Washington State

Office of the Attorney General

Attorney General

Bob Ferguson

AGO 1993 No. 8 -
Attorney General Christine Gregoire

STATE--CITIES AND TOWNS--COUNTIES--TREASURER--FUNDS--INVESTMENTS--PUBLIC FUNDS--Ability of state and local governments to invest in commercial paper

1.   Article 8, sections 5 and 7, and article 12, section 9 of the Washington Constitution prohibit gifts or loans of public money or credit and the acquisition of interests in private stocks or bonds.

2.  RCW 43.84.080(7) authorizes the state treasurer, under certain circumstances, to invest public funds in commercial paper.  RCW 39.59.020 empowers local governments to make investments authorized by law for the state treasurer.

3.   Under article 8, sections 5 and 7, and article 12, section 9 of the Washington Constitution, state and local governments can invest in commercial paper purchased on the secondary market.

                                                                   * * * * * * * * * *

                                                                   April 27, 1993

Honorable Daniel K. Grimm
State Treasurer
Legislative Building, MS 0200
Olympia, Washington  98504-0200
                                                          Cite as:  AGO 1993 No. 8

Dear Mr. Grimm:

            By letter previously acknowledged you asked for our opinion on a question concerning the authority of certain public officials to invest in commercial paper.  We paraphrase your question as follows:

            Does article 8, section 5 or 7, or article 12, section 9 of the Washington Constitution limit the manner in which commercial paper may be acquired by state, county, or municipal treasurers?

            We answer your question as set forth in the analysis below.  Briefly stated, we conclude that state, county, and municipal treasurers may invest those public funds that are under their control and eligible for investment in commercial paper purchased on the secondary market.


            RCW 43.84.080 permits the state treasurer to invest public funds in commercial paper.  It provides in part as follows:

            Wherever there is in any fund or in cash balances in the state treasury more than sufficient to meet the current expenditures properly payable therefrom,the state treasurer may invest or reinvest such portion of such funds or balances as the state treasurer deems expedient in the following defined securities or classes of investments:

                       . . . .

                        (7)  Commercial paper:  PROVIDED, That the treasurer shall adhere to the investment policies and procedures adopted by the state investment board.

(Emphasis added.)  Although this statute authorizes only the state treasurer to invest in commercial paper, county and municipal treasurers are authorized under the terms of another statute to invest their funds in commercial paper.  RCW 39.59.020 provides in pertinent part that:

            In addition to any other investment authority granted by law and notwithstanding any provision of law to the contrary, the state of Washington andlocal governments in the state of Washington are authorized to invest their funds and money in their custody or possession, eligible for investment, in:

                       . . . .

                        (4)  Any investments authorized by law for the treasurer of the state of Washington or any local government of the state of Washington other than a metropolitan municipal corporation but, except as provided in chapter 39.58 RCW, such investments shall not include certificates of deposit of banks or bank branches not located in the state of Washington.

(Emphasis added.)  This provision extends to local governments power to invest in commercial paper similar to that granted to the state treasurer in RCW 43.84.080(7).  A "local government" for purposes of this statute includes any county, city, town, or municipal corporation in the state.  RCW 39.59.010(2).  Therefore, treasurers for the state, counties, and municipal corporations have statutory authority to invest certain funds in commercial paper, provided that the paper chosen for investment meets the criteria set by the State Investment Board.[1]  Your question is whether the state constitution restricts the acquisition of this paper.[2]

            Article 8, section 5 provides that:  "The credit of the state shall not, in any manner be given or loaned to, or in aid of, any individual, association, company or corporation."  Article 8, section 7 provides that:

                        No county, city, town or other municipal corporation shall hereafter give any money, or property, or loan its money, or credit to or in aid of any individual, association, company or corporation, except for the necessary support of the poor and infirm, or become directly or indirectly the owner of any stock in or bonds of any association, company or corporation.

Article 12, section 9 provides that:  "The state shall not in any manner loan its credit, nor shall it subscribe to, or be interested in the stock of any company, association or corporation."[3]

            Together, these three sections prohibit two broad categories of transactions:  (1) gifts or loans of public money or credit, and (2) acquisition of interests in private stocks or bonds.  We must consider whether these sections restrict the manner in which commercial paper may be acquired.  We begin with a discussion of the nature of commercial paper.  We then consider whether its acquisition violates the prohibition on giving or loaning public money or credit or acquiring interests in private stocks or bonds.

