If a 1960s South Dakota city built a nursing home with revenue bonds and the home could not cover operating costs from its revenues, could the city use general-fund money, special tax levies, or transfers from city-owned liquor store profits to keep it running?
Plain-English summary
A South Dakota city (referred to as City "B") had used the authority granted by Chapter 286 of the 1963 Session Laws to issue revenue bonds and build a municipal nursing home. The home charged monthly rates to occupants. By the time the questions reached the AG, construction costs and operating costs had outrun the home's revenue, and the city could not cover bond principal and interest from operating margins.
The city's officials wanted to know whether they could legally use other municipal funds to bail out the operation. They specifically asked about three sources:
- Transfers from the city's liquor store revenues, on the theory that liquor store revenues were not "tax" money.
- Transfers of net revenues from the city hospital or water works for the limited purpose of operating expenses (so that nursing home revenue could go to bond payments).
- Short-term loans or transfers from those same sources, to be repaid when the nursing home reached break-even.
The AG took the questions together. The key statute was SDC 1960 Supp. 45.0202(2), as amended by Chapter 140, Session Laws of 1964. That statute authorized cities to "establish and maintain hospitals" and to levy a special tax outside the general levy ceiling for "operation and maintenance of such hospital," with the term "hospital" defined to include "a nursing home or a home for the aged." So the city had statutory power to subsidize nursing-home operations from a special tax levy, period.
The revenue-bond statute's restriction was narrower than it looked. Chapter 286, S.L. 1963, prohibited the city from pledging its "credit and taxing powers" to bondholders; bondholders could not compel the appropriation of city funds for principal and interest. The AG read that as a protection against turning revenue bonds into general-obligation bonds, not as a ban on the city assisting with operating expenses through separate, lawful channels.
The opinion concluded the city could either levy the special hospital/nursing-home tax under SDC 1960 Supp. 45.0202(2) and appropriate from the proceeds, or appropriate from the general fund up to the equivalent amount. The liquor store fund was not a special fund recognized by law; the AG cited prior opinions treating liquor store revenues as effectively part of the general fund, transferable at will.
The opinion did not separately answer Questions 1, 2, and 3 in the form asked. It treated them as a single problem and offered the unified statutory path.
Currency note
This opinion was issued in 1966 (approximate, based on session-law references). 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. South Dakota's modern municipal finance code is in SDCL Title 9; revenue-bond authority and nursing-home/hospital operating provisions have been recodified and significantly revised since 1966.
What the opinion meant at the time
The opinion gave a city an escape valve. Revenue-bond-financed projects were politically attractive in the 1960s because they avoided the constitutional debt limit and did not require voter approval. But the financial model assumed operating revenue would cover everything (debt service plus operations). When that assumption failed, the city was stuck unless some other lawful funding source could reach the operation.
The AG's reading was that "revenue bond" status restricted only the bondholders' rights, not the city's broader powers as a municipal corporation. A city could still tax for hospital and nursing-home operations under SDC 1960 Supp. 45.0202(2), and could still move money between its own funds at year-end under SDC 1960 Supp. 45.1413 (as amended by Chapter 213, S.L. 1965). The revenue-bond promise to bondholders was narrowly that they had no right to compel tax revenues to flow to bond service; nothing prevented the city from voluntarily helping the operation stand on its feet.
The treatment of the liquor store fund was also significant. South Dakota cities ran municipal liquor stores in the 1960s, with profits flowing to the city budget. The AG, citing prior opinions in 1937-38 AGR 435, 1951-52 AGR 371, and 1953-54 AGR 283, treated liquor store revenue as effectively part of the general fund, transferable to other municipal purposes without statutory ceremony.
Common questions
Q: Is this opinion still good law?
A: Not directly. The SDC 1960 Supp. citations have been recodified. Modern SDCL Title 9 governs municipal finance, with separate provisions for revenue bonds, general-obligation bonds, and municipal services. The general principles, that revenue-bond restrictions limit bondholders' remedies rather than the city's general powers, and that cities may subsidize operations from separate funds, have been broadly carried forward, but the specific levy caps, transfer mechanics, and authorized funding sources have changed multiple times. Any current question about cross-subsidizing a revenue-bond-financed municipal facility should be analyzed under current SDCL Title 9 and current bond covenants.
