Court Opinion

ID: 4130214
Source: CourtListenerOpinion
Date Created: 2017-02-18 01:01:38.730831+00
Date Added: 2024-06-11T12:45:34.746946
License: Public Domain

December 11, 1990

Honorable 0. H. "Ike" Harris     Opinion No. JM-1255
Chairman
Economic Development Committee   Re: Use of municipal rev-
Texas State Senate               enue bonds to acquire a
P. '0. Box 12068                 school building for lease
Austin, Texas    78711-2068      to an independent school
                                 district   (RQ-1876)
Dear Senator Harris:
     you ask whether two proposed transactions involving the
issuance of revenue bonds by a municipality to finance the
acquisition of a school building or facility to be leased
to an independent school district solely for educational
purposes "would violate Article III or any other provision
of the Texas Constitution.** Given the strict division of
governmental powers between     municipalities and    school
districts that the Texas courts have derived from the state
constitutional provisions concerning municipal and school
finance, we must conclude that these proposed transactions
violate the Texas Constitution. See aenerally Tex. Const.
arts. VII, XI.
     You describe one of the two proposed transactions   as
follows:
           [The1  transaction would involve a pur-
        chase of land by a municipality, and the
        construction of a school building or facility
        on such land, all with proceeds from the sale
        of revenue bonds, and the lease of such land
        and building or facility to a districts. The
        lease would be for a maximum term of ~years
        extending at least to the final maturity of
      _ the bonds, and probably to the end of the
        expected useful life of the building or
        facility. The lease rentals would be payable
        from the district's annual maintenance taxes,
        on a year-to-year basis, with an annual
        option to renew by annual appropriation of
        lease rental.    There would be no      legal
        obligation on the part of the district to
        make any future payment, and the lease would
        be renewed annually only at the option of the

                             P. 6682
Honorable 0. H. OIIkelV
                      Harris - Page 2   (JM-1255)

       district . . . . The annual lease rental for
       each fiscal year would be at least sufficient
       to pay the principal and interest     on the
       bonds during such fiscal year, and        the
       district would be required to operate and
       maintain the building or facility and pay the
       expense thereof during such fiscal year.   If
       the district failed to exercise its annual
       option and renew the lease, it would be
       required to vacate . . . but the district
       would not be liable for any further payments.
     The brief included with your request explains that the
school district assisted by the municipality would be
located within the municipality's boundaries. No mention is
made in the brief of any municipal use of the building or
facility during the period leased to the district or to
concurrent arrangements with other lessees that        would
generate additional funds that could be used for municipal
purposes. In fact, the brief states that the building or
facility will be leased solely for educational purposes
and makes no mention at all of any expected profit on the
transaction.
     The second transaction you propose involves "terms and
conditions similar" to the first transaction except that the
municipality in the second would lease land then owned by
the district upon which to construct the school building or
facility. After construction is complete, the municipality
would "lease-back" the land and the new building or facility
to the school district solely for educational purposes.
Annual lease payments to be paid by the school district
"would be sufficient to amortize the bonds and provide to
the municipality its annual land rental to the district."
If the school district does not exercise its annual option
to renew the lease, the municipality would not be obligated
to make future lease payments. In addition, the brief
explains that it
       is probable that the [lease-back] transaction
       would be structured so that at least one or
       two years of municipality land rentals would
       be escrowed from bond proceeds to pay such
       rentals. This would result in forcing the
       district to vacate the school building or
       facility for at least a year or two if it
       failed to exercise its annual option to renew
       the building lease-back.
     In Attorney General Opinion JM-1194 (1990), we noted
that the Texas Constitution is replete with provisions

