State v. State Board of Education

• Decision Date: 20 December 1937
• Docket Number: No. 4-4945.,4-4945.
• Parties: STATE ex rel. HOLT, Atty. Gen., v. STATE BOARD OF EDUCATION.
• Court: Arkansas Supreme Court

Page 18

112 S.W.2d 18

STATE ex rel. HOLT, Atty. Gen., v. STATE BOARD OF EDUCATION.

No. 4-4945.

Supreme Court of Arkansas.

December 20, 1937.

Rehearing Denied January 17, 1938.

Appeal from Pulaski Chancery Court; Frank H. Dodge, Chancellor.

Suit by the State of Arkansas, on the relation of Jack Holt, Attorney General, against the State Board of Education. The defendant's demurrer to the complaint was sustained, and the Attorney General appeals.

Reversed.

Jack Holt, Atty. Gen., and Leffel Gentry, Asst. Atty. Gen., for appellant.

Rose, Hemingway, Cantrell & Loughborough, of Little Rock, for appellee.

GRIFFIN SMITH, Chief Justice.

By the terms of Act 162, page 601, approved March 1, 1937, the State Board of Education, subject to approval of the Governor, is authorized to issue and sell "State Board of Education Bonds."

The State, on relation of the Attorney General, filed complaint in the Pulaski chancery court, alleging that certain authority which act No. 162 undertakes to confer upon the State Board of Education is in excess of the legislative power, in that Amendment No. 20 to the State Constitution, adopted in 1934, prohibits the pledging of any of the State's revenues. That amendment is: "Except for the purpose of refunding the existing outstanding indebtedness of the State and for assuming and refunding valid outstanding road improvement district bonds, the State of Arkansas shall issue no bonds or other evidence of indebtedness pledging the faith and credit of the State or any of its revenues for any purpose whatsoever, except by and with the consent of the majority of the qualified electors of the State voting on the question at a general election or at a special election called for that purpose."

Specifically, the complaint alleges that, unless restrained, the State Board of Education, in pursuance of resolutions adopted November 3, 1937, will issue bonds in the sum of $240,000, and as security for the payment of principal and interest will pledge the revenues in question. The demurrer was sustained, and the Attorney General appealed.

Act No. 162 authorizes the State Board of Education (hereinafter sometimes referred to as the "Board") to issue its bonds, and to take as security any school district bonds in the state treasury on which loans were made from the revolving loan fund. The board is permitted to deposit such district school bonds with a designated trustee, who shall have a right to sell them should default occur in payment of principal or interest on the Board of Education bonds. The total amount of bonds to be issued shall not exceed 50 per cent. "of the total then outstanding balances of loans made from the revolving loan fund."

Proceeds of bonds so sold shall be paid into the state treasury to the credit of the revolving loan fund, and the board is empowered to make loans to any school district in the state, to be used in buying "the outstanding bonds and other valid indebtedness at a discount, and to accept such bonds so bought, together with a pledge of the state apportionment of school funds to said district as collateral or security for the loan." Certain conditions are attached which are not material to this opinion.

In Davis v. Phipps, 191 Ark. 298, 85 S. W.2d 1020, 1022, 100 A.L.R. 1110, questions somewhat similar to those involved in the instant case were before the court. Davis, as a citizen and taxpayer, undertook to enjoin Phipps, as commissioner of education, from carrying out a plan to sell bonds issued by the State Board of Education. The board contended that full authority was conferred by Act No. 333, page 969, of 1935; that the proposed securities purported to be revolving loan fund bonds issued by the State Board of Education; and that there was an express provision in Act No. 333 prohibiting the full faith and credit of the state from being pledged. In commenting upon the end Amendment No. 20 was intended to serve, and the purpose of its promulgation, we said:

"The financial affairs of our commonwealth had been well-nigh wrecked by issuance of bonds far in excess of the amount justified by the liquid resources of the state. High taxes had been imposed to raise revenues to meet these enormous obligations. It was well understood then, as it is now, that a continuation of these practices that had grown up were pyramiding debts and topping every source of revenue for payment thereof and could not continue without practical bankruptcy. * * * When we refer to the revenues of the state, we usually mean the annual or periodic yield of taxes, excise, customs, etc., which the state collects and receives into the treasury for public use, but the word `revenues' may be much broader than that as it may include rent, yield, as of land, profit. It includes annual and periodical rent, profits, interest, or issues of any species of property, real or personal, income. The yield from taxes is one of the last meanings given in Webster's International Dictionary, yet it is the one with which we have most to do in questions such as are presented here.

