Schelle v. Foss, 9666
| Decision Date | 25 June 1957 |
| Docket Number | No. 9666,9666 |
| Parties | Henry B. SCHELLE, Plaintiff, v. Joe FOSS, Governor of the State of South Dakota; Bernard Linn, Commissioner of School and Public Lands of the State of South Dakota; Ed T. Elkins, Treasurer of the State of South Dakota; Fay Allbee, Auditor of the State of South Dakota; The Board of School and Public Lands and the Board of Finance of the State of South Dakota; Joe Foss, Bernard Linn and Fay Allbee, members of the Board of School and Public Lands, and said persons together with Ed T. Elkins, Phil Saunders, Gordon H. Maxam, Morris G. Hallock, and Clara Halls, as members of the Board of Finance, of the State of South Dakota, Defendants. |
| Court | South Dakota Supreme Court |
M. Q. Sharpe, John W. Larson, Kennebec, for plaintiff.
Phil Saunders, Atty. Gen., Benj. D. Mintener, Asst. Atty. Gen., for defendants.
G. J. Danforth, Jr., Danforth & Danforth, Sioux Falls, amici curiae.
The plaintiff seeks a writ of prohibition to prevent the defendants from further proceeding with a proposed plan involving the sale and reinvestment of securities belonging to the permanent school funds. The plaintiff is a citizen and taxpayer and brings this action on behalf of himself and all others similarly situated. The defendants are members of the State Board of School and Public Lands, members of the State Board of Finance, the Commissioner of School and Public Lands and the Governor. Because of manifest public concern, this court has assumed original jurisdiction.
The permanent school and educational funds of the state now total, in the aggregate, over $34,000,000. The Commissioner of School and Public Lands is charged with the duty of investing this money, subject to the approval or supervisory control of the Governor, the Board of School and Public Lands and the State Finance Board.
The moneys belonging to the permanent school fund can only be invested in 'bonds of the United States, securities guaranteed by the United States, bonds of the State of South Dakota, or in bonds of any school corporation, organized county, or incorporated city within the State of South Dakota and at such rates of interest as the Legislature shall, from time to time, determine.' Art. VIII, Sec. 11 of the Constitution. Pursuant thereto over $30,000,000 of such funds are now invested in United States Government bonds. In recent years few loans have been made to local political subdivisions as they have been able to obtain money from private investors at lower interest rates than the 3% required on school fund loans. Consequently, the school funds were of necessity largely invested in bonds of the United States.
During the past year the prevailing policy of easy money and low interest rates has been supplanted by the trend to tight money and higher interest rates. The 3% permanent school fund money therefore became attractive to the local political subdivisions. The numerous demands for such loans greatly exceed the available funds on hand for investment. On the expectation of receiving 3% loans from the permanent school fund local subdivisions of the state have approved bond issues totaling over nine million dollars for the construction of new schools and other public buildings. A few even have commenced actual construction in anticipation of such loans. To alleviate their condition the Commissioner of School and Public Lands now proposes to immediately sell approximately $13,000,000 worth of Government bonds belonging to the school funds and bearing interest at 2 1/2% and 2 3/4%. The bonds will have to be sold at a discount of 7cents to 9cents on the dollar. Over nine million dollars of the proceeds would be reinvested in local bonds bearing 3% interest. The balance would be reinvested in local bonds bearing 4% interest and in Federal Housing Administration bonds bearing 4-4 1/2% interest which may now be purchased at a discount. The Commissioner's plan of sale and reinvestment had been duly approved by the Board of School and Public Lands, by the Governor, and by the Board of Finance. Unless prohibited by this court the proposed plan will be effectuated.
It is conceded the sale and conversion of the United States bonds at a discount will deplete the permanent school funds to the extent of the discount. Defendants' proposal contemplates selling Series G Bonds having a face value of $1,955,000 at the current market value of approximately $1,911,434, which will result in a total discount of $43,566 of which $12,325 would be charged to the common school fund and the balance of $31,241 would be charged to the other endowed funds. It is also proposed to immediately convert non-negotiable Series B Bonds having a face value of $11,000,000 which will result in a discount of at least $880,000, all of which discount would be chargeable to the common school fund. A larger sale or conversion of Series B Bonds would, of course, result in a greater depletion of the principal funds. The Series B Bonds are long-term bonds callable in 1975 and maturing in 1980, while the Series G Bonds are callable in successive years with the final bonds maturing in 1962.
The defendants further propose to restore the resulting 'depletion' to the corpus of the permanent school funds in the following manner: (1) The $12,325 loss resulting from the sale of Series G Bonds to be restored to the common school fund by allocating a similar amount of face value Federal Housing Administration insured mortgages now invested in the common school fund and representing a face value in excess of their actual purchase price; and (2) the discount on the sale of Series G Bonds resulting to the other endowed funds to be restored by transferring the amount of such discount forthwith from the interest and income funds of such endowed institutions to the permanent fund account of such institutions, and (3) the loss resulting from the conversion of long-term United States Series B Bonds be restored by purchasing Federal Housing Administration insured mortgages at a discount of approximately 6% on the dollar and the balance of the discount be amortized over the necessary period of years by crediting the common school permanent fund with the total increase in earnings occasioned by the entire transaction, or by the immediate transfer from the common school interest and income fund of an amount not in excess of premiums heretofore secured on the sale of securities above their cost or the purchase of securities below the face value.
The defendants estimate the depletion in the permanent school funds will be completely restored in a matter of five or six years. Thereafter during the normal life of the reinvestments the interest and income funds will gain approximately $1,500,000 over the rate on the bonds proposed to be sold.
The plaintiff does not question the meritorious motives of the defendants. He concedes they are well intentioned and are acting in good faith. He does, however, challenge their legal and constitutional authority to proceed on the following grounds: (1) The sale and conversion of United States bonds at a discount will result in a loss and diminution of permanent school funds contrary to the provisions of Sections 2 and 7 of Article VIII of the State Constitution; and (2) that to transfer at face value securities purchased at a discount, or to transfer cash from the interest and income funds to the permanent funds would constitute an unlawful diversion of interest and income contrary to the provisions of Sections 3 and 7 of Article VIII of the Constitution; and (3) there is no statutory authorization permitting the defendants to sell, exchange, convert, negotiate, or otherwise dispose of securities legally invested prior to maturity.
The defendants' assertions may be summarized as follows:
(1) The state as trustee of the permanent school funds must be treated as any other trustee and the rules of law regulating ordinary trusts apply;
(2) There is no law or constitutional provision prohibiting the sale of securities belonging to the permanent school fund and, therefore, they have discretionary power and authority to do so, and
(3) The 1952 amendment to Section 11, Article VIII of the Constitution directing the investment of the permanent educational funds so as 'to provide the highest income compatible with safe investment' must prevail over the previous constitutional provisions in case a strict compliance therewith nullifies the apparent intent of the latter amendment.
The primary question presented is whether or not the defendant officials have the express or implied authority to voluntarily sell invested securities belonging to the permanent school fund at a loss. The answer rests almost entirely on the application and interpretation of our own statutory and constitutional provisions. Few helpful authorities from other jurisdictions have been found or presented.
The pertinent portions of our constitutional provisions are all found in Article VIII thereof, as follows:
Sec. 3. 'The interest and income of this fund, together with all other sums which may be added thereto by law, shall...
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