OFFiCE OF THE ATTORNEY GENERAL STATE OF TEXAS 

JOHN CORNYN 

June 15,1999 

The Honorable Jose R. Rodriguez 

El Paso County Attorney 

County Courthouse 

500 East San Antonio, Room 203 

El Paso, Texas 79901 

Opinion No. JC-0068 

Re: Whether a hospital district is authorized to 

execute a contract to hedge against interest rate 

fluctuations (RQ-1157) 

Dear Mr. Rodriguez: 

You ask whether the El Paso Hospital District, established under article IX, section 4 of the 

Texas Constitution and chapter 281 of the Health and Safety Code, is authorized to execute an 

interest rate hedge contract that entitles the District to receive a lump sum ifmarket interest rates rise 

in relation to the interest rate on certain of the District’s outstanding bonds but that requires the 

District to pay out a lump sum if interest rates fall. A hospital district has only such authority as is 

expressly conferred on it by statute or necessarily implied from the authority expressly conferred to 

effectuate the express powers. The District has express authority to manage a hospital system and 

issue bonds to acquire hospital facilities or to refund outstanding bonds issued for hospital purposes. 

Because execution ofthe interest rate hedge contract is unnecessary to effectuate issuance of bonds 

or refunding bonds, it is the opinion of this office that the District is not authorized to execute such 

a contract. 

You inform us of the following facts giving rise to your question: In February 1996, the 

District entered into a Warrant Purchase Agreement (the “Warrant Agreement”) with a financial 

institution as purchaser of the Warrant (the “Warrant Holder”), an underwriting firm that acted as 

a broker in the transaction, and the Warrant Holder’s affiliate, as agent. In exchange for the Warrant 

Holder placing $1.85 million in escrow (the “Escrowed Funds”) for the benefit of the District, the 

District issued a warrant (the “Warrant”) that entitled the Warrant Holder or its transferee, in certain 

circumstances, to receive on July 1, 1998 a given amount. That amount (“Settlement Amount”) was 

calculated by a formula whereby it would decrease as interest rates associated with a hypothetical 

bond issue having the characteristics of an outstanding bond issue of the District increased or 

increase as interest rates of the hypothetical bond issue decreased. If interest rates increased 

sufficiently by July 1, 1998, the District would retain the Escrowed Funds. But if the interest rates 

decreased to or lower than the interest rates ofthe hypothetical bond issue, then the Warrant Holder 

would be entitled to a Settlement Amount. Interest rates in fact declined, and the District was 

required to pay a Settlement Amount of approximately $5.6 million to the Warrant Holder, against 

which amount the District applied the Escrowed Funds, including interest earnings, totaling $1.9 
The Honorable Jost R. Rodriguez - Page 2 (X-0068) 

million. Thus, the District had to pay to the Warrant Holder approximately $3.9 million in addition 

to the Escrowed Funds. Because the Warrant was not a bond or a bond-related document, it was not 

submitted to nor approved by the Office of the Attorney General.’ 

The Warrant, you inform us, was an attempt to “lock in interest rate savings” with respect 

to the District’s outstanding General Obligation Refunding Bonds, Series 1988 (the “Outstanding 

Bonds”) without actually refunding them? The “hypothetical” bonds in the Warrant transaction 

described above reflected the annual debt service required with respect to the Outstanding Bonds. 

Interest rates on the Outstanding Bonds issued in 1988 were considerably higher than the prevailing 

interest rates in 1996. But the District could not redeem the Outstanding Bonds in 1996 because they 

were not subject to redemption until July 1,1998, and they could not be “advance refunded”on a taxexempt’ basis under federal tax law.4 (The District did not want to issue refunding bonds in escrow 

or enter into any forward delivery contract, which were the alternatives to the Warrant transaction 

for addressing the federal tax limitations.‘) The Escrowed Funds in the Warrant transaction 

represented the present value of the debt service savings the District would have achieved over the 

‘The District’s bonds together with the transcript of the proceedings related to the bonds, like those of other 

public bodies in the state, must be submitted to and approved by the Attorney General. See TEX. HEALTH & SAFETY 

CODE ANN. $5 281.103, ,105 (Vernon 1992); Tex. Fzv. Qv. STAT. ANN. art. 717k-8 (Vernon Supp. 1999). 

2A refunding involves the issuance of new bonds by a governmental entity, the proceeds (either the sale 

proceeds or the proceeds and the investment earnings thereon) ofwhich are used to pay debt service (principal, interest, 

and premium, if any) on and retire an outstanding issue of bonds. D. FRANKLIN & J. PRENDERGAST, GLOSSARY OF 

PUBLIC FINANCE TERMINOLOGY 35 (1992) [hereinafter GLOSSARY]; ARTHUR M. MILLER & VALERIE PEAR~ALL 

ROBERTS, Refunding Odine, 365 PRACTICING L. INST., TAX L. & ESTATEPLANNING COURSEHANDBOOK SERIES, TAX 

L. & PRAC. 269,271 (1995) [hereinafter PLI]. A governmental entity may undertake a refunding to save on interest 

cost, stretch out 01 otherwise restructure the debt service, 01 remove restrictive covenants in the bond documents. 

