## QBffice oftfy Igttornepflheral %stateof aexae
August 6,199l

Honorable Edmund Kuempel Committee on House Administration Texas House ofRepresentatives P.O. Box2910 Austin, Texas 78768-2910 Opinion No.DM- 31 Re: Whether a city may grant a homestead exemption that would compromiw its outstanding bond obligations (RQ-75) Dear Mr. Kuempel: We have been informed that in September 1990 the city of Camp Wood pledged all of its ad valorem tax revenues to the repayment of certain bonds. In January of 1991, the citizens of Camp Wood approved through a referendum election a proposition that the city grant a $50,000homestead exemption from ad valorem taxes to resident taxpayers 65 years old or older or disabled. Our understanding is that an exemption of only $3,000had been in place from the time the revenues were pledged until the adoption of the present exemption. There is grave concern that the application ofthe new exemption will impair the city’sdebt obligations. You have requested an opinion from this office as to whether a city may grant a homestead exemption that would impair the city’sability to pay debt service on its outstanding bonds. We have determined that such an exemption may not be applied under these circumstances. Section 11.13(d)ofthe Tax Code provides the following:

In addition to [other exemptions] an individual who is disabled or. 65 or older is entitled to an exemption from taxation by a taxing unit of a portion (the amount ofwhich isfixed asprovided by Subsection (e) of this section) of the appraised value of his residence homestead ifthe exemption is adopted either: (1) by the governingbody ofthe taxingunit; orHonorable Edmund Kuempel -Page 2 (DM-31)

(2) by a favorable vote of a majority of the qualified voters of the taxing unit at an election called bythe governing body ofthe taxingunit.

. . . Subsection (e) provides that the amount ofthe exemption be $3,000unless a larger amount is specified in the subsection (d) process of adopting the exemption. It is our understanding that the exemption at issue here was adopted in accordance with these statutory provisions. Section 11.13(i) addresses the propriety of granting an exemption that would cause an impairment ofoutstanding contract obligations:

The assessor and collector -fora taxing unit may disregard the exemptions authorized by Subsection (b), (c), (d), or (n) ofthis section and assess and collect a tax pledged for payment of debt without deducting the amount ofthe exemption iE (1) prior to adoption of the exemption, the unit pledged the taxes forpayment ofa debt; and (2) granting the exemption would impair the obligation ofthe contract creating the debt.1 In the case of Camp Wood, the city pledged its ad valorem tax revenues to the repayment bonds in September 1990. As noted above, the exemption election took place the followingJanuary. Therefore, the facts ofthis case are within subsection (i)(l) ofsection 11.13.2

‘section ll.U(d) of the Tax Code permits the adoption of the exemption at issue by a referendum election carried alit in accordance with that section’s requirements. There seems to be no question about the validity of the referendum vote in this case. *Set? also Tea. Const. art.8,s l-b(b) (“Whereany ad valorem taxhas theretofore been pledged forthe payment of any debt, the taxing officers of the political subdivision shall have authority to eontiaue

to levyandCO&XI

thetaxagainst

thehomestead

propertyatthesamerateasthetaxso pledged until the debt is discharged, if the cessation of the levy would impair the obligation of the contract by which the debt was created.“). Section ll.U(i) is a statutory restatement of the constilutional provision. 21 Howell, Property Taxes 0208 (Texas Practice 1988,3d ed.). Accordingly, any inconsistency bchvecn the language of the constitutional and stahltory provisions should be resolved in favor of the former. Id We therefore construe the term “taxassessor and collector” in thr statute broadly to encompass the “taxingoficcrs” specified in the constitution. In some instances, as

p. 143Honorable Edmund Kuempel -Page 3 (DM-31)

Both the U.S. Constitution and the Texas Constitution prohibit legislation impairing the obligation ofcontracts. U.S.Const. art. I, 8 10cl. 1;Tex. Const. art. I, 5 16. This fact is critical to our determination ofwhether the city may grant the exemption at issue. It iswell established that the constitutional prohibition applies to contracts made by states or municipalities, and that it applies to municipal bylaws and ordinances. Determon v. CityofIrving,

609S.W.2d 565, 569 (Tex. Civ. App.-Dallas 1980, no writ), citing VonHoffman v. Cityof Quincy,71 U.S. 535 (1866),u&Atlantic Coast LineRR v.City ofGoldrboro,

232U.S. 548, 555 (1914). The court in Detennan found that an amendment to a city charter limiting the amount of yearly increases in ad valorem taxes was void as an impairment of the obligation of the contract between the city and holders of outstanding bonds to which the ad valorem taxes had been pledged. The court stressed that “the protection ofthe contract clause was activated by unquantified financial loss or the potential for financial lossresulting from a legislative act.” 609 S.W.2dat 570, citing United States Trust Co.v.NewJersey,

431 U.S. 1(1977), and City ofAransm

Pm v. Keeling, 247 S.W. 818, 821 (1923) (emphasis added); see also Attorney General Opinion JM-453 (1986). Thus, if application of the homestead exemption in this case would impair the obligation of the pre-existing contract with the city’s bondholders, the exemption wouldbe unconstitutional. Section 11.13(i) ofthe Tax Code is designed to deal with the circumstances that Camp Wood may be facing. Section 11.13(i) states that the assessor-collector of the taxing unit may disregard an exemption adopted pursuant to section 11.13(d)(2). Where granting an exemption would result in impairment of contractual obligations, the only constitutionally permissible course available to the taxassessor-collector isto deny the exemption.3 The homestead exemption at issue cannot validly be granted if doing so would impair the city’s ability to fulfill its pre-existing contractual obligations to bondholders. As this office cannot make factual determinations, we stress that this opinion does not constitute a finding that granting the exemption at issue would

whenthctax

assessor-collector is an employee of one of these entities, the taxiog officer may be a mayor, citymanager, or lhe city coumil. 3The word ‘may” in astatute is sometimes construed as mandatory when used to describe the duty of a public offkial to carry out functions that benefit private iudividuals. 1A Sutherland STATUTORY

CONSTRUCTION

5 25.04 (4th ed. 1985); see also Supervisorsv. LlnircdStates, 4 Wall. 435, 438 (U.S. lJ366).

p. 144Honorable Edmund Kuempel -Page 4 (DM-31)

impair the contract obligations here; rather, it instructs that a taxing unit’s ability to grant aduly adopted exemption issubject to constitutional limits. 

### SUMMARY Under the Texas and the U.S. Constitutions, a city may not apply a homestead exemption approved by referendum in accordance with Texas Tax Code section 11.13(d) and (e) if doing so will impair the obligation of a contract creating a debt incurred by the taxing unit prior to adoption of the exemption. Texas Tax Code section 11.13(i)authorizes the taxing officers of the unit to disregard the duly adopted exemption when such circumstances exist.

DAN MORALES Attorney General ofTexas WILLPRYOR First Assistant Attorney General MARY KELLER Executive Assistant Attorney General JUDGE ZOLLKESTEAKLEY (Ret.) Special Assistant Attorney General RENEAHICKS Special Assistant Attorney General MADELEJNE B.JOHNSON Chair, Opinion Committee Prepared by Faith Steinberg Assistant Attorney General

P- 145