The Small Business Administration proposed that South Dakota's permanent school fund invest in the guaranteed portion (90%) of SBA-guaranteed bank loans to small businesses. The state Constitution allowed the fund to be invested only in 'securities guaranteed by the United States.' Could the fund buy a 90% SBA guarantee on a bank's small-business loan?

Plain-English summary

The Regional Director of the Small Business Administration in Sioux Falls had pitched the Commissioner of School and Public Lands on a creative arrangement. SBA was guaranteeing 90% of bank loans to small businesses across South Dakota. The Regional Director proposed that the state's permanent school fund buy the guaranteed portion of those loans. Mechanically, the bank would assign the 90% guaranteed portion to the fund; the bank would collect from the borrower and remit 9/10 of each principal payment to the fund. The bank would keep servicing the loan and the unguaranteed 10%.

The Regional Director said the arrangement could make more funds available for small-business loans. The AG noted the commissioner's desire to aid industry and earn higher investment income. The Regional Director said the program had been used in North Dakota, Utah, and Wyoming with state employee pension funds and investments by the Bank of North Dakota.

But the South Dakota Constitution and the implementing statute were stricter. Article VIII, Section 11 said the permanent school fund "shall be invested by the Commissioner of School and Public Lands only in bonds of the United States, securities guaranteed by the United States" (and a few other narrow categories). SDCL 5-10-18, the statute implementing this constitutional rule, listed "(1) bonds of the United States; (2) securities fully guaranteed by the United States, including Farmers Home Administration and Federal Housing Administration mortgages."

The AG framed the legal question in two parts:

Questions 1 and 2: Could the fund invest in the proposed SBA loan portions? The answer was no. The AG said the constitutional phrase "securities guaranteed by the United States" could conceivably be read liberally to cover an investment that protected the fund 100%, even though the underlying security was guaranteed only 90%. But SDCL 5-10-18 limited investment to securities fully guaranteed by the United States and did not authorize buying a guaranteed portion of a security. The AG also said the statute strongly implied a limit to loans secured by real estate.

Question 3: Did "by an agency of the United States" (like SBA) have the same legal force as "by the United States"? Yes. The AG cited U.S. v. Stuart, 271 F. Supp. 939, which held SBA was a non-incorporated Federal Agency and an integral part of the United States Government. The AG said the two phrases had identical legal force and effect.

Question 4: If the Constitution did permit SBA loan investments but SDCL 5-10-18 narrowed it, could the statute be amended to allow them? The AG was non-committal. He could not definitively say the constitutional phrase "securities guaranteed by the United States" could be expanded by legislative rule to include partial SBA guarantees. Such an enactment would raise constitutional questions. The AG declined to opine on the constitutionality of a hypothetical broadening statute.

The AG said it would be preferable to amend the Constitution to authorize investment of permanent school funds in SBA loans.

Currency note

This opinion was issued in 1969. 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 VIII, Section 11 of the state Constitution and the implementing investment statutes (in SDCL Title 5) may have been amended since 1969 to broaden the categories of permitted permanent school fund investments. Modern questions about state fund investment authority should be addressed under the current constitutional and statutory provisions, not the 1969 framework.

What the opinion meant at the time

For the Commissioner of School and Public Lands, the AG's answer to the proposed purchase was no under the statutory language then in force. The opinion quoted statutory permission for United States bonds and fully guaranteed securities.

For the SBA proposal, the identity of SBA as a federal agency did not defeat eligibility. The problem was the statute's treatment of a guaranteed portion of a security that was only 90% guaranteed overall.

For legislators, the AG declined to say whether a statute could validly expand the constitutional phrase to allow investment in SBA loans. He said such a law would raise a constitutional question and preferred a constitutional amendment.

The opinion quoted a Bank of North Dakota statute allowing obligations guaranteed "in part or in full" by the United States. It did not analyze the constitutional law of the other states named in the proposal.

