. 

, 

THE ATTORNEY GENERAL 

OF TEXAS 

August 30, 1972 

Honorable Hugh C. Yantls, Jr ,. Opinion No. M- 1202 

Executive Director 

Texas Water Quality Board 

Lowlch Building 

Austin. Texas 78701 

Re: Whether bonds of Northwest 

Houston Water SUQQ~Y CorQoratlon issued pursuant 

to contract with-the City 

of Houston under Article 

llOgj, V.C.S. as obllgatlons of the 6it.y under 

Sections 21.601-21.617 

Texas Water Code are eilglble for purchase by the 

Dear Mr. Yantla: state, and related queatlons? 

Your recent request for an opinion states that In 1965 the 

City of Rouston became concerned about the lack of water and 

sewer facllltles In that area adjacent to the City known as 

Acre8 Homes. Supported by Resolution of the City Council, three 

Houston residents were requested to form a non-profit water 

supply corporation under the provisions of Article 143&a 

Vernon's Civil Sta&utes,* to acquire or construct the nec&sary 

facllltles to service this area. 

It apparently was contemplated that the facilities were 

to be.acquired with corporate bond proceeds flowing from a 

contract with the City of Houston, under the provisions of 

Article llOgj, whereby the City agreed to purchase the facllltles from the non-profit corporation and in consideration 

therefor was to pay to the corporation periodic amounts necessary to pay off the corporate bond debt. The City would annex 

that area known as Acres Homes in phases as the various sections 

were provided water and sewer service. The corporation was 

organized as the Northwest Houston Water Supply Corporation with 

all Its stock being held In trust by the Mayor of Houston for the 

benefit of the residents of that area. 

It appears that the parties are now In phase three of 

*All references to Articles are to Vernon's Civil Statutes, 

unless otherwise stated. 

-5087- 
Honorable Hugh C. Yantls, Jr., page 2 (M-1202) 

ii:, 

the four phase plan for annexation of the Acres Homes area. 

Your lnqulrlea with reference to the character of the 

"corporate obligations" of the Northwest Houston Water 

Supply Corporation have been paraphrased for purposes of 

clarity: 

(1) Are bonds of Northwest Houston Water 

Supply Corporation Issued pursuant to and 

Supported by a contract with the City of 

Houston under the Qrovlslons of Article 

1lOgj considered *other obligations" of 

the City of Houston within the provisions 

of Sections 21.601 through 21.612 of the 

Texas Water Code and as such eligible for 

purchase by the State? 

(2) If the bonds of Northwest Houston Water 

Supply Corporation are not considered *other 

obligations" of the City of Houston as that 

term Is used In Section 21.602 (6)(T) of 

the Texas Water Code, would they beaome so 

eligible If they were to bear a aertlflcate 

signed by the Mayor of the City of Houston 

to the effect that the City Is unconditionally 

obligated to pay the bonds f'rom Its ad valorem 

tax revenues? 

(3) Could the provisions of Subchapter I, 

Chapter 21, Subtitle C of the Texas Water Code 

(Sections 21.601 - 21.612) be amended so as to 

Include bonds of this non-profit corporation 

within the term "other obligations of a political 

subdlvlaion" where the bonds offered for sale to 

the State are unconditionally secured by a contract with a political subdlvlalon under the 

provisions of Article llOgj? 

Before answering your first question, we must first examine 

the "legal character" of the parties to that oontract herelnabove referred to. 

In the case of Tarrant County Water Supply Corporation 

v. Hurst-Euless-Bedford Independent School Dl t I t 1 

3 W 2d 162 (Tex.Clv.AQQ. 1963 error ref n.r.e. ' ' &5~gthe 

c&k. sQeclflcally held that bubllc utility corporations 

of the klnd here under consideration are 
: 

Honorable Hugh C. Yantls, Jr., Qage 3 (M-1202) 

I, 

. . . not munlclpal~or governmental 

;E;e;ef#, . . , Neither wo luld a corporation 

nder the Qrovlslons of Article 

143ka be a political aubdlvlslon." (at 

Q. 163). 

On February 15 1972, this office In Opinion M-1070 

sQeclflcally held that the Northwest Houston Water Supply 

Corporation was not a "Qolltlcal subdlvlslon" as that 

term Is used In Sections 21.601 through 21.612 of the 

Texas Water Code. 