Q: Why was the city's liquor store fund treated as part of the general fund?
A: South Dakota's then-existing statutes did not designate the liquor store fund as a "special fund" with restricted purposes. The AG's prior opinions (1937-38 AGR 435 etc.) had treated it as a profit center whose proceeds flowed to the general fund. That made it freely transferable to other municipal needs.
Q: Did the opinion rule that the city had to subsidize the nursing home?
A: No. The opinion ruled the city could lawfully subsidize, not that it had to. The decision to levy the special hospital/nursing-home tax or to appropriate from the general fund was a discretionary call by the city's governing body.
Q: Could the city pledge taxing power to bondholders by amending the contract?
A: No. The revenue-bond statute (Ch. 286, S.L. 1963) categorically prohibited pledging the city's "credit and taxing powers" to bondholders. Doing so would have re-characterized the bonds as general obligations, which had distinct legal procedures including debt-limit calculations and voter approval. The AG's path preserved the bonds' revenue-bond character while letting the city pay operating bills from other funds.
Q: Was nursing-home failure common in 1960s South Dakota?
A: The opinion's facts describe a city whose home could not meet bond service from operating margins. Whether this was an isolated case or a pattern across South Dakota cities is not addressed in the opinion. The AG's pragmatic answer suggests the office was hearing similar questions from multiple municipalities.
Background and statutory framework
Three statutory threads intersect in the opinion:
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Authority to operate hospitals and nursing homes. SDC 1960 Supp. 45.0202(2), as amended by Chapter 140, S.L. 1964, authorized first-class cities to establish and maintain hospitals, with a special tax levy of up to 5 mills (cities under $8 million assessed valuation) or 3 mills (over $8 million) for operation and maintenance, outside the general levy limitation. The amendment expressly defined "hospital" to include a nursing home or home for the aged. This was the primary statutory power for ongoing operating subsidy.
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Revenue-bond authority. Chapter 286, Session Laws of 1963, authorized cities to issue revenue bonds for facilities, including nursing homes. The statute's anti-pledge clause was specific: revenue bonds were "payable solely from and shall constitute a lien upon the gross revenues derived from and traceable to properties acquired" with bond proceeds. The city could not pledge "credit and taxing powers" to bondholders; bondholders had no right to compel appropriations for principal and interest. The AG read those limits as protections for bondholders' classification, not as bars on the city's other powers.
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Year-end fund transfers. SDC 1960 Supp. 45.1413, as amended by Chapter 213, S.L. 1965, authorized year-end transfers of fund cash balances by unanimous council vote, subject to the constraint that transferred money could not be spent for purposes not in the appropriation ordinance. The cross-subsidy path therefore had a statutory framework: levy or appropriate for the nursing home, or move year-end balances by unanimous vote.
The AG also cited SDC 1960 Supp. 12.0617(12), as amended by Chapter 38, S.L. 1964, as an additional method of helping a nursing home stand on its feet. That cite suggests there was a separate state-aid or grant track for nursing homes operated by municipalities, although the opinion does not develop it.
Citations and references
Statutes (as cited in the opinion):
- SDC 1960 Supp. 45.0202(2), as amended by Ch. 140, S.L. 1964
- SDC 1960 Supp. 45.1413, as amended by Ch. 213, S.L. 1965
- SDC 1960 Supp. 12.0617(12), as amended by Ch. 38, S.L. 1964
- Chapter 286, Session Laws of 1963 (revenue bond authority)
Cases: None cited.
Prior AG opinions referenced:
- 1937-38 AGR 435 (treatment of liquor store fund)
- 1951-52 AGR 371 (transfer of municipal funds)
- 1953-54 AGR 283 (transfer of municipal funds)
- Opinion issued April 16, 1966 to Hon. Ronald A. Leighty, State Representative (transfer of municipal funds)
Source
Original opinion text
Nursing. Cities may pay operation and maintenance costs of city nursing home even though nursing home was built with Revenue Bond.
