SER School Building Authority v. Marockie
Annotate this Case
September 1996 TERM
____________
No. 23675
____________
STATE OF WEST VIRGINIA EX REL. SCHOOL
BUILDING AUTHORITY OF WEST VIRGINIA,
Relator
v.
DR. HENRY R. MAROCKIE, PRESIDENT,
SCHOOL BUILDING AUTHORITY OF WEST VIRGINIA,
Respondent
_____________________________________
Rule in Mandamus
Writ Granted as Moulded.
____________________________________
Submitted: November 19, 1996
Filed: December 13, 1996
James K. Brown
Christopher L. Callas
Jackson & Kelly
Charleston, West Virginia
Attorneys for the Relator
Silas B. Taylor
Managing Deputy Attorney General
Dawn E. Warfield
Deputy Attorney General
Charleston, West Virginia
Attorneys for the Respondent
JUSTICE CLECKLEY delivered the Opinion of the Court.
JUDGE RECHT sitting by temporary assignment.
SYLLABUS BY THE COURT
1. "Because the previous issue of State of West Virginia School Building
Authority bonds is not invalid under principles of retroactivity and because we also have
determined that the refunding of bonds does not create new debt, the State of West Virginia
School Building Authority is authorized to issue refunding bonds from the Capital
Improvement and Revenue and Refunding Bonds, Series 1993, to replace existing bonds at
a lower interest rate." Syl. pt. 10, Winkler v. State Sch. Bldg. Auth., 189 W. Va. 748, 434 S.E.2d 420 (1993).
2. A writ of mandamus is a proper method of testing the legality of a bond
issue before the bonds are actually issued where the issue presented is one for which there
has been a tradition of judicial accessibility and where immediate judicial access would play
a significant and positive role in the resolution of the particular constitutional problem in
question.
3. In light of ever-changing market and economic conditions, the School
Building Authority of West Virginia may decide to refund bonds different from those
specifically designated for refunding in Winkler v. State School Building Authority, 189
W. Va. 748, 434 S.E.2d 420 (1993), in order to receive the greatest benefit from lower
interest rates applicable to the refunding bonds.
4. The School Building Authority of West Virginia may issue refunding
bonds in a principal amount larger than the principal amount of bonds to be refunded that
were issued prior to Winkler v. State School Building Authority, 189 W. Va. 748, 434 S.E.2d 420 (1993), in order to establish an escrow account for the repayment of those pre-Winkler
bonds that are not presently due and payable. However, the School Building Authority of
West Virginia may issue such additional refunding bonds only in the amount required to
establish and maintain the escrow account, and the revenue generated by the excess
refunding bonds should be no greater than that amount needed to secure the repayment of
the higher interest pre-Winkler bonds to be refunded.
5. The School Building Authority of West Virginia may not issue bonds
alleged to be refunding bonds for the redemption of obligations created before Winkler v.
State School Building Authority, 189 W. Va. 748, 434 S.E.2d 420 (1993), which have the
practical effect of generating cash at closing in order to make immediately available to the
School Building Authority of West Virginia the anticipated debt service savings from the so-
called refunding bonds. Rather, the authority of the School Building Authority of West
Virginia to issue refunding bonds to redeem pre-Winkler obligations is specifically limited
to encompass only those bonds, the proceeds of which the School Building Authority will
use to discharge its pre-existing obligations.
Cleckley, Justice:
In this original mandamus proceeding, the relator, the School Building
Authority of West Virginia [hereinafter SBA], requests this Court to determine the SBA's
authority to issue refunding bonds to discharge those SBA bonds issued prior to this Court's
decision in Winkler v. State School Building Authority, 189 W. Va. 748, 434 S.E.2d 420
(1993). The respondent, Dr. Henry R. Marockie, State Superintendent of Schools and
President of the SBA, see W. Va. Code, 18-9D-1 (1990), asserts that the proposed bond
issuance, which would generate approximately $5.66 million cash at the time the bonds are
issued, violates certain provisions of the West Virginia Constitution and this Court's holding
in Winkler. We issued a rule to show cause and now grant the writ of mandamus as
moulded.See footnote 1
I.
FACTUAL AND PROCEDURAL HISTORY
In 1988, the West Virginia Legislature created the School Building Authority
of West Virginia (SBA) in order "to facilitate and provide state funds for the construction
and maintenance of school facilities so as to meet the educational needs of the people of this
state in an efficient and economical manner." W. Va. Code, 18-9D-15(a) (1989).See footnote 2 The
Legislature also authorized the SBA to issue revenue bonds to finance its statutory purpose
of improving the educational facilities in this State. See W. Va. Code, 18-9D-4 (1988). See
also W. Va. Code, 18-9D-1 to -18 (collectively referred to as the "School Building Authority
Act"). It seems apparent that the Legislature, in establishing the SBA's bond-issuing
authority, intended to redeem any bonds issued by the SBA from the State's general revenue
funds, without pledging the State's credit. W. Va. Code, 18-9D-6 (1988);See footnote 3 18-9D-13 (1988); 18-9D-14 (1988). See also W. Va. Code, 11-15-30 (1994). In accordance with this statutory
authority, the SBA issued Capital Improvement and Revenue and Refunding Bonds, Series
1993, in the amount of $338,145,000.See footnote 4
Disagreement concerning the constitutionality of the SBA's 1993 bond issuance
with respect to Section 4 of Article X of the West Virginia Constitution resulted in our
review of the SBA's bond-issuing authority in Winkler. We determined that "the [statutory]
requirement of maintaining [a] sinking fund in order to service the bonds [issued by the SBA]
and provide for their redemption indicates a financial commitment by the Legislature." 189
W. Va. at 763, 434 S.E.2d at 435. Accordingly, we held that the "[r]evenue bonds
authorized under the School Building Authority Act, W. Va. Code, 18-9D-1, et seq.,
constitute an indebtedness of the State in violation of Section 4 of Article X of the West
Virginia Constitution." Syl. pt. 7, in part, Winkler. However, we limited this holding
"[b]ased upon our general principles of retroactivity of judicial decisions," and recognized
that the "revenue bonds issued by the State of West Virginia School Building Authority
pursuant to W. Va. Code, 18-9D-1, et seq., prior to the date of this opinion [July 22, 1993]
are not invalid."See footnote 5 Syl. pt. 9, Winkler. Similarly, we concluded that "[b]ecause the previous
issue of State of West Virginia School Building Authority bonds is not invalid under
principles of retroactivity and because we also have determined that the refunding of bonds
does not create new debt, the State of West Virginia School Building Authority is authorized
to issue refunding bonds from the Capital Improvement and Revenue and Refunding Bonds,
Series 1993, to replace existing bonds at a lower interest rate."See footnote 6 Syl. pt. 10, Winkler.