There la no question that we are here dealing with 

two separate legal entitles which do not look to each other 

for their Identity or existence. The Northwest Houston 

Water Supply Corporation, Incorporated under the provisions 

of Article 149a Is not a part of the City of Houston nor 

could It be considered as one of Its agencies or departments. 

The relatlonshlp which the parties bear to one another would 

be determined by contract, but we do not believe any such 

contract could operate to change the "legal nature" of the 

parties as they existed at the time the contract was made. 

This same Qrlnclple would apply to any security which the 

city or the corporation might contemplate lssulng. No 

contract between the parties could convert a bond, note or 

warrant of the City of Houston Into an obligation of the 

corporations, nor vice-versa. 

It Is contended by the attorneys for one of the lnterested partlea that the bonds Issued by the Northwest Houston 

Water Supply Corporation are eligible for purchase by the 

Texas Water Development Board under Section 21.601, et seq., 

Texas Water Code, because they are "obll ations" of the City 

of Houston within the meaning of Set JEdFIXE(7) In 

support of this proposition, the following addltloAa1 facts 

and considerations are presented: 

"2 . Northwest Houston Is a non- roflt 

corporation organized under Article 1 I: 34a 

Vernon's Texas Civil Statutes at the reqiest 

of the City, and all of the siock Is held In 

trust by the Mayor of Houston for the benefit 

of the residents of the City and the residents 

of the Acres Homes area adjacent to the City. 

"3. The corporate charter prohibits dividends 

-5889- 
Honorable Hugh C. Yantla, Jr.; page 4 (M-1202) 

and requires that all profits of the corporation 

be paid out to the cities, towns, and other entitles 

with whom the corporation does business. No business 

has ever been conducted except with the City of 

Houston. 

“4. The Mayor and City Council of Houston 

appoint the corporation's directors and all of 

the corporation's actions are subml&ed to the 

City for approval. 

“5. The basic contract between the City and 

Northwest Houston Water Supply Corporation and 

all supplemental contrac~ts, require the foilowing: 

(a) Approval by the Mayor and City 

Council of the City of Houston of the plan 

Of finanCing QrOQOSed QrOjeCtS; 

(b) Approval by the City's Director of 

Public Works of plans, speclflcatlons, and 

contract documents; 

(c) Approval by the Houston City Council 

of construction bids and QrOQOSSd awards of 

construction contracts; and 

(d) Approval by the Houston City Council 

of the resolution authorizing Issuance of the 

bonds. 

“6. The contracts obligate the City of Houston 

to pay directly to the bond paying agent sums,sufflclent to pay the principal of and Interest on the 

bonds, just as the City does for Its own bonds. 

“7 . The contracts require those payments to be 

made from a continuing direct annual ad valorem tax 

on all taxable property within the City, as Is the 

case with general obligation bonds Issued by the 

city. 

“8. The City Ordinance authorlzlng the contracts 

levies the ad valorem tax required to make such prlnclpal and Interest payments. 

“9. The City Ordinance approving the bond reso- 

-5890- 
Honorable Hugh C. Yantls, Jr., page 5 (M-1202) 

lutlon, the Interest rates, and the sale of the 

bonds and authorizing their Issuance reaffirms the 

unconditional obligation of the City to make the 

payment of principal of and Interest on the, bonds. 

"10. The contracts provide that 

'The City's obligation to levy such 

annual tax and to make the payments on the 

purchase price as herein provided shall 

Inure to the benefit of the owners and holders 

of the aforesald,bonds of the company who 

shall have, In addition to all other remedies 

at law and In e,qulty, the right to enforces 

speolflc performance of the City!8 obligation 

to levy such annual payments.' 

