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