February 26,1999 

The Honorable Judith Zaffirini 

Chair, Human Services Committee 

Texas State Senate 

P.O. Box 12068 

Austin, Texas 78711 

Opinion No. X-0004 

Re: Whether a county is authorized to invest 

county permanent school fund proceeds in “passthrough’mortgage-backed securities at aninterest 

rate that is below market rate for comparable 

securities to assist in providing low-income 

housing in the county (RQ-887) 

Dear Senator Zaftirini: 

On behalf of Webb County, you ask whether a county is authorized to invest county 

permanent school fund proceeds in “pass-through’ mortgage-backed securities’ at an interest rate 

that is below market rate for comparable securities. Your request letter suggests that the crucial legal 

question is whether the contemplated investment is authorized by the Public Funds Investment Act, 

TEX. GOV’T CODE ANN. ch. 2256 (Vernon 1999), particularly Government Code sections 2256.009 

and 2256.024. We do not reach the Public Funds Investment Act, however, because we conclude 

that article VII, section 6 of the Texas Constitution precludes the county from making such an 

investment on behalf of the county permanent school fund. 

Article VII, section 6 provides in pertinent part that county school lands “and the proceeds 

thereof, when sold, shall be held by said counties alone as a trust for the benefit of public schools 

therein; said proceeds to be invested in bonds of the United States, the State of Texas, or counties 

in said State, or in such other securities, and under such restrictions as may be prescribed by 

law. .” TEX. CONST. art. VII, 5 6. Numerous court opinions and opinions of this office treat a 

county permanent school fund as a trust and stress the fiduciary nature of a county’s duty to invest 

the county permanent school fund on behalfofpublic schools in the county. See, e.g., Delta County 

v. Blackburn, 93 SW. 419, 422 (Tex. 1906) ( counties are trustees for benefit of state’s public 

schools); Comanche County Y. Burks, 166 S.W. 470,473-74 (Tex. Civ. App.-Fort Worth 1914, writ 

ref d); County School Trustees v. Brazoria County, 240 SW. 675,676 (Tex. Civ. App.-Galveston 

1922, no writ) (county held fund as trustee for schools); see also Tex. Att’y Gen. Op. Nos. H-506 

‘The term “pass-through” is used to describe a mortgage-backed security for which the payments on the 

underlying mortgages are passed from the mortgage holder through the servicing agent to the security holder. The 

servicing agent usually keeps a portion of the payments as a fee. See DAWD A. FRANKLIN, GLOSSARY OF PUBLIC 

FINANCE TERMINOLOGY 30 (1992). 
The Honorable Judith Zaffirini - Page 2 (JC-0004) 

(1975) at 2 (county commissioners court acts in fiduciary capacity as trustee of permanent school 

fund), H-239 (1974) at 1 (“The county permanent school fund is impressed with a trust in favor of 

the local inhabitants and schools, and the commissioners court administers the fund as trustee, with 

the duties oftrustee.“), M-l 104 (1972) (applying Texas Trust Act to county permanent school fund), 

V-1089 (1950) at 3 (commissioners court is trustee of permanent school fund; if commissioners 

court abused its discretion by failing to invest fund for benefit of permanent school Rmd, order 

would not be valid). As one court has stated, 

The county for which [the county commissioners] act holds the proceeds as 

an express trust, and the investment thereof in the securities named in the 

Constitution or otherwise, as may be prescribed by law, necessarily involves 

an exercise of judgment and discretion. 

[W]e see no reason why the county should not be held to the same rules of 

law that are applicable to other trustees. 

Burks, 166 S.W. at 473-74 (emphasis added). 

