 in our jurisprudence. But actual injustice is never a trifling

Footnotes 1 Senior Judge William L. Knopf sitting as Special Judge by assignment of the Chief Justice pursuant to Section 110(5) (b) of the Kentucky Constitution and KRS 21.580. 2 Ky. OAG 04–001, 2004 WL 220675 (Ky.A.G.). The subject of this Kentucky Attorney General Opinion is the “Constitutionality of a retroactive amendment to KRS 61.637(7)(a), commonly referred to as the ‘double-dipping’ provision.” While the term “double-dipper” has developed a negative connotation, this well-reasoned Opinion of the Attorney General correctly points out that there is nothing unlawful about the practice of double-dipping in the absence of legislative prohibition. The Opinion answered a legislative query whether such a prohibition could be created and made retroactive. In summary, the Attorney General stated that “retrospectively prohibiting the practice of ‘double dipping’ would necessarily ‘impair the obligations' of the ‘inviolable contract’ of the Commonwealth created by KRS 61.510 to 61.705 [state retirement benefits] in violation of the Contract Clause of the United States Constitution and Section 19 of the Kentucky Constitution. Thus, the General Assembly can only prohibit the practice of ‘double dipping’ on a prospective basis.”

3 The legislature requires each entity participating in the Kentucky Group Health Insurance Plan, including the Systems and KTRS, to pay “an amount at least equal to the state contribution rate[,]” determined as part of the state budget process, for each employee or retiree, as the case may be. KRS 18A.225(2)(h). This is the minimum established by the legislature. A participating agency is not prohibited from paying more than the state contribution rate for each employee or retiree. The Systems was a participating agency which, by statute, was required to pay “[t]he premium in full” for retirees entitled to full benefits. KRS 61.702(3)(1995), recodified at KRS 61.702(3)(a) 5. 4 As developed infra, the question whether the Systems received a copy of the form that included Martin's calculations is the only fact issue the Board determined in a manner contrary to the fact-finding of the hearing officer. 5 The Systems' attorney called this statute, 26 U.S.C. § 125, “[t]he elementary and uncontested provision of law governing this case.” His prime exception to the hearing officer's recommendation was that the hearing officer “demonstrates that he fails to understand the most basic and elementary issue in this case”—“that Kentucky Retirement Systems may not provide a cafeteria plan or flexible spending account to its retirees.” However, if the Systems had simply followed Baker's method for cross-referencing and paid $175.50 to Plan Source—not FEBCO—the source of funding for Baker's FSA would not have been the Systems and the federal statute would not have been offended. 6 We rely on Baker's March 31, 1997, Corrected Answers to Interrogatories regarding these claimed damages amounts which are consistent with his testimony during the September 19, 1997, hearing. The figure calculated by the hearing officer ($839.04) appears to be incorrect due to minor errors in transcription and calculation. The actual figure would appear to us to be $735.56, being 7 months of delinquency at $105.08 per month. 7 Plan Source never made demand on Baker to pay this arrearage and Baker, in fact, never paid it. Consequently, it is not an amount recoverable by Baker in damages. 8 This is the only out-of-pocket expense Baker experienced as a result of the Systems' failure to follow his cross-referencing method and pay his premium “in full” within the meaning of KRS 61.702(3)(1995). Baker declined participation in the FSA for years subsequent to 1996. 