JIM MATTOX Attorney General

Supreme Court Building P.0.Box12549 Austin.TX. 7971%2549 512/47~~2501 Telex 9101874-1397 Telecopier 512/475.0266

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714Jackson, Suite700 Dallas, TX. 75202-450s 214/742-9944

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AnEqualOppOrtUnitYl Affirmative Action Employer 

# TheAttorney General
August 19, 1986

Honorable BobBul1oc.k Comptroller ofPublic L.B.J. Building Austin. Texas 78774

DearMr.Bullock: Accounts

Youinform usthat youhave received numerous inquiries from city and county officials regarding whether interest should be paid on 

# ofTexas

Opinion No. JM-539

Re: Whether interest should be paid ontaxes collected by the Comptroller onbehalf of local jurisdictions

taxes collected byyour office OIIbehalf of local taxing units. YOU note that heretofom nointerest has been paid to local taxing units
on these funds between the date on which your office collects the taxes and the datf: onwhich such funds are disbursed to the local taxing units. Accordingly you askusfour questions:

1. Mustinterest earned onall taxes collected on behalf of' local jurisdictions be remitted to the jurisdictions for which the taxes were collected?

2. If the answer toquestion (1) is "yesrn should the Statf: Treasurer calculate the interest based upon the rate earned by the State Treasury while they [sic] held the funds?

3. If interest is payable onsuch amounts, should interest earned inprevious periods beremitted to the local jurisdictions?

4. If the answer to question (3) is “yes,” how far back must interest calculations be made and interest remitted?

Wedo not understmd you to ask whether the state is entitled to interest on taxes collected by local taxing units on behalf of the state anddeposited in their accounts prior to their remittance to the state. See, m, TaxCode, 55152.001 et seq.
TheLocal Sales andUseTaxAct, V.T.C.S.. article 1066c, permits
acity, byamajor:ity vote of the qualified voters of the city voting

p. 2480Honorable BobBullock - Page!2 (X3-539)

at anelection held for thm.tpurpose, to adopt alocal sales anduse tax. Section 5(a) of the act provides in pertinent part that I,

. . .the comptroller sha:.3. perform all functions incident to the administration, collection, enforcement, and operation of the tax.

. . .” Section 7.A of the act provides the following:

Any local sales and use tax collected by the Comptroller under this Act onbehalf of any city shall be depositlzd with the State Treasurer & trust and shall be kept in a separate suspense account for each mch city. (Emphasis added).

Section 8(a) of the act setli forth the following inpertinent part:

‘Each city’s share of all local sales anduse tax collected under ti:Ls Act by the Comptroller shall be transmitted to the Treasurer or the officer performing the fractions of such office of such city by the Conptroller payable to the city periodically as smromptlyas feasible. Transmittals required unlier this Act shall be made at least twice in eac:hstate fiscal year. Thefunds
so transmitted m&ybe used by the city for any purpose for “hid. the general funds of the city maybe used. Befo.ce transmitting such funds, the Comptroller shall deduct twopercent (2%) of the
sum collected from each such city during such period as acharge by the State of Texas for its services specified in this Act, andthe amounts so deducted, subject ‘tothe provisions of Section 7B of this Act, shal:. bedeposited bytheComptroller in the State Trealrury to the credit of the General Revenue Fundof the State.

Section 9 of this act provides that “[mloney collected under this [a]ct is for the use andb’znefit of the cities of the state; but no city maypledge anticipate’3 revenue from this’ source to secure the payment of bonds or oth#!r: indebtedness.” The act contains no provision specifically detailing the proper disposition of interest accruing to the accounts of the cities imposing the tax.
The comptroller also has responsibility under V.T.C.S. articles 1118x and 1118~. which aut’vlrlze the creation of metropolitan rapid transit authorities and regional transportation authorities, respectively. Each act pe:mlits authorities created pursuant to the act to levy local sales and use taxes. Such taxes are to be administered andcollected bythe comptroller. V.T.C.S. arts. 1118x. §llB; 1118y, §16. Under both acts, the provisions of the Limited Sales, Excise andUseTax, V.T.C.S. art. 1066c, are applicable to the -,

P. 2481Honorable BobBullock - PaSe3 (JM-539)

,- collection of the tax. V.T.C.S. arts. 1118x, §llB(c)(3); 1118y,

516(f) (2)Cc). It is the interest generated by the deposit of these taxes with which you are ccncerned.

