DAN MORALES

ATTORNEY GENERAI. 

## QBffice

oftty Rlttornep@enera &ate ofQexas January 34 1992

Honorable Temple Dickson Senate Economic Development committee P.O.Box 12068 Austin, Tex& 78711 Opinion No.DM-80 Re: Whether a municipal industrial development corporation mayuse funds generated by a sales taxfor the purpose of aquirin~~ constructing, and operating a *forprofit”hospital or clinic @Q-101) Deer Mr. Dickson:
You ask whether a for-profit hospital or cIin$c may be considered an
“industrial faciliv pursuant to the Development Corporation Act of 1979, as amended, article 5190.6, V.T.CS.1 The Development Corporation Act permits the creation ofnonprofit industrial development corporations to act on behalf ofcities, counties, orwater districts as issuersofbonds to Penancecertaia projects, as defied inthe act. Asthe interest on theboa under proper &cumstance~ isexempt from federal income taxation, the projects financed bythese bonds may receive !hancing

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at interest rates substantially lower than the rates available with conventional financing.* The projects that may be financed by the proceeds of bonds issued by an industrial development corporation are defined by section 2(10) of the Development Corporation Act. As ahospital isclearly not a transportation, waste disposal, pollution control, water supply, distribution, or warehouse facility, a hospital would only be within the act’s definition of project if the legislature intended the term “manufacturing and industrial facilities” to be broad enough to encompass a hospital, or ifthe legislature intended that ahospital could be found bythe board of directors ofadevelopment corporation tobe afacility

required or suitable for the promotion of commercial development and expansion and in furtherance of the public purposes ofthis Act, orforuseby commercial enterprises, all as defined inthe rules ofthe department. Currently, to quality as aproject as defined by section 2(10), facilities required or suitable for the promotion ofcommercial development must be located in “blighted or economically depressed areas, development areas or federally assisted new communities located within a home-rule cityor a federally designated economically depressed county ofless than 50,000persons according to the last federal decennial census.” As originally enacted, the Development Corporation Act included facilities

“required or suitable for the promotion of commercial or industrial development and expansion”within the definition of“project,”asgenerally applicable to facilities wherever located. Acts 1979,66th Leg.,ch.700,s 2,at 1676.

%%einterest oo such bonds may be tax exempt under provisions of the Internal Revenue Code that provide for federal iacome tax exemption oa the obligations of states aad political subdivisions thereof.

26 USC. 5 103. when the proceeds of such obligatioas are to be ased ia the trade or business of a persoa other thaa a goverame~tal unit, tbue obligations arc referred to as “private achity bonds’ Federal income tax exemption for the interest oa private activity bonds requires compliaace with a number of provisioas of the Internal Revcauc Code. See general& 26 U.S.C. 0 141, d seq. Some projects eligiile for fmaaciag with tax exempt bonds uader the Internal Revenue Code of 1954,md enumerated iathe Developmeat Corporation Act, are no longer so eligible under the Internal Revenue Code of 19% While it appears clear that the legislature enacted the Development Corporation Act to facilitate tax exempt fmanciag, tbc Development Corporation Act does not make federal tax exemption a criterion for projects to be fmanced by industrial development corporations. An industrial development corporation could fuwce a project through the issuaace of taxable bonds.

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In its original form, the Development Corporation Act authorized the creation ofmedical development corporations inaddition to industrial development corporations, and included “medical research projects” as a discrete item enumerated in section 2 of the act. Id While a medical research project is not synonymous with a hospital or a clinic,the inclusion ofa specific authorization for suchprojects nevertheless indicates that the legislature considered medical facilities tobe conceptually distinguishable fromindustrial facilities. References to medical development corporations and medical research projects were deleted from the Development Corporation Act in 1981. Acts 1981, 67th Leg., ch.792,at 3025. In the same act, the legislature reworked the definition of “project,”limiting projects for “commercial development” to facilities in certain areas. Id at 3826. In the same session, the legislature enacted the Health Facilities Development Act. Acts 1981,67th Leg., ch. 783,at 2966 (now Health and Safety Code section 221.001,et seq.). The Health Facilities Development Act permits the creation of health facilities development corporations which may issue bonds on behalf of cities, counties, or hospital districts for the purpose of financing health facilities as defined in that act. Hospitals and clinics are expressly within the definition of health facilities permitted to be financed by bonds issued by health facilities development corporations, as are medical research facilities. Health & Safety Code S221.003(8)(B), (D).3 The biIl analysis prepared by the House Committee on State Affairs with respect to the bill that enacted the Health Facilities Development Act stated, in part, asfollows:

