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. William N. Kifby 

colmtliseioner of Education 

Texas Education Agency 

1701 N. 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 letter requesting sn opinion of this office reads 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 pursuant to the provisions of the 

Constitution of Texas, article VII, section 5, 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 Permanent School 

Fund. This guarantee results in better bond 

ratings and lower interest rates for Texas school 

districts. Since its inception, 218 bond issues 

worth $1.250.505.000 have been guaranteed. We 

estimate that the guarantee program already has 

saved Texas school districts and their taxpayers 

millious of dollars. At present, 25 districts 

have psuding applications for the guarantee of 

bonds worth $122,480.000. 

. . . . 

In the past year, 33 bond issues guaranteed by 

the Permanent School Fund have been defeased and 

refunded pursuant to Texas Revised Civil Statutes 

Annotated. article 717k, or Texas Education Code, 

section, 20.05. These refunded bonds are in the 

principal auount of about $336,010,000. 

The question has arisen whether such bonds that 

have been fully defeased and refunded are still 

guaranteed by the Permanent School Fund. If full 

provls~~on has been made for the papnent of the 

bonds uo that they are no longer considered out8tandir.g for purposes of the guarantee, then the 

securities currently pledged to their payment 

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

pursuant to the guarantee could be reallocated to 

guarantee pending applications from other districts. This result would allow us to reinstitute 

the guarantee program 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.arr impairing 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 selling of 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 obligations representrrd by the bonds refunded; that refunding 

bonds do not create new i.cbt but merely continue an existing debt. 

Id. 1267, at 301. - 

As you note, article VII, section 5 of the Texas Constitution was 

amended in 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 school d.istricts. 

Anticipating adoption of the constitutional amendment, the 

legislature in 1983 enacted statutory provisions to Implement the 

new authority - statutes whi.ch are now codified as subchapter E of the 

1. Subsection (a) of that constitutional provision establishes 

as the permanent school fund "[tlhe principal of all bonds and other 

funds, and the principal arising from the sale of lands hereinbefore 

set apart to said school fund," and establishes as the available 

school fund (to be applied twuu~.lly to the support of the publfc free 

schools) "all the interesi: derivable therefrom and the taxes herein 

authorized and levied." 

p. 2105 
Mr. William N. 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 approval by 

the commissioner of educazion. "bonds Issued under Subchapter A of 

this chapter [chapter 201,' including refunding bonds" are guaranteed 

by the Permanent School Fund. Section 20.903(a) states that 

[tlhe commissiov~r may not approve bonds for 

guarantee if the approval would result In the 

total amount of outstanding guaranteed bonds 

exceeding an amount equal to two times the cost 

value or market value, whichever is less, of the 

permanent scho,,:t fund, 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 governing body of the school 

district made 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. Section 20.01 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 obligations of the United States 

government purchased with the proceeds of the 

refunding bonds and other moneys belonging to the 

school districts (which have been deposited under 

the escrow agreement to which reference is made in 

the statute). 

2. Subchapter A of chapter 20 of the Education Coda, consisting 

of sections 20.01 through 20.06, concerns school district tax bonds 

and maintenance taxes. Section 20.01 authorizes school districts to 

issue negotiable coupon bonds to acquire sites for, constmct, and 

equip school buildings, and to levy ad valoram taxes for their payment. Section 20.05(b) provides for the issuance of refunding bonds 

payable from ad valoram taxes "to refund or refinance all or any part 

of any district's outstani&ng bonds" without an election unless the 

Texas Constitution requires one. 

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

Section 20.05 of the Uducation Code is part of subchapter A, the 

subchapter which 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 interest to 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 section 20.05, Subchapter A, provide a 

method for paying off or redeeming bonds: 

(g) To refund, bonds or to pay or redeem bonds 

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 

account both the principal and interest to accrue 

on the assets of tmy escrow account created under 

Subsection (h) of this section, to provide for the 

payment or redeulptioa of the bonds and assumed 

obligations that are to be refunded or to be paid 

or redeemed. Thr deposit constitutes the waking 

of firm banking~~d financial arrangements for the 

discharge and 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:i the 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 

States and that nature or beer interest payable at 

times and In amounts sufficient to provide for the 

scheduled payment or redemption of the bonds. The 

governing board or cosmissioners court shall enter 

into an appropriate escrow or a similar agreement 

if any of the bends are scheduled to be paid or 

redeemed on a daxe later than the next succeeding 

scheduled interest payneat date. 

Subsection (i), expressly states: 

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

(i) If the governing body or commissioners 

court has entered into an escrow or a similar 

agreement under Subsection (h) of this section, 

the refunded bwds are considered to be defcased 

and may not be licluded in or considered to bc an 

indebtedness of &e district for the purpose of a 

limitation on oui%tauding indebtedness or taxation 

for any other pul:)ose. (Empbasfs added). 

