Berven v. Board of Regents of Education

201 N.W.2d 218, 86 S.D. 741, 1972 S.D. LEXIS 169

• Court: South Dakota Supreme Court
• Decided: October 10, 1972
• Docket: File 11062
• Status: Published

Opinions

WOLLMAN, Judge

(on reassignment).

This is an original action brought by plaintiff on his own behalf and on behalf of all other persons similarly situated. He asks that the Board of Regents of Education of the State of South Dakota be prohibited from refunding and consolidating into one institutional revenue bond issue in the amount of $3,957,000 the outstanding obligations on six previous revenue bond issues by the Board of Regents for and in behalf of South Dakota State University, secured by a pledge of the net income from all of the student housing and eating facilities constructed with the various bond issues to retire the consolidated bond issue. Special Resolution No. 48-1971 was adopted by the Board of Regents at a meeting held on October 21 and 22, 1971 under the authority granted by Ch. 134, Laws of 1971 (SDCL 13-51 A). The six bond issues referred to are described in the resolution of consolidation as follows:

"(i) The dormitories completed in 1959 with the proceeds of $2,050,000 South Dakota State College of Agriculture and Mechanic Arts Dormitory and Apartment Revenue Bonds of 1957, Series B, authorized under Special Resolution No. 10-1958, adopted February 13, 1958.

(ii) The student dormitory and dining hall completed in 1962 with the proceeds of $1,700,000 South Dakota State College of Agriculture and Mechanic Arts Dormitory and Dining Hall Revenue Bonds, Series 1961, authorized under Special Resolution No. 27-1961, adopted June 16, 1961.

(iii) The student dormitory and dining facilities building completed in 1965 with the proceeds of $1,875,000 South Dakota State College Dormitory and Dining Hall Revenue Bonds, Series B of 1963, authorized under Special Resolution No. 65-1964, adopted June 19, 1964, and as amended by Special Resolution No. 94-1964 adopted August 5, 1964.

(iv) The student dormitory completed in 1967 with the proceeds of $1,275,000 South Dakota State University Dormitory Revenue Bonds, Series B of 1964, authorized under Special Resolution No. 174-1965 adopted March 25, 1965.

(v) The student dormitory completed in 1969 with the proceeds of $2,800,000 South Dakota State University Dormitory Revenue Bonds, Series B, of 1967, authorized under Special Resolution No. 156-1967 adopted July 20, 1967.

(vi) The married student housing completed in 1970 with the proceeds of $620,000 South Dakota State University Married Student Housing Revenue Bonds, Series 1970, authorized under Special Resolution No. 94-1970, adopted July 16, 1970.”

SDCL 13-51 A-15 provides that the issuance of any bonds issued pursuant to SDCL 13-51A may be secured by a pledge of and lien on all or any part of the income and revenue derived from:

"(1) fees, rentals and other charges from students, staff, members and others using or being served by, or having-the right to use or the right to be served by, or to operate*, any project,

■(2) health, hospital, medical, laboratory, admission, student activities, student services, and all other fees collected from students matriculated, registered or otherwise enrolled at and attending each such institution and

(3) rentals from any facility or building leased to the. United States of America."

SDCL 13-51A-23 provides:

"Nothing in this chapter shall be construed to authorize the board or any institution to contract a debt on behalf of, or in any way to obligate, the state of South Dakota, or to pledge, assign or encumber in any way, or to permit the pledging, assigning or encumbering in any way, of appropriations made by the Legislature of the. state of South Dakota."

SDCL 13-51A-24 provides:

"All bonds issued pursuant to this chapter shall be-obligations of the board payable only in accordance with. the terms thereof and shall not be obligations general, special or otherwise, of the state of South Dakota. Such bonds shall not constitute a debt, legal or moral, of the state of South Dakota, and shall not be enforceable against the state, nor shall payment thereof be enforceable out of any funds of the board, or of any institution, other than the income and revenues pledged and assigned to, or in trust for the benefit of, the holder or holders of such bonds."

