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### THE ATTORNEY GENERAL 0F TEXAS

October 25, 1988

Honorable Mike Millsap Opinion No. SM-970 House Administration Texas House ofRepresentatives Re: Constitutionality of a P. 0. BOX 2910 plan to finance renovation Austin, Texas 78769 ofthe Capitol (RQ-1468)

Dear Representative Millsap:

you ask about the authority of the Texas Public Finance Authority to issue bonds under article 601d-2, V.T.C.S. Specifically, you askwhether the authority may, without executing a leasewith the State Preservation Board, issue bonds forthe renovation of the State Capitol and provide that the payment ofprincipal and interest on the bonds will bepaid from appropriations made directly to the Texas Public Finance Authority.

The Texas Public Finance Authority (theauthority) was created by the 68th Legislature and was originally called the Texas Public Building Authority. Acts 1984, 68th Leg., 2dC.S., ch. 5,at 15 (repealing original version of Public Building Authority Act, Acts 1983, 68th Leg., ch. 700, at 4360). A 1987 enactment changed thename of the authority fromthe Texas Public Building Authority to the Texas Public Finance Authority. Acts 1987, 70th Leg., 2nd C.S., ch. 75, p. 234. The general provisions governing the authority are set out inarticle 601d,V.T.C.S.

Under article 601d the authority may issue and sell bonds for the financing, acquisition, construction, repair, and renovation of buildings used by state agencies. V.T.C.S. art. 601d, §9. Section 13states that the bonds
arepayable mNsolelyfrom revenue asprovided by this Act"; and section 12(a) states that the authority may provide for thepayment of the principal and interest on thebonds by (1)pledging all orpart ofthe designated rents, issues and profits from leasing abuilding to the state or (2)from any other source lawfully available to the authority. Section 13provides that bonds issued under article 601d are not a debt of the state or any state agency and that the bonds must contain on their face a statement to that effect. Id.



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Honorable Mike Millsap -Page 2 (JM-970)

5 13. The legislature must specifically authorize any project forwhich bonds are sold under article 601d, and the bonds must be approved by the attorney general. z!L §§ 10, 16.

Soon after the enactment ofarticle 601d, the authority proposed abond issuance to finance the construction of a state office building for the Texas Youth Commission and the Texas Rehabilitation Commission. The attorney general, arguing that the bond issuance would violate several constitutional provisions, refused to approve the proposed bond issuance. Therefore, the authority applied to the Texas Supreme Court for awrit ofmandamus directing the attorney general to approve thebond issuance. Texas Public Buildinq Authoritv v. Mattox, 686 S.W.2d 924 (Tex. 1985). The attorney general argued that the bond issuance would be in violation of article 'III,section 49, which prohibits the creation ofdebt whyoronbehalf of the state." The court rejected that argument by pointing out that article 601d expressly provides that thebonds arenot debts of the state andnot apledge of the state's full faith and credit. The court also rejected the attorney general's argument that the proposed bond issuance would violate article III, section 44,which prohibits the appropriation ofmoney to any individual on aclaim that isnotprovided forby pre-existing law.1 Wewill return to the court's discussion of article III, section 44, after we examine theprovisions of the statute you ask about, article 601d-2,V.T.C.S.

After the Supreme Court upheld the provisions of article 601d, the legislature enacted article 601d-2 to provide ameans to finance renovation of the State Capitol. Acts 1987, 70th Leg., ch. 626, p. 2407. Article 601d-2 authorizes theboard ofdirectors of the authority to issue and sell bonds for that purpose. V.T.C.S. art. 601d-2, .$2. Proceeds from suchbonds are tobe deposited inthe state treasury to the account of the State Preservation Board. 48, 5 3(a). Article 601d-2 appropriates those funds to the State Preservation Board for projects for the repair and renovation of the State Capitol. Id. 5 3(b). Section 4 of article 601d-2 provides:

1. The attorney general also argued that the proposed bond issuance would be inviolation ofArticle I, section 17;Article III, section 49a; andArticle VIII, section 6, of the Texas Constitution. The court rejected all of those arguments.

p. 4934Honorable Mike Millsap -Page 3 (JM-970)

(a) The board [of the Public Finance Authority] may provide forthe repayment of the principal and interest on the bonds issued under this Act from any source of funds lawfully available to theboard.