GLOSSARY supra, at 35; PLI at 274. 

‘“The term ‘tax-exempt’ means, with respect to any bond (or issue), that the interest on such bond (or on the 

bonds issued as part of such issue) is excluded from gross income [of the recipient].” 26 U.S.C.A. 5 150(a)(6) (West 

1998). 

‘Federal tax law distinguishes between “current” and “advance” refimdings. A “current” refunding is a 

refunding in which the prior bonds are called for redemption OI mature within ninety days of the issuance of the 

refunding bonds; all otherrefundings aretreatedas advancerefimdings. See26 U.S.C.A. $149(d)(3), (d)(5) (West Supp. 

1998); Treas. Reg. $! 1.150-l(d)(3) & -l(d)(4) (1999). Accordingly, an “advance refunding” is a refinancing of 

outstanding bonds or obligations-the refunded bonds-by a new issue ofbonds-the refunding bonds-more than 90 

days prior to the date on which the outstanding bonds or obligations can be redeemed, and deposit of the proceeds of 

the refunding bonds in escmw to retire the refunded bonds when they can be redeemed. See 26 U.S.C.A. $149(d)(5) 

(West Supp. 1998); GLOSSARY supra, at 1. Among other restrictions, original new money bonds issued on or after 

January 1, 1986 (or SUCC~SSOI current refunding bonds) may be advance refunded once. 26 U.S.C.A. 5 149(d)(3) 

& (d)(6) (West Supp. 1998). Those issued prior to January 1,1986, may be advance refunded hvice. Id. The District’s 

Series 1988 Bonds had already advance refunded a prior issue and could not be advance refunded again. Letter from 

Mark E. Mendel, Mendel Guztin Blumenfeld, LLP, to Sarah Shirley, Chair, Opinion Committee (Nov. 17, 1998) (on 

file with Opinion Committee) [hereinafter Mendel letter of 1 l/17/98]. 

‘Mendel letter of 1 l/17/98. at 3. 
The Honorable Jo& R. Rodriguez - Page 3 (~~-0068) 

life of the Outstanding Bond if it could have refunded them by the issuance of refunding bonds at 

the lower 1996 interest rates. The Outstanding Bonds remained outstanding, however, and there was 

no actual debt service savings with respect to them in 1996. The District did achieve an actual debt 

service savings of approximately $7 millionwhen it refunded the Outstanding Bonds in August 1998 

in a separate transaction by issuing refunding bonds.6 This savings was, of course, spread out over 

time-the life of the refunding bonds-and not received as a lump sum payment. 

You believe that the District did not have authority to execute the Warrant Agreement or pay 

the Settlement Amount. In contrast, bond counsel to the District on the Warrant transaction contends 

that the District did have such authority derived from the District’s power to borrow money and issue 

bonds. As bond counsel notes, this office does not interpret or construe particular contracts in an 

attorney general opinion. Tex. Att’y Gen. Op. Nos. DM-198 (1992) at 10; JM-697 (1987) at 6. This 

office, however, does address a public entity’s authority to contract with respect to a particular 

subject or to accept particular terms if the question can be answered as a matter of law. Tex. Att’y 

Gen. Op. No. DM-192 (1992) at 10 n.14. Accordingly, while we cannot review the validity ofthe 

particular transaction giving rise to your request, we can generally address the District’s legal 

authority to issue an instrument like the Warrant.’ 

The Warrant is a type of“derivative product,” used to hedge8 against interest rate fluctuations 

in the market. Derivative products are specially designed financial instruments such as interest rate 

swaps, inverse floating-rate products, currency swap agreements, and forward municipal contracts 

that “derive” their value from the performance of an underlying asset, such as securities, 

‘See transcript of proceedings relating to Series 1998 Bonds submitted to the Office of fhe Attorney General 

as required by article 717k-8, TEX. REV. CIV. STAT. ANN. (Vernon Supp. 1999) (on file with Office ofthe Comptroller 

of Public Accounts). 

‘Bond counsel also questions this office’s authority to issue an opinion in response to a request from a county 

attorney. See Mendel letter of 1 l/17/98, at 2. We believe this office has the requisite authority. This oftice has issued 

opinions responding to requests from county attorneys since at least 1917, relying on current sections 402.042 and 

402.043 of the Government Code and their predecessor, article 4399 of the Revised Civil Statutes. See also 35 DAVID 

B. BROOKS, COUNTY AND SPECIALD~STRICT LAW 0 3.19 (Texas Practice 1989) (listing county attorneys as authorized 

requesters). No court has questioned that authority. 

