Untitled Texas Attorney General Opinion ( 1972 )

.
,
THE ATTORNEY GENERAL
OF TEXAS
August 30, 1972
Honorable Hugh C. Yantls, Jr,. Opinion No. M- 1202
Executive Director
Texas Water Quality Board Re: Whether bonds of Northwest
Lowlch Building Houston Water SUQQ~Y Cor-
Austin. Texas 78701 Qoratlon issued pursuant
to contract with-the City
of Houston under Article
llOgj, V.C.S. as obllga-
tlons of the 6it.yunder
Sections 21.601-21.617
Texas Water Code are eilgl-
ble for purchase by the
Dear Mr. Yantla: state, and related queatlons?
Your recent request for an opinion states that In 1965 the
City of Rouston became concerned about the lack of water and
sewer facllltles In that area adjacent to the City known as
Acre8 Homes. Supported by Resolution of the City Council, three
Houston residents were requested to form a non-profit water
supply corporation under the provisions of Article 143&a
Vernon's Civil Sta&utes,* to acquire or construct the nec&sary
facllltles to service this area.
It apparently was contemplatedthat the facilities were
to be.acquiredwith corporate bond proceeds flowing from a
contract with the City of Houston, under the provisionsof
Article llOgj, whereby the City agreed to purchase the facll-
ltles from the non-profit corporationand in consideration
therefor was to pay to the corporation periodic amounts neces-
sary to pay off the corporate bond debt. The City would annex
that area known as Acres Homes in phases as the various sections
were provided water and sewer service. The corporationwas
organized as the Northwest Houston Water Supply Corporationwith
all Its stock being held In trust by the Mayor of Houston for the
benefit of the residents of that area.
It appears that the parties are now In phase three of
*All references to Articles are to Vernon's Civil Statutes,
unless otherwise stated.
-5087-
Honorable Hugh C. Yantls, Jr., page 2 (M-1202)
the four phase plan for annexation of the Acres Homes area.
Your lnqulrlea with reference to the character of the
"corporateobligations" of the Northwest Houston Water
Supply Corporation have been paraphrased for purposes of
clarity:
(1) Are bonds of Northwest Houston Water
Supply Corporation Issued pursuant to and
Supported by a contract with the City of
Houston under the Qrovlslons of Article
1lOgj considered *other obligations"of
the City of Houston within the provisions
of Sections 21.601 through 21.612 of the
Texas Water Code and as such eligible for
purchase by the State?
(2) If the bonds of Northwest Houston Water
Supply Corporationare not considered *other
obligations"of the City of Houston as that
term Is used In Section 21.602 (6)(T) of
the Texas Water Code, would they beaome so
eligible If they were to bear a aertlflcate
signed by the Mayor of the City of Houston
to the effect that the City Is unconditionally
obligated to pay the bonds f'romIts ad valorem
tax revenues?
(3) Could the provisions of Subchapter I,
Chapter 21, Subtitle C of the Texas Water Code
(Sections 21.601 - 21.612) be amended so as to
Include bonds of this non-profit corporation
within the term "other obligations of a political
subdlvlaion"where the bonds offered for sale to
the State are unconditionallysecured by a con-
tract with a political subdlvlalonunder the
provisions of Article llOgj?
Before answering your first question, we must first examine
the "legal character" of the parties to that oontract hereln-
above referred to.
ii:,
In the case of Tarrant County Water Supply Corporation
v. Hurst-Euless-BedfordIndependent School Dl t I t 1
3 W 2d 162 (Tex.Clv.AQQ.1963 error ref n.r.e.' ' &5~gthe
c&k. sQeclflcallyheld that bubllc utility corporations
of the klnd here under considerationare
:
Honorable Hugh C. Yantls, Jr., Qage 3 (M-1202)
I,
. . . not munlclpal~or governmental
;E;e;ef#,. . , Neither wolulda corporation
nder the Qrovlslons of Article
143ka be a political aubdlvlslon." (at
Q. 163).
On February 15 1972, this office In Opinion M-1070
sQeclflcally held that the Northwest Houston Water Supply
Corporationwas not a "Qolltlcalsubdlvlslon"as that
term Is used In Sections 21.601 through 21.612 of the
Texas Water Code.