Presumably in response to this Court's holding in Winkler, the West Virginia
Legislature amended the School Building Authority Act expressly to permit the SBA to
refund pre-Winkler bonds. The relevant portion of this revision provides:
"(a) The school building authority may by
resolution, in accordance with the provisions of this article,
issue revenue bonds of the authority from time to time, either to
finance the cost of construction projects for public schools in
this state, or to refund, at the discretion of the authority, bonds
issued to finance the cost of the construction projects for public
schools in this state and outstanding under and pursuant to the
provisions of this article as in effect prior to the twentieth day
of July, one thousand nine hundred ninety-three.See footnote 7 The principal
of, interest and redemption premium, if any, on such bonds shall
be payable solely from the special fund herein provided for such
payment." W. Va. Code, 18-9D-4 (1994). (Emphasis and
footnote added).See footnote 8
The Legislature further provided that the "school building capital improvements fund" of the
State treasury, originally created in 1988, W. Va. Code, 18-9D-6 (1988), would serve as the
source of payment for both pre-Winkler bonds and those bonds subsequently issued to refund
pre-Winkler bonds. W. Va. Code, 18-9D-6(a) (1993, 1994, & 1996).See footnote 9 Finally, the
Legislature codified the procedure for handling any surplus funds generated by the refunding
of pre-Winkler bonds:
"Any aggregate savings resulting from the
issuance of refunding bonds pursuant to section four [§ 18-9D-
4] of this article shall be retained by the school building
authority. Any savings shall be utilized solely for the
construction and maintenance of schools and may not be used
to fund administrative costs of the authority." W. Va. Code, 18-
9D-4a (1996). (Emphasis added).
Despite this Court's acknowledgment in Winkler that the SBA could issue
refunding bonds to replace pre-Winkler bonds, the SBA declined to do so until after the
Legislature's enactment of W. Va. Code, 18-9D-4a, in March, 1996.See footnote 10 In response to the SBA's request for competitive bids from municipal bond underwriters, Smith Barney, Inc.,
developed a proposal for issuing Series 1996 refunding bonds. Smith Barney's "Proposal to
Provide Underwriting Services," dated May 8, 1996, anticipated issuing $129,480,000 in new
refunding bonds to discharge pre-Winkler bonds in the principal amount of $121,375,000.
This proposal contemplated a savings to the State's general revenue fund of approximately
$5,426,503.75, over the entire twenty-six year life of the bonds, as a result of reduced debt
service.See footnote 11 It appears from the record that the SBA subsequently selected Smith Barney as the
underwriter for its contemplated issuance of Series 1996 refunding bonds.
In July, 1996, Smith Barney provided the SBA with a compilation of
alternative financing schemes which would result primarily in either (1) a savings to the
State's general revenue fund as a result of reduced debt service or (2) a sum of "cash at
closing"See footnote 12 which the SBA perceived to be immediately available to fund new school construction projects.See footnote 13 Although the record is somewhat unclear, it seems that after reviewing these scenarios the SBA decided to issue "Capital Improvement Revenue
Refunding Bonds, Series 1996" to refund certain pre-Winkler bondsSee footnote 14 and, on August 27,
1996, adopted a resolution reciting this purpose. In this resolution, the SBA directed Dr.
Henry R. Marockie, President of the SBA,See footnote 15 to execute all documents necessary to effectuate the Fifth Supplemental Indenture (the issuance of Series 1996 refunding bonds).See footnote 16 By letter
of the same date, the respondent, Dr. Marockie, refused to execute the Fifth Supplemental
Indenture and other necessary documents, until this Court has reviewed this matter, because
of his concern that the proposed bond issue violates various provisions of the West Virginia
Constitution or abrogates this Court's prior holding in Winkler, supra.See footnote 17
The day following the SBA's resolution and Dr. Marockie's letter, Smith
Barney tendered to the SBA a "Revised Refunding Analysis." The revised proposal
contemplates issuing $144,130,000 in new refunding bonds to discharge pre-Winkler bonds
in the principal amount of $127,200,000.See footnote 18 After deducting the costs of the bond issuance,
bond insurance, and underwriter's fees, a bond issuance in accordance with the revised
analysis would result in approximately $5,665,197.67 cash at closing. The SBA states that
this cash at closing would be immediately available for new school construction projects pursuant to W. Va. Code, 18-9D-4a.See footnote 19 This scheme also contemplates debt service savings
to the State's general revenue fund in the amount of $62,931.25 which would be realized over
the twenty-six year life of the new refunding bonds. It is this revised proposal that the SBA
requests this Court to approve in this original jurisdiction proceeding. The SBA further
requests this Court to issue a writ of mandamus compelling Dr. Marockie to execute the Fifth
Supplemental Indenture and other documents necessary for the SBA to proceed with the
issuance of Series 1996 refunding bonds.
II.
DISCUSSION
Once again, we are presented with a test case regarding the issuance of bonds.
The relator SBA seeks judicial clearance so that it that it may proceed with its proposed
issuance of Series 1996 bonds to refund certain pre-Winkler bonds. In response to the
concerns raised by respondent Dr. Marockie, the SBA requests this Court to determine (1)
whether the SBA has the authority to refund pre-Winkler bonds that were not designated for
refunding by this Court in the Winkler decision; (2) whether this Court in Winkler, by limiting the "school building capital improvements fund" to the level of discretionary
legislative appropriations from the State's general revenue fund necessary to repay
outstanding pre-Winkler bonds, converted the "school building capital improvements fund"
into a "special" or "separate" fund; and (3) if, in fact, this Court converted the "school
building capital improvements fund" into a "special" or "separate" fund, whether the SBA
may issue refunding bonds in an amount greater than the principal amount of the pre-Winkler
bonds to be refunded in order to (a) utilize "advance refunding" or (b) receive "cash at
closing" (the net present value of the anticipated debt service savings that would otherwise
be realized over the life of the bonds) to immediately be used for new school construction
projects. After a brief discussion of the standard for issuing a writ of mandamus, we will
address the merit of the parties' contentions.
A. Standard for Issuing Writ of Mandamus
The remedy of mandamus is a drastic one, to be invoked only in extraordinary
situations where the relator can show a clear and indisputable right to relief sought. As we
have noted in our prior decisions, mandamus is a remedy that is available only in limited and
truly exceptional circumstances. See, e.g., State ex rel. Billings v. City of Point Pleasant,
194 W. Va. 301, 303, 460 S.E.2d 436, 438 (1995) (stating "[s]ince mandamus is an
'extraordinary' remedy, it should be invoked sparingly" (footnote omitted)); State ex rel.
United States Fidelity & Guar. Co. v. Canady, 194 W. Va. 431, 436, 460 S.E.2d 677, 682
(1995) (providing "[m]andamus, prohibition and injunction against judges are drastic and extraordinary remedies. . . . As extraordinary remedies, they are reserved for really
extraordinary causes" (citations omitted)).
When dealing with a proposed bond issuance, our case law has not been so
demanding. Nevertheless, our analysis involves two complementary considerations. First,
the issue presented must be one for which there has been a tradition of judicial accessibility.
See State ex rel. Marockie v. Wagoner, 190 W. Va. 467, 469 n.1, 438 S.E.2d 810, 812 n.1
(1993) (stating "[t]his type of proceeding [mandamus] has been the traditional format for this
Court to pass on the constitutionality of state bonds in advance of their issuance" (citations
omitted)).See footnote 20 The second consideration is whether immediate judicial access would play a
significant positive role in the resolution of the particular constitutional problem in question.
