Untitled Texas Attorney General Opinion

,- 6, . . -~ State Board of Education Austin, Texas Dear Sirs: Opinion No. O-6983 Re: Refunding or readjustment of the bonds of the Cisco Inde- pendent School District which are held by the State. We are In receipt of your letter concerning the bonds of the Cisco Independent School District together with a copy of the application for readjustment submitted to you by the School District. We summarize the facts in this case and the problems you present for our opinion to be as follows: The bonds of this school district were originally issued at a time when the as- sessed valuation of the district was many times that of today. When issued, the bonds met every requirement and were entirely eligible for purchase as an investment for the Permanent School Fund. The instability of estimated 011 values have caused the 'present assessed valuations to be much lower than at the time the bonds were ,lssued. However, the large debt of the district still remains. The Permanent School Fund owns the bonds with which'we are concerned. The bonds bear interest at the rate of five per cent (5%) and because of the lowered valuations of the district, Its income is insufficient to meet interest payments and'has been for a number of years. The proposal is to refund the~'bondswhich have not matured at a lower rate of interest or to "readjust" the indebtedness by changing those bonds on the~irface to provide for two and one-half percent (2s) inter- est instead of five percent (5%). The plan also calls for the postponement of the payment of the past-due interest now owing to the available school fund. Article VII, Section 4, of the Constitution of Texas provides as follows: "The lands herein set apart to the Public Free School,Fund, shall be sold under such regulations, titsuch times, and on such terms as may be prescribed - . State Board of Education, page 2 by law; and the Legislature shall not have power to grant any relief to purchasers thereof. The Comptroller shall invest the proceeds of such sales, and of those heretofore made, as may be directed by the Board of Education herein provided for, in the bonds of the United States, the State of Texas, or counties in said State, or in such other securities, and under such restrictions as may be prescribed by law; and th St t h 11 b responsible for all investments.' (Ze:sZorini ours.) Article 2669, V.A.C.S., provides as follows: "The State Board of Education is authorized and empowered to invest the permanent public free school funds of the State In bonds of the United States, the State of Texas, or any county thereof, and the independent or common school districts, road precincts, drainage, irrtigation,navigation and levee districts in this State, and the bonds of incorporated cities and towns, and obligations and pledges of the University of Texas." Authority for the issuance of refunding bonds is con- tained in Article 2789, V.A.C.S., which reads as follows: "Where bonds have been legally issued, or may be hereafter issued, by any town or village incorporated for free school purposes only, or any common school district, Independent school district, consolidated common school district, consolidated independent school district, county line school district, consolidated county line school district, or rural high school dis- trict, new bonds, bearing the same or a less rate of interest, may wh.enordered by the governing board there- of be Issued either as term bonds or as serial bonds, maturing in either case within forty (40) years from date of issue, and may be made optional on any interest payment date as the governing board shall direct; pro- vided further+ that matured Interest coupons of such district may be refunded in like manner; and provided further, that no election shall be necessary to au- thorize the issuance of such new bonds; and provided further, that the State Treasurer shall, upon or- der of the State Board of Education, exchange bonds not matured held by him for the permanent school fund forthe new refunding bonds Issued by the same State Board of Education, page 3 incorporation under the provisions of this Sub- division, in case the rate of interest on the new bonds ‘isnot less than the rate of interest on the bonds for which they are exchanged.” -(Underscoringaura,) This department has always ruled that Article 2789, above, prohibits the State Board of Education from permitting the refunding of bonds held for the benefit of the State Per- manentSchoo1 Fund into new bonds bearing a lower rate of in- terest. OnMarch 19, 1937, Assistant Attorney General Victor W; Bouldin wrote an opinion addressed to Mr. H. A. Hefner;, Batson, Texas, which stated In part as follows: "Rowever, the statute specifically prohibits ,the State Board of Education from permitting the refunding of bonds held for the benefit of the State Permanent School Fund into new bonds bear- ,inga lower rate of interest. In fact this de- partment has held that the Constitution prohibits the lowering of a contractual rate of interest due the state on bonds held by the Permanent School Fund. " The Constitutional provision referred to in'that opln- IOU IsArtIcle III, Section 55, which reads as follows:, ; "The Legislature shall have no power to re- lease or extinguish, or to authorite the releas- ing or extinguishing, in whole or in part, the indebtedness, liability or obligation of any in- corporation or Individual, to this State, ,or to anycounty or other municipal corporation therein.'