Nature of Commercial Paper

            When the phrase is used in a legal sense, "commercial paper" describes a very wide range of instruments.  A legal dictionary, for example, defines commercial paper as "[b]ills of exchange (i.e., drafts), promissory notes, bank-checks, and other negotiable instruments for the payment of money, which, by their form and on their face, purport to be such instruments."  Black's Law Dictionary 271 (6th ed. 1990);see alsoMartin v. McAvoy, 130 Wash. 641, 644, 228 P.2d 694 (1924) (commercial paper is negotiable paper given in due course of business).  In essence, commercial paper is a written promise to pay a definite sum of money, either on demand or at a specified time.

            Since the term "commercial paper" is used in a statute dealing with the state treasurer's authority to invest funds in various securities and other investment vehicles, however, we believe it should be given the narrower meaning it carries in the financial world.[4]  In that setting, commercial paper is understood to be a short-term, unsecured obligation issued by commercial, agricultural, or industrial concerns.  SeeEncyclopedia of Banking & Finance 194-95 (G. Munn, F.L. Garcia & C. Woelfel 9th ed. 1991);see alsoSecurities Indus. Ass'n v. Board of Governors, 807 F.2d 1052, 1055 (D.C. Cir. 1986).  Such paper matures in nine months or less,[5]and generates revenue used to meet current capital, as opposed to speculative or investment, needs of the issuer.  Id. Given its short life span and the generally prudent use made of the funds for which it is exchanged, commercial paper, while not without risk, generally is considered a sound investment vehicle.  Encyclopedia of Banking & Finance, at 195.  Commercial paper may be acquired directly from the issuer, or may be purchased on the secondary market.

Gift or Loan of Public Money or Credit

            We now consider whether acquisition of commercial paper is restricted as a result of the constitutional prohibition against gifts or loans of public money or credit.  Despite obvious textual differences between article 8, section 5, and article 8, section 7, the Washington Supreme Court on many occasions has stated that the gift and loan provisions of the two should be construed identically.  See, e.g.,Citizens for Clean Air v. Spokane, 114 Wn.2d 20, 39 n.8, 785 P.2d 447 (1990);see also  Washington Health Care Facilities Auth. v. Ray, 93 Wn.2d 108, 115, 605 P.2d 1260 (1980).  Furthermore, in the only reported case we have located construing article 12, section 9, the court appeared to equate the credit provisions of that section with the credit provisions of article 8, section 5.  SeeSeattle & Lake Washington Waterway Co. v. Seattle Dock Co., 35 Wash. 503, 513-14, 77 P. 845, aff'd, 195 U.S. 624, 49 L. Ed. 350, 25 S. Ct. 789 (1904).

            Accordingly, we read the three provisions together to prohibit the state, counties, cities, towns, and other municipal corporations from giving or loaning their money or credit to or in aid of any individual, association, company, or corporation.  Thus, we must consider whether acquiring commercial paper produces any of four prohibited transactions:  a gift of money, a gift of credit, a loan of money, or a loan of credit.  We will first consider whether it constitutes a loan of money.

            In recent opinions involving article 8, sections 5 and 7, the State Supreme Court has characterized its previous approach to these provisions as "checkered", and announced its intention to apply a more narrow interpretation based upon the concerns of the framers of our constitution.  See, e.g.,Marysville v. State, 101 Wn.2d 50, 52-55, 676 P.2d 989 (1984), andIn re Marriage of Johnson, 96 Wn.2d 255, 264, 634 P.2d 877 (1981).  To determine what motivated the drafters to include these provisions in the constitution, the court inJohnson reviewed the historical record.  Drawing on the Journal of the Washington State Constitutional Convention, as well as on discussions in cases decided by the courts of states with constitutional prohibitions similar to our own, the court concluded that the drafters acted  

            in response to reckless government subsidization of public and communication projects. . . . State and local governments had purchased stock in such enterprises or acted as surety on issued bonds. . . . These private ventures were highly speculative and many failed, leaving governmental entities, and thus the taxpayer, either holding worthless stock or liable for large, inadequately secured debts. . . .

