Opinion No. 19-74
Topics:
SCHOOLS.
SCHOOL FUNDS.
STATE BOARD OF EDUCATION.
Summary conclusion
The State Board of Education may invest money accruing to or currently in the public school fund pursuant to Article IX, Section 5 of the Missouri Constitution without first securing an appropriation from the General Assembly, the State Board of Education may sell securities held by the public school fund before those securities mature, and it may sell those securities at less than their original cost to the fund if a portion of the interest received from the securities purchased with the proceeds is devoted to replenishment of the principal of the fund.
Contents of opinion
January 24, 1974
Dr. Arthur L. Mallory
Commissioner of Education
State Department of Education
Jefferson State Office Building
Jefferson City, Missouri 65101
Dear Commissioner Mallory:
This official opinion is in response to your request for a ruling on the following questions:
"Can the State Board of Education invest money accruing to the Public School Fund and also re-invest maturing bonds belonging to the Public School Fund without an appropriation from the General Assembly?
"Can the State Board of Education sell and re-invest existing bond holdings that have not matured to improve the financial position of the Public School Fund without an appropriation from the General Assembly?"
We understand that your request is prompted by the fact that recent changes in money market conditions have made it unwise to continue holding securities purchased several years ago for the public school fund. Before changing. the portfolio of the fund, however, the State Board of Education desires an opinion on the legality of any such changes and. the necessity for legislative approval of them.
The public school fund (hereafter, the fund) is created in Article IX, Section 5 of the Missouri Constitution, which reads as follows:
"The proceeds of all certificates of indebtedness due the state school fund, and all moneys, bonds, lands, and other property belonging to or donated to any state fund for public school purposes, and the net proceeds of all sales of lands and other property and effects that may accrue to the state by escheat, shall be paid into the state treasury, and securely invested under the supervision of the state board of education, and sacredly preserved as a public school fund the annual income of which shall be faithfully appropriated for establishing and maintaining free public schools, and for no other. uses or purposes whatsoever."
The rules governing the operation of the fund are set forth in Sections 166.011 through 166.111, RSMo. These sections, in brief, provide that the State Board of Education shall invest the money held in the fund (Section 166.011), that the State Treasurer is the custodian and trustee of the money and securities held by the fund (Sections 166.021 through 166.031), and that the Director of Revenue has the authority to accept gifts to the fund which he shall turn over to the Treasurer (Sections 166.061 through 166_111). Income from the investments owned by the fund is paid into the state treasury, credited to the state school moneys fund, and appropriated for the support of free public schools in this state (Sections 166.011, 166.051).
I
Because both of your questions inquire as to the necessity for legislative appropriations for the public school fund, we shall deal with this problem first. The framers of the Missouri Constitution set down the general rule that no money may be paid out of the state treasury in the absence of a corresponding "appropriation made by law." This conclusion arises from the operation of three constitutional provisions. The first is Article III, Section 36, which provides in part as follows:
"All revenue collected and money received by the state shall go into the treasury and the general assembly shall have no power to divert the same or to permit the withdrawal of money from the treasury, except in pursuance of appropriations made by law. . . ."
The second, Article IV, Section 15, provides:
"The state treasurer shall be custodian of all state funds. All revenue collected and moneys received by this state from any source whatsoever shall go promptly into the state treasury, and all interest, income and returns therefrom shall belong to the state.
Finally, Article IV, Section 28, states:
"No money shall be withdrawn from the state treasury except by warrant drawn in accordance with an appropriation made by law, nor shall any obligation for that payment of money be incurred unless the commissioner of administration certifies it for payment and certifies that the expenditure is within the purpose as directed by the general assembly of the appropriation and that there is in the appropriation an unencumbered balance sufficient to pay it. . . ."
