School funding unconstitutional

School districts cannot rely on grants from the state’s common schools trust fund to fund capital projects, according to a ruling issued by North Dakota Attorney General Wayne Stenehjem.

Stenehjem said the Board of University and School Lands, which administers the Common Schools Trust Fund, can make loans for school capitol projects, but only if the loans produce a reasonable return and are consistent with the limits imposed by the Enabling Act, the State Constitution and other statutory requirements.

“It is my opinion that the Land Board is not authorized to provide grants from the Fund without legislative authority subject to the constraints of the state constitution,” wrote Stenehjem in the opinion issued on Tuesday. “Loans or a loan program may be reasonable, but only if such loans are consistent with the limits of the constitution and the Board’s fiduciary duty to secure reasonable returns. Whether a particular loan or program complies with the prudent investor rule and the constitutional limits of the Fund is a question of fact that I am unable to answer without knowing the particulars of the proposed loan or program.”

The trust lands were set aside at statehood and the income from the lands were dedicated to support education and institutions within the state. The largest of the 13 trusts is the Common Schools Trust Fund. The total amount distributed each year is determined by a constitutional formula that uses the five-year average value of the trusts’ financial assets. According to Land Commissioner Lance Gaebe, during the 2013-2015 biennium, a total $130.3 million, or an estimated $613 per student will be annually distributed to the state’s schools; this is an increase of 40 percent over the previous biennium. These funds are used for each district’s operating costs to educate children in the state.

During the lead-up to a school bond issue election last December, people had questioned why funding for new school construction could not come from the Common Schools Trust Fund. School board members had responded that it would be unconstitutional. Voters defeated a proposed $125 million bond issue in December, but did approve a scaled back $39.5 million bond issue in April.

Stenehjem issued his opinion Tuesday in response to a letter from Rep. Scott Louser, R-Minot.

“The Land Board could not gift or grant funds because grants deplete the fund with no possibility of a return,” wrote Stenehjem, which he wrote would violate both federal law and the state constitution.

Stenehjem also wrote that past opinions indicate that the Land Board could make loans from one of the trusts without violating constitutional law, but the loans could not be offered at an interest rate any lower than the current market rate or without regard to the quality of the security pledged.

Stenehjem also wrote that the Land Board is subject to the authority of the state Legislature, but only to some degree as the Land Board is actually governed by the rules set forth in the state constitution. The Legislature does not have free rein to do as it pleases with the school trust, wrote Stenehjem.

“Any legislative control over the Fund must be “within the limits of the constitution” and compatible with the Land Board’s fiduciary duties,” wrote Stenehjem.