3At the time that the Health Facilities Developmeat Act was enacted, for-profit health facilities could take advantage of the provisions of section 103 of the 1954 Internal Revenue Code, which permitted the tax exemption oa the interest of privateactivitybonds to apply to so-called ‘small issuq* i.e. issues of bonds under a set dollar amount. Under that former provisioa, as with bonds ismxi by iadostrial development corporations, the interest OIL bonds issued by health facilities development corporations to fmaace for-profit health facilities would have beea, under proper circamstaaces, exempt t+om federal income taxation, permitting financing at advantageous iatcrest rates. Under current federal tax law for-profit hospitals may DOlonger qualify for the tax exemption provided for small issues. Howcvcr, the Health Facilities Development Act does not make tax exemption a criterion for a project to be financed by a health facilities development corporation. Health facilities development corporations mayfmaacc projects through the issuance oftaxablebonds.

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### BACKGROUND Under present state law, hospital authorities and certain other public bodies are authorized to issue “tax-exempt”bonds to finance hospitals and related facilities operated by non-profit corporations.

. . .However, many privately operated community hospitals, particularly those in less populated areas, are not organized under the state’s general non-profit corporation act and are therefore currently ineligible for such a financing Program. 

### PURPOSE: This bill authorizes the creation of non-profit health facilities development corporations tofinance privately operated hospitals and related facilities with“tax-exempt”bonds. The bill analysis characterizes the enactment ofthe Health Facilities Development Act as necessary to permit for-profit hospitals to take advantage of tax-exempt financing. See note 2, mpra. The Development Corporation Act wasin existence at the time of the enactment of the Health Facilities Development Act. The perceived necessity for the enactment of the Health Facilities Development Corporation Act despite the existence of the Development Corporation Act indicates the legislative view that the latter does not authorize the Snancing of hospitals by industrial development corporations. In addition, the removal in 1981 ofreferences to medical research facilities inthe Development Corporation Act and the provision in the same session for financing such facilities in the Health Care Development Act indicates a legislative intent toprovide for the iinancing ofhealth care facilities in a statutory framework discrete from that whichprovides forfunding of the kinds of facilities described in the Development Corporation Act See Heerson v. State, 758 S.W.2d 694 (Tex. App.-Austin 1988,writ dism’d) (when construing acts passed at the same legislative session, the courts will read them as one act).
To summarize. we find that the legislature did not intend the terms “manufacturing and industrial facilities” or facilities “required or suitable for the promotion of commercial development” as used in the Development Corporation Act to encompass medical or health care facilities. Such facilities may not be

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financed by bonds issued by industrial development corporations created pursuant to that statute. 

### SUMMARX

Hospitals are not “manufacturing or industrial facilities” or facilities “required or suitable for the promotion of commercial development” and may not be financed by bonds issued by industrial development corporations created pursuant to the Development Corporation Act of 1979,asamended.

DAN MORALES Attorney General ofTexas
WILL PRYOR First Assistant Attorney General
MARYKELLER 

### Deputy Assistant Attorney General 

### JUDGE ZOLLIE STEAKLEY (Ret.) SpecialAssistant Attorney General 

### RENEAHIcKs SpecialAssistant Attorney General 

### MADELEINE B.JOHNSON Chair, Opinion Committee Prepared byJohn Steiner Assistant Attorney General

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