THE ATTORNEY GEXERAL 

OF TEXAS 

May 26. 1987 

.Jn¶ xxrrGx 

A-Ey 0RSWRa.L 

Honorable Ray Parabee Opinion No. JM-709 

Co-Chairman 

Joint Special Committee on Re: Constitutionality of proposed 

Cogeneration statute authorizing state agencies 

Texas State Senate to contract for the installation, 

P. 0. Box 12068 operation and financing of coAustin, Texas 78711 generation units 

Honorable James E. (Pete) Laney 

Co-Chairman 

Joint Special Committee 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 contracts between state agencies and third-party vendors for 

the installation, operation, and financing of cogeneration units to be 

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 that prohibits the state from creating debt 

or authorizing the creation of debt on behalf of the state, prevents 

such contracts. 

Section 49 of article III provides: 

No debt shall be created by or on behalf of the 

State, except to supply casual deficiencies of 

revenue, repel invasion, suppress insurrection. 

defend the State in war, or pay existing debt; and 

the debt created to supply deficiencies in the 

revenue, shall never exceed in the aggregate at 

any one time two hundred thousand dollars. 

Tex. Const. art. III, 549. A history of controversy surrounds this 

provision. See generally Attorney General Opinion JR-666 (1987). It 

is not necessary to repeat that history in detail here. 

The Texas Supreme Court has consistently upheld methods of 

avoiding this constitutional prohibition which involve the issuance of 

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Honorable Ray Farabee 

Honorable James E. (Pete) Laney 

Page 2 (a-l-709) 

bonds that are not secured by 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 to maintain the buildings, to pay the interest 

on the bonds, and to eventually retire the bonds. In the Armory 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 Authority vxhepperd, 279 S.W.Zd 

302 (Tex. 1955). the court upheld the creation of a turnpike authority 

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, bondholders had 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 

Authority v. Mat=, 686 S.W.Zd 924, 928 (Tex. 1985). the court again 

relied on the Armory Board case. The court upheld legislation 

creating an agency to issue and sell bonds to finance the acquisition, 

construction, and improvement of buildings used by state agencies. 

The principal and interest on 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 specific proposed 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 Building Authority case, Texas courts would not find the 

legislation invalid under section 49 of article III. The situation 

presented by your request is somewhat different than that presented in 

the Armory Board case and its progeny. In these cases, legislation 

created an agency to issue bonds to finance certain projects. Your 

request involves a contract with a private party to build 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 is not against the credit of the state. 

You indicate that the contemplated legislation would authorize 

contracts for the private construction, operation, and maintenance 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 

payment would continue until an amount determined by the contract had 

been paid. Some contracts may require payment for less than five 

p. 3278 
Honorable Ray Farabee 

EIonorable($smgsgF. (Pete) Lauey 

Page 3 - 

years, others may require payment for more than seven years. In w 

of Tyler v. L.L. Jester 6 Co., 78 S.W. 1058, 1062 (Tax. 1904), the 

Texas Supreme Court held that a contract for the delivery of water for 

a number of years did not create an unconstitutional debt of the city 

because the liability of the city arose only upon the city’s use of 

water during each year. In Charles Scribner's Sons v. Marrs, 262 S.W. 

722 (Tex. 1924), the supreme court upheld a contract between the State 

Textbook Commission and a private party to purchase books for five 

years because the state's obligation was not to buy a fixed number of 

books over five years but to buy only the number of books needed in 

any given year, to be purchased out of the current fund for that year. 

In City of Big Spring v. Board of Control, 404 S.W.Zd 810 (Tex. 1966), 

the supreme court considered an agreement by the city to furnish a 

state hospital with 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 

considered previously theexpress language that contracts must 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 in violation of article III. section 49, of 

the Texas Constitution. 

Attorney General of Texas 

JACK HIGWTOWER 

First Assistant Attorney General 

MARY KELLER 

Executive Assistant Attorney General 

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Honorable Ray Farabee 

Honorable James E. (Pete) Laney 

Page 4 (JM-709) 

JUDGE ZOLLIE STRAKLET 

Special Assistant Attorney General 

RICK GILPIN 

Chairman, Opinion Committee 

Prepared by Jennifer Riggs 

Assistant Attorney General 

p. 3280