.

, THE ATTORNEY GENERAL OF TEXAS

August 30, 1972

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

Director Executive Texas Water Quality Board Lowlch Building Austin. Texas 78701 Re: Whether bonds of Northwest Houston Water SUQQ~Y CorQoratlon issued pursuant to contractwith-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 purchaseby the Dear Mr. Yantla: state, and related queatlons?

Your recent request for an opinion states that In 1965 the City of Rouston became concernedabout the lack of water and sewer facllltles In that area adjacent to the City known as Acre8 Homes. Supportedby Resolutionof the City Council, three Houston residentswere requestedto form a non-profitwater supply corporation under the provisionsof Article 143&a Vernon's Civil Sta&utes,* to acquire or constructthe nec&sary facllltlesto service this area.
It apparentlywas contemplatedthat the facilitieswere to be.acquiredwith corporatebond proceeds flowingfrom a contractwith the City of Houston,under the provisionsof Article llOgj, whereby the City agreed to purchase the facllltles from the non-profitcorporationand in consideration therefor was to pay to the corporationperiodic amounts necessary to pay off the corporatebond debt. The City would annex that area known as Acres Homes in phases as the various sections were providedwater and sewer service. The corporationwas organizedas the NorthwestHoustonWater Supply Corporation with all Its stock being held In trust by the Mayor of Houston for the benefit of the residentsof 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-HonorableHugh C. Yantls, Jr., page 2 (M-1202)

ii:, the four phase plan for annexationof the Acres Homes area.

Your lnqulrleawith reference to the characterof the "corporateobligations"of the Northwest Houston Water Supply Corporationhave been paraphrasedfor purposesof clarity: (1) Are bonds of Northwest Houston Water

Supply CorporationIssued pursuant to and Supportedby a contractwith the City of Houston under the Qrovlslonsof 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 Corporationare 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 provisionsof Subchapter I, Chapter 21, Subtitle C of the Texas Water Code (Sections21.601 - 21.612) be amended so as to Include bonds of this non-profitcorporation within the term "other obligationsof a political subdlvlaion"where the bonds offered for sale to the State are unconditionally secured by a contract with a political subdlvlalonunder the provisionsof Article llOgj? Before answeringyour first question,we must first examine the "legal character"of the parties to that oontractherelnabove referred to.
In the case of Tarrant County Water Supply Corporation v. Hurst-Euless-Bedford IndependentSchool Dl t I t 1 3 **W** 2d 162 (Tex.Clv.AQQ. **1963** error ref n.r.e. ' ' &5~gthe c&k. sQeclflcallyheld that bubllc utility corporations of the klnd here under consideration **are**:

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

I,

. . . not munlclpal~orgovernmental ;E;e;ef#,

. . , Neither wo lulda corporation nder the Qrovlslonsof Article 143ka be a politicalaubdlvlslon." (at Q. 163).
On February 15 1972, this office In Opinion M-1070 sQeclflcallyheld that the Northwest Houston Water Supply Corporationwas not a "Qolltlcalsubdlvlslon"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 entitleswhich 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 relatlonshlpwhich the parties bear to one another would be determinedby 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 contractwas made. This same Qrlnclplewould apply to any securitywhich the city or the corporationmight contemplatelssulng. No contractbetween the parties could convert a bond, note or warrant of the City of Houston Into an obligationof the corporations,

nor vice-versa.
It Is contendedby the attorneys for one of the lnterested partlea that the bonds Issued by the NorthwestHouston Water Supply Corporationare eligible for purchaseby the Texas Water DevelopmentBoard 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 followingaddltloAa1 facts and considerations are presented: "2

. NorthwestHouston Is a non- roflt corporationorganizedunder Article 1I: 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 residentsof the City and the residents of the Acres Homes area adjacent to the City.
"3. The corporate charter prohibitsdividends