*One tax court has described a “hedge” as follows: 

A “hedge” is an investment that is made to offset an adverse economic performance 

of another investment. For example, if the profit of an investment required a rise 

in market prices, a hedge to that investment could be established to profit from a 

fall in the market prices. Effective use of hedging inshunents requires careful 

analysis of the exposure involved. The costs ofhedging and the possibility that the 

hedge may diminish fhe profitability of the program being hedged each require 

quantification of the expense and duration of the hedging activities as they relate 

to the investments hedged. 

Seykota v. Commissioner ofInternal Revenue, 61 T.C.M. (CCH) 2706,271O (1991) 
The Honorable Jo& R. Rodriguez - Page 4 (~~-0068) 

commodities, currencies, or interest rates. 3 M. DAVID GELFAND, STATE&LOCAL GOVERNMENT 

DEBTFINANCING 5 11:06.50 (West Supp. 1998); Robert C. Downs & Lenora J. Fowler, Derivative 

Securities: Governmental Entities As End Users, Bankrupts And Other Big Losers, 65 UMKC L. 

REV. 483,487 (1997). They are generally used by investors to (1) hedge against adverse changes 

in the value of assets or liabilities, (2) restructure financing terms more favorably, (3) change the mix 

of assets in a portfolio, and (4) to speculate on the direction interest rates will move in the hope of 

gaining a pure profit. Alexander E. Kolar, Hammersmith Meets Orange County: “Wishing Upon 

A Star” With Taxpayer Money In The Municipal Bond Derivative Market, 49 WASH. U. .I. URB. & 

CONTEMP. L. 3 15, 320 (1996). Governmental debt issuers have used these instruments to reduce 

borrowing costs by taking advantage of declines in interest rates after bonds have been issued, to 

reduce the risk that interest rates will rise on variable rate bond issues, and to speculate in the market 

place. GELFAND, supra 5 11:06.50, at 12-13. 

It has been said that while derivatives may have legitimate uses, their use by governmental 

entities as speculative investments can result in enormous losses from which their investors may not 

recover, as shown by the recent experience of Orange County, California. Downs & Fowler supra, 

at 483; Kolar supra, at 315. Before the Orange County derivative failure in the United States, the 

most legally significant derivative loss occurred when the Hammersmith and Fulham London 

Borough Council, a local authority incorporated by English royal charter, defaulted in 1989 on 

payments it owed to various banks under a series of swap contracts. The British House of Lords 

subsequently held that the Council did not have authority to enter into the swap contracts. As one 

of the leading treatises in the area of governmental debt financing cautions, “[albsent express 

statutory authorization . . . local government authority to participate in the derivative products 

market must be resolved,” noting that the “significant opinion by the British House of Lords [in 

Hazel1 v. Hammersmith & Fulham London Borough Council, All E.R. 545 (H.L. 1991)] has cast 

doubt on how a state court might respond” to the argument that the authority to borrow through taxexempt bond financing provides additional powers to enter derivative ,contracts. GELFAND, supra 

5 11:06.50, at 13. 

We examine Hazel1 v. Hammersmith & Fulham London Borough Council in detail for two 

reasons. First, no American courts appear to have considered a governmental entity’s authority to 

execute derivative contracts. Second, and more importantly, the nature of the governmental bodies 

at issue are similar. For instance, as a special purpose district, the District has limited authority, TriCity Fresh Water Supply Dist. No. 2 v. Mann, 142 S.W.2d 945,948 (Tex. 1940); Tex. Att’y Gen. 

Op. Nos. DM-107 (1992) at 2; DM-29 (1991) at 3; JM-258 (1984) at 1, and“may exerciseonlysuch 

powers as have been expressly delegated to it by the Legislature, or which exist by clear and 

unquestioned implication,” Mann, 142 S.W.2d at 946. It has only such implied powers as are 

necessary to effectuate the powers expressly granted. Id. at 947. In other words, implied powers are 

“such as are indispensable to the declared objects of the corporation and the accomplishment of the 

purposes of its creation [,r’ and not those “which are merely convenient or useful[.]” Id. Likewise, 

the Council at issue in Hazel1 was not a sovereign body, but could only do such things as were 

expressly or impliedly authorized by Parliament. HazeN, 1 All E.R. at 548. 
The Honorable Jose R. Rodriguez - Page 5 (X-0068) 

Like the Warrant about which you ask, the swaps at issue in Hazel1 were derivative products 

used to hedge against interest rate fluctuations in the market. The Hazel1 opinion described swap 

contracts generally as “‘an agreement between two parties by which each agrees to pay the other on 

a specified date or dates an amount calculated by reference to the interest which would have accrued 

over a given period on the same notional principal sum assuming different rates of interest are 

payable in each case.“’ Hazel& 1 All E.R. at 550; see also BankAtlantic v. Blythe Eastman Paine 

