Court Opinion

ID: 4130922
Source: CourtListenerOpinion
Date Created: 2017-02-18 01:09:57.518796+00
Date Added: 2024-06-11T14:34:15.793990
License: Public Domain

The Attorney General of Texas
                                                   September 16.   1986
JIM MATTOX
Attorney General

Supreme Cowl Bulldin           Honorable Charles D. Bouston           opinion   No. JM-545 &4LC~L&
P. 0. Box 12549                District   Attorney
Austin. TX. 78711. 2549        One East Uein                          Re:   Disposition of interest  earned
512/4752501                    Bellville,   Texas                     on unused portion     of   road bond
Telex 9101814-1287
Telecopier 51214750255
                                                                      proceeds

                               Dear Mr. Eouston:
714 Jackson. Suite 799
Dallas. TX. 75202451X
                                     You have requested    an opinion   from this office     concerning  the
214/742.S944
                               disposition   of moncqr earned as interest    on the invested proceeds      of
                               tax bonda authorized by the Austin County electorate       for the construc-
4S24 Alberls Ave., Sulle 150   tion , maintenance clud operation    of county roads.    -See V.T.C.S.   art.
El Paso. TX. 799052792         6702-l _ (1. All --
                                                et. 8%    Your question is:
915/5333484
                                          Is it proper     for    the interest      on the unused
                                          portion c~f the bond proceeds       to be added to the
                                          principal   sum,     or    should    such   interest be
                                          deposited  to the Interest        and Sinking Fund for
                                          retirement of the bonds?
806 Broadway. Suite 312
Lubbock. TX. 79401-2479
                                    You advise thr.t, pursuant to a bond election      in 1982, $3,000,000
8081747.5225                   In bond proceeds    were received;   but not all         the proceeds   were
                               expended.  You further advise:
4209 N. Tenth, Sulto B                    About Jls.e of     1983,    the conaaissioners    began
McAtlsn. TX. 7&W-1585
5121SS2-4547                              placing the unused portion of the bond proceeds in
                                      ’   30 day certificates      of    deposit.    As interest
                                          accrues on. these deposits,     it is added to the sum
209 Main Plaza. Suile UK)                 of the next monthly certificate       of deposit; it is
San Antonio. TX. 7S2U5.2797
                                          not plawd    in the Interest      and Sinking Fund for
512r2254191
                                          retiremert of the bonds.      (Emphasis deleted).

 An Equal Opportunity/              The bonds in cuestion were issued under srticle 6702-l. V.T.C.S..
 Affirmalive Actlon Employer   the County Road and. Bridge Act. Section 4.411(b) of the act provides:

                                              Any csxmty or any political    subdivision    of a
                                          county o:c any road district    may issue bonds for
                                          the purpxse of the construction,      acquisition   by
                                          purchase, maintenance,   and operation   of macadam-
                                          ized, graveled, or paved roads and turnpikes or in

 c                                        aid of these purposes in any amount not to exceed

                                                            p. 2511
Honorable   Charles D. Houston .- Page 2       (JM-545)
                                                                                        ..
                                                                                          b

            one-fourth     of the assessed valuation    of the real
                                                                                       i ’
            property of the county, political       subdivision,   or
            road district     and m;ay levy and cqllect   ad valorem
            taxes to pay the interest      on the bonds and provide
            a sinking fund far the redemption of the bonds.
            The bonds shall be issued in the manner provided
            in this part and ai contemplated and authorized by
            article    III.   sectron  52, of the Texas Constitu-
            tion.    (Emphasis added) .

      Since 1904. asIL1,                section    52, of the -has
authorized a county, upon two-thirds           majoritjr vote of its electorate,
to incur debt by issuing bo:lds (not to exceed a specified            amount) for
certain    purposes    only.     Pni,ong the purposes:        “The construction,
maintenance and operation o:t macadamized, graveled or paved roads and
turnpikes,   or in aid thereof.”        In 1976, a new subsection was added to
section    52 lovering    the  “two   thirds”     voting requirement for county
road bonds, but retaining        provisions     for the levy and collection       of
taxes to pay the interest          on the bonds as it becomes due and to
“provide a sinking fund for redemption of the bonds.”               See also L
pBLaJ.LALs             .   The ntnr  article    III,g.ection
                                     -.._____.- ->-            52, subsection -- (c)
states:

