Untitled Texas Attorney General Opinion

TEE ATTORNEY GENERAL
OF TEXAS

July 31, 1990

Honorable Garry Mauro Opinion No. JM-1201
Commissioner
General Land Office Re: Authority of the Veterans'
Stephen F. Austin Bldg. Land Board to make certain in-
1700 N. Congress Ave. vestments (RQ-1833)
Austin, Texas 78701

Dear Mr. Mauro:

Your letter asks:

Can the Veterans Land Board, under the
authority granted by TEX. CONST. Article III,
SS 49-b and 49-b-1, invest moneys of the
Veterans Land and Housing Funds not
immediately committed to paying principal and
interest on the bonds or to other. specified
purposes, in the following investments, or
otherwise enter into the following
transactions, authorized by TEX. NAT. RES.
CODE 55 161.173(b) and 162.004:

(a) A direct security repurchase agreement,
5 161.173(b)(4):

(b) Call option contracts, 5 161.173(b)(5);

(C) Reverse repurchase agreements,
5 161.173(b)(6):

(d) Collateralized mortgage obligations
fully secured by securities issued or
guaranteed by the Government National
Mortgage Association, 5 161.173(b)(7)?

Pursuant to sections 49-b and 49-b-l of article III of
the Texas Constitution, the Veterans' Land Board administers
the Veterans' Land Fund and the Veterans' Housing Assistance
Fund. .$&R Nat. Res. Code 55 161.001 et sea. The veterans'
land fund is used to purchase land for resale to veterans.
Ses Attorney General Opinion JM-774 (1987). The veterans'

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housing assistance fund is used for the purpose of making
home mortgage loans to veterans. $i&s Attorney General
Opinion JM-289 (1984). Both funds are augmented by proceeds
from bond sales.

Section 49-b of article III states that bonds sold for
the Veterans' Land Fund are to be repaid from it,

but the moneys of said Fund which are not
immediately committed to the payment of
principal and interest on such bonds, the
purchase of lands as herein provided, or the
payment of expenses as herein provided may be
invested in bonds or obligations of the
United States until such funds are needed for
such purposes.

Similarly, section 49-b-l(e) provides that bonds sold for
the benefit of the Veterans' Housing Assistance Fund are to
be repaid from that fund,

but the money of the fund which is not
immediately committed to the payment of
principal and interest on such bonds, the
making of home mortgage loans as herein
provided, or the payment of expenses as
herein provided may be invested in bonds or
obligations of the United States until the
money is needed for such purposes.

See also Tex. Const. art. III, § 49-b-l(d).

The question before us is whether the types of
investment about which you inquire are "bonds or obligations
of the United States" within the meaning of the two
constitutional provisions. If they are, the legislature may
certainly designate which "obligations of the United States"
are suitable for investment on behalf of the funds; but if
they are not, the legislature cannot authorize investment in
other securities, disregarding the constitutional intent.
See Powell v. State, 17 Tex. Ct. App. 345 (1884).

Section 49-b of article III was added to the Texas
Constitution in 1946. Section 49-b-1, creating the Housing
Assistance Fund, was added in 1983. Prior to 1956, there
was no constitutional provision concerning the investment of
land fund money not immediately needed for land purchases.
In 1949, when the legislature passed an enabling act for the
constitutional provision adopted three years earlier, it

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provided that moneys set aside to pay principal and interest
on its bonds could be invested by the Veterans' Land Board
*in bonds of the United States, or the State of Texas, or of
the several counties or municipalities or other political
subdivisions of the State of Texas." m Acts 1949, 51st
Leg., ch. 318 5 9, at 595 (V.T.C.S. art. 5421m, repealed).

Even after section 49-b was amended in 1956, see S.J.R.
No. 2, Acts 1955, 54th Leg., at 1811, to state that the
"portion of the Veterans' Land Fund not immediately
committed for the purchase of lands may be invested in short
term United States bonds or obligations until such funds are
needed for the purchase of lands," the statute continued to
state that fund moneys could be invested in other
securities. a Acts 1957, 55th Leg., ch. 238, 5 2, at 493.
In 1967, article III, section 49-b, was amended to make the
investment proviso read, "in bonds or obligations of the
United States" m H.J.R. 17, Acts 1967, 60th Leg., at 2984.
The same year article 5421m (the former statute) was amended
to track that language. See Acts 1967, 60th Leg., ch. 129
% 3, at 271. Later, in 1977, the statute was repealed by
the enactment of the Natural Resources Code, which provided
in section 161.173(b):

Money in the fund that is not immediately
committed to paying principal of and interest
on the bonds, to the purchase of land, or to
the payment of expenses as provided in this
chapter may be invested in bonds
obligations of the United States until t:i
funds are needed for these purposes.

Acts 1977, 65th Leg., ch. 871 5 1, at 2345. From 1967,
therefore, until 1989, the constitutional provision and
statutory law were harmonious.

