When a South Dakota school district reorganizes and some of its property moves to a new district, does that property still owe its share of capital outlay certificates the old district issued before the reorganization?
Plain-English summary
In spring 1993, the Jefferson School District issued capital outlay certificates under SDCL 13-16-6.2 to fund some capital project. Later that year, the voters of the Elk Point area approved a school district reorganization effective July 1, 1994: part of Jefferson became the new Elk Point-Jefferson School District, and the remaining part became the new Dakota Valley School District. The question for the AG was straightforward and high-stakes for everyone involved: did the land that moved out of Jefferson still owe its share of those 1993 capital outlay certificates?
The 1994 AG said yes. The land remained liable.
The legal reasoning ran through two layers. First layer: SDCL 13-6-82 says that on school district reorganization, "existing bonded indebtedness" stays attached to the original district's property; the county auditor keeps levying the bonding tax against the originally-taxed property. That part was straightforward. The question was whether capital outlay certificates count as "bonded indebtedness."
Second layer: the AG worked through the statutory history. Capital outlay certificates were authorized in 1978 (S.L. 1978, ch. 109) to let school districts use installment financing for buildings and equipment, with payments backed by the capital outlay fund tax levy. The SD Supreme Court in Schull Construction Co. v. Webster Independent School District had earlier held that the regular capital outlay levy was discretionary year-by-year, so it could not be a true "irrepealable tax" of the kind the constitution requires for bonded debt. The 1973 Legislature responded by making the levy mandatory when needed to meet installment payments, and the 1978 Legislature added the option to make the levy "irrevocably pledged" to back capital outlay certificates. With that pledge, the school board could be compelled by mandamus to make the annual levy as long as the certificates were outstanding.
The result: a capital outlay certificate backed by an irrevocable pledge of the capital outlay fund tax is functionally equivalent to a bond. The Legislature said "certificates" not "bonds" because, unlike bonds, certificates can be issued without an election (subject to statutory and constitutional debt limits). But on the question of survival across reorganization, both function the same way. The land owes the debt, not the district that happens to hold the deed at any given moment.
The AG's answer caveat: this analysis assumed Jefferson actually made the irrevocable pledge when it issued the certificates. If the district issued certificates without making that pledge, the analysis would be different because the obligation would not have the same bonded-debt character.
Currency note
This opinion was issued in 1994. 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. SDCL chapters 13-6 and 13-16 have been amended numerous times since 1994. Modern capital outlay financing, school district reorganization rules, and the irrepealable-tax framework should be checked against the current code, current SDCL chapter 6-8B local bonding standards, and any later AG opinions or court decisions that address how reorganization affects capital outlay debt.
What the opinion meant at the time
For the new Elk Point-Jefferson and Dakota Valley Districts in 1994, the opinion meant that property they inherited from Jefferson came with attached debt service: the county auditor would continue collecting the capital outlay levy on those parcels to pay off the 1993 certificates. The new districts could not push that obligation onto their other property.
For school district reorganization planning committees statewide in the 1990s, the opinion reinforced that a district could not strip debt from its property by reorganizing. Reorganization moved governance, not debt.
For bond counsel and school district financial advisors, the opinion confirmed that capital outlay certificates backed by an irrevocable pledge were treated as bonded debt for reorganization purposes. That parallel mattered for marketing the certificates to investors, who would otherwise have to discount for reorganization risk.
For county auditors handling levy collection across reorganized district boundaries, the opinion gave clear direction: continue the levy on the original property until the certificates are paid, regardless of which district the property now belongs to.
For taxpayers in Jefferson, the opinion meant that the 1993 certificates' costs would be borne by the original tax base. Reorganization did not let part of the district shed the obligation.
Common questions
Q: What is a capital outlay certificate?
A: A debt instrument authorized by SDCL 13-16-6.2 that a SD school district can issue without voter approval to fund capital projects. Payments come from the capital outlay fund tax levy. Compared to school bonds (SDCL 13-16-10), certificates have lower procedural barriers but tighter statutory caps.
