STATE OF SOUTH DAKOTA
OFFICE OF
THE ATTORNEY GENERAL
September 8, 1975
Representative Walter D. Miller
Chairman, Interim Committee on
State Affairs
New Underwood, South Dakota 57761
OFFICIAL OPINION NO. 75-152
Public indebtedness under Article XIII of South Dakota Constitution
Dear Representative Miller:
You have stated that the Interim Committee on State Affairs was assigned the study and evaluation of several economic development proposals presented during the 1975 legislative session. The committee is evaluating proposals for financing any economic development projects that might be proposed pursuant to the Committee's efforts.
On behalf of the Committee you have requested an opinion on the following:
1. May the State of South Dakota incur indebtedness pursuant to Article XIII, §§ 1 and 16, of the state Constitution?
2. If the answer to question number 1 is YES, may economic development programs instituted for such purposes as loaning money to local governments to meet E.P.A. standards or for irrigation, agricultural and industrial development fall within the scope of Article XIII, §§ 1 and 16?
3. Do revenue bonds issued for dormitory housing development, schools and special districts create debt within the meaning of Article XIII, §§ I and 16?
4. What is the definition of "assessed valuation" as used in Article XIII, §§ 1 and 16?
5. May the Legislature transfer money from the cement plant reserve and replacement fund to the general fund to be used for economic development purposes?
The constitutional provisions referenced in your questions read as follows:
§ 1. For the purpose of developing the resources and improving the economic facilities of South Dakota, the state may engage in works of internal improvement, may own and conduct proper business enterprises, may loan or give its credit to, or in aid of, any association, or corporation, organized for such purposes. But any such association or corporation shall be subject to regulation and control by the state as may be provided by law. No money of the state shall be appropriated, or indebtedness incurred for any of the purposes of this section, except by the vote of two-thirds of the members of each branch of the Legislature. The state may also assume or pay any debt or liability incurred in time of war for the defense of the state. The state may establish and maintain a system of rural credits and thereby loan and extend credit to the people of the state upon real estate security in such manner and upon such terms and conditions as may be prescribed by general law. The limit of indebtedness contained in § 2 of this article shall not apply to the provisions of this section, but the indebtedness of the state for the purpose contained in this section shall never exceed one-half of one per cent of the assessed valuation of the property of the state, provided however, that nothing contained in this section shall affect the refinancing or refunding of the present outstanding indebtedness of this state.
§ 16. The state may engage in works of internal improvement, any provision in this Constitution, or limitation in § 2 of this article, to the contrary notwithstanding. The indebtedness of the state for the purposes contained in this section shall never exceed one-half of one per cent of the assessed valuation of all property in this state and no such indebtedness shall be incurred nor money expended, except upon a two-thirds vote of the members elect in each branch of the Legislature.
Under both of the above sections the Legislature is expressly authorized to incur indebtedness on behalf of the state for certain specified purposes. The answer to your question number 1 is YES.
Your question number 2 first calls for an interpretation of the terms, "works of internal improvement," and' 'proper business enterprises." Section 1 further states that the purpose for engaging in such internal improvements or conducting proper business enterprises is to develop the resources and improve the economic facilities of South Dakota. The landmark case of Boe v. Foss, 77 N.W. 2d I (S.D. 1956) attempted to distinguish internal improvements for public purposes from functions of government and in so doing adopted the following definition:
Works of internal improvement, as used in the Constitution, means, not merely the construction or improvement of channels of trade and commerce, but any kind of public works, except those used by and for the state in performance of its governmental functions, such as a state capitol, state university, penitentiary, reformatories, asylums, quarantine buildings, and the like, for the purpose of education, the prevention of crime, charity, the preservation of public health, furnishing accommodations for the transaction of public business by state officers, and other like recognized functions of state government.
In White Eagle Oil and Refining Co. v. Gunderson, 205 N.W. 614 (S.D. 1925) the court discussed the matter of whether legislation granting authority to the State Highway Commission to buy gasoline, oil and other lubricants and sell them at retail constituted a "public purpose" within the meaning of Article XIII, § 1. Although the case was decided on other grounds, the court did state that the mere fact that gasoline may be used in the development of resources is not sufficient to consider the business of selling gasoline at retail as a proper business enterprise. The court implied that state operated or state financed businesses must be closely scrutinized on an individual basis so as to not result in the removal of all practical restrictions on the state to engage in business.
The term "public purpose" also appears in the South Dakota Constitution in regard to limiting uses for which taxes may be levied and collected. (Article XI, § 2.) In Clem v. City of Yankton, 160 N.W. 2d 125 (S.D. 1968) it was stated that:
Determining whether a statutory purpose is public or private is pretty much a matter of policy and wisdom for the Legislature. In making such decision it is vested with a large discretion with which the courts should not interfere unless its action is clearly evasive.
