                     The Attorney              General of Texas
                                           June 6, 1978
JOHN L. i&L
Attorney General


                   Honorable M. L. Brockette                    Opinion No. H- 1174
                   Commissioner of Education
                   Texas Education Agency                       Re: Use of investment income
                   201 E. Eleventh Street                       from school bond proceeds.
                   Austin, Texas 78701

                   Dear Dr. Brockette:

                         ,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
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                 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 V-
I   .._‘~__‘~~   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. - Austin 1920, writ ref’d) stated as
                  rollows:

                                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




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



            APPROVED:
                                                                  .




                DAVID M. KENDALL, First Assistant




                C. ROBERT HEATS& Chairman
                Opinion Committee