Webber, Inc., 955 F.2d 1467, 1469 n.1 (1 lth Cir. 1992) (An interest rate swap is an agreement by 

which one party agrees to pay the counterparty a fixed rate of interest on a notional amount for a 

specified period, and the counterparty agrees to pay to the first party an adjustable rate for the same 

period.). The specific swaps in question, according to the Hazel1 opinion, “were undertaken in the 

hope that the burden of interest payable in respect of borrowings by the [Clouncil would be 

mitigated by profits from swap contracts whereby the council successfully forecast movements in 

interest rates.” Hazell, 1 All E.R. at 550. Generally, the opinion noted, the Council would profit if 

interest rates fell, but would incur substantial losses if interest rates rose. Id. at 545. The Council’s 

losses totaled approximately $337.4 million. Kolarsupra, at 317; see also Hazell, 1 All E.R. at 552 

(auditor’s calculation of Council’s losses). 

The Act of Parliament establishing local governments, including the Council, granted a local 

authority express power to borrow money and prescribed the method of borrowing. Hazell, 1 All 

E.R. at 548, 558. Given that a local authority did not have express authority to do the swap 

transactions, which the banks conceded, the question presented was whether the swap transactions 

were incidental to a local authority’s borrowing power. Id. at 553, 556. The opinion summarized 

the relevant authority on incidental powers as relevant to the swap transaction as follows: 

The authorities also show that a power is not incidental 

merely because it is convenient or desirable or profitable. A swap 

transaction undertaken by a local authority involves speculation in 

future interest trends with the object of making a profit in order to 

increase the available resources ofthe local authorities. Individual 

trading corporations and others may speculate as much as they please 

or consider prudent. But a local authority is not a trading or currency 

or commercial operator with no limit on the method or extent of its 

borrowing or with powers to speculate. The local authority is a 

public authority dealing with public moneys limited by Sch[edule] 13 

[setting out the purposes for which it may borrow money]. 

Id. at 556. The opinion examined at length a local authority’s borrowing powers under the Act and 

the purpose of the swap transactions. It concluded that the swap transactions were inconsistent with 

an authority’s borrowing power and that the contracts were ultra vires. Id. The opinion stated that 

when a local authority borrows money, it must take into consideration the provision of the Act, the 

method ofborrowing, repayment, prevailing interest rates, and the possibility that interest rates may 

rise or fall during the loan period. Id. at 558. And, if the local authority finds that there has been 
The Honorable Jose R. Rodriguez - Page 6 (X-0068) 

a great shift in interest rates that affects a particular borrowing, the opinion explained, it is “not 

without remedial action”: 

It can convert a loan taken out. . . from a variable rate of interest into 

a fixed rate of interest. It can pay off an expensive loan and take out 

a new loan. It is said that the cost of paying off an old loan and 

taking out a new loan would be greater than the cost of entering 

into swap transactions. But this fact alone cannot render swap 

transactions legal. 

Id. Finally, noting that Parliament had granted certain building authorities express power to enter 

into swap transactions, Lord Templeman stated: 

It is for Parliament and not the courts to decide whether there should 

be conferred on local authorities unlimited power to hedge or apower 

limited for the protection of taxpayers and ratepayers. Parliament 

might decide that it was unnecessary or unwise to confer power on 

local authorities to enter the swap market at all. The object of the 

doctrine of ultra vires is the protection of the public. 

Id. at 560.9 

With the above background, we consider the general features of the financial transaction 

about which you ask. This transaction, evidenced by the issuance of a “warrant,” like the derivatives 

described above, is undertaken to profit from interest rate movements, which profit may be but is 

not required to be used to reduce interest payments on existing debt. It gives the issuer an 

opportunity to obtain a lump sum dollar amount ifinterest rates performas the issuer anticipates and 

requires the issuer to pay out a sum if they do not. It is related to outstanding bonds only to the 

extent that if interest rates rise, the amount obtained by the issuer theoretically compensates the 

issuer for the “loss” of potential debt service savings as a consequence of the issuer’s present 

inability or disinclination to refund its outstanding bonds at the lower interest rates. But whether the 

issuer receives or makes a payment does not affect the outstanding bonds, debt service on those 

bonds, or the issuer’s right to refund the outstanding bonds by issuing refunding bonds in the future. 

See Hazell, 1 All E.R. at 586 (purpose of swap transaction not to facilitate borrowing because 

original underlying debts continue in existence and are unaffected by swap transactions; in many 

The opinion also dismissed the contention that if the swap transactions were not incidental to borrowing, they 

were nevertheless authorized as incidental to debt management. The opinion observed that debt management is not a 

function but a way of describing prudent and lawful activities of a local authority. Haze/l Y. Hammersmith & Fulham 

London Borough Council, 1 All E.R. 545,558 (H.L. 1991). Th us, if swap transactions were lawful, a local authority 

would be under a duty to consider entering into swap tmnsactions as part of debt management, “[b]ut if a swap 

transaction is not lawful then it cannot be lawful for a local authority to carry out a swap transaction under the guise of 

debt management.” Id. 
The Honorable Jose R. Rodriguez - Page 7 (X-0068) 

cases, swap transactions are entered into long after borrowing and are not even contemplated at time 

of borrowing). 