            [Blonds may be issued by any county in an amount
            not to exceed one-.fourth of the assessed valuation
            of the real      prcperty   in the county,        for the
            construction,     mdntenance,       and    operation   of
            macadamized.     graveled.     or    paved    roads   and
            turnpikes,    or in aid thereof,      upon a vote of a
            majority of the rwident      property taxpayers voting
            thereon who are qualified      electors   of the county,
            and vithout the rwcessity     of further or amendstory
            legislation.     Tht! county may levy and collect
            taxes to pay the interest          on the bonds as it
            becomes due and to provide          a sinking    fund for
            redemption of the bonds.
                   att.($7o;L-   I
       Although section 4.402-of     the County Road and Bridge Act reserves
 to the appropriate    sinking fund all interest        or investments of money
 in sinking    funds, neither    .the constitutional      provision    nor section
 4.411(b)   of article   6702-1, V.T.C.S.,     nor any other statutory      provi-
 sion we have found. expressly      specifies    the disposition     to be made of
 interest   earned by investing    road bond proceeds.       But the County Road
 and Bridge Act is clear          about the disposition          of the proceeds
 themselves.    Section 4.424 DE    article
                                -_O_--        6702-J,.V.T.C.S..     reads:

             That portion      of the purchase money representing
             capitalized    interest  shall be placed in the county
             treasury    of    the, county   or of   the political
                                                                                       -,
                                                                                       L
                                       p. 2512
Honorable Charles D. Houston *- Page 3 (JM-545)

            subdivision    or road district,    as the case may be,
            and shall be used to pay interest         coming due on
            the bonds or bond anticipation          notes,  and the
            remainder of the ::unds, after the payment of the
            costs     of    issuaree    of   the   bonds   or    bond
            anticipation     notes, shall be placed in the county
            treasury     of the county to the credit          of the
            available     road f,md of the county or of the
            political     eubdivi,3:Lon or road district      or the
            county, as the case may be.

      To better clarify   the issue raised by your inquiry,          it is useful
to review some aspects of bond law.           First.  tax bonds. such as those
involved   here, are secured ‘by all taxable property            in then county.
V.T.C.S.  art. 6702-l.   5§4.41.1~. 4.412.    4.425.  4&b   . If principal      and
interest  payments on the ob:plgations       are not paid when due, the bond
holders can force county officers          to levy .and collect    taxes to meet
the bond obligations.      Citg of Austin v. Cahill,         88 S.W. 542 (Tex.
1905).   See 47 Tex. Jur. 2d?ublic         Securities   and Obligations,   $45 at
                                                                             --
378 (1962).     - -    -    -~

      Second, a “sinking      fund,” as defined       by the 1859 edition       of
Bouvier’s Law Dictionary     527 (vol. II 18159) (15 years before the term
was used in the 1876 Texas C,onstitution         ), is “[a] fund arising     from
particular    taxes, imposts,    or duties,    which is appropriated      towards
the payment of the interest       ‘due on a public loan and for the gradual
payment of the principal.”         See Elser v. City of Ft. Worth, 27 S.W.
739 (Tex. Civ. App. 1894, wricef’d).           The establishment of a sinking
fund is made mandatory b:l article            KT.                 of   the Texas
Constitution     whenever a county        incurs    a debt,    including    debts
authorized by ‘article   iI1,   s,ectioa 52.     See
                                                 -    Attorney  General   Opinion
O-763   (1939).

      Third, an order of the! commissioners          court for a bond election
that specifies      the purpose!, to which the proceeds will be applied
becomes a contract with the voters , and the proceeds cannot be legally
applied to different       or other purposes.     Black v. Strength, 246 S.W.
79 (Tex. 1922).        Of course!, the commissioner’s         court may properly
specify only those purposes for which the constitution             allows bonds to
be issued,    and the language of article       III.    section 52 allowing       the
issuance of bonds voted by the electorate            for road purposes,      “or in
aid thereof” has been construed to permit the use of bond money for
incidental,    directly-relatetl    Duruoses “where necessarv” to accomolish
                                                                           ~-~-z---~~
the    main purpose;        “but   ‘not
                                    - - as    an independen;         or   exclusive
undertaking.”      Aransas Counly v. Coleman-Fulton Pasture Co., 191 S.W.
553,  556 (Tex. 1917).

