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 pitch was attractive on its face. South Dakota's permanent school fund earned a yield from its investments and used that yield to support education. SBA-guaranteed paper was federally backed and would yield more than U.S. Treasury bonds. Plus, the program would channel state funds into in-state small business lending, supporting economic development. The Regional Director noted the same structure was already in use in North Dakota, Utah, and Wyoming for state pension funds.

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 90%-guaranteed SBA loans? The answer was no. The constitutional clause "securities guaranteed by the United States" could conceivably be read liberally to allow any investment in which the fund was protected 100% (the SBA structure was 90% federal guarantee plus a 10% co-investment requirement on the bank, leaving the fund's portion fully covered). But SDCL 5-10-18 (the implementing statute) narrowed the constitutional authority. It said "fully guaranteed" and was silent on partial guarantees. The Legislature had chosen not to liberalize the rule, and the AG was not free to read 90% guarantee as equivalent to full guarantee. The implementing statute could also be read to imply that covered investments had to be loans secured by real estate (since the named examples, FmHA and FHA mortgages, were real estate loans). SBA loans were typically not real estate loans.

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. A guarantee from SBA was a guarantee from the United States. So if the SBA guarantee had been 100%, it would have qualified; the issue was the 10% gap, not the agency identity.

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's bottom-line recommendation was to amend the Constitution if the Legislature wanted the permanent school fund to invest in SBA paper. That was a cleaner solution than trying to stretch existing constitutional language.

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. South Dakota has amended Article VIII, Section 11 of the state Constitution multiple times since 1969 to broaden the categories of permitted permanent school fund investments. The current statutory framework for permanent school fund investments lives in SDCL Title 5 (State Lands and Investments) and includes substantially more flexibility than the 1969 regime. 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 opinion blocked an investment opportunity that on its merits looked attractive. The fund could not buy SBA-guaranteed paper, regardless of the in-state economic development benefits. The Commissioner could continue investing in U.S. Treasury bonds and the narrow list of "fully guaranteed" securities expressly authorized.

For the Small Business Administration's South Dakota operations, the door was closed on this particular state-fund tap. SBA's loan-guarantee program in South Dakota would have to rely on bank capital and federal funding without state matching, at least until the Constitution was amended.

For the South Dakota Legislature, the opinion was a request for action. If legislators wanted the fund to be able to make this kind of investment, they had to put a constitutional amendment on the ballot. A statutory expansion alone would risk being struck down as inconsistent with the constitutional restriction.

For state-fund administrators in other states (North Dakota, Utah, Wyoming) where the SBA arrangement was already operating, the opinion implicitly acknowledged that those states' constitutions and statutes were structured differently. North Dakota's Bank of North Dakota statute, for instance, explicitly authorized "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." That "in part or in full" language was the key, and South Dakota lacked it.

For South Dakota's broader investment policy, the opinion underscored the rigidity of the permanent school fund's constitutional rules. The fund was the largest pool of state-controlled investment capital, and the 1889 Constitution had locked in conservative investment standards (anti-speculation protections for the school endowment). Those standards had aged into modern restrictions that prevented otherwise sound investments simply because the federal guarantee structure had moved on since 1889.

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: The fund's portion in this kind of arrangement is generally fully paid; the 10% gap is on the bank's portion of the loan, not the fund's. The AG's opinion still treated the structure as failing because SDCL 5-10-18 required the security itself to be fully guaranteed, not the fund's particular investment to be fully protected. The text "fully guaranteed by the United States" attached to the security, not to the holder's exposure.

Q: Was there any way for the fund to invest in SBA-related securities under the existing rules?
A: The AG noted that FmHA (Farmers Home Administration) mortgages were on the approved list. To the extent SBA had any 100%-guaranteed instruments, those might have qualified. But the typical SBA 90% guarantee program described in the proposal was not eligible.

Q: Could the fund have made the investment indirectly, through a wholly-state-owned entity?
A: The opinion did not address indirect investment structures. The constitutional language attached to "the Commissioner of School and Public Lands" specifically and named the fund directly, so it is unclear whether a pass-through entity would have evaded the restriction. A separate AG opinion would have been needed to resolve that.

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 read it to suggest that the Legislature had real-estate-secured federal mortgages in mind as the model for the "fully guaranteed" investments. SBA loans were typically business operating loans, not real estate mortgages. So the SBA program would have fallen outside both the "fully guaranteed" textual requirement and (the AG suggested) the implied real-estate-loan limitation.

Q: Did the AG offer any alternative to a constitutional amendment?
A: Implicitly, no. The opinion's express recommendation was to amend the Constitution. The AG declined to opine on whether a legislative rule could expand the constitutional language to cover partial guarantees, and warned that such a rule would raise constitutional questions.

Background and statutory framework

South Dakota's permanent school fund traces its origin to the 1889 admission to the Union. The federal government granted lands to the new state, with revenues from those lands (sales, leases, royalties) dedicated to the support of common schools. The constitutional provisions structuring the fund were conservative, designed to prevent speculative loss of principal: no investment outside a narrow list of conservative federally-backed instruments, and a constitutional bar on appropriating principal.

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 Small Business Administration was established by federal statute in 1953 (15 USCA § 631 et seq.) as an independent federal agency to support small business credit. Its loan-guarantee program guaranteed 90% of qualifying bank loans to small businesses, with the bank retaining 10% of the risk. The 90/10 split was meant to ensure bank diligence in underwriting while still providing meaningful federal credit support.

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 North Dakota model the SBA Regional Director cited (Bank of North Dakota with state-employee-pension and other state funds) operated under more permissive constitutional language. North Dakota's enabling statute for the Bank explicitly authorized purchases of partial federal guarantees. South Dakota's permanent school fund language was older and tighter.

The AG's role under SDCL ch. 1-11 was to issue legal opinions on questions submitted by state officials. The Commissioner of School and Public Lands had standing as a constitutional officer to request the opinion. The AG's opinion was not binding on the Commissioner's investment decisions but was persuasive and would be followed in the absence of court ruling otherwise.

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 §§ 631-647 (Small Business Administration Act)

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

• Landing page: https://atg.sd.gov/OurOffice/OfficialOpinions/opinionhtml.aspx?id=1687
• 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