,- 

6, 

. . -~ 

State Board of Education 

Austin, Texas 

Dear Sirs: Opinion No. 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 Independent School District together with a copy of 

the application for readjustment submitted to you by 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 

school district were originally issued at a time when the assessed valuation of the district was many times that of today. 

When issued, the bonds met every requirement and were entirely 

eligible for purchase as an investment for the Permanent School 

Fund. The instability of estimated 011 values have caused the 

'present assessed valuations to be much lower than at the time 

the bonds were ,lssued. However, the large debt of the district 

still remains. The Permanent School Fund owns the bonds with 

which'we are concerned. The bonds bear interest at the rate of 

five per cent (5%) and because of the lowered valuations of the 

district, Its income is insufficient to meet interest payments 

and'has been 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 indebtedness by changing those bonds 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 

postponement of the payment of the past-due interest now owing 

to the available school fund. 

Article VII, Section 4, of the Constitution of Texas 

provides as follows: 

"The lands herein set apart to the Public Free 

School,Fund, shall be sold under such regulations, 

tit such 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 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 th St t h 11 b 

responsible for all investments. 

ours.) 

' (Ze:sZorini 

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

"The State Board of Education is authorized 

and empowered to invest the permanent public free 

school funds of the State In bonds of the United 

States, the State of Texas, or any county thereof, 

and the independent or common school districts, 

road precincts, drainage, irrtigation, navigation 

and levee districts in this State, and the bonds 

of incorporated cities and towns, and obligations 

and pledges of the University of Texas." 

Authority for the issuance of refunding bonds is contained in Article 2789, V.A.C.S., which reads as follows: 

"Where bonds 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, Independent school district, consolidated 

common school district, consolidated independent school 

district, county line school district, consolidated 

county line school district, or rural high school district, new bonds, bearing the same or a less rate of 

interest, may wh.en ordered by the governing board thereof be Issued either as term bonds or as serial bonds, 

maturing in either case within forty (40) years from 

date of issue, and may be made optional on any interest 

payment date as the governing board shall direct; provided further+ that matured Interest coupons of such 

district may be refunded in like manner; and provided 

further, that no election shall be necessary to authorize the issuance of such new bonds; and provided 

further, that the State Treasurer shall, upon order of the State Board of Education, exchange bonds 

not matured held by him for the permanent school 

fund forthe new refunding bonds Issued by the same 
State Board of Education, page 3 

incorporation under the provisions of this Subdivision, in case the rate of interest on the 

new bonds ‘is not less than the rate of interest 

on the bonds for which they are exchanged.” 

-(Underscoring aura,) 

This department has 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 into new bonds bearing a lower rate of interest. OnMarch 19, 1937, Assistant Attorney General Victor 

W; Bouldin wrote an opinion addressed to Mr. H. A. Hefner;, 

Batson, Texas, which stated In part as follows: 

"Rowever, the statute specifically prohibits 

,the State Board of Education from permitting the 

refunding of bonds held for the benefit of the 

State Permanent School Fund into new bonds bear- 

,ing a lower rate of interest. In fact this department has held that the Constitution prohibits 

the lowering of a contractual rate of interest 

due the state on bonds held by the Permanent School 

Fund. " 

IOU 

The Constitutional provision referred to in'that oplnIsArtIcle III, Section 55, which reads as follows:, ; 

"The Legislature shall have no power to release or extinguish, or to authorite the releasing or extinguishing, in whole or in part, the 

indebtedness, liability or obligation of any incorporation or Individual, to this State, ,or to 

anycounty or other municipal corporation therein.'! 

Several cases have passed on the questions of applying 

this constitutional inhibition to certain executory contracts 

entered into by 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 received by the State below that which the State,would receive 

under a prior contract, The Court stated as follows: 

"A decision that the Legislature is powerless 

to authorize the change of an executory obligation 

in such way 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 important right to contract, unless it Is 

permitted through officers or representatives 

authoriced by the Legislature to modify its 

executory contracts when a proper occasion 

arises .I( 

There can be little question, however, but that Artlcle 2789, quoted herein, does prohibit the State Board of Education 

from accepting refunding bonds 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 department must be controlled by 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 

School District for refunding bonds bearing a lower rate of lnterest. 

It was suggested as an alternate proposal that Instead 

of issuing refunding bonds for exchange that the Board agree to 

change the face of the bonds the Permanent School 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 stated by 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, "A bond is merely an ev3.G 

dence of debt.?:Whether you change the old paper or issue a new 

pa er the contract has been changed and two and one-half percent 

[5!$ i t 

2 ) interest bearing bonds have been exchanged for five percent 

n er eat bearing bonds This department cannot approve this 

proposal which would accomplish by indirection that which is directly prohibited by statute. 

The six percent (6%) interest on delinquent interest referred to in the application submitted by the School Distriot is 

chargeable under the provisions of Article 5070, V.A.C.S., which 

reads as follows: 

"When no specified rate of interest is agreed 

upon by the parties, interest at the rate of six 

per cent per annum shall be 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 department has 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 "certificates of 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 from bonds held for the account of the Permanent 

School Fund into interest refunding bonds to be held for the 

Account of the State Available School Fund, even if the interest refunding bonds 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 application of this School District. 

We wish to acknowledge with appreciation the briefs 

which were submitted in connection with the application of the 

Cisco Independent School District and your opinion request. 

Yours very truly, 

ATTORNEY GENERAL OF TEXAS 

By /a/ Billy B. Goldbert 

Assistant 

BBGgms;djmart 

APPROVED Nov 14, 1946 

/a/ Grover Sellers 

ATTORNEY GENERAL OF TEXAS APPROVED 

Ouinion Committee 

By BWB 

Chairman