       1.   Article   12. section 23 of the constitution            of   1869   also
referred    to “sinking funds” for the redemption of debt.

                                       p. 2513
Eonorable   Charles D. Houstor. - Page 4     (JM-545)

      In considering   your queetion,    it i3 also useful to keep in mind
the effect     of using bond :proceeds to increase          the principal   sum
available   for expenditure 011 projects    authorized by the voters instead
of limiting    that sum to the amount authorized and devoting any excess
to a reduction of the bonded indebtedness.         The practice  could be used
by county officials     to circumvent constitutional      limits  of taxation.
See Ault v. Hill County, 11:. S.W. 425 (Tex. Civ. App. 1908) aff’d.          116
G.     359 (Tex. 1909); Jefl’erson     Iron Company v. Rart, 45 S.W. 321
 (Tex. Civ. App. 1898, no=G:).        Such limits are for the protection       of
taxpayers and to secure economy in the expenditure of public moneys.

       In the situation  you dl!scribe.  we are advised that, of the Austin
County bonds authorized     to be sold in the amount of $3,000,000        for
road purposes (and in aid thereof),       all were sold at once, but less
then $1.000.000     of the pro :eeds have been spent for those purposes;
the rest of the purchase moa,ey paid the county for the bonds has been
invested    at a rate of int~crest not greater than 7.852.        (The bonds
bear interest    at 12.5%.  Set? V.T.C.S. art. 717k-2, 12).    Thus, because
ateast     tvo million doll=;    worth of bo-              before the money
was needed. the taxable property in Austin County has become indebted
for    tens of    thousands   oE dollars    in interest   earned by bonds
prematurely sold.

      You indicate   that in I:he meantime, the costs of “numerous miles
of  black topping and other road Improvements” were paid from the
regular county budget when they should have been charged against the                 L
bond proceeds.     As a result,    property in Austin County has been doubly
taxed to pay for the road improvements made. The practice            of adding
the interest    earned by unu:aed road bond proceeds        to the principal
smount ( rather than using it to reduce the prospective           tax burden,
exacerbates  the inequity.      Cf.
                                --   Attorney General Opinion  C-753   (1966).

      Section 4.424 of the County Road and Bridge Act (set out above),
which    governs    the  disposition       of    road    bond   “purchase   money”
[proceeds],    states   that ;Ifter     putting     aside    the portion   of  the
purchase money representin          “capitalized      interest”   and paying the
costs of issuance of the bonds, the “remainder of the funds” shall be
credited    to the available    road fund.       It is interest     earned by the
investment of this “remainder” portion of the bond proceeds with which
we are concerned.       Whether the interest          also becomes part of the
“remainder” within the meaning of section 4.424.

       Normally,    the rule i,s that interest       is an accretion    to the
principal     fund earning it       and, unless lawfully  separated  from it.
becomes a part of the fun(d, but the overriding             rule is that the
disposition     of interest    earned by a fund cannot contravene constitu-
tional    requirements.     Lawson v. Baker, 220 S.W. 260. 272 (Tex. Civ.
                            --
APP.   - Austin   1920.  writ  ref’d).   It is for that reason that we cannot
consider the interest       earned from investment of the bond proceeds to

                                      p. 2514
Honorable   Charles D. Rouston - Page 5       (JM-545)

be part of the “remainder” which section 4.424 sends to the available
road fund.     The use of pub:ll;c debt in the form of bonds to create a
fund for investment as an illdependent or exclusive undertaking is not
a purpose     sanctioned   by article   III,   section  52, of the Texas
Constitution.    -See Attorney General  Opinion  O-7393 (1946).

      The section 4.424 provi,slon      that “capitalized     interest”    be used
to pay interest     coming due on the bonds sold is instructive              of the
proper disposition       to be made of interest        Incidentally     earned by
unneeded road bond proceeds.          Cf. V..T&S.        art.   67117-1     54.446.
“Capitalized    interest”   is related0      “accumulated interest”        as that
term is used by article     708, V.T.C.S.

