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             State Board of Education
             Austin, Texas
             Dear Sirs:                  Opinion No. O-6983
                                         Re:   Refunding or readjustment of
                                               the bonds of the Cisco Inde-
                                               pendent 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 as-
             sessed 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~'bondswhich have not matured at a lower rate of interest
             or to "readjust" the indebtedness by changing those bonds on
             the~irface to provide for two and one-half percent (2s) inter-
             est 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,
                  titsuch 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.' (Ze:sZorini
    ours.)
           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 con-
 tained 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 dis-
     trict, new bonds, bearing the same or a less rate of
     interest, may wh.enordered by the governing board there-
     of 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; pro-
     vided further+ that matured Interest coupons of such
     district may be refunded in like manner; and provided
     further, that no election shall be necessary to au-
     thorize the issuance of such new bonds; and provided
     further, that the State Treasurer shall, upon or-
     der 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 Sub-
      division, in case the rate of interest on the
      new bonds ‘isnot less than the rate of interest
      on the bonds for which they are exchanged.”
      -(Underscoringaura,)
         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 Per-
manentSchoo1 Fund into new bonds bearing a lower rate of in-
terest. 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-
      ,inga lower rate of interest. In fact this de-
      partment 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. "
           The Constitutional provision referred to in'that opln-
IOU   IsArtIcle III, Section 55, which reads as follows:, ;
           "The Legislature shall have no power to re-
      lease or extinguish, or to authorite the releas-
      ing or extinguishing, in whole or in part, the
      indebtedness, liability or obligation of any in-
      corporation or Individual, to this State, ,or to
      anycounty or other municipal corporation therein.'!
         Several cases have passed on the questionsof 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 Commis-
sion~of Appeals of Texas upheld the validity of a State contract
which, for Consideration, reduced the mineral returns to be re-
ceived 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 import-
       ant 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 Artl-
cle 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 prohi-
bition when applied to the present fact situation is a matter which
must, of necessity, address itself to the Legislature. This de-
partment 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 lnter-
est.
            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 lan-
guage 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
 2 ) interest bearing bonds have been exchanged for five percent
[5!$ in tereat bearing bonds   This department cannot approve this
proposal which would accomplish by indirection that which is di-
rectly prohibited by statute.
           The six percent (6%) interest on delinquent interest re-
ferred 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."
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        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 inter-
        est 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 inter-
        est 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