You have requested an opinion based upon the following factual situation:
"The City of "B" has availed itself of Chapter 286 of the 1963 Session Laws and has issued revenue bonds pursuant thereto and has had erected and is operating a nursing home facility charging monthly rates to the occupants or patients residing therein. Section 1 of said act provides: 'Such revenue bonds shall be payable solely from and shall constitute a lien upon the gross revenues derived from and traceable to properties acquired by the expenditure of the proceeds of revenue bonds, or of bonds refunded thereby, as fixed and determined by the governing body in accordance with the provisions of this chapter. The credit and taxing powers of the municipality shall not be pledged for the payment of revenue bonds issued hereunder and the bond-holders shall have no right to compel the appropriation of any of the municipality's other funds, money or property for the payment of the principal thereof or interest thereon.'
It appears that by reason of increased costs of construction and operation, the interest and principal payments cannot be met out of margins over and above costs of operation."
You have asked the following specific questions:
"1. May the governing body transfer funds from the City liquor store revenues which it has not otherwise pledged, its other funds for the operation, of city government being in surplus, liquor store net revenues not being moneys derived from taxing powers?
"2. If it cannot pledge or transfer funds from the City liquor store net revenues or other net revenues from either its city hospital operation or water works operation for nursing home bond or interest payment, may it transfer such funds for the purpose of operating the home, as for example payment of help, food and supplies, and thereby free the revenues it receives for patient care for bond redemption and interest payment.
"3. If it cannot permanently transfer funds under either No. 1 or No. 2, may it borrow or transfer from the surpluses in its liquor store, waterworks or hospital operation on a temporary basis, and repay any sums so borrowed when its nursing home operation begins to show a sufficient net revenue to permit such repayment."
SDC 1960 Supp. 45.0202 (2) as amended by Chapter 140, Session Laws of 1964 reads in part as follows:
"To establish and maintain hospitals and medical dispensaries and to regulate the same; to levy a tax for the operation and maintenance of such hospital of not to exceed five mills in cities having an assessed valuation of eight million dollars or less and three mills in cities having an assessed valuation of over eight million dollars, which levies shall not be subject to any levy limitations imposed in any statute;. In this subsection, the term 'hospital' may be construed to mean hospital, a nursing home or a home for the aged..."
SDC 1960 Supp. 45.1413 as amended by Chapter 213, Session Laws of 1965 reads in part as follows:
"...if upon the expiration of any fiscal year there remains in any fund any cash balance, after paying all obligations of the municipality properly chargeable against such fund, the governing body by a unanimous vote may transfer such balance to such other fund as it may deem advisable. Provided, however, that money transferred pursuant to this section shall not be expended for any purpose not provided for in the annual appropriation ordinance;..."
It is clear that cities have authority under SDC 1960 Supp. 45.0202(2) as amended to establish, operate and maintain a nursing home and to levy a tax outside the general tax levy limitation for such purpose.
It is my opinion that if a city elects to construct a nursing home with revenue bonds under the authority of Chapter 286, Session Laws of 1963, that such procedure does not prohibit the city from also using the provisions of SDC 1960 Supp. 45.0202(2) as amended.
It is my opinion, however, that the city may not pledge any of its taxing power for the payment of the revenue bonds and the bondholders have no right to compel the appropriation of any city funds for the payment of such revenue bonds and interest. It is my opinion that such limitations are for the purpose of keeping the revenue bonds, as revenue bonds, and eliminating the possibility of them being classified as general obligation bonds and that such limitations do not prohibit the city from assisting with the operating and maintenance expenses of a nursing home under the provisions of SDC 1960 Supp. 45.0202(2) as amended.
As to transfer of municipal funds, see official opinion issued to the Honorable Ronald A. Leighty, State Representative, April 16, 1966, 1951-52 AGR 371 and 1953-54 AGR 283.
It is my opinion that a municipality may appropriate for specific purposes from the general fund in lieu of using special levies for specific purpose, provided the amount appropriated is within the amount that would be authorized by the special levy for such specific purpose.
In summary and without answering your specific questions as such, it is my opinion that a city may either make a special levy and an appropriation to assist their nursing home with its operating and maintenance expenses under SDC 1960 Supp. 45.0202(2) as amended or may make an appropriation from the general fund for such purpose. An additional method of assisting a nursing home is provided by SDC 1960 Supp. 12.0617 (12) as amended by Chapter 38, Session Laws of 1964.
In general the liquor store fund is not a special fund recognized by law and in reality is a part of the general fund of the municipality and may be transferred to the general fund at any time. See 1937-38 AGR 435; 1951-52 AGR 371; and 1953-54 AGR 283.