The distinction between the two South Dakota provisions matters: the constitutional phrase was possibly open to a liberal interpretation, while the statute expressly required fully guaranteed securities and did not authorize purchase of a guaranteed portion.

Common questions

Q: What if the bank agreed to take the 10% loss itself, so the fund's portion would always be fully paid?
A: That was essentially the proposed arrangement: the bank would assign the guaranteed 90% portion to the fund, potentially protecting its investment 100%. The AG still answered no because SDCL 5-10-18 required fully guaranteed securities and did not authorize purchase of only a guaranteed portion of a security.

Q: Was there any way for the fund to invest in SBA-related securities under the existing rules?
A: The opinion did not consider a different SBA security. It rejected the proposed purchase of guaranteed portions of loans that were guaranteed to 90% overall.

Q: Could the fund have made the investment indirectly, through a wholly-state-owned entity?
A: The opinion did not address indirect investment through a state-owned entity.

Q: Did the opinion's reasoning extend to other restricted state funds?
A: The Teachers' Retirement Fund was mentioned in the SBA Regional Director's letter as the kind of fund that had made these investments in North Dakota and Wyoming. The AG noted that the Teachers' Retirement Fund was not affected by the constitutional limitation that constrained the permanent school fund. The reasoning was specific to the permanent school fund and the educational funds within Art. VIII, § 11.

Q: What did "securities fully guaranteed by the United States, including Farmers Home Administration and Federal Housing Administration mortgages" tell us about the Legislature's intent?
A: The AG said the statute strongly implied, and might be read to mean, that the Legislature intended to limit investments to loans secured by real estate. He did not make a separate finding about the security for each proposed SBA loan.

Q: Did the AG offer any alternative to a constitutional amendment?
A: The AG preferred a constitutional amendment. He declined to express an opinion on whether a statute allowing the proposed investment would be constitutional.

Background and statutory framework

The opinion quoted Article VIII, Section 11 and SDCL 1967 5-10-18 as the governing investment provisions for the permanent school fund and other educational funds.

Article VIII, Section 11 in 1969 read in relevant part: "The moneys of the permanent school fund and educational fund shall be invested by the Commissioner of School and Public Lands only in bonds of the United States, securities guaranteed by the United States . . ." The "Legislature shall provide by law, such rules, regulations and safeguards as it may deem necessary to secure safe and continuous investment of such funds so far as possible, and to provide the highest income compatible with safety investments."

SDCL 1967 5-10-18 implemented this constitutional restriction with: "The moneys of the common school permanent fund and other education fund shall be invested only in: (1) bonds of the United States; (2) securities fully guaranteed by the United States, including Farmers Home Administration and Federal Housing Administration mortgages . . ."

The proposal described SBA guarantees of up to 90% of small-business loans. It would have assigned the guaranteed portion from banks to the fund, while banks serviced the loans and remitted the fund's share of principal payments.

U.S. v. Stuart, 271 F. Supp. 939, established that SBA was an integral part of the United States Government, not a separate legal entity. That meant SBA's guarantees were United States guarantees for legal purposes, ending any question whether "by an agency of the United States" differed from "by the United States."

The AG quoted a North Dakota statute permitting the Bank of North Dakota to purchase obligations guaranteed in part or in full by the United States. South Dakota's statute did not contain comparable authorization for buying only a guaranteed portion.

The Commissioner of School and Public Lands requested this opinion on the proposed investment. The AG said the answer to the first two questions was not free from doubt and could be answered authoritatively only by the South Dakota Supreme Court.