In sum, the significant features of the warrant transaction for the purposes ofour analysis are: 

(1) that whether the issuer profits under the warrant is wholly dependent on the rise and fall of 

interest rates; (2) issuance of the warrant is a separate transaction from the refunding of the 

outstanding bonds; and (3) there is no debt service savings with respect to those bonds unless and 

until they are actually refunded. See id. at 554 (swap transactions are separate collateral contracts). 

With this general understanding of the warrant in question, we look at the District’s authority to 

enter such a contract. 

We consider the District’s constitutional and statutory powers. The District is a county-wide 

hospital district established under article IX, section 4 of the Texas Constitution and chapter 28 1 of 

the Health and Safety Code. Article IX, section 4 empowers the legislature to authorize the creation 

of county-wide hospital districts “with power to issue bonds for the purchase, acquisition, 

construction, maintenance and operation of any county owned hospital” and that “assume[s] full 

responsibility for providing medical and hospital care to needy inhabitants of the county[,]” in 

counties with a population in excess of 190,000. TEX. CONST. art. IX, $4. 

Subchapter C of chapter 281 sets out the general powers and duties of article IX, section 4 

districts. Such a district is required to assume “full responsibility for furnishing medical and hospital 

care for indigent and needy persons residing in the district.” TEX. HEALTH & SAFETY CODE ANN. 

5 281.046 (Vernon 1992). A district’s board of managers is authorized to “manage, control, and 

administer the hospital or hospital system ofthe district,” id. § 28 1.047, and to adopt rules governing 

the system’s operations, id. 5 281.048. More specifically, the board is authorized to “construct, 

condemn, acquire, lease, add to, maintain, operate, develop, regulate, sell, exchange, and convey any 

property, property right, equipment, hospital facility, or system to maintain a hospital, building, or 

other facility or to provide a service required by the district.” Id. 5 281.050 (Vernon Supp. 1999). 

To effectuate these powers, it is also authorized to contract or cooperate with the federal government, 

the state, another governmental entity, or a private hospital. Id. 5 28 1.05 1. Additionally, the district 

is authorized to exercise the power of eminent domain, accept gifts and donations, and to sue and 

be sued. Id. $5 281.054, ,055, ,056 (Vernon 1992 & Supp. 1999). Furthermore, the district may 

establish a health maintenance organization, id. 3 281.05 17 (Vernon Supp. 1999) and create a 

charitable organization to facilitate the management of health care services or to provide ancillary 

support services, id. 5 28 1.0565. 

Subchapter F of chapter 281 sets out the powers and duties with respect to district bonds. 

The commissioners court of the county, in the district’s name and on its credit, is authorized to issue 

general obligation bonds to acquire, construct, equip, or enlarge the hospital or hospital system if 

approved by the voters. Id. $4 281.101 (Vernon 1992). Refunding bonds to refund any outstanding 

indebtedness of the district may be issued without voter approval. Id. $3 281.102, .103(a). When 

such bonds are issued, the commissioners court is authorized to levy a tax for the benefit of the 

district. Id. 5 28 1.121 (a). Proceeds of the tax levied may be used for bond debt service payment or 
The Honorable Jose R. Rodriguez - Page 8 (~~-0068) 

maintenance or operation of the hospital system. Id. 5 281.121(c). Before the district’s bonds are 

delivered to their purchasers in exchange for the purchase price, they must be approved by the 

Attorney General. Id. $5 281.103, ,105; TEX. REV. CIV. STAT. ANN. art. 717k-8 (Vernon Supp. 

1999). 

Additionally, other statutory provisions relating to the issuance ofbonds or other obligations 

may also be utilized by the District. A district may issue long-term, contractual obligations to 

acquire or use personal property. See TEX. Lot. GOV’T CODE ANN. $5 271.003(4), (5) (Vernon 

1988) (governmental agency included hospital district), 271.005 (authorizing governmental agency 

to execute contract). A district may issue refunding bonds to refund its outstanding bonds or other 

obligations utilizing the procedures ofarticle 717k ofthe Revised Civil Statutes. See TEX. F&v. CIV. 

STAT. ANN. art. 717k $5 1 (Vernon 1964 & Supp. 1999) (act applicable to any political district or 

subdivision having the power to issue bonds and remnding bonds), 2 (authorizing issuer’s governing 

body to issue refunding bonds and deposit proceeds with Comptroller of Public Accounts to retire 

outstanding bonds), 7A (authorizing deposit of refunding bond proceeds directly with any place of 

payment for outstanding bonds). 