The foregoing provisions, all found in subchapter A, were added by 

Acts 1983, Sixty-eighth Lel:J.slature, chapter 256, page 1142, effective 

May 27. 1983. Subchapter E, which concerns the constitutionally 

authorized guarantee, does uot contain similar language. 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:. deprive the underlying bonds (the bonds 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 thereof and cancelled. In other 

words, would the underlying “refunded” bonds continue to constitute 

“outstanding guaranteed bon’ds” for purposes of the section 20.903(a) 

limitation? 

Section 20.902 of 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 

then permsnent school fun&” (Emphasis added). The provision is 

ambiguous because the emphasized words 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 

themselves be the beaefic:Laries of the constitutionally-permitted 

guarantee if the commissioner approved. Or, those words could mean 

that the holders of origiDa1 bonds so guaranteed are to be protected 

by the guarantee so long as: the school district remains obligated 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 Education Code helps resolve the ambiguity. Section 2 of 

Acts 1983, Sixty-eighth Legislature , chapter 154, page 675, states: 

In accordance with the provisions of this Act, the 

commissioner of ciducation may approve for guarantee 

any eligible bonds issued after the effective date 

of this Act, in,<Luding refunding bonds for bonds 

issued or sold tzfore the effective date of this 

Act. - (Emphasis i.dded) ~. . 

p. 2108 
Mr. William N. Kirby - Pagf, 6 (~~-460) 

III our opinion, this passage demonstrates a legislative understanding 

that the commissioner will separately approve original and refunding 

bonds for participation in the guarantee program. Such an intent, 

while not necessarily incmsistent with the idea that the guarantee 

survives the "refunding" of guaranteed bonds, does denigrate the 

argumant that by using the! words, "including refunding bonds", in 

section 20.902, 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 security originally bargained for. As 

you have noted, by reasou af 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 resource fcr the payment of bonds is the taxing power 

of a political subdivision as it existed when the bonds were issued, 

any law which withdraws or limits such .power and leaves no adequate 

means for payment of the b'onds is forbiddan by constitutional provisions protecting 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 address it 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 contract if 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 defined by the statutes in effect at 

the time of their issuance. and those statutes became a Dart of. and 

timem, the contracts. Baukers Life 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. 

Kleberg County, 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 anacted during the same session of the 

legislature. They are in mri materia and are to be read together, 

oue with reference to thF;her, as though embodied in a single act. 

See 53 Tax. Jur. 2d Statutes 05186. 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 outstanding guaranteed 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 section 20.05, subsection (i), stating that 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 opinion is limited to those circumstances. 

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

,- 

"refunding" escrow agreement as described has been entered into, the 

refunded bonds are to be considered to be defeased and may not be 

included in or considered to be an indebtedness of the district "for 

the purpose of a limitation on outstanding Indebtedness or taxation - or 

for any other purpose." (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 

amount has been deposited vith the state treasurer in accordance with 

the statute, the deposit 

shall constitute the making of firm banking and 

financial arrangements for the discharge and final 

payment or redemption of the obligations being 

refunded. 

This language was added to the statute in 1969, effective June 14, 

1969. See Acts 1969, 61st Leg., ch. 783, at 2316. Section 7A of 

articlemk, which provides for an escrow arrangement similar to that 

described in subsection (1,) of section 20.05 of the Education Code, 

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, effective June 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" judicial gloss with respect to refunding bonds. See City of 

McAllen V. Daniel, 211 S.W.:!d 944, 947 (Tex. 1948). Absenzsrepresentation or 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 such bonds, 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 bonds were 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 States Trust 

Company of New York V. New Jersey, 431 U.S. 1 (1977); Continental 

Illinois National Bank au,d Trust 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 

article 717k, V.T.C.S., section 7A, as amended in 1985, at the time 

. As amanded in 1969. for refunding accomplished pursuant to 

section 7 of article 717k. 

p. 2110 
Mr. William N. Kirby - Page! 8 (JM-460) 

they were issued, may be rc!f:unded pursuant to those provisions without 

impairing the 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 

meaning of section 20.903 of the Education Code limiting the amount of 

bonds which may be guarantcled by the permanent school fund. 

SUMMARY 

School district ad valorem bonds incorporating 

the provisions of statutes respecting refunding of 

the bonds may be refunded pursuant thereto without 

impairing the obligation of 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 A /+lztQ 

JIM MATTOX 

Attorney General of Texas 

JACKHIGRTOWER 

First Assistant Attorney Gtmaral 

MARYKRLLRR 

Executive Assistant Attorncby General 

ROBERT GRAY 

Special Assistant Attorney General 

RICK GILPIN 

Chairman, Opinion Committee: 

Prepared by Bruce Youngbloc,d 

Assistant Attorney Ganeral 

p. 2111