South Dakota sold the state cement plant in 2001. The voters that year added Article XIII §§ 20 and 21 to the state constitution to protect the proceeds: $238 million was placed in a trust fund, $12 million transfers annually to the general fund, and if the trust's market value grew enough above the original principal, additional money could be appropriated for the support of education. By 2004 the trust had grown, but no one had ever made the additional 'support of education' distribution before. The Bureau of Finance and Management wanted to know: what's the right valuation date, how does the Legislature actually appropriate the money, and what happens if the trust value drops between when we measure it and when the Legislature acts?

Plain-English summary

South Dakota's cement plant, a state-owned enterprise dating to 1919, was sold in 2001 for approximately $238 million. The voters approved constitutional amendments that year adding Article XIII §§ 20 and 21 to the South Dakota Constitution. The amendments placed the sale proceeds in a trust fund that would benefit the citizens of South Dakota in perpetuity. The South Dakota Investment Council was to invest the trust in stocks, bonds, mutual funds, and other instruments.

Section 20 required a transfer of $12 million each fiscal year from the trust fund to the state general fund, beginning fiscal year 2001. The Legislature would then appropriate that $12 million through the normal budget process.

Section 21 added a second potential distribution. Once the original principal of the trust fund was preserved, if the trust had grown enough during a fiscal year, the Legislature was required (not allowed, required) to appropriate the difference between the $12 million annual transfer and 5% of the market value of the trust fund, with that additional appropriation directed to the support of education (but not as a replacement for existing state aid to general or special education). Beginning fiscal year 2006, the market value calculation would use a 16-quarter moving average.

Section 21 also contained the central protection: "the original principal of the trust fund shall forever remain inviolate," subject only to the Section 20 transfer.

By 2004 the trust fund had grown to the point where a Section 21 distribution might be possible. But the constitutional provisions did not say how the calculation should be done procedurally. They did not say when the market value should be measured. They did not say how quickly after the measurement the Legislature should appropriate. They did not say what to do if the market dropped between the measurement and the appropriation.

Commissioner Jason Dilges of the Bureau of Finance and Management proposed a framework: measure the trust fund at close of all markets on June 30, audit in August, notify the Governor and Legislature of the result, and refrain from distributing until the Legislature appropriated. He asked AG Lawrence Long whether the framework was correct, and whether a market drop between June 30 and the appropriation date would defeat any otherwise-lawful distribution.

The AG approved the framework on both counts.

June 30 valuation. Section 21 limits the distribution to an amount that maintains the original principal "in that fiscal year." The only valuation date that can ensure compliance with that fiscal-year-bounded restriction is June 30, the last day of the fiscal year. Anything earlier wouldn't capture the full year; anything later wouldn't be in the fiscal year at all. June 30 was textually right.

Appropriation timing. Section 21 mandates an appropriation when there are sufficient funds. The amendment does not give the Legislature discretion to decline. But the amendment does not specify when the appropriation must occur. The AG read it as: the appropriation occurs when the Legislature next convenes after the June 30 valuation. Unless the Governor calls a special session under Article III § 31 or Article IV § 3, the appropriation would happen during the regular session that begins the second Tuesday of January (Article III §§ 6 and 7). The voters who adopted §§ 20 and 21 must be presumed to have been aware of the existing legislative schedule and the appropriation framework, and the AG could not conclude they intended to amend those other provisions.

Vote threshold. Unlike most appropriations subject to special restrictions, the Section 21 appropriation has no room for legislative discretion as to amount or purpose. The amount is fixed by formula. The purpose (support of education) is fixed by the constitutional text. Therefore the appropriation can be made by simple majority of each house, not the supermajority sometimes required for special appropriations.

Audit before appropriation. The amendment does not require a full formal audit before appropriation. But the market value determination must be reliable enough that the Legislature can use it for the appropriation calculation. The Bureau's plan to conduct an August audit (after the June 30 valuation, before the next legislative session in January) was prudent and supported.

Market drop between June 30 and appropriation. The second question was the harder one. What if the trust value drops below the threshold between when you measure it on June 30 and when the Legislature acts? The AG read Section 21 to test the principal-protection at the June 30 valuation date, not at the moment of appropriation or distribution. If the market value at June 30 was sufficient to support the calculated distribution while maintaining the original principal, the distribution remained lawful even if a subsequent market drop would (in some technical accounting sense) cause the post-distribution trust value to dip below original principal. Any other reading, the AG explained, would make appropriations essentially impossible to plan, since the market value would inevitably fluctuate between any measurement date and any disbursement date.

