December 15, 1997

Maurice C. Christiansen
Auditor General
427 South Chapelle
Pierre, SD 57501-3595

OFFICIAL OPINION NO. 97-06

State Investment Council-Administrative Costs Investment of Article VIII Trust Funds

Dear Mr. Christiansen:

You have requested an opinion from this Office based upon the following factual situation regarding a legal interpretation of the state constitution and laws that apply to the Investment Council's investment of monies of the permanent school and other educational funds:

          FACTS:

As the result of the 1996 constitutional amendment, the authority for the investment of the permanent school and other education funds was transferred from the Commissioner of School and Public Lands to the Investment Council.  Specifically, you have requested an opinion as to the source of payment to the Investment Council for administrative costs that are incurred as a result of investing these funds.  You note that under SDCL 4‑5‑30, the administrative costs incurred by the Investment Council are authorized to be paid from assessments of various fund accounts.  The funds are assessed at the beginning of the fiscal year with money deposited into the Investment Council expense account.  The permanent school and other education funds were not assessed any portion of the Investment Council's administrative costs since the constitutional amendment was not effective until November of 1996.

Historically the administrative costs of the School and Public Lands were financed through appropriations from the State general fund.

Based upon the above facts you have raised the following questions:

          QUESTIONS:

1.   Does SDCL 4‑5‑30 apply to the Investment Council's investment of permanent school and other educational funds?

2.   If the answer to question 1 is no, how should the costs associated with the investment of the permanent school and other educational funds be assessed?

IN RE QUESTION NO. 1:

     The questions you raise require an interpretation of statutes in the context of the state constitutional provisions regarding funds mandated by the state constitution to be held in trust.  Article VIII of the South Dakota Constitution creates a perpetual trust for permanent school and other educational funds.  Various provisions within Article VIII address the nature of the trust and restrictions on principal and income.

     The nature of this trust relationship and the obligations it places upon the State have been a subject of several Supreme Court opinions.  The South Dakota Supreme Court in Schomer v. Scott, 65 S.D. 353, 274 N.W. 556, 559 (1937), after reviewing the provisions of Article VIII of the South Dakota Constitution, set forth the purpose of this article:

     It becomes apparent at the outset that this purpose to devise a plan rendering it impossible for funds dedicated for sacred educational purposes to ever become lost or diminished, pervades the whole of the constitutional provision on that subject and must override and set aside any mere technical argument based upon particular words or even upon what may seem to be literal meanings.

     The Court, in one of its earliest decisions, viewed general statutory provisions as not controlling when addressing the State's constitutional trust  responsibilities.  In Heston v. Mayhew, 9 S.D. 501, 70 N.W. 635 (1897), the Court was faced with ruling on the applicability of general statutory provisions to the state's obligations to apportion incomes of the trust funds.  The State auditor was refusing to issue and transmit a warrant to the Commissioner of School and Public Lands for monies apportioned to rent of lease lands based upon alleged lack of statutory authority due to a recent repeal of general law that authorized issuance of warrants.  The Court, in holding that the repeal of the law did not apply to the management of the school funds, stated:

     The income derived from these school lands is held by the state in trust for the different corporations and institutions to which it belongs.  It is the duty of the legislature to direct and control the management of such trust.  These funds are held in an essentially different manner than are the ordinary revenues of the state.  In dealing with them, the legislature is guided and controlled by specific constitutional provisions.  The act of 1895 relates to an entirely different subject.  Repeals by implication are not favored.  We do not think the act of 1895 was intended to affect the management of the school funds, and therefore hold that it is defendant's duty to issue his warrant for the amount apportioned by the commissioner, as directed by the law of 1890.

Heston v. Mayhew, 70 N.W. at 636.