Article VIII, section 7, of the Texas Constitution provides the follo"ing:
TheLegislature shall not have power toborrow, or

in anymannerdivert from its purpose, anyspecial fund that may, cr ought to, come into the Treasury; and shall makeit penal for any person or persons to borrow, withhold or in any manner to divert from its purpose.any special fund, or any part thereof.
Article VIII, section 7, has been construed to require that interest onconstitutionally dedicated funds maybespent only for the purposes for which the fund wascreated; adiversion of such interest to other purposes would v::olate the constitution. Lawson v. Baker, 220 S.W. 260, 272 (Tex. Civ. App. - Austin 1920, writ ref'd). Consequently, interest earned on a constitutional fund must be credited to that fund, unless the constitution itself otherwise directs. Attorney General Opinions JM-323, JM-321 (1985); M-468 (1969). Theninterest on E,tate funds dedicated by statute, however, maybe legally severed ar.d placed in the general fund. See Gulf
-- Insurance Co. v. James, 185 S.W.Zd 966 (Tex. 1945) (article VIII, section 7, of the Texas Constitution applies only to special funds created by the constitution, not by statute); Attorney General Opinions JM-323, JM-321 (17135); MW-338(1981); see also Brazos River Conservation &Reclamation-District v. M&raw, 91 S.W.2d 665 (Tex. 1936) (article VIII, section 7, does not apply to general revenue funds). Article 2543d (since repealed and m-codified es section 3.042(a) of V.T.C.S., article 4393-l) effects such a severance of interest onstatutory funds asageneral rule.

Section 3.042(a) of ;.rticle 4393-1, V.T.C.S., the article that sets forth the powers andduties of the state treasurer, provides the following:

Interest receivei. fro" time deposits of money in

funds andaccouni:s in the charge of the treasurer shall be allocated es follows: to each constitutional fund there shall be credited the pro rata portion of the interest received duethe fund; the remainder of th; interest received, with the exceotion of tha.t vortion required by other statutes to be credited on a pro rata basis to protested tax payments. shall be credited to the General Revenue Fund. Theinterest received shall
--

p. 2482, Honorable BobBullock - Page 4 (.Jki-539)

be allocated on a monthly basis. (Emphasis added).

The funds about which you inquire are not constitutionally dedicated funds; rather, they are statutory funds. Consequently, pursuant to section 3.042(a), the in,:erest on such funds would normally be credited to the General Rerenue Fund. However, the rule with regard tothe disposition of interest earned bythe deposit of trust funds is different.
This office previously 'hasdetermined that theprovisions ofwhet is now section 3.042(a). V.T.C.S., art. 4393-1. do not apply to interest earned ontrust funds that are not the property of the state and that the state treasurer holds as trustee out of the state treasury. Opinions issued bythis office consistently havemaintained that interest onsuch trusj: funds becomes part of the principal end, consequently, part of the fund that generated the interest. See Attorney General Opinions JM-306, .Jk-300 (1985); MW-82(1979); H-1040 (1977); M-468 (1969). Cf. Attorney General Opinions MW-338 (1981); H-1187 (1978). Theissur'then, is whether the funds about which you inquire are trust funds, as opposed to statutory funds. Weconclude that they are trust funds.

