Petition — Idaho ex rel. Moon v. State Board of Examiners

83-186

No.

IN THE SUPREME COURT

OF THE UNITED STATES

October Term, 1982

5 1983

L. STEVAS,

THE STATE OF IDAHO, on relation

of MARJORIE RUTH MOON, State

Treasurer of the State of Idaho,

Petitioner,

vs.

STATE BOARD OF EXAMINERS, and

the Legislature of the State of

Idaho, by and through THOMAS W.

STIVERS, Speaker of the House,

and JAMES E. RISCH, President

Pro-Tem of the Senate,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF IDAHO

Wayne P. Fuller

Special Assistant

Attorney General

State of Idaho

Post Office Box 130

Caldwell, Idaho 83605

(208) 459-1681

ATTORNEY FOR PETITIONER

QUESTIONS PRESENTED FOR REVIEW:

Whether state legislation which shifts

the burden of supplying substanital losses

from the state to the beneficiaries of the

Public School Endowment Fund (hereinafter

called The Fund) violate the Trust condi-

tions established when the state was admit-

ted to the Union and granted public lands:

1. When the Trust conditions require a

permanent school fund that is to be used

exclusively for education, and were intend-

ed *y Congress to require the beneficiaries

to"derive full benefit" of the grant;

2. When the Trust conditions include

the provisions of the state constitution

(Article IX, §3) which provisions were ac-

cepted, ratified and confirmed by Congress,

and provide in part:

"No part of this fund, principal or in-

terest, shall ever be transferred to

any other fund, or used or appropriated

except as herein provided.”

"The state shall supply all losses

thereof that may in any manner occur."

I

TABLE OF CONTENTS

Page

Qestions Presented -------- I

Opinions Below---------- 2

Jurisdiction ---*----\*-+-e-s 2

Constitutional and

Statutory Provisions - - -- - - 3

Statement of the Case - ---=- = 4

Reasons for Granting the Writ- - - 11

Conclusion --\--*---°--°. -- 20

TABLE OF AUTHORITIES

CASES

Te. F278, a0G=90— (NIE

Andrus v. Utah, 12, 19

446 U.S. 500, 523-524 (1980)

Board of Commissioners v. State ex rel.

Commissioners, 17, 15

Okl. » 257 P.778, 779 (1926)

Ervien v. United States, abe an

251 U.S. 41, 45-48 (1919)

Lassen v. Arizona, 11

II

CASES ' PAGE

McCornick v. Western Union Telegraph Co. 17

79P. 449 452 (8th Cir. 1897) ;

Moon v. Investment Board, 10

58 Idaho 200, 560 P.2d 871 (1977)

Newton v. State Board of Land Commis-

sioners, 17

37 Idaho 58, 219 Pac. 1053, 105 (1923)

Oklahoma poucat son Assoc., Inc. v. Nigh

642 p.dd 230, 235, 236 (Okla. 1982)

14, 15, 16

State ex rel. Bottcher v. Bartlin P

Iq Neb. FI, 31 N.W.2 a 423 407-4 -428 (1948)

16, 14, 15

etate of Idaho v. State Board of Examiners,

3d 858 (9th Cir. 1578), cert. a.

438 a. .S. 915 (1978)

State ex rel Moon v. State Board of

Examiners, 2

662 P.2d 221 (Idaho 1983)

United States v. Fenton, 13

27 F.Supp. 616, 817, 818 (D.C. Idaho

1939)

Constitutional Provisions

United States Constitution

Article 4, Section 3 3

Article 6, Section 1 | 3

Idaho Constitution

Article 9, Section 3 & 4

3, 5, 6, 7, 16

Irl

CASES PAGE

Federal Statutes

Idaho Admission Act

“Sections 1, 4 & 5 ee Oe

Organic Act of Territory

of Idaho,

“Section 14 ‘2

28 U.S.C. Section 1257(3) 2

State Statutes

Idaho Code, Section 57-724

3, 6, 8, 10, 16

IN THE SUPREME COURT

OF THE UNITED STATES

October Term, 1982

No.

THE STATE OF IDAHO, on relation

of MARJORIE RUTH MOON, State

Treasurer of the State of Idaho,

Petitioner,

vs.

STATE BOARD OF EXAMINERS, and

the Legislature of the State of

Idaho, by and through THOMAS W.

STIVERS, Speaker of the House,

and JAMES E. RISCH, President

Pro-Tem of the Senate,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

SUPREME COURT OF IDAHO

MARJORIE RUTH MOON, State Treasurer of

the State of Idaho, (hereafter called Reti-

tioner) hereby Petitions that a writ of

certiorari issue to review the judgment of

the Supreme Court of Idaho filed March 24,

1983, and the denial of Petition for re-

hearing filed May 10, 1983.

OPINIONS BELOW

The opinion of the District Court of

the Fourth Judicial District of the State

of Idaho, Ada County, is not officially

reported, but is reprinted at App. , -

The opinion of the Idaho

Supreme Court is officially reported at

662 P.2d 221 (Idaho 1983).

JURISDICTION

The opinion and judgment of the Supreme

Court of Idaho were issued on March 24,

1983. Treasurer's timely filed Petition

for rehearing was denied on May 10, 1983.

(App.c ) - The federal questions pre-

sented herein were raised in and decided

by both the trial court and the Idaho Sup-

reme Court. This Court has jurisdiction

pursuant to 28 U.S.C. §1257(3).

1 The Appendix to this petition shall

et all times be referred to as "Aop.".

3

CONSTITUTIONAL PROVISIONS, STATUTES

AND LAWS INVOLVED

The United States Constitutional pro-

visions involved are:

a. Article 4, Section 3, which provides

the congress shall have power to dispose

of and make all needful rules and regula-

tions respecting the territory or other

property belonging to the United States.

b. Article 6, which provides this Const-

itution and the laws of the United States

shall be the supreme law of the land.

The federal statutes involved are:

a. Organic Act of Territory of Idaho, 12

Stat L 808, Ch 117 (1863) Section 14.

b. Idaho Admission Act, 26 Stat L 215,

Ch 656 (1890) Sections 1,4,5, and 7.

The State Constitutional and statutory

provisions involved are:

Article 9, Section 3 and 4, Constitu-

tion of State of Idaho, Section 57-724,

Idaho Code.

The constitutional provisions and sta-

tutes are set out verbatim in Appendix E.

STATEMENT OF CASE

In 1863 Congress enacted the Organic Act

of the Territory of Idaho, 12 Stat. 808

(1863). That Act provided sections 16 and

36 in each Township were reserved for the

purpose of being applied to schools in

said Territory and in states thereafter er-

ected out of the same. In 1890 Congress

enacted the Idaho Admission Bill, 26 Stat.

L.215 (1890). Congress has amended this

act several times: 56 Stat. L.48 (1942);

63 Stat. L.714 (1949); 71 Stat. L.277

(1957) and 88 Stat. 1821, Pub. L.93-562

(1974).

Section 4 of the Admission Bill grant-

ed Sections 16 and 36 to said state for the

support of common schools. Section 5

Created a permanent school fund, and pro-

vided in part:

“all lands herein granted for educa-

tional purposes shall be disposed of

only at public sale, the proceeds to

constitute a permanent school fund,

the interest of which only shall be

expended in the support of said schools."

5

Over the years the proceeds of these pub-

lic lands granted to Idaho formed a signi-

ficant part of The Fund.

Prior to becoming a state, the people

of the Territory of Idaho on July 4, 1889,

held a constitutional convention, and

Grafted a proposed constitution, which was

adopted at an election in November, 1889.

When Congress admitted Idaho as a state,

Section 1 of the Idaho Admission Bill pro-

vided the State Constitution was accepted,

ratified and confirmed. The State Con-

stitution provided at the time of Idaho's

admission into the Union in Article IX,

Section 3, as follows:

"The public school fund of the state

shall forever remain inviolate and in-

tact; the interest thereon only shall

be expended in the maintenance of the

schools of the state, and shall be

Gistributed among the several counties

and school districts of the state in

such manner as may be prescribed by

law. No part of this fund, principal

or interest, shall ever be transferred

to any other fund, or used or appro-

priated except as herein provided.

The state treasurer shall be the cus-

todian of this fund, and the same shall

6

be securely and profitably invest-

ed as may be by law directed. The

state shall supply all losses thereof

that may in any manner occur."

This provision has never been amended.

In 1969, the state legislature enacted

I.C. §57-724, to provide a method of com-

puting net capital gains, based on the mar-

ket value of investments as of March 25,

1969, and for a 2 year settlement date,

and that all net capital losses shall be

made up from an appropriation from the gen-

eral fund on a biennial basis. In 1975,

the state legislature amended I.C. §57-724

to provide in part:

"In computing net capital gains or

net capital losses the board shall

use the marketable value of the sec-

urities as of the effective date here-

of (March 25, 1969) for its computat-

ion on July 1, 1971, and shall there-

after use the difference between ac-

quisition cost of securities and

actual proceeds received from the sale

of securities as the determinant of

the gain or loss. Gains or lossess

shall be determined for four (4) year

periods, commencing on July l, 1975.

At the end of each such four (4) year

period, the net amount of losses on

the sale of securities, not offset by

ains on the sale of securities dur-

tos such period shall be computed and

7

such net losses shall be made up from

an appropriation from the general

fund, and shall be credited to the

appropriate fund." (Emphasis supplied)

Petitioner, who has served as state

treasurer since 1963, found initially there

were losses not supplied by the state

since 1969, but thereafter discovered loss-

es reported in 1938 going back to statehood,

for which no appropriation had been made.

(See Supplemental Complaint, App. D}

In December, 1975, petitioner presented

a claim to the State Board of Examiners,

which was denied. Thereafter, Petitioner, .

as custodian of the Fund, originally fil-

ed a complaint in the United States Dis-

trict Court for the District of Idaho (Civ.

No. 1-76-72) on April 26, 1976, alleging

against respondents two claims for relief

for the benefit of the school children of

Idaho, who are the beneficiaries of the

Pund. The federal district court found

the grant of public lands and the condi-

tions of the grant in the Idaho Admission

Act presented a substantial federal ques-

tion, but dismissed the case based upon

the Abstension Doctrine. The Ninth Cir-

cuit Court of Appeals affirmed, 567. F.2d

858 (9th Cir. 1978) stating that the court

did have jurisdicition over the suit, and

while the United States does have a con-

tinuing interest in insuring that the con-

ditions of the grant are satisfied, that

state political and judicial processes had

not been shown incapable of dealing with

the problem. The United States Supreme

Court denied certiorari,438 U.S. 915

(1978).

Petitioner then brought the present ac-

tion in state district court on December

18, 1978, alleging losses to principal of

$3,977,702.00 for the period from March 29,

1969, to June 30, 1973. The state district

court dismissed the complaint without pre-

judice, construing the state statute, I.C.

57-724 so that any claims could be present-

ed to the legislature after the four (4)

9

year accounting period ending July 1, 1979.

The court specifically stated if the legis-

lature fails to decline to execute its

duties, then plaintiff may renew her act-

ion. The 1980 state legislature took no

action, even though petitioner submitted a

request to make up all losses and submit-

ted proposed legislation.

On May 7, 1980, petitioner filed a Sup-

plemental Complaint (App. D)

which alleges the Fund has incurred and

realized losses to its principal from 1931

to 1979, totaling $7,009,358.60, and loss-

es of $6,431,593.72 due to interest that

could have been earned on the principal.

Petitioner raised the federal questions

sought to be reviewed in the state dis-

trict Court, alleging in her Supplemental

Complaint that the state was: violating

the conditions of the federal grant, fail-

ing to provide full benefits by making up

all losses to the Pund, and offsetting

10

gains by losses so that the purposes of

the grant were not being met. The state

district court in its memorandum decision

and order (See App. B.) found

for petitioner, stating:

"The Court is persuaded that the hold-

ings in Moon v. Investment Board, 98

Idaho 200, 560 P.2d 871 (1977) and

State ex rel Bottcher v. Bartling, sup-

ra, are dispositive of the pivotal is-

sues in this case. The practical re-

sult of the procedures set forth in I.C.

57-724 is to allow the State of Idaho

to 'claim benefits to itself for pro-

fits flowing to trust funds of which it

is trustee and thus relieve it of its

constitutional obligation as a state

to keep inviolate such trust funds.'

