INVESTMENTS—PUBLIC FUNDS—STATE-EDUCATION—Investment Of Certain Scholarship Funds In Stocks Of Private Companies
State matching funds held in the Washington State Opportunity scholarship and endowment accounts probably may not be invested in the stocks of private companies pursuant to article XII, section 9 of the Washington Constitution.
December 14, 2015
Brad Smith, Chair
Dear Mr. Smith:
By letter previously acknowledged, you have requested our opinion on the following paraphrased question:
May state matching funds held in the Washington State Opportunity scholarship and endowment accounts be invested in stocks of private companies, associations, or corporations?
Probably not. Article XII, section 9 of the Washington Constitution prohibits the investment of state funds in the stock of private companies unless otherwise permitted by another constitutional provision. In determining whether particular funds may be invested in private stocks, the overarching question is whether the funds are public or private. The statutes governing the state matching funds held in the scholarship and endowment accounts have some features supporting the conclusion that the funds should be considered private, and some features supporting the conclusion that the funds should be considered public. Although reasonable minds could differ, we conclude that the funds would likely be deemed public funds because they consist primarily of legislative appropriations from general government revenues and the State retains some control over the funds until they are disbursed to scholarship recipients. There is no constitutional provision authorizing investment of these funds in the stock of private companies. Therefore, article XII, section 9 would likely prohibit such investment.
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In 2011, the legislature passed the Opportunity Scholarship Act. RCW 28B.145. The Act created the opportunity scholarship program to help low and middle-income resident students pursue baccalaureate degrees in high employer demand programs and to encourage scholarship recipients to work in this state. RCW 28B.145.005, .040(1). The Act also created the Opportunity Scholarship Board (Scholarship Board) to oversee the program. RCW 28B.145.020.
The Scholarship Board is staffed by a “Program Administrator” defined as “a college scholarship organization that is a private nonprofit corporation registered under Title 24 RCW and qualified as a tax-exempt entity under section 501(c)(3) of the federal internal revenue code, with expertise in managing scholarships and college advising.” RCW 28B.145.010(8), .020(5). The Program Administrator serves under contract with the Washington Student Achievement Council and is responsible for many of the day-to-day operations of the scholarship program. RCW 28B.145.030. The Council is a legislatively created, nine-member body whose mission generally is to promote higher education. RCW 28B.77.003, .005.
Scholarships are funded by a combination of private grants and contributions and state matching funds. RCW 28B.145.040(4). Private contributions earn a state match up to a maximum of fifty million dollars annually. RCW 28B.145.040(4). State matching funds are appropriated by the legislature and placed in the opportunity scholarship match transfer
account, which is a non-appropriated account in the custody of the state treasurer. RCW 28B.145.050(1), (2). The purpose of the account is to provide matching funds for the opportunity scholarship program. RCW 28B.145.050(1). Only the executive director of the Council or the director’s designee may authorize expenditures from the account, and expenditures cannot exceed the total amount of private contributions to the scholarship program. RCW 28B.145.050(3), (4). Before the director can authorize expenditures, two conditions must be met: (1) the Program Administrator must provide proof of private contributions to the program; and (2) the Council and Program Administrator must enter into an agreement demonstrating an exchange of consideration for the state matching funds.
RCW 28B.145.050(3), (5).
Expenditures from the opportunity scholarship match transfer account are deposited, along with private contributions, in one of two accounts established and managed by
the Program Administrator: the scholarship account and the endowment account. RCW 28B.145.030(2). The legislature has declared that, once funds are transferred into one of these two accounts, the State acts in a fiduciary rather than an ownership capacity and the funds are not considered state monies or revenues. RCW 28B.145.030(2)(b)(iv). The Program Administrator is directed to achieve “the maximum possible rate of return on investment of the accounts.” RCW 28B.145.030(1). At the discretion of the Scholarship Board, funds in the two
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accounts may be invested by the Washington State Investment Board (Investment Board). RCW 28B.145.090(1). The Investment Board is authorized to invest, reinvest, manage, contract, sell, or exchange funds in the two accounts. RCW 28B.145.090(1). Funds in the accounts may be commingled with other funds invested by the Investment Board. RCW 28B.145.090(3).
With the exception of investment costs which are paid from investment proceeds, only the Scholarship Board or its designee may authorize disbursements from the accounts, and only for the purposes specified in the Act. RCW 28B.145.090(6). Funds in the scholarship account must be disbursed every October. RCW 28B.145.030(2)(b)(i). Funds in the endowment account are disbursed only when mandatory targets are met. RCW 28B.145.030(2)(b)(ii).
The Scholarship Board and the Council have contracted with the College Success Foundation to serve as the Program Administrator. The contract with the Foundation specifies: “All assets held in the Scholarship Account and in the Endowment Account are held in trust by [the College Success Foundation] for the exclusive benefit of the WSOS Board to carry out the purposes set forth in Ch. 28B.145 RCW.” Contract No. 15-CS-095 (Contract), at 3 (attached to your request letter).
