July 31, 1980
Mr. Warren R. Neufeld
Secretary
Department of Water and Natural Resources
Foss Building
Pierre, South Dakota 57501
Official Opinion No. 80-51
Appointment of Trustees for Interim Financing
Dear Mr. Neufeld:
You have requested an official opinion from this office in regard to the following factual situation:
FACTS:
The Board of Water and Natural Resources has appointed an out-of-state bank to act in the South Dakota Conservancy District's behalf and arrange for the sale of interim financing notes under Chapter SDCL 46-17A. In issues financed to date, the same bank has also been chosen by the system receiving the subsequent loan of the note proceeds to act as trustee and paying agent for the borrowed funds. Some concern has been expressed that South Dakota banks should have the opportunity to act as trustee and paying agent on behalf of the entity receiving the borrowed funds.
Based upon the above facts, you have asked the following question:
QUESTION:
Is it the responsibility of the Board of Water and Natural Resources to notify and solicit bids from South Dakota banking concerns to act as trustee and paying agent for the proceeds of sale of the Conservancy District's loan and grant anticipation notes or is this the right and responsibility of the entity receiving the loan from the Conservancy District?
In essence, there are three questions involved in your inquiry. (1) Must competitive bidding be sought pursuant to SDCL Chapter 5-18 prior to appointment of a trustee to handle the issuance of interim notes and reinvest the note proceeds? (2) Is there a residential preference under SDCL Chapter 5-19 for the appointment of a trustee? (3) Is the Board of Water and Natural Resources responsible for employing a trustee or is that the right or responsibility of the entity receiving the loan from the Conservancy District?
IN RE QUESTION NO. 1:
SDCL 5-18-2 provides:
All contracts of any public corporation, whether for the construction of public improvements or contracts for the purchase, lease or rental of materials, supplies or equipment, when such contracts involve an expenditure equal to or in excess of the amount provided for in § 5-18-3, must be let to the lowest possible bidder. . . .
SDCL 5-18-18 enumerates the contracts exempt from competitive bidding requirements, but there is no exemption listed for the activity involved in this question. However, there is authority in South Dakota holding that contracts for personal services should not be included within the competitive bidding provision of SDCL 5-18. In Foss v. Spitznagel, 77 S.D. 633, 97 N.W.2d 856 (1959), the court held that SDCL 5-18-2 would not be applied to a municipality hiring an architect to work on a civic auditorium. The court cited McQuillin on Municipal Corporations, Third Edition, Volume 10, Section 29.35 with approval in saying,
[A]lthough they are sometimes held to apply to such an agreement, provisions requiring competitive bidding as a basis for entering into contractual relations with a governmental body usually are held not to apply to contracts for personal services involving particular skill or ability. . . . Foss v. Spitznagel, supra.
The reason for this exemption is that specialized personal services require special skill and ability which cannot necessarily be obtained through the competitive bidding process.
In 1965-66 A.G.R. 121 it was determined that the employment of a planning consultant to aid in the preparation of a comprehensive plan constituted personal services and, in referring to Spitznagel, the opinion said, 'It is my opinion that the above-cited decision would also be applicable to any contract for personal services. . . .'
The exemption from competitive bidding does not apply to all cases of employment of personal services. In Official Opinion No. 76-61 it was said: 'The significance of the Spitznagel case is limited to situations involving professional services or services involving a peculiar and unique skill.'
Consistent with this opinion, the South Dakota Supreme Court held in Northern Hills Sanitation v. Board of Commissioners of the City of Lead, 272 N.W.2d 835 (1978), that a contract for the collection and hauling of solid wastes is void if SDCL Chapter 5-18 is not followed. Further, the servicing of radio equipment for a city is also not likely to be found the kind of personal services that are unique and peculiar. 1949-50 A.G.R. 161.
The resolution of this question turns upon a determination of whether or not the personal services by a trustee in reinvesting the proceeds from the sale of interim notes and acting as paying agent for those proceeds can be considered peculiar and unique; whether the services are to be put in the same category as those provided by an architect or planning consultant or whether they are closer to the services provided in garbage hauling or machinery repair.
It is my opinion that the complex and specialized services provided by a trustee in this kind of situation are substantially equivalent to those of an architect or planning consultant and therefore competitive bids need not be solicited by the Board of Water and Natural Resources when seeking to employ a trustee to handle the issuance of interim notes.
IN RE QUESTION NO. 2:
SDCL 5-19-3 provides:
Whenever a contract is let by the state or department thereof, or any county, city, town, school district, or other public corporation of the state of South Dakota for the erection, construction, alteration or repair of any public building or other structure or for making any addition thereto, or for any public work or improvement or for the purchase of any goods, merchandise, supplies or equipment of any character, such contract shall be let to the lowest responsible resident bidder, provided that a resident bidder may be allowed a preference on any such contract as against the bid of any bidder from any other state enforcing or having preference for resident bidders equal to such preference.
Since it is my opinion that competitive bidding is not required under SDCL Chapter 5-18 it would follow that SDCL 5-19-3 does not apply to the transaction in question because SDCL 5-19 applies only to bidding for contracts. Further, the policy reasons for not requiring competitive bidding on specialized personal service contracts would also apply to resident preference contracts.
IN RE QUESTION NO. 3:
SDCL 46-17A-23 gives the Conservancy District the power to issue interim notes, and SDCL 46-17A-28.1 makes certain bond issuance provisions applicable to interim financing. One of these provisions is SDCL 46-17A-37 which provides:
The district shall have power to vest in a trustee or trustees the right to receive all or any part of the proceeds of the bonds and all or any part of the income and revenue pledged and assigned to, or for the benefit of the holder or holders of bonds issued under this chapter, and to hold, apply and dispose of the same and the right to enforce any convenant made to secure or pay or in relation to the bonds; execute and deliver a trust agreement or trust agreements which may set forth the powers and duties and the remedies available to the trustee or trustees and limiting the liabilities thereof and describing what occurrences should constitute events of default and prescribing the terms and conditions upon which the trustee or trustees or the holder or holders of any specified amount or percentage of the bonds may exercise such right and enforce any and all such convenants and resort to remedies as may be appropriate.
Official Opinion No. 79-19 stated that SDCL 46-17A-37 allows the district to enter financing agreements allowing a trustee to reinvest note proceeds during the construction period. There is no statute that restricts this right on the part of the district, nor does any statute exist that would prohibit the entity receiving the loan from appointing a trustee to act as its fiscal agent should the district choose not to act, subject to any self-imposed restriction on the capacity of the entity.
Furthermore, such trust agreements are clearly proper subject for inclusion in the financing arrangements referred to in SDCL 46-17A-23.1 and as such are proper subjects for a mutual exercise of discretion by the board and the receiving entity.
Therefore, it is my opinion that the actions taken by the Board of Water and Natural Resources in the past in appointing an out-of-state trustee to handle the interim note issuance without requesting competitive bidding from resident financial institutions is not improper, nor is it improper for the Board to assume the responsibility rather than permitting it to be exercised by the entity receiving the loan.
Further, the Board may enter into a financial agreement with the borrowing entity authorizing or requiring that entity to select a trustee to reinvest the funds generated by the note issuance. The use of out-of-state as opposed to in-state institutions is a decision for the judgment of the Board. Such a judgment is for the Board to decide based upon all the factors and has not been made the subject of a statutory direction by the Legislature.
Respectfully submitted,
Mark V. Meierhenry
Attorney General