The District may not exercise, however, the powers generally granted to “issuers” by article 

717q ofthe Revised Civil Statutes to enter into “credit agreements.” See TEX. REV. CIV. STAT. ANN. 

art. 717q (Vernon Supp. 1999). This statute authorizes certain issuers to issue obligations “and 

execute credit agreements in relation thereto to finance project costs of an eligible project, or to 

refund obligations issued in connection with an eligible project _” Id. 5 2(a). A “credit 

agreement” is a 

loan agreement, revolving credit agreement, agreement establishing 

a line of credit, letter of credit, reimbursement agreement, insurance 

contract, commitments to purchase obligations, purchase or sale 

agreements, interest rate swap agreement, or commitments or other 

contracts or agreements authorized and approved by the governing 

body of an issuer either in connection with the authorization, 

issuance, security, exchange, payment, purchase, or redemption of 

obligations and/or interest thereon, or as otherwise authorized by this 

Act. 

Id. 5 l(6) (emphasis added). Although “issuer” includes numerous entities, it does not include a 

hospital district established under chapter 28 1 ofthe Health and Safety Code. Id. 5 l( 1). Therefore, 

we need not determine whether the warrant is a credit agreement authorized under article 717q. 

In brief, the District is expressly authorized to acquire and manage a hospital system and to 

provide medical and hospital care for the needy residents in the county. It may borrow money for 

hospital purposes. Specifically, the El Paso County Commissioners Court, in the name of and for 

the District, or the District may issue bonds or other obligations to acquire or equip hospital facilities 

or issue refunding bonds to retire outstanding bonds or other obligations. In this regard, we note that 
The Honorable Jose R. Rodriguez - Page 9 (X-0068) 

bonds or other negotiable debt can only be issued for the purposes and in the manner expressly 

authorized. See&n Antonio Union Junior College Dist. v. Daniel, 206 S.W.2d 995,999 (Tex. 1947) 

(and cases cited therein) (power to issue negotiable paper beyond powers of city or county unless 

specially granted and when granted, can only be exercised in mode and for purposes specified, 

concluding that junior college district not authorized to issue refunding bonds); see also Lopez v. 

Ramirez, 558 S.W.2d 954, 957 (Tex. Civ. App.-San Antonio 1977, no writ) (statutes regarding 

authority to create debt must be strictly and narrowly construed citing Robertson v. Breedlove, 61 

Tex. 316 (1884), and Daniel). 

As is evident from the statutory provisions discussed above, the District does not have 

express authority to undertake a warrant transaction to hedge against interest rate fluctuations as 

evidenced by the issuance of a warrant. And for the reasons explained below, we conclude that the 

District does not have the implied authority to issue such a warrant derived from its authority to 

borrow money, i.e., to issue or retire bonds. 

Implied powers of the District are those that are indispensable to effectuate the District’s 

express purposes and not those that are merely convenient or useful. See Mann, 142 S.W.2d at 947. 

The District is specifically authorized to issue bonds or other obligations for hospital facilities and 

equipment. It is true that when a governmental entity has express authority to acquire or construct 

facilities and expend money for them, it may have implied authority to finance those facilities by 

means other than issuance ofbonds. See, e.g., San Antonio RiverAuth. v. Shepperd, 299 S.W.2d 920 

(Tex. 1957) (county impliedly authorized to enter into long-term contractual obligation to finance 

flood control facilities based on its express authority to engage in flood-control programs and expend 

taxes therefor); Lasaterv. Lopez, 217 S.W.2d373 (Tex. 1919) ( county impliedly authorized to issue 

warrant for road improvements; long-standing authority to issue warrant for public improvements 

not repealed by express authority to issue road bonds); Tex. Att’y Gen. Op. No. JIM-642 (1987) 

(county and city impliedly authorized to borrow money to improve joint county-city hospital based 

on their express authority to maintain and equip hospital and expend tax funds therefor). The 

warrant, however, is not issued to acquire any hospital facilities, equipment, or even provide a 

required hospital service. Nor is the warrant related to bonds or obligations issued to acquire 

hospital facilities. First, it does not change the terms of the outstanding obligations or reduce the 

interest payments on those obligations. Second, it provides no benefit or service necessary to the 

issuance of those bonds-the outstanding bonds in reference to which the profit or loss under the 

warrant is calculated would have been issued prior to the warrant transaction. In short, given that 

the warrant does not relate to the acquisition of hospital facilities or the issuance of bonds for that 

purpose, it cannot be indispensable to effectuate either of those District purposes, 

