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AGO 1965 No. 50 - November 16, 1965
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John J. O'Connell | 1957-1968 | Attorney General of Washington


FUNDS ‑- STATE UNIVERSITY PERMANENT FUND ‑- TRANSFER TO UNIVERSITY OF WASHINGTON BOND RETIREMENT FUND OR UNIVERSITY BUILDING ACCOUNT ‑- EFFECT OF COMMINGLING OF FUNDS ‑- AUTHORITY OF STATE FINANCE COMMITTEE.

(1) A transfer of funds from the University permanent fund to the "University of Washington bond retirement fund" or to the University building account under authority of § 4, chapter 135, Laws of 1965, Ex. Sess., is not inconsistent with so much of § 1, chapter 135, Laws of 1965, Ex. Sess., as requires that certain designated proceeds "shall be deposited to the credit of the state university permanent fund, shall be retained therein and shall not be transferred to any other account or fund," because § 1 applies only to proceeds received after the effective date of chapter 135, Laws of 1965, Ex. Sess.

(2) Same:  The provisions of § 4, chapter 135, Laws of 1965, Ex. Sess., requiring the state finance committee to liquidate permanent university fund investments under direction of the board of regents of the University as a step in accomplishing a requested transfer of funds from the university permanent fund to the university bond retirement fund or university building account does not conflict with Article XVI, § 1, or Article IX, § 5, of the Washington State Constitution.

(3) Same:  The commingling of the funds subject to transfer with those which may not be transferred because of restrictions in the Enabling Act does not prevent the transfer authorized by § 4, chapter 135, Laws of 1965, Ex. Sess., when it is possible to trace the separate fund sources and determine the total amount attributable to each source.

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                                                               November 16, 1965

State Finance Committee
Room 110 Public Health Building
Olympia, Washington

                                                                                                                Cite as:  AGO 65-66 No. 50

Attention:  !ttMr. Roy A. Pitt, Jr.
Secretary

Gentlemen:

            By letter previously acknowledged you have made detailed  [[Orig. Op. Page 2]] reference to the provisions of chapter 135, Laws of 1965, Ex. Sess., designed to make available certain assets of the state university permanent fund for use in the construction of educational facilities at the University of Washington.  You have requested our opinion on several questions pertaining to this legislation.  We paraphrase your questions as follows:

            (1) Would a transfer of funds from the university permanent fund to the "University of Washington bond retirement fund" or to the university building account under authority of § 4, chapter 135, Laws of 1965, Ex. Sess., be inconsistent with so much of § 1, chapter 135, Laws of 1965, Ex. Sess., as requires that certain designated proceeds "shall be deposited to the credit of the state university permanent fund, shall be retained therein and shall not be transferred to any other account or fund"?

            (2) Does the provision of § 4, chapter 135, Laws of 1965, Ex. Sess., requiring the state finance committee to liquidate permanent university fund investments under direction of the board of regents of the University of Washington as a step in accomplishing a requested transfer of funds from the university permanent fund to the university bond retirement fund or university building account conflict with

            (a) Article XVI, § 1, of the Washington Constitution; and/or

            (b) Article IX, § 5, of the Washington Constitution, where such investments are sold at a loss?

            (3) Can the state finance committee comply with the "transfer of funds" requirements of § 4, chapter 135, Laws of 1965, Ex. Sess., in view of the fact that the university permanent fund currently contains commingled funds derived from lands granted to the state of Washington under both §§ 14 and 17 of the Enabling Act?

            We answer your first and second questions in the negative, and your third question in the affirmative for the reasons set forth in our analysis.