Q: What is an irrevocable pledge in this context?
A: The school board's commitment to keep levying the capital outlay tax annually until the certificates are paid, with the pledge backing the certificates. Once made, the pledge is enforceable by mandamus against future school boards.
Q: What does SDCL 13-6-82 do during reorganization?
A: It says existing bonded indebtedness stays attached to the original district's land. The county auditor keeps levying the bonding tax on the originally-taxed property until the debt is paid, no matter how the district lines are redrawn.
Q: Why did the AG have to decide whether certificates count as bonds?
A: Because SDCL 13-6-82 uses the term "bonded indebtedness." The Legislature did not explicitly include certificates in that term, so the AG had to read the statutes together to determine intent.
Q: What is the irrepealable tax under S.D. Const. art. XIII, § 5?
A: The constitution requires that bonded debt be backed by a tax that cannot be repealed until the debt is paid. The 1978 amendments made it possible for capital outlay certificates to be backed by such a pledge, putting them on the same footing as bonds for this purpose.
Q: What if Jefferson never made the irrevocable pledge?
A: The opinion's analysis assumed Jefferson made the pledge at issuance. If it did not, the certificates might not qualify as "bonded indebtedness" for SDCL 13-6-82 purposes, and the AG's answer could shift.
Q: Does this rule apply to non-school reorganizations?
A: SDCL 13-6-82 is specific to school district reorganizations. Other forms of local government merger or boundary change have their own statutes addressing debt liability.
Background and statutory framework
South Dakota school district reorganization is a recurring feature of K-12 governance, driven by declining rural enrollment, consolidation pressures, and changing tax bases. The Legislature anticipated the debt-allocation problem when it wrote SDCL 13-6-82: the original district's land keeps its debt obligation through any reorganization. The county auditor enforces the obligation by continuing the relevant tax levy on the original property.
The narrower question, which the 1994 AG resolved, was whether capital outlay certificates count as "bonded indebtedness" under SDCL 13-6-82. The capital outlay system under SDCL chapter 13-16 was designed in part to give school districts a more flexible alternative to traditional school bonds. Bonds under SDCL 13-16-10 require voter approval and are backed by an irrepealable tax under S.D. Const. art. XIII, § 5. Certificates under SDCL 13-16-6.2 can be issued without an election, but they are capped at 1.5% of taxable valuation under SDCL 13-16-6.3 and at constitutional debt limits.
The history is important. In Schull Construction Co. v. Webster Independent School District, the SD Supreme Court held that the original capital outlay levy was discretionary; the school board could choose each year whether to levy. That discretion was incompatible with the constitutional "irrepealable tax" requirement for bonded debt. The Legislature responded in two waves. In 1973, it made the capital outlay levy mandatory when needed for installment payments and clarified that the fund could be used for building construction (S.L. 1973, ch. 91). In 1978, it added the irrevocable-pledge option for certificates, making the underlying tax enforceable by mandamus when certificates were outstanding (S.L. 1978, ch. 109).
That 1978 amendment is what makes capital outlay certificates "bonded indebtedness" in everything but name. Functionally, they are bonds with a streamlined issuance procedure. The 1994 AG recognized that reality and aligned the reorganization rule accordingly.
The AG also worked through the procedural references that originally treated certificates like bonds (SDCL §§ 13-19-19, 13-19-21 to 13-19-26). Those references were superseded in 1984 when SDCL chapter 6-8B standardized local bonding, but the structural treatment carried forward.