(b) From funds appropriated for the purpose, the State Preservation Board shall pay to the board under a lease agreement an amount determined by the board to be sufficient to:
(1)pay theprincipal and interest on the bonds:
(2)maintain any reserve fundnecessary to service the debt: and

(3) reimburse the authority for other costs and expenses incurred by the authority relating to a project under this Act or to outstanding bonds.

(c)Bonds payable frommoney appropriated by the legislature shall notmature or be subject to redemption before September 1, 1989, and the date of the first interest payment to bemade fromappropriated money shall not be scheduled to occur before -September 1, 1989.

Section 6 provides that the State Preservation Board may enter into lease agreements under article 601d-2 and may spend appropriated funds orother funds forthepurpose of making leasepayments. Section 5provides that bonds issued under article 601d-2 are subject to anumber of provisions of the Public Finance Authority Act, including section 13, which provides that bonds issuedunder article 601d are not
adebt of the state or any state agency and that the bonds must contain on their facea statement to that effect. Your question iswhether the authority may, without executing a leasewith the State Preservation Board, issuebonds forthe renovation of the State Capitol and "repay theprincipal of and interest on thebonds fromdirect legislative appropriations for that purpose."
Although the authority's power to issuebonds for the repair and renovation ofthe State Capitol isnot explicitly made dependent onthe existence ofa leasewith the State Preservation Board, article 601d-2 clearly contemplates that

P. 4935Honorable Mike Millsap -Page 4 (JM-970)

bonds issued pursuant to that article will be paid from
revenues from a lease with the State Preservation Board. Also, the incorporation of section 13 of the Texas Public Finance Authority Act,which provides that the bonds are to be revenue bonds,2 indicates that the legislature intended

2. Article 601d gives the authority power to lease a building financed with bonds issuedunder that article to anyperson or entity ifthe state fails or refuses to pay rental on the building. V.T.C.S. art. 601d, 5 12(d). Thus, there would be apotential source of revenue fromwhich to pay principal and interest on the bonds even if the legislature failed to appropriate money for the lease of a building financed under article 601d. However, even if there were a lease between the authority and the State Preservation Board, bonds issuedunder article 601d-2 would look less like revenue bonds than bonds issued under article 601d since the legislature did not even attempt to give the authority power to lease the State Capitol to aperson or entity other than the state.

On the subject ofa lease of the State Capitol &o the State Preservation Board from the authority, it is interesting to note section 11(a) of article 601d, which provides:

Property financed by the authority under thisAct does not **become** part of other property towhich itmay be attached oraffixed or into which itmay be incorporated, regardless of whether the other property isreal orpersonal. The rights of the State Preservation Board in property financed by the authority under this Act are those ofa lessee, and aperson claiming under or through the State Preservation Board does not acquire any greater rightswith respect to that property.

That section **tracks** section 7of article 601d-2, V.T.C.S. Both provisions overrule the common law rule that fixtures become part of the real property towhich they are attached. The provisions are important to the schemes provided for in articles 601d and 601d-2 in instances inwhich the bond money isused for repair orrenovation of existing state buildings because they allow the state to assume the role of lessee of improvements to statebuildings. It ishard to (Footnote Continued)

p. 4936Honorable Mike Millsap -Page 5 (JM-970)

that the bonds would bepayable fromrevenue from the lease of the State Capitol to the State Preservation Board. However, we need not determine whether the legislature intended article 601d-2 togive the authority power to issue bonds without executing a leasewith the State Preservation Board because we conclude that the proposal you ask about would notbepermissible under article III,,section44, of the Texas Constitution.

Article III, section 44, of the Texas Constitution provides:

The Legislature shall provide by law for

the compensation of all officers, servants, agents andpublic contractors, not provided for inthis Constitution, but shall not grant extra compensation to any officer, agent, servant, or public contractors, after such public service shall have been performed or contract entered into, forthe performance of the same: nor grant, **by** appropriation or otherwise, any amount of money out of the Treasury of the State, to any individual, on aclaim, real or pretended, when the same shall not have been provided for by pre-existing law;nor employ any one in the
name of the State, unless authorized by pre-existing law.

