ATTORNEY GENERAL OF TEXAS
GREG ABBOTT



### The Honorable Royce West Chair, Committee onJurisprudence Texas State Senate Post Office Box 12068 Austin, Texas 78711-2068

Dear SenatorWest: July 29, 2014

OpinionNo. GA-1071

Re: Whether a charitable organization formed under section281.0565 ofthe Health and Safety Code is apolitical corporation or subdivision of the State of Texas for purposes of article III, section 52(a) ofthe Texas Constitution (RQ-1180-GA)

You ask whether a charitable organization formed under section 281.0565 of the Texas Health and Safety Code is a "political corporation or subdivisionofthe State ofTexas"for purposes ofarticle III, section 52(a) ofthe Texas Constitution.' Ifthe answer to your first question is yes, you present an additional question of whether section 281.0518 ofthe Health and Safety Code "authorize[s] such [a] charitable organization to engage in ajoint venture with a for-profit entity." RequestLetter at 1.

Subsection 281.0565(b) authorizes certain hospital districts to "create a charitable organization2 

### to facilitate the management of a district health care program by providing or arranging health care services, developing resources for health care services, or providing ancillary support services for the district." TEX. HEALTH & 

### SAFETY CODE ANN. § 281.0565(b) (West 2010). You tell us that the Parkland Center for Clinical Innovation (the "Center") was created under this subsection to support the Dallas County Hospital District d/b/a/ Parkland Health and Hospital

'Letter from Honorable Royce West, Chair, Senate Comm. on Jurisprudence, to Honorable Greg Abbott, Tex. Att'y Gen. at 1(Jan. 29, 2014), http://www.texasattomeygeneral.gov/opin ("Request Letter").

2A '"charitable organization' means an organization that is exempt from federal income tax under Section 501(a) of the Internal Revenue Code of 1986 by being listed as an exempt organization in Section 501(c)(3) or 501(c)(4)" ofthe Code. TEX. HEALTH & SAFETY CODE ANN.§ 281.0565(a) (West2010). You indicate that the Center is "currently authorizedto operate as an organizationthat is exempt from federal income taxunder Section 501(a) ofthe Code by being listed as an exempt organization in Section .501(c)(3) ofthe Code during the pendency ofthe [Center's] application." RequestLetter at2. You do not ask about, andwe do not opine on, whether an entity with only apending application is a charitableorganization under section281.0565.The Honorable Royce West

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System (the "District" or "Parkland"). Request Letter at 1-2. You state that the Center now contemplates ajointventure with a for-profit entity whereinthe for-profit entitywould develop and sell developed technology or intellectualproperty as well as performrelated services. See id. at 2- 4. The business structure ofthejointventure is notyet defined and could involve differentkinds of organizations and structures, and you are concerned about compliance with article III, section 52(a) oftheTexas Constitution. See id. at 3.

Article III, section 52(a) prohibitsthe Legislature from authorizing

any county, city, town or other political corporation or subdivision of the State to lend its credit or to grant public money or thing ofvalue in aid of, orto any individual, association, or corporation whatsoever,
or to become a stockholder in such corporation, association or company.

TEX. CONST. art. III, § 52(a). Before we address your question about the Center, we must first address a fundamental issue involving the District. The District is a political subdivision subject to article III, section 52(a). See Tex. Att'y Gen

. Op. No. GA-0188 (2004) at 2-4 (considering a hospital district's expenditure to its charitable organization under article III, section 52). The prohibition in article III, section 52(a) limits gratuitous transfers or grants of public funds or property. City ofTyler v. Tex. Emp'rs'Ins. Ass'n, 288 S.W. 409, 412 (Tex. Comm'nApp. 1926, judgm't adopted). Apolitical subdivision's transfer ofpublic assets orproperty "is not 'gratuitous' ifthepolitical subdivision receives return consideration." Tex. Mun. LeagueIntergov 'tl RiskPoolv. Tex. Worker's Comp. Comm 'n, 74 S.W.3d 377, 383 (Tex. 2002). Such transfers are permissible so long as thetransfer serves a legitimatepublic interest and affords a clearpublicbenefitinreturn. /d. The Texas Supreme Court has articulated a three-part test to determine whether a transfer satisfies article III, section 52(a)'s constraints: The entity making the grant or transfer must: (1) ensure that its purpose is to "accomplish a public purpose, not to benefit private parties"; (2) retain public control over the public assets and/or rights associated with the transaction in orderto ensure that a "public purpose is accomplished and to protect the public's investment"; and (3) "ensure that the political subdivision receives a return benefit." /d. at 384. You do not provide information about the ownership ofthe technology and intellectual property at issue here. However, to the extent the technology, intellectual property, or any other thing of value used in conjunction with the anticipated venture is the property ofthe District, the District may not grant it to the Center or to a for-profit entity without satisfying the Texas Supreme Court's three-parttest. See id.; see also Tex. Att'y Gen. Op. No. JC-0335 (2001) at 6-7 (discussing apolitical subdivision's authority to contract withprivate entityto ensure the accomplishmentofthepolitical subdivision'spublicpurpose).