See State ex rel. Lawrence v. Polan, 192 W. Va. 629, 635, 453 S.E.2d 612, 618 (1994)
(stating "we have commonly recognized that a writ of mandamus is a proper method of
testing the legality of a bond issue before the bonds are actually issued"). Although we
traditionally have encouraged governmental entities to test the legitimacy of a proposed bond issuance by way of mandamus prior to issuing the bonds in question, the continuation of our
prior practice in this area will be adhered to only when this Court's prior decisions are not
believed adequate to provide proper guidance for meaningful legal evaluation. When a
proposed issue adheres to legal principles we have enunciated in these bond cases, there is
no need to seek prior judicial approval and we will not entertain the original action. In the
case sub judice, the parties to this original action legitimately seek to clear up a gap left open
by our prior opinions. Thus, we find that mandamus is an appropriate method by which the
SBA may challenge its authority to issue the Series 1996 refunding bonds proposed in this
case.
B. Authority of the SBA to refund pre-Winkler bonds that were not designated for
refunding by this Court in Winkler
Before proceeding to the merits of this case, one consideration weighs heavily
in our analysis, and we state it at the outset. Our prior decisions have stretched and
expanded constitutional principles regarding debt limitations as far as we can legitimately
permit. In future cases, counsel would be well advised to seek constitutional revision and
not judicial expansion of our bond cases. To some extent, this case underscores our concern.
The SBA argues this Court's holding in Winkler, authorizing the SBA to refund
pre-Winkler bonds, applies both to those bonds designated for refunding in Winkler (Series
1993 bonds) and to those other pre-Winkler bonds that were not specified for refunding. In this regard, the SBA contends that Winkler establishes two relevant propositions. First, a
portion of the bonds at issue in Winkler were to be used to refund earlier bonds and,
secondly, refunding bonds are generally perceived as not creating new indebtedness. See
Winkler, 189 W. Va. at 766 n.27, 765-66, 434 S.E.2d at 438 n.27, 437-38. See also Board
of Educ. of County of Hancock v. Slack, 174 W. Va. 437, 445, 327 S.E.2d 416, 425 (1985)
(finding "[t]here is no question that the majority of jurisdictions still hold that refunding
bonds do not create a new indebtedness"). Indeed, we did hold that the issuance of Series
1993 bonds to refund earlier bonds would not violate West Virginia Constitution Article X,
Section 4. 189 W. Va. at 765-66, 434 S.E.2d at 437-38.
Adopting our reasoning in Winkler, the SBA urges that we now should permit
the issuance of the contemplated Series 1996 bonds. Specifically, the SBA seeks judicial
approval of the issuance of the contemplated Series 1996 bonds, which are intended to
refund certain pre-Winkler bonds, on the legal premise that we allegedly did not limit, in
Winkler, the authority of the SBA to refund pre-Winkler bonds to only those bonds
designated for refunding. In short, the SBA asserts we did not restrict the scope and breadth
of our Winkler analysis, and the reach of Winkler therefore covers any other pre-Winkler
bonds. As with the Series 1993 refunding bonds approved in Winkler, the proposed Series
1996 refunding bonds would be issued at a lower interest rate than the pre-Winkler bonds
they are intended to refund. However, the SBA submits that it is not feasible to refund the
same bonds contemplated to be refunded in Winkler because different interest rates, changing market conditions, and the bond terms themselves affect the overall profitability
of bond refunding. Thus, the SBA requests this Court to approve its proposal to refund pre-
Winkler bonds different than those contemplated for refunding in the Winkler decision. Dr.
Marockie does not respond to this argument.
We find the argument of the SBA persuasive. In spite of our specific direction
in Winkler that the SBA would be permitted to refund Series 1993 bonds, we do not believe
it is judicially sound or feasible to limit our prior holding to refunding by the SBA of only
the 1993 bonds. The SBA is correct in its assertion that refunding bonds generally do not
constitute a new indebtedness because they provide a method of refinancing an earlier bond
issue at a lower interest rate. See, e.g., County Comm'n of Boone County v. Hill, 194
W. Va. 481, 487 n.6, 460 S.E.2d 727, 733 n.6 (1995); Winkler, 189 W. Va. at 765-66, 434
S.E.2d at 437-38; Slack, 174 W. Va. at 444-45, 327 S.E.2d at 424-25. Here, we are faced
with a situation in which the SBA does not propose the incurrence of new debt, but rather
wishes merely to refund a portion of its prior debt in order to reap the benefits of lower
interest rates.
The facts before the Court suggest that a refunding of Series 1993 bonds, as
originally contemplated in Winkler, would not be as economically beneficial to the SBA as
a refunding of other pre-Winkler bonds, as proposed in the instant case. In our present
society, ever-changing market conditions frequently result in a financial atmosphere that differs drastically from day to day. Because bonds and their interest rates are affected by
these economic circumstances and because such deviations are beyond the control of the
SBA, we necessarily must permit the SBA to refund pre-Winkler bonds different from those
specified in the Winkler decision. Otherwise, the SBA would be unable to realize the value
of redeeming earlier bonds at lower interest rates, thereby obtaining substantial debt service
savings. A refusal on our part to permit the SBA to select the bonds most appropriate for
refunding would effectively abrogate the capacity of the SBA to refund any of its pre-
Winkler bonds. Accordingly, we find that the SBA may refund pre-Winkler bonds that were
not specifically designated for refunding in our prior decision.
C. Effect of Winkler decision upon "school building capital improvements fund" vis-a-
vis creation of "special" or "separate" fund
This decision brings us to the SBA's second contention. The SBA next asserts
that this Court's decision in Winkler, which limited the "school building capital
improvements fund" to those discretionary appropriations from the State's general revenue
fund necessary to repay outstanding pre-Winkler bonds, effectively converted the "school
building capital improvements fund" into a "special" or "separate" fund. In Winkler, we
ruled that new revenue bonds issued by the SBA pursuant to the School Building Authority
Act, W. Va. Code, 18-9D-1 to -18, and payable from the school building capital
improvements fund, violate the prohibition on State-incurred debt in West Virginia Constitution Article X, Section 4.See footnote 21 Winkler, 189 W. Va. at 764, 434 S.E.2d at 436.
However, we declined to make this decision retroactive and ruled further that the SBA could
issue refunding bonds to discharge the pre-existing bonds at issue in Winkler. Thus, the SBA
urges that we effectively continued the school building capital improvements fund for the
specific purpose of discharging these pre-existing obligations and maintaining the debt
service for the new refunding bonds.
In support of its position, the SBA relies upon our statement in Syllabus Point
6 of Winkler:
"Section 4 of Article X of the West Virginia
Constitution is not designed to prohibit the State or the state's
agencies from issuing revenue bonds that are to be liquidated
from contracts requiring rental payments from another state
agency or from contracts for necessary services such as utilities;
nor does this constitutional provision preclude the issuance of
revenue bonds which are to be redeemed from a special fund."
(Emphasis added).
The SBA contends that bonds are constitutionally permissible when they will be redeemed
from a special fund. In Winkler, we stated that "the special fund doctrine is based on the fact
that a specific source of revenue is required to be identified and committed to the repayment
of the bonds beyond mere annual appropriations from the general revenue fund." 189
W. Va. at 758, 434 S.E.2d at 430. (Emphasis in original). Because the pre-Winkler bonds,
and any bonds issued to refund these bonds, are to be redeemed from the school building
capital improvements fund, the SBA contends that this Court, in effect, converted this fund
into a "separate" or "special" fund for the purpose of redeeming SBA bonds. Moreover, the
SBA asserts that the school building capital improvements fund addresses this Court's
acknowledgment that the identification and dedication of a special fund necessarily limits
the maximum value of bonds that may be issued. In this manner, the SBA's bonded
indebtedness, as a result of the pre-Winkler bonds and new refunding bonds, is limited by
the existence of a specific fund, the school building capital improvements fund, for
redeeming these bonds.
