# The Attorney General ofTexas
January 21, 1982 MARK WHITE Attorney General

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An Equal Opportunity/ Affirmative Action Employer HonorableWarren G. Harding StateTreasurer L.B.J. Building Austin, Texas 78711 OpinionNo.MW-429
Re: Constitutionality of statute authorizingparticipation of the permanent and available school fund in a stock and bond loanprogram Dear Mr. Harding:
You request an opinion regarding Senate Bill No. 883 enacted by the Sixty-sixthLegislature. Your questions concern the construction of this enactmentand its constitutionalityin 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 accordancewith section 15.02of the EducationCode.
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 theavailable school fundby the fastest available means. Educ. Code 515.13(a). Under this provision, the State Board of Educationmay permit a bank to receive payment as a collecting agent of dividends and interest on permanent fund securities and transmit themby wire to the state treasurer. Bill analysis on SenateBillNO. 883 prepared for HouseWays and Means Committee,Legislative Reference

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Library. This system would speed the collection and delivery of available fund income,by eliminatingthe 6 to 8 day delay incidentto sending the payments by mail. Fiscal Note on Senate Bill No. 883. March 23. 1979, Bill File on Senate Bill No. 883, Legislative ReferenceLibrary.
Senate Bill No. 883 also added section 15.14 to the Education Code. This provision states inpart:

The State Board of Education is authorized and empowered to contractwith the commercialbank 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 securitiesbrokersand dealers on short term loan.
You ask:
Is it constitutionalto lend securitiesowned by thepermanent school fund in themanner and for thepurpose authorized in thisbill? Section 15.14of the EducationCode authorizesthe State Board of Education to enter into contractswith commercialbanks wh,erebythe banks could lend public school fund securities to securities brokers and dealerson a short-termbasis. According~toinformation submitted to this office, the contracting bank would physically transfer the securities to a broker in exchange for cash collateral of equal or greatervalue. See Educ. Code 515.14(b)(4). The brokerwould use the securities to co= delivery of securities bought from one customer and sold to another, where the seller was unable to produce the certificateson time for the transfer. The bankwould invest the cash collateraland part of **the** intereston this investmentwould go to the permanent school fund. Section 15.14(b) of the Education Code sets outvarious requirementswhich the securities loan programmust meet. According to the FiscalNote attached to SenateBill No. 883, this is a "risk-free"program. Fiscal **Note** to S.B. 883,March 23, 1979.
In our opinion, the provisions of section 15.14which authorize the securities loan program violate article VII, sections 4 and 5 of the Texas Constitution. The public school fund is established by, articleVII, 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 thepermanent school fund, and all the interest

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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 appropriatedto 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 theTexas Constitutionprovides that:

The landsherein set apart to the PublicFree School Fund, shallbe soldunder 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, asmay be directedby 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 restrictionsas may be prescribedby law; and the state shall be responsible for all investments. (Emphasisadded). ~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 responsiblefor all investments." In our opinion, the legislaturemay not constitutionally authorize the delegation ,of the investment functionto a commercialbank.
You also ask:

DO sections 15.13 and 15.14 usurp the constitutional and statutory duties and responsibilities of the state treasurer in regard

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**to** his custodianship and accountability of securitiesowned by thepermanentschool fund?
We find no constitutional provision on the treasurer's~duties with respect to the permanent school fundwhich would be violated by theseprovisions. SeeAttorneyGeneralOpinionMW-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" systemwhereby a bank near to the source of such payments acts as collecting agent. The fiscal agentmails such payments to a designatedpost office box and a local bank wire transfers them to the treasurer. The bank can provide this servicewithout becoming custodian of the securities. Thus, section 15.13(a)does not conflictwith the treasurer's statutory duty to be custodian of the securities enumerated in section 15.02(a)(5) of the EducationCode. Section 15.11(f)provides as follows:

The state treasurer shallbe the custodianof all securities enumerated in Subdivision (5) of Subsection (a) of Section 15.02 of this,code and of such other securitiesas 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 theproper 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 Educationmay designate other securities for the custodianshipof the treasurer or may contract with a bank to act as custodian. See generallyAttorney General Opinion IN-264 (1980) (TexasHousing Agency may appoint custodian of its funds other than treasurer).
It has **been** suggested **that** article IV section 25 of the Texas Constitutionimpliedly provides that only public officialsmay act as custodiansof public funds. This provisionreadsas follows:

The Legislature shall pass efficient laws facilitating the investigation of breaches of

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trust and duty by all custodians of public funds and providing for their suspension from office on reasonable cause shown,and for theappointmentof temporary incumbents of their officesduring 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 officialswho 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 (statutesauthorizinguse of banks as statedepository).
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 chargewithdrawals of state funds tothe 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 contractwith 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 reasonablenessof the commercial banks charges for services rendered pursuant to sections 15.13 and 15.14, further indicating the legislature'sintent 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, .weneed not answeryour 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 securitiesof thepublic school fund are constitutional, provided that all interest received therefrom is paid to the state. The provisions of section 15.14,authorizingthe Board of Education to contractwith commercialbanks for the short-term loan of public school fund securities to security brokers and dealers, is unconstitutional in that it contravenes the

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provisionsof articleVII, sections4 and 5 of the Texas Constitution. Very trulyyours

WHITE AttorneyGeneralof Texas
JOHNW. FAINTER,JR. FirstAssistantAttorneyGeneral
RICHARDE. GRAY III ExecutiveAssistantAttorneyGeneral Preparedby SusanL. Garrison AssistantAttorneyGeneral
APPROVED: OPINIONCOMMITTEE
SusanL. Garrison,Chairman Jon Bible RickGilpin Jimnoellinger

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