-5889-HonorableHugh 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 corporationdoes 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 contractbetween the City and Northwest Houston Water Supply Corporation and all supplementalcontrac~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 constructionbids and QrOQOSSd awards of constructioncontracts;and (d) Approval by the Houston City Council of the resolutionauthorizingIssuance of the bonds. “6. The contractsobligate the City of Houston to pay directly to the bond paying agent sums,sufflclent to pay the principalof 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 continuingdirect annual ad valorem tax on all taxable propertywithin the City, as Is the case with general obligationbonds Issued by the city. “8. The City Ordinanceauthorlzlngthe contracts levies the ad valorem tax required to make such prlnclpal and Interest payments. “9. The City Ordinanceapproving the bond reso-

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

lutlon, the Interest rates, and the sale of the bonds and authorizingtheir Issuance reaffirmsthe unconditionalobligationof the City to make the payment of principalof and Interest on the, bonds. "10. The contractsprovide 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 performanceof the City!8 obligation to levy such annual payments.' "11. The contracts, the bond resolutions, and the bonds themselvesprovide 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 sQeclflcallyrefer to rights of the bond holders as against the City In the event of default. It Is clear that 'allof the Instruments were preparedand 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 contractwith the bond holders,and the bonds themselvesare obligations of the City of Houston. "12. There Is no unconstitutional grant of publicmoney 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 violationof Article 701, Vernon's Texas Civil Statutes. These are not the bonds of the City even though they are obligationsof the City. There Is no constitutional or statutoryrelulrement **for** an election to approve the contract**or** the bonds.
-5891-Honorable Hugh

"14. The Federal Income

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

Intereston the bonds Is exempt from taxationunder rulings of the Internal Revenue service,
"15. The bonds are eligible for purchaseand unlimited holding by national banks under rulings of the Comptrollerof the Currency that the bonds are general obligationsof a state or political subdlvlslon." Article 1lOgj Is express authority for cities to contract with non-profitcorporationsfor the purpose of acquiring for the benefit of the cities,water dlstrlbutlonand 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 consideredas "obligations" of the cities contracting. The Article In referring to the responslblllty of cities under any such contract states:

"Such contractmay provide for purchase by the city.

. . of such system. by periodic payments to such. , . corporationby the city.

. . In amounts which. will be sufficientto pay the principalof and'lntereston the bonds of the corporationas 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 Corporationwere eligible for purchaseby the Texas Water Development Board with funds made available through the water "enhancement account" as authorizedby 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 enhancementfunds. Because the water supply corporationIs not a political subdivlslon their bonds as such are not eligible. Atty. (lenl. Opinion M-1070, supra. We have previouslyconcluded that the bonds Issued pursuant to a contractauthorizedby Article 1lOgj are the bonds of the corporationand not the City.. Where the statute uses the term "other obligationsof a political~ubdlvlslon"It must be construed to have reference'to\securltles of the same -5092-:

Honorable Hugh C. Yantls, Jr., ,page7 (M-1202)

nature or characteras bonds (I.e. warrants certlflcatesof obligation,etc.) and may not be lnterpreteibroadly to lnelude any or all types of obligationsof a political subdlvlslon.1 The fact that the City of ,Houston has direct "obllgatlons"

under a contractwith the NorthwestWater Supply Corporationpursuant to Article llOgj, Is thus not sufficient to make the corporatebonds 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 questionyou have suggested that If the bonds of the water supply corporationbear a certificate signed by the mayor of the City of Houston, citing the City's unconditionalobligation to pay the bonds that they then might be considered "otherobligations"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 accommodationlndorser 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 recognizedthat 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 concernedwith a non-municipalbond, and should the city wish to have outstanding Its general obligationbonds to cover the proposed projects It would be necessary to comply with the requirementsof Artlcie 701, which reads, In part,

"The bonds of shall never be lsau;d: 1 an IncorporatedCity. , . unless a proposltlon for the Issuance of such bonds shall have been first submitted to the qualifiedvoters.

. .'I

'Noscltur**A.** Soclls (It Is known,from Its associates 1 Vent. 225.) The doctrinemeans that general and speclfldwords are associatedwith 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,140Fla. 794,viAg~Q40.3~4,(1g3g).