9 The Kentucky Retirement Systems' insurance fund was established for the purpose of funding the state contribution on behalf of retirees. KRS 61.701. The Systems and its Trustees who comprise the Board oversee the insurance fund in a fiduciary capacity and administer it “solely in the interest of the members and beneficiaries.” KRS 61.650(1)(c) 1. 10 Information regarding this meeting is taken from the Minutes of the Administrative Appeals Committee, April 27, 1998. Chairman Larry C. Conner and Bobby H. Henson were the members of the Administrative Appeals Committee in attendance. 11 For example, the word “forward” is misspelled in both documents as “froward.” (Compare R.342 and R.449). The word “own” is misspelled “on” in both documents in the phrase “contrary to her on [sic] prior course of dealing”. (Compare R.351 and R.457). The phrase “over come” is used in both documents where the word “overcome” is clearly intended. (Compare R.361 and R.466). Similarly, identical errors in grammar appear in both documents, as where the phrase “the coordination of Baker's insurance premiums were accomplished” is used. (Compare R.349 and R.456). As noted, infra, after this case was remanded on its first appeal to this Court, the Chairman of the Board of Trustees simply signed a reprinted copy of the Committee Order. Consequently, these identical typographical and grammatical errors can also be found at R.475, R.484, R.493 and R.482, respectively. 12 Those sentences appear as the first sentence of paragraph 1, page 17 (R.463); the second half of the fourth sentence in paragraph 2, page 18 (R.464); and, the last sentence in paragraph 5, page 21 (R.467). 13 The Committee's Conclusions of Law directly correspond with the Systems' Arguments as follows: Conclusion of Law 1 = Systems' Argument I (first part) Conclusion of Law 2 = Systems' Argument I (second part) Conclusion of Law 3 = Systems' Argument II Conclusion of Law 4 = Systems' Argument III Conclusion of Law 5 = Systems' Argument IV Conclusion of Law 6 = Systems' Argument VI Conclusion of Law 7 = Systems' Argument VII (paragraph 1) Conclusion of Law 8 = Systems' Argument VII (paragraph 2) Conclusion of Law 9 = Systems' Argument VII (paragraph 3) Conclusion of Law 10 = Systems' Argument VII (paragraph 4) 14 In pertinent part, KRS 13B.020(1) says that “[a]n agency head may not ... delegate the power to issue a final order unless specifically authorized by statute ....“ (emphasis supplied). In 2002, the Systems responded to Baker I by seeking such authorization. That year, the Kentucky legislature passed House Bill 309 amending KRS 61.645(16). The amendment

authorized the Systems' Board of Trustees to create an appeals committee and to delegate to it the “authority to act upon the recommendations and reports of the hearing officer on behalf of the board” in cases such as Baker's. 2002 Kentucky Laws Ch. 52 (H.B.309), § 11. 15 Appellant's Brief, Arguments III and IV, pp. 12–14. 16 Appellant's Brief, Argument V, p. 15. 17 Appellant's Brief, Argument I and II, pp. 8–12. 18 Governance effected through a proliferation of federal and state agencies has been referred to as “the modern administrative state.” See Massachusetts v. E.P.A., 549 U.S. 497, 127 S.Ct. 1438, 1454 (2007). In Kentucky, we have referred to agencies as the “fourth branch of government.” American Beauty Homes, 379 S.W .2d at 454 fn.4 (“An administrative agency has been realistically characterized as a fourth branch of government.” Emphasis in original); Kentucky Commission on Human Rights v. Fraser, 625 S.W.2d 852, 857 (Ky.1981)(“[T]here has developed in our government a fourth branch known as administrative proceedings[.]”); see also Legislative Research Com'n By and Through Prather v. Brown, 664 S.W.2d 907, 916 (Ky.1984)(“[T]here are three branches of government[. T]he net effect of the words ‘independent agency of state government’ [in legislation creating the Legislative Research Commission] was to create a fourth branch of