Authority Of Educational Service Districts To Issue Bonds

BONDS—EDUCATIONAL SERVICE DISTRICTS—Authority Of Educational Service Districts To Issue Bonds

1. The word “instrument” in RCW 28A.310.200 is sufficiently broad to authorize educational service districts to issue bonds within the borrowing authority granted by that statute.
   
2. Educational service districts must pledge as collateral property acquired through the issuance of the bonds authorized by RCW 28A.310.200.
   
3. RCW 39.46 applies to educational service districts that choose to exercise the authority granted under it.
   
4. Educational service districts that use the provisions of RCW 39.46 must also comply with compatible educational service district-specific requirements in RCW 28A.310.200.
   
5. Statutory and constitutional debt limitations do not apply to educational service districts.

May 28, 2012

Dear Auditor Sonntag:

 By letter previously acknowledged, you have requested our opinion on the following questions:

1. With RCW 28A.310.200 as the context, does the term “instruments” include bonds?  If the answer is no, does the term “notes” include bonds?

2. Does RCW 28A.310.200 require an educational service district to pledge the property (real or personal) as collateral when borrowing under this statute?

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3. Does RCW 39.46 apply to an educational service district?

4. If the answer to question 3 is yes, is an educational service district required to comply with both RCW 28A.310.200 and RCW 39.46 when issuing bonds, and therefore harmonize the two statutory schemes?

5. If an educational service district has authority to issue bonds, are there applicable constitutional or statutory debt limitations?

BRIEF ANSWERS

1. “Instrument” is a broad term with many possible meanings.  Whether, in a particular usage, it denotes a “bond” depends upon the context in which it is used.  Although the question is not entirely free from uncertainty, given the particular language of RCW 28A.310.200, the context in which “instrument” is used, and the legislative history of the provision, the better view is that RCW 28A.310.200(6) is sufficiently broad to authorize educational service districts to issue bonds evidencing borrowing authority within the authority granted by that statute.
2. Educational service districts must pledge as collateral property that is acquired under the borrowing authority granted in RCW 28A.310.200.
3. Given the definitions in RCW 39.46.020, the question of whether RCW 39.46 applies to educational service districts depends upon whether such a district is a “political subdivision.”  There is no case law from Washington which answers this question.  However, the nature of educational service districts and the legislature’s treatment of certain other local entities suggest that educational service districts could be considered “political subdivisions” and are therefore covered by RCW 39.46 if they choose to use the authority under it.
4. Educational service districts that use the provisions of RCW 39.46 must also comply with compatible educational service district-specific requirements in RCW 28A.310.200.  The requirement in RCW 28A.310.200 that educational service districts pledge acquired property and the authority and requirements in RCW 39.46 do not conflict and, therefore, do not need to be harmonized.
5. Existing state statutory and constitutional debt limitations do not appear to apply to educational service districts.  However, the legislature has effectively limited educational service district borrowing power by restricting such authority to the acquisition of real or personal property necessary for the operation of the educational service district and the execution of its duties.

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BACKGROUND

          Educational service districts (ESDs) are “regional agencies” and were established to provide various services to local school districts and the state superintendent of public instruction.  RCW 28A.310.010; see also RCW 28A.310.340, .350 (identification of general and specific ESD “core services” for budget purposes).  ESDs receive funding from state allocations, various grants, and agreements with school districts.  ESDs do not have the power to tax.

          Prior to 1990, ESDs did not have authority to borrow money.  In 1990, the legislature enacted Substitute House Bill 2378 (S.H.B. 2378) (Laws of 1990, ch. 159, § 1), which granted ESDs serving 200,000 or more K-12 students authority to borrow money to acquire real and personal property necessary to the operation of the district.  In 2001, the legislature extended this borrowing power to all ESDs.  See Laws of 2001, ch. 143 (H.B. 1257).  The law is codified at RCW 28A.310.200:

           In addition to other powers and duties as provided by law, every educational service district board shall:

            . . .

          (6) Acquire by borrowing funds or by purchase, lease, devise, bequest, and gift and otherwise contract for real and personal property necessary for the operation of the educational service district and to the execution of the duties of the board and superintendent thereof and sell, lease, or otherwise dispose of that property not necessary for district purposes.  No real property shall be acquired or alienated without the prior approval of the superintendent of public instruction and the acquisition or alienation of all such property shall be subject to such provisions as the superintendent may establish.  When borrowing funds for the purpose of acquiring property, the educational service district board shall pledge as collateral the property to be acquired.  Borrowing shall be evidenced by a note or other instrument between the district and the lender[.]

