                       TO BE PUBLISHED IN THE OFFICIAL REPORTS


                            OFFICE OF THE ATTORNEY GENERAL

                                      State of California


                                      JOHN K. VAN DE KAMP

                                         Attorney General


                                       ----------------------------
                                                    :
                         OPINION                    :
                                                    :
                              of                    :      No. 87-204
                                                    :
                JOHN K. VAN DE KAMP                 :       MARCH 9, 1988
                   Attorney General                 :
                                                    :
                 ANTHONY S. DaVIGO                  :
                Deputy Attorney General             :
                                                    :
                        ----------------------------------------------------------


               THE STATE TEACHERS RETIREMENT SYSTEM has requested an opinion on
the following question:

               Should interest earned on the investment of the outstanding balance of warrants
drawn against the State Teachers Retirement Fund be credited to that Fund or to the General Fund?

                                            CONCLUSION

                Interest earned on the investment of the outstanding balance of warrants drawn
against the State Teachers Retirement Fund should be credited to that Fund.

                                              ANALYSIS

                There are, in the custody of the State Treasurer, certain assets consisting of the
amounts which have been drawn by the State Controller against the Teachers' Retirement Fund
(TRF), the warrants for which have not been presented for payment. The amount of each warrant
drawn on TRF is transferred from that account to the Outstanding Warrants Account until the
warrant is cashed. The balance in this account, consisting of all disbursements remaining uncashed
for a period from one day to four years, is invested daily by the State Treasurer as part of the State's
Pooled Money Investment Account. The present inquiry is whether the interest earned on the
investment of this outstanding warrant balance should be credited to TRF or to the General Fund.
                 TRF is a special trust fund created and administered solely in the interest of the
members, retirants, and beneficiaries of the State Teachers' Retirement System (STRS).
(§§ 22225.5; 22300.)1 Pertinent provisions of the State Teachers' Retirement Law (§ 22000 et seq.)
are set forth as follows:

               "§ 22224.

               "The board has exclusive control of the administration of the funds. No
       transfers or disbursements of any amount from the funds shall be made except upon
       the authorization of the board for the purpose of carrying into effect the provisions
       of this part."

               "§ 22300.

              "There is in the State Treasury a special trust fund to be known as the
       Teachers' Retirement Fund.[2] There shall be deposited in that fund the assets of the
       system and its predecessors, consisting of employee contributions, employer
       contributions, state contributions, appropriations made to it by the Legislature,
       income on investments, other interest income, income from fees and penalties,
       donations, legacies, bequests made to it and accepted by the board and any other
       amounts provided by this part.

              "Disbursement of money from the Teachers' Retirement Fund of whatever
       nature shall be made upon claims duly audited in the manner prescribed for the
       disbursement of other public funds except that notwithstanding the foregoing
       disbursements may be made to return funds deposited in the fund in error."
       (Emphasis added.)




   1
    Unidentified statutory citations are to the Education Code.
   2
    Section 22309 (Stats. 1986, ch. 900, § 1) provides:

          "Notwithstanding any other provision of law, the board may retain a bank or
       trust company to serve as custodian for safekeeping, delivery, securities
       valuation, investment performance reporting, and other services in connection
       with investment of the Teachers' Retirement Fund."

                                                2.                                             87-204

               "§ 22301.


               "Return on investments shall be collected by the State Treasurer, and together
       with any other moneys received for the Teachers' Retirement Fund shall be
       immediately deposited to the credit of that fund and reported forthwith to the system.
       Money in whatever form received directly by the system shall be deposited forthwith
       in the State Treasury to the credit of that fund." (Emphases added.)

Under these provisions of the State Teachers' Retirement Law, as expressly indicated in sections
22300 and 22301, interest earned on investments or other interest income must be immediately
deposited to the credit of TRF.

               We next consider a separate and distinct statutory scheme pursuant to which, in 1949,
the centralized State Treasury System was established in order to realize the maximum return
consistent with safe and prudent treasury management. (Stats. 1949, ch. 1534; § 16305 et seq.)
Pertinent provisions of the Government Code are set forth as follows:

               Section 16305.2:

               "All money in the possession of or collected by any state agency or
       department is subject to the provisions of Sections 16305.3 to 16305.7, inclusive, and
       is hereafter referred to as state money."

