The Attorney General of Texas 

January 21, 1982 

MARK WHITE 

Attorney General 

Supreme Ccwl Building 

P. 0. BOX 12548 

Austin. TX. 78711 

512,475.2501 

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Telecopier 5121475~266 

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Dallas. TX. 75201 

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Houston. TX. 77692 

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An Equal Opportunity/ 

Affirmative Action Employer 

Honorable Warren G. Harding 

State Treasurer 

L.B.J. Building 

Austin, Texas 78711 

Opinion No. MW-429 

Re: Constitutionality of 

statute authorizing participation of the permanent and 

available school fund in a 

stock and bond loan program 

Dear Mr. Harding: 

You request an opinion regarding Senate Bill No. 883 enacted by 

the Sixty-sixth Legislature. Your questions concern the construction 

of this enactment and its constitutionality in certain respects. 

Senate Bill No. 883 amended chapter 15 of the Education Code, 

which governs the investment of the public school funds. The public 

school funds consist of the permanent school fund, established by 

article VII, section 5 of the Texas Constitution, and the interest 

thereon, known as the available school fund. See Educ. Code 515.01 

(composition of permanent and available schoolfunds). The State 

Board of Education is authorized to invest the permanent school fund 

in accordance with section 15.02 of the Education Code. 

Senate Bill No. 883 enacted section 15.13 of the Education Code 

which provides in part: 

The State Board ~of Education is authorized 

and empowered to contract with a commercial bank 

or banks to receive payments of dividends and 

interest on securities in which the state 

permanent school funds are invested and to 

transmit such money with identification of their 

source to' the state treasurer for the account of 

the available school fund by the fastest available 

means. 

Educ. Code 515.13(a). Under this provision, the State Board of 

Education may permit a bank to receive payment as a collecting agent 

of dividends and interest on permanent fund securities and transmit 

them by wire to the state treasurer. Bill analysis on Senate Bill NO. 

883 prepared for House Ways and Means Committee, Legislative Reference 

p. 1463 
Honorable Warren G. Rarding - Page 2 (MW-429) 

Library. This system would speed the collection and delivery of 

available fund income, by eliminating the 6 to 8 day delay incident to 

sending the payments by mail. Fiscal Note on Senate Bill No. 883. 

March 23. 1979, Bill File on Senate Bill No. 883, Legislative 

Reference Library. 

Senate Bill No. 883 also added section 15.14 to the Education 

Code. This provision states in part: 

The State Board of Education is authorized 

and empowered to contract with the commercial bank 

or banks to serve both as a custodian of 

securities in which the state permanent school 

funds are invested and to lend these securities, 

under the conditions set out in Subsection (b) of 

this section, to securities brokers and dealers on 

short term loan. 

You ask: 

Is it constitutional to lend securities owned 

by the permanent school fund in the manner and for 

the purpose authorized in this bill? 

Section 15.14 of the Education Code authorizes the State Board of 

Education to enter into contracts with commercial banks wh,ereby the 

banks could lend public school fund securities to securities brokers 

and dealers on a short-term basis. According~to information submitted 

to this office, the contracting bank would physically transfer the 

securities to a broker in exchange for cash collateral of equal or 

greater value. See Educ. Code 515.14(b)(4). The broker would use the 

securities to co= delivery of securities bought from one customer 

and sold to another, where the seller was unable to produce the 

certificates on time for the transfer. The bank would invest the cash 

collateral and part of the interest on this investment would go to the 

permanent school fund. Section 15.14(b) of the Education Code sets 

out various requirements which the securities loan program must meet. 

According to the Fiscal Note attached to Senate Bill No. 883, this is 

a "risk-free" program. Fiscal Note to S.B. 883, March 23, 1979. 

In our opinion, the provisions of section 15.14 which authorize 

the securities loan program violate article VII, sections 4 and 5 of 

the Texas Constitution. The public school fund is established by, 

article VII, section 5 of the constitution, which provides as follows: 

The principal of all bonds and other. funds, 

and the principal arising from the sale of lands 

hereinbefore set apart to the school fund, shall 

be the permanent school fund, and all the interest 

p. 1464 
- . 

Honorable Warren C. Harding - Page 3 (Mw-429) 

derived therefrom and the taxes herein authorized 

and levied shall be the available school fund. 

The available school fund shall be applied 

annually to the support of the public free 

schools. And no law shall ever be enacted 

appropriating any part of the permanent or 

available school fund to any other purpose 

whatever; nor shall the same, or any part thereof 

ever be appropriated to or used for the support of 

any sectarian school; and the available school 

fund herein provided shall be distributed to the 

several counties according to their scholastic 

population and applied in such manner as may be 

provided by law. 

Article VII, section 4 of the Texas Constitution provides that: 

The lands herein set apart to the Public Free 

School Fund, shall be sold under such regulations, 

at such times, and on such terms as may be 

prescribed 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 the 

state shall be responsible for all investments. 

(Emphasis added). 

~Thus, investments of the public free school fund may be made only by 

the comptroller, subject to the direction of the Board of Education. 