This background and these relevant provisions of RCW 28B.145 provide the backdrop against which we analyze your question.
You ask whether state matching funds held in the scholarship and endowment accounts can be invested in stocks and bonds of private companies, associations, or corporations. This question implicates article XII, section 9 of the Washington Constitution: “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.” We must consider whether this provision limits the investment options available to the Investment Board under RCW 28B.145.090 as to the state matching funds.
In 2000, our office analyzed article XII, section 9 in considering whether funds held in the advanced college tuition payment program account (commonly referred to as the GET program) could be invested in private companies. AGO 2000 No. 5 (attached). In that opinion, we noted that there is no significant body of Washington case law to help answer the question and that courts in other states with similar constitutional provisions have been divided in their
analytical approaches. We also noted that the purpose behind article XII, section 9 is not clearly
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articulated, thereby making it more difficult to predict how a court might apply it to a particular set of facts. AGO 2000 No. 5, at 5. All of these difficulties remain today, and we have found no useful developments in the case law on this topic since our 2000 opinion. These facts make it challenging to predict with any certainty how a court would answer your question. However, the analysis in the 2000 opinion provides a useful framework for determining whether certain funds may be invested in private stocks.
Here, as in the 2000 opinion, the overarching question is whether the funds at issue are public funds or private funds. If the funds are public, then the plain language of article XII, section 9 prohibits their investment in private stocks because that would result in the State being impermissibly “interested in the stock” of a private company, association, or corporation. If the funds are private, then the constitution places no limitation on their investment.
Like the statute considered in our earlier opinion, the Act expressly provides that the funds at issue are held in a “fiduciary” capacity rather than an “ownership” capacity. RCW 28B.145.030(2)(b)(iv). This description suggests that the legislature intended the funds to be considered private rather than public. But while this legislative intent is given great weight, it does not control the analysis. See State ex rel. Washington State Bldg. Fin. Auth. v. Yelle, 47 Wn.2d 705, 710-12, 289 P.2d 355 (1955) (determining entity described in statute as “body politic and corporate” was actually state agency); In re Interest of N.M., 102 Wn. App. 537, 542, 7 P.3d 878 (2000) (label affixed by legislature not controlling; court looks to actual effect); West Virginia Trust Fund, Inc. v. Bailey, 199 W. Va. 463, 473-74, 485 S.E.2d 407 (1997).
Rather than relying exclusively on the statutory language, the 2000 opinion focused on four factors in concluding that funds held in the advanced college tuition payment program account were private rather than public. The first factor was that no part of the account was derived from taxes, fees, or other governmental revenues. AGO 2000 No. 5, at 7. The other three factors focused on who ultimately owns or controls the funds. We concluded that the funds in the college tuition payment program account were not public funds because: (1) the State had no legal entitlement to use the money in the account, unless and until a private third party (the account holder) requested their use; (2) funds in the account were refundable to the private program participant up until the date that tuition units purchased with the funds were redeemed
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for educational costs; and (3) the program was voluntary because no person had any obligation to purchase tuition units. AGO 2000 No. 5, at 7. Based on all of these factors, we ultimately concluded that it was the private participants and not the State that owned and controlled the funds in the college tuition payment program account. But we noted that the question was a close one and that even slight variations in the program’s structure could result in a contrary conclusion. AGO 2000 No. 5, at 7 n.10.
Before applying this test to the scholarship funds here, it is important to be precise about what we are analyzing. There does not appear to be any question that the State owns the funds that are placed in the opportunity scholarship match transfer account and in the custody of the state treasurer. At that point, the funds are clearly public. The crucial question is whether the funds remain public after they are transferred, in exchange for consideration, from the opportunity scholarship match transfer account into the scholarship and endowment accounts.
Although we think it a close question, we believe that the funds remain public funds even after they are transferred. All four factors analyzed in our 2000 opinion suggest this result, though to varying degrees.
The first factor is the source of the funds. Unlike with the GET program, the state scholarship matching funds here consist almost exclusively of taxes or other governmental revenues that have been appropriated by the legislature. RCW 28B.145.050(2). This weighs in favor of deeming them public. This factor is important because where funds unquestionably start off as public, there is always a risk that by transferring those funds to another entity the State is attempting to circumvent article XII, section 9. See, e.g., Sprague v. Straub, 252 Or. 507, 524-25, 451 P.2d 49 (1969) (emphasizing that State could not circumvent provision simply by transferring money to another entity). By contrast, where funds unquestionably start off as private, as with private investments in the GET program or private donations to the scholarship and endowment accounts here, the funds were never public in the first place and there is no risk of circumvention apparent.
