The Attorney General of Texas
March 28, 1986
JIM MATTOX
Attorney General
Supreme Court Building Mr. WilliamN. Kifby OpinionNo. JM-460
P. 0. Box 12548 colmtliseioner
of Education
Austin. TX. 78711-2548
512/47,2501
Texas EducationAgency Re: Effect of refunding those
Telex 9101874.1387 1701 N. CongressAvenue bonds originallyguaranteedunder
Telecopier 51214750288 Austin.Texas 78701 the Texas Bond GuaranteeProgram
714 Jackson, Suite 700 Dear Mr. Kirby:
Dallas, TX. 752024508
214/742-8944 Your letter requestingsn opinionof this office reads in part:
The Texas bond guarantee program was esta-
4824 Alberta Ave.. Suite 160
blished in 1983 pursuantto the provisionsof the
Et Paso, TX. 799052793
915i533-3464
Constitutionof Texas, articleVII, section5, and
the enabling statute, Texas Education Code,
section 20.901 et seq. Through this program the
“‘Ii Texas, Suite 700 bond i~,suesof local school districtsare secured
msto”, TX. 77002.3111 by the corpus and income of the PermanentSchool
713n23eaS
Fund. This guarantee results in better bond
ratingsand lower interestrates for Texas school
506 Broadway, Suite 312 districts. Since its inception,218 bond issues
Lubbock. TX. 794063479 worth $1.250.505.000have been guaranteed. We
W&747-5233 estimate that the guarantee program already has
saved Texas school districtsand their taxpayers
4309 N. Tenth. Suite B millious of dollars. At present, 25 districts
McAllen, TX. 78501-1885 have psuding applicationsfor the guarantee of
51218824547 bonds worth $122,480.000.
200 Main Plaza, Suite 400
. . . .
San Antonio, TX. 792052797
512r225-4191 In the past year, 33 bond issues guaranteedby
the PermanentSchool Fund have been defeased and
refundedpursuantto Texas Revised Civil Statutes
An Equal Opportunity/
Affirmative Action Employer
Annotated.article 717k, or Texas EducationCode,
section,20.05. These refunded bonds are in the
principalauountof about $336,010,000.
The questionhas arisenwhether such bonds that
have been fully defeased and refunded are still
guaranteedby the PermanentSchool Fund. If full
provls~~onhas been made for the papnent of the
bonds uo that they are no longer consideredout-
8tandir.gfor purposes of the guarantee,then the
securities currently pledged to their payment
p. 2104
Mr. WilliamN. Kirby - Page 2 (JM-460)
pursuant to the guaranteecould be reallocatedto
guarantee pending applicationsfrom other dis-
tricts. This resultwould allow us to reinstitute
the guarantee program ou a limited basis, thus
producing addlt:tonalsavings for Texas school
districtsand taxpayers.
A "bond" is a coutrac1: whereby oue binds himself to another to
pay a sum of money or do some other act. See 10 Tex. Jur. 3d. Bonds
and UndertakingsIl. at 4.. Public bonds issued by states and their
political subdivisions constitute contracts within constitutional
provisions prohibiting l.arrimpairing the obligation of contract.
U.S. Const. art. I, 510; TIXK.Coast. art. I. 116; DetermanV. City of
w 609 S.W.2d 565, 569 (Tex. Civ. App. - Dallas 1980, no writ).
A defeased"bond is one that has been defeated,i.e., renderedvoid
and of uo effect by anothw instrument. Sea BlacELaw Dictionary,
376 (5th cd. 1979). -Cf. .-
C:ttyof HcAllea~Daniel, 211 S.W.2d 944,
947-48 (Tex. 1948).
"Refunding"has been defined as a replacementof one obligation
with another,includingth,zsellingof new securitiesfor the purpose
of redeemingthose outstareitng. See 64 Am. Jur. 2d Public Securities
and Obligations5261, at 295. Thzited authorityalso asserts that
refundingbonds are not or.lpobligationsin themselvesfor what they
purport to be on their face and under the statutespursuant to which
they are issued, but are authorizedextensionsand continuationsof
the obligationsrepresentrrd by the bonds refunded; that refunding
bonds do not create new i.cbtbut merely continue an existing debt.
