Can a Texas school district set up a permanent endowment fund, and what money can it use?

Plain-English summary

Plano Independent School District wanted to set up a permanent endowment fund to support its education program over the long term: income from the fund could be spent, but the principal would stay intact. The district floated several possible sources for the fund's corpus: a designated portion of its general-fund balance, surplus land (bought with bond money for future school sites but no longer needed), proceeds from selling district land, and bequests or donations. A House committee chair asked the Attorney General whether a Texas public school district can create such a fund and which of those sources it can use.

The Attorney General's answer split three ways. Donated or willed money: yes. A school board's authority is only what statute gives it, but Education Code section 23.26 expressly lets trustees receive bequests and donations, manage the schools, and adopt rules, and section 21.903 lets a board use donated property or its income for any purpose the donor designates that fits the lawful purposes of the schools. From those provisions, the office concluded a board could establish an education endowment fund with money willed or donated for that purpose, even though no statute expressly authorizes endowment funds.

Land-sale proceeds: no. Selling school district property is tightly governed. Section 23.30(c) requires the proceeds of a sale of school property to be used for buying more convenient or desirable school property, for constructing or repairing school buildings, or for deposit to the district's local maintenance fund. The parallel authority to sell surplus real property and issue revenue bonds (chapter 20, subchapter F) carries similar restrictions. None of those permitted uses includes parking the money in a permanent endowment fund, so the office concluded a district may not place land-sale proceeds in one.

Current tax revenues: declined. The general fund and local maintenance money come largely from local property taxes, and at the time the constitutionality of the entire Texas school finance system was in active litigation (the Edgewood line of cases and a fresh challenge to Senate Bill 7). Because diverting current local tax revenues into an endowment for future years touched the very issues the courts were deciding, the office followed its long-standing rule against issuing advisory opinions on questions in litigation and declined to answer that part.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The opinion itself cautioned that most of the Education Code provisions it discussed were set for repeal effective September 1, 1995, under Senate Bill 7 of the 73rd Legislature, and the Education Code was in fact recodified in 1995. The school finance litigation referenced here has also since been resolved and revisited. Confirm the current statutes and case law before relying on anything described here.

Background and statutory framework

A Texas school board has only the powers the legislature gives it, expressly or by implication (Mesquite Indep. Sch. Dist. v. Gross; Texas Roofing Co. v. Whiteside). For independent school districts, Education Code section 23.26 supplies the core grant: the trustees are a body corporate that may acquire and hold property, sue and be sued, and "receive bequests and donations or other moneys or funds coming legally into their hands"; they have exclusive power to manage and govern the schools; all title to school property vests in them; and they may adopt rules they deem proper. An "endowment fund," as the Texas Education Agency's accounting manual defined it, is a fund whose income may be spent but whose principal must stay intact.

No statute expressly authorized a district to create an endowment fund, but the office read section 23.26 (plus section 21.903 on donor-designated gifts and section 20.482 on investing gifts for scholarships) to give a board implied authority to set one up for educational purposes with money willed or donated for that use.

The general-fund question ran into the school finance litigation. The general fund pays for ordinary district operations, financed largely by local property tax revenue. Education Code section 20.48 controls how public free school funds are spent: state and county available funds are limited to teacher and superintendent salaries and a few other items, while local funds may go to a broad list of school purposes "to be determined by the board of trustees." But that local authority is not unlimited. The Texas Supreme Court had declared the property-tax-based finance system unconstitutional for failing fiscal neutrality (Edgewood Indep. Sch. Dist. v. Kirby, 777 S.W.2d 391, and the later Edgewood and Carrollton-Farmers Branch decisions), and a new suit challenging Senate Bill 7 was pending in a Travis County district court (cause No. 362516, 250th Judicial District, filed June 1993). Setting aside current local tax revenues to fund future operations implicated the same questions, so the office invoked its rule against advisory opinions on matters in litigation and would not address it.

The land-sale question turned on the statutes governing disposition of school property. School property is held in trust for school purposes (Love v. City of Dallas; Texas Antiquities Comm. v. Dallas County Community College Dist.), and it may be conveyed only as the law provides (Thermo Products Co. v. Chilton Indep. Sch. Dist.; Crouch v. Posey). Section 23.30(c), the primary sale statute, requires proceeds to be used for more convenient or desirable school property, for constructing or repairing buildings, or for the local maintenance fund. Earlier opinions had read that statute (and its predecessor) to permit a sale only if the proceeds go to those uses. Chapter 20, subchapter F, which lets a district sell surplus real property and issue revenue bonds, imposes similar limits (school buildings, sites, or debt service on the bonds). Because none of those permitted uses is a permanent endowment, the office concluded land-sale proceeds may not be placed in one.

