JIM MATTOX Attorney General 

## The Attorney General of Texas

March 28, 1986

Supreme Court Building P. 0. Box 12548 Austin. TX. 78711-2548 512/47,2501 Telex 9101874.1387 Telecopier 51214750288 Mr. WilliamN. Kifby colmtliseioner

of Education Texas Education

Agency 1701N. Congress

Avenue Austin.Texas 78701 Opinion No. JM-460

Re: Effect of refunding those bonds originally

guaranteed

under the Texas Bond Guarantee Program

714 Jackson, Suite 700 Dallas, TX. 752024508 214/742-8944 Dear Mr. Kirby:

Your letterrequesting sn opinionof this officereads in part:

4824 Alberta Ave.. Suite 160 Et Paso, TX. 799052793 915i533-3464

“ ‘Ii Texas, Suite 700 msto”, TX. 77002.3111 713n23eaS

506 Broadway, Suite 312 Lubbock. TX. 794063479 W&747-5233

4309 N. Tenth. Suite B McAllen, TX. 78501-1885 51218824547

200 Main Plaza, Suite 400 San Antonio, TX. 792052797 512r225-4191

An Equal Opportunity/ Affirmative Action Employer The Texas bond guarantee program was established in 1983 pursuantto the provisions of the Constitution

of Texas, article

VII, section5, and the enabling statute, Texas Education Code, section 20.901 et seq. Through this program the bond i~,sues

of local school districts are secured by the corpus and income of the PermanentSchool Fund. This guarantee results in better bond ratingsand lower interestrates for Texas school districts. Since its inception,218 bond issues worth $1.250.505.000 have been guaranteed. We estimate that the guaranteeprogram already has saved Texas school districtsand their taxpayers millious of dollars. At present, 25 districts have psuding applicationsfor the guarantee of bonds worth $122,480.000.

. . . .
In the past year, 33 bond issues guaranteed by the PermanentSchool Fund have been defeasedand refunded

pursuantto Texas RevisedCivil Statutes Annotated.

article 717k, or Texas Education Code, section,

20.05. These refundedbonds are in the principal

auountof about $336,010,000.

The question

has arisen

whether such bonds that have been fully defeased and refunded are still guaranteed

by the PermanentSchool Fund. If full provls~~on

has been made for the papnent of the bonds uo that they are no longer consideredout8tandir.g

for purposes of the guarantee, then the securities currently pledged to their payment

p. 2104Mr. WilliamN. Kirby - Page 2 (JM-460)

pursuantto the guarantee couldbe reallocated to guarantee pending applicationsfrom other districts. This resultwould allowus to reinstitute the guaranteeprogram ou a limited basis, thus producing addlt:tonal savings for Texas school districts

and taxpayers.

A "bond" is a coutrac1: whereby oue binds himself to another to pay a sum of money or do some other act. See 10 Tex. Jur. 3d. Bonds and Undertakings

Il. at 4.. Public bonds issued by states and their political subdivisions constitute contracts within constitutional provisions prohibiting l.arrimpairing the obligation of contract. U.S. Const. art. I, 510; TIXK. Coast. art. I. 116; Determan V. City of
w 609 S.W.2d 565, 569 (Tex.Civ. App. - Dallas 1980, no writ). A defeased"

bond is one that has been defeated,i.e., rendered void and of uo effect by anothw instrument. Sea BlacELaw Dictionary, 376 (5th cd. 1979). Cf. C:tty of HcAllea~Daniel, 211 S.W.2d 944, - .- 947-48 (Tex. 1948). "Refunding"

has been defined as a replacement of one obligation with another,including th,z sellingof new securities for the purpose of redeeming

those outstareitng. See 64 Am. Jur. 2d Public Securities and Obligations

5261, at 295. Thzited authority also asserts that refunding

bonds are not or.lp obligations

in themselves

for what they purport to be on their face and under the statutes pursuant to which they are issued,but are authorized extensions

and continuations

of the obligationsrepresentrrd by the bonds refunded; that refunding bonds do not create new i.cbt but merely continuean existingdebt. Id. 1267, at 301. -
As you note, article VII, section5 of the Texas Constitution was amendedin 1983 to provide:

(b) The legislature by law may provide for using the permanent school fund and the income from the permeue~~t school Tund to guarantee bonds issued by schoold.istricts.
Anticipating adoption of the constitutionalamendment, the legislaturein 1983 enacted statutoryprovisions to Implement the
new authority

- statutes

whi.ch are now codified

as subchapter

E of the

1. Subsection (a) of that constitutional provisionestablishes
as the permanentschool fund "[tlhe principal of all bonds and other funds, and the principalarising from the sale of lands hereinbefore set apart to said school fund," and establishesas the available school fund (to be appliedtwuu~.lly to the supportof the publfc free schools) "all the interesi: derivabletherefromand the taxes herein authorized

and levied."