"11. The contracts, the bond resolutions, and 

the bonds themselves provide for a pledge of the City's 

payments to the paying agent bank as security for the 

bonds. The only security behind the bonds and the 

sole source of payment of the bonds Is ad valorem 

tax revenues of the City. In addition, the bond resolutions and the contracts sQeclflcally refer to rights 

of the bond holders as against the City In the event 

of default. It Is clear that 'all of the Instruments 

were prepared and entered into In the accomplishment 

of a single QurQose~ and must be construed together 

as one Instrument. Guadalupe-Blanc0 River Authorlt 

200 3 W 2d -1. 

bllgatioti to pay tz'b%s 

from tax revenues Is a part of the contract with the 

bond holders, and the bonds themselves are obligations 

of the City of Houston. 

"12. There Is no unconstitutional grant of 

public money or thing of value, lending of credit, 

or grant of special prlvlleges. The City Is contracting for services It could perform, and Indeed 

Is obligated to perform, for Itself. . . , 

"13. The levy of ad valorem taxes by the City 

Is not a violation of Article 701, Vernon's Texas 

Civil Statutes. These are not the bonds of the 

City even though they are obligations of the City. 

There Is no constitutional or statutory relulrement 

for an election to approve the contract or the bonds. 

-5891- 
Honorable Hugh 

"14. The 

Federal Income - _ 

C. Yantls, Jr., page 6 (M-1202) 

Interest on the bonds Is exempt from 

taxation under rulings of the Internal 

Revenue service, 

"15. The bonds are eligible for purchase and 

unlimited holding by national banks under rulings 

of the Comptroller of the Currency that the bonds 

are general obligations of a state or political 

subdlvlslon." 

Article 1lOgj Is express authority for cities to contract 

with non-profit corporations for the purpose of acquiring 

for the benefit of the cities, water dlstrlbutlon and sanitary sewer systems. There Is nothing In this act which would 

Indicate that bonds Issued pursuant to any such contract 

would be or should be considered as "obligations" of the 

cities contracting. The Article In referring to the responslblllty of cities under any such contract states: 

"Such contract may provide for purchase by 

the city. . . of such system. by periodic 

payments to such. , . corporation by the city. . . 

In amounts which. will be sufficient to pay 

the principal of and'lnterest on the bonds of the 

corporation as they become due." (Ehphasls 

adie;). 

It Is clear that the act considers these bonds "corporate" 

bonds and not "municipal" bonds. 

We recognize that It would be to the City of Houston's 

advantage If the bonds of the Water Supply Corporation were 

eligible for purchase by the Texas Water Development Board 

with funds made available through the water "enhancement 

account" as authorized by Article III Section 49-d-l of 

the Texas Constitution. Sections 21.601 through 21.612 

of the Texas Water Code speaks to "bonda or other obligations 

of a political subdlvlslon" as being eligible for purchase 

with water quality enhancement funds. Because the water 

supply corporation Is not a political subdivlslon their bonds 

as such are not eligible. Atty. (lenl. Opinion M-1070, supra. 

We have previously concluded that the bonds Issued pursuant to a contract authorized by Article 1lOgj are the bonds 

of the corporation and not the City.. Where the statute uses 

the term "other obligations of a political ~ubdlvlslon" It 

must be construed to have reference'to\securltles of the same 

-5092- 
: 

Honorable Hugh C. Yantls, Jr., ,page 7 (M-1202) 

nature or character as bonds (I.e. warrants certlflcates of 

obligation, etc.) and may not be lnterpretei broadly to lnelude any or all types of obligations of a political subdlvlslon.1 The fact that the City of ,Houston has direct 

"obllgatlons" under a contractwith the Northwest Water 

Supply Corporation pursuant to Article llOgj, Is thus not 

sufficient to make the corporate bonds Issued pursuant 

to the contract, eligible as "other obilgatlons" of the 

City of Houston as that term Is used In Sectlon~ 21.602 (6)(7). 

In your second question you have suggested that If the 

bonds of the water supply corporation bear a certificate 

signed by the mayor of the City of Houston, citing the City's 

unconditional obligation to pay the bonds that they then 

might be considered "other obligations" 04 the city for 

water enhancement loan purposes. 