               Section 16305.3:

                "All state money shall be deposited in trust in the custody of the Treasurer,
       . . . All state money deposited in trust in the custody of the Treasurer shall be held
       in a trust account or accounts and may be withdrawn only upon the order of the
       depositing agency or its disbursing officer. . . ."

               Section 16305.5:

               "Money in treasury trust accounts shall be deposited, invested and reinvested
       in the same manner and to the same extent as if the money in trust accounts were
       money in the State Treasury."

               Section 16305.7:

               "Any increment collected as the result of investment of state money shall be
       collected by the State Treasurer and reported by him to the State Controller for credit
       to the General Fund in the State Treasury." (Emphases added.)




                                                 3.                                              87-204

From the foregoing it is clear, as expressly set forth in section 16305.7, that any increment collected
by the State Treasurer as the result of investment of state money deposited in trust in his custody
must be credited to the General Fund.3

                We are faced with the unequivocal though inconsistent provisions respectively of
Government Code section 16305.7 pertaining to "state money" and sections 22300 and 22301
relating to the retirement fund. We resort to familiar rules of statutory construction. It must first
be recognized that for nearly four decades since its enactment, Government Code section 16305.7
has been understood and administratively applied without regard to sections 22300 and 22301. An
administrative application of the language of a statute is entitled to respect, and unless clearly
erroneous is a significant factor to be considered in the determination of legislative intent. (Klarfeld
v. State of California (1983) 142 Cal.App.3d 541, 548; 67 Ops.Cal.Atty.Gen. 325, 329 (1984).)
Conversely, an administrative interpretation which is erroneous or contrary to law will be
disregarded. (Douglas Aircraft Co. v. Cal. Unemp. Ins. App. Bd. (1960) 180 Cal.App.2d 636, 642.)

              On the other hand, the following rules applicable in the event of an ostensible conflict
between two state statutes were summarized in American Friends Service Com. v. Procunier (1973)
33 Cal.App.3d 252, 263, as follows:

               "The applicable rule of construction in such an instance has been described
       by the Supreme Court in the following manner: '"It is the general rule that where the
       general statute standing alone would include the same matter as the special act, and
       thus conflict with it, the special act will be considered as an exception to the general
       statute whether it was passed before or after such general enactment. Where the
       special statute is later it will be regarded as an exception to or qualification of the
       prior general one; and where the general act is later the special statute will be
       considered as remaining an exception to its terms unless it is repealed in general
       words or by necessary implication." (People v. Breyer, 139 Cal.App. 547, 550; Riley
       v. Forbes, 193 Cal. 740, 745.)' (In re Williamson (1954) 43 Cal.2d 651, 654.) More
       recently the court has expressed the same rule in somewhat different language: 'Also
       of importance here is the rule that where the same subject matter is covered by
       inconsistent provisions, one of which is special and the other general, the special one,
       whether or not enacted first, is an exception to the general statute and controls unless
       an intent to the contrary clearly appears.' (Warne v.Harkness (1963) 60 Cal.2d 579,
       588; see also Lacy v. Orr (1969) 276 Cal.App.2d 198, 201-202, and cases cited
       therein, holding that the general adjudicatory hearing provisions of the
       Administrative Procedure Act yield to certain special adjudicatory hearing
       procedures of the Vehicle Code relating to drivers' licenses.) A more accurate
       'harmonizing' of the two acts results, in our view, from treating the special act as an
       exception to the general."


   3
    The General Fund consists of money received into the treasury and not required by law to be
credited to any other fund. (Gov. Code, § 16300.)

                                                  4.                                              87-204

(And see 66 Ops.Cal.Atty.Gen. 73, 78 (1983).)