State ex rel Bottcher v. Bartling sup-

ra. The "mere bookkeeping arrange-

ment' devised by I.C. 57-724 enables

the state to effectively divert monies

from the Fund for the purpose of min-

imizing or negating altogether the

state's obligation to ‘supply all

losses' as required by the Constitution.

This legislatively authorized use of

the Fund's assets is clearly not in

furtherance of any educational purpose

and is therefore incompatible with the

terms of the trust agreement with the

United States and contrary to the will

of the people of Idaho as expressed in

their Constitution: I.C. §57-724 is

therefore unconstitutional.” App B.

Upon appeal to the Idaho Supreme Court,

11

the decision was reversed in an opinion |

Gated March 24, 1983. (See App. A.)

Rehearing was denied May 10, 1983.

(App. C.):

REASONS FOR GRANTING THE WRIT:

The court below decided an important

question of federal law in a manner that

conflicts with the principles established

in Lassen v. Arizona, 385 U.S. 458, 467-

470 (1967) and earlier announced in Ervien

v. United States, 251 U.S. 41, 45-48 (1919).

The principles of Lassen were reaffirmed

in Alamo Land & Cattle Co. v. Arizona. 424

U.S. 295, 300-303 (1976).

In Lassen, the Court adopted a doctrine

that Congress required an admission act's

beneficiaries to "derive the full benefit

of the grant.” The Court stated, at 385

U.S. 468:

"Nothing in these restrictions is ex-

plicitly addressed to acquisitions by

12

the State for its other public acti-

vities; the Enabling Act is, as we have

noted, entirely silent on these ques-

tions. We must nevertheless conclude

that the purpescs oo congress Fequare

that e Act's designate neficiar-

ies ‘derive the Fatt benefit’ of the

rant. The conclusive presumption of

enhancement which the Arizona Supreme

Court found does -not in our view ade-

quately assure fulfillment of that

purpose, particularly in the context

of lands that as variegated and far-

flung as those comprised in this

grant." (Emphasis added)

In Ervien, the Court found the state

legislation was a breach of trust, and in-

dicated the use of three percent (3%) of

the annual income for publicity purposes

was not a purpose enumerated in the En-

abling Act. The court stated, at 25l,

U.S. 47:

"There is in the Enabling Act a spec-

ific enumeration of the purposes for

which the lands were granted, and the

enumeration is necessarily exclusive

of any other purpose.”

Justice Powell in this dissenting opin-

ion in Andrus v. Utah, 446 U.S. 500 (1980),

recognized the perpetual obligation to use

the granted lands for public education,

13

stating at 446 U.S. 523-524:

"Congress also imposed upon the State

a binding and perpetual obligation

to use the granted lands for the sup-

port of public education. All reven-

ue from the sale or lease of the school

grants was impressed with a trust in

favor of the public schools. No state

could divert school lands to other pub-

lic uses without compensating the trust

for the full marke? value of the in-

terest taken.”

The decision below is also contrary to

the interpretation of the Idaho Admission

Act rendered in United States v. Fenton, 27

F.Supp. 816 (D.C. Idaho 1939). In that

case, the court stated, at page 817:

"The Admission Act requires all pro-

ceeds derived from the sale of school

land, 'to constitute a permanent school

fund, the interest of which only shall

be expended in the support of (State)

schools * * * but shall be reserved

for school purposes only.'"

Regarding the express purpose of the Act,

the court stated, at page 818:

"The express purpose of the Admission

Act and the State Constitution is to

protect and hold inviolate and intact

the fund from the Acts of the Legis-

lature or acts or failures of the of-

ficers of the State.”

14

Regarding the Trust nature of the Pund, the

court, quoting from Board of Commissioners

v. State ex rel. Commissioners, 257 P.778

(Okla. 1926), stated at page 819:

"On the other hand, the common school

fund does not belong to the state, but

the state merely holds such fund in

trust under the conditions of the fed-

eral grant contained in the Enablin

Act. The school funds were Sarely f -

trusted for the benefit of the common

school, and the state pledged itself

to hold such trust inviolate for the

benefit of the schools.”

The decision below also conflicts with

the opinions in State ex rel Bottcher v.

Bartling, 149 Neb. 491, 31 N.W.2d 422 (1948)

and Oklahoma Education Association, Inc.

v. Nigh, 642 P.2s 230 (Okla. 1982). In

Bartling, the court stated, at 31 N.W.2d

417-418:

"To permit that which the Legislature

has attempted to authorize by the pro-

vision complained of would be to per-

mit the State to be relieved of its

obligation to restore losses to the

perpetual school funds by a mere book-

keeping arrangement by the Board of

Educational Lands and Punds over which

funds the Legislature has no control

15

and in which it and the State have

no interest except in a supervisory

capacity, and from which the State

may not profit."

The court in Bartling, emphasized the fed-

eral duty, at 31 N.W.2d 428:

"The State under the provisions of

the Acts of Congress and the Nebraska

Constitution herein referred to may

not claim benefits to itself for pro-

fits flowing to trust funds of which

it is trustee and thus relieve if of

its constitutional obligation as a

state to keep inviolate such trust

funds.

The provision of the Act in question,

if a valid exercise of legislative

power, would permit the offset of

losses occasioned by breach of trust

against profits as well as losses

not involving breach of trust. No

different treatment is accorded to

one than the other."

In Nigh, the court stated, at 646 P.2d

235:

"The gift of these lands and funds

under the Enabling Act was accepted

irrevocably by the people of Oklahoma,

and such acceptance was set out in the

Oklahoma Constitution under Article XI

Section 1. These acceptance provisions

of the Oklahoma Constitution and The

Enabling Act constitute an irrevocable

compact between the United States and

Oklahoma, for the benefit of the common

16

schools, which cannot be altered or

abrogated. No disposition of such

lands or funds can be made that con-

flict either with the terms and pur-

poses of the grant in the Enabling Act

or the provisions of the Constitution

relating to such land and funds. The

State has an irrevocable duty as

Trustee, to manage the trust estate

for the exclusive benefit of the bene-

ficiaries, and return full value from

the use and disposition of the trust

property.”

The Court in Nigh, also stated, at 646

P.2d 236:

"No Act of the Legislature can validly

alter, modify or diminish the State's

duty as Trustee of the school land

trust to adminiter it in a manner most

beneficial to the trust estate and in

a manner which obtains the maximum

benefit in return from the use of

trust property or loan of trust funds.”

The decision of the court below also

conflicts with the Idaho Admission Act

because: the use contemplated in §57-724

I.C. violates the conditions that The Pund

be used only for educational purposes and

be held inviolate forever. The decision

below also violates Article IX, §3, Con-

stitution of Idaho which requires the

17

state to supply all losses. The provis-

ions of the Idaho Constitution concerning

school lands were accepted, ratified and

confirmed by Congress in the Admissions

Act. This ratification invests the state

constitutional provisions with ali the

authority conferred by an act of Congress.

Newton v. State Board of Commis-

sioners, 37 Idaho 58, 219 Pac. 1053,

(1923); McCornick v. Western Union Tele-

graph Co. 79F 449, 452 (8th Cir. 1897).

‘The decision of the Idaho court upholds

legislation that uses the ‘assets of The

Fund to offset losses. The main issue

determined by Idaho was who is to make up

the losses to The Fund. The decision below

requires the beneficiaries and their assets

shall be used to make up the losses, and

not the state's assets. The school child-

ren of Idaho, beneficiaries of the federal

grant, are denied "full benefit” of that

grant.

18

The decision below shifts the respon-

sibility for supplying losses to the bene-

ficiaries of The Pund even though the

state gave its solemn promise in its con-

stitution that it would supply all losses.

The state profits from the use of an as-

set of The Fund when gains are used to

offset losses.

The question presented is ripe for re-

view by the United States Supreme Court.

Petitioner has attempted to obtain relief

for the beneficiaries of The Fund in both

the federal and state courts. The deci-

sion below decides an important federal

question in conflict with the applicable

decisions of this Court, and in conflict

with the decision of two other state courts

of last resort. During these times of

tight state budgets, it is important to

resolve this issue. If the decision be-

low is left to stand, it will signal

a major change in this Court's long-

19

standing policy of carefully protecting

the rights of beneficiaries of public

lands granted to the states.

It is critical that the question pre-

sented be resolved as soon as possible.

Petitioner, who is custodian of the Pund,

and who daily buys/sells securities at the

direction of the Investment Board, needs

to find out if such substantial losses now

and in the future are to be wiped out by

a bookeeping entry. The state legisla-

tures need a final determination about who

will supply the losses to this federally

created fund. Is it the State or the

beneficiaries? The resolution of this

question is especially important for many

states in the West, which have large sel-

ections still to make of in lieu lands,

(See Andrus v. Utah, supra) and will have

larger sums to invest. There is also a

national concern for improving education

and about the amount of support needed

20

to do this.

Are Idaho's solemn obligations to meet

the Trust conditions it undertook at the

time of its admission in the Union to be

shifted now to its school children?

CONCLUSION

For the reasons stated above, this

Court should grant certiorari to review

the Idaho Supreme Court's determination of

the federal questions presented herein.

Respectfully Submitted

Wayne P. Fuller i

Special Assistant

Attorney General

Post Office Box 130

Caldwell, Idaho 83605

ATTORNEY FOR PETITIONER

APPENDIX

TABLE OF CONTENTS

Opinion of the Idaho Supreme

Court

Memorandum Decision of State

District Court

Order Denying Rehearing

Supplemental Complaint

Text of Constitutional and

Statutory Provisions

1a

20a

33a

34a

49a

la

APPENDIX A

The STATE of Idaho, on relation of Marjorie Ruth MOON,

State Treasurer of the State of Idaho, Plaintiff-Respondent,

Cross-Appellant,

v.

STATE BOARD OF EXAMINERS, and the Legisiature of the

State of Idaho, By and Through Thomas W. Stivers, Speaker

of the House, and James E. Risch, President Pro-Tem of the

Senate, Defendants-Appellants, Cross-Respondents.

No. 14060.

Supreme Court of Idaho.

March 24, 1983.

Rehearing Denied May 10, 1983.

State treasurer brought action seeking an order requiring the

legislature to reimburse public school endowment fund for losses

incurred on individual security trades. The Fourth Judicial

District Court, Ada County, Jesse R. Walters, J., granted partial

summary judgement in favor of the state treasurer, and appeal

was taken. The Supreme Court, Huntley, J., held that statute

permitiing offsetting of capital gains against capital losses at the

end of a four-year accounting period did not violate

constitutional provision mandating that losses suffered by public

school endowment fund be reimbursed by legislative

appropriations.

Reversed.

Bistline, J., filed dissenting opinion.

Schools 10

Statute permitting offsetting of capital gains against capital

losses at the end of a four-year accounting period did not violate

state constitutional provision mandating that losses suffered by

public school endowment fund be reimbursed by legislative

appropriations. Const. Art. 9, § 3; 1.C. § $7-724.

Jim Jones, Atty. Gen., Lynn E. Thomas, Sol. Gen., Steven

2a

M. Parry, Deputy Atty. Gen., Boise, for defendants-appellants,

cross-respondents.

Wayne P. Fuller, Sp. Asst. Atty. Gen., Caldwell, for plaintiff-

respondent, cross-appellant.

HUNTLEY, Justice.

The Idaho Constitution mandates that losses suffered by the

Public School Endowment Fund (the ‘‘fund’’) be reimbursed

by legislative appropriation. Article 9, § 3 states:

‘‘Public school fund to remain intact.— The public school

fund of the state shall forever remain inviolate and intact;

the interest thereon only shall be expended in the

maintenance of the schools of the state, and shall be

distributed among the several counties and school districts

of the state in such manner as may be prescribed by law.

No part of this fund, principal or interest, shall ever be

transferred to any other fund, or used or appropriated

except as herein provided. The state treasurer shall be the

custodian of this fund, and the same shall be securely and

profitably invested as may be by law directed. The state

shall supply all losses thereof that may in any manner

occur.”’

By this appeal we are asked to determine whether the legislative

implementation of an accounting procedure for computing the

extent of capital losses, if any, through the accounting method

set forth in I.C. § 57-724, passes constitutional muster’.

'1.C. § $7-724. ‘Distribution of income from investments—Determination

of net capital gains or losses. —The board shall distribute the income from

the investments of securities in accordance with this act. For the purposes of

this act, income shall not include capital gains derived from the sale of

investments or securities. In computing net capital gains or net capital losses

the board shall use the marketable value of the securities as of the effective

date hereof [March 25, 1969] for its computation on July 1, 1971, and shall

thereafter use the difference between acquisition cost of securities and actual

proceeds received from the sale of securities as the determinate of the gain

3a

The Fund is managed and invested by the Endowment Fund

Investment Board which invests a portion of the funds in

authorized corporate stocks, bonds, and debentures.