      Article 708. V.T.C.S., provides that county bonds shall never be
sold at less than their par value and accumulated interest,   exclusive
of commissions.    As expla%ned by Attorney     General Opinion O-121
(1939) :

                The statutes    provide that bonds shall never be
            sold for less t1.a.n par and accrued interest          to
            date of sale.     The authorities     are in accord with
            the conclusion    that the par value of an interest-
            bearing bond on t’he date of issuance is a value
            equal to the prlmcipal       thereof,    and on any day
            subsequent to ita issuance it is a value equal to
            the principal      pIus the accrued interest.         The
            nominal or par value of such a bond necessarily
            increases with each succeeding day by the amount
            of interest    accrwd which on its face it promises
            to qay.    Hence, the money received from the sale
            of bonds at par plus accrued interest         represents
             the par value of the security.

       In determining   the d,isposition         to be made of such accrued
 interest  when received by t’he county,         Attorney General Opinion O-121
 reasoned:

                 The total  fat,:   amount of the bonds Issued and
             sold represents      the maximum amount authorized by
             the voters,    or a diminished          part thereof,     and
             interest accruing; on such bonds issued but not yet
             sold is specific&tly      an accrued liability       against
             the issuing body, and which must be discharged out
             of taxes levied       and collected       for that purpose.
             Accordingly,   the ~sumreceived as accrued interest
             in the sale of the bonds should properly be an
             offset  to such xcruing        liability.      Eence, it is
             the opinion   of this     department that the correct
             procedure would be to credit               such sum to the

                                       p. 2515
            Aonorable   Charles D. Houston -. Page 6       (Jtd-545)

                        interest    and sink:tng fund, thereby         insuring   the
                        taxpayer   the benef:tt of the offset.

                  Thus, when the sale of bonds is delayed uutil the bond proceeds
            are needed for the project authorized by the voters,        the “accumulated”
            interest    earued by the bonds during the delay is capitalized            and
            results   in the county receiving     more borroved money than the elector-
            ate authorized    for the project;      the amount representing   the excess,
            i.e.,    the   accumulated   in,:erest.     must be used      to  reduce   the
            indebtedness.

                   If. as here, rather tL,an delaying        the sale of bonds until        the
            proceeds     are needed, county officials       sell    the bonds at once and
            invest the proceeds (thereby denying to taxpayers and to the interest
            and sinkins      fund the benefrlt of interest       that would accrue before
            sale).    cf. -Navarro County 9’. Corsicana      National Bank, 287 S.W. 501
            (Tex. Cx        App. - Waco 1926, writ ref’d),       we believe     the investment
            income is properly to be credited         to the interest     and sinking fund to
            help retire      the debt, and that It csnnot constitutionally             be made
            available     or used for any other expenditure       or purpose until the debt
            is retired.      Tex. Coast. art. III,     152.   Cf. Attorney General Opinion
            s-142     u984);    O-697351.         If the authotised      funds voted for the
            approved projects      prove insuE:Eicient , the recourse of county officials
             is to return to the electorate      for additional     authorization.    -Cf. Tex.
            Const. art. VIII, 59 (additi’>nal       road tax).

                  Our conclusion is bolstered    by similar ones reached in the past
            concerning bond proceeds urneeded for completed bond projects.         In
            Attorney General Opinion O-6373 (1945). bond money voted for roads was
            not used because the state       built  the roads itself.    The opinion
            concluded that’ the surplus could be used only for the retirement      of
            the outstanding obligations    and should be placed in the sinking fund
            for that purpose.    In a sim:Llar situation,    it vas held by Attorney
            General Opinion V-684 (19m:

                         If the bond purpose has been completed,    then the
                         $10,000 left over Ishould be used to retire     out-
                         standing bonds.    1.f the owners of such bonds are
                         unknown to the county.     then the money should be
                         placed in the sinking fund.

                   The principle      is the isame. Unneeded receipts           from bond sales
             cannot be used for any purpose other than to retire                       the bonded
             indebtedness.       After    the    indebtedness      is retired,     any remaining
             surnlus    mav be used for            lother moiects.     but counties       are not
             authorized     to artificially       c:onstruct   or perpetuate    a surplus.    -See
             V.T.C.S.    art.    6702-&-&~!JJ         CcZi_Attorney   General Opinion       J
                                                                                      -!?kxxL
             &J&J;     Atl=%.&era1            Ol+i~n     C-753 (19&j.      -Cf. Attorney General
             Opinion O-5-..    ,___., .
                          Inn 1lQW.
,

    .   .