There la no question that we are here dealing with
two separate legal entitles which do not look to each other
for their Identity or existence. The Northwest Houston
Water Supply Corporation, Incorporatedunder the provisions
of Article 149a Is not a part of the City of Houston nor
could It be considered as one of Its agencies or departments.
The relatlonshlpwhich the parties bear to one another would
be determined by contract, but we do not believe any such
contract could operate to change the "legal nature" of the
parties as they existed at the time the contract was made.
This same Qrlnclple would apply to any security which the
city or the corporation might contemplate lssulng. No
contract between the parties could convert a bond, note or
warrant of the City of Houston Into an obligation of the
corporations,nor vice-versa.
It Is contended by the attorneys for one of the lnter-
ested partlea that the bonds Issued by the Northwest Houston
Water Supply Corporationare eligible for purchase by the
Texas Water DevelopmentBoard under Section 21.601, et seq.,
Texas Water Code, because they are "obll ations" of the City
of Houston within the meaning of SetJEdFIXE(7) In
support of this proposition,the following addltloAa1 facts
and considerationsare presented:
"2. Northwest Houston Is a non- roflt
corporation organized under Article 1I:
34a
Vernon's Texas Civil Statutes at the reqiest
of the City, and all of the siock Is held In
trust by the Mayor of Houston for the benefit
of the residents of the City and the residents
of the Acres Homes area adjacent to the City.
"3. The corporate charter prohibits dividends
-5889-
Honorable Hugh C. Yantla, Jr.; page 4 (M-1202)
and requires that all profits of the corporation
be paid out to the cities, towns, and other entitles
with whom the corporation does business. No business
has ever been conducted except with the City of
Houston.
“4. The Mayor and City Council of Houston
appoint the corporation'sdirectors and all of
the corporation'sactions are subml&ed to the
City for approval.
“5. The basic contract between the City and
Northwest Houston Water Supply Corporation and
all supplementalcontrac~ts,require the foilowing:
(a) Approval by the Mayor and City
Council of the City of Houston of the plan
Of finanCing QrOQOSed QrOjeCtS;
(b) Approval by the City's Director of
Public Works of plans, speclflcatlons,and
contract documents;
(c) Approval by the Houston City Council
of constructionbids and QrOQOSSd awards of
construction contracts; and
(d) Approval by the Houston City Council
of the resolution authorizing Issuance of the
bonds.
“6. The contracts obligate the City of Houston
to pay directly to the bond paying agent sums,suffl-
clent to pay the principal of and Interest on the
bonds, just as the City does for Its own bonds.
“7. The contracts require those payments to be
made from a continuing direct annual ad valorem tax
on all taxable property within the City, as Is the
case with general obligation bonds Issued by the
city.
“8. The City Ordinance authorlzlng the contracts
levies the ad valorem tax required to make such prln-
clpal and Interest payments.
“9. The City Ordinance approving the bond reso-
-5890-
Honorable Hugh C. Yantls, Jr., page 5 (M-1202)
lutlon, the Interest rates, and the sale of the
bonds and authorizing their Issuance reaffirms the
unconditionalobligation of the City to make the
payment of principal of and Interest on the,bonds.
"10. The contracts provide that
'The City's obligation to levy such
annual tax and to make the payments on the
purchase price as herein provided shall
Inure to the benefit of the owners and holders
of the aforesald,bondsof the company who
shall have, In addition to all other remedies
at law and In e,qulty,the right to enforces
speolflc performanceof the City!8 obligation
to levy such annual payments.'