This action was originally filed in the U.S. District Court for

the State of Idaho. The District Court’s dismissal of the

complaint upon the abstension doctrine was affirmed by the

Ninth Circuit Court of Appeals. Thereafter plaintiff filed her

complaint in state district court, challenging the offset procedure

dictated by I.C. § 57-724. The complaint was dismissed without

prejudice by the district court on April 30, 1979, for lack of a

justiciable controversy. In dismissing the complaint, the district

court stated: ‘‘If the legislature fails or declines to execute its

duties by accomplishing the purpose and intent of I.C. § 57-724,

following July 1, 1979, then the plaintiff may renew her action.”’

The endowment fund investment board issued copies of its

audit report and financial statements to each member of the

legislature on January 4, 1980. The audit report indicated that

there had been a $1,359,000 gain to the public school fund, and

thus there were no losses to be made up. The auditors, for

purposes of ascertaining whether there was a gain or loss to the

fund, used the procedure provided in I.C. § 57-724. The treasurer

asserts that if proper and constitutional accounting methods were

used, there are losses to be made up of $7,009,385.60 principal

and $6,431,593.72 interest.

Following adjournment of the 1980 session of the legislature,

respondent filed a supplemental complaint seeking an order

or loss. Gains or losses shall be determined for four (4) year periods,

commencing on July 1, 1975. At the end of each such four (4) year period,

the net amount of losses on the sale of securities, not offset by gains on the

sale of securities during such period shall be computed and such net losses

shall be made up from an appropriation from the general fund, and shall be

credited to the appropriate fund. All net income or net losses from the

investments or securities shall be distributed to each participating fund in the

same rates as each fund’s average daily balance bears to the total average daily

balance of all participating funds, provided, losses of the public school fund

shall be maintained separate from all other funds as required by section 3 of

article 9 of the Idaho Constitution.”

4a

requiring the board of examiners to allow the claims and

requiring the legislature to reimburse the fund. The state board

of examiners and the legislature filed a motion to dismiss,

asserting that they had complied with the court’s earlier order

and that the complaint failed to state a claim. The district court

denied appellants’ motion to dismiss, granted a partial summary

judgment to the respondent, denied appellants’ motion to

reconsider and this appeal followed.

The specific issue on appeal is whether, as contended by the

Treasurer and held by the trial court, the loss on each individual

security trade must be reimbursed, or whether it is

constitutionally proper, as per I.C. § 57-724, and as contended

by the Board and the appellants, to offset capital gains against

capital losses to determine whether there has been either a net

loss or a net gain during the four-year accounting period.

Article 9, § 3 of the Idaho Constitution requiring the legislature

to supply all losses to the Fund is not self-executing—rather it

requires implementing legislation. In Moon v. Investment Board,

96 Idaho 140, 143, $25 P.2d 335, 337 (1974), we stated:

‘“‘Implementation of constitutional principles is an

appropriate function of legislation, and unless such

implementing legislation is clearly in violation of the

constitutional principle, it is a valid exercise of the legislative

power....””

The question becomes, is the method of computing losses as

contained in Article 9, § 3 in violation of a constitutional

provision? We hold that it is not and reverse the judgment of

the district court.

The public school endowment fund is a trust, the principal

of which is derived primarily from the sale or lease of lands

designated exclusively for school purposes. Idaho’s admission

to the federal Union was conditioned upon the creation of a

permanent school fund. Idaho accepted this condition of

admission to the union by enacting Article 9, § 3 of the Idaho

Constitution. Duchesne County v. State Tax Comm’n, 104 Utah

365, 140 P.2d 335 (Utah 1943), held that an agreement whereby

an Admission Act makes a gift to the State of certain government

Sa

lands and makes the proceeds from the sale of such lands a

permanent fund, the interest only of which is to be expended

for support of common schools, and which gift is accepted by

a reciprocal provision of the state constitution creating the states’

school fund, amounts to the creation of an express trust of which

the state is trustee and guarantor of the trust estate against loss.

The Fund is a trust of the most sacred and highest order. See

State v. Peterson, 61 Idaho $0, 97 P.2d 603 (1939); I.C. § §7-715.

In United States v. Fenton, 27 F.Supp. 816 (D.Idaho 1939), the

court stated:

The express purpose of the Admission Act and the State

Constitution is to protect and hold inviolate and intact the

fund from the Acts of the Legislature or acts or failures

of the officers of the State.’’ 27 F.Supp. at 818.

In Moon v. Investment Board, supra, we quoted from the

proceedings and debates of the Idaho Constitutional Convention

(1889), Vol. I, at 647, as instructive in ascertaining the intent

of the Constitutional Convention in drafting article 9, § 3, as

follows:

**Mr. McCONNELL: Mr. Chairman, I think no fund is

more sacred than the schoo! fund, and perhaps there is no

other fund so sacred; it should be guarded in every manner

possible, and by having this provision in here, the children

will always be made sure there will be that much money

to their credit, and we will have that much at stake in our

schools. But if there is no provision for making this fund

good in every way, it may be squandered, and the first thing

we know our school fund will be so smali that we can only

maintain the schools by local taxation. I think the legislature

can provide for making good any losses which may occur.

They will probably be more careful in making investments

if it is known that the state has to make it good.’”’

We held that this indicated that the Constitutional Convention

intended the legislative branch of the government should have

control over the fund and as an incentive to making sound

investments, the convention provided that the legislature would

have to make good all losses. A logical and common sense

6a

reading of the method used to compute losses as codified in I.C.

§ §7-724 leads us to the conclusion that this method does not

violate the constitutional mandate. To require the legislature to

make up losses incurred on each security sale might well act to

the detriment of the school children of Idaho. It would unduly

restrict the Endowment Fund Investment Board.

For example, the Fund frequently holds bonds, which if held

to maturity would yield a certian profit, but which if sold before

maturity at a loss, and with the proceeds elsewhere reinvested,

would yield a higher long range profit. This flexibility and

opportunity for higher profit would likely not be exercised if

the legislature would be forced to make up the loss of the sale

of the bonds. j

The result contended for by the treasurer would have us

interpret the terms ‘‘capital gains’’ and ‘‘interest’’ as being

synonymous. Noting that the constitution provides the ‘‘interest

thereon only shall be expended in the maintenance of the

schools...,"° she argues that to offset capital gains and capital

losses would be to in effect spend the gains other than for school

purposes. However, the constitution does not specify how losses

shall be computed. It does not define capital gains and interest

as being synonymous term ; and we decline to do so.

We have reviewed the decision in State ex rel. Bottcher v.

Bartling, 149 Neb. 491, 31 N.W.2d 422 (1948), relied on by the

district court and respondents. There is a significant difference

in the wording of the Nebraska Constitution interpreted therein

and the wording of the Idaho Constitution.

With regard to the public school fund, the Nebraska

Constitution makes no distinction between interest income and

capital gain, but simply provides that a//

‘‘income arising therefrom shall be faithfully applied to the

specific objects of the original grants or appropriations. 31

N.W.2d at 426 [Emphasis added.].”’

In contrast, the Idaho Constitution provides that the portion

of income represented by interest is to be spent on the

maintenance of the schools. The Bartling decision merely stands

for the proposition that capital gains are income to a public

7a

school fund and is not germain to interpreting the effect of the

very different language of the Idaho Constitution.

Accordingly, we hold that I.C. § $7-724, permitting the

offsetting of capital gains against capital losses at the end of a

four-year accounting period, is in keeping with the constitutional

mandate of Article 9, § 3, of the Idaho Constitution. Under I.C.

§ $7-724, the net capital gains at the end of each four-year period

become part of principal and then become inviolate.

It is to be noted that the legislative duty to offset losses

occasioned by a breach of trust, or other mechanisms not placed

in issue by the appeal, are not addressed by this decision. The

requirement of Article 9, § 3, is that the Public School

Endowment Fund be kept inviolate. The accounting procedure

adopted by the legislature in I.C. § §7-724 satifies that mandate.

The judgment is reversed.

DONALDSON, C.J., and SHEPARD and BAKES, J.J.,

concur.

BISTLINE, Justice, dissenting.

If I correctly understand the Court's resolution of the very

narrow issue presented, it is that the Court, overwhelmed with

the State’s responsibility to recompense the public school

endowment fund for over $13,000,000 in losses, has arrived at

a decision based on policy rather than constitutional law. As a

preface to this dessent, it is important to note that it is not this

Court’s role to amend the Constitution or to uphold legislative

enactments which have that same effect. If the Idaho

Constitution is to be amended, the legislature alone can initiate

an amendment in accordance with Idaho Constitution, article

20, section 1:

‘‘Any amendment...to this Constitution may be proposed

in either branch of the legislature, and if the same shall be

agreed to by two-thirds (2/3) of all the members of each

of the two (2) houses, ...such proposed amendment.../shall

be submitted/ to the electors of the state at the next general

election...and if a majority of the electors shall ratify the

same, such amendment...shall become a part of this

Constitution.”’

The experience recently gained at the last (1982) general election

suggests that the legislature could reasonably expect favorable

voter reaction to a proposed amendment. The legislature,

however, has not gone that route, and I submit that it is not

for this Court, the members of which are sworn to uphold our

Constitution, to condone legislation beyond the pale of the

Constitution—even though the thing sought to be accomplished

would undoubtedly appear attractive to private enterprise dealing

in its own finances.

Upon its admission into the Union, Idaho was granted by the

United States land sections numbered 16 and 36 in every township

in the state or sections in lieu thereof ‘‘for the support of common

schools.’’ 26 Stat.L. 215, ch. 656 § 4 (Idaho Admission Act).

The Idaho Admission Act required that ‘‘all lands herein granted

for educational purposes shall be disposed of only at public sale,

the proceeds to constitute a permanent school fund, the interest

of which only shall be expended in the support of said schools.”’

26 Stat.L. 215, ch. 656, § §. The Idaho Admission Act declared

that ‘‘the constitution which the people of Idaho have formed

for themselves be, and the same is hereby accepted, ratified, and

confirmed.”’ 26 Stat.L. 215, ch. 656, § 1. The Idaho Constitution,

which was at that time confirmed by Congress, contained the

following provision regarding the public school fund established

with the proceeds from the United States land grant:

‘‘Public school fund to remain intact.—The public school

fund of the state shall forever remain inviolate and intact;

the interest thereon only shall be expended in the

maintenance of the schools of the state...No part of this

fund, principal or interest, shall ever be transferred to any

other fund, or used or appropriated except as herein

provided. The state treasurer shall be the custodian of this

fund, and the same shall be securely and profitably invested

as may be by law directed. The state shall supply all losses

thereof that may in any manner occur.’’ Id. Const. art. 9,

§ 3 (emphasis added).

The money held in this public school endowment fund are not

9a

monies held by the State in its sovereign capacity but are heid

by the State only in @ trust capacity for future generations of

Idaho school children. The State’s responsibility in administering

this trust was recognized in United States v. Fenton, 27 F.Supp.

816 (D.Idaho 1939):

‘*/T) State holds the Public School fund in trust under the

conditions of a National Act and the constitution of the

State and not as its property. The Supreme Court of

Oklahoma explains clearly this distinction in the case of

Board of Commissioners of Woods County v. State ex rel.

Com’rs, 125 Okl. 287, 257 P. 778, 779, 53 A.L.R. 1128,

where it is said: ‘There is a distinction between right accruing

to the state in handling revenues belonging to it and the

rights of the state arising from control of the common

school fund, held in trust by the state. The revenues

belonging to the state in its sovereign capacity are a part

of its property, and so long as the state keeps within

constitutional limitations it may deal with its property as

it sees fit. On the other hand, the common school fund does

not belong to the state, but the state merely holds such fund

in trust under the conditions of the federal grant contained

in the Enabling Act. The school funds were merely intrusted

for the benefit of the common school, and the state pledged

itself to hold such trust inviolate for the benefit of the

schools.***’ See Jn re Loan of School Fund, 18 Colo. 195,

32 P. 273.

‘*As both the Admission Act and the State Constitution

grants in trust Public school lands, the proceeds from the

sale thereof naturally remains as a part of the Trust, and

that the conditions are inviolable conditions which were

accepted by the State. The State cannot violate these

conditions nor dissipate such funds...’’ Jd. at 819 (emphasis

added).