The opinions cited above ,indicate that in order to be characterized as trust fur&s, the funds in question should reflect, among other things, (1) that they are administered by a trustee or trustees, (2) that the funds neither are granted to the state in its sovereign capacity nor collected for the general operation of state government, and (3) that :they are to be spent and invested for specific, limited purposes andfor the benefit of aspecific group of individuals. Being in the nature of atrust, such funds are entitled to retain the proceeds :irom their investment. Attorney General Opinions MW-481(1982); M-468 (1969). It is clear from areading of V.T.C.S., articles 1066~. 1118x. and 1118~ that the funds about which you inquire are trust fund:; andare entitled to be credited with the accrued interest earned bI' their deposit. Under each statute, the comptroller acts as trustee on behalf of the various taxing units imposing the taxes. The taxes are not granted to the state nor collected for the general operation of the state. Each statute specifies the purposes for which such taxes maybe spent, with each taxing unit receiving the amountof taxes that each imposes.

Your remaining questions concern the proper method of crediting the various funds for interest earned in previous years. Wedecline togive advice astothe specific accounting methods or time intervals to be used in calculatirg past interest. The answers to these questions depends upon ini'ormation not provided by your request -- s, the terms, duration, andtypes of deposits, applicable rates of interest. etc. Wecan sta,te as ageneral matter, however, that the -,

P. 2483Honorable BobBullock - Page 5 (JM-539)

funds have exhibited the aforementioned trust fund characteristics since their creation. Con:iequently, the funds are entitled to credit for depository interest from the various dates of their inception. Before the funds maybe credited with this interest, however, certain limitations ontheuse of treasury funds mustbeconsidered.

You first asked whett:er interest earned by the state on taxes collected onbehalf of local taxing units must be "remitted" to the taxing units for which thmztaxes were collected. Theword "remit"
means "to transmit or send, especially to a distance, as money in payment of ademand, account, draft, etc." Nicoletti v. Bankof Los Banos, 214P. 51, 52 (Cal, 1923), 27A.L.R. 1479 (1923); Katcher v. American Express Cc., 109,4. 741, 742 (1920); First National Bankv. People's Bank, 140S.E. 705 (N.C. 1927); Hollowell V. Life Insurance CompanyofVirginia, 35S.E. 616, 617 (N.C. 1900). Weunderstand your first question, then, to 'mmprise two parts: first, whether local jurisdictions are entitled to interest earned by the state on taxes collected onbehalf of local jurisdictions; and, second, if the answer is "yes," whether the stats treasurer must then disburse or transmit such funds to the respecttire taxing units. Weanswer the first part of the first question in the affirmative; the second part, in the negative.
Article VIII, sectior. 6, of the Texas Constitution prohibits withdrawal of funds from the state treasury in the absence of legislative appropriation. The Texas Supreme Court has held that funds erroneously deposited in the treasury are nevertheless subject to this constitutional lirlitation and maynot be removed from the treasury without legislative action. Manion v. Lockhart. 114S.W.2d 216, 219 (Tex. 1938). Accordingly, the legislature must make a specific appropriation befm,re any interest erroneously deposited in the general revenue fundmayberemitted to the cities or authorities.

Wenote that the disuetion that the legislature mayexercise in this area is broad. For ertample, rather than remit such interest to the taxing unit, the legis:lature, if it so chose, could require by statute that' all such interest be retained in the General Revenue fund, transfered to another fund, or directed tobe expended for some other purpose. In Gulf 1n;urance Co. v. James, 185S.W.2d 966 (Tex. 1945). the Texas Supreme ?ourt upheld the constitutionality of a statute which served to transfer from ststutory "special funds" to the General Revenue Fundportions deemed surplus created from taxes paid into the Motor Vehicle Division Fundandthe Fire Insurance Division Fund. TheCourt declared:

Weagree with the holding of the Court of Civil Appeals' that ths: Legislature has the right to transfer the a&e on hand in these special funds to the Gengral Revenue Fund. In so doing

p. 2484, Honorable BobBullock - Page:6

theLegislature dms not violate the provisions of Article VIII, section 7, of the Texas Constituticn.

