Untitled Texas Attorney General Opinion

OFFICE OF THE ATTORNEY GENERAL. STATE OP TEXAS
JOHN CORNYN
October 13. 1999
The Honorable Riley J. Simpson Opinion No. JC-0127
District Attorney
52d Judicial District Re: Whether proceeds of bonds approved by
Coryell county voters to construct a public improvement project
P.O. Box 919 may be used for legal fees for arbitration of a
Gatesville, Texas 76528-0919 contract related to the construction (RQ-0051-JC)
Dear Mr. Simpson:
You ask whether the proceeds of bonds approved by voters to construct a public
improvement project may be used for legal fees relating to arbitration of a contract for construction
of that project. We conclude that the proceeds may be used to pay the arbitration legal fees if
arbitration is a reasonably necessary step toward constructing the project.
The circumstances prompting your request, as we understand them, are as follows: In
accordance with articles 701 through 705 of the Revised Civil Statutes,’ the residents of the City of
Copperas Cove (the “City”) approved the issuance of $1,500,000 in bonds “for the purpose of
constructing permanent improvements by constructing, expanding and extending the fire/EMS
Department station and substation in said City, and related improvements. . .” See Copperas Cove,
Tex., An Ordinance Calling for and Ordering an Election for May 7, 1994 on the Question of the
Issuance of Bonds (Feb. 15, 1994) [hereinafter “Election Ordinance”]. These bonds, payable from
ad valorem taxes levied on all taxable property in the City, were subsequently issued and sold by the
City for that purpose. ‘See Copperas Cove, Tex., Ordinance Authorizing Issuance ofCity ofcopperas
Cove, Texas General Obligation Bonds, Series 1994 (Aug. 9, 1994). After construction on the fire
station commenced, the City and the construction management firm for the project had several
disputes that were ultimately settled through arbitration procedures set forth in the construction
management contract. Although the tire station was never completed, $350,000 of the bond
proceeds-approximately twenty-three percent of the bonds’ principal amount-was expended for
legal fees for the arbitration. Because the City’s residents have questioned the expenditure of the
bond proceeds for the arbitration costs, you ask: “Can general obligation bond proceeds be used to
‘Articles 701 through 842a of the Texas Revised Civil Statutes were repealed and recoditied, without
substantive change, by the 76th Legislature at Title 9 of the Texas Government Code. See Act of May 10,1999,76th
Leg.,R.S., ch. 227, $5 1,28(a), 29(a), 1999Tex. Sess. Law Serv. 721,775-76,1056(tobecodifiedatT``.Go~’~C0``
ANN.tit. 9). For ease of citation, tbis opinion will refer to the provisions of the law as they will be codified in the Texas
Government Code.
The Honorable Riley J. Simpson - Page 2 (X-0127)
finance expenses to defend or pursue arbitration of construction. . that result from the purposes for
which the general obligation bond was originally issued?” See Letter from Honorable Riley .I.
Simpson, District Attorney, 52d Judicial District, Coryell County, to Office ofthe Attorney General
(Mar. 25, 1999) (on file with Opinion Committee).
We find no statute setting forth specific costs that may be paid with bond proceeds. Chapter
125 1 of the Government Code, under which the City’s bonds were issued, authorizes a city to issue
bonds for public improvements payable from ad valorem property taxes levied on all taxable property
in the city (general obligation bonds), subject to voter approval. See TEX. GOV’T CODEANN. $5
1251.001-,005 (bond elections), 1331.001 (municipal authority to issue bonds). Chapter 1251 does
not list specific costs that a city may pay with proceeds of authorized bonds. See id. Nor are we
aware of any other statute applicable to the City’s bonds that does.
Proceeds of the bonds in the situation about which you ask must be used for construction,
expansion, and extension of the fire/EMS station and substation “and related improvements.”
Election Ordinance, supra. Where the electorate has approved the issuance of bonds, bond proceeds
may be expended only for the purposes for which the bonds were approved. Troy Dodson Constr.
Co. v.McClelland,993F.2d 1211,1216 (5thCir. 1993);Barrington v. Cokinos, 338 S.W.2d 133,142
(Tex. 1960); Lewis v. City of Fort Worth, 89 S.W.2d 975,978 (Tex. 1936); Black v. Strength, 246
S.W. 79,80 (Tex. 1922); Moore v. Coffman, 200 SW. 374,375 (Tex. 1918). Seegenerally 60 TEX.
JUR.3d Public Securities and Obligations 5 77 (1988). A city is required to include in the bond
proposition in the election ordinance and in the notice of election the purposes for which bonds
payable from ad valorem property taxes will be issued because the electorate is entitled to know in
advance the particular purpose for which its taxes levied pursuant to the election will be used. See
TEX. GOV’TCODEANN 55 1251.002-.004;Moore, 200 S.W. at 374. Theordinance calling the bond
election and establishing the purposes for which bonds will be issued becomes a contract with the
voters once the voters approve the bonds. Black, 246 S.W. at 80-81; Moore, 200 S.W. at 374;
Devorsky v. La Vega Indep. Sch. Disc., 635 S.W.2d 904, 908 (Tex. App.-Waco 1982, no writ);
Inverness Forest Improvement Dist. v. Hardy Street Investors, 541 S.W.2d 454, 460 (Tex. Civ.
App.-Houston [ 1st Dist.] 1976, writ ref d n.r.e.). Thus, the issue presented in this opinion is whether
the legal fees, while not for the actual construction of the project, are nonetheless a cost of the project
and, therefore, within the scope of the purpose for which the bonds were approved.