The opinion gave a worked example. If on June 30 the trust fund was at $260 million, 5% is $13 million; less the $12 million general fund transfer, $1 million remained for support-of-education distribution. Even if the unaudited market value of the trust fund dropped by the time of appropriation, the $1 million distribution remained lawful. Conversely, if on June 30 the trust fund was at $250 million, no additional distribution could occur (because $12.5 million minus $12 million = $500,000 would, after the $12 million transfer, leave the trust at $237.5 million, below the $238 million original principal). This was true even if the trust value rose between June 30 and the appropriation date.

The protection of the trust principal, in the AG's reading, was the structural guarantee: the 5%-less-$12-million formula and the principal-inviolate clause, taken together, ensured the trust would maintain itself in real terms. The June 30 valuation date was the testing point.

Currency note

This opinion was issued in 2004. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. Article XIII §§ 20 and 21 have remained in place and the trust fund has continued to make Section 21 distributions in many years. Anyone today implementing a distribution should consult current legislative practice and the current trust valuation procedures, as legislative practice may have refined since 2004.

What the opinion meant at the time

For the Bureau of Finance and Management staff preparing for the first Section 21 distribution in 2004, the opinion provided a clear procedural roadmap. Measure the trust fund at close of all markets on June 30. Conduct an audit during August. Notify the Governor and Legislature of the result. Refrain from disbursing until the Legislature convened and appropriated.

For state legislators, the opinion clarified the appropriation framework. The Section 21 appropriation was constitutionally mandated when the market-value floor was cleared. The Legislature could not decline to appropriate. The amount and purpose were fixed by the constitutional text. Simple majority sufficed for passage. The appropriation would occur during the regular session (or a special session if called) following the June 30 valuation.

For the South Dakota Investment Council managing the trust portfolio, the opinion gave a clear measuring date. Portfolio managers could plan rebalancing and liquidity for the June 30 valuation rather than scrambling at unpredictable points.

For school districts and the Department of Education looking at the potential Section 21 distribution as a future revenue source, the opinion clarified what they could (and could not) expect. The distribution would happen, but only after the June 30 valuation and the subsequent legislative appropriation. Districts could not budget in advance of the appropriation, but they could budget once the appropriation passed.

For state auditors, the opinion specified that the August audit was a workable check on the June 30 number but was not constitutionally required. The market value determination just had to be reliable enough for the Legislature to use in the formula calculation.

For the broader public following the cement plant trust fund's evolution, the opinion confirmed that the constitutional structure was self-executing in its essentials. The voters had created a trust that would maintain its principal in real terms and would distribute the growth (above $12 million per year) to support education. The AG opinion provided the operational details that the constitutional text had left to implementation.

Common questions

Q: What is the cement plant trust fund?
A: The trust fund established in 2001 with the net proceeds from the sale of South Dakota's state cement plant. Original principal: approximately $238 million. Codified at S.D. Const. art. XIII §§ 20 and 21.

Q: What gets transferred annually?
A: Section 20 requires a $12 million transfer each fiscal year from the trust fund to the state general fund.

Q: What additional distributions are possible?
A: Section 21 requires the Legislature to appropriate the difference between the $12 million annual transfer and 5% of the market value of the trust fund, for the support of education, if the trust fund's market value increase that fiscal year is sufficient to maintain the original principal after such distributions.

Q: When is the market value measured?
A: Per this AG opinion, at the close of all markets on June 30 (the last day of the state fiscal year).

Q: What happens beginning fiscal year 2006?
A: Per Section 21, the market value is determined by a 16-quarter moving average (the market value of the trust at the end of each of the most recent 16 calendar quarters, divided by 16).

Q: Does the Legislature have to appropriate?
A: Yes. Section 21 uses "shall," which is mandatory. The Legislature has no discretion to decline.

Q: What if the market drops between June 30 and the appropriation?
A: Per this AG opinion, the distribution remains lawful. Section 21 tests principal protection at the June 30 valuation date.

Q: What is the vote threshold for the Section 21 appropriation?
A: Simple majority, per this AG opinion. The constitutional text fixes amount and purpose, so no supermajority requirement applies.

Q: Could the Governor veto the appropriation?
A: Per Article IV § 4 (general gubernatorial veto power), yes in principle, though Section 21 is mandatory and a vetoed appropriation would arguably leave the Legislature obligated to override and re-pass.

Q: Does Section 21 replace existing state aid to education?
A: No. Section 21 expressly excludes the support of replacement of state aid to general education or special education. The distribution must support additional education programming, not supplant base state aid.