                             P. 6683
Honorable 0. H. "Ike" Harris - Page 3 (JR-1255)

limiting the use of governmental resources ‘and powers for
public purposes. L     at 2 (referring
III, 55 50, 51, 52(a): art. VIII, § 3:
XVI, 8 6); See also Tex. Const. art.
economic development and diversification and the elimination
of unemployment as public purposes). Transactions permis-
sible under these provisions must provide "for the direct
accomplishment of a legitimate public purpose.lq Brazoria
Countv v. Perry, 537 S.W.Zd 89, 91 (Tex. Civ. App. - Bouston
[lst Dist.] 1976, no writ): see al         Vl          V
Tavlor, 67 S.W.Zd 1033, 1034 (Tex. ltt4)@fthi oEjec?Eo    Ei
achieved must be directly connected to the local govern-
ment).   Furthermore, the accomplishment of the       public
purpose must be secured by placing sufficient controls
on a transaction "to insure that the public purpose will
be carried out."   Attorney General Opinion JM-1229 (1990)
at 6.
     The limitation that public resources and powers be used
for public purposes restricts the legislature as well as
political subdivisions.   Attorney General Opinion JM-1194
at 2: gee also 1 G. Braden, The Constitutio of the State of
Texas: An A otated and Comoarative Analvsys 257-58 (1977).
Political su%visions,   however, may assist each other, but
only if the resources and powers donated by one political
subdivision to another are used for a definite public
purpose of the donating subdivision. State ex re 1 . Grimes
Countv Taxoavers Ass'n       Texas Mun. Power Aaency, 565
S.W.2d 258, 265 (Tex. CivT'App. - Houston [lst Dist.] 1978,
writ dism'd w.o.j.) (purpose ~for transfer must be within
oowers of aovernmental entity transferring the resources) ;
Willatt, C&stitutional Restriction on Use of Public Money
and Public Credit, 38 Tex. B. J. :13     421 (1975).   Thus,
municipal resources  and  powers, incl;ding  municipal  bond
powers; must be used to accomplish municipal purposes.   See
Braden, m;     2 E. McQuillen, The Law on MUniCiDal CorDOra-
tions 0 10.31, at 818-19 (3d ed. 1979) (all of a munici-
pality's powers, property and offices constitute a public
trust and must be used for lawful municipal purposes).
     The initial determination whether a particular use of a
municipal resource or power satisfies the public purpose
requirement is within the sound discretion of the myici-
pality's governing body.     See. e.a., Davis v. Ci v of
Tavlor, suora, at 1034; pod o      Marshall 118 S.W.2d 621
(Tex. Civ. App. - Waco 1938: iriz dism‘d w.A.j.). The exer-
cise of this discretion,   however, is  subject to judicial
review, and "in its final analysis, it is for the courts to
answer" whether the constitutional requirement is satisfied.
15 McQuillen, suora, 5 39.19, at 39 (3d ed. 1985).

                             p. 6684
Honorable 0. H. rlIkerO
                      Harris - Page 4   (JM-1255)

     The Texas courts have addressed‘the division of powers
between municipalities and school districts, and absent
further judicial guidance, we are constrained to find the
proposed transactions in violation of the Texas Constitu-
tioii. In Citv of R ckd le v. Cure-      229 S.W. 852 (Tex.
1921). the Texas SuoEemeaCourt refused'to aonlv the consti-
tutional limitation; on municipal taxation-to-prohibit the
issuance of bonds by the city of Rockdale for the purpose of
constructing public school buildings. The city of Rockdale
had previously taken over the control of the public schools
withinits boundaries and had thereby constituted itself a
municipal school district in accordance with section 3 of
article VII of the Texas Constitution.1

     1. Section 3 of article VII of the 1876           Texas
Constitution severely restricted state taxation for school
purposes. Section 3 as well as section 1 of article VII,
which mandates the creation of an efficient system of public
schools, were thoroughly and bitterly debated during the
Convention of 1875. &,8 Sheoherd v. San Jacinto Junior
Colleae Dist., 363 S.W.Zd 742 (Tex. 1962) (summarizes
history of the provisions and the debate at the convention):
Braden, B,      at 505-06, 511-12.     Much of the debate
centered on the ability of Texas to bear the costs of
increased taxation after the Civil War and whether the
benefits of free public schools supported by public taxation
would offset the costs.    S. McKay, Debates in the Texas
Constitutional Convention of 1875 100-13, 194-201, 212-34
(1930); Shenherd, suora, at 747-48 n.3. In 1883, section 3
was amended to increase state taxation for school purposes
and to authorize the legislature to create school districts.
Section 10 of article XI, which had been part 'of the
constitution since 1876, already authorized the legislature
to constitute any city or town a separate and independent
school district.
     The 1883 amendment to section 3 also permitted the
legislature to authorize districts that it created to levy
property taxes not to exceed 20 cents on the $100.      Sub-
sequent amendments raised this maximum first to 50 cents and
later to $1.00 on the $100.    The 1883 amendment carefully
excepted from the district tax limitation incorporated
cities and towns constituting separate and independent
school districts.    This exception was consistent      with
section 10 of  article XI of the 1876 Constitution, which
permited municipalities constituting separate and indepen-
dent school districts to levy any tax in agreement with
                                        (Footnote Continued)