By contrast, Dr. Marockie contends that no "special" or "separate" fund exists
for the repayment of pre-Winkler bonds or for the maintenance of debt service for refunding
bonds issued to redeem pre-Winkler bonds. He argues that W. Va. Code, 18-9D-6 (1996),
forecloses any construction of the school building capital improvements fund as a "special"
fund since this provision does not create a fund separate and apart from the general revenue
fund or provide any source of income for the fund other than from appropriations from the State's general revenue.See footnote 22 In addition, the respondent asserts that, in Winkler, this Court
authorized continuance of the school building capital improvements fund for the sole purpose
of repaying the pre-Winkler bonds. Therefore, Dr. Marockie argues this limited role of the
fund cannot be construed as also permitting it to finance any new refunding bonds or any
new construction projects made possible by the issuance of excess "refunding" bonds.See footnote 23
Moreover, Dr. Marockie asserts that this Court recognized the decision to
appropriate moneys to the school building capital improvements fund would be entirely
within the Legislature's discretion because this Court cannot dictate how the Legislature
should satisfy its pre-existing debts. See Gribben v. Kirk, ___ W. Va. ___, 475 S.E.2d 20
(1996). Therefore, while the school building capital improvements fund may exist for the
repayment of pre-Winkler bonds, whether the fund will contain any moneys available to
discharge these obligations is entirely within the Legislature's discretion. In this regard, the
respondent notes this Court's decision in State ex rel. Marockie v. Wagoner, 190 W. Va. 467, 438 S.E.2d 810 (1993). In Marockie, we invalidated the Legislature's creation of a "special
fund" for debt service of SBA bonds because the source of the dedicated funds, sales tax
revenues, traditionally had been deposited into the State's general revenue fund. Thus, the
respondent states that even if the Legislature designates specific moneys as income for the
school building capital improvements fund, both the dedication of moneys to the "special"
fund and the source of the dedicated moneys are relevant in determining whether a "special"
fund actually exists.
To determine whether, in fact, the school building capital improvements fund
is a "special" or "separate" fund, we must review the "separate fund doctrine." In Winkler,
we noted that
"the special fund doctrine is based on the fact that a specific
source of revenue is required to be identified and committed to
the repayment of the bonds beyond mere annual appropriations
from the general revenue fund. [B]y identifying and dedicating
this specific source of funds, the process automatically limits the
total value of bonds that can be used. The Legislature will have
to quantify initially the amount it is willing to commit in order
to avail itself of the special fund doctrine." 189 W. Va. at 758,
434 S.E.2d at 430. (Emphasis in original).
Based upon the facts presented by the parties, we find that any attempt to construe the school
building capital improvements fund as a "special" fund must fail. As the respondent notes,
W. Va. Code, 18-9D-6, which creates this fund, does not specify any source of revenue to maintain this fund. Therefore, one may infer that the school building capital improvements
fund is to be funded by appropriations from the general revenue fund. In fact, our holding
in Winkler, which limits the continuance of the school building capital improvements fund
to the level of discretionary legislative appropriations needed to redeem the pre-Winkler
bonds, suggests that moneys from the general revenue would be used to finance this fund.
Since there is no source of funding separate and apart from "appropriations from the general
revenue fund," characterization of the school building capital improvements fund as a
"special" or "separate" fund is precluded. Accordingly, we hold that the school building
capital improvements fund is not a "special" fund.
Upon resolving this issue, we must note our disagreement with a portion of the
arguments tendered by Dr. Marockie. The respondent apparently believes that our holding
in Winkler prohibited the school building capital improvements fund from financing any new
refunding bonds issued to redeem pre-Winkler bonds or from funding new school
construction projects. Although we agree that this fund cannot finance new construction
projects,See footnote 24 we expressly find that it is available to fund refunding bonds such as those
currently proposed by the SBA. Were this not the case, our decision in Winkler, permitting
the SBA to issue refunding bonds, would have no practical effect whatsoever since the
authority to issue refunding bonds is moot without a source from which to repay such bonds. Thus, we find that this fund is available to repay refunding bonds issued by the SBA to
redeem pre-Winkler obligations.
D. Authority of SBA to issue additional refunding bonds in order to (1) utilize "advance
refunding" or (2) receive "cash at closing"
Finally, the SBA contends that if, in fact, this Court converted the "school
building capital improvements fund" into a "special" or "separate" fund, the SBA may issue
refunding bonds in a principal amount greater than the principal amount of the pre-Winkler
bonds to be refunded in order to (1) utilize "advance refunding" or (2) receive "cash at
closing" (the net present value of the anticipated debt service savings that would otherwise
be realized over the life of the bonds) to immediately be used for new school construction
projects. The SBA asserts further that the only limitation upon its authority to issue
refunding bonds is that the post-refunding total debt service (for the refunding bonds and any
remaining pre-Winkler bonds) cannot be greater than the total pre-refunding debt service (for
the pre-Winkler bonds). In support of its position, the SBA cites Slack in which we
determined that a refunding scheme is generally valid if the total obligation (principal and
interest for both the refunding bonds and the pre-existing bonds that have not been refunded)
is less than, or equal to, the total obligation originally authorized by the voters. 174 W. Va.
at 445-46, 327 S.E.2d at 425-26.
Although the SBA concedes that the instant case does not involve voter-
approved debt, it asserts that this Court, in Winkler, established the total debt level that the
SBA is permitted to incur: the total amount needed to discharge the remaining pre-Winkler
bonds. Thus, because the proposed Series 1996 refunding bonds do not exceed the
maximum allowable debt, the SBA contends that it should be permitted to structure its bond
issuance to include advance refunding and cash at closing.
Dr. Marockie disputes the SBA's logic in this regard and states that the SBA
cannot issue bonds in excess of those necessary "to redeem a previous liability of the State."
W. Va. Const. Art. X, Sec. 4. The respondent disputes the applicability of Slack and other
decisions cited by this Court in Winkler because such decisions did not address Section 4 of
Article X of the West Virginia Constitution. By contrast, this Court, in Winkler, specifically
considered Section 4 in authorizing the SBA to issue refunding bonds to redeem certain pre-
Winkler bonds. Since Section 4 expressly permits the State to incur debt for the limited
purpose of "redeem[ing] a previous liability of the State," Dr. Marockie contends that the
SBA's issuance of refunding bonds to redeem pre-Winkler bonds constitutes a new State debt
permitted by Section 4. In this regard, the respondent asserts that any prior authority the
SBA had to issue the original pre-Winkler bonds is irrelevant because Section 4 governs the
SBA's proposed issuance of refunding bonds. Moreover, Section 4 limits the purpose of the
SBA's refunding bonds to the satisfaction of pre-existing bonds. This section does not
condone a purpose other than the redemption of a previous debt. Accordingly, Dr. Marockie contends that the SBA may not issue refunding bonds in excess of the amount needed to
discharge the pre-Winkler obligations in order to obtain financing for new school
construction.
1. Advance refunding
The SBA states that many of the pre-Winkler bonds which it proposes to
refund through the Series 1996 refunding bonds are not yet due and payable and have not yet
reached their first call dates. In order to provide for the redemption of these bonds, the SBA,
in accordance with the recommendations of Smith Barney, proposes the establishment of an
escrow account into which a portion of the refunding bond proceeds would be deposited.