When section 49-b was amended in 1967, the following
language was incorporated:

This Amendment being intended only to
establish a basic framework and not to be a
comprehensive treatment of the Veterans' Land
Program, there is hereby reposed in the
Legislature full power to implement and
effectuate the design and objects of this
Amendment, including the power to delegate
such duties, responsibilities, functions, and
authority to the Veterans' Land Board as it
believes necessary.

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H.J.R. 17, Acts 1967, 60th Leg., at 2986. In 1989 the
legislature relied upon this language -- twenty-two years
after its appearance in the constitution -- as its authority
to "clarify and interpret I1 the constitutional phrase "bonds
or other obligations of the United States." It amended
section 161.173(b) of the Natural Resources Code to
authorize the investment of Land Fund and Housing Assistance
Fund moneys in eight categories of financial instruments,
four of them about which you have asked. See Acts 1989,
71st Leg., ch. 720, 5 2, at 3268.l

So long as the section 49-b "investment" provision read
"in United States bonds or obligations" it might have been
barely arguable that the word "obligations," as used in the
constitution, was not intended to be modified by the words
"United States.1' But once the constitutional provision was
changed in 1967 to read "bonds or obligations of the United
States," there could be no such argument. The provision
permits investments of Veterans' Land Fund money, risking
loss, & upon the credit of the United States. * U.S.
Const. art. I, 5 8; & Weston Citv Council of
mrleston, 2 Pet. 481, 7 L.Ed. 449 (li29).

We do not think the "full power to implement and
effectuate the design and objects" of section 49-b includes
the power to "clarify and interpret" its provisions in a way
at odds with its plain language, or to usurp the
interpretive powers of the judicial branch. w Powell v.
S+z;:,,A;rra: Armadillo Bail Bonds v. State, 772 S.W.2d 193
. . - Dallas 1989, no pet.).

1. The initial section of the enacting bill declared:

Article III, Sections 49-b and 49-b-1, of the
Texas Constitution established basic frameworks for the
veterans land program and the veterans' housing
assistance program. Those sections gave the legisla-
ture full power to implement and effectuate the design
and objects of those sections and the legislature
proposes by this Act to clarify and interpret the
provisions in those sections authorizing certain money
in the veterans land fund and the veterans' housing
assistance fund to be invested in bonds or obligations
of the United States and to be used to pay certain
expenses.

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The phrase, llbonds of the United States," refers to
credit instrumentalities of the federal government. And the
phrase, nobligations of the United States," when coupled
with "bonds of the United States," signifies
instrumentalities of the same character. See Rockford Life
S. . v. llinois DeD’t of Revenue, 482 U.S. 182 (1987);
Smith v. Davis, 323 U.S. 111 (1944).

Long before the phrase, "bonds or obligations of the
United States," was utilized in article III, section 49-b,
of the Texas Constitution, the characteristics of federal
credit instrumentalities were firmly established. In Smith
v Da is s nra. the United States Supreme Court held such
i&tr&eAtayities to be characterized by (1) written
documents, (2) the bearing of interest, (3) a binding
promise by the United States to pay specified sums at
specified dates, and (4) specific congressional
authorization that pledges the faith and credit of the
United States in support of the promise to pay. 323 U.S. at
115.

None of the four financial instruments about which you
ask meet those criteria. None purchase a binding promise by
the United States to pay specified sums at specified dates
to the funds. All represent instrumentalities of third
parties, not of the United States. They are described by
the 1989 act amending section 161.173(b) of the Natural
Resources Code as:

(4) a direct security repurchase agree-
ment under which the board buys, holds for a
specified time, and then sells back any
investments described in Subdivisions (1) and
(2) of this subsection;

(5) a contract written by the board in
which the board grants the purchaser the
right to purchase securities in the board's
marketable securities portfolio at a
specified price during a specified period and
for which the board is paid a fee;

(6) a reverse security repurchase agree-
ment under which the board sells and after a
specified time buys back any investments
described in Subdivisions (1) and (2) of this
subsection:

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(7) a collateralized mortgage obligation
fully secured by securities.issued or guaran-
teed by the Government National Mortgage
Association (GNMA).

Acts 1989, 71st Leg., ch. 720, § 2, at 3268.

Assuming that the terms, "investments described in
subdivisions (1) and (2)" and "securities in the board's
marketable securities portfolio," as used in the foregoing
excerpts from the amended statute, refer to credit
instrumentalities of the United States, the consideration to
flow to the fund from each of the contemplated transactions
is merely a promise from a third party regarding the manner
in which the third party will deal with credit
instrumentalities of the United States. Such third party
obligations do not become obligations of the United States
merely because the assets which are the subject of
speculative transactions with the third party are
obligations of the United States. See Attorney General
Opinions JM-570 (1986); JM-23 (1983) (distinguishing Bathe
Halsev Stuart Shields Inc. v. Universitv of Houston, 638
S.W.Zd 920 (Tex. App. - Houston 1982, writ ref'd n.r.e.));
a Attorney General Opinion JM-975 (1988). "Investment~~'
in them are not investments in obligations of the United
States.

