Can the West Virginia Department of Education pay a county school board's bank loan directly from state aid funds to help the county get a better interest rate?

Official title

Opinion of the Attorney General Regarding the Authority of the West Virginia Department of Education to Directly Repay a Loan Taken by a County Board of Education

Plain-English summary

Fayette County Board of Education wanted to fund a $11 million, 15-year lease-purchase agreement to consolidate schools. A private financial advisor told the board it could shave 0.25% off the interest rate if the West Virginia Department of Education paid the lender directly out of the state aid the legislature already sends Fayette County. The lender would take a security interest in the equipment and fixtures bought with the loan. WVDE was told it would not "assume" the county's liability and could opt out annually, but, as the advisor candidly explained, the state's involvement would "provide reassurance to potential lenders." The State Superintendent asked the AG whether WVDE could legally do this.

The AG predicted the West Virginia Supreme Court of Appeals would strike the arrangement down on two independent grounds.

First, art. X, § 6 (the state credit clause): "The credit of the state shall not be granted to, or in aid of any county, city, township, corporation or person." State ex rel. Charleston v. Sims read "credit" broadly: anything that lets a county "depend on" state involvement to obtain financing it could not get on its own counts as a grant of credit. The advisor's own admission that WVDE involvement would lower the rate and reassure lenders was the smoking gun. The county did not need WVDE; it could collect state aid as always and pay the lender itself. The only reason to put WVDE in the chain was to use the state's credit.

Second, art. X, § 4 (the debt clause): "No debt shall be contracted by this state, except to meet casual deficits in the revenue, to redeem a previous liability of the state, to suppress insurrection, repel invasion or defend the state in time of war." Winkler v. State School Building Authority took a "functional rather than formalistic" approach: even if the bonds said the state had "no legal obligation" to pay, where general revenue was the only realistic source, "it defies logic to say that the Legislature has no obligation to fund such bonds." The "annual funding opt-out clause" in the Fayette deal would not save it. The lender's security interest in the schools' equipment paralleled the bondholders' interest in Winkler. The funds would come from general appropriations under § 18-9A-1. Even the public-education context did not insulate the deal; Winkler itself involved school funding and was struck down anyway.

The AG declined to address several other potential issues (state contracting requirements under § 5A-3-10, the limit on committing unappropriated funds in § 12-3-17, and possible constraints in the state aid formula) because the two constitutional grounds were dispositive.

Currency note

This opinion was issued in 2015. 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.

Common questions

Q: What is West Virginia's "state credit clause"?

A: W. Va. Const. art. X, § 6 prohibits the state from granting its credit "to, or in aid of any county, city, township, corporation or person" and from assuming responsibility for the debts of any such entity. The clause is one of several state-credit provisions across U.S. state constitutions, all reflecting nineteenth-century concerns about states bailing out failed local infrastructure ventures (canals, railroads). It limits how creatively state and local governments can structure cooperative finance.

Q: How broadly does the West Virginia Supreme Court read "credit"?

A: Very broadly. State ex rel. Charleston v. Sims rejected a narrow reading and held that letting a municipality withdraw a fixed amount each fiscal year from a special state fund was a "plain granting of credit," because the city could plan future expenditures around the state's commitment. State ex rel. State Bldg. Comm'n v. Casey held that providing rent-free space in a state building was also a granting of credit. AG opinions across decades have applied the clause to county boards paying out-of-state student tuition (53 W. Va. Op. Att'y Gen. 352) and to a state university paying part of a city police officer's salary (45 W. Va. Op. Att'y Gen. 143). Anything that improves a local entity's financial position by reference to the state's resources tends to fall within the clause.

Q: What's the difference between a state-credit problem and a state-debt problem?

A: A state-credit problem (§ 6) is about helping someone else borrow. A state-debt problem (§ 4) is about the state borrowing for itself. Section 4 strictly limits when the state can incur debt: only for casual revenue deficits, to redeem prior liabilities, to suppress insurrection, repel invasion, or defend the state in time of war. The two problems often appear together because a transaction that improperly extends state credit to help someone else borrow can also amount to the state implicitly contracting the debt itself.

Q: How did Winkler change debt-clause analysis?

A: Winkler v. State School Building Authority (1993) shifted from a formalistic to a functional approach. Earlier decisions accepted "no legal obligation" language at face value: if the bond said the legislature did not have to appropriate, the bond was not state debt. Winkler said the court would look at "what [the transaction] actually is," not "what it purports to be," and rejected the proposition that the legislature could realistically default on bonds it had marketed. So if the only practical source of repayment is general appropriations, the bond is state debt under § 4 regardless of what the document says.

Q: Why doesn't an "annual funding opt-out" save the arrangement?