                             p. 6685
Honorable 0. H. "Ike" Harris - Page 5     (JM-1255)

     At the time  of the bond issue considered in Citv of
pockdale v. Cureton, section 3 of article VII authorized the
legislature to create school districts.    The section also
imposed a maximum on the rate of ad valorem taxation by
such school districts, but excepted from the maximum "incor-
porated cities or towns, constituting separate and indepen-
dent school districts.@' The supreme court referred to this
exception and held inapplicable the constitutional limita-
tions on municipal taxation.      Relying on the separate
constitutional provisions for municipal and school finance,
the supreme court stated that a municipality
          taking over the control of its public schools
          shall constitute such a [school] district.
          There may thus be conferred upon a city a
          dual character, and with such character, dual
          powers. There could have been no purpose
          in authorizing the creation of towns and
          cities as independent school districts -- a
          recognized separate class of municipal cor-
          porations with individual powers, unless in
          that capacity they were to have the powers of
          such districts.
             The City of Rockdale had lawfully acquired
          this dual character.   It had its powers m
          strictlv a municioalitv. to be exercised fo
          strictlv municioal ourooses: and it had it:
          powers as a dulv constituted indeoendent
          school district. The two are not to be con-
          fused.
229 S.W. at 852-53 (emphasis added): Ree also Attorney
General Opinion O-7060 (1946) (recognizing the dual nature
of cities constituting independent school districts and that
article VII governs and limits school powers, while article
XI governs municipal powers).2

(Footnote Continued)
their charters. In 1920, section 3 was amended to except
all independent and common school districts from the consti-
tutional restriction on taxation. Section 10 of article XI
was repealed in 1969 as obsolete, but as early as 1901, the
Texas Supreme Court recognized that the 1883 amendment to
section 3 of article VII had superseded that section. State
v. Brownson, 61 S.W. 114 (Tex. 1901).
     2.    But see Citv of Athens v. Moody, 280 S.W. 514 (Tex.
                                          (Footnote Continued)

                                p. 6686
Honorable 0. H. wIketlHarris - Page 6   (JM-1255)

     The reasoning in Citv of Rock&ale v. CuretQn has been
extended beyond the area of taxation. In Citv of El Paso v.
Carroll, 108 S.W.Zd 251, 257 (Tex. Civ. App. - El Paso 1937,
writ ref'd), the court summarized &&j&-         and related
decisions before concluding that these ndec?sions seem to
us to be conclusive of the lack of power in the city council
to aid in financing the support and maintenance of the
schools." The city of El Paso, like the city of Rockdale,
had assumed control of its public schools. The court held
that the city of El Paso, even though it was a home rule
city, could not lend $54,000 from surplus revenues generated
by-its water works system to the school district until the
district was able to collect certain delinquent taxes.   108
S.W.Zd at 259.   In the court's view, "the rigid constitu-
tional property tax structure would be violated if local
governments were permitted to shift funds among them-
selves." pden,    suara, at 258 (discussing Citv of El Paso
v. CarrolJ .
     The holding in the El Paso case was affirmed ten
years later in San Antonio IndeD .   chool Dist. v. Board of
Trustees of San Antonio Elec. 6 Gas Svs- I 204 S.W.2d 22
(Tex. Civ. App. - El Paso 1947, writ ref'd n.r.e.).       The
city of San Antonio had proposed paying the school district
approximately $114,000 a year for 30 years from certain city
utility revenues as reimbursement for district taxes that
would have been imposed if the city had not purchased the
local electric and gas utility.    Citing to Citv of El Paso
v. Carroll, the court held that the city could not donate
public funds to the school district since such a transaction
would violate sections 51 and 52 of article III of the Texas
Constitution, which prohibit the grant of public funds.
Underlying this    holding is     the recognition    that
municipality lacks power to aid in the financing of publig
schools as stated in Citv of El Paso v. Carroll, since if
such assistance were a public purpose of a municipality, the
proposed annual donation of city funds to the school
district to replace lost tax revenue would not have violated
sections 51 and 52 of article III. Braden, suora, at 232-35
(and authorities cited therein explaining the public purpose

(Footnote Continued)
1926) (considering outstanding school building indebtedness
of a city, which was constituted as a separate school
district, as a reduction in total indebtedness that could be
incurred for.municipal purposes given limits on municipal
taxation). Comoare Attorney General Opinion O-6059 (1944)
(distinguishing Citv of Athens on statutory grounds).