Nor is the warrant indispensable to effectuate the District’s authority to redeem or refund 

outstanding bonds. As indicated earlier, the District also has express authority to issue refunding 

bonds to retire its outstanding bonds or other obligations. The warrant is not issued to retire any 

outstanding bonds or obligations. Any outstanding bonds are retired only when and if the District 

refunds its outstanding bonds by the issuance of refunding bonds or otherwise retires them with 

moneys derived from other sources. Moreover, the warrant does not provide a benefit or service 
The Honorable Jose R. Rodriguez - Page 10 (JC-0068) 

necessary to the issuance of the refunding bonds when and if they are authorized. Issuance of the 

warrant is a separate transaction undertaken in lieu of or prior to the issuance ofrefunding bonds-it 

is undertaken precisely because the issuer is at the time unable or unwilling to issue refunding bonds, 

If the District does not have the authority to issue a warrant derived from its specific 

authority to issue bonds and refunding bonds to which the warrant would purportedly relate, that 

authority cannot be inferred from the general authority to manage and control the hospital system. 

See Mann, 142 S.W.2d at 947 (when powers are granted by specific statutory provisions, they are 

not enlarged by general language elsewhere in the statute); cf. Canales v. Laughlin, 214 S.W.2d 45 1, 

457 (Tex. 1948) (“The specific statutes covering this particular matter [employment of person to 

supervise county road system] are controlling in this case over the general provisions . . .“). A 

contrary rule-that the general authority to manage and control authorizes any specific financial 

vehicle or means the District finds useful or convenient-would render most specific statutes 

providing for or limiting governmental borrowing powers superfluous. See Mann, 142 S.W.2d at 

947; Canales, 214 S.W.2d at 457. 

Our interpretation here, that the authority to issue a warrant or undertake other derivative 

transactions cannot be implied from the specific authority to issue or refund bonds or from the 

general authority “to manage and control,” is supported by legislative enactments. The legislature 

has expressly authorized certain governmental entities to enter into particular derivative contracts 

in prescribed circumstances. See, e.g., TEX. REV. Crv. STAT. ANN. art. 717q (Vernon Supp. 1999) 

(authorizing certain issuers to enter into swap contracts in connection with issuance ofbonds or other 

obligations that are subject to Attorney General approval); TEX. NAT. RES. CODE ANN. 5 161.074 

(Vernon Supp. 1999) (authorizing Veterans Land Board to enter into interest rate swap agreements, 

currency swap agreements, or forward payment conversion agreements in order to place Board’s 

bonds on desired interest rate basis); TEX. TRANSP. CODE ANN. 8 452.102 (Vernon Supp. 1999) 

(authorizing regional transportation authority to invest its funds in interest rate swap or similar 

agreements); TEX. GOV’T CODE ANN. 4 2306.351 (Vernon 1999) (authorizing Department of 

Housing and Community Affairs to enter into interest rate swap agreements, currency swap 

agreements, or forward payment conversion agreements in order to place Department bonds on 

desired interest rate basis); but see TEX. GOV’T CODE ANN. $4 2256.009(b), .024(b) (prohibiting 

governmental bodies, other than those specifically named, from investing in collateralized mortgage 

obligations on which interest rate is tied to index that adjusts opposite market index). Thus, when 

the legislature intends that a governmental body have the authority to undertake derivative 

transactions it so expressly provides. 

As indicated earlier, the District’s bond counsel for the Warrant transaction contends that the 

District has implied authority to issue an interest rate hedge warrant based on its express authority 

to issue bonds and refunding bonds, relying on Texas cases and attorney general opinions that, 

according to bond counsel’s letter brief, have recognized “a variety of powers . in the context of 

public finance, even where an express grant ofthe power does not exist.” Mendel letter of 1 l/l 7/98, 

at 7 (citing Lasater, 217 S.W.2d 373; Shepperd, 299 S.W.2d 920; Tex. Att’y Gen. Op. Nos. JM-697 

(1987), JM-642 (1987)). The cited authority is inapposite. These cases and attorney general 
The Honorable Jose R. Rodriguez - Page 11 (X-0068) 

opinions recognize political entities’ implied authority only to acquire public improvements by 

means other than the issuance of bonds, derived from the governmental entities’ express powers to 

acquire and expend money for those improvements. See Lasater, 217 S.W.2d 373; Shepperd, 299 

S.W.2d 920; Tex. Att’y Gen. Op. Nos. JM-697 (1987), JM-642 (1987). For example, in the leading 

case in this area, Lasater V. Lopez, 217 S.W.2d 373, the Texas Supreme Court upheld counties’ 

implied authority to issue interest-bearing, time warrants to finance public improvements. This wellestablished, legislatively-sanctioned authority to issue non-negotiable warrants for road 

improvements, the court stated, was not abrogated implicitly by the more recent express authority 

to issue negotiable bonds for the same purpose. Id. at 376-77. Similarly, in San Antonio River 