                                                    p. 2516
,            Honorable Charles D. Aouston -- Page 7          (JR-545)

                    The purpose of the bond sale authorized by Austin County voters
             was to provide $3,000,000      in borrowed funds as needed, to be available
             for the accomplishment of mad projects          -- for the repayment of which
             their taxable property was t:o stand as security.             We have not been
             provided a copy of the Austin County 1982 road bond resolution                 or
             order.    For purposes of thill opinion we have assumed (without decid-
             ing) that    investment of the bond proceeds in 30 day certificates            of
             deposit is not prohibited       b7, that instrument or by law.     But vhatever
             “investment” authority may t,ov be extended over road bond proceeds by
             statute= or by the bond ord~?r. it cannot be read as allowing the use
             of the funds to augment that amount, i.e.,         to make available    for such
             expenditure more than the f!lectorateauthorized            on the projects    for
             which the bonds were voted.         Such a reading would allow bond proceeds
             to be used for an independent or exclusive           undertaking not necessary
             accomplishment of the purpose for which the bonds were authorized,            and
             would violate     article III.     section 52. of the Constitution      of #Texas
             limiting   the purposes for vhich such bonds may’be voted.         -Cf. Attorney
             General Opinion O-1952 (1940).

                   Attorney General O&D%X~)                  held that a school board
             might deposit interest    earnei by excess school bond proceeds In the
             sinking fund created to reti,re the indebtedness.        To the extent the
             opinion suggests the board possessed discretion     to do otherwise,   it is
        ,-
             disapproved.   A similar    qwstion   was presented    in Attorney General
             Opinion v              .~ which construed ewtioa    20.43 of the Education
    i        Code to permit the use of such interest     for other purposes.      To that
             extent, it is disapproved,    also.

                  In our opinion,  any int.erest  earned from the investment of the
             bond proceeds ,must be depot;i.ted in the interest and sinking fund to
             help retire the bonded indebtedness.

                     2. Until    1981,    there: was not a statute             permitting   ‘county
             OfficialS    to invest      bond proceeds.         See Attorney General Oa
             Mu-224 (W        . -1182 (1951’1 :w                     . In that year, section 7
                                                 ‘d
             of article     717R-6, V.T.C.S,,         the Bond Procedures Act of 1981. was
              enacted to HfIow the inve!~tment of “revenue” bond proceeds                     “until
             needed,” and                7544. V.T.C.S.,       was amended to allow particular
              investment    of     funds    in      the    county   depository      “not   required
              immediately,”    so long as no law expressly               prohibited     it and the
              depository   contract    was not: contravened.         In the same year, article
              2546, V.T.C.S.,     vhich allows; the placement of county funds on “time
             ‘deposit ,I’ was amended.       See also V.T.C.S.
                                             ---                      art.   2547 (“county     funds
              derived from the sale of ,recuriti&?);-Navarro                 County v. Corsicana
             National Bank, 287 S.W. 501 :(Tex. Civ. App;‘- Waco 1926, writ ref’d).
              Cf. City of Bonham v. Taylor,              16 S.W. 555 (Tex. 1891) ; Austin v.
             Freestone    County, 288 S.W.-30             (Tex. Civ. App. - Waco 1926, writ
              ref ‘d) ; Austin Bros. Bridge Co. v. Road District                No. 3 of Liberty
              County, 247 S.W. 674 (Tex. C9.v. App. - Beaumont 1923. writ ref’d).

                                                   p. 2517
Aonorsble   Charles D. Rouston - Page 8         (34-545)
                                                                            .

                                  SUUHARY

                Any interest  cmmed from investment of county
            road bond procemrds must be deposited      in the
            interest   and sinking  fund to help retire   the
            bonded indebtedness.

                                            Very truly     your ,

                                            J   JIM
                                                      A      hLs%
                                                        HATTOX
                                                Attorney General of Texas

 JAcKEIGRTOWgR
-First Assistant Attorney   General

 MARYKELLER
 Executive Assistant   Attorney   General

 RICX GILPIN
 Chairman, Opinion Comittec:

 Preparid by Bruce Youngblood:
 Assistant Attorney General

                                      p. 2518