These proceeds would then be invested in United States Treasury obligations and the
principal and interest of these obligations would be available to redeem the appropriate pre-
Winkler bonds as they come due.
In conjunction with this advance refunding scheme, the SBA would be required
to issue refunding bonds in a greater principal amount than the principal amount of the pre-
Winkler bonds they are intended to refund because federal regulations governing such
programs require the escrow account to yield no more than the average interest rate of the
refunded bonds. See 26 U.S.C. § 148 (1994). The condition of a low-yield escrow account
requires a larger amount of escrow principal in order to satisfy the higher interest rate
enjoyed by the bonds to be refunded. Through this process of advance refunding, the SBA would still issue refunding bonds with a lower interest rate than the pre-Winkler bonds to be
refunded. Citing Slack, 174 W. Va. at 446 n.9, 327 S.E.2d at 425 n.9 ("We note that W. Va.
Code, 13-2-1 [1984], appears to permit the issuance of a greater principal amount of
refunding bonds than the bonds to be refunded if 'the amount of debt service payable on such
refunding bonds in each year is equal to or less than the amount of taxes expected to be
available therefor[.]' We express no view on the validity of this provision").
In further support of its authority to utilize advance refunding, the SBA notes
that this Court has earlier approved the use of escrow accounts in refunding schemes without
specifically using the term "advance refunding":
"The use of an escrow fund to liquidate or defease the bonds
originally issued is specifically authorized by W. Va. Code, 13-
2-4 [1984]. Even in the absence of statutory authorization,
courts have held that the escrow technique is an acceptable
method of retiring an original bond issue. . . . The court in
Rodin [v. State ex rel. City of Cheyenne], 417 P.2d [180,] 189
[Wyo. 1966], stated: '[T]he irrevocable and positive
commitment of moneys made presently available through the
sale of refunding bonds, for either the immediate or future
payment of both principal and accruing interest of outstanding
securities, must be considered as an acceptable substitute for the
actual discharge of debt[.]'" Slack, 174 W. Va. at 449 n.15, 327 S.E.2d at 429 n.15.
Similarly, the SBA contends that W. Va. Code, 18-9D-9 (1993),See footnote 25 expressly authorizes
advance refunding by permitting the SBA to deposit refunding bond proceeds into a trust in
order to pay the principal, interest, and redemption premium of bonds that are not presently
due.
While the respondent does not reply directly to this argument, he does oppose
any attempt by the SBA to issue refunding bonds in an amount greater than that necessary
to redeem the pre-Winkler obligations. See Section II.D.2., infra.
The advance refunding scheme proposed by the SBA has never been formally
approved by this Court. In Slack, as correctly noted by the SBA, we alluded to the propriety of such a refunding scheme as a method of discharging prior obligations and impliedly
approved this procedure by upholding the refunding scheme in that case which included an
escrow component. 174 W. Va. at 449 n.15 & 449, 327 S.E.2d at 429 n.15 & 429. Though
we did not directly approve an advance refunding plan in Winkler, we did note that W. Va.
Code, 18-9D-9 (1993), authorizes the SBA to issue refunding bonds. With regard to the
instant case, W. Va. Code, 18-9D-9,See footnote 26 not only authorizes the SBA to issue refunding bonds,
it also expressly permits the SBA (1) to deposit in trust proceeds of refunding bonds to be
used to discharge pre-existing bonds that are not "immediately due and payable" and (2) to
invest these proceeds in United States Treasury obligations. Construed in conjunction with
our ratification of the SBA's authority to issue refunding bonds, to redeem pre-Winkler
bonds, the advanced refunding scheme proposed by the SBA appears to be consistent with
our intent, in Winkler, to provide for the redemption of the SBA's prior obligations. In fact,
the proposed advance refunding scheme may expedite the redemption of pre-Winkler
obligations by ensuring that funds are available, in escrow, for the repayment of these bonds
as they come due.
Thus, we find that the SBA may issue refunding bonds in a principal amount
larger than the principal amount of pre-Winkler bonds to be refunded in order to establish
an escrow account for the repayment of those pre-Winkler bonds that are not presently due and payable. We caution the SBA, however, that it may issue such additional refunding
bonds only in the amount required to establish and maintain the escrow account. In other
words, the revenue generated by the excess refunding bonds should be no greater than that
amount needed to secure the repayment of the higher interest pre-Winkler bonds to be
refunded. We limit our holding in this regard to maintain the integrity of our ruling in
Winkler, which permits the SBA to issue refunding bonds to redeem pre-Winkler obligations,
but which prohibits the SBA from issuing any new revenue bonds in accordance with the
unconstitutional procedure contained in the School Building Authority Act.
2. Cash at closing
The SBA also asserts that it should be permitted to issue additional refunding
bonds in an amount sufficient to generate cash at closing. In other words, the SBA wishes
to realize the majority of the debt service savings from the refunding bonds at the time the
bonds are issued rather than over the life of the refunding bonds. If such funds are presently
available to the SBA, it states that it could use these moneys to finance new school
construction projects.
To arrive at this conclusion, the SBA submits that W. Va. Code, 18-9D-4a
(1996),See footnote 27 anticipates "aggregate savings" resulting from the refunding of the pre-Winkler bonds. Because this section permits these savings to be used for the construction of schools,
the SBA contends that any savings it realizes from the Series 1996 refunding bonds should
also be applied to this purpose. The SBA maintains further that the word "aggregate," used
in section 18-9D-4a, indicates that the Legislature, in enacting this provision, intended the
relevant savings to be "aggregated" and immediately available at the beginning of the
refunding process. In order to achieve these "aggregate savings," the SBA argues that it must
be allowed to issue refunding bonds in an amount greater than the principal to be refunded
and to advance the capitalization of these anticipated future savings.
Additionally, the SBA states that there is no conflict between the provisions
of W. Va. Code, 18-9D-9, which limits the manner in which refunding bond proceeds may
be expended, and W. Va. Code, 18-9D-4a, which permits the use of aggregate savings for
school construction projects. In this regard, the SBA urges the Court to examine the
Legislature's intent which is better expressed by the newly enacted section 18-9D-4a (1996)
as opposed to the older statute, section 18-9D-9 (1993), which has not been amended since
this Court's decision in Winkler. Citing State ex rel. Frazier v. Meadows, 193 W. Va. 20, 24, 454 S.E.2d 65, 69 (1994) (stating "[c]ourts . . . may venture beyond the plain meaning
of a statute in the rare instances in which there is a clearly expressed legislative intent to the
contrary[,] in which a literal application would defeat or thwart the statutory purpose[,] or
in which a literal application of the statute would produce an absurd or unconstitutional
result" (citations omitted)).
Lastly, the SBA urges that the refunding scheme it has proposed is remarkably
similar to that previously approved by this Court in Slack. In Slack, this Court permitted the
school board to utilize funds previously held for the payment of outstanding bonds for school
construction projects, rather than requiring that these funds be used to discharge pre-existing
obligations. 174 W. Va. at 443-44, 456-57, 327 S.E.2d at 422-23, 435-37. Thus, the SBA
requests this Court to uphold the analogous procedure proposed in the instant case whereby
revenue generated by refunding bonds would be applied to school construction rather than
to pre-existing bond obligations.