The second factor is whether the State retains the right to use the funds after they are transferred into the scholarship and endowment accounts. As with the GET program, here the State does not appear to retain the right to use these funds for any other purpose after they are transferred. That said, the State retains some control over how the funds are ultimately
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used. Only a state entity, the Scholarship Board or its designee, may authorize expenditures from the accounts and only for the purposes established in the Act. RCW 28B.145.090(6). This differs from the expenditure of funds from the GET account because the expenditure there depends upon the authorization of the private account owner, who can demand a refund of the funds at any time (albeit with penalties). AGO 2000 No. 5, at 7. Although the non-profit Program Administrator establishes and manages the accounts, the Program Administrator does so under contract with another state entity, the Council. RCW 28B.145.030. Further suggesting the state involvement with the Program Administrator is that the same Program Administrator acts as staff to the Scholarship Board and exercises some joint duties with the Board. RCW 28B.145.030(1). Under this statutory scheme, the State decides whether and how to invest the funds and remains involved in making the ultimate decisions about how to spend the funds.
The third factor is whether a private party has a right to demand the funds back. Here, unlike with the GET program, no private person can demand a refund of the State’s matching funds.
The final factor is whether contributions to the program are voluntary. Here, unlike with the GET program, the program is not voluntary in the sense that state funds contributed to the program come from taxes and other government sources of revenue, not from voluntary participation by citizens.
Our conclusion is also consistent with a reading of the state constitution as a whole, including its amendments. On numerous occasions, the state constitution has been amended to explicitly allow the investment of certain funds in private stock, including public employees’ pension and retirement funds, industrial insurance funds, and funds held in trust for the benefit of persons with disabilities. Const. amends. 49, 75, 93. The existence of these amendments carries with it a negative implication that without the amendments, such funds could not be invested in private stock. See AGO 1984 No. 22, at 5. Since the funds here are similar to those funds, in particular those held in trust for persons with disabilities, the implication is that a constitutional amendment may be required. Thus, as we have noted in other Attorney General Opinions, the approach more likely to succeed would be to seek a constitutional amendment allowing for the investment of these funds in private stocks. AGO 1984 No. 22, at 5.
If state matching funds did not come from general government revenues or if the State retained less control over the funds, we might reach a different conclusion. However, under the
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program as structured, we conclude that the state scholarship matching funds are likely public funds. They therefore cannot be invested in private stocks under article XII, section 9 of the Washington Constitution without a constitutional amendment authorizing such investment.
We trust that the foregoing will be useful to you.
ROBERT W. FERGUSON
PETER B. GONICK
Deputy Solicitor General
 See, e.g., State ex rel. Gainer v. West Virginia Bd. of Invs., 194 W. Va. 143, 459 S.E.2d 531 (1995) (holding that public employees’ retirement funds are public funds that cannot be invested in corporate stocks); Bd. of Trustees of Pub. Emps.’ Ret. Fund v. Pearson, 459 N.E.2d 715 (Ind. 1984) (same); Sprague v. Straub, 252 Or. 507, 451 P.2d 49 (1969) (holding that public retirement funds and industrial insurance funds can be invested in corporate stocks because the state acts as custodian rather than owner of those funds).
 The 2000 opinion also considered, and rejected, two other possible bases for invalidating the investment of funds in private stocks pursuant to a statutory program. First, the opinion concluded that the State did not improperly bear the risk of loss of funds, in part due to the statutory safeguards preventing risky investments and the state purpose behind use of the funds. AGO 2000 No. 5, at 6-7. Second, the opinion concluded that article XII, section 9 does not prohibit the State from investing private funds it holds as trustee or custodian. AGO 2000 No. 5, at 9-10. We adhere to those conclusions here, and address only the nature of the funds as public or private as dispositive.
 Bailey involved a challenge to a West Virginia statute that established a private non-profit corporation to manage and invest public pension and workers’ compensation funds. Bailey, 199 W. Va. at 467. The West Virginia Supreme Court determined that the corporation functioned as an arm of the state and that the state, through the non‑profit, was indirectly and impermissibly investing public funds in private stocks. Id.
 We do not mean to imply here that funds that start as public may never be invested in stocks; one would always need to analyze the other factors. Cf., e.g., Sprague, 252 Or. at 524-25 (holding that Oregon’s equivalent of article XII, section 9 did not bar investment of funds, such as employee pension funds, that “the state has expended and for which the state has received a quid pro quo, as it does when it receives coverage for its employees through its contributions as an employer to these funds”). Our point is simply that the original nature of the funds carries significant weight. Our opinion here should not, therefore, be read to limit investment of privately donated funds. See RCW 28B.145.030(2)(b) (allowing private donations to scholarship and endowment accounts).
 We acknowledge that the statutes governing the GET program have similar language regarding expenditures from the account. See RCW 28B.95.070(4). Nevertheless, such statutory language remains relevant here because, unlike the GET program, the statutory scheme here purports to relinquish ownership of the funds to a private party (the Program Administrator), yet continues to exercise some control.
 By contrast, private donors to the endowment account are allowed to request a refund of their donations under limited circumstances. RCW 28B.145.030(2)(b)(ii)(C).