This means that nomoney may be appropriated unless, at the time the appropriation ismade, there isalready in force
somevalid law constituting the claim tobepaid a legal and valid obligation of the state. Austin National Bank v. Shevnard 71 S.W.2d 242 (Tex. 1934); State v. Per1 tein S.W.2d 1;3 (Tex.Civ.App. -Austin 1934,writ disi#d).' 79

InTexas Public Huildina Authoritv v. Mattox, 686 S.W.2d 924, the court responded to the attorney general's argument that appropriations forthepurpose ofmaking lease payments to the authority would violate article III, section 44, **as** follows:

(Footnote Continued) imaginewhat the substance of the state's leasehold would be, however, if bonds issuedunder article 601d or 601d-2
were used, for example, for sand-blasting.

p. 4937Honorable Mike Millsap -Page 6 (JM-970)

The Attorney General argues that any appropriation by the Legislature to make rental payments to theAuthority pursuant to the lease agreement must necessarily violate the article III, section 44 prohibition against themaking ofgrants ofmoney out of the State Treasury to an individual on a claimwhen the same shall nothave been provided forbypre-existing law. The execution of the LeaseAgreement between the Authority and the Commission under theprecise terms contained therein isexpressly authorized by Section 12 of the Act. The manner of repayment of the bonds and the manner in which the rents and feesto be paid by the Commission are to **be** calculated are likewise express;l.euthorized by theAct. We believe that expressly authorized by a pre-existing statute, an appropriation of funds in furtherance ofan authorized project does notviolate article III, section 44.

Thepurpose of the article III, section 44 proscription is the prevention of 'raids' upon the State Treasury by private individuals or entities. We consider inapposite authorities such as A stunNtional Bank v. Shevnard 123 Tex. 272: 71 S.W.2d 242 (1934) because 'here, the Legislature itself ha; created the Authority and authorized the execution of contracts between itand state agencies, which contracts do not otherwise violate the state constitution. Appropriations made in furtherance of those contracts
are fully 'provided forbypre-existing law.' Thus, appropriations made in the future by the Legislature in fulfillment of the Commission's obligations under the Lease Agreement with the Authority are not proscribed by article III, section 44.

686 S.W.2d at 929. In short, the Supreme Court found that appropriations to the authority forthe purpose of making lease payments were proper because the state agencies involved had pre-existing authority to enter into leases for building space. The proposal you ask about, however, would involve leg~islative appropriations made directly to the authority forthepurpose ofpaying principal and interest
on the bonds. Article 601d-2 expressly provides that the bonds are not legal obligations of the state and that they 4.

p. 4938, Honorable Mike Millsap -Page 7 (JM-970)

are revenue bonds. Thus, not only would an appropriation for thepurpose ofpaying principal and interest on bonds issued under article 601d-2beunauthorized by pre-existing law, itwould be anappropriation topay for something that the legislature had expressly proclaimed itself unobligated topay. &= Attorney General Letter Advisory No. 107 (1975).

Ithas been suggested that theproposal you ask about would not violate article III, section 44, because an appropriation to the authority would notbe an appropriation "onaclaim."3 m Jones, me Future ofMoral Obliaation Bonds asaMethod ofGovernment Finance inTexas, 54Tex. L. Rev. 314, 328-30 (1976). The suggestion is that appropriation to the authority would avert default on tz: bonds and would necessarily avert the assertion of any wclaims," i.e., lawsuits. L We disagree with that suggestion. Ifbondholders did sue the state for payment, anappropriation topay those claims would clearly violate article III, section 44. Certainly it follows that the legislature cannot circumvent article III, section 44, by appropriating money forpayments it isnot obligated tomake inorder toprevent the assertion of Vlaims" not provided forbypre-existing law. Therefore, we conclude that the proposal you ask aboutwould be impermissible under article III, section 44, of the Texas Constitution.

A proposal whereby the Texas Public Finance Authority would issue llrevenuell bonds andprovide that principal and interest on

3. Ithas also been suggested that an appropriation to the authority would not be an appropriation to an individual. We think, however, that an appropriation to the authority for the purpose ofpaying bondholders is, in effect, an appropriation to individuals. See aenerallv Austin National Hankv. Shenvard, 71 S.W.2d 242 (Tex. 1934).

P. 4939Honorable Mike Millsap -Page 8 (JM-970)

thebonds would bepaid fromdirect legislative appropriations would be impermissible under article III, section 44, of the Texas Constitution.~

Very truly yo , 

# J-h

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JIM MATTOX Attorney General of Texas

MARYXELLXR First Assistant Attorney General

LOU MCCREARY Executive Assistant Attorney General

JUDGE ZOLLIE STEAXLXY Special Assistant Attorney General

RICK GILPIN Chairman, Opinion Committee
Prepared by Sarah Woelk Assistant Attorney General

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