Common questions

Can a Texas school district create a permanent endowment fund at all?
Yes, for educational purposes, using money willed or donated for that purpose. No statute expressly authorizes endowment funds, but the office found implied authority in the board's power to receive bequests and donations and to manage the schools under Education Code section 23.26.

Can the district fund the endowment with proceeds from selling its land?
No. Education Code section 23.30(c) requires land-sale proceeds to be used for buying or building school property or for the local maintenance fund, and the subchapter F revenue-bond route has similar limits. A permanent endowment is not among the allowed uses.

Can it use general-fund money or current tax revenues?
The office did not answer. Because that money comes largely from local property taxes, and the constitutionality of the school finance system was in active litigation, the office applied its rule against advisory opinions on questions in litigation and declined to decide.

Why did the opinion warn the law might soon change?
Senate Bill 7 of the 73rd Legislature set most of the Education Code provisions discussed (Titles 1 and 2, with exceptions) to be repealed effective September 1, 1995, and directed the commissioner of education to propose revised versions. The office cautioned its answers were based on the statutes then in effect.

Citations

Statutory provisions discussed:

• Tex. Educ. Code § 23.26 (trustees' powers; bequests and donations; management; rules)
• Tex. Educ. Code § 21.903 (use of donated funds for donor-designated purposes)
• Tex. Educ. Code § 20.482 (investing gifts for college scholarships)
• Tex. Educ. Code § 20.48 (expenditure of public free school funds)
• Tex. Educ. Code § 23.30 (sale of school district property; permitted uses of proceeds)
• Tex. Educ. Code § 20.922 (sale of surplus real property; revenue bonds, subchapter F)

Cases discussed:

• Mesquite Indep. Sch. Dist. v. Gross, 67 S.W.2d 242 (Tex. 1934)
• Texas Roofing Co. v. Whiteside, 385 S.W.2d 699 (Tex. Civ. App.—Amarillo 1964, writ ref'd n.r.e.)
• Edgewood Indep. Sch. Dist. v. Kirby, 777 S.W.2d 391 (Tex. 1989); 804 S.W.2d 491 (Tex. 1991)
• Carrollton-Farmers Branch Indep. Sch. Dist. v. Edgewood Indep. Sch. Dist., 826 S.W.2d 489 (Tex. 1992)
• Thermo Products Co. v. Chilton Indep. Sch. Dist., 647 S.W.2d 726 (Tex. App.—Waco 1983, writ ref'd n.r.e.)
• Crouch v. Posey, 69 S.W. 1001 (Tex. Civ. App. 1902, no writ)
• Love v. City of Dallas, 40 S.W.2d 20 (Tex. 1931); Texas Antiquities Comm. v. Dallas County Community College Dist., 554 S.W.2d 924 (Tex. 1977)
• McLean Indep. Sch. Dist. v. Andrews, 333 S.W.2d 886 (Tex. Civ. App.—Amarillo 1960, no writ)

Prior Attorney General opinions referenced: JM-1000 (1988), O-1570 (1939), JM-958 (1988), MW-205 (1980), V-291 (1947).

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0260
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1993/dm0260.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

October 14, 1993

Honorable Ashley Smith
Chair
Committee on Higher Education
Texas House of Representatives
P.O. Box 2910
Austin, Texas 78768-2910

Opinion No. DM-260

Re: Whether an independent school district may use various assets to create an endowment fund (RQ-244)

You have requested an opinion from our office about the creation of a permanent endowment fund by a Texas public school district.

You inform us that the Plano Independent School District seeks to establish a permanent endowment fund for the continuing financial support of its education program. You state that the corpus of the fund will be established from the "designated fund balance of the general fund, land assets of the School District, proceeds from the sale of land owned by the district, bequests from individuals and/or capital expenditures to provide education services to the students of the District." The fund would be managed and administered under policies adopted by the board of trustees, accounted for as a trust fund, and be subject to all existing controls and auditing requirements currently in effect in the district's accounting system.

You ask the following questions:

1. [May a] permanent endowment fund be created by a Texas public school district?
2. May designated general fund reserves (that is, general fund balance); land assets of the [d]istrict (that is, surplus land purchased with bond proceeds for future school sites but no longer needed for school sites), and/or proceeds from the sale of land owned by the [d]istrict be used as sources to establish and increase the corpus of the fund?
3. If so, is revenue from these sources restricted in any manner? If so, how[?]