"11. The contracts, the bond resolutions,and
the bonds themselves provide for a pledge of the City's
payments to the paying agent bank as security for the
bonds. The only security behind the bonds and the
sole source of payment of the bonds Is ad valorem
tax revenues of the City. In addition, the bond reso-
lutions and the contracts sQeclflcallyrefer to rights
of the bond holders as against the City In the event
of default. It Is clear that 'all of the Instruments
were prepared and entered into In the accomplishment
of a single QurQose~ and must be construed together
as one Instrument. Guadalupe-Blanc0River Authorlt
200 3 W 2d -1.
bllgatiotito pay tz'b%s
from tax revenues Is a part of the contract with the
bond holders, and the bonds themselves are obligations
of the City of Houston.
"12. There Is no unconstitutionalgrant of
public money or thing of value, lending of credit,
or grant of special prlvlleges. The City Is con-
tracting for services It could perform, and Indeed
Is obligated to perform, for Itself. . . ,
"13. The levy of ad valorem taxes by the City
Is not a violation of Article 701, Vernon's Texas
Civil Statutes. These are not the bonds of the
City even though they are obligations of the City.
There Is no constitutionalor statutory relulrement
for an election to approve the contract or the bonds.
-5891-
Honorable Hugh C. Yantls, Jr., page 6 (M-1202)
"14. The Interest on the bonds Is exempt from
Federal Income
- _ taxation under rulings of the Internal
Revenue service,
"15. The bonds are eligible for purchase and
unlimited holding by national banks under rulings
of the Comptroller of the Currency that the bonds
are general obligations of a state or political
subdlvlslon."
Article 1lOgj Is express authority for cities to contract
with non-profit corporationsfor the purpose of acquiring
for the benefit of the cities, water dlstrlbutlonand sani-
tary sewer systems. There Is nothing In this act which would
Indicate that bonds Issued pursuant to any such contract
would be or should be considered as "obligations"of the
cities contracting. The Article In referring to the respon-
slblllty of cities under any such contract states:
"Such contract may provide for purchase by
the city. . . of such system. by periodic
payments to such. , . corporationby the city. . .
In amounts which. will be sufficient to pay
the principal of and'lntereston the bonds of the
corporationas they become due." (Ehphasls
adie;).
It Is clear that the act considers these bonds "corporate"
bonds and not "municipal"bonds.
We recognize that It would be to the City of Houston's
advantage If the bonds of the Water Supply Corporationwere
eligible for purchase by the Texas Water Development Board
with funds made available through the water "enhancement
account" as authorized by Article III Section 49-d-l of
the Texas Constitution. Sections 21.601 through 21.612
of the Texas Water Code speaks to "bonda or other obligations
of a political subdlvlslon"as being eligible for purchase
with water quality enhancement funds. Because the water
supply corporation Is not a political subdivlslon their bonds
as such are not eligible. Atty. (lenl.Opinion M-1070, supra.
We have previously concluded that the bonds Issued pur-
suant to a contract authorized by Article 1lOgj are the bonds
of the corporation and not the City.. Where the statute uses
the term "other obligations of a political ~ubdlvlslon"It
must be construed to have reference'to\securltles of the same
-5092-
:
Honorable Hugh C. Yantls, Jr., ,page7 (M-1202)
nature or character as bonds (I.e. warrants certlflcatesof
obligation, etc.) and may not be lnterpreteibroadly to ln-
elude any or all types of obligations of a political sub-
dlvlslon.1 The fact that the City of ,Houstonhas direct
"obllgatlons"under a contractwith the Northwest Water
Supply Corporation pursuant to Article llOgj, Is thus not
sufficient to make the corporate bonds Issued pursuant
to the contract, eligible as "other obilgatlons"of the
City of Houston as that term Is used In Sectlon~21.602 (6)(7).
In your second question you have suggested that If the
bonds of the water supply corporation bear a certificate
signed by the mayor of the City of Houston, citing the City's
unconditional obligation to pay the bonds that they then
might be considered "other obligations" 04 the city for
water enhancement loan purposes.
