The Attorney General of Texas
June 6, 1978
JOHN L. i&L
Attorney General
Honorable M. L. Brockette Opinion No. H- 1174
Commissioner of Education
Texas Education Agency Re: Use of investment income
201 E. Eleventh Street from school bond proceeds.
Austin, Texas 78701
Dear Dr. Brockette:
,You inquire about the purposes for which a school district may use
interest earned on the investment of school bond proceeds. You inform us
that an independent school district issued bonds for the air conditioning,
heating, and lighting of school buildings and the construction of a stadium.
All the purposes .of the bond issue have been accomplished except for the
improvement of one building, which is old and which the school board has
determined should be replaced. All of the original bond proceeds have been
spent, but there remains on hand over one million dollars earned by investing
the bond proceeds pursuant to section 20.42 of the Education Code. You wish
to know whether the interest
‘. earned. on the proceeds may be used to
construct a new school buildmg.
Section 20.42 of the Education Code provides that school districts which
have bond proceeds not immediately needed may place them in an interest
bearing time deposit or invest them in obligations of the United States. The
following provision is made for the redemption of deposits and investments:
[WI hen such sums so placed or so invested by a school
district are needed for the purposes for which the
bonds of the school district were originally authorized,
issued and sold, such time deposits or bonds or other
obligations of the United States of America in which
such sums have been placed or invested shall be
cashed, sold or redeemed and the proceeds thereof
shall be used for the purposes for which the bonds of
the school district were originally authorized, issued
and sold.
P. 4743
.. ’ . *.
Honorable M. L. Brockette - Page 2 (H-1174)
Sec. 20.42 (emphasis added). In our opinion, this provision requires that the entire
amount realized upon the redemption of investments “be used for.the purposes for
which the bonds of the school district were originally authorized, issued and sold.”
We believe that the statutory language “the proceeds thereof” refers to ,the
proceeds of the investment, and not merely to the original bond proceeds. Thus the
use of interest is subject to the same restraints as the use of bond proceeds.
The meaning of section 20.42 becomes clearer when the language of a similar
statute is examined. Article 708b, V.T.C.S., provided for the investment of bond
proceeds in obligations of the federal government when wartime labor and
materials shortages delayed construction. This statute provides in part:
[Tl he obligations of the United States in which said proceeds
are invested shall be sold or redeemed and the proceeds of
said obligations shall be used for the purpose for which the
bonds of any such political subdivision were authorized.
V.T.C.S. art. 708b (emphasis added). This language makes it clear that the
proceeds of the obligations, and not merely of the bonds, are to be devoted to
authorized purposes. See also V.T.C.S. art. 1269j-3; Attorney General Opinion V-
I .._‘~__‘~~ ll82 (1951).
The disposition of interest provided by section 20.42 also follows the general
rule that interest on a special fund becomes part of that fund. The court in Lawson
v. Baker, 220 S.W. 260, 272 (Tex. Civ. App. - Austin 1920, writ ref’d) stated as
rollows:
Interest, according to all the authorities, is an accretion to
the principal fund earning it, and, unless lawfully separated
therefrom, becomes a part thereof.
See also State Highway Commission v. Spainhower, 504 S.W.2d 121(MO. 19731; Union
v. Straub, 400 P.2d 229 (Ore. 1965) (en bancj (“proceeds” of gasoline and vehicle tax
fund includes interest).
This general rule, however, is subject to modification by the issuer at the
time of the issuance of the bonds by means of specific language in the bond
covenants to bondholders; i.e., by clear specification of the sources of security for
repayment of the bonds, the issuer may exclude “interest proceeds” from “bond
proceeds” in the disposition of funds, if there are no other prohibitions to their
“lawful separation,” as in Lawson.
When we refer to this specific opinion request, it appears that such covenants
were utilized to join, rather than separate these “proceeds,” in that the original
n n-Inn
.* ’
,
,
Honorable M. L. Brockette - Page 3 (B-1174)
bond order established only one fund, i.e., an interest and sinking fund. Since the
principal maturities of these bonds occur from 1980 to 1989, these covenants are
still binding on the district.
We note that Attorney General Opinion C-537 (1965) stated in dicta that the
predecessor of s,ection 20.42 “does not specify what use may be made of the
interest earned on such investment.” A brief submitted to us suggests that this
language permits the district to spend interest on construction projects not
authorized at the time the bonds were issued. We do not believe that section 20.42
or Attorney General Opinion C-537 allows the school district to do so.
Bond proceeds may be used onlv for the ourooses for which thev are voted.
Barrington v. Cokinos, 338 S.W.2d 133 (Tex. 1966); -Lewis v. City of Fort Worth, 89
S.W.2d 975 (Tex. 1936); Attorney General Opinion H-968 (1977). Thus, the proceeds
. in this instance may be spent-only for air conditioning, heating, and lighting of
school buildings or the construction of a stadium. We do not address the question
of whether a more broadly written electoral proposition would permit covenants in
the bond order to allow investment proceeds to be expended consistent with the
proposition’s grant of a more general authority.
_..- -.j y You also ask what may lawfully be done with the interest, if it cannot be
-- _ spent to build a new school. It need not be spent on improving the old school, if
materially changed conditions have rendered that project an unwise and unneces-
sary expenditure of public funds. Hudson v. San Antonio Independent School
District, 95 S.W.2d 673 (Tex. 1936). Section 20.05 of the Education Code DrOVideS a
procedure for refunding any outstanding bonds. The interest may also be-placed in
the sinking fund for the retirement of bonds. See ,Attorney General Opinions C-537
(1965); G-6973 (1945).
SUMMARY
Interest earned on the investment of school bond proceeds
pursuant to section 20.42 of the Education Code must be
spent for purposes authorized for. the bond proceeds.
Interest not needed for those purposes may be placed in the
sinking fund or used to refund bonds pursuant to section
20.05 of the Education Code.
. ..,I. ,
Honorable M. L. Brockette - Page 4 (H-1174)
APPROVED:
.
DAVID M. KENDALL, First Assistant
C. ROBERT HEATS& Chairman
Opinion Committee