p. 2105Mr. WilliamN. Kirby - Page 3 (JM-460)

Texas Education Code. See Acts 1983, 68th Leg., ch. 154, at 671. --. Section 20.902 of the Edumtion Code provides that upon approvalby the commissioner

of educazion."bonds Issued under Subchapter A of this chapter [chapter 201,' including

refunding

bonds" are guaranteed by the Permanent

SchoolFund. Section20.903(a) statesthat
[tlhe commissiov~rmay not approve bonds for guarantee if the approval would result In the total amount of outstanding guaranteed bonds exceedingan amount equal to two times the cost value or market value, whichever is less, of the permanent scho,,:tfund, exclusive of real estate.

. . . (Emphasis added).

That limitation

has promptlrd

your question.

Tou accompanied

your request for an opinion with information pertaining

to a particular

method of "refunding" which,we understand, is the focus of your concern, and we will limit our discussion accordingly. In that connection, you advise:

At the time the original bonds of the district
were issued, the governingbody of the school districtmade provision for the payment of the bonds by the levy of an ad valoram tax which was pledged to the payment of the principal of and interest

on the hcmds. Section20.01 of the Texas Education

Code.
By reason of the refunding, the original

bonds
are no longer psgable from ad valoram taxation, but are payable :?rom the principal

of and interest
on the direct obligationsof the United States governmentpurchased with the proceeds of the refunding

bonds and othermoneys belongingto the schooldistricts (which have been deposited under the escrowagreement to which reference

is made in the statute).

2. Subchapter

A of chapter20 of the Education Coda, consisting of sections 20.01 through 20.06, concerns school districttax bonds and maintenance

taxes. Section 20.01 authorizes school districtsto issue negotiablecoupon bonds to acquire sites for, constmct, and equip schoolbuildings, and to levy ad valoram taxes for their payment. Section 20.05(b) provides for the issuanceof refunding bonds payable from ad valoramtaxes "to refundor refinance all or any part of any district's

outstani&ng

bonds" without an electionunless the Texas Constitution requires

one.

p. 2106Mr. WilliamN. Kirby - Page 4 (JM-460)

Section20.05 of the Uducation Code is part of subchapter A, the subchapterwhich concerns the tar bonds that nay be guaranteed according

to subchapter

E'. Under it, refunding bonds may be delivered to the present bondholders in exchange for the old bonds to be refunded,

or they nay be so:Ld for cash with which to pay off the old bonds in full (principal tnd interestto maturity)or to redeem the old bonds before maturity (Iprincipal and interest to the redemption data,plus any redemption Premium). Or if money is available therefor from other sources, outstauding bonds way be paid off or redeemed without issuing

refunding

bonds.
Subsections

(g) and (h) of section20.05, Subchapter A, providea method for paying off or redeeming bonds:
(g) To refund,

bonds or to pay or redeembonds in whole or in part without issuing refunding bonds, the governing board or cosmissioners court way deposit directly with the paying agent the proceeds from that

sale of refunding

bonds or any other available Cunds or resources. The deposit must be In an amount sufficient, after taking into accountboth the principal and interestto accrue on the assets of tmy escrow account createdunder Subsection(h) of this section, to providefor the payment or redeulptioa of the bonds and assumed obligations

that are to be refundedor to be paid
or redeemed. Thr deposit constitutes the waking of firmbanking~~d financial arrangements

for the dischargeand f&l payment or redemption of the bonds being refuuzed. (Emphasis added.) -- (h) The governing

board or commissioners court may enter into 1.11. escrow or a similar *greentent with the paying agent with respect to the safekeeping,investment, reinvestment.

administration, or disposition

o:ithe deposits,

but the deposits may be invested and reinvested only in direct obligations of ,the United States, including obligations

the principal

of and Interest

on which
are unconditionr.l,ly guaranteed by the United Statesand that nature or beer interest payableat times and In amountssufficient to provide for the scheduled

paymentor redemption of the bonds. The governing

board or cosmissioners court shallenter into an appropriate escrow or a similaragreement if any of the bends are scheduledto be paid or redeemedon a daxe later than the next succeeding scheduled

interest

payneatdate.
Subsection(i), expressly states:

p. 2107Mr. WilliamN. Kirby - Page 5 (JM-460)

(i) If the governing body or commissioners court has entered into an escrow or a similar agreementunder Subsection (h) of this section, the refunded

bwds are considered to be defcased and may not be licludedin or considered to bc an indebtedness

of &e districtfor the purpose of a limitation

on oui%tauding

indebtedness

or taxation for any otherpul:)ose. (Empbasfs added).