In our opinion, the short term loan of permanent school fund 

securities in exchange for cash collateral which is invested, 

constitutes any investment of permanent school funds. Thus, this 

investment function .can be performed only by the comptroller. 

Moreover, article VII. section 4 provides that "the state shall be 

responsible for all investments." In our opinion, the legislature may 

not constitutionally authorize the delegation ,of the investment 

function to a commercial bank. 

You also ask: 

DO sections 15.13 and 15.14 usurp the 

constitutional and statutory duties and 

responsibilities of the state treasurer in regard 

p. 1465 
Honorable Warren G. tlarding - Page 4 (MW-429) 

to his custodianship and accountability of 

securities owned by the permanent school fund? 

We find no constitutional provision on the treasurer's ~duties 

with respect to the permanent school fund which would be violated by 

these provisions. See Attorney General Opinion MW-333 (1981). 

The Board of Education may contract pursuant to section 15.13 

with a commercial bank to receive payments of dividends and interest 

on all permanent fund securities. Section 15.13(a) contemplates the 

use of the commercial bank "lock-box" system whereby a bank near to 

the source of such payments acts as collecting agent. The fiscal 

agent mails such payments to a designated post office box and a local 

bank wire transfers them to the treasurer. The bank can provide this 

service without becoming custodian of the securities. Thus, section 

15.13(a) does not conflict with the treasurer's statutory duty to be 

custodian of the securities enumerated in section 15.02(a)(5) of the 

Education Code. 

Section 15.11(f) provides as follows: 

The state treasurer shall be the custodian of 

all securities enumerated in Subdivision (5) of 

Subsection (a) of Section 15.02 of this,code and 

of such other securities as may be designated from 

time to time by the State Board of Education in 

which the school funds of the state have been or 

may hereafter be invested, and shall keep these 

securities in his custody until paid. off, 

discharged, delivered as required by the State 

Board of Education, or otherwise disposed of by 

the proper authorities of the state.... 

This provision requires that the treasurer be custodian of the 

securities enumerated in section 15.02(a)(5) of the Education Code, 

&, "bonds of counties, school districts, incorporated cities or 

towns, road precincts, drainage, irrigation, navigation, and levee 

districts in Texas" subject to stated regulations. The Board of 

Education may designate other securities for the custodianship of the 

treasurer or may contract with a bank to act as custodian. See 

generally Attorney General Opinion IN-264 (1980) (Texas Housing Agency 

may appoint custodian of its funds other than treasurer). 

It has been suggested that article IV section 25 of the Texas 

Constitution impliedly provides that only public officials may act as 

custodians of public funds. This provision reads as follows: 

The Legislature shall pass efficient laws 

facilitating the investigation of breaches of 

p. 1466 
Honorable Warren G. Harding - Page 5 mw-429) 

trust and duty by all custodians of public funds 

and providing for their suspension from office on 

reasonable cause shown, and for the appointment of 

temporary incumbents of their offices during such 

suspension. 

In our opinion, this provision does not bar the legislature from 

placing public funds and publicly owned securities with custodians 

other than public officers. It merely insures that the legislature 

has authority to suspend public officials who may have violated their 

trust as custodians of public funds. Tex . Const. art. IV, 025 

(Interpretative Commentary). See also V.T.C.S. arts. 2525-2543d 

(statutes authorizing use of banks as state depository). 

It is also suggested that article 2535. V.T.C.S., .applies to 

contracts with commercial banks to serve as custodians of permanent 

school funds. Article 2535, V.T.C.S., provides that, with certain 

exceptions, state depositories shall remit free of charge withdrawals 

of state funds to the treasurer. In our opinion, this provision does 

not apply to contracts entered into pursuant to section 15.14 of the 

Education Code. The authority to contract with a commercial bank to 

serve 'as custodian of permanent school funds carries the implied 

authority to make reasonable and necessary expenditures for that 

purpose. The Board of Education is required to consider the 

reasonableness of the commercial banks charges for services rendered 

pursuant to sections 15.13 and 15.14, further indicating the 

legislature's intent that contracts for such services not be subject 

to article 2535, V.T.C.S. 

In view of our answers to your first two questions, .we need not 

answer your additional questions. 

SUMMARY 

Sections 15.13 and 15.14, of the Texas 

Education Code, authorizing the Board of Education 

tom contract with commercial banks to act as 

custodians of securities of the public school fund 

are constitutional, provided that all interest 

received therefrom is paid to the state. The 

provisions of section 15.14, authorizing the Board 

of Education to contract with commercial banks for 

the short-term loan of public school fund 

securities to security brokers and dealers, is 

unconstitutional in that it contravenes the 

p. 1467 
. . 

Honorable Warren G. Harding - Page 6 (Mw-429) 

provisions of article VII, sections 4 and 5 of the 

Texas Constitution. 

Very truly yours 

WHITE 

Attorney General of Texas 

JOHN W. FAINTER, JR. 

First Assistant Attorney General 

RICHARD E. GRAY III 

Executive Assistant Attorney General 

Prepared by Susan L. Garrison 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE 

Susan L. Garrison, Chairman 

Jon Bible 

Rick Gilpin 

Jim noellinger 

p. 1468