                                                                     ANALYSIS

            In AGO 63-64 No. 133 [[to Prosecuting Attorney, Pend Oreille County on December 30, 1964]], a copy enclosed, we described the status and contents of the university permanent fund as follows:

             [[Orig. Op. Page 3]]

            "The university permanent fund under existing law is a 'permanent and irreducible' fund into which is paid the proceeds from the sale of all university lands.  RCW 43.79.060.  (University lands are public lands of the state 'held in trust for university purposes.'  RCW 79.01.004.)  By far the greatest portion of these university lands were acquired by the state of Washington from the federal government.  This acquisition came about in two ways.  First, under § 14 of the Enabling Act the United States gave seventy-two sections of public lands to the state for the purpose of a university.  Secondly, under § 17 of the Enabling Act, the United States gave 200,000 acres of public lands to the state for 'charitable, educational, penal, and reformatory institutions.'  Thereafter the legislature set aside one‑half of this latter grant for the benefit of the University.  Laws of 1893, chapter 122, § 9.  This it had the right to do.  State ex rel. Moore v. Callvert, 34 Wash. 58, 74 Pac. 1018 (1904)."

            We then observed that:

            "Prior to the May 31, 1962, amendment of the Enabling Act, proceeds from the sale of both § 14 and § 17 lands constituted permanent funds of the state which could not be expended.  State ex rel. Heuston v. Maynard, 31 Wash. 132, 71 Pac. 775 (1903); AGO 59-60 No. 2, January 19, 1959 [[to Paul Ellis, Legislative Auditor on January 19, 1959]].  The amendment, however, added the following provisions to § 11:

            "'. . . "proceeds from the sale and other permanent disposition of the two hundred thousand acres granted to the State of Washington for State charitable, educational, penal, and reformatory institutions may be used by [the] . . . State for the construction of any such institution."'  [Public Law 87-473, 76 Stat. 91 (1962).]"

            Thereupon, in answer to a question which had been posed by President Charles E. Odegaard of the University of Washington, we stated:

             [[Orig. Op. Page 4]]

            "This provision, in our judgment, now authorizes state use of the proceeds from § 17 university lands for the 'construction' of educational facilities at the University of Washington should the legislature so provide.  Any such proceeds that may now be in the university permanent fund are eligible for this new use."

            In other words, we concluded that to the extent the university permanent fund comprises funds derived from transactions involving the 100,000 acres of "charitable, educational, penal, and reformatory institutions" lands set aside for the state university by § 9, chapter 122, Laws of 1893 (together with chapter 91, Laws of 1903), the fund could be made available for use in the construction of educational facilities at the University of Washington.1/

             Chapter 135, Laws of 1965, Ex. Sess., to which you have referred, is, obviously, a legislative response to this 1964 opinion.2/   Though this enactment contains a total of six sections, we need only be concerned with §§ 1 and 4 in resolving the questions which you have posed.

            Section 1 provides in material part as follows:

             [[Orig. Op. Page 5]]

            "All moneyshereafter received from the lease or rental of lands set apart for the University of Washington by chapter 91, Laws of 1903 and section 9, chapter 122, Laws of 1893, and all interest or income arising from the proceeds of the sale of such land and all proceeds from the sale of timber, fallen timber, stone, gravel, or other valuable material and all other receipts therefrom shall be deposited to the credit of the 'University of Washington bond retirement fund' to be expended for the purposes set forth in RCW 28.77.540.  All proceeds of sale of such lands, exclusive of interest, shall be deposited to the credit of the state university permanent fund, shall be retained therein and shall not be transferred to any other fund or account.  All interest earned or income received from the investment of the money in the state university permanent fund shall be deposited to the credit of the University of Washington bond retirement fund."  (Emphasis supplied.)