. . . Thestate could have required the funds ccllectzd for the purposes indicated to be paid directly to the General Revenue Fund in the first instance.

. . . If it haddone so, then certainly the exxss, if any, would have been available for uce for general purposes. The propriety andfairness of anenactment authoristhe use of the unexpended balances in these funds for general purp,%es present legislative rather than judicial corgideraticns. Consequently, the state nowhas the :cight, if the Legislature deems it wise to pass suitable laws authorizing it, to
use the balance!; of these special funds for general purposes. (Emphasis added).

185S.W.2d 966, 971.
Indeed, even in the case of a statutory trust fund, the Texas SupremeCourt has ruled tha:, solong as novested right is impaired,
an amendment that serves t,c alter or reduce a benefit heretofore granted by statute is permissible. In the leading case of City of Dallas v. Tramnell, 101 S.W.2d 1009 (Tex. 1937), the Texas Supreme Court specifically upheld the constitutionality of a statute, the effect of which was to reduce the.pension benefits of apensioner. Thecourt stated (and restated andrestated again) the issue thus:

As we view 1:he matter, the true question involved is this: Does the employee, after retirement, have avested right to participate in the pension fund tothe extent of the full amount of retirement; is; that does he have a vested right in future installments which cannot be affected by subsequent legislation tending to diminish the amcuut of such installments? Putting the matter in somewhat different language, wemay properly inquire if the right which the employee has to participate in the pension fund, acquired byvirtue of his contract, imposes upon the city and the Legislature of the state (the source of the city's power andauthority in amatter of this kind) the inviolal~le duty ofmaintaining apension fund of such prcportions as will guarantee the right to defendant in error and others having equal rights with himto participate to the full extent of the monthly amounts previously awarded to them at the time the right to participate accrued? In other words, is the LegislatureHonorable BobBullock - Page 7 (.D+539)

without constitul:icnal power to repeal the laws upon which the pension system of the City of Dallas is based, or tomodify their provisions in such way as to tiiminish the pensions payable to those whohave become qualified toreceive themso long as any one whohas been granted apension shall live?

101S.W.2d 1009, 1011.
Thecourt concluded that
the right of a pensioner to receive monthly payments from the pension fund after retirement from service, or aEter his right toparticipate in the fund has accrued, is predicated upon the anticipated continuance of existing laws, and is subordinate to the right of the Legislature to abolish the per.sicn system, or diminish the accrued benefits of pensioners thereunder, is undoubtedly the scund rule tobeadopted.

TheCourt then declared th,lt aright, tobewithin the protection of the constitution, mustbea.vested right or something morethanamere expectancy based upon ananticipated continuance of anexisting law; in this instance, the pensioners' rights were mere "expectancies." 101 S.W.2d 1009, 1014-16. See also Woodsv. Reillv. 218S.W.Zd 437
--- (Tex. 1949); Board of Manaf;ers of the Harris County Hospital District
v. Pension Board of the Pension System for the City of Houston, 449 S.W.2d 33 (Tex. 1970); De& v. City of SanAntonio, 443 S.W.2d 590 --- it ref'd): Attcrnev General Letter (Tex. Civ. APP. - Waco 15,69, wr Advisory No. 5.(1973). ,

SUMMARY

Interest earnai on all taxes collected on behalf of local Iaxing units must be credited to those taxing ur,its. Any interest previously deposited in the general revenue fund of the state treasury must receive specific legislative appropriation before riuchinterest can be remitted to thevarious taxing units.

JIM MATTOX Attorney General ofTexas

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JACKHIGHTOWER First Assistant Attorney General

MARYKELLER Executive Assistant Attorney General

RICKGILPIN Chairman, Opinion Committee Prepared byJimMcellinger Assistant Attorney General

p. 2487