. 1 

Honorable Harry P. Burleigh 

Executive Director 

Opinion No. M-980 

Texas Water Development Board 

301 West Second Street 

Austin, Texas 78711 

Dear Mr. Burleigh: 

Re: Does the "cumulative 

average effective rate" 

referred to in Article 

8280-9, Section 12(g), 

V.C.S., have included 

in its computation the 

current outstanding 

interest on long-term 

federal contracts? 

In your recent letter you request this Office to 

render an opinion on the following question: 

"Does the 'cumulative average effective 

rate' referred to in Article 8280-9, Section 

12(g), V.C.S., have included in its computation the current outstanding interest on longterm federal contracts?" 

In connection with the above question, you advise that 

Section 49-d of Article III of the Constitution of Texas authorizes the Texas Water Development Board to enter into long-term 

contracts with the federal government for the acquisition and 

development of storage facilities in reservoirs. Such contracts 

when executed shall constitute general obligations of the State 

of Texas in the same manner and with the same effect as state 

bonds issued under the authority of Section 49-c of Article III 

of the Constitution of Texas. The Legislature, pursuant to 

constitutional authority, has prescribed terms and conditions 

under which the Texas Water Development Board can sell or 

transfer its interest in any acquired storage facilities. 

Article 8280-9, Sec. 12(e), 12(f) and 12(g), Vernon's Civil 

Statutes. Section 12(g), which prescribes a formula that the 

Texas Water Development Board is to use in determining the sales 

price of the State's interest in a project acquired under a 

contract, reads in part as follows: 

,I . . . the price shall be the sum of the 

'direct cost of the Board in acquiring same,’ 

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, ,A 

Honorable Harry P. Burleigh, page 2 (M-980) 

. . ., plus an interest charge thereon of onehalf of one percent (l/2 of 1%) per annum from 

the date of acquisition of such facilities by 

the Board, plus interest at the cumulative 

average effective rate on all Texas Water 

Development Bonds sold up to the date of the 

sale of such facilities for each of those 

vears or nortions of vears on which the Board 

paid interest to the other party(ies) to the 

contract, Elus the Board's cost of operating 

and maintaining the facilities being sold or 

transferred from the date of acquisition to 

the date of transfer, less any payments received by the Board from the lease of such 

facilities or the sale of water therefrom." 

(Emphasis added.) 

Your question is directed to that portion of the 

formula which provides that the selling prioe of the facilities 

is to include "interest at the cumulative average effective 

rate 'on all Texas Water Development Bonds sold up to the date 

of the sale of such facilities." 

The term "Texas Water Development Bonds" is referred 

to in Section 49-c of Article III of the Constitution as 

follows: 

"The bonds authorized herein or permitted 

to be authorized by the,Legislature shall be 

called 'Texas Water Development Bonds,' shall 

be executed in such form, denominations and 

upon such terms as may be prescribed by law, 

0, . . . ., (Emphasissadded.) 

It is apparent from this reference that long-term federal contracts were not intended to come within the meaning of the term 

Texas Water Development Bonds. 

As further evidence that long-term federal contracts 

are not to be included within this portion of the formula we 

note that the cumulative average effective interest rate is to 

be determined from the Texas Water Development Bonds sold up 

to the date of the sale of the facility. 

Once we have determined the cumulative average effective interest rate from rates applicable to Texas Water Development Bonds sold up to the time of the sale of the facility, we 

-4779- 
, 

Honorable Harry P. Burleigh, page 3 (M-980) 

are faced with a further difficulty of interpretation in applying this rate to the "direct cost" of the facility for the 

purpose of arriving at this portion of the selling price. 

"Direct cost" is defined in Article 8280-9, Sec. 12(f) as 

II the principal amount the Board pays or agrees to pay for 

s;ch ;acilities." 

If the rate on bonds is applied to the total "direct 

cost" of the facility, we might recover an interest charge 

without regard to the source of the cost element. If bond money 

finances the whole cost of the facility to be sold, no problem 

exists. On the other hand, if the facility is financed in 

part by bond money and in part through long-term federal contracts, then the application of our previously defined cumulative 

average effective interest rate to the whole of the "direct 

cost" might fail to account for all of the interest paid out on 

the federal contract applicable to the facility in question 

to the extent that the interest rate on federal contracts 

exceeded the cumulative average effective interest rate on bonds. 

This procedure would not account for all of the interest costs 

incurred in purchase of the facility. 