Relying on the foregoing authority, this office has applied statutory provisions applicable to 

trusts generally to county permanent school funds. See Tex. Att’y Gen. Op. No. M-l 104 (1972) at 

2. Noting that under the Texas Trust Act a trustee could not sell property to the trust, this office 

concluded that county commissioners could not sell to the county’s permanent school fund bonds 

or other securities issued by the county while serving as trustees of the fund. Id. In addition, 

reasoning that a trustee must “exercise the judgment and care under the circumstances then 

prevailing, which men of ordinary prudence, discretion and intelligence exercise in the management 

of their own affairs,” this office concluded that the proposed investment was also impermissible 

because of the low interest rate on the securities to be purchased. Id. at 2-3. The opinion 

emphasized that “great caution should be exercised [by the county commissioners court] to insure 

that the highest prevailing rate of interest, consistent with investment safety, is secured on any 

investment of county permanent school funds, and that said funds are invested in securities other 

than those issued by the trustee-commissioners.” Id. at 3. 

“The ‘prudent’ character of an investment is ordinarily one of fact, unless reasonable minds 

could not disagree.” Tex. Att’y Gen. Op. No. H-239 (1974) at 2. In one opinion, however, this 

office concluded that courts would consider the investment of county permanent school fund 

proceeds in low-interest bearing independent school district bonds imprudent as a matter of law. Id. 

Your letter states that although the “pass-through” mortgage-backed securities would yield 

more than present county permanent school fund investments, the county would receive below 

market rate for similar securities available in the market, explaining that the purpose of the program 

“is to assist in providing housing to a segment of Webb County’s population that otherwise could 

not afford it . . . Investment in the securities also will further the public purpose of providing low 
The Honorable Judith Zaffirini - Page 3 (JC-0004) 

income housing in an area with an urgent need for such assistance.” We assume, based on your 

description of the other similar securities as “comparable,” that the similar securities pose no greater 

risk. 

Based on the facts you have provided, we believe that a court would very likely conclude that 

the proposed investment is imprudent as a matter of law. First, it is doubtful that a prudent investor 

would select the securities the county proposes to purchase on behalf of the permanent school fund, 

given that other, similar securities available in the market would yield more at no greater risk. 

Furthermore, although facilitating the provision of low-income housing pursuant to certain statutes 

is a legitimate public purpose of the county,* the county’s duty of loyalty to the county permanent 

school fund trust precludes it from pursuing this county purpose in investing permanent school fund 

proceeds at the expense of the trust. Based on the information provided, we believe that a court 

would conclude that the investments you describe are not consistent with the county’s 

constitutionally-imposed fiduciary duty to the beneficiaries of the county permanent school fund.l 

‘See TEX. LOCAL GOV’T CODE ANN. chs. 392, 394 (Vernon 1998 & Supp. 1999) (authorizing counties to 

establish housing authorities and housing finance corporations); see also TEX. GOV’T CODE ANN. 5 2256.024(c) 

(Vernon 1999) (permitting housing bond programs operated by county housing authorities and county housing finance 

corporations to purchase mortgage pass-through certificates and individual mortgage loans). We do not address here 

whether a county may assist in providing low-income housing other than pursuant to these stahrtory provisions. See, 

e.g., Tex. Att’y Gen. Op. No. JM-942 (1988) at 3 (concluding that commissioners courts lack authority to guarantee 

loans for housing purposes). 

‘Under the Texas Trust Code, a trustee who commits a breach of trust is chargeable with any damages arising 

from the breach of trust, including any profit that would have accrued to the bust if there had been no breach of tmst. 

See TEX. PROP. CODE ANN. 5 114,001(c)(3) (Vernon 1995). 
The Honorable Judith Zaffirini - Page 4 (JC-0004) 

SUMMARY 

A county’s plan to invest county permanent school fund proceeds in 

“pass-through” mortgage-backed securities at an interest rate that is below 

market rate for similar securities available in the market in order to assist in 

providing low-income housing in the county is not consistent with the 

county’s trustee duties with respect to the fund under article VII, section 6 of 

the Texas Constitution. 

Attorney General of Texas 

ANDY TAYLOR 

First Assistant Attorney General 

CLARK RENT ERVIN 

Deputy Attorney General - General Counsel 

ELIZABETH ROBINSON 

Chair, Opinion Committee 

Prepared by Mary R. Crouter 

Assistant Attorney General