Dr. Marockie replies that the SBA cannot issue excess refunding bonds in order
to generate cash at closing. In this regard, the respondent relies upon a Georgia Attorney
General's Opinion addressing this precise issue: the propriety of using debt service savings
to provide cash at closing. 1994 Ga. Op. Att'y Gen. 17, 1994 WL 81295, at *1 (No. 94-8
Feb. 25, 1994). The Georgia Attorney General interpreted a Georgia constitutional provision
similar to West Virginia Constitution Article X, Section 4, which limits the amount of debt that the State may incur to that amount necessary to retire a previous debt. In sum, the
Georgia Attorney General concluded:
"the principal amount [of the refunding bonds] should only be
increased in the amount necessary to effect the refunding, i.e.
reduce the principal and interest requirements over the life of
the bonds and pay premiums and any other costs associated with
the refunding issue. . . . Accordingly, all proceeds generated at
closing of the refunding issue should be spent on costs of the
refunding or used to pay principal, interest and premiums on the
refunded debt." Id. at *2.
Likewise, Section 4 of Article X of the West Virginia Constitution limits the ability of the
State to incur debt to, among other purposes, the redemption of a previous liability of the
State. Therefore, the SBA cannot receive anticipated debt service savings as cash at closing
because this "windfall" is not within the purposes anticipated by the governing law. See
State ex rel. Dep't of Employment Sec. v. Manchin, 178 W. Va. 509, 515, 361 S.E.2d 474,
480 (1987) (interpreting redemption language in W. Va. Const. Art. X, Sec. 4).
The respondent also opposes any attempt by the SBA to rely upon Winkler as
(1) authorizing the issuance of excess refunding bonds and (2) permitting these proceeds to
be used for new school construction. In Winkler, this Court relied upon W. Va. Code, 18-
9D-9 (1993), in determining that the SBA could issue refunding bonds. See 189 W. Va. at
765, 434 S.E.2d at 437. However, this statute does not include the construction of new schools among the permissible uses of refunding bond proceeds.See footnote 28 In a similar manner, the
respondent urges that W. Va. Code, 18-9D-4a, cannot be construed as authorizing the SBA
to generate cash at closing through the issuance of excess refunding bonds. The respondent
contends that if section 18-9D-4a were interpreted as the SBA perceives, to permit it to issue
excess refunding bonds in order to immediately realize aggregate savings, this statute would
be unconstitutional because it permits the incurrence of debt for purposes other than the
redemption of prior State liabilities and obligates future legislatures to repay the debt service
necessary to generate such cash.
Finally, Dr. Marockie notes that while Winkler authorizes the SBA to issue
refunding bonds to redeem pre-Winkler bonds and to reduce the debt service on these obligations, Winkler does not permit the SBA to issue refunding bonds to obtain funds for
new school construction projects. 189 W. Va. at 764, 434 S.E.2d 436. See also County
Comm'n of Boone County v. Hill, 194 W. Va. at 487 n.6, 460 S.E.2d at 733 n.6. Moreover,
even if the SBA could issue excess refunding bonds, the respondent asserts that this Court's
decision in Slack suggests that the SBA could use these funds only for projects funded by
the original SBA bonds and that the SBA could not use these proceeds for new projects. See
Slack, 174 W. Va. at 449, 327 S.E.2d at 429.See footnote 29
We decline to address the parties' statutory and constitutional arguments
because our decision of the "cash at closing" debate turns solely upon our interpretation of
our prior holding in Winkler. In that case, we limited the authority of the SBA to issue
refunding bonds to those amounts needed to redeem previously-issued SBA bonds. 189
W. Va. at 764, 434 S.E.2d at 436. We further prohibited the SBA from issuing new revenue
bonds in accordance with its prior scheme because we found that method of bond issuance
to be unconstitutional. Id. In its present attempt to receive cash at closing by issuing refunding bonds in an amount greater than that needed to redeem pre-Winkler bonds, the
SBA is requesting, in effect, this Court to expand the scope of Winkler to an extent that we
simply are unwilling to allow. In our prior decision, we expressly recognized that the SBA's
issuance of bonds would be invalid pursuant to West Virginia Constitution Article X, Section
4, were it not for our determination that a retroactive application of this ruling would have
a devastating effect upon the national credit rating of this State. See Winkler, 189 W. Va.
at 760, 763-64, 434 S.E.2d at 432, 435-36.
Given our conditional approval of pre-Winkler bonds and those bonds
necessary to refund them, we are hard-pressed to ascertain how the proposed issuance of
excess refunding bonds, which would generate cash at closing purportedly for new school
construction projects, is not simply a camouflaged attempt by the SBA to issue the same
bonds that we previously prohibited. From our prior holding granting the SBA limited
authority to issue bonds to refund its pre-Winkler obligations, it is evident that we did not
intend to permit the SBA to utilize proceeds from the refunding bonds to finance new school
construction projects. While we applaud the ultimate goal of the SBA to improve the quality
of schools in this State, we simply cannot extend the Winkler holding beyond our original
directive. To do so would abrogate our ruling that the issuance of SBA bonds pursuant to
the School Building Authority Act violates West Virginia Constitution Article X, Section 4,
and our decision to make this ruling prospective only in an attempt to protect the financial
integrity of this State.
Accordingly, we hold that the SBA may not issue bonds alleged to be
refunding bonds for the redemption of pre-Winkler obligations which have the practical
effect of generating cash at closing in order to make immediately available to the SBA the
anticipated debt service savings from the so-called refunding bonds. Rather, the authority
of the SBA to issue refunding bonds to redeem pre-Winkler obligations is specifically limited
to encompass only those bonds, the proceeds of which the SBA will use to discharge its pre-
existing obligations.
III.
CONCLUSION
For the foregoing reasons we hold that the SBA may issue revenue bonds in
a principal amount greater than the principal amount of pre-Winkler bonds to be refunded
in order to establish an escrow account for the repayment of those pre-existing obligations
that are not presently due and payable. However, the SBA may issue refunding bonds only
in that additional amount required to establish and maintain the aforementioned escrow
account. In addition, the SBA may not issue bonds alleged to be refunding bonds for the
redemption of pre-Winkler obligations which have the practical effect of generating cash at
closing in order to make immediately available to the SBA the anticipated debt service savings from the so-called refunding bonds. Accordingly, the writ of mandamus is granted
as moulded.
Writ granted as moulded.
Footnote: 1
The Honorable Arthur M. Recht resigned as Justice of the Supreme Court of Appeals
of West Virginia effective October 15, 1996. The Honorable Gaston Caperton, Governor
of the State of West Virginia, appointed him Judge of the First Judicial Circuit on that same
date. Pursuant to an administrative order entered by this Court on October 15, 1996, Judge
Recht was assigned to sit as a member of the Supreme Court of Appeals of West Virginia
commencing October 15, 1996, and continuing until further order of this Court.Footnote: 2
The Legislature established the SBA, in part, in response to this Court's concern in
Pauley v. Kelly, 162 W. Va. 672, 255 S.E.2d 859 (1979), that the State of West Virginia had
failed to meet the guarantee of the West Virginia Constitution to provide "a thorough and
efficient system of free schools." W. Va. Const. Art. XII, Sec. 1.Footnote: 3
W. Va. Code, 18-9D-6 (1988), directs in this regard:
"There is created in the state treasury a school
building capital improvements fund to be expended by the
authority [SBA] for the purposes of this article.