Your questions are general in nature, and you do not ask us to address specific statutes or constitutional provisions. We will discuss statutes that are relevant to this proposal, but we must caution you that most of the statutes we discuss are set for repeal effective September 1, 1995, under the following provision of Senate Bill 7 of the 73rd Legislature:

Section 8.33. Effective September 1, 1995, the following provisions of the Education Code are repealed:
(1) Title 1; and
(2) Title 2, except Chapters 16, 20, and 36.
Section 8.34. Not later than June 1, 1994, the commissioner of education shall submit to the legislature a proposed revision of Education Code provisions repealed by Section 8.33 of this article.

Our answers to your questions are thus based on statutes currently in effect, and will not necessarily apply to revised versions of those statutes.

A school board possesses only the authority expressly or impliedly given it by statute. Mesquite Indep. Sch. Dist. v. Gross, 67 S.W.2d 242 (Tex. 1934) (annexation); Texas Roofing Co. v. Whiteside, 385 S.W.2d 699 (Tex. Civ. App.—Amarillo 1964, writ ref'd n.r.e.) (contracting). Chapter 23 of the Education Code, applicable to independent school districts, includes the following provision:

(a) The trustees shall constitute a body corporate and in the name of the school district may acquire and hold real and personal property, sue and be sued, and receive bequests and donations or other moneys or funds coming legally into their hands.
(b) The trustees shall have the exclusive power to manage and govern the public free schools of the district.
(c) All rights and titles to the school property of the district, whether real or personal, shall be vested in the trustees and their successors in office.
(d) The trustees may adopt such rules, regulations, and by-laws as they deem proper.

Educ. Code § 23.26.

An "endowment fund" is a fund from which the income may be expended, but whose principal must remain intact. TEXAS EDUCATION AGENCY, FINANCIAL ACCOUNTING MANUAL, BULLETIN 679 Appendix A (February 15, 1991).[1] We find no statute that expressly authorizes a school district to establish an endowment fund, although the board may have some implied authority to place particular assets in one. A school board has express authority under section 23.26 of the Education Code "to receive bequests and donations," "to manage and govern the public free schools in the district," and to "adopt such rules, regulations, and bylaws as they deem proper," as long as they are consistent with law.[2] Section 21.903 permits a school board to use donated funds or other property, or the income therefrom, for any purpose designated by the donor, so long as the purpose is in keeping with the lawful purposes of the schools. See also Educ. Code § 20.482 (school board may invest a gift, devise, or bequest to the district for college scholarships for its graduates). Under these provisions, we believe a school board could establish an endowment fund for educational purposes with money willed or donated for that purpose. Id. § 23.26. We will look next at the statutes applicable to the particular assets you mention to determine whether the board may place them in an endowment fund.

You first ask about placing "designated general fund reserves" or "general fund balance" in an endowment fund. The general fund of a school district is used to finance the ordinary operations of a school district. TEXAS EDUCATION AGENCY, supra. The school district contemplates setting aside a portion of the general fund to place in the endowment fund, or using assets remaining in the general fund at the end of the fiscal year for that purpose. The school board thus contemplates setting aside revenues collected in this year to support the schools in future years.

The following provision controls the expenditure of public funds for the operation of a school district:

(a) The public free school funds shall not be expended except as provided in this section.
(b) The state and county available funds shall be used exclusively for the payment of teachers' and superintendents' salaries, fees for taking the scholastic census, and interest on money borrowed on short time to pay salaries of teachers and superintendents . . . .
(c) Local school funds from district taxes, tuition fees of pupils not entitled to free tuition and other local sources may be used for the purposes enumerated for state and county funds and for purchasing appliances and supplies, for the payment of insurance premiums, janitors and other employees, for buying school sites, buying, building and repairing and renting school houses, and for other purposes necessary in the conduct of the public schools to be determined by the board of trustees . . . , provided, that when the state available school fund in any city or district is sufficient to maintain the schools thereof in any year for at least eight months, and leave a surplus, such surplus may be expended for the purposes mentioned herein.

Educ. Code § 20.48 (emphasis added). The italicized language of section 20.48(c) appears to give the board of trustees broad authority to decide how to spend school funds. However, other provisions of law may restrict this authority.