The same logic and language was used in In re Heartland Consumers Power District, 180 N.W. 2d 398 (S.D. 1970) in upholding the authority of the Legislature to create public power districts to provide electric energy throughout the state. The argument that the involvement of the state in business operations should be restricted to those purposes specifically set forth in Article XIII (re. - cement, coal, electricity) is not persuasive. The facts in each case, of course, dictate the final decision as to whether a business or program is a public purpose project. Based on the hereinbefore cited cases I am of the opinion that irrigation, agricultural and industrial development programs may be considered legitimate public purposes. With regard to loans to local governments to meet EPA standards, I hesitate to offer a conclusive opinion without the benefit of more information concerning the EP A program being implemented. In other words, the EP A program would have to effectuate a direct development of resources or improvement of economic facilities in the state to constitute a public purpose.
Therefore, subject to the above comments it is my opinion that economic development programs as described in your question number 2 fall within the scope of Article XIII, §§ 1 and 16 and the Legislature has the authority to designate such as public purposes and make loans or give credit within the prescribed debt limits. The answer to your question number 2 is YES.
The answer to your question number 3 is NO. It has been judicially determined on several occasions that the self-liquidating feature of revenue bonds removes them from the constitutional and statutory debt limitations unless expressly stated otherwise. State College and Development Association v. Nisson, 281 N.W. 907 (S.D. 1938); Boe v. Foss, 77 N.W. 2d 1 (S.D. 1956). However, if revenue from a source of income other than the specific project financed by the bonds is used to supplement repayment, said revenue is subject to the debt limitations.
The definition of the term "assessed valuation" must be determined by referring to other constitutional and statutory provisions relating to taxation of property. Article XI, § 2 reads as follows:
§ 2. To the end that the burden of taxation may be equitable upon all property, and in order that no property which is made subject to taxation shall escape, the Legislature is empowered to divide all property including moneys and credits as well as physical property into classes and to determine what class or classes of property shall be subject to taxation and what property, if any, shall not be subject to taxation. Taxes shall be uniform on all property including privileges, franchises and licenses to do business in the state. Gross earnings and net incomes may be considered in taxing any and all property, and the valuation of property for taxation purposes shall never exceed the actual value thereof. The Legislature is empowered to impose taxes upon incomes and occupations, and taxes upon incomes may be graduated and progressive and reasonable exemptions may be provided.
The Legislature basically implemented this provision in SDCL 10-4, wherein property is classified for purposes of taxation, and SDCL 10-6 wherein guidelines and procedures for determining valuation are established.
SDCL 10-6-33 states that "all property shall be assessed at its true and full value in money but only sixty per cent of such assessed value shall be taken and considered as the taxable value of such property upon which the levy shall be made and applied and the taxes computed ... "
True and full value is defined as “the usual cash selling price at the place where the property to which the term is applied shall be at the time of the assessment." SDCL 10-6-1(5).
Thus, it is my opinion that "assessed valuation" for purposes of Article XIII means the total dollar figure as determined by application of the true and full value formula, of all property in South Dakota subject to property taxation.
Your final question involves the legality of the transfer of cement plant reserve and replacement funds to the state general fund for use in economic development projects. The reserve and replacement fund was established by the Legislature in 1966 as a depository for necessary funds over and above operating expenses for repairs, renewals, replacements and improvements of the state cement plant. (SDCL 5-17.) All other income from the cement plant is to be credited to the state cement plant fund to be expended for other purposes authorized by law. (SDCL 5-17-27.)
The following constitutional provisions are also relevant to your question:
Art. XIII - § 10. The manufacture, distribution and sale of cement and cement products are hereby declared to be works of public necessity and importance in which the state may engage, and suitable laws may be enacted by the Legislature to empower the state to acquire, by purchase or appropriation, all lands, easements, rights of way, tracks, structures, equipment, cars, motive power, implements, facilities, instrumentalities and material, incident or necessary to carry the provisions of this section into effect: provided, however, that no expenditure of money for the purposes enumerated in this section shall be made, except upon a vote of two-thirds of the members elect of each branch of the Legislature.
§ 11. The state may pledge such cement plants and all of the accessories thereto, and may pledge the credit of the state, to provide funds for the purposes enumerated in § 10 of this article, any provision in this Constitution to the contrary notwithstanding.
It is my opinion that the Legislature, incident to its constitutional authority to manufacture, distribute and sell cement and cement products to the public, necessarily has the authority to provide for the disposition of profits from the state cement plant. As stated in the Clem case, hereinbefore cited:
The Constitution is not a grant but a limitation upon the lawmaking power of the state Legislature and it may enact any law not expressly or inferentially prohibited by state and federal constitutions.... Consequentially, in determining whether an act is unconstitutional we search the State and Federal Constitution for provisions which prohibit its enactment rather than for grants of such power. Except as limited by them the legislative power of our state Legislature is unlimited.
However, appropriate legislation would be necessary since under the present fund structure and procedure established by law all revenue not earmarked for operating expense or reserve and replacement purposes is to be credited to a public service enterprise fund rather than the general fund. SDCL 4-4-4(6). The answer to your question number 5 is YES.
Respectfully submitted,
William Janklow
Attorney General
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