The Attorney General of Texas 

June 6, 1978 

JOHN L. i&L 

Attorney General 

Honorable M. L. Brockette 

Commissioner of Education 

Texas Education Agency 

201 E. 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 of the Education Code. You wish 

to know whether the interest earned. on the proceeds may be used to ‘. construct a new 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 is made for the redemption of deposits and investments: 

[WI hen such sums so placed or so invested 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 
. . ’ . *. 

Honorable M. L. Brockette - Page 2 (H-1174) 

Sec. 20.42 (emphasis added). In our opinion, this provision requires that the entire 

amount realized upon the redemption of investments “be used 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 of interest is subject to the same restraints as the use of bond proceeds. 

The meaning of section 20.42 becomes clearer when the language of a 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 in part: 

[Tl he obligations of the United States in which 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 of any 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 on a special fund becomes part of that fund. The court in Lawson 

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 an accretion to 

the principal fund earning it, and, unless lawfully separated 

therefrom, becomes a part thereof. 

See also State Highway Commission v. Spainhower, 504 S.W.2d 121 (MO. 19731; Union 

v. Straub, 400 P.2d 229 (Ore. 1965) (en bancj (“proceeds” of gasoline 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 to bondholders; 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 we refer to this specific opinion request, it appears that such covenants 

were utilized to join, rather than separate these “proceeds,” in that the original 

n n-Inn 
.* ’ 

, 

, 

Honorable M. L. Brockette - Page 3 (B-1174) 

bond order established only one fund, i.e., an interest and sinking fund. Since the 

principal maturities of these bonds occur from 1980 to 1989, these covenants are 

still binding on the district. 

We note 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.” A brief 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. We do not believe that section 20.42 

or Attorney General Opinion C-537 allows the school district to do so. 

. 

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

Barrington v. Cokinos, 338 S.W.2d 133 (Tex. 1966); -Lewis v. 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. We do 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 of a more general authority. 

.- j 

_. -. 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, 95 S.W.2d 673 (Tex. 1936). Section 20.05 of the Education Code DrOVideS a 

procedure for refunding any outstanding bonds. The interest may also be-placed in 

the sinking fund for the retirement of bonds. 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. , 

Honorable M. L. Brockette - Page 4 (H-1174) 

APPROVED: 

DAVID M. KENDALL, First Assistant 

C. ROBERT HEATS& Chairman 

Opinion Committee 

.