These permanent school funds have long and consistently been

regarded by the courts as trust funds of the highest and most

sacred order. United States v. Fenton, supra; Moon vy. Investment

Board, 96 Idaho 140, $25 P.2d 335 (1974); State v. Peterson,

10a

61 Idaho 50, 97 P.2d 603 (1939). I.C. § 7-715 similarly declares

that ‘‘/p/ermanent endowment funds of the state of Idaho are

hereby declared to be trust funds of the highest and most sacred

order and shall be controlled, managed and invested...in

accordance with the highest standard...”’

The legislature, however in 1969, enacted I.C. § 7-724, which

purports to relax the trust responsibility established by the Idaho

Constitution. That enactment in pertinent part provides:

‘*At the end of each such four (4) year period, the net

amount of losses on the sale of securities, not offset by gains

on the sale of securities during such period shall be

computed and such net losses shall be made up from an

appropriation from the general fund.’’

Although the Constitution provides that ‘‘/t/he state shall supply

all losses /from the fund/ that may in any manner occur,” I.C.

§ 57-724 would nullify that with the provision that at the end

of four-year intervals the state is only required to replace ‘*such

net losses on the sale of securities, nor offset by gains...”’

(Emphasis added.) The Constitution dictates otherwise, and

directs that the state recompense the fund for all losses that may

occur ‘‘in any manner.”’

The Court finds that since this constitutional provision is not

self-executing, a premise which may be accepted arguendo,

implementing legislation cannot violate the command of the

Constitution. It is said today that I.C. § 57-724 provides a

reasonable means for carrying out the constitutional mandate.

On today’s money market, obviously not at all like that which

existed at the turn of the nineteenth century, absent a

Constitution, reasonableness is apparent. But article 3 of the

Constitution simply does not endow the legislature with the right

to determine for itself that a profit and loss statement may

encompass a four-year period. The Constitution is clear and

unequivocal that ‘‘/n/o part of this fund, principal or interest,

shall ever be transferred...or used or appropriated except as

herein provided.’’ For certain, the legislature is without any

authority—no matter how keenly its collective judgment is

attuned to the recent money market—to set up a four-year

lla

period, a ten-year period, or any period whwerein investment

losses will be deducted from investment gains to arrive at the

net losses it shall supply under the constitutional mandate.' The

Constitution did not so contemplate. Instead, ‘{tJhe state

treasurer shall be the custodian of this fund, and the smae shall

be securely and profitably invested as may be by law directed.’

Undoubtedly, the framers were aware that in making investments

there might be some losses, but, rather than providing for an

offset against the gains as is the legislative proposition here at

issue, they went on in the very next sentence to provide: ‘‘The

state shall supply a// losses thereof that may in any manner occur.

(Emphasis added.)

The majority determines that the method for computing losses

found in I.C. § 57-724 does not violate the constitutional

provision requiring the State to reimburse the public school

endowment fund for ‘‘all losses.’’ However, the majority ignores

that part of the Constitution which requires that ‘‘(njo part of

this fund, principal or interest, shall ever be transferred to any

other fund, or used or appropriated except as herein provided.”’

This provision prohibits the transfer, use, or appropriation of

‘‘capital gains’’ for any other purpose than is provided in the

Constitution itself. The Constitution does not provide that capital

gains may be used to offset capital losses. The majority, in

another part of its analysis, finds that cpaital gains do not

constitute ‘‘interest’’ and so do not have to be used solely for

‘the maintenance of the schools of the state.’’ Even adopting,

arguendo, the conclusion that capital gains do not constitute

‘‘interest,’’ it still does not follow that capital gains do not

constitute ‘‘principal’’ and so are similarly prohibited from being

transferred or used or appropriated except as constitutionally

provided. The Constitution divides the public endowment fund

into two categories: ‘principal or interest.’ Whichever category

'‘The expression ‘forever remain inviolate and intact’ would not mean ten

or any number of years that may be enacted into a statue, but it means forever.”

United States v, Fenton, 27 F.Supp. 816, 818 (D.C.Idaho 1939).

l2a

capital gains fall into, principal or interest, the Constitution is

clear: they may not be used or appropriated to offset capital

losses.

The Court opts for what it sees as ‘‘a logical and common-

sense’’ approach to constitutional construction. It declines to

be persuaded by compelling precedent. The United States

Supreme Court in Lassen v, Arizona, 385 U.S. 458, 87 S.Ct.

$84, 17 L.Ed.2d $15 (1967), examined Congress’concern with

permanent school endowment funds created by land grants to

the states:

‘All these restrictions in combination indicate Congress’

concern both that the grants provide the most substantial

support possible to the beneficiaries and that only those

beneficiaries profit from the trust.

‘(The] premise [involved] was that the grants cannot ‘be

too carefully safeguarded for the purpose for w hich they

are appropriated.’ Senator Beveridge described the

restrictions as ‘quite the most important item’ in the

Enabling Act, and emphasized that his committee believed

that ‘we were giving the lands to the States for specific

purposes, and that restrictions should be thrown about is

which would assure its being used for those purposes.’ ”’

385 U.S. at 467-68, 87 S.Ct. at $89 (emphasis added)

(footnote omitted).

Congress, in granting lands to the states, sought to insure the

educational needs of future generations of children. Its premise

‘‘was that the grants cannot ‘be too carefully safeguarded...’ ”’

The Idaho Court, however, looks not to the aspect of

safeguarding the permanent endowment fund, but finds succor

in its own four-member rationale that ‘‘(t]o require the legislature

to make up losses incurred on each security sale might well act

to the detriment of the school children of Idaho,’’ and ‘*would

unduly restrict the Board of Examirers.”’ Concededly, as against

investing in the private sector, the Constitution is restrictive. And

so it was intended, and so it was worded. The Court would

properly say, ‘‘so be it.’’ If the legislature is not satisfied with

l3a

the Constitution as written and ratified by the people, change

can come through procedures which are within constitutional

limitations.

The result opted for by today’s Court flies in the face of

precedent, obviously a matter given scant concern by the

majority. As early as 1897, this Court in State v. Fitzpatrick,

5 Idaho 499, $1 P. 112 (1897), held that the usury laws did not

apply to a loan of the public school endowment fund. The Court

in so holding stated:

‘“‘The people, throughout the constitution, have thus

declared for what purpose all interest on the permanent fund

shall be applied. No part of it can be expended in the

payment of forfeitures or penalties imposed by the statute

law of the state. Any law enacted by the legislature diverting

one dollar of principal or interest of said fund to other

purposes would be unconstitutional... The constitution

expressly prohibited the legislature from enacting a law that

would divert one dollar of said funds otherwise than as

provided by the constitution.

‘“‘In the face of those solemn provisions of the

constitution, it is sought in this action to impose a forfeiture

or penalty of $560 out of accrued interest earned by $2,000

of the permanent school fund, which interest, the

constitution declares, must be distributed to the schools

throughout the state; and also to reduce the permanent fund

$133.44, which fund, the constitution has declared, must

be kept inviolate and intact. The legislature cannot thus do

indirectly what it is prohibited from doing directly.’’ Id.

at 507, $1 P. at 114 (emphasis added).

The Court today does just that—it upholds a law which indirectly

takes money from the permanent school fund by allowing the

Board to offset losses which the State would otherwise have to

supply from the general fund. In Fitzpatrick, the relief requested

was merely for an offset of a $560 statutory usury penalty to

be made from the $2,000 interest that was made on a usurious

loan. The Court would not allow it. Such an offset should not

be allowed today.

l4a

The language and reasoning used by the Court in Fitzpatrick

was reaffirmed by this Court in State v. Peterson, 61 Idaho SO,

97 P.2d 603 (1939), wherein it was held that the statute of

limitations did not bar an action to foreclose a mortgage given

to secure a loan from the public school endowment fund. The

Court there stated:

‘*Thus these public school endowment funds are trust funds

of the highest and most sacred order, made so by Act of

Congress and the Constitution, so considered by the

members of the Constitutional Convention...and so

recognized and declared by this court.’’ /d. at 53-54, 97

P.2d at 604.

The Court similarly fails to take note of this Court’s recent

decision in Moon v. Investment Board, 98 Idaho 200, 560 P.2d

871 (1977). In that case, the Investment Board had, pursuant

to appropriations by the legislature, transferred $100,000 interest

income earned by investment of public school endowment funds

into the Investment Board Expense Fund to defray expenses of

investing those assets by the investment board. The Court held

this action unconstitutional:

‘*The sole issue presented by plaintiff's petition is whether

or not the legislature may constitutionally appropriate and

authorize a portion of the earnings from the investment of

the public school funds to be transferred to and used by

the Investment Board Expense Fund to defray the expenses

incurred by the Investment Board in the investment of the

public school fund. It is our opinion that the legislation

authorizing this practice and the practice itself, is in

violation of Article 9, § 3, of the Constitution of the State

of Idaho.’ 98 Idaho at 202, 560 P.2d at 872 (citing State

v. Fitzpatrick, § Idaho 499, 51 P. 112 (1897) among other

cases.

It is interesting to note that the Court in adopting this position

was not then persuaded by the argument made by a dissenting

justice:

‘I find it hard to conceive that the drafters of the

Constitution, while specifically providing that the corpus

lSa

of the Public School Fund should remain ‘inviolate’ and

requiring the makeup of all losses to said fund, also meant

that the gross earnings from the investments are similarly

‘inviolate’ from any costs reasonably incurred in the

investment process. I realize the the language of the

Constitution:

‘No part of this fund, principal or interest, shall ever be

transferred to any other fund, or used or appropriated

except as herein provided’

could be so construed, however, I do not believe that such

a narrow construction of that clause is either necessary or

desirable.’’ Jd. at 201, $60 P.2d at 872 (Shepard, J.,

dissenting)(emphasis in original)

The Court today again achieves an aurora of being consistently

inconsistent, to the extent of once again breaking with precedent,

and in this instance rewriting the Constitution. What may be

even more interesting to note is that the dissent in the 1977 Moon

case addressed the very issue with which the Court is faced today:

*‘Here there is no argument but that the monies so

appropriated by the legislature were reasonably necessary

to and represent the reasonable expenses incurred by the

Board in its investment duties. There can be no argument

that such legislation is merely a ruse to allow invasion of

the corpus of the school fund since rhe Constitution also

requires that any losses to that fund, occasioned by

investment, will be by the legislature made up to the Public

School Fund. See Moon v. Investment Board [96 Idaho 140,

$25 P.2d 335].”’ Id. (Emphasis added.)

The Court attempts to distinguish this case from Bottcher v.

Bartling, 149 Neb. 491, 31 N.W.2d 422 (Neb. 1948), which Judge

Walters found to be ‘virtually in point regarding the legitimacy

of offsetting gains and losses from a permanent school fund,”’

saying:

**We have reviewed the decision in State ex rel. Bottcher

v. Bartling [149 Neb. 491], 31 N.W.2d 422 (1948), relied

on by the district court and respondents. There is a

significant difference in the wording of the Nebraska

16a

Constitution interpreted therein and the wording of the

Idaho Constitution.

‘‘With regard to the public school fund, the Nebraska

Constitution makes no distinction between interest income

and capital gain, but simply provides that ail

‘income arising therefrom shall be faithfully applied to

the specific objects of the original grants or appropriations.

31 N.W.2d at 426. [Emphasis added.].’

In contrast, the Idaho Constitution provides that the portion

of income ;tpresented by interest is to be spent on the

maintenance of the schools. The Bartling decision merely

stands for the proposition that capital gains are income to

a public school fund and is not germain to interpreting the

effect of the very different language of the Idaho

Constitution.’’ Majority Opinion at 223—224.

Confessing my inability to understand and apply this analysis,

I cannot argue against it. | do comprehend that which the Bartling

court said:

‘‘The particular complaint of the plaintiff is that the

Legislature was without constitutional power to provide that

in case of sales of bonds held in the various funds under

the management and trusteeship of the Board of

Educational Lands and Funds for more than the par value

of such bonds, the difference between the par value and

the sellii.g price should be set up as a capital reserve to offset

past capi‘al losses.