                Government Code section 16305.7 (enacted by Stats. 1949, ch. 1534, § 8, and never
amended) pertains generally to "state money," i.e., all money possessed or collected by any state
agency. (Gov. Code, § 16305.2.) Section 22300 (enacted by Stats. 1969, ch. 896, § 2; amended by
Stats. 1974, ch. 795, § 4), and section 22301 (enacted by Stats. 1969, ch. 896, § 2; amended by Stats.
1971, ch. 407, § 14, and Stats. 1974, ch. 795, § 9) pertain specifically to the retirement fund. Thus,
sections 22300 and 22301 being later in time and specific, must be viewed as an exception to
Government Code section 16305.7.

                  Moreover, if the term "state money," consisting of "[a]ll money in the possession of
. . . any state agency" (Gov. Code, § 16305.2), is literally construed, it would include TRF money,
and any interest on the investment of the entire principal, as distinguished from the balance of
outstanding warrants, would be creditable to the General Fund. Hence, the reference in Government
Code section 16305.7 to "[a]ny increment collected as the result of investment of state money" has
never been deemed to include interest on TRF investments. Nor do we perceive any inherent
significance of a warrant being issued against TRF, prior to its presentation for payment. Aside
from the constitutional impediment, which is discussed below, we have not been apprised of any
statutory basis for the transfer of funds from TRF to any other account prior to presentation of the
warrant.

                 In any event, a constitutional dimension appears which, in our view, is dispositive.
In this regard, the assets of a public pension or retirement system are constitutionally designated as
trust funds for exclusive purposes, and may not be deemed or treated otherwise by statute.
Specifically, California Constitution, article XVI, section 17, provides in pertinent part as follows:


               "Notwithstanding provisions to the contrary in this section and Section 6 of
       Article XVI, the Legislature may authorize the investment of moneys of any public
       pension or retirement system, subject to all of the following:

               "(a) The assets of a public pension or retirement system are trust funds and
       shall be held for the exclusive purposes of providing benefits to participants in the
       pension or retirement system and their beneficiaries and defraying reasonable
       expenses of administering the system.

               "(b) The fiduciary of the public pension or retirement system shall discharge
       his or her duties with respect to the system solely in the interest of, and for the
       exclusive purposes of providing benefits to, participants and their beneficiaries,
       minimizing employer contributions thereto, and defraying reasonable expenses of
       administering the system.

              "(c) The fiduciary of the public pension or retirement system shall discharge
       his or her duties with respect to the system with the care, skill, prudence, and

                                                  5.                                           87-204

       diligence under the circumstances then prevailing that a prudent person acting in a
       like capacity and familiar with these matters would use in the conduct of an
       enterprise of a like character and with like aims.

               "(d) The fiduciary of the public pension or retirement system shall diversify
       the investments of the system so as to minimize the risk of loss and to maximize the
       rate of return, unless under the circumstances it is clearly prudent not to do so."

               Inasmuch as such assets constitute a trust for exclusive purposes, they may not be
appropriated for general fund uses. As stated by the court in Valdes v. Cory (1983) 139 Cal.App.3d
773, 788 - concerning the Public Employees Retirement System:

                "Once paid, appropriated employer contributions constitute a trust fund held
       solely for the benefit of PERS members and beneficiaries (§ 20200). Income in
       excess of interest credited to employee and employer accounts is to be retained in
       that trust fund as a reserve against deficiencies. The reserve constitutes an integral
       part of that trust fund. (§ 20203.) Consequently, none of the funds within PERS
       including those in the reserve against deficiencies, may be appropriated for a general
       public purpose unrelated to the benefit of PERS members (Gillum v. Johnson (1936)
       7 Cal.2d 744), because funds received into the treasury for special trust purposes are
       'in their nature a continuing appropriation for a specific purpose' (p. 758; Daugherty
       v. Riley (1934) 1 Cal.2d 298, 308).

               "Had the Legislature actually appropriated any of the PERS trust funds for
       purposes unrelated to the benefit of PERS members, e.g., to balance the state budget
       and avoid a year-end deficit, we would have no difficulty in concluding that such
       legislative action modified vested rights of PERS members. (See Sgaglione v.
       Levitt, supra, 337 N.E.2d 592; State Teachers' Retirement Board v. Giessel, supra,
       106 N.W.2d 301; cf. Whitmire v. City of Eureka (1972) 29 Cal.App.3d 28, 34.)"