A: Because Winkler treats the formal opt-out as cosmetic when the practical reality is that the state must fund or face a default that would damage its credit rating. The court explicitly said it would not "ignore the practical reality that will be visited upon a state's credit if there is a default on the bonds." The Fayette deal had the same structure: the lender held a security interest tied to specific school equipment, and a state default would have rippled through the state's overall borrowing capacity.

Q: Could the county simply borrow on its own without WVDE involvement?

A: Yes. The opinion explicitly noted that the county could receive state aid as it always had, then pay the lender itself. The constitutional problem was specifically the structural choice to insert the state into the payment chain to secure a better rate. A pass-through where state aid arrives at the county and the county then chooses to spend it on debt service does not raise the same § 6 problem.

Q: Does this opinion close off all forms of state-county cooperative finance?

A: No. State borrowing for state purposes (under § 4 exceptions) and state appropriations to local governments (which are not credit grants) remain permissible. The opinion targets a specific structure: state payment of a local entity's loan, in exchange for better lender terms, where the state's involvement provides credit support without the state explicitly assuming the debt. There may be other structures, like a state revolving loan fund or a school building authority bond program, that operate within the constitutional limits.

Background and statutory framework

The constitutional framework. Two provisions in W. Va. Const. art. X drive the analysis.

Section 6 (state credit clause): "The credit of the state shall not be granted to, or in aid of any county, city, township, corporation or person; nor shall the state ever assume, or become responsible for the debts or liabilities of any county, city, township, corporation or person."

Section 4 (state debt clause): "No debt shall be contracted by this state, except to meet casual deficits in the revenue, to redeem a previous liability of the state, to suppress insurrection, repel invasion or defend the state in time of war."

The expansive reading of "credit." State ex rel. Charleston v. Sims, 132 W. Va. 826 (1949), set the rule: "[u]nquestionably, credit is that which enables one to enter into an obligation to be met in the future, but that is not the only meaning." A statutory mechanism letting municipalities withdraw a fixed amount from a state special fund each fiscal year was "a plain granting of credit," even though the state was not directly co-signing any loan. State ex rel. State Bldg. Comm'n v. Casey, 160 W. Va. 50 (1977), held that letting a private entity use government office space without paying rent was also a granting of credit. AG opinions stretching back decades have read the clause similarly.

The functional approach to debt. Winkler v. State School Building Authority, 189 W. Va. 748 (1993), considered revenue bonds whose only repayment source was annual legislative appropriations from the general fund. The bonds expressly said the state had "no legal obligation" to fund them. The Court struck them down anyway, applying a functional test borrowed from Ohio (State ex rel. Ohio Funds Mgmt. Bd. v. Walker). The Court "must examine a transaction not only for what it purports to be, but what it actually is." The Court was not "naive" enough to accept that the legislature could let a school-bond default tank the state's credit.

State ex rel. Clarksburg Mun. Bldg. Comm'n v. Spelsberg, 191 W. Va. 553 (1994), applied Winkler to municipal building bonds, again looking past plain-language disclaimers to "the practical consequences." McGraw v. Caperton, 191 W. Va. 528 (1994), distinguished Winkler from a contract that created no security interest, suggesting that a security interest is a key marker of a state-debt-like obligation.

Application to the Fayette deal. The arrangement had the markers Winkler condemned: general-revenue source (state aid under § 18-9A-1 is appropriated from general revenue), security interest (the lender would take a lien on the equipment bought with loan proceeds), and a state-credit halo (the financial advisor had told the county that the state's involvement would lower the rate and reassure lenders). Each element pushed the arrangement past § 6 and § 4. The opinion noted that the Court in Winkler also dealt with public education funds and was not deterred by the gravity of the educational mission.

The opinion expressly did not reach W. Va. Code § 12-3-17 (commitment of unappropriated funds), § 5A-3-10 (state contracting requirements), or the state aid formula in §§ 18-9A-1 to -22, because the constitutional grounds were sufficient.

Citations

• W. Va. Const. art. X, § 4; art. X, § 6
• W. Va. Code § 5-3-1 (AG written opinions)
• W. Va. Code § 18-9A-1, -3 (state aid)
• W. Va. Code § 12-3-17; § 5A-3-10
• State ex rel. Charleston v. Sims, 132 W. Va. 826, 54 S.E.2d 729 (1949)
• State ex rel. State Bldg. Comm'n v. Casey, 160 W. Va. 50, 232 S.E.2d 349 (1977)
• Winkler v. State School Building Authority, 189 W. Va. 748, 434 S.E.2d 420 (1993)
• State ex rel. Clarksburg Mun. Bldg. Comm'n v. Spelsberg, 191 W. Va. 553, 447 S.E.2d 16 (1994)
• McGraw v. Caperton, 191 W. Va. 528, 446 S.E.2d 921 (1994)
• State ex rel. Ohio Funds Mgmt. Bd. v. Walker, 561 N.E.2d 927 (Ohio 1990)
• 53 W. Va. Op. Att'y Gen. 352 (1969)
• 45 W. Va. Op. Att'y Gen. 143 (1952)

