Untitled Texas Attorney General Opinion ( 1971 )

THE ATJXBRNEY GENERAL
AUSTIN. TEXAS 78711
April 2, 1971
Honorable Ben Barnes Opinion No ~ M-825
Lieutenant Covernor
State Capitol Building Re : Whether a constitutional
Austfn. Texas 78711 amendment is necessary in
order to empower, political
subdivisions to Issue in,-
Dear Covernor‘ Barnes : dustrlal revenue ,bonds.
Your request for an opfnion on the above subject matter,
asks the following question:
“Would a constitutional amendment be required
in order to empower political subdivisions to Issue
induatrfal revenue bonds such as is outlined in the
attached act entitled, ‘The Texas Industrial Develop-
ment Act I D”
“The Texas Industrial Development Act” enclosed wfth your
request authorizes cities, counties and navigation dfstricts
to fssue revenue bonds for the purpose of acqufrfng property
,for industrfal development purposes and to lease, .su.ch proper~ty,
“‘upon such terms and conditions as the governing body may deem
advisable and as ahall not confl$ct with the provisfons of
tads Act ~”
Subdivfsfon a of Section 5 provfdes:
“All bonds issued by a city or county or navf-
gatfon district under the authority of this Act ”
shall be lfmfted obligatfons of the city or county
or navigation district, Bonds and interest coupons .,
issued under the authorfty of thisAct, shall not
constftute or gfve, rise to a pecunfary lfabilfty
of the cfty or county OP navigatfon district or a ,’ ‘:
charge against its general credit, (emphasis ours,),
or taxfna oowers. Such lfmftatfon shall be plainly
stated upon the face of each of such bonds.”
Section 5.Z~of Article III of the Constitution of Texas ~
prohibits the lending of fts credit by any political subdivisions,
and makes no dfstfnctfon between the general OP special credit
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,.
Honorable Ben Barnes, page 2 (M-825)
of such subdivisions. Section 52 of Article III provides:
“The Legislature shall have no power to
authorize any county, city, town or other polit-
ical corporation or subdivision of the State to
lend its credit or to grant public money or thing
of value In aid of, or to any individual, association
or company; ~Dr D”
The questions raised as to the legality of “The Texas Indus-
trial Development Act” are:
(1) Whether the issuance of Industrial revenue
bonds would violate the State Constitution’s credit
clauee; and,
(2) Whether the issuance of such bonds to finance
the building of factory ahd similar Industrial facilities
would serve a valid public purpose,
A number of Texas casea and Attorney General Opinions in-
dicate that if the “Public Purpose Doctrine” Is satisfied; then
“Credit Clause” is rendered inapplicable by virtue of any private
benefit having become subordinate to the general public necessity.
These cases and,opinions have for the most part been Interpretive
of Article III Section 51 of the Constitution dealing withy ,. ,..
grants of public monies rather than lending the public credit,
but we believe the principles involved apply equally to both
concepts ~ State v. City of Austin, 160 Tex. 348, 331 S.W.2d
737 (1960); Brown v, Galveston 97 Tex, 1 75 S.W. 488 (,1903);
52 Tex. JUP. 2d 754 7 7 State’of Texas i3& 0 Attorney Qeneral’s
Opinions Nos. V-106; 71450) and C-530 (1965 '.
Our consideration of this problem is, by virtue of the
preceding suthorities narrowed to a consideration of whether
OP not tnr issuance of’industrial revenue bonds is for a valid
public purpose o
4 In Bland v. City of Taylor, 37 S.W.2d 291 (Tex. Civ, App.
1931, aff. I.23Tex. 39, 67 S.W.2d 1033) the Court of Civil Appeals
observed :
“What constitutes a public purpose as contra-
distinguished from.a private purpose for which
public funds may be applied has, been repeatedly ‘,
before the courts of practically every State In
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Honorable Ben Barnes, page 3 (M-825)
the Union and the S.uprerne Court of the United States,
but no court has undertaken to lay down with minute
detail an inexorable rule that would dlstlngulsh one
from the other, Obviously no such rule could be
laid down., DD' (37 S,W. 2d 291, at p..293).
We regard the question as extremely difficult, especially
In view of the fact that our search has uncovered no Texas case
OP authority lnvolvlng the constltutlonallty (public purpose)
of the Issuance of industrial revenue bonds. In rendering this
opinion, then, ordinarily our function would be to ahtlclpate,,,
as best we can, the holding of the courts If and when the question
should be presented to them, but where ouropfnlon affects the
validity of bonds additional problems are involved. The Attormy
General approves the issuance of practically all types of public
securities Issued in Texas as to their legality, based upon his
examination of the underlying legal proceedings authorizing
the actual issue, In this instance we are asked to give our
opinion as to the legality of bonds in advance of the receipt
of any actual proceeding% authorizing them and ln a situation
where the constltutlonallty of their statueory authori.zation
has bean questioned.