The resolution authorizing the consolidated bond issue provides for the payment of the bonds in the following language:

"The Board of Regents of the State of South Dakota hereby covenants with the registered owner of this Bond that it will keep and perform all the covenants and agreements in the Bond Resolution, and hereby irrevocably obligates itself to administer the said revenue, fees and receipts derived from the operation of said Housing and Auxiliary Facilities, as provided for in and by the Bond Resolution, and to establish from time to time parietal rules, rents, fees and charges for the use of the said Housing and Auxiliary Facilities and to maintain and collect rents, charges and fees sufficient to pay the reasonable cost of operating, maintaining, insuring, and repairing of said Housing and Auxiliary Facilities, and pay the principal of and interest on all said Revenue Bonds which by their terms are payable from such revenues, until all of such Bonds have been paid in full, both as to principal and interest."

and it defines gross revenues and net revenues in the following language:

"(E) 'Gross Revenues' used in connection with the Housing and Auxilia™ Facilities shall mean and include all revenues, income, receipts, profits, rates, rents, charges fees and returns to be received from the continued use and operation of the Housing and Auxiliary Facilities.

(F) 'Net Revenues' used in connection with the Housing and Auxiliary Facilities, shall mean that portion of the Gross Revenues received from the continued operation, use and maintenance thereof remaining after providing sufficient funds for the reasonable and necessary cost of currently maintaining, repairing, insuring, and operating the same, including the Operating Reserve."

The bonds to be issued under the resolution here in question state on their face: "This Bond is not a general obligation of the Board of Regents of the State of South Dakota, or the State of South Dakota, and does not create an indebtedness, legal or moral, of the State of South Dakota." The resolution states that such bond "does not create an indebtedness, legal or moral, of the State of South Dakota, and is payable only from the net revenues, fees and receipts to be derived from the operation of the said Housing and Auxiliary Facilities, and is not payable out of or enforceable against the State of South Dakota, or any fund created or maintained directly or indirectly from taxation,"

The bond issues being refunded have had substantial payments made on them in varying amounts over the years since-their issuance, all from the revenue of the facility provided by each issue, so there is less now owing than the amount of the original bonds. It has been stipulated that the following is a: recapitulation as to various aspects of the project contemplated by Special Resolution No. 48-1971:

Year of Original Resolution Amount of Original bond issue Principal balance owed Fall 1971 Series of bonds in proposed new issue

1958 $2,050,000 $1,665,000 A

1961 1.700.000 1.341.000 B

1964 1.875.000 1.397.000 C

1965 1.275.000 1.174.000 D

1967 2.800.000 2.760.000 E

1970 620,000 620,000 F

Plaintiff's position is that Ch. 134 of the Laws of 1971 is unconstitutional and that the proposed refunding of the bond issues is void because of the debt limitation established by § 2, Art. XIII of the Constitution of South Dakota. Article XIII, § 2 reads in pertinent part:

"For the purpose of defraying extraordinary expenses and making public improvements, or to meet casual deficits or failure in revenue, the state may contract debts never to exceed with previous debts in the aggregate one hundred thousand dollars * * * and provision shall be made by law for the payment of the interest annually, and the principal when due, by tax levied for the purpose or from other sources of revenue * ¥ 4» "

The question, then, is whether the consolidated revenue bond issue creates a debt within the meaning of Article XIII, § 2. In State College Development Ass'n v. Nissen, 66 S.D. 287, 281 N.W. 907, this court held that the issuance of bonds for the construction of two dormitories on the campus of State College payable out of the net revenues of the dormitories to be built did not create an indebtedness within the meaning of the constitutional debt limitation. The court stated that:

" * * * under the facts in the instant case no contingency could arise imposing an obligation, moral or otherwise, upon the State of South Dakota, to levy a tax or to appropriate funds to pay any loss that may result from the transactions between the Board of Regents and the plaintiff association. Title to the buildings erected on the campus of the college will be in the State from the time of their erection and no encumbrance or lien thereon will be created. The bonds will not constitute a general obligation against the State. The buildings will be made available to the State under the proposed contract enabling the State to pay for their construction and equipment from earnings accruing from their operation." 281 N.W. 907, 909.