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

One cannot accomplish indirectlythat which It has no authority to do In the first Instance.
As a matter of Information.the orooosed contractbetween the parties covering Phasd 3 of‘thk project,which you forwarded~tothis office as part of your background Information,calls for **a** water supply and distribution system as well as certain sewage facllltles,excludln speclflcallya sewage treatmentplant, to be with the bond proceeds.
Even If the-bondswere conslder$_bonds of the City

. . of Houston they would still not be ellglble for Qurcnase oy the Texas Water DevelopmentBoard, for Section 21.601 does not contemplatetheir Inclusionbut sQeclflcallystates:

"The purpose of this subchapterIs to provide for making loans of water quality enhancementfunds authorizedby Article fI1, 3 t1 - -

1 of the Texas Constitution t~cQo~?tlcals~bdlvlsionsof the state fo$ uiilng maximum federal grants for the constrmctlon Of treatmentWorks." (EmphasisSUpplied).
It is also noted that the QMceedS realized from the sale of these bonds must be used In constructionof treatment works exclusively,and we are aware of no exception that would Include a waterworks system.
Your final question lnvolvss. the possibilityof amending SubchapterI of Chapter 23 of the Water Code to include bonds of such **a** non-profitcorporationas here exists within the term "otherobligationsof a political subdivision." While Article III, Sections 50 and 52, Texas Constitution, declares that the legislaturehas 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 legislaturefrom authorizinga 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? & ReclamationDlst. **v. McGraw**  126 Tex. 506 91 3 W 2d **bb5** -Cl93b) **H**

**;** lghway Comm. v. Vaugh, 288 S.W. 835 (Tei.tiV.AQQ.
-5894-HonorableHugh 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 enactmentwere enacted, the City of Houston would be contracting for Qubllc~governmental serviceswhich It may legally perform and for which It Is obligatedunder the law to provide. The ~contracts call for the improvement and enlargementof specificwater 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 governmentalQurQo%e,and It thereforedoes not constltute a grant of money to the non-proflkcorporatlon for Individualor private purposes or an unconstitutionallending or pledgingof credit by the City In aid of the corporation. San Antonio River Authorityv. Shepperd, 157 Tex. 73, 299 S.W.= 920, 928 (1957).
It Is therefore-ouropinion that the.QroViSiOnS of SubchapterI, Chapter 21, Subtl,tle C of the Texas Water Code (Sections21.601 - 21.612), could be amended In such a ,way as to Include bonds of such a non-profitcorporation within the term "other obligations,ofa politicalaubdivision"where the bonds offered for sale to the State are uncondltlonally~secured by a contractwith the political subdlvlslonunder the provisionsof Article 1lOgj. .A8 stated In Attorney General Opinion No. w-1229(1961), the determln:tlonof what constitutesa public governmental purpose has been held to be primarilya legislative function subject to review by the courts when abused and the determination

of the legislativebody of the matter has been held to be not subject to b,e reversed except In Instances where such determlnatlonnls palpablyand manifestlyarbitrary and Incorrect. See also In accord, Attorney GeneralOpinion No. c-530(1965) and authoritiestherein 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 personsare benefittedtherefrom,and that the courts will look to the characterof 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 supportedby a contract with the City of Houston pursuant to the provisionsof Article llOgj, V.C.S are not to be consideredas "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 conditionspresented;within the term "other obligationsof 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 Constitutionprohibitingthe lending of credit to any Individual,associationor corporation. Vedtruly yours,

Preparedby Robert B. Davis AssistantAttorney Qeneral
APPROVED: OPINION COMMITTEE
Kerns Taylor, Chairman W. E. Allen, Co-Chairman

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

Roger Tyler William Craig V. F. Taylor Robert Lemens
SAMUEL D. MCDANIEL Staff Legal Assistant
ALFRED WALKER ExecutiveAssistant
NOLA WHITE First Assistant

-5a97-