government.” Emphasis in original); see also Federal Trade Commission v. Ruberoid Co., 343 U.S. 470, 487, 72 S.Ct. 800, 810 (1952)(Administrative agencies “have become a veritable fourth branch of the Government, which has deranged our three-branch legal theories much as the concept of a fourth dimension unsettles our three-dimensional thinking.” Jackson, J., dissenting). Whatever its label, it should be clear that it exists because the judiciary has permitted it to exist. It is not clear from the Constitution that this transference of governmental power to the agencies is constitutional. Indeed, the text may suggest just the opposite.... The most fundamental challenge to the administrative state focused on whether this delegation of power is permissible. The [United States Supreme] Court's affirmative answer to this question represents one of the most important developments in constitutional history. .... The Court's role in the administrative state has been that of both facilitator and skeptic.... Having allowed the establishment of the administrative state, the Court has assumed a role in supervising the agencies. In this role the Court tends to avoid unduly interfering [but, a]s in virtually every other area of the law, the Court tends to equate judicial review with the very idea of the rule of law. Kermit L. Hall, ed., The Oxford Companion To The Supreme Court of the United States 11, 16 (1992). Administrative agencies and the function they perform have become so entrenched in the makeup of our federal and state governments that to strictly apply constitutional principles to do away with them would place burdens on the three traditional branches of government that they could not feasibly bear. 19 Characterizing non-judicial functions as “administrative” in Hilltop is not as “ill-advised” as the use of “quasi-judicial” to describe the same function, see, Hilltop at 468 n. 1, since an agency's “administrative functions or acts are distinguished from such as are judicial.” Black's Law Dictionary 42 (5th ed.1979). 20 Baker does not claim entitlement to any more than the applicable state contribution rate. 21 On appellate review, we must look at “the whole record [,]” KRS 13B.150(2)(c); see also KRS 13B.130(1)-(10), just as we should expect the Board did. 105 KAR 1:215 Section 8 (“final order of the board shall be based on substantial evidence appearing in the record as a whole[.]”). This would include at least viewing the videotaped testimony of these two witnesses. Appellate courts often view videotape to observe a person's demeanor where such demeanor has a bearing on the review. See, e.g., Gabow v. Commonwealth, 34 S.W.3d 63, 79 (Ky.2000)(Appellate court's viewing of videotape determined defendant's demeanor during confession to be “calm” and not “under the influence of alcohol or drugs.”); Transit Authority of River City (TARC) v. Montgomery, 836 S.W.2d 413, 416 (Ky.1992)(On claim of judicial misconduct, Appellate court's viewing of videotape determined trial judge's “ ‘body language’ [and] plain physical attitude and tone of voice do not [appear] vituperative[.]”); Price v. Commonwealth, 734 S.W.2d 491, 494 (Ky.App.1987)(Appellate court viewing of videotape revealed defendant's demeanor of “despair and shame.”). By doing so, we are not substituting our judgment of demeanor for that of the hearing officer or the Board. We observe the videotape only to gain insight into whether the decision under review meets the standard of that review. 22 We do not suggest that any particular Systems employee, including the employees who testified, was necessarily responsible for the tampered condition of the document. We take no more specific position than that the hearing officer determined “someone within the Systems” did so. If the Board chooses to investigate or ignore the conduct of its employees, it is free to do so.