The foregoing

provisions,

all found in subchapter A, were added by Acts 1983, Sixty-eighth Lel:J.slature,

chapter256, page 1142,effective May 27. 1983. Subchapter E, which concerns the constitutionally authorized

guarantee,

does uot containsimilarlanguage. Subchapter E became law November 8, 1983, upon adoption of the constitutional amendment. Acts 1983, 68th Leg., ch. 154, at 671.

Pou wish to know whether the making of such subsection A “deposits”

for payment

wil:. deprivethe underlying bonds (thebonds to be refunded)

of any subsectfon

E guarantee

that might have originally protected them, even though the underlying bonds have not been actually surrendered by tb,e holders thereofand cancelled. In other words, would the underlying“refunded” bonds continue to constitute “outstanding

guaranteed

bon’ds” for purposesof the section 20.903(a) limitation?

Section20.902of subchapter E provides

that upon approval

by the commissioner,

“bonds Issued under Subchapter A of this chapter, including refunding

bonds, ere guaranteed by the corpus and incomeof thenpermsnent school fun&” (Emphasis added). The provision is ambiguous because the emphasizedwords could have either of two meanings. “Bonds issued,” including refunding

bonds, could mean that the holders of new bondds issued to refund current bonds could themselvesbe the beaefic:Laries of the constitutionally-permitted guaranteeif the commissioner approved. Or, those words could mean that the holders of origiDa1 bonds so guaranteed are to be protected by the guaranteeso long as: the school districtremainsobligated to them, even If the original bonds are “refunded,” i.e., even though the original obligations are extended and continuedby the “refunding” device.

20 An uncodified portion of the act adding subchapter E to chapter of the EducationCode helps resolve the ambiguity. Section 2 of Acts 1983, Sixty-eighth Legislature

, chapter154, page 675, states:

In accordance

with the provisions of this Act, the commissioner

of ciducation

may approvefor guarantee any eligible

bonds issued after the effective date of this Act, in,<Luding refunding

bonds for bonds issued or sold tzfore the effectivedate of this Act. - (Emphasis ~.

i.dded)

.

p. 2108Mr. William N. Kirby - Pagf,

6 (~~-460)

III our opinion,this passagedemonstrates a legislative

understanding that the commissioner will separately

approve originaland refunding bonds for participation in the guaranteeprogram. Such an intent, while not necessarilyincmsistent with the idea that the guarantee survives the "refunding"of guaranteedbonds, does denigrate the argumant that by using the! words, "includingrefundingbonds", in section20.902,the legislature axpressly

so provided.

The "refunding"scheme of subsections (g) and (h) of section 20.05, when coupled with the subsection (i) provision, allows the complete substitution of t,he

securityoriginally bargained for. As you have noted,by reasouaf such refunding , the original

bonds are no longer payable from ad valoram taxation,but are payable from the principal

and interest

on the direct obligations of the United States purchased

with moneys deposited in escrow for that purpose. Generally,where the resourcefcr the payment of bonds is the taxingpower of a politicalsubdivision as it existedwhen the bonds were issued, any law which withdrawsor limits such .power and leaves no adequate
means for payment of the b'onds is forbiddan

by constitutional

provisionsprotecting the obli.gation

of contract. Mobile v. Watson, 116 U.S. 289, 305 (1886). Whether a substituted means of payment is "adequate"

is another question,see Shapleigh v. City of San Angelo, 167 U.S. 646. 657 (1897), bwt we=d not addressit here.

The question of "adeqmcy" is not controlling here because the substitution

of security,

qahatever

its "adequacy,"

cannot constitute
an impairment

of the obligation

of contractif the right to make such substitution

was a part of the original contract between the school district and the bondholders.' The holders of the bonds took them with the rights guaranteed nnd definedby the statutesin effect at the time of their issuance. and those statutes became a Dart of. and 

### timem, the contracts. BaukersLife Co. v. Breckenridge' Independent School District, 97 S.W.2d-933, 937 (Tex. 1936). See Empire Gas & Fuel Coi v. State, 47 S.W.:ld 265, 266 (Tax. 1932)FCf. Norton v. KlebergCounty,231 S.W.2d "1.6, 718 (Tax. 1950). -