Id. 1267, at 301.
-
As you note, articleVII, section5 of the Texas Constitutionwas
amendedin 1983 to provide:
(b) The legislatureby law may provide for
using the permanent school fund and the income
from the permeue~~t
school Tund to guaranteebonds
issuedby schoold.istricts.
Anticipating adoption of the constitutionalamendment, the
legislaturein 1983 enacted statutory provisions to Implement the
new authority- statuteswhi.chare now codifiedas subchapterE of the
1. Subsection(a) of that constitutionalprovision establishes
as the permanentschool fund "[tlhe principalof all bonds and other
funds, and the principalarising from the sale of lands hereinbefore
set apart to said school fund," and establishesas the available
school fund (to be appliedtwuu~.lly
to the supportof the publfc free
schools) "all the interesi:derivable therefromand the taxes herein
authorizedand levied."
p. 2105
Mr. WilliamN. Kirby - Page 3 (JM-460)
See Acts 1983, 68th Leg., ch. 154, at 671.
Texas Education Code. --.
Section 20.902 of the Edumtion Code provides that upon approvalby
the commissionerof educazion."bonds Issued under SubchapterA of
this chapter [chapter201,' includingrefundingbonds" are guaranteed
by the PermanentSchool Fund. Section20.903(a)statesthat
[tlhe commissiov~rmay not approve bonds for
guarantee if the approval would result In the
total amount of outstanding guaranteed bonds
exceedingan amount equal to two times the cost
value or market value, whichever is less, of the
permanent scho,,:tfund, exclusive of real
estate. . . . (Emphasisadded).
That limitationhas promptlrd
your question.
Tou accompaniedyour request for an opinion with information
pertainingto a particularmethod of "refunding"which, we understand,
is the focus of your concern, and we will limit our discussion
accordingly. In that connection,you advise:
At the time the originalbonds of the district
were issued, the governing body of the school
district made provision for the payment of the
bonds by the levy of an ad valoram tax which was
pledged to the payment of the principal of and
intereston the hcmds. Section20.01 of the Texas
EducationCode.
By reason of the refunding,the originalbonds
are no longer psgable from ad valoram taxation,
but are payable :?romthe principalof and interest
on the direct obligationsof the United States
government purchased with the proceeds of the
refundingbonds and other moneys belongingto the
schooldistricts (whichhave been depositedunder
the escrowagreementto which referenceis made in
the statute).
2. SubchapterA of chapter20 of the EducationCoda, consisting
of sections 20.01 through 20.06, concerns school district tax bonds
and maintenancetaxes. Section 20.01 authorizesschool districtsto
issue negotiablecoupon bonds to acquire sites for, constmct, and
equip school buildings,and to levy ad valoram taxes for their pay-
ment. Section 20.05(b)provides for the issuanceof refundingbonds
payable from ad valoram taxes "to refund or refinanceall or any part
of any district'soutstani&ngbonds" without an electionunless the
Texas Constitutionrequiresone.
p. 2106
Mr. WilliamN. Kirby - Page 4 (JM-460)
Section20.05 of the UducationCode is part of subchapterA, the
subchapter which concerns the tar bonds that nay be guaranteed
accordingto subchapterE'. Under it, refundingbonds may be delivered
to the present bondholders in exchange for the old bonds to be
refunded,or they nay be so:Ldfor cash with which to pay off the old
bonds in full (principaltnd interest to maturity) or to redeem the
old bonds before maturity (Iprincipaland interest to the redemption
data, plus any redemptionPremium). Or if money is availabletherefor
from other sources, outstaudingbonds way be paid off or redeemed
without issuingrefundingbonds.