Outside this jurisdiction there are. two dlametrlcally
opposed views as to the constitutionality of industrial aid
bonds authorized solely by statute.
.~...,. .,. ,.~.~
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.~ ,3
.
These views aye best illustrated by a short historical
resume of decfsions on this question. We quote several~excerpts
from the Vanderbilt Law Revlew, Vol. 19 ,(1965),the first at
pages 31-32, asp followss
"The United -EtateETSupreme Court's d$flslon in
CitlzensQ Savings 8e Loan Assun. v. Topeka, is pro-
bably the forebe%r,of all Judicial precedents con-
sidering the use of municipal bonds to aid Local
industry, and for many years It w%s the prlnclpal
authority on the constitution%l question involved,,
Pmsuant to an enabling act of the Kansas legislature,
Topeka had donated IO0 thousand dollars of its bonds
to an lron works company in order to encourage its
establishment in the city. In an action brought
after the bonds had defaulted, it was conceded that
they had been, regularly famed and that the plaintiff
2187 u,S. 655 (1875)e
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Honorable Ben Barnes, page 4 (M-825)
was a bona fide purchaser so that the sole
question was the authority of the Kansas
legislature to pass the enabling statute. OO.
It was held that a tax can only be levied for
a public purpose and that a contribution to
the aid of any manufacturer was not such a
purpose. Hence, these bonds were void."
(emphasis ours).
Similar results followed In Parkersburg v. Brown, 106 U.S.
487 (18831, and Cole v. La Grange, 113 U.S. 1 (1885).
At page 33 this law review makes this comment on these
cases:
"Unfortunately for the innocent holders Involved
in the Topeka, Parkersburg and La Grange cases, these
decisions were not rendered prior to the sale of bonds'
but several years later when suit was brought for their
payment, The recent decisions on this subject have all
been the result of some type of test case...."
After the U. S. Supreme Court's decisions in these three
early cases, the Court began in Jones v. Portland, 245 U.S. 217
(1917)9 an about-face. We quote again from the Vanderbilt Law
Review, supra, Volume 19> at page 34:
"In Jones v. Portland 3' the Court coneldered
an act of the Maine leglsliture authorizing any
city to establish a munlcipaI coal and fuel yard
where such necessities could be sold at cost. * 0,0
This endeavor was approved and the Court added:
'While the ultimate authority to determine
the validity of legislation under the Fourteenth
Amendment is rested in this Court local condltlons
are of such varying character tha& what Is OP Is
not a public use in a particular State Is manifestly
a matter respecting which local authority, leglsla-
tive and judicial, has peculiar facilities for
securing accurate information, In that view the
judgment of the highest court of the State upoh
what should be deemed a public use in a particular
,.
30245 U.S. 217 (1917).
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Honorable Ben Barnes, page 5 (M-825)
State is entitled to the highest respect.'"31
At page 37 this law review article states:
"The various state courts considering the validity
of industrial development bonds have had much.more
difficulty resolving the problems presented under the
state constitutions than In satisfying the requirements``'
of the fourteenth amendment. In' addition to the. uni-,
versally implied requirement that the taxing and
borrowing powers of a state are subdect to the publ,ic
purpose doctrine, almost every state constitution
speclflcalPy prohibits the use of the credit of the
state or any of its polit al subdivisions for the
aid of any private party. JiGI
Nevertheless, the ma,jorit,y of state courts which have faced
and dealt with the problem have upheld the bonds on the theory
that the relief of unemployment caused by underdevelopment of
Industry, and the resultant poverty and human hardship are indeed
public purposes for which the states can use private industry
for the accomplishment of such public purpose.
Again we quote from the Vanderbilt Law Hev,lew, supra, at
pages 38-39:
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"The first contrary decision was reached in Florida
where the tour% not only found that a proposed revenue
bond arrangement violated the specific constitutional
prohibltfon against the lending of credit but added
that any financlhg of private enterprise by the use
of public funds was en%lrely foreign to our constitu-
tional system no matter how worthwhile the undertakfng.49
As opposed to the decisions in Kentucky and Alabama,
this court did not place any signlflcance on the fact .*:..
%hat revenue bonds would no% involve any municipal ,'
liability OP tax, On the contrary, ft states that,
once the bonds were sold, the proceeds would be public
funds and could no% be expended in aid of any private
.’
31T.d. at 221,
44Note, 108 V.Pa.L.Hev, 95 (1959).
QqS%a%ev, Town of North Miami, 59 So. 2d 779 (Fla,.1952).
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Honorable Ben Barnes, page 6 (M-825)
enterprise 050 There had been no enabling legislation
nor any vote of the electorate on the Florida
proposal D However, the court took pains to avoid
any implication that a specific legislative deter-
mination of public purpose would have changed
its decision, stating that: ‘There are certain’
limits beyond which the Legfslature cannot go.