‘‘With a clear design to preserve and protect the grant

of lands made by the United States to Nebraska for support

of common schools and the benefits flowing therefrom, a

provision was placed in the Constitution of 1866, which

was the first state Constitution, in part as follows: ‘The

principal of all funds arising from the sale or other

disposition of lands or other property granted or intrusted

to this State, for educational and religious purposes, shall

forever be preserved inviolate and undiminished; and the

income arising therefrom shall be faithfully applied to the

17a

specific objects of the original grants or appropriations.’

Const. 1866, art. VII, § 1.

‘* “All funds belonging to the state for educational

purposes, the interest and income whereof only are to be

used, shall be deemed trust funds held by the state, and

the state shall supply all losses thereof, that may in any

manner accrue, so that the same shall remain forever

inviolate and undiminished; ***.’ Const. art VII, § 9.

‘*By the provision complained of the Legislature sought

to relieve the State from its constitutional obligation to

supply all losses to the perpetual school funds. We have

not been cited to any precedents and we think there are none

which would permit the Legislature in such manner to

override and render for naught the will of the people as

expressed through the Constitution. It is fundamental that

in case of a conflict between the Constitution and a

legislative enactment the statute must give way to the

Constitution. The Constitution is the paramount of law.

Where there is a conflict between an act of the Legislature

and the Constitution of the State, the statute must yield

to the extent of the repugnancy. (Citations omitted.]

‘To permit that which the Legislature has attempted to

authorize by the provision complained of would be to

permit the State to be relieved of its obligation to restore

losses to the perpetual school funds by a mere bookkeeping

arrangement by the Board of Educational Lands and Funds

over which funds the Legislature has no control and in

which it and the State have no interest except in a

supervisory capacity, and from which the State may not

profit.

‘‘The State under the provisions of the Acts of Congress

and the Nebraska Constitution herein referred to may not

claim benefits to itself for profits flowing to trust funds

of which it is trustee and thus relieve it of its constitutional

obligation as a state to keep inviolate such trust funds.

18a

‘‘The provision of the Act in question, if a valid exercise

of legislative power, would permit the offset of losses

occasioned by breach of trust against profits as well as losses

not involving breach of trust. No different treatment is

accorded the one than the other.

‘‘Even in the absence of constitutional obligation upon

the trustee to restore funds, as it is true here, a trustee would

not be permitted to offset losses occasioned by his breach

of trust against profits and no valid statute could be enacted

legalizing any such transaction.

‘The rule in this connection is well stated in Restatement,

Trusts, § 213(b), p. 595, as follows: ‘If the trustee is liable

for a loss occasioned by a breach of trust in respect of one

portion of the trust property, he cannot reduce the amount

of his liability by deducting the amount of gain which has

accrued with respect to another part of the trust property

through another and distinct transaction which is not a

breach of trust.’

‘‘This proposition is fundamental in the law of trusts and

it would therefore be necessary, even in the absence of

constitutional obligation of the State to supply the losses

to the perpetual school funds, to say that the provision

permitting offset of past losses against profits would not

be a valid exercise of legislative power.

‘‘A grant of specific power by the Legislature is contrary

to and out of harmony with the fundamental law is

unconstitutional and void. Scort v. Flowers [61 Neb. 620,

85 N.W.857], supra; Tiernan v. Rinker, 102 U.S. 123, 26

L.Ed. 103.’’ 31 N.W.2d at 425—28.

Joining company with Judge Walters, I find the Bartling opinion

well-reasoned and persuasive. Even without that case, however,

my view is that the Court today could have readily, properly

and wisely adopted the district court’s opinion as its own.

As noted by the majority, this case was initially filed in the

United States District Court for the State of Idaho. That court

dismissed the complaint on the basis of federal court abstention.

This dismissal was upheld on appeal to the Ninth Circuit. State

19a

of Idaho v. State Board of Examiners, $67 F.2d 858 (9th Cir.

1978), cert. denied, 438 U.S. 915, 98 S.Ct. 3144, 57 L.Ed.2d

1160. The Ninth Circuit found that the dismissal was warranted

for the purpose of conserving judicial resources. However, the

court in so holding did find that the case involved a substantial

federal question:

‘In this case, however, we have more than mere

ratification of state-created rights. As the district court

noted, this suit concerns conditions attached to the grant

of public lands to the state of Idaho. Hence, a substantial

federal question is presented, and the district court correctly

found subject matter jurisdiction.’’ /d. at 859.

I take solace in the fact that Ms. Moon may appeal today’s

decision to the federal courts and relitigate this ‘‘substantial

federal question’’ to insure that the public school endowment

fund does in fact ‘‘forever remain inviolate and intact.’’ Id.

Const. art. 9, § 3.

20a

APPENDIX B

IN THE DISTRICT COURT OF THE FOURTH JUDICIAL

DISTRICT OF THE STATE OF IAHO, IN AND FOR THE

COUNTY OF ADA

on relation of

MARJORIE RUTH

MOON, State Treasurer

of the State of Idaho

Plaintiff,

THE STATE OF IDAHO, \

Case No. 66087

|

—vs— | MEMORANDUM

STATE BOARD OF DECISION AND

EXAMINERS, and the \ ORDER

Legislature of the State

of Idaho, by and

through RALPH

OLMSTEAD, Speaker

of the House, and

REED W. BUDGE,

President Pro-Tem of

the Senate,

Defendants. )

APPEARANCES:

For the Plaintiff: WAYNE P. FULLER

Special Assistant Attorney General

For the Defendant: STEVEN MICHAEL PARRY

Deputy Attorney General

In this action the plaintiff, as the constitutionally designated

custodian of the Public School Endowment Fund (hereinafter

‘‘Fund’’ or ‘‘permanent school fund’’) seeks to have the

defendants approve and appropriate money from the State’s

2la

general revenues to reimburse the Fund for certain monetary

losses alleged to have occured since 1931. The action is founded

upon Idaho Constitution Art. 9, Sec. 3 which directs the

legislature to supply all losses to the permanent school fund, and

I.C, 57-724 which spells out the method by which such losses

are to be computed.

Idaho Constitution Art. 9, Sec. 3 provides:

‘Sec. 3. Public school fund to remain intact.— The

public school fund of the state shall forever remain inviolate

and intact; the interest thereon only shall be expended in

the maintenance of the schools of the state, and shall be

distributed among the several counties and school districts

of the state in such manner as may be prescribed by law.

No part of this fund, principal or interest, shall ever be

transferred to any other fund, or used or appropriated

except as herein provided. The state treasurer shall be the

custodian of this fund, and the same shall be securely and

profitably invested as may be by law directed. The state

shall supply all losses thereof that may in any manner

occur.”’

Although the state treasurer, plaintiff herein, is the custodian

of school funds, the authority to invest and manage school funds

is allocated to an investment board by the provisions of Chapter

7, Title §7, Idaho Code. Moon v. Investment Board, 96 Idaho

140, $25 P.2d 335 (1974).

Section $7-724 of the Idaho Code referring to the duties of

the Investment Board currently provides:

‘57-724. Distribution of income from investments —

Determination of net capital gains or losses.— The board

shall distribute tne income from the investments or securities

in accordance with this act. For the purposes of this act,

income shall not include capital gains derived from the sale

of investments or securities. In computing net capital gains

or net capital losses the board shall use the marketable value

of the securities as of the effective date hereof (March 25,

1969) for its computation on July 1, 1971, and shall

thereafter use the difference between acquisition cost of

22a

securities and actual proceeds received from the sale of

securities as the determinant of the gain or loss. Gains or

losses shall be determined for four (4) year periods,

commencing on July 1, 1975. At the end of such four (4)

year period, the net amount of losses on the sale of

securities, not offset by gains of the sale of securities during

such period shall be computed and such net losses shall be

made up from an appropriation from the general fund, and

shall be credited to the appropriate fund. All net income

or net losses from the investments or securities shall be

distributed to each participating fund in the same rates as

each fund's average daily balance bears to the total average

daily balance of all participating funds, provided, losses

of the public school fund shal! be maintained separate from

all other funds as required by section 3 of article 9 of the

Idaho Constitution.”

This is the second time that the instant controversy has been

before the Court. The original Complaint was filed on December

8, 1978. In a Memorandum Decision issued on April 30, 1979,

this Court dismissed the plaintiff’s action without prejudice due

to the absence of a justiciable controversy. The basis of the

Court’s holding revolved around the language of I.C. Sec.

57-724, supra, which effectively gave the legislature a period of

time until the adjournment of the 1980 legislative session in which

to act upon claims submitted to it by plaintiff through the State

Board of Examiners. The Court found that inasmuch as the 1980

Session had not yet even convened at the time of the hearing

on the original complaint, the plaintiff's cause of action was

premature and properly dismissable.

During the 1980 Session of the Idaho legislature, the plaintiff

formally submitted an independently audited accounting of the

Fund’s investment gains and losses as required by law. Idaho

CodeSec. 57-725. This report has been attached as Exhibit A

to the Affidavit of William G. Hepp, the Investment Manager

of the Endowment Investment board and presented to the Court

for review in this case. The report concluded that between March

25, 1969, and June 30, 1979, the Fund’s investment gains

23a

exceeded its losses by $1,359.000 (Gains and losses occurring prior

to March 25, 1969 are not addressed by I.C. Sec. 57-724 and

in the absence of enabling legislation to effectuate the

constitutional dictates of Art. 9, Sec. 3, there is currently no

authority for the legislature to consider the need to reimburse

the fund for that time period. See the discussion in Moon v.

Investment Board, 96 Idaho 140, 525 P.2d 333 (1974), holding

that while the legislature cannot avoid its responsibility to supply

‘tall losses’’ to the Fund, it has the inherent discretion to

approach this obligation in a piecemeal manner by enacting

limited laws such as I.C. 57-724.) The legislature, in reviewing

the auditor’s report of 1980 concluded that no ‘‘loss’’ had

occurred and therefore took no action to reimburse the Fund.

The plaintiff disagreed with the legislature’s interpretation of

the auditor’s report and following the adjournment of the 1980

session of the legislature, filed a Supplemental Complaint seeking

an order from this Court requiring the State Board of Examiners

to allow the claims for losses and requiring the legislature to

reimburse the Fund. The defendants filed a Motion to Dismiss

the Supplemental Complaint on the ground that the legislature

had properly complied with its constitutional and statutory

responsibilities with respect to the Fund in concluding that the

Fund had not incurred losses necessitating reimbursement and

contending therefore that the plaintiff was not entitled to the

relief sought.

In as much as matters outside of the pleadings in the form

of affidavits, responses to discovery, a deposition, and exhibits

were presented to the Court for consideration in respect to the

Motion to Dismiss, and because the determination made herein

is one of law, and because there are not any issues of materia!

fact in dispute in this case, the Motion will be treated and

disposed of as one for summary judgment. Rush v. G-K

Machinery Co., 84 Idaho 10, 367 P.2d 280 (1961); Boesigner

v. DeModena, 88 Idaho 337, 339 P.2d 635 (1965); Coddington

v. Lewiston, 96 Idaho 135, 525 P.2d 330 (1974). Under

appropriate circumstances, such as exist in this case, the Court

is empowered to enter a summary judgment pursuant to Rule

24a

$6 as a matter of law against the movant and in favor of the

non-moving party. Fountain v. Filson, 336 U.S. 681, 93 L.Ed.

971, 69S.Ct. 754 (1949); Moore’s Federal Practice, 2d Ed. Vol.

6, pg. 2089; Annotation 48 A.L.R.2d 1188 (1956).

The plaintiff's position throughout these proceedings has been

that a// investment losses, irrespective of contemporaneous

accounting period gains, must be supplied to the Fund by the

legislature. The defendants have maintained that the legislature

has the discretion to determine precisely how losses should be

defined and supplied and that the provisions of I.C. $7-724

allowing the offsetting of gains against losses in order to ascertain

the existence of a loss requiring reimbursement is a

constitutionally sound exercise of the legislature’s inherent power.

See Idaho Gold Dredging Co. v. Balderston, £8 Idaho 692, 78

P.2d 105 (1938).

The issue in this case, therefore, is whether the procedure

prescribed in I.C. 57-724 is valid with regard to the Fund.

Although the present action differs materially from the

declaratory judgment sought in Moon v. Investment Board, 96

Idaho 140, $25 P.2d 335 (1974), this action will also necessitate

the Court examining the constitutionality of the current version

of I.C. $7-724.

A brief review of the history underlying the Fund is critical

to understanding the ultimate determination of this Court. The

Origin of the permanent scheol fund dates back to statehood.