Local school funds derive largely from school district property tax revenues. Edgewood Indep. Sch. Dist. v. Kirby, 777 S.W.2d 391 (Tex. 1989). This system has been declared unconstitutional because it is not fiscally neutral, since students in low property wealth districts do not have access to funds substantially equal to those available to students in high property wealth districts. Kirby, 777 S.W.2d at 397; see also Carrollton-Farmers Branch Indep. Sch. Dist. v. Edgewood Indep. Sch. Dist., 826 S.W.2d 489 (Tex. 1992); Edgewood Indep. Sch. Dist. v. Kirby, 804 S.W.2d 491 (Tex. 1991). Recently adopted legislation on school financing is before the courts. [Plaintiff] v. Meno, No. 362516 (Dist. Ct. of Travis County, 250th Judicial Dist. of Texas, plaintiff's motion for declaratory judgment and injunction filed June 11, 1993) (challenge to the constitutionality of S.B. 7, Acts 1993, 73d Leg.). The school district's proposal to use current local tax revenues to establish an endowment fund for the future support of the district's schools raises issues that implicate the issues before the court. We cannot address this question while the constitutionality of the school financing system remains the subject of litigation. See Attorney General Opinions MW-205 (1980); V-291 (1947) (the attorney general will not issue an advisory opinion addressing a question in litigation).

We turn to your questions about placing the proceeds from real property sales in an endowment fund. Property of a school district may be conveyed only in the manner provided by law. Thermo Products Co. v. Chilton Indep. Sch. Dist., 647 S.W.2d 726 (Tex. App.—Waco 1983, writ ref'd n.r.e.); Crouch v. Posey, 69 S.W. 1001 (Tex. Civ. App. 1902, no writ). Section 23.30 of the Education Code, the primary statute governing sales of school district property, provides in part:

(a) The board of trustees of any independent school district may, by resolution, authorize the sale of any property, other than minerals, held in trust[4] for free school purposes.
. . . .
(c) The proceeds of such sale shall be used for the purchase of more convenient and more desirable school property or for the construction or repairing of school buildings or deposited to the credit of the local maintenance fund of the district. [Footnote added.]

An independent school district may sell its land only if the proceeds are used according to section 23.30(c). Attorney General Opinions JM-1000 (1988) at 4; O-1570 (1939) at 3-5 (construing predecessor statute). These purposes do not include placement in a permanent endowment fund for the "continuing financial support of . . . the educational program."

Chapter 20, subchapter F of the Education Code authorizes a school board to sell surplus real property and issue revenue bonds. Educ. Code § 20.922; see id. §§ 20.921-20.927 (subchapter F). The proceeds from the sale are subject to restrictions similar to those applicable under section 23.30; they must be used for (1) constructing or equipping school buildings or purchasing building sites or (2) payment of principal, interest, and premium on any bonds issued under subchapter F. Thus, the proceeds of land sold under chapter 20, subchapter F of the Education Code, may not be placed in an endowment fund.

Accordingly, we conclude that a school district may not place the proceeds from the sale of land owned by the district in an endowment fund. This office will not issue an advisory opinion on whether a school district may allocate current local tax revenues to an endowment fund for the future support of the district's schools while the constitutionality of the school financing system remains the subject of litigation.

SUMMARY

The board of trustees of a school district may establish an endowment fund for educational purposes with money willed or donated for that purpose. The school board may not place the proceeds from the sale of land owned by the district in an endowment fund. This office will not issue an advisory opinion on whether a school district may allocate current local tax revenues to an endowment fund for the future support of the district's schools while the constitutionality of the school financing system remains the subject of litigation.

DAN MORALES
Attorney General of Texas

WILL PRYOR
First Assistant Attorney General

MARY KELLER
Deputy Attorney General for Litigation

RENEA HICKS
State Solicitor

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by Susan L. Garrison
Assistant Attorney General

[1] The Financial Accounting Manual, adopted by reference in the rules of the State Board of Education, 19 T.A.C. § 109.61, sets out the requirements for budgeting, accounting, financial reporting, and auditing applicable to school districts. 19 T.A.C. § 109.1; see Educ. Code §§ 23.42(b) (budget must be prepared according to rules and regulations of State Board of Education), 23.48(b) (school district accounting system must meet minimum requirements prescribed by State Board of Education), 23.45(d) (authority of State Board of Education to establish financial reporting requirements).

[2] Sullivan v. University Interscholastic League, 616 S.W.2d 170 (Tex. 1981); McLean Indep. Sch. Dist. v. Andrews, 333 S.W.2d 886 (Tex. Civ. App.—Amarillo 1960, no writ).

[4] School district property is held by the trustees in trust for school purposes. Love v. City of Dallas, 40 S.W.2d 20 (1931); see also Texas Antiquities Comm. v. Dallas County Community College Dist., 554 S.W.2d 924 (Tex. 1977); Attorney General Opinion JM-958 (1988) (relying on Love v. City of Dallas).