Since Article IX, Section 1(a), establishes public schools as a state responsibility, and Article IX, Section 5, requires certain types of money received by the state to be paid into the treasury for the fund, it is clear that these quoted pro - visions requiring appropriations apply to the fund. Compare State ex rel. Thompson v. Board of Regents for Northeast Missouri State Teachers' College, 264 S.W. 698 (Mo. Banc 1924), with Petition of Board "of Public Buildings, 363 S.W.2d 598 (Mo. Banc 1962). However, appropriation made by law" does not necessarily mean "appropriation made by statute," and an appropriation may be made by action of the Constitution itself.
The Missouri Supreme Court has adopted the following test to be used to determine if a constitutional provision is self-executing:
". . . 'One of the recognized rules is that a constitutional provision is not self-executing when it merely lays down general principles, but that it is self-executing if it supplies a sufficient rule by means of which the right which it grants may be enjoyed and protected, or the duty which it imposes may be enforced, without the aid of a legislative enactment. * * * Another way of stating this general, governing principle is that a constitutional provision is self-executing if there is nothing to be done by the legislature to put it in operation. . . ." State ex rel. City of Fulton v. Smith, 194 S.W.2d 302, 304 (Mo. Banc 1946).
While the court in the above case was concerned with whether the Constitution gave cities the power to issue and sell bonds in the absence of any statutory provisions on the subject, the rule may also be applied to questions dealing with appropriations. The test to be applied is whether the terms of the Constitution determine the distribution of the funds without reference to legislative action.
The Missouri Supreme Court has held on at least two occasions that the provisions of the Constitution designating certain money for the support of education are self-executing. In Gross v. Gentry County, 8 S.W.2d 887 (Mo. Banc 1928), the court said, in reference to the provision now found at Article IX, Section 7:
"Incidentally it may be said that, since the adoption of section 5 of article 9 of the Constitution of 1865, which was continued in force in section 8 of article 11 of the Constitution of 1875, the legal necessity of the enactment of statutes directing the disposition of funds arising from fines, penalties, and forfeitures has not existed, except to give formal legislative recognition to the constitutional provision in regard thereto. This provision is affirmative in its nature and direct in its terms; it consists simply in a mandatory declaration as to the disposition that is to be made of the public funds designated, and is self-executing. . . ." 8 S.W.2d at 889-890.
Similarly, the court in New Franklin School Dist. No. 28 v. Bates, 225 S.W.2d 769 (Mo. 1950), held that twenty-five percent of all state revenue stands appropriated for the support of public schools by action of Article IX, Section 3.
Applying the principles of these cases to the problem before us, we conclude that those provisions of Article IX, Section 5, dedicating certain money to the public school fund are selfexecuting, and that this money becomes part of the fund upon receipt by the treasurer without the necessity of legislative action or appropriation, and it may be immediately invested by the State Board of Education. This conclusion is required because the Constitution allows no room for legislative discretion concerning this money. If money described by one of the categories enumerated in Section 5 is received by the state, the legislature does not have the power to devote it to any use other than the fund, and the legislature also lacks the power to decline to turn it over to the fund. Therefore, in the words of the City of Fulton case quoted above, "there is nothing to be done by the legislature to put it in operation."
This conclusion applies both to money accruing to the fund and to money already in the fund. When a bond held by the fund matures or is sold and the principal is returned to the fund, this money is not subject to legislative action. Rather, it, too, may be reinvested by the State Board of Education without an appropriation.
Therefore, it is our opinion that an appropriation by the legislature is never necessary with regard to money devoted by the Constitution to the corpus of the public school fund, since the constitutional provision creating the fund is self-executing.
II
The other problem raised by your opinion request is whether the State Board of Education has the power to sell securities held by the fund before they mature, and if so, does the State Board have the power to sell those securities at a loss.
The two statutory provisions relevant to our inquiry hereare Sections 166.011 and 166.021, RSMo. [Footnote 1]
Section 166.011, reads in part as follows:
. . All such funds shall be paid into the state treasury and securely invested by the state board of education, and sacredly preserved as a public school fund, the annual income of which shall be faithfully appropriated for establishing and maintaining free public schools and for no other uses or purposes whatsoever."