                        The constitutional provisions were a response to two features of those schemes. . . . They jeopardized state assets and, secondly, the public lacked control over both the enterprise and the extent of the public's liability.  These evils resulted in the creation of section 5. . . .  In the debates surrounding section 5, the delegates denounced "government subsidization of private enterprise." . . . Their disapproval was so great that they rejected a provision exempting those subsidies which served public purposes. . . . They also vituperatively spoke of government entanglement with private enterprise and the public's inability to control any attendant liability.

Id.at 265-66 (citations omitted).

            As the quotation above illustrates, the drafters had two principal concerns:  avoiding the subsidy of private enterprise and protecting public funds from excessive risk.  InState ex rel. Graham v. Olympia, 80 Wn.2d 672, 676, 497 P.2d 924 (1972), the court considered these motivating factors and the language of article 8, sections 5 and 7, and declared that the constitutional prohibition is against "loans as used in the ordinary and popular sense, between a lender and a borrower, where a question of the security of funds in such transactions would be involved".  The court said "loan" should be interpreted in this way, in part because language in the constitution, which was written for adoption by voters of this state, is presumed to mean that which a voter -- a person of ordinary prudence and average intelligence and information -- would understand it to mean.  SeeState ex rel. O'Connell v. Public Util. Dist. 1 of Klickitat Cy., 79 Wn.2d 237, 240-41, 484 P.2d 393 (1971).

            A "loan" is commonly understood to be

            an advancement of money or other personal property to a person, under a contract or stipulation, express or implied, whereby the person to whom the advancement is made binds himself to repay it at some future time, together with such other sum as may be agreed upon for the use of the money or thing advanced.

Id.at 241; Hafer v. Spaeth, 22 Wn.2d 378, 384, 156 P.2d 408 (1945).

            Applying the ordinary definition of a loan, the court concluded that depositing public funds in interest-bearing time accounts with banks, mutual savings banks, and savings and loan associations did not constitute loaning those funds.  The court identified two reasons for distinguishing bank deposits from ordinary loans.  First, it stated that loans usually are associated with a risk of loss.  Almost no risk of loss, however, accompanies bank or association deposits of public funds.  Such deposits are federally insured, and also are required by statute to be collateralized against loss.  Graham, 80 Wn.2d at 677-82.  As a result, the court considered the protection against loss of public deposits in banks and associations as virtually absolute.  Id. at 680.

            Second, the court reasoned that people opening interest-bearing time accounts did not believe themselves to be loaning money to the bank or association.  Id. at 676.  In other words, since a deposit would not be understood in the "ordinary and popular sense" as a loan, the prohibition against loans of money in article 8, section 5 of the state constitution was not intended to apply to the accounts in question.  Id. at 676.

            A deposit is not ordinarily thought of as a loan, the court suggested, in part, because the depositor does not enter into the transaction to benefit the banking institution.  Instead, a depositor acts for the depositor's own benefit by securing a return on what otherwise would be idle funds.  Id. at 676-77.  Thus, the purpose of the transaction should be considered in determining whether it constitutes a loan prohibited by the state constitution.

            Having reviewed several of the court's rulings on the constitutional restrictions on loaning money, we now examine the extent to which these provisions affect the acquisition of commercial paper by state, county, and municipal treasurers.

Loan of Money

            In our view, the manner in which a treasurer acquires commercial paper determines whether the transaction constitutes a constitutionally prohibited loan of money.  If the paper is acquired directly from the issuer, the transaction has the distinctive features of a loan as defined by the State Supreme Court.  That is, the lender advances money to the borrower, which binds itself in the note -- the commercial paper -- to repay the money, plus interest, at some future date.  SeeO'Connell, 79 Wn.2d at 240-41.