                  Is interest derived from the investment of the outstanding warrant balance an asset
of the trust for purposes of California Constitution, article XVI, section 17, supra? We conclude that
it is. At common law the proceeds of an investment are an accretion or increment to the principal
earning it, and unless lawfully separated therefrom becomes a part thereof. (Pomona City School
Dist. v. Payne (1935) 9 Cal.App.2d 510, 516.) Since proceeds, including interest and dividends,
become part of the principal, they are subject to the same restrictions. (See 65 Ops.Cal.Atty.Gen.
588 (1982).)

               In Provident Land Corp. v. Zumwalt (1938) 12 Cal.2d 365, an irrigation district had
acquired certain land to be held "in trust for . . . and set apart to the uses and purposes set forth in
[the California Irrigation District Act]." (Id. at 374.) The court held that while no provision had
been made for the disposition of the proceeds of the land, such proceeds, over and above operating
expenses, remain subject to the trust. (Id. at 376-377.) The court stated in part (id. at 375):


                                                  6.                                            87-204

                 "Once it is made clear that the lands are held in trust, it necessarily follows
        that their proceeds, whether by sale or lease, are likewise subject to the trust. It
        would be manifestly absurd to say that although property is held in trust, none of the
        benefits of the trust accrue to the beneficiaries, and that none of the rents or profits
        of the trust property need be used in furtherance of the trust purposes. On this point,
        namely, that the land is trust property, held for the 'uses and purposes' of the act, and
        that the proceeds are stamped with the character of the property from which they
        flow, the statute, read in the light of elementary principles, leaves no room for
        debate."

                  In City of Long Beach v. Morse (1947) 31 Cal.2d 254, the state had granted to the
city its interest in tidelands within the corporate limits "in trust for the uses and purposes" connected
with the development of the municipal harbor. (Id. at 256-258.) The city proposed to divert certain
revenues derived from the production of oil and gas from the tidelands to the "Public Improvement
Fund" for general municipal purposes unconnected with the grant. (Id. at 255.) It was first noted
that as trustee, the city assumed the same burdens and was subject to the same regulations that
appertain to other trustees. (Id. at 257.) Holding that such revenues from the land could be used
only in furtherance of the trust purpose (id. at 258), the court stated in part (id. at 257-258):

                 "The city of Long Beach contends that the proceeds from the production of
        oil and gas is merely income from the land and as such is not covered by any
        provisions of the trust, on the ground that the trust expressly applies only to the
        physical uses of the land. Whether the fund should be regarded as part of the corpus
        of the trust or merely as a part of the rents and profits of the land, the city as trustee
        has no right to devote the proceeds to general municipal improvements unconnected
        with the trust purposes. If the proceeds from the sale of oil and gas are regarded as
        corpus (see Rest. Trusts, § 238; Bogert, Trusts and Trustees, §§ 789, 828), they must
        be used for the purposes set forth in the legislative grants in trust, for the city, as
        trustee, clearly has no authority to appropriate the corpus to its own uses contrary to
        the terms of the trust. If the proceeds are regarded as income from trust property, the
        trustee, in the absence of a legislative provision to the contrary, has no more right to
        them than it has to the corpus. (Civ. Code, § 2229 [see now Probate Code, § 16004];
        Provident Land Corp. v. Zumwalt, 12 Cal.2d 365, 375; Lamb v. Lamb, 171 Cal. 577,
        580-582; Purdy v. Johnson, 174 Cal. 521, 529; see Methodist Benev. Assn. v. Bank
        of Sweet Spring, 227 Mo.App. 566, 573 [54 S.W.2d 474, 478]."

                Where a trust is constitutionally established for a designated purpose, neither the
principal nor its proceeds may be statutorily diverted. It is concluded, therefore, that interest earned
on the investment of the outstanding balance of warrants drawn against TRF should be credited to
that Fund.

                                                *****




                                                   7.                                                87-204