            Section 4 states that:

            "The board of regents of the University of Washington is empowered to authorize from time to time thetransfer from the state university permanent fund to be held in reserve in the bond retirement fund created by RCW 28.77.540 any unobligated funds and investments derived from lands set apart for the support of the university by chapter 91, Laws of 1903 and section 9, chapter 122, Laws of 1893, to the extent required to comply with bond covenants regarding principal and interest payments and reserve requirements for bonds payable out of the bond retirement fund up to a total amount of five million dollars,and to transfer any or all of said unobligated funds and investments in excess of five million dollars to the university building account created by RCW 43.79.330 (22).  Any funds transferred to the bond retirement fund pursuant to this section shall be replaced by moneys first available out of the  [[Orig. Op. Page 6]] moneys required to be deposited in such fund pursuant to section 1 hereof.  The board is further empowered to direct the state finance committee to convert any investments in such permanent fund acquired with funds derived from such lands into cash or obligations of or guaranteed by the United States of America prior to the transfer of such funds and investments to such reserve account or building account.

            "All interest earned on and profits derived from the sale of any investments of money in such University of Washington bond retirement fund shall be deposited in and become a part of such fund."  (Emphasis supplied.)

            Question (1):

            Your first question, as above paraphrased, is simply whether a transfer of unobligated "C. E. P. & R. I. ‑ University permanent"3/ funds to the state university bond retirement fund (RCW 28.77.540) or to the university building account (RCW 43.79.330 (22)) under authority of § 4,supra, would be inconsistent with so much of § 1,supra, as provides:

            ". . . All proceeds of sale of such lands, exclusive of interest, shall be deposited to the credit of the state university permanent fund, shall be retained therein and shall not be transferred to any other fund or account. . . ."

             [[Orig. Op. Page 7]]

            Any apparent conflict between these two provisions must be reconciled, and thereby eliminated, if at all possible.  See,Rosenoff v. Cross, 95 Wash. 525, 164 Pac. 236 (1917).  In our opinion the inconsistency which you here suggest exists completely vanishes once it is carefully noted that § 1, supra, applies solely to moneys hereafter received; i.e., after the effective date of the act (April 19, 1965, when signed by the governor, because of an "emergency clause" contained in § 6).  Thus, it is only proceeds (exclusive of interest) received after April 19, 1965, from the sale of "C. E. P. & R. I. ‑ University" permanent4/ lands which must be deposited and retained in the university permanent fund.  Such proceeds received and deposited into the university permanent fund prior to that date are available for transfer to the university bond retirement fund or university building account to the extent and in the manner provided by § 4,supra, which notably goes on to provide that:

            ". . . Any funds transferred to the bond retirement fund pursuant to this section shall be replaced by moneys first available out of the moneys required to be deposited in such fund pursuant to section 1 hereof. . . ."

            Question (2):

            Your second question involves compliance by the state finance committee with so much of § 4, chapter 135, Laws of 1965, Ex. Sess., supra, as requires the committee to convert permanent university fund investments into cash or United States government obligations under direction of the University of Washington board of regents as a step in accomplishing a requested transfer of funds.

            You first ask whether compliance by the finance committee with such a directive would conform with Article XVI, § 1, of the Washington Constitution, which provides:

            "All the public lands granted to the state are held in trust for all the people and none of such lands, nor any estate or interest therein, shall ever be disposed of unless the full market value of the estate or interest disposed of, to be ascertained in such manner as may be provided by law,  [[Orig. Op. Page 8]] be paid or safely secured to the state; nor shall any lands which the state holds by grant from the United States (in any case in which the manner of disposal and minimum price are so prescribed) be disposed of except in the manner and for at least the price prescribed in the grant thereof, without the consent of the United States."

            Simply stated, the constitutional provision governs only the disposition of public lands granted to the state and has nothing to do with application or other use of the proceeds derived from such dispositions.  Accord, Article XVI, §§ 24; contrast, Article XVI, § 5, which applies after disposition has produced proceeds available for investment.  Thus, we do not believe that the conversion of university permanent fund investments into cash or United States government obligations under authority of § 4, chapter 135, Laws of 1965, Ex. Sess., could be said to involve a violation of Article XVI, § 1, supra.