Citations and references
Statutes and constitutional provisions:
- S.D. Const. art. XIII, § 5 (irrepealable tax)
- SDCL 13-6-1(4) (school district reorganization defined)
- SDCL 13-6-82 (existing bonded indebtedness survives reorganization)
- SDCL 13-16-6, 13-16-6.2, 13-16-6.3 (capital outlay fund and certificates)
- SDCL 13-16-7 (annual levy and irrevocable pledge)
- SDCL 13-16-10 (capital outlay bonds)
- SDCL chapter 6-8B (standardized local bonding procedures)
- SDCL chapter 13-19 (pre-1984 school bond procedures)
Cases:
- South Dakota Board of Regents v. Hegge, 428 N.W.2d 535 (S.D. 1988)
- American Rim and Brake Inc. v. Zoellner, 382 N.W.2d 421 (S.D. 1986)
- Border States Paving v. Department of Revenue, 437 N.W.2d 872 (S.D. 1989)
- Whalen v. Whalen, 490 N.W.2d 276 (S.D. 1992)
- LaBore v. Muth, 473 N.W.2d 485 (S.D. 1991)
- Schull Construction Co. v. Webster Independent School District, 198 N.W.2d 512 (S.D. 1972)
- Meierhenry v. City of Huron, 354 N.W.2d 171 (S.D. 1984)
Prior AG opinions referenced:
- 1967-68 AGR 407
- 1967-68 AGR 258
Source
Original opinion text
OFFICIAL OPINION NO. 94-04
Capital Outlay Certificates
Dear Dr. Holt:
You have requested an official opinion from this Office concerning the following factual situation:
FACTS:
In the Spring of 1993, the Jefferson School District issued capital outlay certificates pursuant to SDCL 13-6-6.2 which did not obligate the District for future payments in excess of 1.5% of the taxable valuation of taxable property within the District. SDCL 13-16-6.3. In November, 1993, a plan of reorganization was adopted by the voters of the Elk Point School District whereby, effective July 1, 1994, a portion of the property then located within the Jefferson School District would become part of the new Elk Point-Jefferson School District and the remaining property would be known as the Dakota Valley School District.
Based upon these facts, you have asked the following question:
QUESTION:
Whether property which is subject to a levy for the repayment of capital outlay certificates properly issued by the School Board of the District in which the property is located remains liable for repayment of said certificates if such property is subsequently transferred to another school district as a result of reorganization?
The answer to your question depends on whether capital outlay certificates issued pursuant to SDCL 13-16-6.2 constitute "bonded indebtedness" within the contemplation of SDCL 13-6-82. In my opinion, outstanding outlay certificates are bonded indebtedness. Therefore, my answer to your question is, "Yes."
SDCL 13-6-82 provides in relevant part:
Nothing in this chapter shall be construed to authorize the transfer of the liabilities of existing bonded indebtedness from the district or territory against which it was originally incurred. Should there be any existing bonded indebtedness against a district, the county auditor shall continue the annual tax levy that was provided for the redemption of such bond issue.
This statute applies when there has been a "reorganization" of school districts (as defined in SDCL 13-6-1(4)), as there has been here. This Office has on several occasions interpreted this statute to mean that such reorganization does not relieve district lands of liability for bonded indebtedness existing at the time of reorganization. See 1967-68 AGR 407; 1967-68 AGR 258. The lands which were part of the "old" district remain liable for outstanding bonded indebtedness, even though those lands are now a part of a "new" district.
The issue, then, is whether capital outlay certificates were intended by the Legislature to fall within the phrase "bonded indebtedness." Resolution of the issue becomes a matter of statutory construction; the goal is to determine the intent of the Legislature. As a base principle of statutory construction, it is appropriate to look not only to the words used in the statute at issue, but also to examine other statutes on the subject as well. South Dakota Board of Regents v. Hegge, 428 N.W.2d 535, 541 (S.D. 1988). Further, words used in a statute are to be given their plain, ordinary and popular meaning, unless the context clearly requires otherwise. SDCL 2-14-1; American Rim and Brake Inc. v. Zoellner, 382 N.W.2d 421 (S.D. 1986); Border States Paving v. Department of Revenue, 437 N.W.2d 872, 874 (S.D. 1989); Whalen v. Whalen, 490 N.W.2d 276 (S.D. 1992). Finally, legislative history, title and the total content of the legislation are all important in ascertaining the meaning of a statute. LaBore v. Muth, 473 N.W.2d 485 (S.D. 1991).