Sections 4 and 5 of the Idaho Admission Act, 26 Statutes at Large

215, ch. 656 (1890), condition Idaho’s admission to the federal

Union upon the creation of a permanent school fund, the res

of which was to be derived primarily from the sale or lease of

lands designated exclusively for school purposes. Section 4 reads:

‘School lands.—Sections numbered 16 and 36 in every

township of said state, and where such sections or any parts

thereof, have been sold or otherwise disposed of by or under

the authority of any act of Congress, other lands equivalent

thereto, in legal subdivisions of not less than one quarter

section, and as contiguous as may be to the section in lieu

of which the same is taken, are hereby granted to said state

25a

for the support of common schools, such indemnity lands

to be selected within said state in such manner as the

legislature may provide, with the approval of the secretary

of the interior.’’

Section 5 provides in pertinent part:

“Sec. 5. Sale or lease of school lands.—(a) Except as

provided in subsection (b) all lands herein granted for

educational purposes shall be disposed of only at public

sale, the proceeds to constitute a permanent school fund,

the interest of which only shall be expended in the support

of said schools. Such lands may, under such regulations

as the legislature shall prescribe, be leased for periods of

not more than ten years, and in the case of an oil, gas, or

other hydrocarbon lease or a geothermal resource and

associated by-products lease, for as long thereafter as such

product is produced in paying quantities or the lessee in

good faith is conducting well drilling or construction

Operations, and such land shall not be subject to pre-

emption, homestead entry, or any other entry under the

land laws of the United States, whether surveyed or un-

surveyed, but shall be reserved for school purposes only.”’

Idaho accepted this condition of admission to the Union by

enacting Article 9., sec. 3 of the Idaho Constitution, supra. It

has been held that such an agreement whereby an Admission

Act makes a gift to the State of certain government lands and

making the proceeds from the sale of such lands a permanent

fund, the interest only of which is to be expended for support

of common schools, and which gift is accepted by a reciprocal

provision of the state constitution creating the state’s school fund,

amounts, to the creation of an express trust of which the state

is trustee and guarantor of the trust estate against loss. Duchesne

County vy. State Tax Commission, 104 Utah 365, 140 P.2d 335

(1943).

The origin and status of the Fund is essentially identical to

similar permanent school funds in neighboring sister states. See

State v. Board of Educational Lands and Funds, 154 Neb. 244,

47 N.W.2d 520 (1951); Schomer vy. Scott, 65 S.D. 353, 274 N.W.

26a

$56 (1937); Alamo Drainage Dist. v. Bd. of County

Commissioners, 60 Wyo. 177, 148 P.2d 229 (1944). These

permanent school funds have been consistently regarded by the

courts as trust funds of the highest and most sacred order. See

State v. Peterson, 61 Idaho $0, 97 P.2d 603 (1939) and cases

cited therein. In this regard, Idaho Code 57-715 declares:

“*S7-715. Permanent endowment funds declared to be

trust funds. —Permanent endowment funds of the state of

Idaho are hereby declared to be trust funds of the highest

and most sacred order and shall be controlled, managed

and invested by the board and the investment manager(s)

Or custodian(s) in accordance with the highest standard, and

as hereinafter provided."’

The case of United States v. Fenton, 27 F.Supp. 816 (D. Idaho

1939) dealt with the ramifications of the interrelationship between

the Idaho Admission Act and Article 9, sec. 3 of the Idaho

Constitution. There the Court observed:

‘The express purpose of the Admission Act and the State

Constitution is to protect and hold inviolate and intact the

fund from the Acts of the Legislature or acts or failures

of the officers of the State.’’ 27 F.Supp. at 818.

That Court further stated with respect to the general revenue

fund vis-a-vis the permanent school fund:

‘There is a distinction between it and the common school

fund, as the State holds the revenue as its own property

and can enact such legislation applying to it as to statute

of limitation as it sees fit, while as has been said the State

holds the Public School fund in trust under the conditions

of a National Act and the Constitution of the State and

not as its property. The Supreme Court of Oklahoma

explains clearly this distinction in the case of Board of

Commissioners of Woods County v. State ex rel. Comm’rs,

125 Okl. 287, 257 P. 788, 779, 53 A.L.R. 1128, where it

is said: ‘There is a distinction between right accruing to the

state in handling revenues belonging to it and the rights of

the state arising from control of the common school fund,

held in trust by the state. The revenues belonging to the

27a

State in its sovereign capacity are a part of its property, and

So long as the state keeps within constitutional limitations

it may deal with its property as it sees fit. On the other hand,

the common school fund does not belong to the state, but

the state merely holds such fund in trust under the

conditions of the federal grant contained in the Enabling

Act. The school and the state pledged itself to hold such

trust inviolate for the benefit of the schools.’ '’ 27 F.Supp.

at 819. See also 78 C.J.S. Schools and School Districts, sec.

19,

The fundamental contention of plaintiff is that the mechanics

of I.C. $7-724 which permits the offsetting of investment gains

and losses by the Fund flies in the face of the rule establishing

the inviolability of the Fund and denies the beneficiaries of the

trust the full benefits intended by Congress and the draftsmen

of the Idaho Constitution. It is argued that I.C. §7-724

impermissibly allows the diversion of interest (gains) from the

Fund for a noneducational purpose, i.e., to offset losses suffered

by the Fund.

The courts have the duty of carrying out as far as possible

the provision of the constitution requiring that permanent school

funds shall remain forever inviolate and undiminished. Alamo

Drainage Dist. v. Bd. of Educational Lands and Funds, supra;

78 C.J.S. Schools and School Districts, sec. 19. The

implementation of constitutional principles is an appropriate

function of legislation and unless such implementing legislation

is Clearly in violation of the constitutional principle, it is a valid

exercise of the legislature’s power. Idaho Gold Dredging v.

Balderston, supra; Moon vy. Investment Board, 96 Idaho 140,

$25 P.2d 335 (1974).

On a number of occasions the Supreme Court of the State

of Idaho has found that an act of the state legislature had the

effect of improperly diverting monies from the permanent school

fund in violation of the Idaho Constitution. See State v.

Fitzpatrick, 5 Idaho 499, 51 P. 112 (1897); Roach v. Gooding,

1] Idaho 244, 81 P. 642 (1905); Teacher's Retirement System

of Idaho v, Williams; 84 Idaho 467, 374 P.2d 406 (1962).

28a

The most and analogous Idaho decision in this subject area

is the case of Moon v. Investment Board, 98 Idaho 871, $60 P.2d

871 (1977). In that case, the legislature had authorized that a

portion of the earnings from the investments of the permanent

school fund could be used to defray expenses incurred by the

Fund’s Investment Board in its activities related to investing the

Fund’s assets. The Supreme Court found this was an improper

diversion of monies from the Fund becuase the purpose of the

appropriation was clearly unrelated to the maintenance of the

schools of the state.

This Court’s research has uncovered a case from another

jurisdiction that is virtually in point regarding the legitimacy of

offsetting gains and losses from a permanent school fund. In |

the case of State ex rel. Bottcher v. Bartling, 149 Neb. 491, 31

N.W, 2d 422 (1948), the Nebraska legislature passed a law by

which certain of the permanent school fund’s gains, obtained

from the sale of bonds at a price in excess of par value plus

accrued interest, were permitted to be set aside from the funds

as a separate capital reserve to offset past capital losses by the

permanent school fund. The Supreme Court of Nebraska

reasoned that:

‘*By the provision complained of the Legislature sought to

relieve the State from its constitutional obligation to supply

all losses to the perpetual school funds. We have not been

cited to any Legislature in any such manner to override and

render for naught the will of the people as expressed through

the Constitution. It is fundamental that in case of a conflict

between the Constitution and legislative enactment the

statute must give way to the Constitution. The Constitution

is the paramount law. Where there is a conflict between

an act of the Legislature and the Constitution of the State,

the statute must yeild to the extent of the repugnancy.

(Citations omitted.)

To permit that which the Legislature has attempted to

authorize by the provision complained of would be to

permit the State to be relieved of its obligation to restore

losses to the perpetual school funds by a mere bookkeeping

29a

arrangement by the Board of Educational Lands and Funds

over which funds the Legislature has no control and in

which it and the State have no interest exceot in a

supervisory capacity, and from which the State may not

profit.

The State under the provisions of the Acts of Congress

and the Nebraska Constitution herein referred to may not

claim benefits to itself for profits flowing to trust funds

of which it is trustee and thus relieve it of its constitutional

obligation as a state to keep inviolate such trust funds.

The provision of the Act in question, if a valid exercise

of legislative power, would permit the offset of losses

occasioned by breach of trust against profits as well as losses

not involving breach of trust. No different treatment is

accorded the one than the other.’’ 31 N.W.2d at 427-428.

The holding of the court in State ex rel. Bottcher v. Bartling,

supra, is cited as authority by the authors of 78 C.J.S. Schools

and School Districts, Sec. 19 at page 636 for the proposition that:

‘*##*®So, where bonds belonging to the perpetual school

funds are sold at a price in excess of the par value with

accrued interest, the difference between par value with

accrued interest and the sale price constitutes capital gain

rather than income which may be distributed, and a statute

providing that such gain may be set up as a capital reserve

to offset past capital losses is invalid as impairing the trust

fund.’’ (Emphasis supplied.)

The Court is persuaded that the holdings in Moon v.

Investment Board, 98 Idaho 200, $60 P.2d 871 (1977) and State

ex rel. Bottcher v. Bartling, supra, are dipositive of the pivotal

issues in this case. The practical result of the procedures set forth

in I.C. §7-724 is to allow the State of Idaho to ‘‘claim benefits

to itself for profits flowing to trust funds of which it is trustee

and thus relieve it of its constitutional obligation as a state to

keep inviolate such trust funds.’’ State ex rel. Bottcher v.

Bartling, supra. The ‘‘mere bookkeeping arrangement”’ devised

by I.C. $7-724 enables the state to effectively divert monies from

the Fund for the purpose of minimizing or negating altogether

30a

the state’s obligation to ‘‘supply all losses’’ as required by the

Constitution. This legislatively authorized use of the Fund’s assets

is clearly not in furtherance of any educational purpose and is

therefore incompatible with the terms of the trust agreement with

the United States and contrary to the will of the people of Idaho

as expressed in their Constitution. I.C. Sec. 57-724 is therefore

unconstitutional.

This Court’s holding however leaves the plaintiff’s prayer for

affirmative relief partially in a legal vacuum. The situation in

Idaho is that the constitutional provisions for the preservation

of the permanent school fund are not self-executing, i.e., they

require complementary legislation in order to effectively carry

out the intent of the constitution. Moon v. Investment Board,

96 Idaho 140, $25 P.2d 335 (1974). Accord, State v. State School

Fund Comm'n, 152 Kan. 427, 103 P.2d 801 (1940). Having found

that I.C. $7-724 is invalid and there being no other statute

carrying out the intent of the Idaho Constitution Art. 9, sec.

3, this Court is without power to compel performance of the

state’s obligation, if any, to replace shortages in the Fund. 78

C.j.S. Schools and School Districts, Sec. 19, pg. 636.

Appropo is the observation of the Nebraska court in addressing

a case similar to the instant matter. There the court said:

‘There is another and perhaps even more cogent reason

why this action may not be maintained. Section 9, art. VII

of the Constitution, supra, provides that the state shall

supply all losses which shall in any manner accrue to the

school funds. The Constitution, however, does not prescribe

means or a method of carrying into effect this imposed

obligation; hence, this provision is not self-executing.

A comprehensive definition of constitutional provisions

which are not self-executing is the following from 16 C.J.S.,

Constitutional Law, p. 98, Sec. 48; ‘Constitutional

provisions are not self-executing if they merely indicate a

line of policy or principles, without supplying the means

by which such policy or principles are to be carried into

effect, or if the language used and the circumstances of its

adoption that subsequent legislation was contemplated to

3la

Carry it into effect.’

It is clear that legislation is necessary to carry into effect

a restoration of the losses in the permanent school fund.

No existing law is found providing a means or method of

raising necessary revenue to replace losses in the fund in

case any are discovered, and neither is there any law

requiring a ministerial ascertainment of information relative

to losses and the furnishing of such information to the

legislature or to some other department of government.

In the vein and somewhat in paraphrase of some of the

language used in the opinion in State of Alabama v.

