,- 6,

. . -~

State Board of Education

Austin, Texas

Dear Sirs: OpinionNo. O-6983

Re: Refunding or readjustment of the bonds of the Cisco Independent School District which
are held by the State.

We are In receipt of your letter concerning the bonds of the Cisco IndependentSchool District togetherwith a copy of the application for readjustment submitted to youby the School District.

We summarize the facts in this case and the problems you present for our opinion to be as follows: The bonds of this schooldistrictwere originally issued at a time when the assessed valuation of the districtwas many times that of today. When issued, the bonds met every requirement and were entirely eligible for purchase as an investmentfor the Permanent School Fund. The instabilityof estimated 011 values have caused the 'presentassessedvaluations to be much lower than at the time the bonds were ,lssued. However, the large debt of the district still remains. The PermanentSchool Fund owns the bonds with which'we are concerned. The bonds bear interestat the rate of five per cent (5%) and because of the loweredvaluations of the district, Its income is insufficientto meet interestpayments and'hasbeen for a number of years. The proposal is to refund the~'bonds

which have not matured at a lower rate of interest
or to "readjust"the indebtednessby changing thosebonds on the~ir face to provide for two and one-half percent (2s) interest instead of five percent (5%). The plan also calls for the postponementof the payment of the past-due interestnow owing to the available school fund.

ArticleVII, Section 4, of the Constitution of Texas provides as follows:

"The landsherein set apart to the PublicFree School,Fund, shallbe sold under such regulations, titsuch times, and on such terms as may be prescribed- .

State Board of Education,page 2

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 thoseheretoforemade, as may be directedby theBoard of Educationherein 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 th St t h 11b responsible for all investments. ours.) ' (Ze:sZorini

Article 2669, V.A.C.S., provides as follows:

"TheStateBoard of Education is authorized and empowered to invest the permanent public free school funds of the State Inbonds of the United States, the State of Texas, or any county thereof, and the independentor common school districts, road precincts,drainage, irrtigation, navigation and levee districts in this State, and the bonds of incorporatedcities and towns, and obligations and pledges of theUniversity of Texas." Authority for the issuance of refundingbonds is contained inArticle 2789,V.A.C.S., which reads as follows:

"Wherebonds have been legally issued, or may be hereafter issued,by any town or village incorporated for free school purposes only, or any common school district, Independentschooldistrict, consolidated
common school district, consolidated independent school district, county line schooldistrict, consolidated county line school district, or rural high school district, new bonds, bearing the same or a less rate of interest,may wh.enorderedby the governingboard thereof be Issued either as termbonds or as serialbonds, maturing in either case within forty (40) years from date of issue,and may be made optional on any interest payment date as the governingboard shall direct; provided further+ thatmatured Interest coupons of such districtmay be refunded in likemanner; and provided further, that no election shallbe necessary to authorize the issuanceof such new bonds; and provided further, that the State Treasurer shall,upon order of the State Board of Education, exchangebonds not matured held by him for the permanent school fund forthe new refundingbonds Issuedby the sameState Board of Education, page 3

incorporationunder the provisions of this Subdivision, in case the rate of intereston the
new bonds ‘isnot less than the rate of interest
on the bonds for which they are exchanged.” -(Underscoring

aura,)
This departmenthas always ruled that Article 2789, above, prohibits the State Board of Education from permitting the refunding of bonds held for the benefit of the State PermanentSchoo1 Fund intonew bonds bearing a lower rate of interest. OnMarch 19, 1937,Assistant AttorneyGeneralVictor W; Bouldin wrote an opinion addressed to Mr. H. A.Hefner;, Batson, Texas, which stated In part as follows:

"Rowever,the statute specificallyprohibits ,theState Board of Education from permitting the refunding of bonds held for the benefit of the State Permanent School Fund intonew bonds bear- ,inga lower rate of interest. In fact this departmenthas held that the Constitutionprohibits the lowering of a contractual rate of interest due the state on bonds heldby the PermanentSchool Fund."