Citations and references

Constitution and statutes:

• S.D. Const. Art. VIII, § 11 (permanent school fund and educational fund investment restrictions)
• SDCL 1967 5-10-18 (statutory implementation of the constitutional rule; "fully guaranteed by the United States, including Farmers Home Administration and Federal Housing Administration mortgages")
• 15 USCA Section 631 through 647

Cases:

• U.S. v. Stuart, 271 F. Supp. 939 (SBA is a non-incorporated Federal Agency and integral part of the United States Government)

Comparative authority:

• Bank of North Dakota investment statute (authorizing purchases of obligations "insured by, or guaranteed, in any manner, in part or in full, by the United States or any instrumentality thereof")

Source

• Official HTML: https://atg.sd.gov/OurOffice/OfficialOpinions/opinionhtml.aspx?id=675
• Original PDF: https://atg.sd.gov/OfficialOpinions/Official%20Opinion%2069-83.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

OFFICIAL OPINION NO. 69-83

Investment of permanent school funds in Small Business Administration loans, constitutional limitations

STATE OF SOUTH DAKOTA
OFFICE OF THE ATTORNEY GENERAL
October 3, 1969

Bernard Linn, Commissioner
Department of School and Public Lands
Pierre, South Dakota 57501

Dear Mr. Linn:

We have your request for an official opinion as to investing a portion of the permanent school funds of the State of South Dakota in Small Business Administration loans. An examination of the file reveals that heretofore the Regional Director of the Small Business Administration, Sioux Falls, South Dakota, submitted a proposal that the Commissioner of School and Public Lands, as custodian of the common school permanent fund and other education funds, make disbursements from such fund in exchange for an assignment from banks of the guaranteed portions of SBA guaranteed loans. Among other things, the Regional Director stated:

"We propose that the Commissioner of School and Public Lands, with the approval of Board of School and Public Lands and of the Governor, give written authorization to the State Treasurer, as custodian of the Common School Permanent Fund and other education funds (hereinafter referred to as 'fund'), to make disbursements from Fund in exchange for assignments from banks of the guaranteed portions of SBA guaranteed loans.

"SBA loans to small businesses and industries can be authorized up to $350,000 (SBA share), for terms up to fifteen years for construction, ten years for other than working capital and construction, and six years for working capital. Such loans may be guaranteed by SBA up to 90% and bear interest at the rate set by the bank, but not to exceed 8% per annum. Out of the interest set by bank, it pays SBA 1/2 of 1% as the guaranty fee on the guaranteed portion and the bank services the loan. Only the guaranteed portion, or a part thereof, would be assigned to the Fund, which would make its investment 100% guaranteed by the Small Business Administration, an agency of the United States Government."

We have examined the guarantee agreement and the form of the proposed assignment of the securities to the permanent school fund that will be used by SBA and the bank that makes the loan to the borrower. The guarantee is 90% of the outstanding balance of the loan. The proposed instrument whereby the bank would assign the guaranteed portion of the loan sets out therein that the bank will collect the installments on the loan, as paid, and 9/10 of the payments received and collected on the principal of said loan will be remitted monthly to the assignee of the certificate of guaranty. In other words, you would be purchasing 90% of the security. The Regional Director of SBA also states that the program, as outlined in his letter, has been placed in effect in North Dakota, Utah and Wyoming with state employee pension funds and investments by the Bank of North Dakota. The types of funds in North Dakota and Wyoming are similar to South Dakota's Teacher's Retirement Fund, which is not affected by the constitutional limitation that we are concerned with in this opinion.

It is interesting to note, however, that in North Dakota the statute which pertains to investments by the Bank of North Dakota provides that:

"It may make such loans and advances of credit and purchases of obligation representing loans and advances of credit as are insured by, or guaranteed, in any manner, in part or in full, by the United States or any instrumentality thereof."

While it is not the function of this office to determine the advisability of such an investment, it would seem there is merit to the Regional Director's proposal wherein he states in his letter of June 12, 1968 as follows:

". . . it will make it possible for banks in this state to make loans to small business concerns which otherwise could not be made on account of unavailability of funds. It would permit banks to cultivate profitable business and industry accounts, well secured, and at the same time enable the firm to obtain a very favorable interest rate at no risk."