This difficulty may be overcome by adding the entire 

interest on the federal contracts applicable to a particular 

facility to the cost of its operation and maintenance as provided 

in the fourth item of Section 12(g). However, this would create 

an additional interest charge not authorized. This is because 

the cumulative average effective interest rate on bonds sold 

applied to the "direct cost" of the facility will automatically 

account for all the interest cost connected with a particular 

facility, except where the interest rate on the federal contract 

exceeds the cumulative average effective interest rate on 

bonds. There is no necessity at this date based upon the existing federal contracts, to require a separate collection of the 

interest cost on long-term federal contracts under maintenance 

and operating costs. 

The only circumstance where recovery of such interest 

as a component of maintenance and operation expense is justifiable 

would occur in the event the cumulative average effective interest 

rate'were applied against that portion of the direct cost of the 

facility which could be attributable solely to bond money. 

If that were done, then the interest on the cost applicable 

to long-term federal contracts, if any, could be recovered as 

an item under maintenance and operation. This method of cost 

recovery would avoid the afosesaid difficulties of double or 

additional interest charges inherent in the other suggested 

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I 

Honorable Harry P. Burleigh, page 4 (M-980) 

methods, and would permit total cost recovery in compliance with 

the constitutional and statutory requirements. We are, of 

course, aware that nothing in this opinion should be understood 

as preventing the State from securing the highest possible 

price for the sale of these facilities. We are only concerned 

herein with interpreting the statutory requirements for establishing a minimum selling price which accounts for all the 

cost elements. 

As a result of the foregoing analysis; we are of the 

opinion that the phrase "cumulative average effective rate", 

referred to in Section 12(g) of Article 8280-9, Vernon's 

Civil Statutes, does not have included inits computation the 

current rate of interest being charged the State on long-term 

federal contracts, but that any attempts to determine selling 

price of a particular facility must consider that the rate of 

interest on such federal contracts might exceed the cumulative 

average effective rate. To the extent it does, care should be 

taken to fully recover the excess, without at the same time 

requiring collection of what would amount to a double or additional interest charge not authorized by the statute. To this 

end, we are of the further opinion that the cumulative average 

effective rate should be applied only to that portion of the 

"direct cost" of the facility attributable to monies from the 

sale of Texas Water Development Bonds, and that the interest 

paid on long-term federal contracts connected with the development of the facility be collected under maintenance and operating 

expenses. In no event, however, should the selling price of the 

facility, determined in this manner, be less than the actual 

total cost of the facility. To illustrate our holding: assume 

a $100,000 facility which was financed partly ($50,000) by 

Texas Water Development Bonds and partly ($50,000) by longterm federal contracts. The cumulative average effective 

rate on Texas Water Development Bonds sold to date is 5%. 

The rate of interest paid on the federal contracts is 6%. The 

selling price encompassing only the items with which we are 

here concerned would be determined as follows: 

Direct cost of the facility $100,000 

Plus: (1) 5% of $50,000 (bond money) 

(2) 6% of $50,000 (federal 

contract money) set out as 

maintenance and operation 

expense 

2,500 

3,000 

TOTAL SELLING PRICE $105,500 

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. . 

Honorable Harry P. Burleigh, page 5(M-980) 

In this example, application of the 5% to the entire $100,000 

of "direct cost" would result in only $5,000 added to the 

selling price, leaving us $500 short of the total cost. If 

it were permissible to add in the $5,000 and still add the 

6% on federal contracts to maintenance and operation expense, 

we would sanction an interest charge of $8,000 ($5,000 + 

$3,000) which would materially exceed the total expense. 

Our opinion is that this would not be a proper interpretation of 

what the Legislature intended inArticle 8280-9, Sec. 12(g), 

supra. 

SUMMARY 

The phrase "cumulative average effective 

rate", referred to in Section 12(g) of Article 

8280-9, Vernon's Civil Statutes, does not include in its computation the current rate of 

interest being charged the State on long-term 

federal contracts. The computation of actual 

interest expense incurred and ta be recovered 

as an item of selling price shall be made by 

applying the cumulative average effective 

rate to only that portion of the "direct cost" 

of the facility which is attributable to monies 

from the Texas Water Development Fund, and by 

including the actual interest paid on longterm federal contracts connected with the 

development of the facility in the category 

of maintenance and operat'ng expenses. 

A 

Prepared by James H. Quick 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE: 

Kerns Taylor, Chairman 

W. E. Allen, Co-Chairman 

-4782- 
Honorable Harry P. Burleigh, page 6 (M-980) 

Roger Tyler 

Marietta Payne 

Jack Goodman 

John Reeves 

SAM MCDANIEL 

Staff Legal Assistant 

ALFRED WALKER 

Executive 'Assistant 

NOLA WHITE 

First Assistant 

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