We find nothing In our statutes that would authorize 

the City of Houston to act as an accommodation lndorser or 

surety on the bonds of a separate entity. The authority of 

the City Is one In contract pursuant to Article llOgj, and 

Its responslbllltles are contained therein and confined 

thereto. It Is generally recognized that without legislative 

authority, a city may not legally become a guarantor, lndorser or surety for the payment of bonds or other obligations 

of another corporate entity. 

Vol.. 15, Section 39.10. 

McQulllln, Municipal Corporations, 

As stated earlier In this opinion, 

we are here concerned with a non-municipal bond, and should 

the city wish to have outstanding Its general obligation bonds 

to cover the proposed projects It would be necessary to comply 

with the requirements of Artlcie 701, which reads, In part, 

"The bonds of 

shall never be lsau;d: 1 

an Incorporated City. , . 

unless a proposltlon 

for the Issuance of such bonds shall have been first 

submitted to the qualified voters. . .'I 

'Noscltur A. Soclls (It Is known,from Its associates 1 

Vent. 225.) The doctrine means that general and speclfld words 

are associated with and take color from each other, restricting 

general words to sense analogous to less general. 53 Tex.Jur.2d 

; Farmers.' & MechanIcat Nat, Bank v. 

.w. 1120(1911) c alvert v. 

365 S.W.2d 212 (Tex Cl 

Austin 

19b 

I;I v. State,140 Fla. 794,viAg~Q40.3~4,(1g3g). 

-5893- 
Honorable Hugh C. Yantls, Jr,, page 8 (M01202) 

One cannot accomplish indirectly that which It has no 

authority to do In the first Instance. 

As a matter of Information. the orooosed contract between the parties covering Phasd 3 of‘thk project, which 

you forwarded ~to this office as part of your background 

Information, calls for a water supply and distribution 

system as well as certain sewage facllltles, excludln 

speclflcally a sewage treatment plant, to be 

with the bond proceeds. 

Even If the-bonds were conslder$_bonds of the City . . of 

Houston they would still not be ellglble for Qurcnase oy 

the Texas Water Development Board, for Section 21.601 does 

not contemplate their Inclusion but sQeclflcally states: 

"The purpose of this subchapter Is to 

provide for making loans of water quality 

enhancement funds authorized by Article fI1, 

3 t1 - - 1 of the Texas Constitution 

t~cQo~?tlcal s~bdlvlsions of the state fo$ 

uiilng 

maximum federal grants for the constrmctlon 

Of treatment Works." (Emphasis SUpplied). 

It is also noted that the QMceedS realized from the 

sale of these bonds must be used In construction of treatment works exclusively, and we are aware of no exception 

that would Include a waterworks system. 

Your final question lnvolvss. the possibility of amending 

Subchapter I of Chapter 23 of the Water Code to include bonds 

of such a non-profit corporation as here exists within the 

term "other obligations of a political subdivision." 

While Article III, Sections 50 and 52, Texas Constitution, 

declares that the legislature has no power to give or to lend 

or to authorize the giving, lending or pledging of the credit 

of the state In aid of any person or corporation, whether 

municipal or other, the courts have held that It doe?. not prohibit the legislature from authorizing a state or gcvernmental 

agency to use the credit of the state for governmental, public 

or state purposes. State v. Dallas, 319 S.W.2d 767, affirmed, 

160 Tex. 348, 331 S.W.2d 73'/ (19 t3f; Aransas Pass v. Keelln 

112 Tex. 339, 247 S.W. 818 (1923 ; Brazos River Conservatlo? 

& Reclamation Dlst. v. McGraw 126 Tex. 506 91 3 W 2d bb5 

-Cl93b) ; H lghway Comm. v. Vaugh, 288 S.W. 835 (Tei.tiV.AQQ. 

-5894- 
Honorable Hugh C ~ Yantls,'Jr., page 9 (M-1202) 

1926, error ref. 