"It must be remembered that the bonds pledged in this case, as security, were bonds issued by school districts, delivered to the state board of education as security for money obtained from the revolving loan fund. This is not, in fact, strictly a part of the state's revenues, as distinguished from school funds. It is a part of the assets belonging to this revolving loan fund, but is, for practical purposes, as distinct from the state as are school districts, or improvement districts, about which no question is ever raised as to their individual entity, as distinguished from the state. These school districts and improvement districts are, in some senses at least, merely agencies of the state, organized under proper authority to render a certain service to particular localities.

"The revolving loan fund is not confined to any individual locality, but is limited to a particular and individual purpose, designed to render a service not otherwise provided for. If by a strained construction we should say that these funds in the hands of the state board of education are funds of the state, we can with the same parity of reasoning say that the state board of education, through the revolving loan fund, shall not issue any bonds, because it is only an agency of the state, and by the same process of deduction, if we hold one agency of the state without power or authority, we may in like manner hold all other agencies of the state, as school districts and improvement districts, impotent in borrowing money or issuing bonds."

After referring to the fact that the proposed bonds were not issued by the State itself, the opinion continues: "In the second proposition our conclusions are not without quite eminent authority to the effect that revenues mentioned in Amendment No. 20, as revenues of the state, do not include the securities pledged with the state board of education, nor the interest derived from those securities. An imposing array of authorities showing the distinction between revenues collected by the state for its support and maintenance, and those collected by state agencies or subdivisions, could easily be cited. * * * Finally, it may be suggested that the pledges contemplated by the state board of education are not within the forbidden class for another reason; that is, under Amendment No. 20, it would seem that pledges of revenue are forbidden only when such pledges are to secure state bonds. This seems to be in accordance with the language of Amendment No. 20."

This appeal cannot be disposed of in an intelligible manner without tracing the origin of the funds affected, and identifying the purposes of the various acts under which such funds were created. This court takes judicial notice of the public records and reports of the several departments of the state, when required by law to be so made and filed.

The state comptroller's biennial report, dated December 1, 1934, reviews the history of the permanent school fund, and other state funds, with particular reference to those intended for educational purposes. Beginning at page 42, it is shown that in 1917 the permanent school fund had a credit balance of $1,134,500, evidenced by bonds of the State drawing 3 per cent. interest. By Act No. 128, page 681, of 1917, those securities were converted into 5 per cent. bonds or notes; the corpus to remain the property of the permanent school fund, and the interest only to be used for common school purposes. A sinking fund was created, and, from such sinking fund, interest on the permanent school fund was payable to the common school fund. By Act No. 356, page 392, of 1921, $180,000 was transferred from the permanent school fund for use of the penitentiary; and by Act No. 199, page 572, of 1925, $100,000 was transferred for the benefit of the State Teachers College at Conway. These two items, aggregating $280,000, for which the State Debt Board placed with the permanent school fund State 5 per cent. bonds, increased to $1,414,500 the State's debt to the permanent school fund.

In 1927, by Act No. 119, page 358, the revolving loan fund was created, the provisions of which were, with slight changes, brought forward into Act No. 169, page 476, of 1931. Act No. 169 was a recodification of the school laws. It vested the State Board of Education with power to "manage and invest the permanent school fund of the state." Section 103 of Act No. 169 expressly perpetuated the revolving loan fund "for the purpose of aiding needy school districts in repairing, erecting and equipping school buildings and paying for outstanding indebtedness on buildings heretofore erected, and equipment heretofore purchased."

The State Board of Education was directed, not later than June 15 of each year, to "determine the approximate amount of money which the school districts may need and be entitled to borrow from the Revolving Loan Fund," section 104, and the...