RCW 28A.310.200(6) (emphases added).

          It is our understanding that some ESDs have issued bonds under the authority of RCW 28A.310.200.  This opinion does not consider or address any aspect of those bonds.  Further, it is not provided for any use related to the issuance of bonds.  Rather, it provides our legal analysis with respect to the general legal questions that you have posed and for the sole purpose of providing legal advice to your office.

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ANALYSIS

1. With RCW 28A.310.200 as the context, does the term “instruments” include bonds?  If the answer is no, does the term “notes” include bonds?

          ESDs, as public entities, have only those powers specifically conferred by statute or necessarily implied therein.  Chemical Bank v. Washington Pub. Power Supply Sys., 99 Wn.2d 772, 792, 666 P.2d 329 (1983).  The power to borrow money must be expressly granted.  Edwards v. City of Renton, 67 Wn.2d 598, 601, 409 P.2d 153 (1965).  As noted above, the legislature has expressly granted ESDs the authority to “[a]cquire by borrowing funds . . . real and personal property necessary for the operation of the educational service district and to the execution of the duties of the board and superintendent thereof[.]”  RCW 28A.310.200(6).  Such borrowings “shall be evidenced by a note or other instrument between the district and the lender[.]”  RCW 28A.310.200(6) (emphasis added).

          The goal of statutory interpretation is to give effect to the intent of the legislature.  Tesoro Ref. & Mktg. Co. v. Dep’t of Revenue, 173 Wn.2d 551, 556, 269 P.3d 1013 (2012).  The first source for determining legislative intent is the statutory language itself, considered as a whole, including related statutes.  Dep’t of Ecology v. Campbell & Gwinn, L.L.C., 146 Wn.2d 1, 11, 43 P.3d 4 (2002).  If the statutory language is subject to only one reasonable interpretation, the statute is unambiguous, and the statute is given its plain meaning.  Tesoro, 173 Wn.2d at 556.  If the statute is still “susceptible to more than one reasonable interpretation, then a court may resort to statutory construction, legislative history, and relevant case law for assistance in discerning legislative intent.”  Christensen v. Ellsworth, 162 Wn.2d 365, 373, 173 P.3d 228 (2007).

          RCW 28A.310.200 does not define “instrument.”  Where statutes do not define terms, it is appropriate to look to a dictionary to identify meaning.  State v. Kintz, 169 Wn.2d 537, 547, 238 P.3d 470 (2010).  Webster’s defines an “instrument” as “5 a : a legal document (as a deed, will, bond, lease, agreement, mortgage, note, power of attorney, ticket on carrier, bill of lading, insurance policy, warrant, writ) evidencing legal rights or duties esp. of one party to another[.]”  Webster’s Third New International Dictionary Of The English Language 1172 (2002) (emphasis added).  Thus, the term “instrument” is a broad term with many possible meanings.  Whether, in a particular usage it denotes a “bond” depends upon the context in which it is used.

          The context in which the term “instrument” is used in RCW 28A.310.200(6) is an ESD’s borrowing to finance acquisition of certain real or personal property.  “Borrowing shall be evidenced by a note or other instrument between the district and the lender[.]”  RCW 28A.310.200(6).  A bond is evidence of a long-term debt.  Webster’s, at page 250, defines “bond” to mean “5 b : an interest-bearing document giving evidence of a long-term debt[.]”  As a “borrowing” under RCW 28A.310.200(6) is to be “evidenced by a note or other instrument between the district and the lender,” the fact that a bond is a document evidencing a debt would support the conclusion that, as used in RCW 28A.310.200(6), the term “instrument” includes bonds.  As to whether a bond is an “instrument between the district and the lender,” it is our understanding that bonds frequently are underwritten and sold by a third party to bondholders,

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who purchase the bonds.  In an economic sense, however, bondholders serve a lending function in that ultimately they provide funds integral to an ESD’s acquisition of real or personal property in return for a bond evidencing the ESD’s obligation to pay the bond according to its terms.  Accordingly, a bond reasonably may be viewed as an instrument “between the district and the lender” that evidences borrowing.  RCW 28A.310.200(6).  By the same token, the relevant statutory language comfortably describes a financing in which a bank or other financial institution lends money to an ESD in return for a note and mortgage, deed of trust, or other instrument evidencing the borrowing.  We also are cognizant that, in other statutes, the legislature has referred to bonds as “instruments.”  Such references are consistent with the point made above, that the term “instrument” may include bonds.