In Boe v. Foss, 76 S.D. 295, 77 N.W.2d 1, the court had before it a resolution of the Board of Regents to construct a women's dormitory, a men's dormitory and an apartment building on the campus of South Dakota State College, the construction to be financed by revenue bonds issued pursuant to the provisions of Ch. 49, Laws of 1955. The bond resolution provided that the bonds were to be payable solely from and secured by a pledge of the net revenues of the buildings authorized to be constructed and by a pledge of the net revenues of all or such of the existing dormitory facilities at said institution not otherwise pledged. In holding that the Board of Regents could not pledge the income from existing dormitory facilities, the court stated that:

"By their proceedings the Board of Regents has pledged to a special fund and to the payment of these revenue bonds, not only the net income of the facilities to be acquired with their proceeds, but also the net income, in an amount of not less than $500,000 of the dormitories presently in use at the college. Conceding that the holders of the proposed bonds must look solely to the special fund thus created for payment of principal and interest, the question arises whether, within the meaning of Sec. 2, Art. XIII, a debt is incurred because the Board of Regents, an agency of the state, with the sanction of the legislature, is pledging in payment of these bonds resources and revenues belonging to the state in addition to the net income of the property to be acquired with their proceeds. Because of that pledge of additional property and resources of the state, we are solemnly persuaded that such a debt will be incurred." 77 N.W.2d 1, 5.

The question, then, is whether our holding in Boe v. Foss is controlling here. We conclude that it is not. Without question the Board of Regents originally could have constructed the student facilities simultaneously and financed their cost by one revenue bond issue. This was expressly decided in State College Development Ass'n v. Nissen, supra, in which the court said, "The only liability is against a special fund which is to be made up exclusively of net rentals. No violation of the constitutional provision against indebtedness is involved." Such a course of action would also have been constitutionally permissible under Boe v. Foss.

Consolidation and refunding does not change the nature of the bonds, nor does it enlarge the obligation of the state. Only the revenue from rentals of the facilities will be pledged. This court held in Gross v. City of Bowdle, 44 S.D. 132, 182 N.W. 629, that bonds issued to refund special assessments did not constitute a "debt" within the meaning of our constitution, as "These bonds will be paid by the funds to be collected from the said special assessments, and not by any general taxes * * The same principle applies in the present case. See also Hyde v. Ewert, 16 S.D. 133, 91 N.W. 474; Hughes County, S. D. v. Livingston, 8 Cir., 104 F. 306, cert. denied 181 U.S. 623, 21 S.Ct. 926, 45 L.Ed. 1033; National Life Ins. Co. of Montpelier v. Mead, 13 S.D. 37, 82 N.W. 78.

The power to issue the various revenue bonds in the first instance carries with it the implied power to refund the same according to the dictates of good fiscal management and control so long as no "debt" in the constitutional sense is created. See Beaumont v. Faubus, 239 Ark. 801, 394 S.W.2d 478; Talkington v. Turnbow, 190 Ark. 1138, 83 S.W.2d 71.

To summarize, Boe v. Foss holds that revenues from existing dormitories which are constructed by state funds derived from taxation cannot be pledged to help pay for the cost of new dormitories. This restriction should not be held to apply to existing dormitories and student facilities constructed with the proceeds of revenue bonds. No other source of revenue is being pledged and the state is under no obligation, legal or moral, to repay the same from any other source of revenue. We conclude, therefore, that the Board of Regents may legally consolidate and refund the existing revenue bonds. The refunding of the existing revenue bonds does not create a "debt" in violation of our Constitution, as the obligation of the state is not changed by the refunding and consolidation in any manner. To hold otherwise would be to extend the rule in Boe v. Foss to an unnatural and illogical degree.

In conclusion, then, in holding that the refunding of the existing revenue bond issues by consolidating the obligations into one revenue bond issue secured by the pledge of the net income from the facilities constructed with the proceeds from the several bond issues does not create a debt within the meaning of Article XIII, § 2 of the Constitution, we are limiting Boe v. Foss to its particular facts. We confine our holding here to the precise facts before us and we intimate no view as to the constitutionality or legality of any other provision contained in SDCL 13-51 A.

The writ of prohibition is denied.

HANSON, P. J. and DOYLE, J., concur. BIEGELMEIER, J., dissents. WINANS, J., dissents.