We find nothing In our statutes that would authorize
the City of Houston to act as an accommodationlndorser or
surety on the bonds of a separate entity. The authority of
the City Is one In contract pursuant to Article llOgj, and
Its responslbllltlesare contained therein and confined
thereto. It Is generally recognized that without legislative
authority, a city may not legally become a guarantor, ln-
dorser or surety for the payment of bonds or other obligations
of another corporate entity. McQulllln, Municipal Corporations,
Vol..15, Section 39.10. As stated earlier In this opinion,
we are here concerned with a non-municipalbond, and should
the city wish to have outstanding Its general obligation bonds
to cover the proposed projects It would be necessary to comply
with the requirementsof Artlcie 701, which reads, In part,
"The bonds of an IncorporatedCity. , .
shall never be lsau;d: 1 unless a proposltlon
for the Issuance of such bonds shall have been first
submitted to the qualified voters. . .'I
'Noscltur A. Soclls (It Is known,from Its associates 1
Vent. 225.) The doctrine means that general and speclfld words
are associated with and take color from each other, restricting
general words to sense analogous to less general. 53 Tex.Jur.2d
; Farmers.'& MechanIcat Nat, Bank v.
.w. 1120(1911) calvert v. Austin
365 S.W.2d 212 (Tex Cl 19b
I;I
v. State,140 Fla. 794,viAg~Q40.3~4,(1g3g).
-5893-
Honorable Hugh C. Yantls, Jr,, page 8 (M01202)
One cannot accomplish indirectly that which It has no
authority to do In the first Instance.
As a matter of Information.the orooosed contract be-
tween the parties covering Phasd 3 of‘thk project, which
you forwarded~to this office as part of your background
Information, calls for a water supply and distribution
system as well as certain sewage facllltles, excludln
speclflcallya sewage treatment plant, to be
with the bond proceeds.
Even If the-bonds were conslder$_bonds of the
. City
. of
Houston they would still not be ellglble for Qurcnase oy
the Texas Water Development Board, for Section 21.601 does
not contemplate their Inclusion but sQeclflcally states:
"The purpose of this subchapter Is to
provide for making loans of water quality
enhancement funds authorized by Article fI1,
3 t1 - -1 of the Texas Constitution
t~cQo~?tlcal s~bdlvlsionsof the state fo$
uiilng
maximum federal grants for the constrmctlon
Of treatment Works." (Emphasis SUpplied).
It is also noted that the QMceedS realized from the
sale of these bonds must be used In constructionof treat-
ment works exclusively,and we are aware of no exception
that would Include a waterworks system.
Your final question lnvolvss.the possibilityof amending
Subchapter I of Chapter 23 of the Water Code to include bonds
of such a non-profit corporationas here exists within the
term "other obligations of a political subdivision."
While Article III, Sections 50 and 52, Texas Constitution,
declares that the legislature has no power to give or to lend
or to authorize the giving, lending or pledging of the credit
of the state In aid of any person or corporation,whether
municipal or other, the courts have held that It doe?.not pro-
hibit the legislature from authorizinga state or gcvernmental
agency to use the credit of the state for governmental,public
or state purposes. State v. Dallas, 319 S.W.2d 767, affirmed,
160 Tex. 348, 331 S.W.2d 73'/(19 t3f;Aransas Pass v. Keelln
112 Tex. 339, 247 S.W. 818 (1923 ; Brazos River Conservatlo?
& Reclamation Dlst. v. McGraw 126 Tex. 506 91 3 W 2d bb5
-Cl93b); Hlghway Comm. v. Vaugh, 288 S.W. 835 (Tei.tiV.AQQ.
-5894-
Honorable Hugh C ~ Yantls,'Jr., page 9 (M-1202)
1926, error ref.); 52 Tex.Jur. 754, State of Texas, Sec.