Subsections(g) and (h) of section20.05, SubchapterA, providea
method for paying off or redeemingbonds:
(g) To refund, bonds or to pay or redeem bonds
in whole or in part without issuing refunding
bonds, the governingboard or cosmissionerscourt
way deposit directly with the paying agent the
proceeds from thatsale of refundingbonds or any
other available Cunds or resources. The deposit
must be In an amount sufficient,after taking into
accountboth the principaland interestto accrue
on the assets of tmy escrow account createdunder
Subsection(h) of this section,to providefor the
payment or redeulptioa of the bonds and assumed
obligationsthat are to be refundedor to be paid
or redeemed. Thr deposit constitutesthe waking
of firm banking~~d financialarrangementsfor the
dischargeand f&l payment or redemptionof the
bonds being refuuzed.
-- (Emphasisadded.)
(h) The governingboard or commissionerscourt
escrow or a similar *greentent
may enter into 1.11.
with the paying agent with respect to the safe-
keeping,investment,reinvestment.administration,
or dispositiono:ithe deposits,but the deposits
may be invested and reinvested only in direct
obligations of ,the United States, including
obligationsthe principalof and Intereston which
are unconditionr.l,ly guaranteed by the United
States and that nature or beer interestpayableat
times and In amountssufficientto provide for the
scheduledpaymentor redemptionof the bonds. The
governingboard or cosmissionerscourt shall enter
into an appropriateescrow or a similaragreement
if any of the bends are scheduledto be paid or
redeemedon a daxe later than the next succeeding
scheduledinterestpayneatdate.
Subsection(i), expresslystates:
p. 2107
Mr. WilliamN. Kirby - Page 5 (JM-460)
(i) If the governing body or commissioners
court has entered into an escrow or a similar
agreement under Subsection (h) of this section,
the refundedbwds are consideredto be defcased
and may not be licludedin or consideredto bc an
indebtednessof &e districtfor the purpose of a
limitationon oui%taudingindebtednessor taxation
for any other pul:)ose.(Empbasfsadded).
The foregoingprovisions,all found in subchapterA, were added by
Acts 1983, Sixty-eighthLel:J.slature,
chapter256, page 1142, effective
May 27. 1983. Subchapter E, which concerns the constitutionally
authorizedguarantee,does uot containsimilarlanguage. SubchapterE
became law November 8, 1983, upon adoption of the constitutional
amendment. Acts 1983, 68th Leg., ch. 154, at 671.
Pou wish to know whether the making of such subsection A
“deposits”for paymentwil:.deprivethe underlyingbonds (the bonds to
be refunded)of any subsectfonE guaranteethat might have originally
protected them, even though the underlying bonds have not been
actually surrenderedby tb,eholders thereof and cancelled. In other
words, would the underlying“refunded”bonds continue to constitute
“outstandingguaranteedbon’ds”for purposes of the section 20.903(a)
limitation?
Section20.902 of subchapterE providesthat upon approvalby the
commissioner,“bonds Issued under SubchapterA of this chapter, in-
cluding refundingbonds, ere guaranteedby the corpus and incomeof
thenpermsnent school fun&” (Emphasis added). The provision is
ambiguous because the emphasized words could have either of two
meanings.“Bonds issued,” includingrefundingbonds, could mean that
the holders of new bondds issued to refund current bonds could
themselves be the beaefic:Laries of the constitutionally-permitted
guaranteeif the commissionerapproved. Or, those words could mean
that the holders of origiDa1bonds so guaranteedare to be protected
by the guaranteeso long as:the school districtremains obligatedto
them, even If the originalbonds are “refunded,”i.e., even though the
original obligationsare extended and continuedby the “refunding”
device.
An uncodifiedportion of the act adding subchapterE to chapter
20 of the EducationCode helps resolve the ambiguity. Section 2 of
Acts 1983, Sixty-eighthLegislature
, chapter154, page 675, states:
In accordancewith the provisionsof this Act, the
commissionerof ciducation
may approvefor guarantee
any eligiblebonds issued after the effectivedate
of this Act, in,