May 15, 1989
Timothy H. Amdahl
Commissioner of School and Public Lands
State Capital
Pierre, SD 57501-0590
OFFICIAL OPINION NO. 89-14
Permanent school trust fund-capital gains from investments
Dear Commissioner Amdahl:
You have requested an official opinion from this office in regard to the following:
FACTS:
AGR 1939-40 page 324 holds that under Article VIII 3 of the South Dakota Constitution, monies received as premiums from the sale of bonds result from investment of permanent school trust funds should be credited to the interest and income fund account and not to the corpus or principal account. As a result of this Attorney General's Opinion, it has been the practice of the Commissioner of School and Public Lands to credit to the interest and income fund account, and devote to subsequent distribution in accordance with SDCL 13-13-1 and 5-10-6, all profits or net capital gains (capital gains in excess of capital losses) from the sale and purchase of investment securities. The State Investment Office and myself are concerned about the continued treatment of net capital gains as income. This concern is due to the fact that paying out net capital gains as income is diminishing the corpus or principal of the permanent school trust fund in both a nominal and real sense. It is our opinion that by placing net capital gains in the principal account more income will be distributed to the counties for educational purposes to future generations.
Based on the above facts you have asked the following question:
QUESTION:
Whether the Commissioner of School and Public Lands is required to credit to the interest in income account for yearly dispersal, net capital gains resulting from the sale and purchase of permanent school trust fund investment securities.
IN RE QUESTION:
As noted by the South Dakota Supreme Court Kanaly v. State by and through Janklow, 368 N.W.2d 819 (S.D. 1985), the constitutional and statutory provisions concerning the permanent school and educational trust funds are the result of the February 22, 1889, Enabling Act passed by the United States Congress which allowed the division of the Dakota Territory into two states and admitted South Dakota to the Union upon creation and ratification of a State Constitution. Several provisions of the Enabling Act granted federal lands to the new State to designate and dedicate various acreages to different educational institutions upon the condition that the land and proceeds received from any sale constituted a permanent fund for the support of the public schools for which land had been granted. In response to the Enabling Act, the South Dakota Constitution contains a number of provisions regarding the lands given by the United States for the use of public schools in the State and provides for the creation of a permanent school trust fund. See Article VIII, 2 through 14 of the South Dakota Constitution.
The Supreme Court in Schelle v. Foss, 76 S.D. 620, 629, 83 N.W.2d 847, 853 (1957) held that investments in the fund could not be sold below cost since the corpus would be diminished. In support of this decision, the Court stated:
The framers of our Constitution intended to, and did establish a special trust for the administration and preservation of our permanent school and educational funds. Article VIII of the Constitution serves as the trust instrument containing the declarations of trust. Its provisions are written in strong, clear, self-expressive language. Its beneficiaries are all of the public schools in the state together with its endowed charitable and educational institutions. The trust must be administered for their sole benefit and best interests. An involvement of the trust funds for any other purpose, consideration, or motivation would be in violation of the basic intendment of the trust.
The constitutional provisions pertinent to this question, are: (1) Article VIII, 2 creating the trust and mandating that the principal forever remain inviolate, that may be increased but never diminished; (2) Article VIII, 3 stating that the interest and income of the trust fund shall be faithfully used and applied each year for the benefit of the public schools of the State and apportioned to the public school districts in proportion to the number of school age children in each district; (3) Article VIII, 7 reiterating that the property and proceeds from grants and gifts shall remain in the perpetual funds, the interest and income shall be "inviolably appropriated" and that the fund may increase but never diminish with only the interest and income being dispersed; and (4) Article VIII 11 specifically limits the investment of the monies of the trust fund to United States bonds, securities guaranteed by the United States, bonds of the State of South Dakota, or in bonds of any school corporation, organized county or incorporated city within the State of South Dakota. The Legislature was directed to set up rules, regulations and safeguards for all trust fund investment. In apparent response to Schelle v. Foss, Article VIII, 11 was amended to specifically provide that bonds of the United States may be sold at below cost to secure the highest income compatible with safe investment.
To carry out the constitutional mandates, the Legislature enacted a number of provisions concerning the permanent school trust fund. See SDCL ch. 5-10 and 13-13-1 to 13-13-3, inclusive. Within this statutory scheme, only income derived from the lease of lands and oil, gas and other mineral rights, as well as interest on investments are to be credited to the interest and income fund for ultimate distribution. See SDCL 5-10-1, 5-10-3, 5-10-6 and 13-13-1.
Based upon the above constitutional and statutory scheme, it is my opinion that my predecessor in AGR 1939-40 page 324 erred in determining that Article VIII 3 of the South Dakota Constitution requires capital gains from the purchase and sale of permanent school fund investments to be credited to the interest and income fund account. In my opinion, not only is this conclusion not mandated by our Constitution, it is contrary to the statutory scheme enacted by the South Dakota Legislature. The phrase "income" as used in Article VIII, must be considered in context. In my opinion, the term "income" only refers to monies received from the lease of public lands and their oil, gas and other mineral rights. The use of the term "income" was not intended to mandate the Commissioner of School and Public Lands to disburse capital gains received from the purchase and sale of permanent school trust fund investments.
This opinion is consistent with the language the Legislature used in SDCL Chapters 5-10 and 13-13 in determining what portion of the permanent school funds were to be disbursed on a yearly basis. For example, in SDCL 5-10-6 and 13-13-1 the Commissioner is directed to apportion "funds derived from the lease of . . . lands" and the "accrued interest on the invested funds . . ." The words "accrued interest" as that term is understood in the ordinary sense does not include capital gains from the purchase or sale of the investment securities themselves. Black's Law Dictionary 5th Ed. (1979) defines accrued interest as "Interest earned but not yet paid." "Interest" is defined as: "Interest is the compensation allowed by law or fixed by the parties for the use or forbearance of detention of money . . . . A corporation pays interest on its bonds to the bondholders." Capital gains on the other hand, is defined as: "Gain (profit) realized on sale or exchange of [an] asset."
The difference between proceeds received from the "use" of an asset and the "sale or exchange" of an asset prohibits an interpretation that "accrued interest" on invested funds includes "capital gains." Had the Legislature determined that all monies derived from the investment of securities were to be apportioned, they could have easily so stated. This omission supports my determination that capital gains, except as provided by Article VIII 11 and SDCL 5-10-18.2, are to be maintained as part of the principal or corpus of the permanent school trust fund. As such, it is my conclusion that AGR 1939-40 p. 324 is in error and is hereby overruled.
In overruling my predecessor, it is my opinion that by maintaining net capital gains as part of the permanent school trust fund corpus, the constitutional directives contained in Article VIII are satisfied. It is clear, that the Constitution's provisions were intended to preserve the source of income for the education of South Dakota's citizens for all time. Assuming prudent investment in accordance with Article VIII, 11 and statutory provisions enacted pursuant thereto, retention of capital gains prevents the trust fund from being diminished due to inflationary effects over time. As we are aware, a dollar tomorrow is worth less than a dollar today. This opinion will eventually result in more monies being distributed to school districts and counties in accordance with Article VIII 3.
It is therefore, my legal opinion that except as provided under Article VIII, 11 and SDCL 5-10-18.2 all gains resulting from the purchase and sale of investments are to remain part of the trust fund and not to be distributed as interest or income.
Respectfully submitted,
ROGER A. TELLINGHUISEN
ATTORNEY GENERAL
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