                              p. 6687
. Honorable 0. H.   “Iken   Harris - Page 7   (JM-1255)

  exception to the constitutional prohibitions        against   the
  loan or grant of public resources).
       The three cases discussed above and the related deci-
  sions summarized in Citv of El Paso v. Carr 11 all focus on
  the dual and separate nature of municipalyties and school
  districts.3   This focus may be attributable in part to an
  approach to constitutional construction that gives greater
  weight to implied limitations than a court today would
  accord. Se          Sc
  u,     363 z.W.2d ;42   743 (Tex. 1962) (upholding le&Taz
  tion authorizing j&or      college district taxation     and
  stating that legislative acts are not unconstitutional
  absent express constitutional prohibition or clear implica-
  tion that they are unconstitutional).     Comoarg Parks v.
  &&,   111 S.W. 726, 727 (Tex. 1908) (noting the many limita-
  tions in article VII and holding unconstitutional school
  districts created to cross county lines). Nevertheless, we
  have no indication in any opinion that the courts would
  reject today the reasoning concerning the separation of
  municipal and school powers or the results in Eitv of
  wv.                 and in Gtv of El Paso v. Carroll and
  the related decisions.   Thus, we must conclude that muni-
  cipal powers and purposes do not include those reserved to
  school districts for the provision and maintenance of
  schools, including the power to finance and construct school
  buildings or facilities.4
       The brief accompanying your request refers to section
  52-a of article III of the Texas Constitution as support for
  the proposed transactions. Section 52-a was adopted by the

       3. See also Attorney General Opinions O-7060 (1946):
  O-6059 (1944) (for citations to other related cases).
       4. Chapter 20 of the Education Code covers the tax and
  revenue bond powers given by the legislature to school
  districts for building construction ahd other purposes.
  Sections 20.22, 20.51(g), 20.922, and 20.925 authorize the
  use of revenue bonds subject to certain restrictions.    In
  general, these provisions authorize school districts to
  issue revenue bonds to acquire athletic and recreational
  facilities or to pledge the proceeds from the sale of
  surplus realty owned by the district for the purpose of
  retiring revenue bonds issued by the district for       the
  construction of school facil,ities. Other sections of the
  chapter authorize the issuance of bonds secured by ad
  valorem taxes. See. e .a ., Educ. Code 50 20.01, 20.04.

                                   p. 6688
Honorable 0. H. 'IIkell
                      Harris - Page 8   (JM-1255)

voters in 1987'1 Section 52-a expands the definition of
public purposes to include economic development and diversi-
fication, elimination of unemployment and underemployment,
stimulation and growth of agriculture, and expansion of
state transportation and commerce.
      As we stated in Attorney General Opinion JM-1227
(1990), section 52-a does create mexceptions to the pre-
existing constitutional prohibitions on the lending of
public credit." L     at 3. Pertinent commentary preceding
adoption of section 52-a by the voters, however, makes clear
that it was intended to authorize the legislature 'to enact
laws that created governmental programs furthering economic
growth or that authorized governmental loans or grants of
public funds to assist private businesses.         &g   House
Research Organization's Special Legislative Report, J2s.z
Constitutional Amendments     and Referendum    Prooositions,
August 17, ~1987 (new section will permit the state and local
governments to assist individual private enterprises): Texas
Legislative Council Information Report No. 87-2, &nalvses of
prODOSed Constitutional Amendments and Referenda Anoearinq
on the No emb r 3. 1987 Ball&& September 1987 (section will
overcome zonstitutional prohibition against use of public
resources to obtain      general benefits obtainable     from
assisting private industry).
     No language in section 52-a or in the commentary pre-
ceding its adoption suggests that the section was intended
to   overcome   any   constitutional   prohibition   against
municipalities assisting school districts to acquire school
facilities through the use of municipal powers. In fact,
the commentary states that those against adoption of the new
section argued that the proper role of government was the
financing of public     educational facilities and     other
infrastructure improvements such as highways and airports,
and not the provision of public funds to private businesses.
House Research Organization's~Special Report, suora, at 17
(government should let individual businesses assume the
risks and rewards of the free market and instead support
public schools and needed transportation improvements):
Texas Legislative Council Information Report, suora, at 15
(giuen.shortage of public funds, such funds should be used
for the support of essential government functions and not
the support of private enterprises).
     Furthermore, there is no language in either section
52-a or in the relevant commentary to suggest that the
amendment was. intended to change the requirements that
public resources and powers be used for "the direct accom-
plishment of a public purpose**and that transactions using
such resources and powers contain sufficient controls "to