42.
Under the facts presented,and If a proper statutory
enactment were enacted, the City of Houston would be con-
tracting for Qubllc~governmentalservices which It may
legally perform and for which It Is obligated under the
law to provide. The ~contracts call for the improvement
and enlargement of specific water and sewage systems owned
and to be acquired by the City of Houston and for the bene-
fit of the general public within such City, and in accordance
with agreed contractual.plans. The parties to the contracts
are obligated In quid pro quo contracts. The City Is
authorized legally to so oontractfor such a Qubllcbeneflt
and governmental QurQo%e, and It therefore does not constl-
tute a grant of money to the non-proflkcorporatlon for
Individual or private purposes or an unconstitutionallend-
ing or pledging of credit by the City In aid of the corp-
oration. San Antonio River Authority v. Shepperd, 157 Tex.
73, 299 S.W.= 920, 928 (1957).
It Is therefore-ouropinion that the.QroViSiOnSof
Subchapter I, Chapter 21, Subtl,tleC of the Texas Water
Code (Sections 21.601 - 21.612),could be amended In such
a ,wayas to Include bonds of such a non-profit corporation
within the term "other obligations,of a political aub-
division" where the bonds offered for sale to the State
are uncondltlonally~securedby a contract with the political
subdlvlslonunder the provisions of Article 1lOgj. .A8
stated In Attorney General Opinion No. w-1229(1961), the
determln:tlonof what constitutesa public governmental
purpose has been held to be primarily a legislative
function subject to review by the courts when abused and
the determinationof the legislative body of the matter has
been held to be not subject to b,ereversed except In Instances
where such determlnatlonnlspalpably and manifestly arbi-
trary and Incorrect. See also In accord, Attorney
General Opinion No. c-530(1965) and authorities therein
cited, holding that the benefit; to the state,or governmental
entity Is In the nature of considerationand that the funds
expended or loaned are not an unconstitutionalgift or loan
even though private persons are benefitted therefrom, and
that the courts will look to the character of the use for
which the money Is expended or loaned, not who receives It.
81 C.J.S. 1148, States, Sec. 133.
-5895-
Honorable Hugh C. Yantis, Jr., page 10 (M-I202)
SUMMARY
Bonds of the Northwest Houston Water Supply
Corporation Issued pursuant to and supported by
a contract with the City of Houston pursuant to
the provisions of Article llOgj, V.C.S are not
to be considered as "other obligations"of the
city as that term is used In Subchapter I, Chap-
ter 21 of the Texas Water Code,
A certificate appearing on the bonds of
the Northwest Houston Water Supply Corporation,
signed by the Mayor of the City of Houston to
the effect that the City is unconditionally
obligated to pay said bonds from ad valorem tax
revenues of the City 1s not sufficient to render
such bonds "other obilgations" of such city as
that term is used In Subchapter I, Chapter 21 of
the Texas Water Code.
A proper statutory.amendmentto Subchapter
I, Chapter 21 of the Texas Water Code which
would Include bonds of such a non-profit corpo-
ration as herein described, and under the facts
and conditions presented; within the term "other
obligations of a political subdivision"as uaed
In said Chapter could be upheld as not in contra-
vention of Article III Sections 50 and 52 of the
Texas Constitution prohibiting the lending of credit
to any Individual, association or corporation.
Vedtruly yours,
Prepared by Robert B. Davis
Assistant Attorney Qeneral
APPROVED:
OPINION COMMITTEE
Kerns Taylor, Chairman
W. E. Allen, Co-Chairman
-5a96-
Honorable Hugh C. Yantls, Jr., page 11 (M-1202)
Roger Tyler
William Craig
V. F. Taylor
Robert Lemens
SAMUEL D. MCDANIEL
Staff Legal Assistant
ALFRED WALKER
Executive Assistant
NOLA WHITE
First Assistant
-5a97-