We nowtumto your specific question aboutthe Center. Becausethe Centeris not a county, city or town, article III, section 52(a) applies to the Center only ifit is a "political corporation or subdivision." TEX. CONST. art. III, §52(a);seeLewisv. Indep

.Sch. Dist. of Austin, 161 S.W.2d 450, 452 (Tex. 1942) (equating the terms "political corporation" and "political subdivision" in considering whether an independent school district was subject to article III, section 52(a)). In determining whether an entity is a political subdivision, Texas courts have said that "[a] political subdivision contemplates: geographical area and boundaries, public elections, public officials,The Honorable Royce West

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taxing power and a**gene~al** public purpose or benefit." Bolen v. Bd. of Firemen, Policemen & Fire Alarm Operators'Trs., 308 S.W.2d 904, 905 (Tex. Civ. App.-SanAntonio 1958, writ ref'd). You tell us that the Center "has no geographical area or boundary, has no taxing or bonding power, and is not subject to public elections." Request Letter at 5 (footnote omitted). Under the Bolen analysis, the Center, as yourepresentit, is likely not apolitical subdivision.

Subsection 281.0565(c), however, specifically provides that "[a] charitable organization created by a district underthis section is a unit oflocal government for purposes of[the Texas Tort ClaimsAct]." TEX. HEALTH & SAFETYCoDEANN.§ 281.0565(c) (West 2010); see TEX. Civ. PRAC. & REM. CODE ANN. §§ 101.001-.109 (West 2005 & Supp. 2013) ("Texas Tort Claims Act"). The Legislature's decision to designate entities like the Center as units oflocal government for purposes of the Tort Claims Act could suggest an intent that these entities be treated like units of local governments in other contexts as well. Ifthe Center is generally a unit oflocal government, it is likely also apolitical subdivision.

We caution further that, depending on the extent ofthe financial and governance connection betweenthe Center andthe District, the entities couldbe so closely connectedthatthe Center could not be considered a separate, private entity. The close relationship between a hospital district and a health maintenance organization ("HMO") createdunder a similarprovisionin chapter 281 required
us to consider a similar issue in a previous opinion. See Tex. Att'y Gen. Op. No. JC-0407 (2001). Invoking the idea ofa corporate alter-ego, Opinion JC-0407 stated that the nonprofit HMO was so closely affiliated with the hospital district "that we hesitate to conclude that it is a private entity." /d. at 4. In JC-0407, the facts indicated that the HMO's board ofdirectors was appointed by and served atthepleasure ofthehospital district'sboard. See id. at 2, 4. Thehospital districtfunded the necessary reserves for the HMO. /d. at 4. In addition, the HMO's assets would revert to the hospital district in the event ofthe HMO's dissolution. /d. Based onthe close relationship between the two entities, JC-0407 concluded that the HMO could not validly be considered a private entity separate from the hospital district. The relationship between the District and the Center, as you describe it, share some attributes-namely the appointment ofthe Center's board by Parkland's Board ofManagers-oftherelationship considered in JC-0407. While the relationship betweenthe Center and the District does not appear to be as close as the relationship considered in JC-0407, based onthe information made available to us, we cannot advise you definitively that the District and the Centerare sufficiently distinct so as to be considered separate entities forpurposes ofarticle III, section 52(a). For these reasons, we cannot definitively advise you whether a court would determine that the Center is a "political corporation or subdivision" subject to article III, section 52(a).

Because your second question is contingent on a determination that the Center is a political corporation or political subdivision, we do not address it directly. However, to the extent the question presumes that the Center, absent direct constraint from article III, section 52, may engage in any multitude ofpossiblejoint ventures, we advise you that anyjoint venture contemplated by the Center must nonetheless strictly comply with any authorizing statute. See TEX. HEALTH & SAFETY CODE ANN. § 281.0518 (West Supp. 2013) (authorizing specific joint ventures for the Dallas CountyHospital District or its nonprofitcharitable organization).The Honorable Royce West

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SUMMARY

We cannot definitively advise you whether a court would determine that the Parkland Center for Clinical Innovation, created under section 281.0565 ofthe Health and Safety Code, is a political corporation or subdivision subject to article III, section 52(a) ofthe Texas Constitution.

DANIELT. HODGE FirstAssistantAttorney General

JAMES D. BLACKLOCK DeputyAttorney General for Legal Counsel

VIRGINIAK. HOELSCHER Chair, Opinion Committee

CharlotteM. Harper Very truly yours,

Attorney General ofTexas

AssistantAttorney General, OpinionCommittee