Schmidt, 232 U.S. 168, 34 S.Ct. 301, $8 L.Ed. 555, the state

of Nebraska received and accepted these public school lands

as a gift, and by the adoption of the constitutional

provisions relating thereto considered this a solemn and

sacred obligation imposed on its public faith. The obligation

is an honorary one which the courts are powerless to

enforce. To perform its sacred obligation, to redeem its

pledge, if the allegations of fact contained in the petition

of the plaintiff with reference to shortages in the permanent

school fund are true, it is the duty of the legislature, long

neglected, to make provision for and to ascertain the

shortages in the fund, and further by appropriate legislation

to take the steps necessary to raise revenue to restore the

fund to its proper condition.’’

State v. Bd. of Commr's for Educational Lands and Funds,

141 Neb. 172, 3 N.W.2d 196, at 200 (1942).

Therefore, in respect to the relief sought by the plaintiff herein,

the Court concludes that a partial judgment should be entered

in favor of the plaintiff based upon the foregoing decision,

ordering that the defendant Board of Examiners allow the claim

of the plaintiff to the legislature, but that the Court is without

power to order the legislature to appropriate funds to replenish

the shortages in the permanent school fund.

The foregoing shall constitute Findings of Fact and

Conclusions of Law of the Court. I.R.C.P. $2 (a).

Counsel for the plaintiff may prepare an appropriate form

32a

of Judgment and Order reflecting the Court’s decision, for entry

by the Court.

IT IS SO ORDERED

Dated this 23rd day of January, 1981

Jesse R. Walters

District Judge

33a

APPENDIX C

IDAHO SUPREME COURT/COURT OF APPEALS

THE STATE OF IDAHO,

ON RELATION OF

MARJORIE RUTH

MOON, STATE

TREASURER OF THE

STATE OF IDAHO,

Plaintiff-Respondent,

Cross-Appellant, ORDER

v. No 14070

STATE BOARD OF

EXAMINERS, et al.,

Defendants-Appellants,

Cross-Respondents, —_)

COUNSEL:

The Court has ORDERED that RESPONDENT'S PETITION

FOR REHEARING of the opinion of this Court issued March

24, 1983 be, and the same hereby is, DENIED.

DATED this 10th day of May, 1983.

By Order of the Supreme Court

Frederick C. Lyon, Clerk

Supreme Court/Court of Appeals

State of Idaho

34a

APPENDIX D

IN THE DISTRICT COURT OF THE FOURTH JUDICIAL

DISTRICT OF THE STATE OF IDAHO, IN AND FOR THE

COUNTY OF ADA

THE STATE OF IDAHO, )

on relation of

MARJORIE RUTH

MOON, State Treasurer |

of the State of Idaho,

Plaintiff,

a

STATE BOARD OF |

EXAMINERS, and the \

Legislature of the State SUPPLEMENTAL

of Idaho, by and COMPLAINT

through RALPH |

OLMSTEAD, Speaker

of the House, and

REED W. BUDGE,

President Pro-Tem of

the Senate,

CASE NO. 66087

Defendants. )

State of Idaho, on Relation of Marjorie Ruth Moon, State

Treasurer, alleges as follows:

I

This action arises under the Idaho Admission Act, 26 Stat.

L.215, (1890) and the United States Constitution as hereinafter

more fully appears. The District Court of the State of Idaho has

jurisdiction over this action pursuant to Article 5, Section 20,

of the Constitution of the State of Idaho.

II

Plaintiff is duly elected, qualified and acting State Treasurer

of the State of Idaho, and, as State Treasurer, is designated by

Article IX, Section 3, of the Constitution of the State of Idaho

3Sa

as custodian of the Public School Endowment Fund. Plaintiff

brings this action for the State of Idaho and for the benefit of

the school children of the State of Idaho who are the beneficiaries

of the Public School Endowment Fund.

Ill

The Public School Endowment Fund was originated in 1863

by the Organic Act of the Territory of Idaho, 12 Stat. 808 (1863),

and was established for the State of Idaho in 1890 in the Idaho

Admission Act, 26, Stat. 215 (1890).

IV

The Public School Endowment Fund constitutes a trust fund

of the highest and most sacred order, made so by Act of Congress

and the Idaho Constitution, and was so considered by the

members of the Idaho Constitutional Convention.

V

Article IX, Section 3 of the Idaho Constitution provides the

state shall supply all losses of the Public School Endowment Fund

that may in any manner occur.

VI

The Board of Examiners of the State of Idaho is established

by Article 4, Section 18, Constitution of the State of Idaho, and

has the power to examine all claims against the State of Idaho,

except salaries or compensation of officers fixed by law.

Vil

The Legislature of the State of Idaho is established by Article

III, Section 1, of the Constitution of the State of Idaho, and

it has the power to appropriate public funds of the State of Idaho

including any public funds necessary to make up losses sustained

by the Public School Endowment Fund.

VIII

The Public School Endowment Fund has incurred and realized

36a

losses in its principal as follows:

(1) For debentures issued between 1931 and 1937 for all

amounts due for losses occurring since statehood, as reported

on 30 September, 1938, in the sum of $725,727.80;

(2) For losses, shown in 1968 Legislative Auditor’s Report in

the sum of $104,707.34;

(3) For losses reported for the period from 25 March, 1969,

through 30 June, 1979, in the sum of $6,168,950.46,

The total of the principal losses to the Public School

Endowment Fund is calculated to be the sum of $7,009,358.60.

The Public School Endowment Fund has incurred losses with

respect to interest that could have been earned on the principal.

The interest losses are computed at the rate of Eight per cent

(8%) per annum on the principal losses listed above as follows:

(1) Interest on reported 1938 losses is calculated to be the sum

of $2,413,187.02;

(2) Interest on reported 1968 losses is calculated to be the sum

of $92,142.49;

(3) Interest on reported 1969 to 1979 losses is calculated to

be the sum of $3,926,264.21.

The total of the interest losses to the Public School Endowment

Fund is calculated to be the sum of $6,431,593.71.

IX

On December §, 1975, Marjorie Ruth Moon, in her capacity

as custodian of the Public School Endowment Fund, presented

to the Board of Examiners a claim for part of said losses; a copy

of said claim is attached as Exhibit ‘‘A’’; that said claim was

denied by the Board of Examiners as is shown by the excerpt

of minutes attached hereto as Exhibit ‘‘B’’; that plaintiff has

presented a new claim covering all losses to the Board of

Examiners and plaintiff expects such new claim to be denied;

that a copy of such new claim is attached as Exhibit ‘*C.”’

X

By virtue of the Idaho Admission Act, and the Constitution

of the State of Idaho, the Board of Examiners has a legal duty

37a

to allow the claim for said losses to the Public School Endowment

Fund, and the Legislature of the State of Idaho has a legal duty

to appropriate public funds to supply and make up said losses,

The Constitution of the State of Idaho, including the provision

in Article IX, Section 3, was a part of the State Constitution

when Congress in 1890 accepted, ratified and confirmed the State

Constitution, as provided in Section 1, Idaho Admission Bill.

The grant of federal lands as provided in Section 4 and 5 of the

Idaho Admission Act was made upon certain conditions,

including the following:

“the proceeds to constitute a permanent school fund, the

interest of which only shall be expended in the support of

said schools.”’

The provisions of the Constitution of the State of Idaho, and

the provisions of the Idaho Admission Act constitute a contract

between the United States and the State of Idaho, to create a

trust fund called the Public School Endowment Fund for the

benefit of the school children of Idaho. The trust fund so created

is not the property of the State of Idaho, and is held in trust

under the conditions of the federal grant contained in the contract

between the United States and the State of Idaho.

In order to reflect the essential purposes of the grants of federal

land made in the Idaho Admission Act, this Court must interpret

Idaho’s Constitution and statutes to provide full benefits by

making up all losses to the Public School Endowment Fund. A

failure to provide such benefits violates the Idaho Admission

Act and the United States Constitution.

XI

The Board of Examiners has the ability to comply with its legal

duty by allowing said claim, and the Board could comply with

its duty without impairing the rights of any person not a party

to this proceeding.

XII

The Legislature of the State of Idaho has the ability to comply

with its legal duty by appropriating public funds to supply and

38a

make up said losses; the Legislature has failed to enact legislation

to appropriate public funds to supply and make up said losses

even though it has had adequate opportunities to do so; the

Legislature could comply with its duty without impairing the

rights of any person not a party to this proceeding.

XIII

The failure of the Board of Examiners to allow said claim and

the Legislature of the State of Idaho to supply said losses

constitutes a breach of said contract, and constitutes a violation

of the Idaho Admission Act and the United States Constitution.

The express purpose of the Idaho Admission Act and the

Constitution of the State of Idaho is to protect and hold inviolate

and intact the Public Schoo! Endowment Fund from the acts

of the Legislature or the acts or failures of the officers of the

State of Idaho.

XIV

The State of Idaho has waived its immunity to be sued by

entering into and assuming contractual obligations arising from

the provisions of the Constitution of the State of Idaho and the

Idaho Admission Act.

XV

Since the memorandum decision and order entered in this case

on July 24, 1979, plaintiff has submitted to the 1980 Legislature

of the State of Idaho a proposed bill for an appropriation to

replace the principal and interest losses set forth in Paragraph

VIII; a copy of the proposed bill is attached hereto as Exhibit

‘*D’’: the 1980 Session of the Legislature of the State of Idaho

has failed to enact the proposed bill or to enact any legislation

to make up any of the aforesaid principal losses or any of the

aforesaid interest losses.

XVI

The losses for the State of Idaho fiscal years ending June 30,

in 1970, 1971 and 1972 are not yet known; that an audit of the

39a

records of the Public School Endowment Fund by the legislative

auditor should be undertaken to identify the precise dollar

amount of losses for those three fiscal years; plaintiff’s own

search of the records indicates there were losses totaling

$283,338.89 during fiscal years 1970 and 1972.

WHEREFORE, Plaintiff prays for judgment as follows:

1. To order the State Board of Examiners to allow said claim

for the losses to the Public School Endowment Fund, and

2. To set a reasonable time for the Legislature of the State

of Idaho to require an audit for fiscal years 1970, 1971 and 1972

of the Public School Endowment Fund, to enact legislation to

appropriate public funds to pay the losses, and in the event the

Legislature fails to act, then to enter a judgment directing

payment of the losses from public funds over a period of time

as determined by the Court, and

3. For such further relief, as may be required to have all losses

to the Public School Endowment Fund made up.

DATED this 7th day of May, 1980.

Wayne P. Fuller

Special Assistant Attorney General

State of Idaho

Post Office Box 130

Caldwell, ID 83605

40a

EXHIBIT A

To: The Board of Examiners of the State of Idaho

State House

Boise, Idaho

The undersigned, in her capacity as State Treasurer and as

Custodian of the Public School Endowment Fund, does hereby

present to the Board of Examiners of the State of Idaho the

following claim:

1. That the sum of $1,319,382 be approved for payment and/or

paid to the Public School Endowment Fund to make up losses

incurred and realized (and realized) on sale of U.S. Government

Bonds during the period from March 25, 1969 to June 30, 1970

by the Investment Board of the State of Idaho.

2. That the sum of $2,651 be approved for payment and/or

paid to the Public School Endowment Fund to make up losses

incurred and realized on sale of the U.S. Government Bonds

during the period from July 1, 1971, to June 30, 1972 by the

Investment Board of the State of Idaho.

3. That the sum of $26,477 be approved for payment and/or

paid to the Public School Endowment Fund to make up losses

incurred and realized on sale of U.S. Government Bonds during

the period from July 1, 1972 to June 30, 1973.

/s/ Marjorie Ruth Moon

Custodian of State Endowment Fund

4la

EXHIBIT B

MINUTES OF THE MEETING OF THE STATE BOARD OF

EXAMINERS Held in the office of the Governor, December

$, 1975. Members present were: Governor Cecil D. Andrus,

Chairman of the Board, Secretary of State Pete T. Cenarrusa

and Attorney General Wayne L. Kidwell. Also present were:

Marjorie Ruth Moon, State Treasurer and her Attorney Wayne

P. Fuller. Called into the meeting was Mr. William G. Hepp,

Investment Manager of the Endowment Fund Investment Board.

News media also present.