            But, you next ask, suppose the liquidation will result in a loss of principal to the university permanent fund.  Would not such a loss be one within the scope of Article IX, § 5, of our state constitution?  This section provides:

            "All losses to the permanent common school or any other state educational fund, which shall be occasioned by defalcation, mismanagement or fraud of the agents or officers controlling or managing the same, shall be audited by the proper authorities of the state.  The amount so audited shall be a permanent funded debt against the state in favor of the particular fund sustaining such loss, upon which not less than six per cent annual interest shall be paid.  The amount of liability so created shall not be counted as a part of the indebtedness authorized and limited elsewhere in this Constitution."

            In order for this section to apply, there must not only be a loss to the permanent educational fund but such loss must have been occasioned or caused by (1) defalcation; (2) mismanagement; or (3) fraud.  The purpose of this constitutional provision was stated by the court in State ex rel. Hellar v.  [[Orig. Op. Page 9]] Young, 21 Wash. 391, 58 Pac. 220 (1899), to be as follows:

            ". . . The purpose of § 5, art. 9, of the constitution, providing that 'All losses to the permanent common school or any other state educational fund which shall be occasioned by defalcation, mismanagement or fraud of the agents or officers controlling or managing the same shall be audited by the proper authorities of the state,' and 'The amount so audited shall be a permanent funded debt against the state in favor of the particular fund sustaining such loss,' etc., was not to render the fund less, but more, secure.  Its purpose was not to relieve one from the liability of restoring what he had illegally obtained, but to make the state a guarantor as against the acts of its officers as mentioned in this section. . . ." (p. 393)

            In short, this provision of our constitution does not prohibit the sustaining of losses to any of the permanent educational funds.  Nor does itimpose liability for even those losses occasioned by defalcation, mismanagement, or fraud upon the responsible agents or officers; such liability arises by reason of their misconduct, if any, in connection with incurrence of the loss and not because of the constitutional provision.  The sole purpose of Article IX, § 5, is to assure indemnification in the event loss by reason of the specified forms of misconduct does in fact occur.

            Furthermore, we are of the opinion that any loss of principal occurring solely by reason of the sale of "CEP&RI ‑ University permanent" fund investments made by the finance committee in order to comply with a directive of the board of regents under § 4, chapter 135, Laws of 1965, Ex Sess.,supra, would be a consequence of an entirely legal and authorized act involving none of the attributes of immorality or incompetence enumerated in the constitutional provision.5/

             [[Orig. Op. Page 10]]

            Accordingly, we answer both facets of your second question, as paraphrased, in the negative.

            Question (3):

            Repeated for ease of reference, your final question (as paraphrased) is as follows:

            "(3) Can the state finance committee comply with the 'transfer of funds' requirements of § 4, chapter 135, Laws of 1965, Ex. Sess., in view of the fact that the university permanent fund currently contains commingled funds derived from lands granted to the state of Washington under both §§ 14 and 17 of the Enabling Act?"

            The problem here of course is more a practical one than a legal one.  There is no question, under the law as described at the beginning of this opinion, that the only funds transferable from the university permanent fund to the university bond retirement fund or the university building account under § 4, chapter 135, Laws of 1965, Ex. Sess.,supra, are "CEP&RI ‑ University permanent" funds; i.e.,

            ". . . funds and investments derived from lands set apart for the support of the university by chapter 91, Laws of 1903 and § 9, chapter 122, Laws of 1893, . . ."

            However, you have advised that these funds are in fact commingled in the university permanent fund with proceeds derived from the first class of university lands (see, AGO 6364 No. 133); namely, the remnants of seventy-two sections of public lands granted to the state by § 14 of the Enabling Act.  These latter principal assets are clearly beyond the permissive scope of chapter 135, Laws of 1965, Ex. Sess.,supra, and quite probably are in any event not expendable without a further amendment to the Enabling Act.  See, AGO 59-60 No. 2, copy enclosed.

