## THE ATTORNEY GEXERAL OF TEXAS
May 26. 1987 .Jn¶xxrrGx A-Ey 0RSWRa.L

HonorableRay Parabee OpinionNo. JM-709 Co-Chairman Joint SpecialCommitteeon Re: Constitutionalityof proposed Cogeneration statuteauthorizing state agencies Texas State Senate to contract for the installation, P. 0. Box 12068 operation and financing of coAustin,Texas 78711 generationunits

Honorable James E. (Pete)Laney Co-Chairman Joint SpecialCommittee on Cogeneration Texas House of Representatives P. 0. Box 2910 Austin,Texas 78769
Gentlemen:

As Co-Chairmen of the Joint Special Committee on Cogeneration, you ask whether article III, section 49, of the Texas Constitution prohibits contractsbetween state agenciesand third-partyvendors for the installation,operation,and financingof cogenerationunits tobe repaid over a period of years from energy savings. You indicate that the coemittee intends to recommend legislation authorizing state agencies to enter into such contracts. Your concern is that article III, section 49, a section thatprohibits the state from creatingdebt
or authorizing the creation of debt on behalf of the state, prevents such contracts.
Section 49 of article III provides:

No debt shallbe createdby or onbehalf of the State, except to supply casual deficiencies of revenue, repel invasion, suppress insurrection. defend the State inwar, or pay existingdebt; and the debt created to supply deficiencies in the revenue, shall never exceed in the aggregate at any one time two hundred thousanddollars.

Tex. Const. art. III, 549. A history of controversy surrounds this provision. See generallyAttorney General Opinion JR-666 (1987). It is not necessary to repeat thathistory in detailhere.

The Texas Supreme Court has consistently upheld methods of avoiding this constitutionalprohibitionwhich involve the issuanceof

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bonds that are not securedby the full faith and credit of the state. For example, in Texas National Guard Armory Board v. McGraw, 126 S.W.2d 627 (Tex. 1939). the court upheld the creation of an authority to issue bonds to acquire buildings to be leased to the state for a rental amount adequate tomaintain the buildings, to pay the interest
on thebonds, and to eventuallyretire thebonds. In theArmory Board case, the court relied on the fact that the whole process depended upon the execution of a new lease every two years. Without an "optional" two-year renewal, the state would be obligated beyond current revenues, see Tex. Const. art. VIII, 56, and would therefore be in violation ofarticle III, section 49. See Armory Board, 126 S.W.2d at 634-35. In Texas Turnpike Authorityvxhepperd, 279 S.W.Zd 302 (Tex. 1955). the courtupheld the creation of a turnpikeauthority to finance a highway system by issuing bonds payable solely from highway tolls and concessions. Even if highway revenues were insufficient to retire the bonds, bondholdershad no recourse against the credit of the state. 279 S.W.2d at 305. The court relied on the Armory Board case and determined that this financing plan did not create a debt in violation of article III, section 49. of the Texas Constitution. See 279 S.W.Zd at 304. In Texas Public Building Authorityv. Mat=, 686 S.W.Zd 924, 928 (Tex. 1985). the court again relied on the Armory Board case. The court upheld legislation creatingan agency to issue and sellbonds to finance the acquisition, construction, and improvement of buildings used by state agencies. The principal and intereston the bonds were to be repaid by pledging all or part of the designated rents, issues, and profits from leasing
a building to the state or by obtaining funds from any other lawful
source. The court held that the act did not create a debt of the state. 686 S.W.Zd at 928.

You have not submitted to this office specificproposed legislation outlining the essential terms that the proposed cogeneration contracts would include. So long as such legislation and contracts executed pursuant to the legislation comply with the guidelines set forth in the BuildingAuthority case, Texas courtswould not find the legislation invalid under section 49 of article III. The situation presentedby your request is somewhatdifferent than thatpresented in the Armory Board case and its progeny. In these cases, legislation created an agency to issue bonds to finance certain projects. Your request involvesa contractwith a privateparty tobuild cogeneration units. Application of the principles announced by the Texas Supreme Court to your situation would require that the private party agree that its recourse isnot against the credit of the state.

You indicate that the contemplated legislation would authorize contracts for the private construction,operation, andmaintenance of cogeneration units for which a state agency would pay an amount of money over a period of years, based on a percentage of the amount of money operation of the unit saved the agency. You indicate that paymentwould continueuntil an amount determinedby the contracthad been paid. Some contracts may require payment for less than five

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years, othersmay require payment formore than seven years. In w of Tyler v. L.L. Jester 6 Co., 78 S.W. 1058, 1062 (Tax. 1904), the Texas SupremeCourtheld that a contract for thedelivery of water for
a number of years did not create an unconstitutionaldebt of the city because the liability of the city arose only upon the city’s use of water during eachyear. In Charles Scribner's Sonsv. Marrs, 262 S.W. 722 (Tex. 1924), the supremecourtupheld a contractbetween the State Textbook Commission and a private party to purchase books for five years because the state's obligationwas not to buy a fixed number of books over five years but to buy only the number of books needed in any givenyear, tobe purchased out of the current fund for thatyear. In City of Big Springv. Board of Control, 404 S.W.Zd 810 (Tex. 1966), the supreme court considered an agreement by the city to furnish a statehospitalwith water "as long as the State of Texas shall in good faith retain and operate said hospital on said site." The court upheld the contract. See 404 S.W.Zd at 814-15. This office has consideredpreviously theexpress language that contractsmust contain in order to comply with article III, section 49, of the Texas Constitution. See, e.g., Attorney General Opinions M-656 (1970); M-253 (1968). Without specific legislation to review, however, it is impossible to determine conclusively whether the contemplated contracts violate article III, section 49, or other constitutional provisions.

SUMMARY

Legislation authorizing state agencies to enter into contracts with third-party vendors for the installation, operation, and financing of cogeneration units to be repaid from energy savings that follows the guidelines in Texas Public Building Authority v. Mattox, 686 S.W.Zd 924 (Tex. 1985) and Charles Scribner's Sons V. Mars, 262 S.W. 722 (Tex. 1924).would not create ZZdebr inviolation of article III. section 49, of theTexas Constitution.

AttorneyGeneral of Texas

JACK HIGWTOWER FirstAssistantAttorney General

MARY KELLER ExecutiveAssistantAttorney General

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JUDGE ZOLLIE STRAKLET SpecialAssistantAttorneyGeneral

RICK GILPIN Chairman,Opinion Committee
Preparedby JenniferRiggs AssistantAttorney General

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