# The Attorney General of Texas
June 6, 1978 JOHNL.i&L Attorney General
Honorable M.L.Brockette Commissioner ofEducation Texas Education Agency 201E.Eleventh Street Austin, Texas 78701 Dear Dr.Brockette: Opinion No.H- 1174 Re: Use of investment income from school bond proceeds.

,You inquire about the purposes for which a school district may use interest earned on the investment of school bond proceeds. You inform us that an independent school district issued bonds for the air conditioning, heating, and lighting of school buildings and the construction of a stadium. All the purposes .of the bond issue have been accomplished except for the improvement of one building, which is old and which the school board has determined should be replaced. All of the original bond proceeds have been spent, but there remains on hand over one million dollars earned by investing the bond proceeds pursuant to section 20.42 ofthe Education Code. Youwish to know whether the interest earned. on the proceeds may be used to ‘
. construct anew school buildmg. Section 20.42 of the Education Code provides that school districts which have bond proceeds not immediately needed may place them in an interest bearing time deposit or invest them in obligations of the United States. The following provision ismade for the redemption ofdeposits and investments:

[WIhen such sums soplaced or soinvested by a school district are needed for the purposes for which the bonds of the school district were originally authorized, issued and sold, such time deposits or bonds or other obligations of the United States of America in which such sums have been placed or invested shall be cashed, sold or redeemed and the proceeds thereof shall be used for the purposes for which the bonds of the school district were originally authorized, issued and sold.

P. 4743**. .**  **’**

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Sec. 20.42 (emphasis added). Inour opinion, this provision requires that the entire amount realized upon the redemption of investments “beused for.the purposes for which the bonds of the school district were originally authorized, issued and sold.” We believe that the statutory language “the proceeds thereof ” refers to ,the proceeds of the investment, and not merely to the original bond proceeds. Thus the use ofinterest issubject to the same restraints asthe use ofbond proceeds. The meaning of section 20.42 becomes clearer when the language ofa similar statute is examined. Article 708b, V.T.C.S., provided for the investment of bond proceeds in obligations of the federal government when wartime labor and materials shortages delayed construction. This statute provides inpart:

[Tlhe obligations ofthe United States inwhich said proceeds are invested shall be sold or redeemed and the proceeds of said obligations shall be used for the purpose for which the bonds ofany such political subdivision were authorized. V.T.C.S. art. 708b (emphasis added). This language makes it clear that the proceeds of the obligations, and not merely of the bonds, are to be devoted to authorized purposes. See also V.T.C.S. art. 1269j-3; Attorney General Opinion VI .._‘~__‘~~ ll82 (1951). The disposition of interest provided by section 20.42 also follows the general rule that interest onaspecial fund becomes part ofthat fund. The court inLawson v. Baker, 220 S.W. 260, 272 (Tex. Civ. App. - rollows: Austin 1920,writ ref’d) stated as

Interest, according to all the authorities, is anaccretion to the principal fund earning it, and, unless lawfully separated therefrom, becomes apart thereof. See also State Highway Commission v.Spainhower, 504S.W.2d121(MO.19731;Union

v. Straub, 400P.2d 229 (Ore. 1965)(en bancj (“proceeds” ofgasoline and vehicle tax fund includes interest). This general rule, however, is subject to modification by the issuer at the time of the issuance of the bonds by means of specific language in the bond covenants tobondholders; i.e., by clear specification of the sources of security for repayment of the bonds, the issuer may exclude “interest proceeds” from “bond proceeds” in the disposition of funds, if there are no other prohibitions to their
“lawful separation,” as in Lawson. When werefer to this specific opinion request, it appears that such covenants were utilized to join, rather than separate these “proceeds,” in that the original

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bond order established only one fund, i.e., an interest and sinking fund. Since the principal maturities of **these** bonds occur from 1980to 1989, **these** covenants **are** still binding on the district. Wenote that Attorney General Opinion C-537 (1965)stated in dicta that **the** predecessor of s,ection 20.42 “does not specify what use may be made of the interest earned on such investment.” Abrief submitted to us suggests that this language permits the district to spend interest on construction projects not authorized at the time the bonds were issued. Wedonot believe that section 20.42 or Attorney General Opinion C-537 allows the school district to doso.

. Bond proceeds may be used onlv for the ourooses for which thev are voted.

Barrington v. Cokinos, 338 S.W.2d 133(Tex. 1966);-Lewisv. City of Fort Worth, 89 S.W.2d 975(Tex. 1936);Attorney General Opinion H-968 (1977). Thus, **the proceeds**  in this instance **may be**  spent-only for air conditioning, heating, and lighting of school buildings or **the** construction of a stadium. Wedo not address **the** question of whether a more broadly written electoral proposition would permit covenants in the bond order to allow investment proceeds to be expended consistent with **the** proposition’s grant ofamore general authority.

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_.-. y You also ask what **may** lawfully be done with the interest, if it cannot be

-- _ spent to build a new school. It need not be spent on improving the old school, if materially changed conditions have rendered that project an unwise and unnecessary expenditure of public funds. Hudson v. San Antonio Independent School District, 95S.W.2d 673 (Tex. 1936). Section 20.05 ofthe Education Code **DrOVideS** a procedure for refunding any outstanding bonds. The interest may also be-placed in **the** sinking fund for the retirement ofbonds. See,Attorney General Opinions C-537 (1965);G-6973 (1945). SUMMARY

Interest earned on the investment of school bond proceeds pursuant to section 20.42 of the Education Code must **be** spent for purposes authorized for. the bond proceeds. Interest not needed for those purposes may be placed in the sinking fund or used to refund bonds pursuant to **section** 20.05 of the Education Code.. ..,I. ,

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APPROVED:

DAVIDM.KENDALL, First Assistant

C. ROBERT HEATS&Chairman Opinion Committee .