          Finally, we understand that language in the final bill report for S.H.B. 2378 (the original bill providing borrowing authority to ESDs) has created uncertainty in some quarters whether the authority provided by RCW 28A.310.200(6) extends to issuing bonds.  See Chadwick Farms Owners Ass’n v. FHC, LLC, 166 Wn.2d 178, 195-96, 207 P.3d 1251 (2009) (considering legislative history as evinced through both House and Senate bill reports).  In its “Background” section, the bill report states that “[b]ecause ESDs do not have taxing authority, they cannot issue bonds for the purchase of buildings or other real property.  Some ESDs have been able to purchase facilities through lease-purchase agreements.”  See Final Bill Report on Substitute H.B. 2378, at 1-2, 51st Leg., Reg. Sess. (Wash. 1990).  This language could be read as an indication that, in passing S.H.B. 2378, the legislature did not intend to authorize ESDs to issue bonds.  However, the language also could be understood to describe the circumstances giving rise to the need for ESDs to have borrowing authority, and to explain that because ESDs do not have taxing authority, they may not issue bonds secured by taxes.  Moreover, the Washington Supreme Court has cautioned against placing undue reliance upon bill reports as statements of the law as it existed before the enactment of the bill to which it pertains.  Dep’t of Labor & Indus. v. Landon, 117 Wn.2d 122, 127, 814 P.2d 626 (1991) (“Bill reports may be relevant in the interpretation of a statute being enacted, but they do not represent binding pronouncements of the state of the law existing before the enactment.”).  We further note the absence of similar language in the bill report for H.B. 1257, enacted in 2001, that extended this borrowing authority to all ESDs.

           Based upon the above discussed statutory language, context, and legislative history, we conclude the better view is that RCW 28A.310.200(6) is sufficiently broad to authorize ESDs to issue bonds evidencing borrowing within the authority granted by that statute.  At the same time, we recognize the ambiguities giving rise to your question, and observe that the legislature may wish to address the matter.

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2. Does RCW 28A.310.200 require an educational service district to pledge the property (real or personal) as collateral when borrowing under this statute?

          RCW 28A.310.200(6) provides, in part, that “[w]hen borrowing funds for the purpose of acquiring property, the educational service district board shall pledge as collateral the property to be acquired.”  “[T]he word ‘shall’ in a statute is presumptively imperative and operates to create a duty. . . . The word ‘shall’ in a statute thus imposes a mandatory requirement unless a contrary legislative intent is apparent.”  State v. Krall, 125 Wn.2d 146, 148, 881 P.2d 1040 (1994) (second alteration in original) (quoting Erection Co. v. Dep’t of Labor & Indus., 121 Wn.2d 513, 518, 852 P.2d 288 (1993)).

          The statute reflects no such apparent legislative intent to make “shall” permissive.  In fact, the various bill iterations of what became codified in RCW 28A.310.200 reinforce our conclusion that “shall” is mandatory.  Lewis v. Dep’t of Licensing, 157 Wn.2d 446, 470, 139 P.3d 1078 (2006) (court may consider sequential drafts of bill to determine legislative intent).  In its original form, H.B. 2378 did not contain any language regarding the pledging of property for collateral purposes.  See H.B. 2378, 51st Leg., Reg. Sess. (Wash. 1990).  However, a substitute house bill was adopted which contained the following language:

When borrowing funds for the purpose of acquiring property, the educational service district board may pledge as collateral the property to be acquired.  Borrowing shall be evidenced by a note or other instrument between the district and the lender.

Substitute H.B. 2378, § 1, 51st Leg., Reg. Sess. (Wash. 1990) (emphases added).  In the Senate, amendments to S.H.B. 2378 resulted in the following language:

When borrowing funds for the purpose of acquiring property, the educational service district board may pledge as collateral the property to be acquired, but state funds directly allocated to the educational service district, or equipment and materials purchased from direct state allocations, shall not be pledged as collateral.  Borrowing shall be evidenced by a note or other instrument between the district and the lender.

Senate Comm. on Ways and Means, S.B. Rep. on Substitute H.B. 2378, at 2, 51st Leg. (Wash. 1990) (emphases added).  The above language—that ESDs “may” pledge acquired property as collateral—changed yet again in the conference committee that was formed to reconcile the House and Senate versions of the bill.  What emerged from conference (and what was enacted into law) was the phrase “shall pledge as collateral the property to be acquired.”  Laws of 1990, ch. 159, § 1.

         Thus, the legislature’s use of “shall” appears to have been a deliberate choice of a mandatory term, leading us to conclude that RCW 28A.310.200 requires an ESD to pledge the property as collateral when borrowing under the statute.