Authority v. Shepperd, 299 S.W.2d 920, the Texas Supreme Court, relying on Lasater among other 

cases, upheld a county’s implied authority to enter into a long-term contract payable from taxes to 

finance construction of flood-control facilities given the county’s express constitutional authority 

to engage in and expend tax funds for flood control programs. Id. at 924. Likewise, in Attorney 

General Opinion JM-697, this office determined that a county has implied authority to finance ajail 

by a long-term, lease-purchase contract in view of its express authority and duty to provide a jail, 

relying on Shepperd and Lasater. See Tex. Att’y Gen. Op. No. JM-697 (1987); see also Zimmelman 

v. Harris County, 819 S.W.2d 178 (Tex. App.-Houston [lst Dist.] 1991, no writ) (county impliedly 

authorized to use nonprofit corporation to finance jail by lease-purchase arrangement). Finally, in 

Attorney General Opinion JM-642, this office determined that a city and a county have implied 

authority to borrow money from a bank to finance joint city-county hospital improvements given 

their express powers to maintain and equip a hospital and to issue bonds. See Tex. Att’y Gen. Op. 

No. JM-642 (1987) (also relying on Shepperd and Lasater). The warrant in question is not issued 

to acquire hospital facilities or improvements. 

Bond counsel’s brief also contends that “[i]n the area of public finance, State courts have 

been particularly expansive in construing the powers ofpolitical subdivisions, concluding long ago 

that political subdivisions should have powers similar to private persons in matter pertaining to 

indebtedness” to support its contention that a hospital district is impliedly authorized to issue an 

interest rate hedge warrant. Mendel letter of 1 l/17/98, at 7 (citing Dallas County v. Lockhart, 96 

S.W.2d 60 (Tex. 1936); Frio County v. Security State Bank of Pharr, 207 S.W.2d 231 (Tex Civ. 

App.-Waco 1947, no writ)). The authority cited does not support this proposition or the authority 

to issue the warrant. The cases cited actually deal with express statutory authority to elect the 

method of redeeming bonds that best served the issuer’s purposes. 

In one of the cases, Dallas County v. Lockhart, 96 S.W.2d 60 (Tex. 1936), the Texas 

Supreme Court upheld a county’s statutory authority to redeem bonds with the cash proceeds of 

refunding bonds against a contention that such refunding could be accomplished only by an 

exchange of the old bonds for the new ones. In this context, the court stated: 

All of the statutes with reference to redeeming and refunding are 

complementary to one another and should be considered together. 

Thus considered, they clearly evidence a legislative intent to vest 

counties and municipalities, as nearly as may be, with the same rights 
The Honorable Jose R. Rodriguez - Page 12 (JC-0068) 

as other creditors, by providing a flexible, equitable, and businesslike 

plan for financing their bonded indebtedness to meet changing 

conditions. 

Id. at 63. Similarly, in the other case, Frio County v. Security State Bank of Pharr, 207 S.W.2d 23 1 

(Tex Civ. App.-Waco 1947, no writ), the court considered a statute that allowed a county to reserve 

the right to redeem bonds prior to maturity as the county determined, “in order that it might handle 

its business affairs with reference to the issuance of refunding bonds in such manner as would seem 

to [its] best advantage . .” Id. The county had reserved a right to redeem some of its bonds prior 

to maturity but not others. Id. The court held that the county was bound by its election and could 

not redeem prior to maturity those bonds that were not subject to early redemption. Id. Thus, 

contrary to bond counsel’s assertion, the courts in these cases did not conclude that political 

subdivisions have financing powers similar to private persons; rather, those cases address statutes 

whereby the legislature provided political subdivisions with “powers similar to private persons in 

matters pertaining” to governmental debt with respect to the specific available methods for refunding 

bonds. The legislature has not afforded similar powers with respect to derivative contracts to 

hospital districts. Accordingly, the cases cited are inapposite. 

In conclusion, although an interest rate hedge warrant may be a desirable financial product 

to profit from interest rate fluctuations in the market to mitigate the burden of interest payments on 

outstanding bonds, it is not indispensable to effectuate the issuance ofnew money bonds, refunding 

bonds, or otherwise effectuate the redemption of outstanding bonds. Accordingly, the authority to 

issue the warrant may not be inferred from the authority to borrow money and issue bonds. Nor can 

that authority be inferred from the District’s general authority to manage and control the hospital 

system. Therefore, it is the opinion ofthis office that the District does not have authority to execute 

a contract to hedge against interest rate fluctuations evidenced by the issuance of a warrant. 
The Honorable Jose R. Rodriguez - Page 13 (JC-0068) 

SUMMARY 

A hospital district is not authorized to execute an interest rate 

hedge contract that entitles the district to receive a lump sum if 

market interest rates rise in relation to the interest rate on certain 

outstanding district bonds but that requires the district to pay out a 

lump sum if interest rates fall. 

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 Sheela Rai 

Assistant Attorney General