Source

• Landing page: https://ago.wv.gov/media/18001/download?inline
• Original PDF: https://ago.wv.gov/media/18001/download?inline

Original opinion text

State of West Virginia
Office of the Attorney General
Patrick Morrisey
Attorney General
(304) 558-2021
Fax (304) 558-0140

December 11, 2015

Dr. Michael J. Martirano
State Superintendent of Schools
1900 Kanawha Boulevard East, Building 6
Charleston, WV 25305

Dear Superintendent Martirano:

You have asked for an Opinion of the Attorney General regarding whether the West Virginia Department of Education ("WVDE") may directly repay a private loan taken by the Fayette County Board of Education ("County Board") using funds from the County Board's portion of state aid to schools. This Opinion is being issued pursuant to West Virginia Code § 5-3-1, which provides that the Attorney General "shall give written opinions and advice upon questions of law . . . whenever required to do so, in writing, by . . . any other state officer, board or commission." To the extent this Opinion relies on facts, it is based solely upon the factual assertions set forth in your correspondence with the Attorney General's Office.

In your letter, you explain that the Fayette County Board of Education is seeking funding for its Comprehensive Educational Facilities Plan in order to consolidate schools and facilitate new school construction. Working with a private financial advisor, the County Board is considering entering into a 15 year $11 million lease-purchase agreement with a financial institution to fund its project. The financial institution would take a security interest in any equipment or fixtures purchased with the loan funds. You note that the loan would have an "annual funding opt-out clause." You also explain that the financial advisor has informed the County Board that the County Board could obtain a slightly lower interest rate if the WVDE pays the financial institution directly from state aid allocated to the County Board by the Legislature. According to your letter, the financial advisor has further said that the WVDE's direct involvement would "provide reassurance to potential lenders." Under the contemplated arrangement, the WVDE would not take on the County Board's liability for the loan, but rather would "function similar to a mortgagee paying insurance premiums and property tax on behalf of the mortgagor from an escrow account."

Your letter raises the following legal question:

Does the West Virginia Department of Education have the authority to direct to a financial institution state aid allocated to a county in order to repay a loan obtained from that financial institution by the county board of education?

Having reviewed controlling case law of the West Virginia Supreme Court of Appeals, we believe that the high court would find that two provisions of the West Virginia Constitution prohibit the WVDE from directly repaying a county board of education's loan using state aid to schools.

To begin, we think it likely that the Supreme Court of Appeals would find the contemplated arrangement to be a violation of Article X, Section 6 of the West Virginia Constitution. That provision states that "[t]he credit of the state shall not be granted to, or in aid of any county, city, township, corporation or person; nor shall the state ever assume, or become responsible for the debts or liabilities of any county, city, township, corporation or person." W. Va. Const. art. X, § 6. At the very minimum, the Supreme Court of Appeals has explained, that provision bars the State or its agencies from extending to a county the State's power to borrow money. Put another way, the State "may not grant its credit in aid of counties and municipalities in negotiating loans." State ex rel. Charleston v. Sims, 132 W. Va. 826, 843, 54 S.E.2d 729, 739 (1949). Yet that appears to be precisely what is intended here. The State is certainly not necessary to the contemplated loan; the County Board could receive its state aid from the WVDE as it always has and then itself pay that money to the financial institution. The only reason for involving the State as a direct payor to the financial institution, your letter represents, is to leverage the State's credit. As you explain, the County Board's financial advisor "believes that [the WVDE's involvement] would lower the interest rate slightly, .25%, and provide reassurance to potential lenders." We do not believe the Supreme Court of Appeals would approve of such an arrangement.

Our conclusion is bolstered by the expansive meaning that the Supreme Court of Appeals has given to the word "credit." The Court has explained that "[u]nquestionably, credit is that which enables one to enter into an obligation to be met in the future, but that is not the only meaning." Sims, 132 W. Va. at 842, 54 S.E.2d at 738. Rejecting a narrow reading of the word "credit," the Court has held that allowing municipalities to withdraw a sum each fiscal year from a special fund in the State Treasury is "a plain granting of credit" because the municipality may depend on the funds in planning future expenditures. Id. It has also concluded that providing space in a government building without cost is a granting of the State's credit. State ex rel. State Bldg. Comm'n v. Casey, 160 W. Va. 50, 56, 232 S.E.2d 349, 352 (1977); see also 53 W. Va. Op. Atty. Gen. 352 (1969); 45 W. Va. Op. Atty. Gen. 143 (1952).

