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