            A very different transaction occurs, however, when commercial paper is purchased on the secondary market.  In that situation, a lender already has loaned money to a borrower, and has received commercial paper in exchange.  This paper evidences the lender's right to receive payments of principal and interest from the borrower.  When commercial paper is sold on the secondary market, it is this valuable right to receive payments that the lender sells to the investor.  The investor advances nothing to the borrower.  In other words, the investor does not loan money to the borrower.  Accordingly, the constitutional prohibition against loans of money would not restrict such purchases.[6]

            State ex rel. Graham v. Olympia considered two additional criteria before determining whether a transaction fitting the definition of a "loan" actually constitutes one for purposes of article 8, sections 5 and 7, or article 12, section 9:  the purpose of the acquisition and the risk of loss.

            An investor acquires commercial paper to earn a return.  The acquisition, therefore, is not primarily motivated by a desire to benefit the borrower, but to enrich the investor.  Thus, the purpose of acquiring commercial paper directly from the issuer is not one that the constitutional drafters intended to ban.

            While the risk of loss on commercial paper may not be great, it does exist; commercial paper is neither insured against loss nor collateralized, as are deposits in banks and savings and loan associations.  Certainly, it lacks the "virtually absolute" protection against loss the court found existed for bank deposits.  Graham, 80 Wn.2d at 680.  Since it is not possible to identify with precision the level of risk with which the drafters were concerned, we must conclude that even a low risk is a significant constitutional consideration.

            Although acquisitions of commercial paper directly from an issuer may not present a high level of risk and ordinarily would not be motivated by a desire to benefit a borrower, we believe that direct acquisitions of commercial paper are sufficiently similar to ordinary loans to fall within the prohibition of article 8, sections 5 and 7, and article 12, section 9.  Because they fit the definition of a "loan" and present some risk of loss to the investor, we conclude that state, county, and municipal funds subject to article 8, section 5 or 7, or article 12, section 9, cannot be used to acquire commercial paper directly from the issuer.[7]  These funds may, however, be used to acquire commercial paper on the secondary market for reasons explained above.

            We now consider whether the remaining prohibitions against loans of credit, and gifts of money or credit restrict the acquisition of commercial paper.

Loan or Gift of Credit

            The State Supreme Court has held that there can be no gift or loan of credit in violation of article 8, section 5 or 7, unless the transaction actually involves public credit.  Washington Higher Educ. Facilities Auth. v. Gardner, 103 Wn.2d 838, 847, 699 P.2d 1240 (1985).  And inGruen v. State Tax Comm'n, 35 Wn.2d 1, 211 P.2d 651 (1949), overruled on other grounds, State ex rel. Washington State Fin. Comm. v. Martin, 62 Wn.2d 645, 384 P.2d 833 (1963), the court construed "credit" as the guaranteeing of private debt.  Thus, a public entity loans its credit when it acts as surety for a borrower.  Gardner, 103 Wn.2d at 847.

            While commercial paper obviously evidences the creation of debt, the public does not become a guarantor or surety for the debt by purchasing this paper.  To the contrary, it becomes the entity to which payment is owed.  In other words, the purchase of paper creates nopublic debt or guaranty.  SeeEngelking v. Investment Bd., 93 Idaho 217, 222, 458 P.2d 213 (1969) (holding that no loan of credit occurred in violation of Idaho constitutional provision nearly identical to article 8, sections 5 and 7, when state funds were invested).  Consequently, no gift or loan of credit occurs when the state, counties, or municipalities acquire commercial paper.

Gift of Funds

            Nor does there occur a gift of money when these entities acquire commercial paper.  A gift for purposes of article 8, sections 5 and 7, is a transfer of property without consideration and with donative intent.  SeeTacoma v. Taxpayers, 108 Wn.2d 679, 702, 743 P.2d 793 (1987).  Public entities purchase commercial paper because they wish to earn a return on their funds.  The contractual right to receive payment of principal and interest suffices as consideration, and the desire to make money establishes that the acquisition is not motivated by donative intent.  Thus, under any ordinary circumstances, purchasing commercial paper would not constitute a gift for purposes of constitutional constraints.

Interest in or Ownership of Stocks or Bonds

            Finally, we consider whether acquisition of commercial paper can be deemed acquisition of an interest in or ownership of stock or bonds.  While explicit mention of bonds is made only in article 8, section 7, this prohibition against acquiring bonds in private entities may be read into article 8, section 5, and article 12, section 9.  The more detailed provisions of article 8, section 7, have been read into article 8, section 5, by implication.  See, e.g.,Gardner, 103 Wn.2d at 845.