IOU The Constitutionalprovisionreferred to in'that oplnIsArtIcle III, Section 55, which reads as follows:,;
"TheLegislature shallhave no power to release or extinguish, or to authorite the releasing or extinguishing, inwhole or in part, the indebtedness,liability or obligation of any incorporation or Individual,to this State, ,orto anycounty or othermunicipal corporation therein.'!

Several cases have passed on the questions of applying this constitutional inhibitionto certain executory contracts entered intoby the State, The principal case Is that of Rhoads DrKling~ Co, v. Allred, 70 S.W.2d 576. In that case the Commission~ of Appeals of Texas upheld the validity of a State contract which, for Consideration,reduced the mineral returns to be receivedby the State below that which the State,would receive under a prior contract, The Court stated as follows:

"Adecision that the Legislature is powerless to authorize the change of an executory obligation in suchway as to benefit one who has contracted with the State would deny to the State the important power and right to modify its contracts.State Board of Education, page 4

”

., . . . "The State cannot enjoy and exercise fully the importantright to contract,unless it Is permitted through officers or representatives authoricedby the Legislature to modify its executory contractswhen a proper occasion arises.I(

There can be little question,however, but that Artlcle 2789, quotedherein, does prohibit the State Board of Education from accepting refundingbonds at a rate of interest lover than those for which they are exchanged. The wisdom of such a prohibition when applied to the present fact situation is a matter which must, of necessity, address itself to the Legislature. This departmentmust be controlledby the plain wording of the statute. You are therefore advised that the State Board of Education would be without authority to exchange the bonds of the Clsco Independent SchoolDistrict for refundingbonds bearing a lower rate of lnterest.

It was suggestedas an alternate proposal that Instead of issuing refundingbonds for exchange that theBoard agree to change the face of the bonds the PermanentSchool Fund now holds to call for,two and one-half percent (2&) interest instead of five per+ent (5%). It was submitted that in this way the express language of Article 2789 could be avoided. However, a bond is only the written evidence of the contract. As statedby Judge Fly of the San Antonio Court of Civil Appeals in the case of New Bueces Hotel Co. v. Weil Bros., 243 S.W. 733, "Abond is merely an ev3.G dence of debt.?:Whether you change the old paper or issue a new pa er the contracthas been changed and two and one-half percent [5!$ i t 2 ) interestbearing bonds have been exchanged for five percent
n ereat bearing bonds This department cannot approve this proposalwhich would accomplishby indirectionthat which is directly prohibitedby statute.

The six percent (6%) interest on delinquent interestreferred to in the application submittedby the School Distriot is chargeableunder the provisions of Article 5070, V.A.C.S., which reads as follows:

"Whenno specifiedrate of interest is agreed upon by the parties, interestat the rate of six per cent per annum shallbe allowed on all written contracts ascertaining the sum payable, from and after the time when the sum Is due and payable; and
on all open accounts, from the first day of January after the.same are made.". .

State Board of Education, page 5

This departmenthas so held over a period of years in several opinions, the latest of which is Opinion No. O-4824, dated September 18, 1942.

We are unable to find any authority for the School District to Issue so-called "certificatesof indebtedness." However, your attention is invited to our Opinion No. O-4850,
a copy of which Is enclosed for your information. In that opinion, this department ruled that the State Board of Education had the authority to authorize the refunding of past due interest coupons frombonds held for the account of the Permanent School Fund into interestrefundingbonds to be held for the Account of the State Available School Fund, even if the interest refundingbonds bear a lesser rate of interest than the bonds from which the coupons are detached.

We trust that this opinion answers your questions relative to the authority of the State Board of Education in passing on the applicationof this School District.

We wish to acknowledgewith appreciation the briefs which were submitted in connectionwith the application of the Cisco IndependentSchoolDistrict and your opinion request.

Yours very truly,

ATTORNEY GENERAL OF TEXAS

By /a/ Billy B. Goldbert

Assistant BBGgms;djmart

APPROVEDNov 14, 1946
/a/ Grover Sellers

ATTORNEYGENERAL OF TEXAS APPROVED Ouinion Committee By BWB Chairman