Washington State

Office of the Attorney General

Attorney General

Bob Ferguson

AGLO 1981 No. 3 -
Attorney General Ken Eikenberry


In the absence of a statute, charter provision, ordinance or bond covenant to the contrary, interest earned on the investment of state or municipal bond proceeds is to be credited to the building or other project fund into which those bond proceeds themselves were placed and not to the bond redemption fund.

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                                                                February 10, 1981

Honorable A. L. "Slim" Rasmussen
State Sen., 29th District
407-B Legislative Building
Olympia, Washington 98504                                                                                                                 Cite as:  AGLO 1981 No. 3

Dear Sir:

            By recent letter you requested our opinion on the following questions regarding the use of interest earned on the investment of municipal or state bond proceeds:

            "1.  If a city or county earns interest on the investment of the proceeds of a bond sale, can the interest then be spent, in addition to the original amount of the bond issue, on the capital project for which the bonds were issued?  Or, stated another way, can interest earned be used for any purpose other than the payment of principal and interest of the appropriate bond issue?

            "2.  Is the answer to Question 1 any different if the public body issuing the bonds is the State of Washington, rather than a city or county?"

            We answer your questions as set forth below. [[Orig. Op. Page 2]]


            Question (1):

            Your first question, as we understand it, assumes that a city or county has issued bonds in order to finance some particular building project or the like.  Then, pending actual disbursement of the bond proceeds to pay for the project, it has invested those proceeds and has earned interest thereon.  The issue you have raised is whether that interest is properly to be credited to (a) the building or other project fund from whence came the monies (i.e., the bond proceeds) through the investment of which the interest was earned, or (b) the bond redemption fund from which principal and interest on the bonds themselves is to be paid.  In the absence of a statute, charter provision, ordinance or authorized bond covenant to the contrary,1/ our answer would be the former; i.e., the building or other project fund and not the bond redemption fund.2/

             Typically, in the case of any state or municipal bond issue, there are two funds involved.  They are (a) the building or other project fund and (b) the bond redemption fund.  Those monies derived from the sale of the bonds go into the building or project fund and are used to finance the project itself.  Then, in turn, in order to pay principal and interest on the bonds, when due, other monies are placed in the bond redemption fund.  Those other monies may include certain tax revenues which have been pledged to the bondholders or they may, perhaps, be the operating revenues derived from the facility itself‑-as in the case of a toll bridge or the like.  But, in the absence of a statute, charter provision, ordinance or bond covenant so providing, those "other" monies which go into the bond redemption fund wouldnot include interest earned from investment of the bond proceeds.

             [[Orig. Op. Page 3]]

            The underlying reason for the foregoing is a principle of law which says that in the absence of any provision to the contrary, all interest earned through the investment of given public funds is to be credited to the fund (in this case, the building or other project fund) from which the monies being invested came.  As this concept was explained in our letter opinion of June 26, 1930 (copy enclosed) to the supervisor of municipal corporations, quoting from an earlier opinion dated April 11, 1923 to the same office:

            "'. . . The principle of law determinative of your question is the rule that funds raised by the issuance of bonds or by taxation for a designated purpose cannot be diverted to some other purpose in the absence of statutory authority therefor.  15 C. J. 584; 28 Cyc. 1653;State v. Mikkelson, 24 N. D. 175; see also, Quaker City Bank v. Tacoma, 27 Wash. 259.

            "'InComanche County v. Burks, 166 S. W. 470, it was held that permanent school funds could not be diverted to the payment of general county obligations and that, where such diversion has been made, the county officers are liable both for the amount of the funds illegally diverted, and interest.

            "'The legislature might have provided that interest on special funds should be paid into the city general fund as a measure of compensation to the city for handling the same, but not having done so, we think it is clear that interest earned by such special funds must be considered a part thereof and incapable of being diverted to the use of any other fund. See Maryland Fidelity & Casualty Company v. Wilkinson County, 109 Miss. 879.'"

            Question (2):

            In response to your second question, what we have just said in answer to question (1) is equally applicable, as a matter of principle, with respect to both state and municipal bonds. [[Orig. Op. Page 4]]

            It is hoped that the foregoing explanation will be of assistance to you.

Very truly yours,

Attorney General

Deputy Attorney General

                                                         ***   FOOTNOTES   ***

1/An absence which, for purposes of this opinion, you have asked us to assume.

2/Of course any expenditures from the building or other project fund would be subject to the applicable appropriation or budget process governing the particular public agency involved in the issuance of the bonds.