Untitled Texas Attorney General Opinion

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