Background and statutory framework

The cement plant. The South Dakota State Cement Plant operated from 1919 to 2001, producing portland cement at its facility in Rapid City. The Plant was sold in 2001 to Grupo Cementos de Chihuahua. The sale proceeds, after expenses, were approximately $238 million.

The 2001 constitutional amendment. The voters approved amendments adding Article XIII §§ 20 and 21 to the South Dakota Constitution. The amendments simultaneously:
- placed the sale proceeds in a trust fund managed by the South Dakota Investment Council;
- mandated a $12 million annual transfer from the trust fund to the state general fund (Section 20);
- protected the original principal as "forever inviolate," subject only to the Section 20 transfer (Section 21);
- mandated additional appropriations for support of education when the trust value exceeded the original principal after all distributions (Section 21).

The fiscal-year framework. South Dakota's fiscal year runs July 1 to June 30. The $12 million annual transfer was tied to that fiscal year. The Section 21 market-value test was tied to "that fiscal year" growth.

The legislative framework. The South Dakota Legislature convenes annually beginning the second Tuesday of January (Article III §§ 6 and 7) for alternating 35 and 40 day sessions. Special sessions may be called by the Governor (Article IV § 3) or by the Legislature (Article III § 31). Appropriations follow the framework in Article XII.

The questions Commissioner Dilges raised in 2004 were the first attempt to put the Section 21 distribution machinery into operation. The constitutional text had been silent on procedural details. The 2004 AG opinion supplied those details.

Constitutional construction principles. The opinion applied the same principles SD courts use: discover the intent of the framers and the people adopting the amendment (Poppen v. Walker (1994)); give regard to the whole instrument and harmonize provisions (S.D. Auto Club v. Volk (1981)); read words in their natural and obvious sense (In re Janklow (1999)); consider the old law, the mischief, and the remedy when interpreting amendments (Volk).

The opinion's structural argument was straightforward. Section 21's principal protection had to be tested at some specific point in the fiscal year. The fiscal-year language pointed to June 30. The Legislature's appropriation had to follow, but the existing schedule of regular legislative sessions meant the appropriation would happen in January following the June 30 valuation. The voters who adopted §§ 20 and 21 must have known about the regular session schedule and the appropriation framework. They could not have intended to amend those by silent implication.

The market-drop question. The second issue was a more difficult drafting gap. The opinion's reasoning: the constitutional text protected against "invasion of principal" by reference to the market value at the testing point (June 30). After the testing point passed and the calculation produced a lawful distribution amount, the appropriation became fixed. Market fluctuation between the testing point and the disbursement was outside the constitutional protection mechanism. A contrary reading would make appropriations effectively impossible because by the time the Legislature voted and the funds actually moved, the market value would inevitably have changed.

The worked examples in the opinion (the $260 million case and the $250 million case) illustrated the rule cleanly. The $260 million case generated a $1 million distribution that survived a later market drop. The $250 million case generated no distribution at all because at the June 30 valuation date the principal protection was not satisfied; a later rise did not retroactively enable a Section 21 distribution.

The 2004 opinion thus set the operational pattern for the cement plant trust fund's Section 21 distributions going forward. Subsequent years have followed the same framework: June 30 valuation, August audit, legislative appropriation in the following session, single-majority passage, simple disbursement.

Citations and references

Constitutional and statutory:
- S.D. Const. art. XIII, §§ 20, 21
- S.D. Const. art. III, §§ 6, 7, 31
- S.D. Const. art. IV, §§ 3, 4
- S.D. Const. art. XII

Cases:
- Poppen v. Walker, 520 N.W.2d 238 (S.D. 1994)
- S.D. Auto Club, Inc. v. Volk, 305 N.W.2d 693 (S.D. 1981)
- In re Janklow, 1999 S.D. 27, 589 N.W.2d 624

Source

• Landing page: https://atg.sd.gov/OurOffice/OfficialOpinions/opinions.aspx
• Original PDF: https://atg.sd.gov/OfficialOpinions/Official%20Opinion%2004-02.pdf

Original opinion text

OFFICIAL OPINION NO. 04-02, Interpretation of Article XIII, §§ 20-21, Cement Plant Sale Trust Fund

June 22, 2004

Jason C. Dilges, Commissioner
Bureau of Finance and Management
500 East Capitol
Pierre, SD 57501-5070

OFFICIAL OPINION NO. 04-02

Interpretation of Article XIII, §§ 20-21
Cement Plant Sale Trust Fund

Dear Commissioner Dilges:

You have requested an official opinion of the Office of Attorney General regarding the following facts:

FACTS:

In 2001, the people amended the South Dakota Constitution by approving constitutional amendments providing for the establishment of a trust fund created from the proceeds of the sale of the State cement plant and authorized certain distributions from that fund. Article XIII of the South Dakota Constitution was amended, adding Sections 20 and 21. Section 20 provides:

The net proceeds derived from the sale of state cement enterprises shall be deposited by the South Dakota Cement Commission in a trust fund hereby created to benefit the citizens of South Dakota. The South Dakota Investment Council or its successor shall invest the trust fund in stocks, bonds, mutual funds, and other financial instruments as provided by law. Each fiscal year beginning in fiscal year 2001, a transfer of twelve million dollars shall be made from the trust fund to the state general fund as provided by law.

