STATE FINANCE COMMITTEE ‑- INVESTMENT OF STATE FUNDS IN FARM OWNERSHIP LOANS UNDER THE PROVISIONS OF THE BANKHEAD-JONES FARM TENANT ACT

STATE FINANCE COMMITTEE ‑- INVESTMENT OF STATE FUNDS IN FARM OWNERSHIP LOANS UNDER THE PROVISIONS OF THE BANKHEAD-JONES FARM TENANT ACT

The State Finance Committee may not invest state funds in farm ownership loans under the provisions of the Bankhead-Jones Farm Tenant Act.

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                                                                   May 28, 1957

State Finance Committee
Legislative Building
Olympia, Washington                                                                                                                Cite as:  AGO 57-58 No. 71

Attention:  Mr. Ernest Minor, Secretary

Gentlemen:

            You have requested our opinion on a proposed program of investment of state funds.  In your letter you state that your committee has been requested to consider the investment of state funds in farm ownership loans which are insured by the Farm Home Administration of the U. S. Department of Agriculture, under authority of the Bankhead-Jones Farm Tenant Act.  We paraphrase your question as follows:

            Is the investment of state funds in farm ownership loans prohibited by Article VIII, § 5 of the state constitution?

            We answer your question in the affirmative.

                                                                     ANALYSIS

            Article VIII, § 5 of the state constitution provides that:

            "The credit of the state shall not, in any manner be  [[Orig. Op. Page 2]] given or loaned to, or in aid of, any individual, association, company or corporation."

            In general, the purpose of the Bankhead-Jones Farm Tenant Act is to make available to certain individuals engaged in farming loans of money for designated purposes in connection with their farming operations where such loans are not obtainable through the usual commercial financial agencies.  Under the act such loans are repayable within an agreed period of not more than forty years and are insured by the United States government through the Secretary of Agriculture.

            As we understand the procedure involved in this type of loan arrangement, the lender accepts a note and mortgage directly from the borrower as security for his money advancement.  In addition, the lender has the security of the financial resources of the United States government to look to in case of default on the note by the borrower.  Section 1005C of the Bankhead-Jones Farm Tenant Act provides that when a mortgagor is in default under his mortgage for more than twelve months, the mortgagee shall be entitled to receive the benefit of the mortgage insurance upon assignment of all his rights and interests under the mortgage to the Secretary of Agriculture.

            It is obvious that if state funds were to be invested in this type of financial operation, the state would be dealing directly with private citizens, and the relationship of creditor and debtor would exist between the state on one hand and private citizens on the other.  The fact that the United States government insures loans of this type in no way detracts from the contractual relationship of the parties to the loan.

            In the case ofAberdeen v. National Surety Co., 151 Wash. 55, our Supreme Court had occasion to discuss Article VIII, § 7 of the state constitution.  That section contains prohibitions against the loaning of credit to individuals by counties, cities, towns, and municipal corporations.  In that respect it is similar to Article VIII, § 5, with which we are herein concerned.  In theAberdeen v. National Surety Company case,supra, the court held that the city council of Aberdeen violated Article VIII, § 7 of the constitution by investing funds in time deposits with a private bank.  The court said:

            "When money is deposited subject to check, it is only a temporary disposition of the money by placing it in the bank for safe keeping, and it is not in any sense a loan.

             [[Orig. Op. Page 3]]

            In re Law's Estate, 144 Pa. St. 499, 22 Atl. 831, 14 L.R.A. 103.  But where money is left for a fixed time at interest, it becomes, to all intents and purposes, a loan.  State V. McFetridge, 84 Wis. 473, 54 N.W. 1, 998, 20 L.R.A. 223; In re Law's Estate, and City of Pocatello v. Fargo, supra.  [41 Idaho 432, 242 Pac. 297]"

            Further, in theAberdeen v. National Surety Co. case, supra, the court commented on the fact that the city's money was not repayable until a future time and stated:

            "Not only did the relation of debtor and creditor exist by the very terms of the instrument evidencing that fact, but the debt was not due and payable until a future fixed date, and was clearly a transaction prohibited by our constitutional provisions above quoted."

            The general purpose of Article VIII, § 5, of the constitution of this state, and of similar provisions in constitutions and laws of other states, is to avoid the obvious evil of direct loaning of money or credit of a state to or in aid of private venture, and this because such loaning is in derogation of the public interest.  Because there is a question of high public interest involved, Article VIII, § 5 of the constitution demands strict construction, and its obvious intent and purpose cannot be avoided by the mere fact that, as in this case, the loan to the individual farmer would be insured by the United States government.

            Although your letter raised only a constitutional question, we wish to point out in passing that pertinent statutes regulating the authority of the State Finance Committee to invest state funds in other than state bonds and warrants would not allow such investment in farm ownership loans under the provisions of the Bankhead-Jones Farm Tenant Act.  The pertinent portions of those statutes are as follows:

            RCW 43.84.010 [[repealed by 1965 ex.s. c 104 § 7]]"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  [[Orig. Op. Page 4]] 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."

            RCW 43.84.080 (1955 Supp.) "Whenever there is in any fund or in cash balances in the state treasury more than sufficient to meet the current expenditures properly payable therefrom, the state finance committee may invest such portion of such funds or balances as it deems expedient in certificates, notes, or bonds of the United States, or in state, county, municipal, or school district bonds, or in warrants of taxing districts of the state.  Such bonds and warrants shall be only those found to be within the limit of indebtedness prescribed by law for the taxing district issuing them and to be general obligations.  The state finance committee may purchase such bonds or warrants directly from the taxing district or in the open market at such prices and upon such terms as it may determine, and may sell them at such times as it deems advisable."

            In short, it is our opinion that the constitution, statutes and public policy of this state limit the investment of state funds to certain designated securities ofbodies politic as distinguished from those of individuals and private corporations.  Accordingly, your committee is prohibited from investing state funds in farm ownership loans under the loan program created by the Bankhead-Jones Farm Tenant Act.

            We trust that this information will be of assistance to you.

Yours very truly

JOHN J. O'CONNELL
Attorney General

MICHAEL J. CRONIN
Assistant Attorney General