It cannot authorize a munfcfpality to spend public
.money or lend or donate, directly or Indirectly,
public property for a purpose which Is not publfc.
A legfslatfve determlnatio may be persuasive,
but it fs not conclusive.’ r:1
“The Florlda decision was followed in Nebraska?2
and Idaho.53 The Nebraska court felt that the deci-
sions in three of its sister states approving revenue
bonds were based on ‘fundamental fallacies of reason-,
it-s, ’ and that the proposed arrangement ‘would con-
stitute a death blow to the private enterprise system
and reduce the Constitution to a shambles in so far
as ft. protectfon of private enterprise is concerned~‘.
D o 34
“On the other hand, the Supreme Court of Maryland,
; ‘in approving an issue of general obligation bonds,
stated that the Constitution does not wrfte the doctrine
of lafssez faere fnto the law and expressly rejected
50This reasoning was followed in Ohfo where the court
invalidated anfndustrfal mortgage program financed by state
revenue bonds *
5lState v. Town of North Miami, supra note &LIPat 785.
j2state ex r-e ~ Beck v ~ city of York, 164 Neb. 223, 82
N.W,2d 269 (1957).
5%illage of Moyie Springs v. Aurora Mfg. Co,, 82 Idaho
337, 353 P,2d 76-rt1960).
%.tate ex rel. Beck v. Cfty of York, supra note 52, at
231, 82 N,W. 2d at 274. ,
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Honorable Ben Barnes, page 7 (M-825)
the reasonfng of the Florida and Nebraska cases.55
The Nebraska decfsfon was overridden by a specific
constitutional amendment. Sfmflar amendments have
been adopted in four other states, and the bonds ‘,
upheld without amendment imat least twelve states. j6:i
At page 42 of this Vanderbilt Law Review, supra, Volume 19,
Is the following:
!Ie 0 0 e The constitutfonal arguments In the
state courts have almost all followed the same pattern,
and the difference between those decisions upholding
the acts and those declaring them Invalid appears to
be a matter of emphasis. The question has been whether.
the public benefit is an Incident of the aid to private
enterprise, or whether the use of private enterprise
is merely an aid to a municfpallty in, accomplishing
the real purpose of the bonds. This difference is
one of degree and more of an economic debate that,
has been, and presumably will continue to be, a
matter of some controversy. Although the greater
number of courts have upheld the bond Issues, there
Is a cleati conflict in the state decisions and no
statute could be safely implemented without the-
approval of the highest court of the par%lcular State.”
(emphasis ours)
In view of the language in Bland v. Cfty of Taylor, supra,
wherefn the COW% indfcates that public ouroos~e fs a auestlon
which can only be determined by cbnsfderat&n of the fa~cts fn
any particular situation, any attempt by the Attorney Cieneral,
to qpeculate what our Supreme Court might hold In a case in-
volving thfa questfon of constftutfonalfty in view of a split
of authorities in other states particularly where bonds were
outstanding, would involve a r&k so great to the. credit of
this State and fts political subdivisions, that the Attorney
55City of Frostburg v. Jenkins 215 Md. 9 136 A.2d 852
(1957)3 This case contains an excellent aumma~yof the several
constitutional problems involved.
56The amendments and decfsfons are set out fn the appendix.
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Honorable Ben Barnes, page 8 (M-825)
General fn all candor, cannot undertake ft. This .has long'
been the Attorney Qeneral's policy. See A~ttorney General
Opinion No. 0-3106 (1941).
In states where this risk has been taken and outstanding
public obllgatfons have been declared void, the credit and
financing ability of the state and all its subdivisions have
been interrupted for years. Traditionally, the municipal bond
market will not touch, under any circumstance, securitieb
which are tainted by even the slfghtest hint or suggestion of
unconstltutfonalfty.
SUMMARY
Absent a definitive decision by the Supreme ,;',',;' ',
Court,of Texas, and'in the light oft a'splf~tof~ %,,,',
authorities on the question In otherstates, this
office will not speculate and advise how the Texas
Supreme Court would rule on the constitutionality
of the proposed statute (The Texas Industrial
Development Act) to empower political subdlvislo~r!s
to Issue fndus%rfal revenue bonds, based upon a
legislative declaration of public purpose.
Very truly yours,
CRAWFORD C. MARTIN
Attorney General of Texas
,By+g&$L&@&
First
“‘‘
,,;
,,~‘,
Assistant
Prepared by Joseph H, Sharpley
Assistapt Attorney General
APPROVED:
OPINION COMMITTEE
Kerns Taylor, Chairman
W. E. Allen, Co-Chairman
Houghton Brownlee
John Banks
John Grace
J. C. Davis
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Honorable Ben Barnes, page 9 (M-825)
MEADEF,. GRIFFIN
Staff Legal Assistant
ALFREDWALKERS
Executive Assistant
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