Section 21 provides:

Except as provided in Article XIII, section 20 of the Constitution of the State of South Dakota, the original principal of the trust fund shall forever remain inviolate. However, the Legislature shall, by appropriation, make distributions from the difference between the twelve million dollar annual general fund transfer and five percent of the market value of the trust fund for the support of education, but not for the replacement of state aid to general education or special education, if the increase in the market value of the trust fund in that fiscal year was sufficient to maintain the original principal of the trust fund after such distributions. Beginning with fiscal year 2006, the market value of the trust fund shall be determined by adding the market value of the trust fund at the end of the sixteen most recent calendar quarters, and dividing that sum by sixteen.

The principal amount placed in the trust after its creation was $238 million. Beginning June 30, 2001, consistent with Article XIII, § 20, $12 million has been transferred each year from the trust to the State General Fund for appropriation by the State Legislature. Recently, the market value of the trust fund has grown so that further distributions under the provisions of Article XIII, § 21 may now be possible. The Legislature has not appropriated any money for school purposes to be distributed from the trust fund. Additionally, there is no legislation that further delineates the parameters of these constitutional provisions.

Absent further direction, you are proposing to determine the market value of the trust fund as of the close of all markets on June 30, 2004. An audit will be performed in August to verify the market value of the trust fund as of June 30, 2004. If the market value is such that a distribution under Section 21 may take place, you will notify the Governor and the Legislature, but will take no action to distribute funds until the Legislature convenes to distribute them by appropriation.

Based upon the above, you have asked the following questions:

QUESTIONS:

1. Are the proposed actions set forth in the statement of facts in accordance with Article XIII, §§ 20 and 21 of the South Dakota Constitution?

2. If, prior to legislative appropriation, the value of the trust fund is diminished to the point that any appropriation would invade the principal, may money still be distributed from the trust fund under Article XIII, § 21?

IN RE QUESTION NO 1:

The questions you have raised are ones of constitutional construction. In construing our state constitution, this Office is required to follow the same rules as the South Dakota Supreme Court. The object of constitutional construction is "to give effect to the intent of the framers of the organic law and of the people adopting it." Poppen v. Walker, 520 N.W.2d 238, 242 (S.D. 1994). In construing a constitutional provision, the court must give regard to the whole instrument, must seek to harmonize the various provisions, and must if possible, give effect to all provisions. S.D. Auto Club, Inc. v. Volk, 305 N.W.2d 693, 696-97 (S.D. 1981). "The words used in the Constitution are to be taken in their natural and obvious sense, and are to be given the meaning they have in common use unless there are very strong reasons to the contrary." In re Janklow, 1999 S.D. 27, ¶ 3, 589 N.W.2d 624, 626 (citation omitted). Finally, constitutional amendments are adopted for the express purpose of making a change in the system and as such, the court is "under the duty to consider the old law, the mischief, and the remedy, and to interpret the constitution broadly to accomplish the manifest purpose of the amendment." Volk, 305 N.W.2d at 697.

Reviewing Article XIII, §§ 20 and 21, it is clear that the people amended the constitution for the express intent of placing the proceeds of the South Dakota cement plant sale in a trust fund where the principal would remain intact and disbursements would be made only as provided by the amendments. The two disbursements specifically authorized are: (1) the $12 million per year transfer to the state general fund for appropriation, and (2) additional distributions for the support of education if the market value of the trust fund sufficiently exceeds the original principal in a fiscal year.

The language in Sections 20 and 21 reflects, at least partially, an intent to make the distributions self-executing. Article XIII, § 20 requires an annual $12 million transfer from the trust fund to the state general fund. Article XIII, § 21 mandates an appropriation of money for educational purposes (except for replacement of state aid to general education or special education) in the amount of five percent of the market value of the trust less the $12 million annual general fund transfer where, after the distributions are made, the market value of the trust fund exceeds the original principal deposited in trust. Beginning with fiscal year 2006, the market value calculations are determined based upon a sixteen quarter moving average.