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3. Does RCW 39.46 apply to an educational service district?

          RCW 39.46 was enacted in part “to grant local governments an alternative flexible authority to structure and sell their bond issues and to include a variety of features on their bonds.”  RCW 39.46.010.  For purposes of this chapter “‘[l]ocal government’ means any county, city, town, special purpose district, political subdivision, municipal corporation, or quasi-municipal corporation, including any public corporation created by such an entity.”  RCW 39.46.020(3).  The statute thus does not list an ESD as a “local government.”  Whether the statute applies to ESDs turns upon whether an ESD is “any . . . political subdivision.”  RCW 39.46.020(3).  We have not located a published court opinion or opinion of this office, considering the meaning of the term “political subdivision” in this context.  Blacks’ Law Dictionary (9th ed. 2009), at page 1277, defines “political subdivision” as “[a] division of a state that exists primarily to discharge some function of local government.”  Accord In re Forfeiture of Prop. of Louis, 932 N.E.2d 924, 927 (Ohio App. 3d 2010) (“[A] ‘political subdivision of the state’ is a geographic or territorial portion of the state to which there has been delegated certain local governmental functions to perform within such geographic area.”).

          The legislature has described ESDs as “regional agencies,” and among other things, has authorized ESDs to act cooperatively with school districts to provide certain services to those districts.  See RCW 28A.310.010, .200.  We also note that the legislature has identified “local service districts” as “public agencies” for purposes of the Interlocal Cooperation Act, RCW 43.39.  For these reasons, we conclude that the meaning of a “local government” in RCW 39.46.020(3) could be considered to be broad enough to include ESDs.  Thus, as political subdivisions, it would follow that ESDs fall within the definition of “local government” and are therefore covered by RCW 39.46.

4. If the answer to question 3 is yes, is an educational service district required to comply with both RCW 28A.310.200 and RCW 39.46 when issuing bonds, and therefore harmonize the two statutory schemes?

          RCW 39.46’s purpose statement explains that it is intended in part “to grant local governments an alternative flexible authority to structure and sell their bond issues and to include a variety of features on their bonds.”  RCW 39.46.010.  The legally operative effect of this policy statement is set forth in detail in RCW 39.46.100:

          RCW 39.46.010 through 39.46.070 shall be deemed to provide a complete, additional, and alternative method for the performance of those subjects authorized by these sections and shall be regarded as supplemental and additional to powers conferred by other state laws.  Whenever bonds and other obligations are issued and sold in conformance with RCW 39.46.010 through 39.46.070, such issuance and sale need not comply with contrary requirements of other state laws applicable to the issuance and sale of bonds or other obligations.

(Emphasis added.)

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          In light of our conclusion that ESDs are required to pledge property when borrowing, it is necessary to explain the relationship between RCW 28A.310.200 and RCW 39.46.100.  We must consider whether the pledge requirement is affected by the phrase in RCW 39.46.100 that states a local government need not comply with a “contrary requirement[] of other state laws” when issuing bonds under the procedures of RCW 39.46.010-.070.  One of those statutory sections, RCW 39.46.040, states that local governments that issue bonds must determine various features of bonds they wish to issue:

          A local government authorized to issue bonds must determine for the bond issue its amount, date or dates, terms not in excess of the maximum term otherwise provided in law, conditions, bond denominations, interest rate or rates, which may be fixed or variable, interest payment dates, maturity or maturities, redemption rights, registration privileges, manner of execution, price, manner of sale, covenants, and form, including registration as to principal and interest, registration as to principal only, or bearer. Registration may be as provided in RCW 39.46.030.

RCW 39.46.040(1) (emphases added).

           We note that RCW 39.46.100 refers to RCW 39.46.010-.070 as an “alternative method for performance[.]”  The word “method” suggests that RCW 39.46.010-.070 are procedural in nature.  Thus, the phrase in RCW 39.46.100’s second sentence—“need not comply with contrary requirements of other state laws”—appears to be a reference to requirements that are procedural in nature.  (Emphasis added.)

           RCW 28A.310.200, on the other hand, is a statute that concerns substantive rather than procedural authority of ESDs, i.e., the authority to borrow subject to the limitations that the borrowing relate to the acquisition of property, and that the property be pledged to support the borrowing.  In addition, we note that the amendment to RCW 28A.310.200 that granted authority to borrow was enacted in 1990, subsequent to the 1983 enactment of RCW 39.46.010-.070.

