                                   The Attorney           General       of Texas
                                                     January 21, 1982
MARK WHITE
Attorney General


                                 Honorable Warren G. Harding             Opinion No. MW-429
Supreme Ccwl Building
P. 0. BOX 12548                  State Treasurer
Austin. TX. 78711                L.B.J. Building                         Re:    Constitutionality    of
512,475.2501                     Austin, Texas   78711                   statute authorizing participa-
Telex SlOiE74-1367                                                       tion of the permanent and
Telecopier 5121475~266
                                                                         available school fund in a
                                                                         stock and bond loan program
1607 Main St., Suite 14OCl
Dallas. TX. 75201                Dear Mr. Harding:
21417428944

                                      You request an opinion regarding Senate Bill No. 883 enacted by
4824 Alberta   Ave.. Suite 160   the Sixty-sixth Legislature. Your questions concern the construction
El Paso, TX. 79905               of this enactment and its constitutionality in certain respects.
91-
                                      Senate Bill No. 883 amended chapter 15 of the Education Code,
,220 Dallas Ave.. Suite 202
                                 which governs the investment of the public school funds. The public
Houston. TX. 77692               school funds consist of the permanent school fund, established by
71~500666                        article VII, section 5 of the Texas Constitution, and the interest
                                 thereon, known as the available school fund. See Educ. Code 515.01
                                 (composition of permanent and available schoolfunds).      The State
806 Broadway. Suite 312
Lubbock. TX. 79401
                                 Board of Education is authorized to invest the permanent school fund
8WT47-5230                       in accordance with section 15.02 of the Education Code.

                                      Senate Bill No. 883 enacted section 15.13 of the Education Code
4309 N. Tenth. Suite B
                                 which provides in part:
McAllen. TX. 78501
51218824547
                                               The State Board ~of Education is authorized
                                          and empowered to contract with a commercial bank
200 Main Plaza. suite u)o                 or banks to receive payments of dividends and
San Antonio. TX. 78205
                                          interest on securities in which the state
512/2254191
                                          permanent school funds are invested and to
                                          transmit such money with identification of their
An Equal Opportunity/                     source to' the state treasurer for the account of
Affirmative Action Employer               the available school fund by the fastest available
                                          means.

                                 Educ. Code 515.13(a). Under this provision, the State Board of
                                 Education may permit a bank to receive payment as a collecting agent
                                 of dividends and interest on permanent fund securities and transmit
                                 them by wire to the state treasurer. Bill analysis on Senate Bill NO.
                                 883 prepared for House Ways and Means Committee, Legislative Reference




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Honorable Warren G. Rarding - Page 2   (MW-429)




Library. This system would speed the collection and delivery of
available fund income, by eliminating the 6 to 8 day delay incident to
sending the payments by mail. Fiscal Note on Senate Bill No. 883.
March 23. 1979, Bill File on Senate Bill No. 883, Legislative
Reference Library.

     Senate Bill No. 883 also added section 15.14 to the Education
Code. This provision states in part:

              The State Board of Education is authorized
         and empowered to contract with the commercial bank
         or banks to serve both as a custodian of
         securities in which the state permanent school
         funds are invested and to lend these securities,
         under the conditions set out in Subsection (b) of
         this section, to securities brokers and dealers on
         short term loan.

    You ask:

              Is it constitutional to lend securities owned
         by the permanent school fund in the manner and for
         the purpose authorized in this bill?

     Section 15.14 of the Education Code authorizes the State Board of
Education to enter into contracts with commercial banks wh,ereby the
banks could lend public school fund securities to securities brokers
and dealers on a short-term basis. According~to information submitted
to this office, the contracting bank would physically transfer the
securities to a broker in exchange for cash collateral of equal or
greater value. See Educ. Code 515.14(b)(4). The broker would use the
securities to co=    delivery of securities bought from one customer
and sold to another, where the seller was unable to produce the
certificates on time for the transfer. The bank would invest the cash
collateral and part of the interest on this investment would go to the
permanent school fund. Section 15.14(b) of the Education Code sets
out various requirements which the securities loan program must meet.
According to the Fiscal Note attached to Senate Bill No. 883, this is
a "risk-free" program. Fiscal Note to S.B. 883, March 23, 1979.

     In our opinion, the provisions of section 15.14 which authorize
the securities loan program violate article VII, sections 4 and 5 of
the Texas Constitution. The public school fund is established by,
article VII, section 5 of the constitution, which provides as follows:

              The principal of all bonds and other. funds,
         and the principal arising from the sale of lands
         hereinbefore set apart to the school fund, shall
         be the permanent school fund, and all the interest




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       Honorable Warren C. Harding - Page 3   (Mw-429)




                derived therefrom and the taxes herein authorized
                and levied shall be the available school fund.
                The available school fund shall be applied
                annually to the support of the public free
                schools.   And no law shall ever be enacted
                appropriating any   part of the permanent or
                available school fund to any other purpose
                whatever; nor shall the same, or any part thereof
                ever be appropriated to or used for the support of
                any sectarian school; and the available school
                fund herein provided shall be distributed to the
                several counties according to their scholastic
                population and applied in such manner as may be
                provided by law.

           Article VII, section 4 of the Texas Constitution provides that:

                      The lands herein set apart to the Public Free
                School Fund, shall be sold under such regulations,
                at such times, and on such terms as may be
                prescribed 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 the
                state shall be responsible for all investments.
                (Emphasis added).