Section 166.021, reads as follows:
"1. All funds accruing to the state public school fund, except the interest on the fund, shall be invested by the state board of education in registered bonds of the United States or the state, bonds of school districts of the state, or bonds or other securities payment of which is fully guaranteed by the United States, of not less than par value.
"2. Whenever the state board of education contracts with the seller of any such bonds or securities, the board shall requisition and the state comptroller shall approve and forthwith issue a warrant upon the state treasurer for the purchase price agreed upon, payable out of the state public school fund, in favor of the seller.
"3. All bonds or securities so purchased shall be made payable to, or be registered in the name of, Lhe state treasurer as trustee of the state public school fund and shall be deposited as part of the state public school fund with the state treasurer who shall give his receipt therefor to the board of education."
The limitations in Section 166.021(1) are intended to make the money invested in the fund as secure as possible by restricting investments to government bonds and government-guarantee securities, and then only to those bonds not selling at discount. The duties of the board are not limited to caring for the safety of the fund, however. The fund exists to produce income for the support of the public schools, Article IX, Section 5, and the board must see that the money is invested productively. Thus the board's duty is to purchase securities which will produce the maximum return consistent with the safety of the money in the fund.
This duty is a continuing one. The board's responsibilities with respect to the management of the public school fund are in many respects parallel to those of the trustee of another's funds, and a trustee must always monitor the money in his custody. As explained by Professor Scott in his treatise on the law of trusts:
"The more fact that when the trustee receives or makes an investment it is a proper trust investment does not relieve him of all further responsibility. He is under a duty to see whether it continues to be a proper trust investment. Ordinarily he need not make as complete an investigation as he was under a duty to make originally, and he need not watch the ticker as a speculator would. It is his duty, however, from time to time to examine the state of the investments to see whether any of them have become such that it is no longer proper to retain them.
"Where the investments, . . . have ceased to be proper investments, it becomes the duty of the trustee to dispose of them, within a reasonable time. . . ." III Scott, Law of Trusts, Third Edition, Sec. 231, p. 1882.
Therefore, when the board reviews the portfolio of the fund and concludes either that a security is no longer safe or that the income of the fund could be improved without increasing risk by shifting the fund's holdings, the board has the duty to dispose of the offending bonds or securities.
We believe further that the board may exercise this duty consistently with the Constitution and the statutes. Only two state courts have discussed the problem of the legal investment powers of the trustees of state school funds in recent years, and they reached exactly contrary conclusions. In Schelle v. Foss, 83 N.W. 2d 847 (S.D. 1957), the relevant constitutional provisions provided that the money in the funds "shall be invested by the Commissioner of Public Lands" and that "the principal [of the fund] shall forever remain involate, and may be increased but shall never be diminished. . ." The court held that the first of these provisions contained no implied power to sell securities once they are purchased, and that in any event the second prohibited a sale for less than the purchase price. In In re Montana Trust and Legacy Fund, 388 P.2d 366 (Mont. 1964), on the other hand, the court held that a constitutional provision stating that the "public school fund shall forever remain inviolate, guaranteed by the state against loss or diversion, to be invested, so far as possible, in public securities within the state," did not prohibit the sale of securities at a loss before maturity. Both of these cases cite the same precedents, and we have examined the legal reasoning of each; we believe the Montana case is more soundly reasoned.
In discussing the implied power to sell securities as necessarily implied from the express power to make investments, the court in the Montana Trust and Legacy Fund case said:
. we are aware of no cogent reason why the general authority of investment and administration of funds should not include the authority to administer investments in a manner consistent with the realities of the securities market. See 2 Scott, Trusts, § 186 (2d ed. 1956). Indeed, we should be most reluctant to announce a rule which would preclude the appropriate state authorities from being able to take advantage of a "better deal," so long as it may likewise be classed as a safe and conservative investment. Because of the constitutional and statutory limitations respecting the type of securities which may be purchased, we do not believe our position throws the door open to dangerous speculation." 388 P.2d, at 370.
