FUNDS ‑- PERMANENT STATE FUNDS ‑- INVESTMENT IN FHA DEBENTURES

FUNDS ‑- PERMANENT STATE FUNDS ‑- INVESTMENT IN FHA DEBENTURES.

Debentures issued by the Federal Housing Administration which are unconditionally guaranteed by the United States as to both principal and interest are authorized for investment of the permanent funds described in RCW 43.84.010.

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                                                                February 21, 1963

State Finance Committee
Legislative Building
Olympia, Washington

                                                                                                                Cite as:  AGO 63-64 No. 12

Attention:  Mr. Roy A. Pitt, Jr., Secretary
Dear Sir:

            By letter previously acknowledged you have requested an opinion of this office on a question which we paraphrase as follows:

            Are debentures issued by the Federal Housing Administration in settlement of claims against FHA mortgage insurance commitments an authorized investment for the permanent funds described in RCW 43.84.010?

            We answer your question in the affirmative for the reasons set forth below:

                                                                     ANALYSIS

            RCW 43.84.010 provides as follows:

            "Whenever there are in the permanent common school fund or in the permanent funds of the state university, scientific school, agricultural college, colleges of education, or the charitable, educational, penal, and reformatory institutions, one thousand dollars or more available for investment, the state finance committee shall invest the same in national, state, county, municipal, or school district bonds; purchasing them either directly or in the open market.  The bonds may bear such interest rates as the state finance committee may determine.

            "In the purchase of such bonds the committee may pay such premium as it may determine:  Provided, That  [[Orig. Op. Page 2]] where bonds are purchased at a premium the state treasurer shall amortize the premium from the interest collected by methods of accounting commonly used by banks and insurance companies to the end that the principal trust funds so invested may not be impaired.

            "The state finance committee may sell any bond or bonds and reinvest the proceeds as provided in this section.

            "The word 'bonds' does not mean or include any special, or assessment district bonds, orbonds other than those found to be within the limit of indebtedness prescribed by law, and authorized and issued as general obligation bonds.

            "School district bonds, duly authorized and issued, shall be given preference in such investments.

            "When an investment is made, the state auditor shall draw his warrant on the proper fund for the amount invested, and the bonds purchased shall be deposited with the state treasurer, who shall collect all interest and principal payments falling due thereon.

            "The state finance committee shall sell no bonds under its control except upon a unanimous vote of its membership at a meeting at which all members are present."  (Emphasis supplied.)

            It is thus apparent that Federal Housing Administration debentures as described in your question are an authorized investment for the permanent funds to which this statute is applicable only if such debentures qualify as "national bonds;" i.e., general obligation bonds of the United States.

            There can be no doubt that these debentures, issued by the Federal Housing Administration in settlement of claims arising against FHA mortgage insurance commitments, are unconditionally guaranteed by the United States as to both principal and interest.  38 Op. Atty. Gen. 319 (October 9, 1935), referred to in our letter to you of January 15, 1963 (concerning the investment of certain public employees' retirement funds in these same FHA debentures).  This, we believe, is sufficient to qualify the debentures as a "general obligation" of the United States.

            Given this proposition, we believe it follows that the debentures  [[Orig. Op. Page 3]] are national debentures, that is, debentures of the United States even though they are actually issued by the Federal Housing Administration, an agency of the United States.

            The only remaining question, then, is whether a "debenture" can be considered a "bond" as the latter term is used in RCW 43.84.010, supra.  Article XVI, § 5, (Amendment 1), of the State Constitution provides:

            "None of the permanent school fund of this state shall ever be loaned to private persons or corporations, but it may be invested in national, state, county, municipal or school districtbonds."  (Emphasis supplied.)

            InState ex rel. Hellar v. Young, 21 Wash. 391, 58 Pac. 220 (1899), it was held that warrants drawn by the state auditor upon the state's general fund do not constitute bonds, in which the permanent school fund may be invested, within the meaning of this constitutional provision, stating:

            ". . . Neither in legal strictness nor in the common acceptation of the term can a warrant be considered a bond."

            It seems obvious that the term "bond" as used in RCW 43.84.010,supra, (relating to the investment of permanent funds including the permanent common school fund) can be given no broader meaning than it has in the context of Article XVI, § 5, (Amendment 1), of our State Constitution,supra.  Soundview Pulp Co. v. Taylor, 21 Wn. (2d) 261, 150 P. (2d) 839 (1944), and cases cited therein.  Thus, underState ex rel. Hellar v. Young, supra, a warrant cannot be considered a bond for the purposes of this statute.  This, to repeat, is because:

            ". . .Neither in legal strictness nor in the common acceptation of the term can a warrant be considered a bond."  (Emphasis supplied.)

            If a warrant cannot be considered a bond for the purposes here under consideration, can a debenture be so considered?

            In the case of obligations issued by business corporations, a debenture is ordinarily distinguished from a bond in that a bond is usually secured by a mortgage or the like, while a debenture usually is not so secured.  Fine v. H. Klein, Inc., 10 N.J. Super. 295, 77 A. (2d) 295 (1950); General Motors Acceptance Corporation v. Higgins, 161 F. (2d) 593 (1947).  However, when we speak of obligations issued by a governmental body, this distinction vanishes.  The general obligation of a public  [[Orig. Op. Page 4]] body is one which is payable out of any and all funds or property of the obligor without regard to source.  43 Am.Jur., Public Securities and Obligations, § 282.

            Of course a debenture issued by the Federal Housing Administration in settlement of claims against FHA mortgage insurance commitments is, by its terms, a promissory instrument.  In this respect, therefore, the debenture is like a bond and unlike a warrant.  Accordingly it is our considered opinion that though a warrant cannot be considered a bond for purposes of the statutes here under consideration, State ex rel. Hellar v. Young, supra, a Federal Housing Administration debenture as described in your question can be considered to be a form of bond both in the sense of "legal strictness" and in conformity with the common acceptation of the term recognizing that we are dealing with an instrument evidencing the promissory obligation of a public body rather than that of a private business corporation.

            Therefore we conclude that debentures issued by the Federal Housing Administration in settlement of claims against FHA mortgage insurance commitments, as described in your question, are an authorized form of investment for the permanent funds, including the permanent common school fund, described in RCW 43.84.010, supra.

            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