A review of the pertinent statutes and their legislative history convinces me that capital outlay certificates are intended to be treated as bonded indebtedness. First, the touchstone of bonded indebtedness, at least in this context, has been the existence of an irrepealable tax to pay the indebtedness. S.D. Const., Art XIII, § 5. The South Dakota Supreme Court addressed the issue in Schull Construction Co. v. Webster Independent School District, 198 N.W.2d 512 (S.D. 1972). There, the court considered what is now the first sentence of SDCL 13-16-7 and concluded that the language authorizing a school board to do an annual levy for the capital outlay fund "at its discretion" did not amount to an irrepealable tax levy that would bind future boards. Rather, the court held that the installment payments authorized by SDCL 13-16-6 were dependent each year on that exercise of discretion to levy taxes. Further, the court ruled that installment contracts payable through the capital outlay fund could not be used to construct buildings in any event. The Legislature's response came the next Legislative Session.
The 1973 Legislature responded to Schull Construction by amending SDCL 13-16-6. The amendment provided that the school district "shall" make a sufficient annual levy to meet installment payments, and made it clear that the capital outlay fund could be used to construct buildings. S.L. 1973, ch. 91, § 1. Other amendments addressed several other items cited by the court in Schull Construction, and were clearly intended to overturn the court's conclusions that installment payments could not be used to construct school buildings.
In 1978, the Legislature authorized the issuance of capital outlay certificates. S.L. 1978, ch. 109. These certificates also could be used for any of the purposes set forth in SDCL 13-16-6, including the construction of buildings. More importantly, the Legislature clarified the irrepealable tax issue. The Legislature amended SDCL 13-16-7 to provide that taxes collected pursuant to the annual levy for the capital outlay fund could be "irrevocably pledged" to the payment of capital outlay certificates. S.L. 1978, ch. 109, § 5.
The amendment went on to provide that the school district could be compelled to levy the annual tax:
[S]o long as any capital outlay certificates are outstanding . . ., the school board of any district may be compelled by mandamus or other appropriate remedy to levy an annual tax sufficient to pay principal and interest thereon, but not to exceed the five mills in any year authorized to be levied hereby.
S.L. 1978, ch. 109, § 5. Thus, although a school district had the discretion to levy the tax as set forth in Schull Construction, the Legislature also gave the school district the power to make the tax irrepealable. The Legislature authorized school districts to back their capital outlay certificates by an irrevocable pledge of capital outlay fund taxes; installment payments and capital outlay certificates would no longer be dependent on an annual exercise of school board discretion, if such a pledge was made. If a board, having made such a pledge of taxes, fails to make an annual levy to pay the certificates, it may be forced to do so through a mandamus action.
In practical and legal effect, the result is the same as application of SDCL 13-16-10, which provides for an irrepealable tax for capital outlay bonds. The primary distinction between the certificates and the bonds is that the former may be issued without an election, assuming of course that the statutory limits are not violated and the constitutional debt limit likewise is not violated. See, Meierhenry v. City of Huron, 354 N.W.2d 171 (S.D. 1984).
Finally, when capital outlay certificates were first authorized by the Legislature in 1978, what was to become the current SDCL 13-16-6.2 was amended to provide that the certificates would "be executed and registered as provided in § 13-19-19 and shall be subject to the provisions of §§ 13-19-21 to 13-19-26, inclusive." S.L. 1978, ch. 109, § 2. Those sections dealt with the registration, replacement and payment of bonds issued by school districts. Although that language was deleted during the 1984 legislative effort to standardize the procedures for issuing local bonds and replaced with the current reference to SDCL ch. 6-8B, it reflects a legislative intent that capital outlay certificates be handled as bonds.
In light of these changes, it is my opinion that capital outlay certificates constitute "bonded indebtedness" for purposes of SDCL 13-6-82. This assumes of course that the school district made an irrevocable pledge of the capital outlay fund taxes at the time it issued the certificates. Therefore, those lands from the old Jefferson School District which were transferred to the Elk Point-Jefferson School District remain liable for their proportionate share of the capital outlay certificates issued prior to the reorganization. Again, my answer to your question is, "Yes."
MB:HHD:nan