            Clear differences exist between commercial paper and stock.  As discussed above, commercial paper is a business's promissory note.  The holder of the paper is entitled to receive payments of principal and interest from the issuer.  The holder is not, however, entitled to participate in the management of the business, as an owner of stock in that business would be.  Nor does commercial paper entitle the holder to any ownership interest in the business that issued the paper.  SeePublic Util. Dist. 1 of Snohomish Cy. v. Taxpayers, 78 Wn.2d 724, 728, 479 P.2d 61 (1971) (distinguishing joint ownership of electric generating plant from ownership of stock in the plant).  For these reasons, we are convinced that the constitutional prohibitions on interest in or ownership of stock place no restriction on the acquisition of commercial paper.

            Remaining for consideration is whether acquiring commercial paper constitutes acquiring an interest in or ownership of bonds.  While notes -- commercial paper, in other words -- and bonds both evidence corporate debt, we believe that the drafters of the constitution ascribed different meanings to the terms.  First, the two words were not considered synonymous when the constitution was written.  Legal treatises from that era, for example, discussed notes and bonds separately.  See, e.g., L. Jones,Corporate Bonds and Mortgages 193 (discussing authority of corporation to make promissory notes), 198 (discussing authority of corporation to issue bonds) (2d ed. 1890); J. Story, Promissory Notes 708 n.1 (7th ed. 1878) (describing corporate bonds as member of class of "other securities for money which differ from [promissory notes] in some respects, but resemble them in others, and are governed by the same rules of the law merchant"); and II T. Parsons,Promissory Notes and Bills of Exchange 114-15 (2d ed. 1875) (discussing bonds in chapter entitled "Of Instruments Similar in Character to Notes and Bills").  Courts also distinguished between bonds and notes.  SeeLeavitt v. Blatchford, 17 N.Y. 521, 541 (1858) (statute forbidding corporate sale of bills and notes did not apply to issuance of bonds).

            Second, the drafters used a broader expression elsewhere in the constitution when they meant to cover debt instruments other than bonds.  Article 12, section 6, provides in part that:

            Corporations shall not issue stock, except to bona fide subscribers therefor, or their assignees;nor shall any corporation issue any bond, or other obligation, for the payment of money, except for money or property received or labor done.

   (Emphasis added.)  The phrase "or other obligation, for the payment of money" clearly encompasses such instruments as notes.  That the drafters inserted this phrase in article 12, section 6, suggests strongly that they did not believe "bonds", standing alone, included other debt instruments.  We must assume that their understanding of the word was the same when they wrote article 8, section 5, as when they wrote article 12, section 6.  Accordingly, we conclude that the prohibition against ownership of or interest in bonds does not extend to ownership of or interest in promissory notes.  Therefore, this prohibition has no effect on how state, county, or municipal treasurers may acquire commercial paper.

            We trust that this opinion will be of assistance to you.

                                                                        Very truly yours,

                                                                        CHRISTINE O. GREGOIRE
                                                                        Attorney General

                                                                        TANYA BARNETT
                                                                        Assistant Attorney General


    [1]In the interest of brevity we will not mention this proviso each time we refer to the authority of a public official to invest funds in commercial paper.  Instead, we note here the general applicability of this restriction.

    [2]We approach this question with some familiar rules of statutory construction in mind.  Paramount among these is the rule that the Legislature's intent should be carried out.  In re Eaton, 110 Wn.2d 892, 898, 757 P.2d 961 (1988).  Consequently, where a statute is susceptible to more than one interpretation, we choose the one that most closely fits the legislative intent.  State v. Demos, 94 Wn.2d 733, 739, 619 P.2d 968 (1980).  However, we also presume that the Legislature meant to enact laws that are constitutional.  Thus, if the possible interpretations include one that would be consistent with constitutional dictates, and one that would conflict with them, we must conclude that the Legislature intended the former.  SeeGrant v. Spellman, 99 Wn.2d 815, 819, 664 P.2d 1227 (1983).