                             P. 6689
. f. .   Honorable 0. H. nIke**Harris - Page 9   (JM-1255)

         insure that the public purpose be carried out."     Attorney
         General Opinion JM-1229 (1990) at 5-6 (and authorities cited
         therein): see al Q pa is . Citv of Tavm        67 S.W.Zd at
         1034 (the objectsto bev achieved must be dir;ctly connected
         to the local government). It merely adds to the purposes
         for which the legislature may authorize the loan or grant of
         public funds.
              Consequently, we are unable to accept the proposition
         that a municipality entering into the proposed transactions
         would satisfy the     public purpose requirement     because
         decreases in unemployment and increases in business activity
         would result from the availability of expanded school
         facilities. Although those changes are within the expanded
         public purposes as described in section 52-a, article III,
         such changes in unemployment and business activity are not
         the direct goal of the proposed transactions as described to
         us. At best, those changes are only incidental benefits to
         be obtained, if at all, indirectly, and in the indefinite
         future.5   Furthermore,   the   proposed   transactions   as
         described to us do not contain sufficient controls to insure
         that such changes will take place as planned.
              Thus, we must conclude that the proposed transactions
         violate the strict division of governmental powers between
         municipalities and school districts that the Texas courts
         have derived from the provisions of the Texas Constitution
         governing municipal and school finance. In addition, we
         find no support in section 52-a, article III, for rejecting

              5. According to the description of the first trans-
         action provided us, the lease would be renewable on a
         year-to-year basis solely at the district's option and the
         annual lease rental paid by the district would be at least
         sufficient to pay the principal and interest on the bonds
         due each year. The second transaction is described as
         similar except that annual school lease rentals would also
         cover the municipality's annual land rentals and perhaps
         would be structured to force the district to vacate the
         building for a year or two if it failed to exercise its
         renewal option.    These terms do not appear to impose
         controls to assure achievment of a direct municipal purpose.
         Nor do they suggest that significant funds in excess of
         those needed to retire the bonds will be generated and
         applied to achieve a municipal purpose. Finally, probable
         availability of the lease for a year or two in the future
         for an unstated and uncertain municipal use cannot meet the
         public purpose requirement.

                                       p. 6690
Honorable 0. H.   *Ike1g   Harris - Page 10   (JM-1255)

the reasoning or the results of the Texas cases establishing
this strict division of powers: nor are we able to discern
any direct municipal purpose to be accomplished in the
proposed transactions as described to us.

                           SUMMARY
           Two proposed transactions involving the
        use of municipal revenue bond powers to
        assist a school district to acquire a school
        building violate the strict. division      of
        governmental powers between municipalities
        and school districts that the Texas courts
        have derived from the state constitutional
        ;;zAzons    governing municipal and school
               . In addition, there is no support in
        section 52-a, article III, for rejecting the
        reasoning or the results of the Texas cases
        establishing this strict division of oowers:
        nor is there any discernible direct m&icipai
        purpose to be accomplished in the proposed
        transactions.

                                     ,-yoh
                                       Very truly
                                     t     I *

                                      JIM     MATTOX
                                      Attorney General of Texas
MARY KELLER
First Assistant Attorney General
LQU MCCREARY
Executive Assistant Attorney General
JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General
RENEA HICKS
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Celeste A. Baker
Assistant Attorney General

                                  P. 6691