Given this backdrop of specific constitutional provisions and supreme court decisions, it is my opinion that SDCL 4‑5‑30 does not apply to the permanent school and other education funds.  The relevant portion of SDCL 4‑5‑30 provides:

At the beginning of each fiscal year the state treasurer shall transfer money from the South Dakota retirement fund, cement plant retirement fund and any other specific fund approved by the bureau of finance and management, other than the state pooled fund account, to the investment council expense fund, which is hereby created in an amount equal to the ratio of the average assets in each fund for the previous fiscal year to the total average assets managed by the investment council for the previous fiscal year multiplied by the difference between the budget of the investment council for the fiscal year and the beginning cash balance in the investment council expense account. At the beginning of each fiscal year the state treasurer shall transfer money from the pooled income account to the investment council expense account in an amount equal to the ratio of the average daily cash balance of the pooled fund account for the previous fiscal year to total average assets managed by the investment council for the previous fiscal year multiplied by the difference between the budget of the investment council for the fiscal year and the beginning cash balance in the investment council expense account.

I note the language of this statute does not mention the permanent school and other education funds.  Given the constitutional restrictions on the principal and income of the permanent school and other education funds, I cannot imply that these funds are included as an "other specific fund" or part of the "state pooled fund account" referenced by SDCL 4‑5‑30.

Several provisions of Article VIII specifically prohibit any diminishment of the principal in these trust funds and impose a constitutional obligation on the State to restore any loss with interest.  See Art. VIII, § 2, 7 and 13.  Further, Art. VIII, § 3 requires that all interest and income earned from the perpetual trust fund for maintenance of public schools be apportioned to the schools for educational purposes.  This constitutional provision prohibits any diversion of income, even temporarily.  Finally, Article VIII § 7 requires the interest and income from the other Article VIII trusts, ". . . shall be inviolably appropriated and applied to the specific objects of the original grants or gifts."  Though this language is different than that contained in Article VIII § 3 I cannot conclude "is substantively different as to allow principal or income diversion.  Under our current constitutional scheme there is simply no authority for state administrative costs to be deducted from the principal of any Article VIII trust fund or income of the perpetual trust fund for maintenance of public schools or other Article VIII created trust.  See, e.g., Kanaly v. State Ex Rel. Janklow, 368 N.W.2d 819 (S.D. 1985).

The fact that the recent constitutional amendment to Article VIII, Section 11 transfers the responsibility for investing the funds from the Commissioner of School and Public Lands to the Investment Council does not change this answer.  The constitutional amendment changed only the entity authorized to invest the trust funds.  It did not affect any of the other constitutional provisions that created the trust, including protection of the funds' principal and disbursal of all interest and income for educational purposes.  The answer to your first question, then, is that no principal from an Article VIII established trust fund, nor interest and income from such a trust, may be used to defray the administrative costs of the Investment Council.

This opinion is consistent with the prior practice of the Office of School and Public Lands, where all the costs of administration of the School and Public Lands were paid through general funds appropriations.

In Re Question No. 2:

Given the above opinion the question remains: what is the source of payment of those costs?  It is my opinion that the answer is governed by the provisions of SDCL 4‑5‑30.  SDCL 4‑5‑30 provides the funding mechanism for the expenditure authority granted by the Legislature in the General Appropriations Act.  Under this statute, Investment Council's approved budget is funded on a prorated basis from gains, interest, and income earned from its investment of the various funds in the state treasury.  Consistent with the opinion rendered above, funding of the Investment Council budget would take place by the transfer of funds to Investment Council expense fund with the limitation that the State Constitution prohibits transfer of permanent school and other educational funds, assets, or gains, interest or income earned therein.

I recognize that applying SDCL 4‑5‑30 in a manner consistent with this opinion may result in a funding shortfall if the Investment Council expenditures reach the budgeted maximums.  Given this potential occurrence, I have contacted the State Investment Officer regarding this potential effect.  I recommended that to avoid a possible funding shortfall, the Investment Council consider seeking an amendment to SDCL 4‑5‑30 or other legislation to cover the portion of the Investment Council budget which would have otherwise been apportioned from permanent school and other educational funds and earning.