IN RE - CLAIM TO THE STATE BOARD OF EXAMINERS

BY WAYNE P. FULLER ON BEHALF OF MARJORIE RUTH

MOON, STATE TREASURER

CLAIM

To: The Board of Examiners of the State of Idaho

State House

Boise, Idaho

The undersigned, in her capacity as State Treasurer and as

Custodian of the Public School Endowment Fund, does hereby

present to the Board of Examiners of the State of Idaho the

following claim:

1. That the sum of $1,319,382 be approved for payment and/or

paid to the Public School Endowment Fund to make up losses

incurred and realized (and realized) on sale of U.S. Government

Bonds during the period from March 25, 1969 to June 30, 1970

by the Investment Board of the State of Idaho.

2. That the sum of $2,651 be approved for payment and/or

paid to the Public School Endowment Fund to make up losses

incurred and realized on sale of the U.S. Government Bonds

during the period from July 1, 1971, to June 30, 1972 by the

42a

Investment Board of the State of Idaho.

3, That the sum of $26,477 be approved for payment and/or

paid to the Public School Endowment Fund to make up losses

incurred and realized on sale of U.S. Government Bonds during

the period from July 1, 1972 to June 30, 1973.

/s/ Marjorie Ruth Moon

Custodian of State Endowment Fund

Attorney General Wayne Kidwell requested permission to abstain

from voting on the issue. Mr. Kidwell acting as Chairman of

the Board, Governor Cecil D. Andrus made the motion,

seconded by the Secretary of State Pete T. Cenarrusa to deny

this claim.

43a

EXHIBIT C

To: The Board of Examiners of the State of Idaho

State House

Boise, Idaho

The undersigned, in her capacity as State Treasurer and as

Custodian of the Public School Endowment Fund, does hereby

present to the Board of Examiners of the State of Idaho the

following claim:

1. The sum of $735,727.80 be approved for payment and/or

paid to the Public School Endowment Fund to make up principal

losses reported 30 September 1938.

2. The sum of $104,707.34 be approved for principal losses

to the Public School Funds reported in 1968.

3. The sum of $6,168,950.46 be approved for principal losses

to the Public School Endowment Fund reported for the period

from 25 March 1969 to 30 June 1979.

4. The sum of $2,413,187.02 be approved to replace interest

losses to the Public School Endowment Fund for the 1938

reported principal losses.

5. The sum of $92,142.69 be approved to replace interest losses

to the Public School Endowment Fund for the 1968 reported

principal losses.

6. The sum of $3,926,142.69 be approved to replace interest

losses to the Public School Endowment Fund on the 1969 to 1979

principal losses.

The undersigned reserves the right to submit an additional

claim for the fiscal years 1970, 1971 and 1972, since the losses

for such years are unknown at this time.

DATED: May, 1980

/s/Marjorie Ruth Moon, Custodian of the

Public School Endowment Fund

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SUPPLEMENTAL COMPLAINT 46.

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46a

EXHIBIT D

IN THE

BILL NO.

BY STATE AFFAIRS COMMITTEE

AN ACT

RELATING TO LOSSES TO THE PUBLIC SCHOOL FUND;

AMENDING SECTION 57-724, IDAHO CODE, TO PRO-

VIDE THAT GAINS AND LOSSES SHALL BE CALCU-

LATED ON AN ANNUAL BASIS, TO PROVIDE THAT

LOSSES SHALL BE MADE UP BY AN APPROPRIATION

FROM THE GENERAL ACCOUNT, TO PROVIDE FOR

THE PAYMENT OF INTEREST ON LOSSES, AND TO

PROVIDE NOMENCLATURE CHANGES; APPROPRI-

ATING MONEYS FROM THE GENERAL ACCOUNT TO

THE PUBLIC SCHOOL FUND TO REPLACE LOSSES;

APPROPRIATING MONEYS FROM THE GENERAL AC-

COUNT TO THE PUBLIC SCHOOL INCOME FUND TO

REPLACE INTEREST LOSSES; AND REQUESTING

THAT THE LEGISLATIVE AUDITOR DETERMINE

LOSSES TO THE PUBLIC SCHOOL FUND BY CON-

DUCTING AN EXAMINATION OF CERTAIN BOOKS

AND RECORDS OF THE ENDOWMENT BOARD.

Be It Enacted by the Legislature of the State of Idaho:

SECTION 1. That Sections 57-724, Idaho Code, be, and the

same is hereby amended to read as follows:

$7-724. DISTRIBUTION OF INCOME FROM INVEST-

MENTS — DETERMINATION OF NEF CAPITAL GAINS

OR LOSSES. The board shall distribute the income from the

investments or securities in accordance with this act. For the

purposes of this act, income shall not include capital gains derived

from the sale of investments or securities. In computing net

Capital gains or net capital losses the board shall

47a

use the marketable value of the securities as of the effective date

hereof for its computation on July 1, 1971, and shall thereafter

use the difference between acquisition cost of securities and actual

proceeds received from the sale of securities as the determinant

of the gain or loss. Gains or losses shall be determined forfour

(4) years annually, commencing on July 1, 197§ 1979. At the

end of each sueh-four-(4)-year annual period, the-net-amount

of all losses, plus interest at the rate of eight percent (8%), on

thesaleof securities notoffset-byvainson+the<aleof securities

during-sueh-period shall be computed and such net losses shall

be made up from an appropriation from the general fund

account, and shall be credited to the appropriate fund or account.

All net income or-net-losses from the investments or securities

shall be distributed to each participating fund or account in the

same rates as each fund’s or account’s average daily balance bears

to the total average daily balance of all participating funds and

accounts, provided, losses of the public school fund shall be

maintained separate from all other funds as required by section

3 or article 9 of the Idaho Constitution.

SECTION 2. There is hereby appropriated from the General

Account to the Public School Fund the following amounts to

replace losses to the Public School Fund:

(1) For losses reported 30 September 1938 $ 735,727.80

(2) For losses reported in 1968 104,707.34

(3) For losses reported for the period

25 March 1969 through 30 June 1979 6, 168,950.46

TOTAL $7,009, 385.60

SECTION 3. There is hereby appropriated from the General

Account to the Public School Income Fund the following

amounts to replace interest losses to the Public School Income

Fund:

48a

(1) Interest on 1938 losses $2,413,187.02

(2) Interest on 1968 losses 92,142.49

(3) Interest on 1969 to 1979 losses 3 926,264.21

TOTAL $6,431 ,593.72

SECTION 4. Because the accounting records of the

Endowment Board for fiscal years 1970, 1971, and 1972 have

not been completely searched to identify the total losses that may

have occurred in the Public School Fund, the Joint Senate

Finance-House Appropriations Committee is requested to order

the Legislative Auditor to conduct an examination of the books

and records of the Endowment Board for fiscal years 1970, 1971,

and 1972 to identify the precise dollar amount of losses to the

Public School Fund.

49a -

APPENDIX E'

TEXT OF CONSTITUTIONAL AND

STATUTORY PROVISIONS

United States Constitution:

Article 4, Section 3:

“New states may be admitted by the congress into

this Union; but no new state shall be formed or

erected within the jurisdiction of any other state,

nor any state be formed by the junction of two or

more states; or parts of states, without the con-

sent of the legislatures of the states concerned as

well as of the congress.

The congress shall have power to dispose of and

make all needful rules and regulations respecting

the territory or other property belonging to the

United States; and nothing in this Constitution

shall be so construed as to prejudice any claims of

the United States, or of any particular states.”

Article 6:

“All debts contracted and engagements entered

into, before the adoption of this Constitution, shall

be as valid against the United States under this

Constitution, as under the confederation.

This Constitution, and the laws of the United

States which shall be made in pursuance thereof;

and all treaties made, or which shall be made, un-

der the authority of the United States, shall be

the supreme law of the land; and the judges in

every state shall be bound thereby, anything in the

Constitution or laws of any state to the contrary

notwithstanding.”

Idaho Constitution:

Article 9, Section 3:

“The public school fund of the state shall forever

remain inviolate and intact; the interest thereon

only shall be expended in the maintenance of the

schools of the state, and shall be distributed among

the several counties and school districts of the

state in such manner as may be prescribed by law.

No part of this fund, principal or interest, shall

ever be transferred to any other fund, or used or

appropriated except as herein provided.”

$4. The public school fund of the state shall con-

sist of the proceeds of such lands as have hereto-

fore been granted, or may hereafter be granted,

to the state by the general government, known as

school lands, and those granted in lieu of such;

lands acquired by gift or grant from any person

or corporation under any law or grant of the gen-

eral government; and of all other grants of land

or money made to the state from the general gov-

ernment for general educational purposes, or

where no other special purpose is indicated in such

grant; all estates or distributive shares of estates

that may escheat to the state; all unclaimed shares

and dividends of any corporation incorporated

under the laws of the state; and all other grants,

gifts, devises, or bequests made to the state for

general education purposes.”

Idaho Admission Act:

“$1. The state of Idaho is hereby declared to be a

state of the United States of America, and is here-

by declared admitted into the union on an equal

footing with the original states in all respects

whatever; and that the constitution which the

people of Idaho have formed for themselves be,

51a

and the same is hereby, accepted, ratified and con-

firmed.”

“34. School lands.—Sections numbered 16 and 36

in everytownship of said state, and where such

sections or any parts thereof, have been sold or

otherwise disposed of by or under the authority

of any act of Congress, other lands equivalent

thereto, in legal subdivisions of not less than one

quarter section, and as contiguous as may be to

the section in lieu of which the same is taken, are

hereby granted to said state for the support of

common schools, such indemnity lands to be se-

lected within said state in such manner as the

legis!ature may provide, with the approval of the

secretary of the interior.”

“35. Sale or lease of school lands.—(a) Except

as provided in subsection (b) all lands herein

granted by educational purposes shall be disposed

of only at public sale, the proceeds to constitute

a agro school fund, the interest of which

only shall be expended in the -upport of said

schools, Such lands may, under such regulations

as the legislature shall prescribe, be leased for

periods of not more than ten years, and in the

case of an oil, gas, or other hydrocarbon lease or a

eothermal resource and associated by-products

ease, for as long thereafter as such product is

produced in paying quantities or the lessee in goo:l

faith is conducting well drilling or construction

operations, and such lands shall not be subject to

preemption, homestead entry, or any other entry

under the land laws of the United States, whether

surveyed or unsurveyed, but shall be reserved for

school purposes only.

(b) Such lands may be exchanged for other

lands, public or private. The values of such lands

so exchanged shall be approximately equal or, if

they are not approximately equal, they shall be

52a

equalized by the payment of money by the appro-

priate party. If any such lands are fies Breer with

the United States, such exchange shall be limited

to Federal lands within the State that are subject

to exchange under the laws oe the admin-

istration of such lands. All such exchanges here-

to fore made with the United States are hereby

approved.”

“$7. Public lands—Sale—Per cent paid state for

school fund.—Five per cent of the proceeds of the

sales of public lands lying within said state which

shall be sold by the United States subsequent to

the admission of said state into the union, after

deducting all the expenses incident to the same,

shall be paid to the said state, to be used as a per-

manent fund, the interest of which only shall be

expended for the support of the common schools

within said state.”

Organic Act:

$14. School lands—When the lands in the terri-

tory shall be surveyed, under the direction of the

theo of the United States, preparatory to

ringing the same into market, sections numbered

sixteen and thirty-six in each township in said

territory shall be, and the same are hereby re-

served for the purpose of being applied to schools

in said territory, and in the states and territories

hereafter to be erected out of the same.”

93a

STATE STATUTES

"57-724. Distribution of Income From

Investments - Determination of Net Capital

Gains or Losses. The board shall distri-

bute the Income from the investments or

securities in accordance with this act.

For the purposes of this act, income shall

not include capital gains derived from the

sale of investments or securities. In

computing net capital gains or net capital

losses the board shall use the marketable

value of the securities as of the effect-

ive date hereof (March 25, 1969) for its

computation on July 1, 1971, and shall

thereafter use the difference between ac-

quisition cost of securities and actual

proceeds received from the saie of securi-

ties as the determinant of the gain or

loss. Gains or losses shall be determined

for four (4) year periods, commencing on

July 1, 1975. At the end of each such

four (4) year period, the net amount of

losses on the sale of securities, not off-

set by gains on the sale of securities

during such period shall be computed and

such net losses shall be made up from an

appropriation from the general fund, and

shall be credited to the appropriate fund.

All net income or net losses from the in-

vestments or securities shall be distri-

buted to each participating fund in the

same rates as each fund's average daily

balance bears to the total average daily

balance of all participating funds, pro-

vided, losses of the public school fund

shall be maintained separate from all

other funds as required by section 3 of

article 9 of the Idaho Constitution."