          In these circumstances, we consider the following principles of statutory construction.  The goal of statutory construction “is to avoid interpreting statutes to create conflicts between different provisions so that we achieve a harmonious statutory scheme.”  American Legion Post 149 v. Dep’t of Health, 164 Wn.2d 570, 585, 192 P.3d 306 (2008) (quoting Echo Bay Cmty. Ass’n v. Dep’t of Natural Res., 139 Wn. App. 321, 327, 160 P.3d 1083 (2007)).  Statutes relating to the same subject are construed together and “are to be read together as constituting a unified whole, to the end that a harmonious, total statutory scheme evolves.”  In re Estate of Black, 153 Wn.2d 152, 164, 102 P.3d 796 (2004).  If there is an apparent conflict between statutory provisions, the more specific and more recently enacted statute is preferred.  American Legion Post 149, 164 Wn.2d at 585-86 (quoting Hallauer v. Spectrum Props., Inc., 143 Wn.2d 126, 146, 18 P.3d 540 (2001)).

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          Consistent with these principles, we reach a construction that avoids a conflict between RCW 39.46.040 and RCW 28A.310.200.  An ESD governing body may meet the procedural requirements under RCW 39.46.040 to determine the “covenants” and “conditions” of bonds, but also remain within its substantive statutory authority.  An ESD complies with both statutes when it determines that its covenants will provide for a pledge of the property that will be acquired with the borrowed funds.  We do not need to, and therefore do not, construe RCW 28A.310.200’s pledge requirement as “contrary” (within the meaning of RCW 39.46.100) to RCW 39.46.040.  For that reason, RCW 39.46.100 does not excuse compliance with the pledge requirement.

          In addition, RCW 28A.310.200 is the more specific statute, and its 1990 amendments relating to borrowing were enacted later than RCW 39.46.040.  The legislature’s intent in 1990 to place limits on ESD borrowing would be ineffective if the general, pre-existing statute (RCW 39.46.040) excused ESDs from compliance with the substantive requirements of the 1990 amendments.  This is an additional reason to conclude that when an ESD exercises its authority under RCW 39.46.040, the ESD must also comply with the requirements found in RCW 28A.310.200 to pledge the property to be acquired with the borrowed funds.

           The remainder of RCW 39.46 contains generally applicable provisions relating to general obligation  and revenue  bonds.  Some elements of these statutory sections refer to matters outside the authority of an ESD; for example, the reference in RCW 39.46.110(2) to tax revenues would not apply to ESDs, because ESDs do not receive tax revenues.  However, we do not perceive this as a conflict between statutes that we must resolve through principles of statutory interpretation.  Rather, to the extent these provisions address some circumstances that are not relevant to ESDs—such as tax revenues—they are simply inapplicable.

5. If an educational service district has authority to issue bonds, are there applicable constitutional or statutory debt limitations?

           Article VIII, sections 1 and 6 of the Washington Constitution establish constitutional debt limitations for the state, and counties, cities, towns, school districts, and other municipal corporations, respectively.  ESDs are not listed among the entities for which the constitution establishes a debt limit.  This office has concluded that ESDs are not municipal corporations.  AGO 1991 No. 19, at 5.  Additionally, it seems apparent that ESDs are entities distinct from the state, or a county, city, town, or school district.  Accordingly these debt limits do not appear to apply to ESDs.  Moreover, the constitutional debt limit for the state relates to a percentage of “general state revenues,” and the limit for the other referenced entities relates to a percentage of the value of taxable property within their respective jurisdictions.  ESDs do not accrue “general state revenues,” and have no taxing authority.  For these reasons, the constitutional debt limitations do not appear to contemplate ESDs.

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           The legislature has established a statutory “working debt limit” for the state in RCW 39.42.140.  RCW 39.42 applies to evidences of indebtedness of the state authorized by the legislature and issued by the state finance committee.  RCW 39.42.010, .020, .030.  Accordingly, bonds authorized and issued by ESDs are not within its terms.  The legislature has also established statutory limits for debt incurred by taxing districts.  See RCW 39.36.020.  The statute defines “taxing district” to mean “all counties, cities, towns, townships, port districts, school districts, metropolitan park districts or other municipal corporations[.]”  RCW 39.36.010.  For reasons previously expressed, ESDs are not subject to this taxing district statutory debt limit.

          Although the constitutional and statutory provisions cited above do not impose a debt limit on ESDs, the legislature has limited ESD borrowing authority to the acquisition of real or personal property necessary for the operation of the educational service district and the execution of its duties.  RCW 28A.310.200(6).

          We trust that the foregoing will be useful to you.

ROB MCKENNA
Attorney General

 

ROBERT J. FALLIS
Assistant Attorney General

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