      ~Thus, investments of the public free school fund may be made only by
       the comptroller, subject to the direction of the Board of Education.
       In our opinion, the short term loan of permanent school fund
       securities in exchange for cash collateral which is invested,
       constitutes any investment of permanent school funds.     Thus, this
       investment function .can be performed only by the comptroller.
       Moreover, article VII. section 4 provides that "the state shall be
       responsible for all investments." In our opinion, the legislature may
       not constitutionally authorize the delegation ,of the investment
       function to a commercial bank.

           You also ask:

                     DO sections 15.13 and 15.14 usurp the
                constitutional    and   statutory   duties    and
                responsibilities of the state treasurer in regard




                                         p. 1465
Honorable Warren G. tlarding- Page 4 (MW-429)




          to  his   custodianship and accountability       of
          securities owned by the permanent school fund?

     We find no constitutional provision on the treasurer's ~duties
with respect to the permanent school fund which would be violated by
these provisions. See Attorney General Opinion MW-333 (1981).

     The Board of Education may contract pursuant to section 15.13
with a commercial bank to receive payments of dividends and interest
on all permanent fund securities. Section 15.13(a) contemplates the
use of the commercial bank "lock-box" system whereby a bank near to
the source of such payments acts as collecting agent. The fiscal
agent mails such payments to a designated post office box and a local
bank wire transfers them to the treasurer. The bank can provide this
service without becoming custodian of the securities. Thus, section
15.13(a) does not conflict with the treasurer's statutory duty to be
custodian of the securities enumerated in section 15.02(a)(5) of the
Education Code.

     Section 15.11(f) provides as follows:

              The state treasurer shall be the custodian of
         all securities enumerated in Subdivision (5) of
         Subsection (a) of Section 15.02 of this,code and
         of such other securities as may be designated from
         time to time by the State Board of Education in
         which the school funds of the state have been or
         may hereafter be invested, and shall keep these
         securities in his custody until paid. off,
         discharged, delivered as required by the State
         Board of Education, or otherwise disposed of by
         the proper authorities of the state....

This provision requires that the treasurer be custodian of the
securities enumerated in section 15.02(a)(5) of the Education Code,
&,    "bonds of counties, school districts, incorporated cities or
towns, road precincts, drainage, irrigation, navigation, and levee
districts in Texas" subject to stated regulations. The Board of
Education may designate other securities for the custodianship of the
treasurer or may contract with a bank to act as custodian.         See
generally Attorney General Opinion IN-264 (1980) (Texas Housing Agency
may appoint custodian of its funds other than treasurer).

     It has been suggested that article IV section 25 of the Texas
Constitution impliedly provides that only public officials may act as
custodians of public funds. This provision reads as follows:

              The Legislature shall pass efficient laws
         facilitating the investigation of breaches of




                                  p. 1466
Honorable Warren G. Harding - Page 5   mw-429)




          trust and duty by all custodians of public funds
          and providing for their suspension from office on
          reasonable cause shown, and for the appointment of
          temporary incumbents of their offices during such
          suspension.

In our opinion, this provision does not bar the legislature from
placing public funds and publicly owned securities with custodians
other than public officers. It merely insures that the legislature
has authority to suspend public officials who may have violated their
trust as custodians of public funds. Tex . Const. art. IV, 025
(Interpretative Commentary).    See also V.T.C.S. arts. 2525-2543d
(statutes authorizing use of banks as state depository).

     It is also suggested that article 2535. V.T.C.S., .applies to
contracts with commercial banks to serve as custodians of permanent
school funds. Article 2535, V.T.C.S., provides that, with certain
exceptions, state depositories shall remit free of charge withdrawals
of state funds to the treasurer. In our opinion, this provision does
not apply to contracts entered into pursuant to section 15.14 of the
Education Code. The authority to contract with a commercial bank to
serve 'as custodian of permanent school funds carries the implied
authority to make reasonable and necessary expenditures for that
purpose.   The Board of Education is required to consider the
reasonableness of the commercial banks charges for services rendered
pursuant to sections 15.13 and 15.14, further indicating the
legislature's intent that contracts for such services not be subject
to article 2535, V.T.C.S.

     In view of our answers to your first two questions, .we need not
answer your additional questions.

                            SUMMARY

              Sections 15.13 and 15.14, of the Texas
         Education Code, authorizing the Board of Education
         tom contract with commercial banks to act as
         custodians of securities of the public school fund
         are constitutional, provided that all interest
         received therefrom is paid to the state. The
         provisions of section 15.14, authorizing the Board
         of Education to contract with commercial banks for
         the short-term loan of public school fund
         securities to security brokers and dealers, is
         unconstitutional in that it contravenes the




                                 p. 1467
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        Honorable Warren G. Harding - Page 6   (Mw-429)




                 provisions of article VII, sections 4 and 5 of the
                 Texas Constitution.

                                               Very truly yours



                                                         WHITE
                                               Attorney General of Texas

        JOHN W. FAINTER, JR.
        First Assistant Attorney General

        RICHARD E. GRAY III
        Executive Assistant Attorney General

        Prepared by Susan L. Garrison
        Assistant Attorney General

        APPROVED:
        OPINION COMMITTEE

        Susan L. Garrison, Chairman
        Jon Bible
        Rick Gilpin
        Jim noellinger




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