23 The number of state agencies and boards using hearing officers comes from the official website of the Commonwealth of Kentucky, Office of the Attorney General, Division of Administrative Hearings. http:// ag.ky.gov/hearings.htm This information is current as of October 10, 2006. 24 The deference reviewing courts have always given an agency's final order is derivative of this expertise. See, e.g., Our Lady of the Woods, Inc. v. Com., Kentucky Health Facilities and Health Services Certificate of Need and Licensure Board, 655 S.W.2d 14, 17 (Ky.App.1982). Deference is accorded [an agency's] factual conclusions for a different reason—[the agency is] presumed to have broad experience and expertise in [the area].... Further, it is the [agency] to which [the legislature] has delegated administration of the [statute]. The [agency], therefore, is viewed as particularly capable of drawing inferences from the facts.... Accordingly, ... a [reviewing court] must abide by the [agency's] derivative inferences, if drawn from not discredited testimony, unless those inferences are “irrational,” ... “tenuous” or “unwarranted.” ... As already noted, however, the [agency], as a reviewing body, has little or no basis for disputing a [hearing officer]'s testimonial inferences. Department of Health and Mental Hygiene v. Shrieves, 641 A.2d 899, 907 (Md.App.1994), quoting Penasquitos Village, Inc. v. National Labor Relations Bd., 565 F.2d 1074, 1078–79 (9th Cir.1977)(internal citations omitted). 25 Chief Justice Hughes' quotation is taken from his Address before the Federal Bar Association in 1931, quoted in N.Y. Times, February 13, 1931, page 18. See James Landis, The Administrative Process (1938) 135, 136. Cf. Bell, Let Me Find the Facts, 26 A.B.A.J. 552 (1940). 26 Kentucky did not adopt either the 1961 or 1981 version of the Model State Administrative Procedures Act (MSAPA). See Model State Admin. Proc. Act, Refs. & Annos., Table of Jurisdictions Where Adopted (1961); Model State Admin. Proc. Act, Refs. & Annos., Table of Jurisdictions Where Adopted (1981). However, the definition of “administrative regulation” contained in KRS 13A.010(2), which is identical to the definition of “regulation” contained in its predecessor statute, KRS 13.080(3)(repealed 1984), is worded nearly identically to the definition for “rule” contained in Section 1(7) of the 1961 MSAPA. 27 The verb “promulgated” in this definition should be distinguished from the technical term “adopted” defined in KRS 13A .010(3)(“ ‘Adopted’ means that an administrative regulation has become effective in accordance with the provisions of this chapter [.]”). “Promulgated” should be given its its “common and everyday meaning [,]” KRS 446.015, which is simply to announce or make known publicly. However, the legislature uses the terms interchangeably in other statutes in the chapter. See, e.g., KRS 13A.100(1) and KRS 13A.120(1). We therefore treat them as synonymous. 28 UCLA School of Law Professor Emeritus Michael Asimow tells us that the trend among the majority of states is to follow federal law and allow agencies to adopt informal statements of policy, referred to as “guidance documents,” without the pre-adoption notice-and-comment required of administrative rulemaking. Michael Asimow, Guidance Documents in the States: Toward a Safe Harbor, 54 ADMIN. L.REV. 631, 632, 644 (2002). However, “eight states have gone in precisely the opposite direction: their statutes and case law explicitly prohibit the adoption of guidance documents except by complying with [their respective state's] rulemaking procedures. California is the most prominent of these states[,]” Id. at 644, but Kentucky is also among them. Id. at 651 (citing KRS 13A.010(2) and KRS 13A.130). In those eight states, the agencies recognize that [u]sing notice and comment to adopt every piece of paper that interprets law or constrains discretion would be prohibitively expensive in terms of scarce staff resources [and] consume precious months.... Instead, agencies generally adopt these documents, pejoratively known as ‘underground regulations,’ and hope that nobody will notice (or at least nobody will challenge) them. Id. at 635. 29 As noted in footnote 24, supra, KRS 13A.010(2) is taken from the definition for “rule” contained in § 1(7) of the 1961 version of the MSAPA, which includes these very same exceptions verbatim. However, the legislature apparently chose not to adopt § 8, the section of the MSAPA that would have authorized all state agencies to issue declaratory rulings. It reads as follows: Each agency shall provide by rule [administrative regulation] for the filing and prompt disposition of petitions for declaratory rulings as to the applicability of any statutory provision or of any rule or order of the agency. Rulings disposing of petitions have the same status as agency decisions or orders in contested cases. 30 KRS Chapter 13A is the successor chapter to KRS Chapter 13. Chapter 13 was originally enacted in 1952, substantially revised beginning in 1972 to reflect developments in administrative law, and repealed in 1984 when replaced by Chapter 13A. 31 This figure is taken from the Systems' “Comprehensive Financial Report for Fiscal Year Ended June 30, 2006,” p. 28, http:// www.kyret.com/cafr/cafr2006.pdf. The actual figure is $15,051,061,000.