The provisions

of subeections(g), (h), and (i) of subchapter A and those of subchapter E wcze anactedduring the same sessionof the legislature. They are in mri materia and are to be read together, oue with reference to thF;her, as though embodiedin a single act. See 53 Tax. Jur. 2d Statutes05186. 188, at 280, 286. In that light, rhc "guarantee"

provisions

TE subchapter

E were anacted in contesplatlou of the "refunding" prcavisions

of subchapter

A; and the requirement of section 20.903 thaz the total amount of outstandingguaranteed bonds shall not axced. two times the cost value or market value of the permanent school fuud (whichever is less), must be read with the language

of section20.05, subsection(i), statingthat if a

3. We understand

that all the bonds to be "refunded" here were issued after the effective dates of the constitutional amendmant

and the 1983 legislation.This opinionis limitedto those circumstances.

p. 2109Mr. WilliamN. Kirby - Pago 7 (JM-460)

,- "refunding" escrow agreement

as described

has been entered into, the refundedbonds are to be consideredto be defeased and may not be includedin or considered to be an indebtedness of the district "for the purposeof a limitation on outstanding

Indebtedness

or taxation

or - for any otherpurpose." (Lmphasis added).

The language of the other statute authorizing a similar "refunding"

mechanism,

artLcle 717k, V.T.C.S., is not so strong, but when its provisions are analysed,the effect is the same. Section 7 of article 717k provides !:hat when a deposit of funds in sufficient amounthas been deposited vith the state treasurer in accordance

with the statute,

the deposit

shall constitutethe making of firm banking and financial

arrangements

for the discharge

and final payment or redemptionof the obligations being refunded.

This language

was added to the statute in 1969, effectiveJune 14, 1969. See Acts 1969, 61st Leg., ch. 783, at 2316. Section 7A of articlemk, which providesfor an escrowarrangement similar

to that describedin subsection (1,) of section 20.05 of the EducationCode,
was added in 1979,but at that time it applied only to the refunding of "revenue"

bonds. See Acts 1979, 66th Leg., ch. 832, at 2182. In 1985, however, it wasamended, effectiveJune 8, 1985,. to apply to bonds payable from ad valorem taxes as well. See Acts 1985, 69th - Leg., ch. 318, at 2513.

The phrase, "firm banking arrsngemants," has acquired a "final payment"judicialglosswith respectto refunding bonds. See City of McAllenV. Daniel, 211 S.W.:!d 944, 947 (Tex. 1948). Absenzsrepresentationor unconscionable behavior on the part of government,so long as the bonds to be Irefunded pursuant to the mechanism of a particular

provision

were ::ssued

subsequent

to the date the provision became applicable

to suchbonds, the mechanism may be utilized

vithout impairing

the obligation

of the bonds because the statutory provision became a part of the contra,ct when the bondswere issued.

We have not been furnished the agreements involved, but no suggestion

has been made th,at the terms of the statutes or the bonds
are materially

misleading

to the investing

public. Cf. United States V. Sioux Nation of Indians,448 U.S. 371 (1980); UnGd StatesTrust Company of New York V. New Jersey, 431 U.S. 1 (1977); Continental Illinois National Bank au,dTrust Company of Chicago V. State of Washington,

696 F.2d 692 (!F:hr. 1983).cert. denied,460 U.S. 1077 (1983). Under such CircumXances,we are of the opinion that school district

ad valorem

bonds which incorporated the provisions

of section 20.05 of the Education Code as amanded in 1983, or the4provlsions of article717k,V.T.C.S., section7A, as amendedin 1985, at the time

. As amanded in 1969. for refundingaccomplished pursuant to section7 of article717k.

p. 2110Mr. William N. Kirby - Page!

8 (JM-460)

theywere issued,

may be rc!f:unded

pursuantto thoseprovisions without impairingthe obligation of the bonds, and when such refunding has been accomplished

pursuant to the statutory machanism,the refunded bonds no longer constitute"outstanding guaranteed

bonds" within the meaningof section20.903of the Education Code limiting

the amount of bonds whichmay be guarantcled by the permanent

school fund.

SUMMARY

School districtad valorem bonds incorporating the provisions

of statutes

respecting

refunding

of the bondsmay be refunded pursuantthereto

without impairing the obligationof the bonds, assuming the investing

public has not been misled. When such refunding

has been accomplished, the refunded bonds no longer constitute "outstanding

guaranteed bonds" within that

meaning of the statute limiting the amount of bonds which may be guaranteed by the permanent

school fund.

Very ruly yours 

# Lt /+lztQ

A JIM MATTOX Attorney

Generalof Texas

JACKHIGRTOWER FirstAssistant Attorney Gtmaral

MARYKRLLRR Executive

Assistant

Attorncby

General

ROBERTGRAY Special

Assistant

Attorney

General

RICK GILPIN Chairman,

OpinionCommittee:
Prepared

by BruceYoungbloc,d Assistant

Attorney

Ganeral

p. 2111