We are aware of the desire of your office to aid the development of industry in the State of South Dakota if this can be legally accomplished and a higher income from the investment be realized.

By assignment of the Certificate of Guaranty to the permanent school fund of the bank involved and an agreement with the bank and the Small Business Administration, it would seem that the fund could be protected 100%. The Regional Director states that the permanent school fund share will be fully guaranteed. On the basis of the proposal submitted, it can be seen that in the final analysis the investment could be fully protected.

You have submitted four questions which will be answered in the order in which they are asked. Questions one and two are answered together.

"1. Does the Constitution, Article VIII, Section 11 permit the investment of permanent school funds in SBA loans?"

"2. Does SDCL 5-10-18, as amended, permit investment in any portion of funds not fully guaranteed by the United States?"

Article VIII, Section 11 provides as to pertinent parts as follows:

"The moneys of the permanent school fund and educational fund shall be invested by the Commissioner of School and Public Lands only in bonds of the United States, securities guaranteed by the United States . . ."

"The Legislature shall provide by law, such rules, regulations and safeguards as it may deem necessary to secure safe and continuous investment of such funds so far as possible, and to provide the highest income compatible with safety investments."

SDCL 1967 5-10-18 provides as to pertinent parts as follows:

"The moneys of the common school permanent fund and other education fund shall be invested only in: (1) bonds of the United States; (2) securities fully guaranteed by the United States, including Farmers Home Administration and Federal Housing Administration mortgages; . . ."

The answer to Questions 1 and 2 is by no means free from doubt and one that can only be authoritatively answered by the Supreme Court of South Dakota. By giving the phrase in the Constitution, that states:

". . . securities guaranteed by the United States"

a liberal interpretation, we could conceivably interpret such statement meaning any investment in which the permanent school fund is protected 100% as is the case here, despite the fact that the security is actually only guaranteed by the United States to the extent of 90%.

The State Constitution gives the Legislature broad rule making powers with respect to the investment of the permanent school fund. However, that body has not seen fit to liberalize or broaden the right of such investments. On the other hand, SDCL 1967 5-10-18 narrows and restricts the right to securities guaranteed 100% and no authorization is given to the purchase of a portion of a security, even though that portion be guaranteed. Also, SDCL 5-10-18 implies very strongly, and may be read to mean that the Legislature intended to limit such investments to loans secured by real estate. To get a different result we would have to read SDCL 5-10-18 as follows:

"Securities, secured or unsecured, or a portion thereof guaranteed in whole or in part, by the United States."

Therefore, the answer to Questions 1 and 2 is in the NEGATIVE.

"3. SBA loans are guaranteed by the Small Business Administration, an agency of the United States Government. The statute provides that to be eligible, securities must be guaranteed 'by the United States.' Are the terms 'by the United States' and 'by an agency of the United States' of identical legal force and effect?"

The answer to this question is in the AFFIRMATIVE. The Small Business Administration was created by an Act of Congress and is found in 15 USCA Section 631 through 647. In the case of U.S. v. Stuart, 271 F. Supp. 939, the court held that the Small Business Administration is a non-incorporated Federal Agency and an integral part of the United States Government. The phrase, "by the United States" and the term "by an agency of the United States" are of identical legal force and effect.

"4. In the event that the Constitution does provide for the investment of SBA loans, would SDCL 5-10-18 preclude such action until such time as this law was amended?"

We are unable to definitely say that the phrase "securities guaranteed by the United States" in Article VIII, Section 11 could by legislative rules and regulations be defined to provide for investment in SBA loans. Such an enactment by the Legislature would raise the question of such law's constitutionality. I make no comment nor express any opinion as to the constitutionality of such an act by the Legislature.

It is my opinion that it would be preferable to amend the Constitution to authorize you to invest permanent school funds in SBA loans.

Respectfully submitted,

Gordon Mydland
Attorney General