Separately, we also think it likely that the Supreme Court of Appeals would find the contemplated arrangement to be a violation of Article X, Section 4 of the West Virginia Constitution. That provision states that "[n]o debt shall be contracted by this state, except to meet casual deficits in the revenue, to redeem a previous liability of the state, to suppress insurrection, repel invasion or defend the state in time of war." W. Va. Const. art. X, § 4. The Supreme Court of Appeals has taken a functional rather than formalistic approach to determining whether the State has incurred a debt in violation of Article X, Section 4. In Winkler v. State School Building Authority, 189 W. Va. 748, 434 S.E.2d 420 (1993), the Court concluded that the School Building Authority had unconstitutionally contracted a debt by issuing revenue bonds that were to be liquidated by legislative appropriations from the general fund, even though the bonds stated that the State had no legal obligation to pay the bonds. Id. at 760, 434 S.E.2d at 432. The challengers in that case specifically argued "that although future legislative appropriations may be used to pay for the bonds, it is clear from the language of the bonds themselves that there is no legal obligation requiring the Legislature to make such appropriations." Id. at 759, 434 S.E.2d at 431. The Court expressly rejected that argument: "where the only source of funds for revenue bonds is general appropriations, it defies logic to say that the Legislature has no obligation to fund such bonds." Id. at 761, 434 S.E.2d at 433. Looking to a case from the Ohio Supreme Court, the West Virginia high court determined that it "'must examine a transaction not only for what it purports to be, but what it actually is.'" Id. at 762, 434 S.E.2d at 434 (quoting State ex rel. Ohio Funds Mgmt. Bd. v. Walker, 561 N.E.2d 927, 932 (Ohio 1990)). The Court stressed that it could not "ignore the practical reality that will be visited upon a state's credit if there is a default on the bonds." Winkler, 189 W. Va. at 761, 434 S.E.2d at 433.

For several reasons, we believe that Winkler would give the Supreme Court of Appeals a further ground to reject the contemplated arrangement.

First, although your letter states that the WVDE would not assume the county's liability to the lender and that the agreement would include "an annual funding opt-out clause," Winkler suggests that the Supreme Court of Appeals would take a functional view of the arrangement and conclude that it effectively creates an unlawful debt. See also State ex rel. Clarksburg Mun. Bldg. Comm'n v. Spelsberg, 191 W. Va. 553, 557, 447 S.E.2d 16, 20 (1994). Especially in light of the understanding that the State's presence would result in a lower interest rate and "provide reassurance to potential lenders," the "practical reality" is that failure to pay would impact the State's credit and financial reputation. See Winkler, 189 W. Va. at 761, 447 S.E.2d at 433. Critically, the financial institution would have a security interest in the equipment and fixtures purchased by the loan, just as the bondholders in Winkler held an enforceable interest in the school buildings funded by the bonds. See McGraw v. Caperton, 191 W. Va. 528, 536 & n.7, 537, 446 S.E.2d 921, 929 & n.7, 930 (1994) (distinguishing the School Building Authority bonds in Winkler from a contract that created no security interest).

Second, the state aid to school districts from which the WVDE would repay the loan is appropriated by the Legislature from general revenue funds. W. Va. Code § 18-9A-1, -3. In Winkler, the Supreme Court of Appeals stressed the distinction between debts tied to a specific source of revenue and those intended to be paid off from the general fund. Winkler, 189 W. Va. at 757-58, 434 S.E.2d at 429-30 (explaining the "special fund doctrine" exception). Like the unlawful bonds in Winkler, the financial obligations discussed in your letter are intended to be repaid from general revenue funds.

Finally, as is true here, Winkler involved funds needed for the public educational system. The Supreme Court of Appeals began that case by acknowledging the "gravity of the bond issue in th[e] case, particularly since it relates to our public educational system." Id. at 753, 434 S.E.2d at 425. Nevertheless, the Court struck down the bonds. Id. at 766, 434 S.E.2d at 438. Thus, while the funds at issue here may also be critical to educational needs, we do not believe that factor will cause the Court to distinguish Winkler.

Because we conclude that the Supreme Court of Appeals would likely find the contemplated arrangement a violation of two provisions of the West Virginia Constitution, we need not and do not address several other potential legal limitations, including one you suggest in your letter. For example, we do not opine on the applicability of West Virginia Code § 12-3-17, which prohibits "any state board, commission, officer or employee" from committing to pay funds in future fiscal years for which the Legislature has not yet made an appropriation. We do not assess whether the state aid formula established under West Virginia Code § 18-9A-1 to -22, which you reference in your letter, might limit the funds the WVDE could pay to a financial institution under the arrangement. Nor do we decide whether the contract described in your letter, which presumably would include the WVDE as a party, would have to comply with the requirements for state contracts. See W. Va. Code § 5A-3-10.

Sincerely,

Patrick Morrisey
Attorney General

Elbert Lin
Solicitor General

Erica N. Peterson
Assistant Attorney General