"The school building authority shall have
authority to pledge all or such part of the revenues paid into the
school building capital improvements fund as may be needed to
meet the requirements of any revenue bond issue or issues
authorized by this article[.]"Footnote: 4
The following disclaimer language appeared on the face of these bonds:
"'The Series 1993 Bonds are limited obligations of
the Authority [SBA] payable solely from the Trust Estate
pledged under the Indenture. The Authority may not at any time
or in any manner pledge the credit or taxing power of the State,
nor shall any of the obligations or debts created by the Authority
under the Indenture be deemed to be obligations of the State.
"'The Series 1993 Bonds are being issued on a
parity with the lien of certain outstanding bonds of the Authority
on amounts on deposit in the Revenue Fund. All Bonds issued
under the Indenture are secured by a pledge of moneys
appropriated by the West Virginia State Legislature and
transferred to United National Bank, as the trustee, for deposit
in the Revenue Fund established under the Indenture.
AMOUNTS AVAILABLE TO BE TRANSFERRED TO THE
TRUSTEE FOR DEPOSIT IN THE REVENUE FUND ARE
SUBJECT TO ANNUAL APPROPRIATION BY THE STATE
LEGISLATURE. THE STATE LEGISLATURE IS NOT
LEGALLY OBLIGATED TO MAKE APPROPRIATIONS IN
AMOUNTS SUFFICIENT TO PAY DEBT SERVICE ON THE
BONDS.'" Winkler v. State Sch. Bldg. Auth., 189 W. Va. 748,
752-53, 434 S.E.2d 420, 424-25 (1993). (Emphasis in original;
footnote omitted).Footnote: 5
These bonds will hereinafter be referred to as "pre-Winkler" bonds.Footnote: 6
This Court noted that approximately $154,000,000 of the bonds at issue in Winkler
were to "be used to refund the earlier bonds at a reduced interest rate[.]" 189 W. Va. at 766
n.27, 434 S.E.2d at 438 n.27. The parties to the instant case state that "[r]efunding bonds are
bonds issued when market conditions are favorable (low interest rates) in order to refinance
the debt service on bonds previously issued during less favorable market conditions (higher
interest rates)." Appendix to the Response, Stipulation of Fact, para. 2, in part. (Footnote
omitted).Footnote: 7
Winkler was submitted to this Court for decision on July 20, 1993. We rendered a
decision in Winkler on July 22, 1993.Footnote: 8
In amending W. Va. Code, 18-9D-4 (1994), the Legislature also added subsection
(b):
"(b) The school building authority may, in
accordance with the provisions of the constitution of West
Virginia, issue general obligation bonds from time to time as
authorized by referendum pursuant to resolution duly adopted
by the Legislature, to finance the cost of construction projects
for public schools in this state."Footnote: 9
In 1996, the Legislature further amended this section to provide that "[t]he school
building capital improvements fund shall be an interest bearing account with interest credited
to and deposited in the school building capital improvements fund[.]" W. Va. Code, 18-9D-
6(a) (1996).Footnote: 10
The facts presented by the parties do not indicate why the SBA did not earlier refund
the pre-Winkler bonds.Footnote: 11
"Debt service" generally refers to the funds necessary to repay the principal, interest,
and other associated costs of bonds over the entire life of the bonds. The issuance of
refunding bonds often reduces the amount of debt service payments because the refunding
bonds are issued at a lower interest rate than the bonds to be refunded.Footnote: 12
The parties use the term "cash at closing" to refer to the advance capitalization of
debt service savings. In other words, rather than realizing the benefit of issuing lower
interest refunding bonds over the life of the refunding bonds as reduced debt service, "cash
at closing" contemplates receiving the benefit of the lower interest rate in a lump sum
payment of cash at the time the new bonds are issued. See Resp. App., Stipulation of Fact,
para. 5.Footnote: 13
The "Savings Analysis" compiled by Smith Barney on July 24, 1996, lists four
alternative financing schemes, which are different from the schemes originally proposed by
Smith Barney on May 8, 1996. In sum, the proposed issuances are:
(1) "Level Savings"
This scenario contemplates issuing $139,635,000
in new refunding bonds to discharge pre-Winkler
bonds in the principal amount of $128,860,000.
Over the life of the bonds (twenty-six years), the
State's general revenue fund would realize debt
service savings in the amount of $9,157,211.25.
A minimal amount of cash at closing, $4,562.45,
also results from this scenario.
(2) "Cash at Closing" or "Matched Debt Service"
This proposal requires issuing $144,350,000 in
new refunding bonds to discharge pre-Winkler
bonds in the principal amount of $128,860,000.
This scheme does not provide any significant debt
service savings to the State's general revenue fund
($58,647.50), but it would generate
$4,688,972.15 cash at closing. The SBA
anticipates using this cash at closing to fund new
school construction projects.
(3) "Deferred Savings"
This plan considers issuing $139,815,000 in new
refunding bonds to discharge pre-Winkler bonds
in the principal amount of $128,860,000. Over
the life of the bonds, which would be reduced by
five years, (twenty-one years as altered by this
plan) the State's general revenue fund would
realize debt service savings in the amount of
$17,556,387.50. This plan would also generate
cash at closing in the amount of $2,267.51.
(4) "Adjusted Deferred Savings" or "Deferred and
Matched"
This scheme envisions issuing $139,495,000 in
new refunding bonds to discharge pre-Winkler
bonds in the principal amount of $128,860,000.
In addition, this scenario proposes issuing an
additional $4,739,178 in new Matching Capital
Appreciation Bonds (apparently these capital
appreciation bonds would be financed by the
otherwise realized debt service savings resulting
from the refunding bonds). While this proposal
does not provide any significant debt service
savings to the State's general revenue fund
($58,930.62), it would generate $4,600,290.75
cash at closing. The SBA anticipates using this
cash at closing to fund new school construction
projects.Footnote: 14
In Winkler, this Court authorized the SBA to refund Series 1993 pre-Winkler bonds.
See Syl. pt. 10, Winkler, supra. However, in the instant case, Smith Barney suggested, and
the SBA apparently has resolved, to refund bonds from Series 1990A, 1990B, 1991A, and
1992A, because changing interest rates and market conditions have negatively impacted the
profitability of refunding the Series 1993 bonds. See Appendix to the Petition, Revised
Refunding Analysis, p. 1.Footnote: 15
Dr. Henry R. Marockie, by virtue of his position as State Superintendent of Schools,
is both an ex officio member and the President of the SBA. See W. Va. Code, 18-9D-1
(1990).Footnote: 16
In pertinent part, the BOND AUTHORIZING RESOLUTION OF THE SCHOOL
BUILDING AUTHORITY OF WEST VIRGINIA provides:
"Section 2. Approval of Fifth Supplemental Indenture
and Other Bond Documents. The Fifth Supplemental Indenture
and Other Bond Documents shall be and the same are hereby
approved in all respects. The President of the Authority [SBA]
shall execute and deliver the Fifth Supplemental Indenture and
Other Bond Documents with such changes, insertions and
omissions as may be approved by the President, and the
Secretary is hereby authorized and directed to affix the seal of
the Authority to the Fifth Supplemental Indenture and Other
Bond Documents and attest the same. The execution of the
Fifth Supplemental Indenture and Other Bond Documents by
said President shall be conclusive evidence of any approval
required by this Section." (Emphasis added).