Repurchase agreements concerning federal credit instru-
mentalities recently have been held not "obligations of the
United States" by a number of courts. Massman Constr. Co.
V. Director of Revenue, 765 S.W.Zd 592 (MO. 1989); Bora v.
Deoartment of Revenue, 774 P.2d 1099 (Ore. 1989); In re:
Sawver Estate, 546 A.2d 784 (Vt. 1987); Deoartment of
Revenue v. Paae, 541 So.2d 1270 (Fla. App. 1989): Canital
Preservation Fund v. DeDartment of Revenue, 429 N.W.2d 551
(Wis. App. 1988); Andras v. Illinois Deu't of Revenue, 506
N.E.2d 439 (Ill. App. 1987), cert denied, 485 U.S. 960, 108
S.Ct. 1223 (1988). "Repurchase agreement" is defined by
article 842a-2, section 2(c)(3), V.T.C.S., to include direct
security repurchase agreements and reverse security
repurchase agreements. Cf, Educ. Code § 53.02(11).

A "call option" is a promise to sell a security in the
future at a price fixed today. The seller agrees to deliver
the security for a set price (the "strike price") during a
limited time. As described by the United States Court of
Appeals for the Seventh Circuit:

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The buyer pays a sum (the 'premium') for the
[call option]. The strike price exceeds the
current market price of the security.
Sellers are betting that the price will not
exceed the strike price during the duration
of the option; buyers are betting that it
will.

B ard of Tr de of itv of Chicaa Set rities and Exchanae
C&m'n, 883aF.2d 5:5 527 (7th"&. 19:9). A call option
contract is not an "hbligation of the United States."

Nor do we think that collateralized mortgage
obligations secured or guaranteed by the Government National
Mortgage Association are llobligations of the United States."
Rockford Life In s. c . v. IllinOiS DeD't Of Revenue, m.
A brief submitted with your request suggests that because a
regulation promulgated by the Office of the Comptroller of
the Currency, 12 C.F.R. § 1.110, defines "obligations of the
United States" for some purposes to include "obligations
issued, insured, or guaranteed by a department or an agency
of the United States," the language of the Texas
Constitution should be construed as broadly. The regulation
you cite was adopted in 1982. Consequently, it is not
useful in interpreting language in the Texas Constitution
that was adopted in 1967. The Rockford and Smith cases, in
contrast, significantly predate the 1967 amendment to
article III, § 49-b. We think those Supreme Court cases are
more reliable sources for determining the legislature's and
the voters' understanding of the phrase "obligations of the
United States." Therefore, we conclude that mortgages
guaranteed by the GNMA are not "obligations of the United
States" for purposes of article III, section 49-b, of the
constitution.

The meaning of "bonds or obligations of the United
States" as used in article III, section 49-b, of the Texas
Constitution was fixed by previous decisions of the Supreme
Court of the United States at the time the phrase was added
to section 49-b in 1967. a Powell v. State, suora. It
was not changed by the use of the same phrase in section
49-b-l when that section was adopted in 1983. (Section
162.004 of the Natural Resources Code merely states that
Housing Assistance Fund money "may be invested in invest-
ments authorized for the veterans land fund.") The phrase
meant in 1967. and means now, credit instrumentalities of
the federal government, Smith v. Davis, m, and it is
beyond the power of the legislature to give it a different
meaning by legislative "clarification and interpretation."

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Powell v. Stab, suora, involved a statute purporting
to interpret constitutional language in a way that departed
from the established meaning. The holding in Powell was
explained by the Texas Court of Criminal Appeals in Lvle V.
w, 193 S.W. 680, 682 (Tex. Grim. App. 1917):

After the adoption of the Constitution of
1845 the Legislature passed a statute
declaring the term 'jeopardy' to have a
meaning therein given, and in the case of
Powell v. State, the decision was that this
statute was void because the definition of
'jeopardy' which it undertook to make was
different from the meaning which the term had
prior to the adoption of the Constitution and
which the Constitution by its adoption
without change of the term had made its own
definition.

See al Armadillo Bail Bonds v. State, suora (usurpation of
judicizy powers).

In our opinion, section 161.173(b), as amended, con-
travenes sections 49-b and 49-b-l of article III of the
Texas Constitution insofar as it purports to permit the
investment of moneys in the Veterans' Land Fund or the
Veterans' Housing Assistance Fund in direct security
repurchase agreements, call option contracts, reverse
repurchase agreements, or collateralized mortgage obliga-
tions.

SUMMARY

The Veterans' hand Board may not invest
moneys of the Veterans' Land Fund or the
Veterans' Housing Assistance Fund in direct
security repurchase agreements, call option
contracts, reverse repurchase agreements, or
collateralized mortgage obligations. Insofar
as section 161.173(b) of the Natural
Resources Code, as amended, purports to
authorize such transactions, it is violative

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of sections 49-b and 49-b-l of article III of
the Texas Constitution.

JIM MATTOX
Attorney General of Texas

MARY IZHLLZR
First Assistant Attorney General

LOU 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 BNCe Youngblood
Assistant Attorney General

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