Article XIII, § 20 specifically authorizes the investment of the trust fund in stocks, bonds and mutual funds. Given the equity investment authorization, and normal market fluctuations, the value of the trust fund may vary substantially during a fiscal year. Section 21 does not establish the date for market valuation to take place. It does, however, contain the restriction that no distribution may take place unless the market value of the trust fund in that fiscal year is sufficient to maintain the value of the original principal after all distributions. Your proposal contemplates a June 30 date to determine the market value of the trust fund. The only valuation date that can ensure compliance with this language is a June 30 date, the last day of a fiscal year. As such, I agree with your proposal to determine the market value of the trust fund as of June 30.

Your proposal contemplates that even if the trust fund's market value is great enough, no distribution will take place until the Legislature convenes sometime after June 30 to appropriate the funds to be distributed. Article XIII, § 21 mandates a legislative appropriation when there are sufficient funds available to make a distribution for the support of education. There is no discretion. There is, however, no specific time frame for that appropriation to take place.

In rendering an opinion on this issue, I must look to other provisions of the state constitution, specifically those addressing the convening of the Legislature and the appropriation process. In my opinion, it must be assumed that the people, in approving the trust fund provisions in Article XIII, §§ 20 and 21, were aware that under Article III, §§ 6 and 7, the Legislature annually convenes for its regular session beginning the second Tuesday of January for alternatively 35 and 40 legislative days. Further, it must be assumed that the voters knew that the constitution in Article XII sets forth the legislative appropriations process which is subject to gubernatorial veto, consistent with Article IV, § 4. Finally, it must also be assumed that the voters were aware of the additional authority that the Governor and Legislature are given to convene special sessions. See Article III, § 31 and Article IV, § 3. I cannot conclude that it was the intent of the people in adopting Sections 20 and 21 to amend these provisions.

Given these assumptions, it is my opinion that it was the intent of the people to have the mandated appropriation take place after the market value determination is made when the Legislature next convenes. Unless a special session is called, the appropriation from the trust fund would take place during the regular legislative session that follows the market value determination.

Unlike the normal appropriation process, Article XIII, § 21 gives the Legislature no room to speculate as to the dollar amount to appropriate or the purpose of that appropriation. Thus, it is my opinion that the appropriation required in Section 21 may be made in the same manner as other appropriations are made for the support of education, that being, only a majority of each house of the Legislature is needed for passage. Since the purpose of the appropriation and the amount are already constitutionally defined, there is no need for the constitutional safeguards that apply to special appropriations. Therefore, I would agree with your proposal that after market value determination is made, funds will not be distributed until the Legislature convenes to distribute them by appropriation.

Finally, your proposal contemplates an audit being conducted before monies are available for appropriation. Though I do not believe a full-blown formal audit of the trust fund is required prior to legislative appropriation, a market value determination must be made in such a manner that it may be relied upon by the Legislature in calculating the amount to be appropriated. When this activity is to be completed depends upon when the Legislature convenes for the purpose of appropriation. Clearly, if the Legislature does not convene until its regular session, the contemplated August audit would suffice.

IN RE QUESTION NO 2:

Your second question concerns what effect, if any, a decline in the market value of the trust fund after the June 30 market valuation date but prior to the date funds are appropriated would have on the legality of any distribution. In my opinion, that answer is none. I construe Article XIII, § 21 to place a restriction on distributions based upon a market valuation of June 30 each fiscal year. When the value of the trust fund on that date is sufficient for distribution to take place, money must be appropriated. The fact that the market value diminished prior to actual disbursement does not affect its legality. To reach any other conclusion would make it impossible for the Legislature to make any appropriation. The people safeguarded the trust fund from depletion by limiting the Section 21 distribution to five percent of the market value less the $12 million transfer.

As a further aid, I am including an example applying the above opinion, as follows:

Assume that on June 30 the market value of the trust fund is $260 million. Five percent of the trust fund is $13 million which, less the $12 million transfer, leaves $1 million to be appropriated for the support of education. On the date of appropriation, however, the unaudited market value of the trust fund has decreased. Nonetheless, the distribution must take place in accordance with the appropriation even though the market value of the trust fund at the date monies are withdrawn is below the $238 million threshold.

If, however, the market value on June 30 were $250 million, no additional appropriation could take place even though there is an additional $500,000 potentially available for the support of education, since, such a distribution after the $12 million annual transfer would reduce the trust fund market value to $237.5 million, below the $238 million original principal level. This is true even though, at the time the Legislature convenes, the market value may have risen and would be sufficient to allow a distribution.

Respectfully submitted,

Lawrence E. Long
Attorney General

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