The court then discussed the problem of whether the constitutional requirement that the fund "remain inviolate" (similar to Missouri's requirement that it be "sacredly preserved") prevented sales of securities at a loss:
. . The question presented by these provisions is whether the announced rule of inviolability of the funds is an absolute prohibition against the incurrence of a short term diminution of principal (by selling securities at less than face value or purchasing at a premium). We conclude the answer is in the negative. Bearing in mind that the purpose of the funds is to help finance this state's educational institutions with income generated therefrom, we do not believe the framers of the Constitution intended to establish a rule which could, under some circumstances, defeat that purpose. There is no doubt but that the varying yield values of different securities render it prudent at times to take a temporary loss of principal in return for a greater realization of income (of course, the measurement of income yield must be made in light of the necessity of allocating a portion thereof to restoration of lost principal.) Therefore, we do not construe the word 'inviolate' as prohibiting the sale of securities at less than purchase price or face value or the purchase thereof at a premium, provided the income gain resulting from such transactions is partially used to restore the temporary loss of principal. ." 388 P.2d, at 370.
The allocation of interest to the restoration of principal does not violate the constitutional command that the income of the fund be appropriated for establishing and maintaining free public schools. The Montana court discussed this problem in the following language:
"We are mindful of the following sentence in Section 12, Article XI, Constitution of Montana:
'The interest of said invested funds [of the state educational institutions] * * * shall be devoted to the maintenance and perpetuation of these respective institutions'. In our opinion, this mandate is satisfied whether the interest is devoted directly or indirectly to the maintenance and perpetuation of those institutions. In other words, we [do] not believe the constitutional requirement is violated by an allocation of some interest toward restoration of a temporary loss of principal when the overall effect of the plan is to improve the income posture of the funds. Such allocation of income is certainly, in the long run, in the interest of maintaining and perpetuating the institutions for whose benefit the funds exist." 388 P.2d, at 371.
Accord, Moses v. Baker, 299 N.W. 315. , 316, 317 12] (N.D. 1941).
We find the same considerations which guided the Montana court to be present here. Interest rates are at historically high levels, and we are advised that the sale of some of the older securities will increase the total income of the fund substantially without any long-term depletion of the corpus of the fund. We believe that the powers given to the State Board of Education by the Constitution would permit it to sell securities with low interest rates and purchase securities with higher interest rates so long as a portion of the increased income is used to replenish the principal over a reasonable span of years. Although Sections 166.011 and 166.021, RSMo 1969, contain language which could be read as in conflict with the Constitution on this point, these sections may be fairly construed consistently with the constitutional grant of authority to sell securities, and where more than one construction of a statute is possible, that one most in accord with the Constitution should be adopted. State ex rel. State Highway Commission v. Paul, 368 S.W.2d 419. (Mo. Banc 1963). Therefore, we conclude that the State Board of Education may exercise all the powers granted to it in Article IX of the Constitution.
CONCLUSION
It is, therefore, the opinion of this office that the State Board of Education may invest money accruing to or currently in the public school fund pursuant to Article IX, Section 5 of the Missouri Constitution without first securing an appropriation from the General Assembly, that the State Board of Education may sell securities held by the public school fund before those securities mature, and that it may sell those securities at less than their original cost to the fund if a portion of the interest received from the securities purchased with the proceeds is devoted to replenishment of the principal of the fund.
This opinion, which I hereby approve, was prepared by my assistant, Richard E. Vodra.
Very truly yours,
John C. Danforth
Attorney General
Footnote 1. It should be noted that the legislature retains power to regulate the operational details of a self-executing constitutional provision. State ex rel. City of Fulton v. Smith, supra.