    [3]We should note those funds to which article 8, sections 5 and 7, and article 12, section 9 do not apply.  As we concluded in AGO 1986 No. 5, the permanent common school fund, public pension or retirement funds, and industrial insurance trust funds may be invested in any manner authorized by statute.  This is because amendments to the state constitution have exempted each of these funds from the restraints formerly imposed on them by various constitutional provisions.  Amendment 44, passed in 1966, provides that:  "The permanent common school fund of this state may be invested as authorized by law."  Amendment 75, passed in 1985, provides that:

     Notwithstanding the provisions of sections 5, and 7 of Article VIII and section 9 of Article XII or any other section or article of the Constitution of the state of Washington, the moneys of any public pension or retirement fund or industrial insurance trust fund may be invested as authorized by law.

    [4]We note that this understanding of the phrase was also the one held by the state treasurer, who requested that RCW 43.84.080 be amended to permit investment in commercial paper.  In a memorandum attached to the fiscal note on Senate Bill 4507, which was enacted as Laws of 1982, ch. 148, § 1, p. 616, and later codified as RCW 43.84.080(7), the treasurer wrote that "[c]ommercial paper is a short-term high yielding instrument of investment consisting of a note sold by a large business corporation."

    [5]This characteristic of commercial paper is a consequence of the securities laws, which exempt paper that matures in 270 days or less from the registration requirements applicable to other securities.  See 15 U.S.C. § 77c(a)(3); RCW 21.20.310(9).

    [6]The conclusion could well be different if the government agency was involved in the initial transaction that created the commercial paper.  In State ex rel. O'Connell v. Public Util. Dist. 1 of Klickitat Cy., 79 Wn.2d 237, the court applied its definition of a loan to a public utility district's practice of purchasing the seller's interest in conditional sales contracts for electrical equipment.  The district paid the seller an amount equal to the balance owing on each of the contracts so purchased.  In return, the district received the right to collect payments of principal and interest from the vendee of the contract.  This transaction, the court said, clearly constituted a loan of the district's money in violation of article 8, section 7, because the district presently paid out money in exchange for the right to receive future repayment, together with interest.  Id.

     Considered in isolation, this opinion suggests that any current payment of money in exchange for the right to receive future repayment -- including the purchase of a seller's or lender's interest in a contract or a note -- constitutes a loan.  Were this the law, then the purchase of commercial paper even on the secondary market would be deemed a loan.  However, we do not believe the court announced so sweeping a rule in O'Connell.  Additional facts in the case that were reported only in the court of appeals decision firmly distinguish the purchase of contracts at issue there from the purchase of commercial paper contemplated here.

     The trial court in that case found that the district actively participated in the underlying transaction, the sale of electrical equipment on credit to the consumer.  SeeState ex rel. O'Connell v. Public Util. Dist. 1 of Klickitat Cy., 2 Wn. App. 366, 369, 469 P.2d 922 (1970), rev'd, 79 Wn.2d 237, 484 P.2d 393 (1971).  Although the district reserved the right not to purchase any of these conditional sales contracts, it appears that the vendor relied on the district to take over many if not most of the contracts it signed.  Under such circumstances, the Supreme Court found that the district loaned its money when it took an assignment of the vendor's interest in the contract.

     In contrast, we do not anticipate that a public entity purchasing commercial paper on the secondary market would have any involvement in the underlying transaction, the loan of money from the lender to the borrower.  Certainly, no lender selling paper on the secondary market could rely on a public entity to buy its interest in the paper.  Since public treasurers purchasing paper on the secondary market would act independently, rather than in concert with the lenders, we believe their purchases would not be deemed loans.

    [7]We concluded in AGO 1988 No. 26 that the authority of municipal treasurers to invest in commercial paper was not restricted by unwritten informal policies of the State Investment Board.  That opinion did not discuss differences in authority depending on whether the paper is acquired directly from the issuer or acquired on the secondary market.  We discuss that here because we are asked for the first time whether the constitution imposes any restrictions on investment in commercial paper.  AGO 1988 No. 26 remains, in our view, the correct statement of the law with respect to the questions answered therein.