! Several cases have passed on the questionsof applying this constitutional inhibition to certain executory contracts entered into by the State, The principal case Is that of Rhoads DrKling~ Co, v. Allred, 70 S.W.2d 576. In that case the Commis- sion~of Appeals of Texas upheld the validity of a State contract which, for Consideration, reduced the mineral returns to be re- ceived by the State below that which the State,would receive under a prior contract, The Court stated as follows: "A decision that the Legislature is powerless to authorize the change of an executory obligation in such way as to benefit one who has contracted with the State would deny to the State the import- ant power and right to modify its contracts. State Board of Education, page 4 ” ., . . . "The State cannot enjoy and exercise fully the important right to contract, unless it Is permitted through officers or representatives authoriced by the Legislature to modify its executory contracts when a proper occasion arises .I( There can be little question, however, but that Artl- cle 2789, quoted herein, does prohibit the State Board of Education from accepting refunding bonds at a rate of interest lover than those for which they are exchanged. The wisdom of such a prohi- bition when applied to the present fact situation is a matter which must, of necessity, address itself to the Legislature. This de- partment must be controlled by the plain wording of the statute. You are therefore advised that the State Board of Education would be without authority to exchange the bonds of the Clsco Independent School District for refunding bonds bearing a lower rate of lnter- est. It was suggested as an alternate proposal that Instead of issuing refunding bonds for exchange that the Board agree to change the face of the bonds the Permanent School Fund now holds to call for,two and one-half percent (2&) interest instead of five per+ent (5%). It was submitted that in this way the express lan- guage of Article 2789 could be avoided. However, a bond is only the written evidence of the contract. As stated by Judge Fly of the San Antonio Court of Civil Appeals in the case of New Bueces Hotel Co. v. Weil Bros., 243 S.W. 733, "A bond is merely an ev3.G dence of debt.?:Whether you change the old paper or issue a new pa er the contract has been changed and two and one-half percent 2 ) interest bearing bonds have been exchanged for five percent [5!$ in tereat bearing bonds This department cannot approve this proposal which would accomplish by indirection that which is di- rectly prohibited by statute. The six percent (6%) interest on delinquent interest re- ferred to in the application submitted by the School Distriot is chargeable under the provisions of Article 5070, V.A.C.S., which reads as follows: "When no specified rate of interest is agreed upon by the parties, interest at the rate of six per cent per annum shall be allowed on all written contracts ascertaining the sum payable, from and after the time when the sum Is due and payable; and on all open accounts, from the first day of January after the.same are made." . . State Board of Education, page 5 This department has so held over a period of years in several opinions, the latest of which is Opinion No. O-4824, dated September 18, 1942. We are unable to find any authority for the School District to Issue so-called "certificates of indebtedness." However, your attention is invited to our Opinion No. O-4850, a copy of which Is enclosed for your information. In that opinion, this department ruled that the State Board of Education had the authority to authorize the refunding of past due inter- est coupons from bonds held for the account of the Permanent School Fund into interest refunding bonds to be held for the Account of the State Available School Fund, even if the inter- est refunding bonds bear a lesser rate of interest than the bonds from which the coupons are detached. We trust that this opinion answers your questions relative to the authority of the State Board of Education in passing on the application of this School District. We wish to acknowledge with appreciation the briefs which were submitted in connection with the application of the Cisco Independent School District and your opinion request. Yours very truly, ATTORNEY GENERAL OF TEXAS By /a/ Billy B. Goldbert Assistant BBGgms;djmart APPROVED Nov 14, 1946 /a/ Grover Sellers ATTORNEY GENERAL OF TEXAS APPROVED Ouinion Committee By BWB Chairman