42. 

); 52 Tex.Jur. 754, State of Texas, Sec. 

Under the facts presented, and If a proper statutory 

enactment were enacted, the City of Houston would be contracting for Qubllc~governmental services which It may 

legally perform and for which It Is obligated under the 

law to provide. The ~contracts call for the improvement 

and enlargement of specific water and sewage systems owned 

and to be acquired by the City of Houston and for the benefit of the general public within such City, and in accordance 

with agreed contractual .plans. The parties to the contracts 

are obligated In quid pro quo contracts. The City Is 

authorized legally to so oontractfor such a Qubllcbeneflt 

and governmental QurQo%e, and It therefore does not constltute a grant of money to the non-proflkcorporatlon for 

Individual or private purposes or an unconstitutional lending or pledging of credit by the City In aid of the corporation. San Antonio River Authority v. Shepperd, 157 Tex. 

73, 299 S.W.= 920, 928 (1957). 

It Is therefore-our opinion that the.QroViSiOnS of 

Subchapter I, Chapter 21, Subtl,tle C of the Texas Water 

Code (Sections 21.601 - 21.612), could be amended In such 

a ,way as to Include bonds of such a non-profit corporation 

within the term "other obligations ,of a political aubdivision" where the bonds offered for sale to the State 

are uncondltlonally~secured by a contract with the political 

subdlvlslon under the provisions of Article 1lOgj. .A8 

stated In Attorney General Opinion No. w-1229(1961), the 

determln:tlon of what constitutes a public governmental 

purpose has been held to be primarily a legislative 

function subject to review by the courts when abused and 

the determination of the legislative body of the matter has 

been held to be not subject to b,e reversed except In Instances 

where such determlnatlonnls palpably and manifestly arbitrary and Incorrect. See also In accord, Attorney 

General Opinion No. c-530(1965) and authorities therein 

cited, holding that the benefit; to the state, or governmental 

entity Is In the nature of consideration and that the funds 

expended or loaned are not an unconstitutional gift or loan 

even though private persons are benefitted therefrom, and 

that the courts will look to the character of the use for 

which the money Is expended or loaned, not who receives It. 

81 C.J.S. 1148, States, Sec. 133. 

-5895- 
Honorable Hugh C. Yantis, Jr., page 10 (M-I 202) 

SUMMARY 

Bonds of the Northwest Houston Water Supply 

Corporation Issued pursuant to and supported by 

a contract with the City of Houston pursuant to 

the provisions of Article llOgj, V.C.S are not 

to be considered as "other obligations"of the 

city as that term is used In Subchapter I, Chapter 21 of the Texas Water Code, 

A certificate appearing on the bonds of 

the Northwest Houston Water Supply Corporation, 

signed by the Mayor of the City of Houston to 

the effect that the City is unconditionally 

obligated to pay said bonds from ad valorem tax 

revenues of the City 1s not sufficient to render 

such bonds "other obilgations" of such city as 

that term is used In Subchapter I, Chapter 21 of 

the Texas Water Code. 

A proper statutory.amendment to Subchapter 

I, Chapter 21 of the Texas Water Code which 

would Include bonds of such a non-profit corporation as herein described, and under the facts 

and conditions presented; within the term "other 

obligations of a political subdivision" as uaed 

In said Chapter could be upheld as not in contravention of Article III Sections 50 and 52 of the 

Texas Constitution prohibiting the lending of credit 

to any Individual, association or corporation. 

Vedtruly yours, 

Prepared by Robert B. Davis 

Assistant Attorney Qeneral 

APPROVED: 

OPINION COMMITTEE 

Kerns Taylor, Chairman 

W. E. Allen, Co-Chairman 

-5a96- 
Honorable Hugh C. Yantls, Jr., page 11 (M-1202) 

Roger Tyler 

William Craig 

V. F. Taylor 

Robert Lemens 

SAMUEL D. MCDANIEL 

Staff Legal Assistant 

ALFRED WALKER 

Executive Assistant 

NOLA WHITE 

First Assistant 

-5a97-