ND Attorney General Rules That Schools Trust Fund Can't Be Used For School Buildings

With North Dakota’s population booming, and with property taxes a perennial source of rancor for citizens, some have wondered why we can’t use the Common Schools Trust Fund (which has over $2.7 billion sitting in it as of December of last year) to finance some of our new school expenses. Like new buildings and the like.

But the Board of University and School Lands argues that they can’t touch the principle in that fund, nor revenues to the fund coming from mineral rights royalties (a big deal now in the midst of the state’s oil boom), because the law prohibits them.

Minot state Rep. Scott Louser, a Republican, asked for a legal opinion on the matter from Attorney General Wayne Stenehjem, and Stenehjem generally sided with the Land Board.

The full opinion is below.

Louser asked two questions of Stenehjem.

First, can the Land Board use the principle of the trust fund to finance school building. Stenehjem’s answer was yes, but only within the guidelines of the fund’s original constitutional mandate and the requirements of the state’s prudent investment laws.

An excerpt from the opinion:

The Land Board could not gift or grant funds because grants deplete the fund with no possibility of a return. This would be a violation, not only of the terms of the permanent fund as set forth in the Act and the state constitution, but also of N.D. Const. art. X, § 18, commonly referred to as the “anti-gift” clause.16

Past opinions indicate the Land Board could make loans without violating N.D. Const. art. X, § 18 because loans do generate returns.17 However, the state constitution states that “no part of the fund must ever be diverted, even temporarily, from this purpose”18 or used for any other purpose which prevents the Land Board from entering into an unfair exchange. When considering any loan, the Land Board must consider its constitutional and fiduciary duties as trustee of the common schools trust fund.

Second, are mineral rights royalties paid to the fund considered revenues or part of the principle? If they are revenues, then they can be used to fund schools (and take the pressure of property taxes). If they are principle, then they are locked in per the AG’s opinion above.

Stenehjem finds that they are principle:

Generally, when a trust asset is sold, the proceeds from the sale of the asset remains characterized as “principal.” Royalties are compensation for the one time depletion of a trust asset and would continue to be considered “principal.”

In this instance, the characterization of royalties is irrelevant because N.D. Const. art. IX, § 2 does not make a distinction between “income” and “principal.” Instead, the state constitution only requires that “[r]evenues earned by a perpetual trust fund must be deposited in the fund.26 “Revenue” is “a broad and general term, including all public moneys which the state collects and receives, from whatever source and in whatever manner.”27 Therefore, regardless of how royalties are categorized, the trust receives the revenues.28 There is no authority in either the Act or the state constitution to treat royalty revenue from trust lands differently than other kinds of revenue.

Once revenue from sources such as royalties, proceeds of asset sales, income earned by the land, or interest earned by the Fund is deposited into the permanent fund it becomes part of the Fund and is subject to the restrictions on the Fund’s use, as I have discussed above.29

On Twitter, Department of Public Instruction spokesman Dale Wetzel inexplicably takes a victory lap saying this “knocks down” the idea that the trust fund is a “honey pot” for school building.

You’d think someone who works for the public schools would be glad of easing the restrictions on the use of these funds for, you know, public schools.

Regardless, it may be time for the Legislature to think about changing some of the restrictions on this fund. It seems ridiculous that we would allow a fund like this to accumulate billions upon billions of dollars without being able to leverage those dollars to benefit our schools and keep taxes low.