The resolution further directs the SBA's Finance Committee to select the refunding scheme
most beneficial to the SBA:
"Section 4. Refunding of Portion of Bonds; Changes and
Other Actions Related Thereto. The Authority hereby
authorizes the Finance Committee to approve the issuance of
Series 1996 Bonds for the purpose of refunding a portion of the
[pre-Winkler] Bonds if the Finance Committee determines that
sufficient debt service savings can be achieved with respect to
the Bonds proposed to be refunded[.]"Footnote: 17
The letter from Dr. Henry R. Marockie, President of the Board, School Building
Authority of West Virginia, to Clacy Williams, Executive Director, School Building
Authority of West Virginia, dated August 27, 1996, states, in part:
"I must and do respectfully decline to execute the Fifth
Supplemental Indenture or any other associated bond documents
necessary to effect the issuance of these refunding bonds until
the constitutionality of the proposed refunding bond issue has
been finally adjudicated.
"I am advised that issues persist as to whether the
proposed refunding bond issue violates certain provisions of the
Constitution of the State of West Virginia and the holding of the
Supreme Court of Appeals in Winkler, including:
"a. Whether the Winkler decision as it addressed the
refunding of pre-Winkler bonds may be
interpreted and applied to permit the refunding of
such pre-Winkler bonds which were not included
for refunding in the proposed refunding issue
before the Court in Winkler?
"b. Whether the Winkler decision, by freezing the
'school building capital improvements fund' at the
level of discretionary legislative appropriations
from the State's general revenue fund needed to
satisfy the payment obligations of the pre-Winkler
bonds then outstanding, converted the 'school
building capital improvements fund' into a
'special' or 'separate' fund as delineated in the
Winkler case and its progeny?
"c. Whether within the limits of the school building
capital improvements fund, as a 'special' or
'separate' fund, the SBA may exercise its
discretion to issue refunding bonds in an
aggregate principal amount in excess of the
aggregate principal amount of pre-Winkler bonds
which are refunded to enable it:
"(1) To utilize 'advance refunding'; and
"(2) To receive the net present value of
interest savings at the time the
refunding bonds are issued for
immediate use in furtherance of its
school construction and
maintenance purposes?
"Consequently, I believe it would be improvident
for the School Building Authority to issue additional bonds until
these issues are finally resolved by a court of competent
jurisdiction."Footnote: 18
Of this $144.13 million, approximately $136,996,790.69 of the refunding bond
proceeds will be invested in United States Treasury obligations and placed in an irrevocable
trust to eventually pay the principal, interest, and redemption premium for those pre-Winkler
bonds designated for refunding but which are not yet due and payable or which are not
subject to early redemption.Footnote: 19
In his response brief, Dr. Marockie contends that the anticipated $5.66 million cash
at closing will require the State's general revenue fund to expend approximately $10.88
million for debt service payments over the twenty-six year life of these bonds. By contrast,
Dr. Marockie asserts that if the SBA issued refunding bonds in the amount of $138,410,000
(the amount necessary to discharge pre-Winkler bonds in the principal amount of
$127,200,000 without generating cash at closing), the general revenue fund would realize
debt service savings of $10,946,512.75.Footnote: 20
In fact, in Winkler, we chastised the SBA for not testing the propriety of the Series
1993 bonds before they were issued:
"We are amazed that no attempt was made before
the original issue of the SBA bonds to obtain an opinion as to
their validity from the Attorney General. Moreover, in view of
the amount involved and the purpose of the bonds, prudence
would have dictated that a court determination should have been
sought as to their legality." 189 W. Va. at 766, 434 S.E.2d at
438.Footnote: 21
West Virginia Constitution Article X, Section 4, provides:
"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; but the payment of any liability
other than that for the ordinary expenses of the State, shall be
equally distributed over a period of at least twenty years."Footnote: 22
W. Va. Code, 18-9D-6(a) (1996), provides, in part:
"(a) There is continued in the state treasury a
school building capital improvements fund to be expended by
the authority [SBA] as provided in this article[.]"
This statute does not indicate whether, in fact, the school building capital improvements fund
is a part of, or distinct from, the general revenue fund. Footnote: 23
The respondent proposes that the term "refunding bonds" does not encompass those
bonds issued at the same time as bonds intended to redeem pre-existing bonds but which
provide revenue for new construction projects (rather than redeeming older bonds).Footnote: 24
For a detailed explanation as to why the Winkler holding does not permit the
issuance of bonds to finance new school construction projects see Section II.D.2., infra.Footnote: 25
In relevant part, W. Va. Code, 18-9D-9 (1993), provides:
"Such amount of the proceeds of the revenue refunding bonds
as shall be sufficient for the payment of the principal, interest
and redemption premium, if any, on such outstanding bonds
which will not be immediately due and payable shall be
deposited in trust, for the sole purpose of making such
payments, in a banking institution chosen by the authority
[SBA] . . . . Any of the moneys so deposited in trust may, prior
to the date on which such moneys will be needed for the
payment of principal of, interest and redemption premium, if
any, on such outstanding bonds, be invested and reinvested as
determined by the authority, in whole or in part: (a) In direct
obligations issued by the United States of America or one of its
agencies or in direct obligations of the state of West Virginia
[or] (b) in obligations unconditionally guaranteed by the United
States of America as to principal and interest[.]"Footnote: 26
See note 25, supra, for the relevant portion of W. Va. Code, 18-9D-9 (1993).Footnote: 27
W. Va. Code, 18-9D-4a (1996) provides:
"Any aggregate savings resulting from the
issuance of refunding bonds pursuant to section four [§ 18-9D-
4] of this article shall be retained by the school building
authority. Any savings shall be utilized solely for the
construction and maintenance of schools and may not be used
to fund administrative costs of the authority."Footnote: 28
W. Va. Code, 18-9D-9 (1993), provides, in relevant part:
"[R]evenue refunding bonds may be issued in an amount at the option of the authority [SBA] sufficient to pay either in part or in full, together with interest earned on the investment of the proceeds thereof, whether or not at the time of the issuance of the revenue refunding bonds the hereafter mentioned bonds are payable or callable for optional redemption: (1) The principal of such outstanding bonds; (2) the redemption premium, if any, on such outstanding bonds if they are to be redeemed prior to maturity; (3) the interest due and payable on such outstanding bonds to and including the maturity date thereof or the first date upon which said outstanding bonds are to be redeemed, including any interest theretofore accrued and unpaid; and (4) all expenses of the issuance and sale of said revenue refunding bonds, including all necessary financial and legal expenses, and also including the creation of initial debt service reserve funds[.]" (Emphasis added).Footnote: 29 Dr. Marockie further argues that the SBA cannot issue additional refunding bonds to obtain cash at closing because federal regulations governing tax-exempt state bonds would treat the excess revenue as the equivalent of a separate bond issue. In this manner, the excess refunding proceeds would be applicable to the purpose for which the refunding bonds were issued (here, the redemption of pre-Winkler bonds). See 26 U.S.C. §§ 103, 148 (1994); 26 C.F.R. § 1.148-10 (1996). Additionally, the respondent contends that while the SBA approved a resolution authorizing the Series 1996 refunding bonds, it has not approved the issuance of refunding bonds that would generate cash at closing. Because our decision focuses upon other grounds raised by the parties, we decline to further address these particular arguments.
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