            We are satisfied that this state of affairs need not result in rejection of requested transfers.  It is well established that the fact of commingling does not in and of itself effect a change in the status of funds or property ‑ and that funds or property retain their separate identity so long as they can be clearly traced and identified.  Dupont De Nemours & Co. v. Garrison, 13 Wn.2d 170, 124 P.2d 939 (1942), and cases cited therein.

             [[Orig. Op. Page 11]]

            In this connection we are advised that our state department of natural resources and state treasurer's office have recently completed a careful and methodical study of prior transactions involving all of the lands in question.  Specifically, it has been determined by the department of natural resources that:

            (1) No monies derived from "C. E. P. & R. I." lands were placed in the University permanent fund prior to September 30, 1906;

            (2) From October 1, 1906, to April 19, 1965, inclusive, the total sum of $175,375.30 derived from university lands acquired under § 14 of the Enabling Act (original university grant lands) was placed in the University permanent fund.

            In addition, according to the state treasurer's records, the cash balance in the University permanent fund on September 30, 1906, was $38,110.30.  Finally, the state treasurer has reported that the cash balance in the University permanent fund on April 19, 1965 (the effective date of chapter 135, Laws of 1965), was $7,157,998.44.6/

             Remembering that it is only "C. E. P. & R. I. ‑ University fund" proceeds received as of April 19, 1965, which are available for transfer under § 4, supra,7/ it therefore follows that based upon these determinations the amount available for transfer is $6,944,512.84.8/   We attach hereto a copy of the certificate executed by the commissioner of public lands summarizing the findings of the department of natural resources in regard to the foregoing.

             [[Orig. Op. Page 12]]

            We trust the foregoing will be of assistance to you.

Very truly yours,

JOHN J. O'CONNELL
Attorney General

PHILIP H. AUSTIN
Assistant Attorney General

                                                         ***   FOOTNOTES   ***

1/Lest there be confusion in regard to this point, we do not view this conclusion as being in any way inconsistent with the conclusions reached in either AGO 63-64 No. 6 [[to Charles P. Moriarty, Jr., State Senator on January 23, 1963]](January 23, 1963), or AGO 65-66 No. 39 [[to State Finance Committee on September 15, 1965]](September 15, 1965).  The first of these opinions, indicating that Article IX, § 3, of the Washington Constitution presently bans use of the permanent common school fund as a base for school construction, has no application to the university permanent fund which is not a component of the permanentcommon school fund.  The second (and more recent) opinion, indicating that though not a component of the permanentcommon school fund (Article IX, § 3), the university permanent fund is included within the "permanent school fund" referred to in Article XVI, § 5 (Amendment 1), means merely that the last-cited constitutional inhibition as toinvestment applies to the university permanent fund.  Neither this opinion not the subject constitutional provision has anything to do with the uses to which the permanent university fund can be put.

2/And, as well, to the underlying May 31, 1962, congressional amendment of the Enabling Act.

3/We shall hereinafter use this short-hand abbreviation to denote that portion of the university permanent fund which is (as above described) derived from transactions involving the 100,000 acres of "charitable, educational, penal and reformatory institutions" lands set aside for the state university by § 9, chapter 122, Laws of 1893 and chapter 91, Laws of 1903, supra.

4/Accord:  Footnote 2, supra.

5/We should make clear, however, that were a loss in principal to be occasioned by the constitutionally prescribed misconduct, the responsible officers would not be exonerated simply because the transaction objectively consummating the previously dormant or inchoate loss was a sale of investments under authority of § 4, chapter 135, Laws of 1965, Ex. Sess.

6/Including book value of investments.

7/See question (1), supra.

8/!tt$7,157,998.44   !tt(bal. 4-19-65)
            ‑  175,375.30  (§ 14 land proceeds from 10-1-06 to 4-19-65)
            ‑   38,110.30   (§ 14 land proceeds to 10-1-06)
                         
$6,944,512.84

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