Bond proceeds may be used, without specific voter approval or statutory authorization, for
certain nonconstruction costs. Proceeds may, for instance, be used to pay reasonable expenses
incident to issuing bonds, such as legal and other professional fees, and printing and advertising
expenses, without specific voter approval and even when they are not statutorily authorized. See 15
EUGENEMCQUILLIN,THELAW OFMUNICIPAL CORPORATIONS § 43.68, at 731 (3d ed. 1995); 3 M.
DAVID GELFAND,STATE& LOCALGOVERNMENT
DEBTFINANCING
$5 11.26.50, 11.39-.42 (1992 &
Supp. 1994). Legal fees for arbitration of a construction contract are not costs incident to the issuance
of bonds, and we have found no case in Texas or another jurisdiction that addresses the use of bond
proceeds to pay arbitration or litigation expenses related to the construction of a project.
The Honorable Riley J. Simpson - Page 3 (JC-0127)
We have two concerns, grounded in the proposition that proceeds of bonds may be used only
for the purposes for which the voters approved the bonds, about concluding that the City’s bond
proceeds may be used to pay arbitration expenses related to the approved public improvement. First,
when such an expenditure is neither judicially recognized nor legislatively authorized, it is difficult
to conclude that the voters contemplated and, thus, approved the expenditure of bond proceeds for
thatpurpose. SeeFZetcherv. Ely, 53 S.W.2d 817,818-19 (Tex. Civ. App.-Amarillo 1932,writrefd)
(intent of parties to bond election, as in all contracts, is “dominant ruling factor” in determining
approved bond purposes); Tex. Att’y Gen. Op. No. H-968 (1977) at 3 (voters ofHarris County could
not have contemplated proposed construction of toll facility in approving bonds for acquisition of
right-of-way). Even though the voters do not specifically approve judicially recognized or statutorily
authorized nonconstmction costs, the voters are presumably on notice, as a matter of law, that the
proceeds may be used for those purposes. Cf: San Antonio River Auth. v. Shepherd, 299 S.W.2d 920,
924-25 (Tex. 1957) (voters’ statutory right to repeal or reduce tax must be construed in harmony with
county’s implied authority to contract its general credit for flood control purposes); San Saba County
v. McGraw, 108 S.W.2d 200,203 (Tex. 1937) (laws in force and effect on election date become part
of voted proposition and part of contract with voters). Whether the voters may be presumed to know
or contemplate that bond proceeds will be used for more indirect, nonconstruction arbitration
expenses that are neither judicially recognized nor statutorily authorized is a more tenuous
proposition.
Second, using proceeds fornonconstruction purposes reduces the funds available to construct
the project that the voters specifically approved. Unlike the recognized and expected nonconstruction
costs such as issuance costs that may be taken into account in sizing the principal amount ofthe bonds
to be issued, unexpected and unrecognized expenses such as arbitration costs are unlikely to have
been taken into account. Expending bond proceeds for these unexpected costs may result in
insufficient or no funds remaining to construct the project actually approved by the voters. Even if
the project is never constructed, the voters remain obligated to pay the ad valorem taxes levied on
their property to support those bonds until they are retired.
Nevertheless, we are ultimately unpersuaded that legal fees for arbitration of a construction
contract never may be paid from the proceeds of bonds approved for the related project. When a city
submits to the voters~a bond proposition stating in general terms the purposes for which the bonds
will be issued, the city’s governing body retains the discretion to determine the particular items for
which bond proceeds will be spent to effectuate that purpose. Barrington, 338 S.W.2d at 142-43.
If the expenditure is for “one step being taken by the city to effectuate” the purposes for which bonds
were authorized, it cannot “be said as a matter of law that the same is foreign to such purposes.” Id.
at 143. Accordingly, we cannot conclude, as a matter of law, that the arbitration fees are not a
reasonably necessary cost of constructing the project.
The voters in Barrington had approved issuance of bonds for the purpose of, among other
things, “‘paying part of the cost of the project for the elimination of railroad grade crossings from the
public streets and highways in the City of Beaumont, and work and expenses incident to such
separation of grades.“’ Id. at 136 (quoting Bond Election Proposal (Aug. 12, 1950)). The Texas
The Honorable Riley J. Simpson - Page 4 (X-0127)
Supreme Court upheld the City of Beaumont’s use of the bond proceeds to remove a span of railroad
track from its present location to another and to provide a new railroad right-of-way to a railroad
company, relying on the principle that when the law entrusts to the governing body the duty to
exercise its sound judgment and discretion, courts may not interfere if the governing body acts
lawfully. Id. at 142-43 (citing Lewis, 89 S.W.2d at 978). The court noted that at the time ofthe bond
election, the city had no definite plans to effectuate the improvements; therefore, neither the city nor
the voters could know the particular items for which the bond proceeds would be spent:
Evidently it was for this reason that the proposal was submitted in
rather general terms, and approval of the same by the electorate
necessarily left to the sound judgment and discretion ofthe governing
body the devising of a program or plan for the elimination of grade
crossings which would be advantageous to the municipality and its
citizens.
Id. at 143. Although the “question is not entirely free Tom doubt,” the court “concluded that the
city’s undertakings under the contract are not outside the scope of the bond proposition approved by
the electorate . . .” Id. at 142.
Webelieve Barrington’s rationale applies here, even though Barrington deals with expending
bond proceeds for specific improvements encompassed within the voter approved projects rather than
expending bond proceeds for particular nonconstruction cost relating to an approved project at issue
here. Like the bond proposition in Barrington, voter approval of a project in general terms in this
instance-construction of a capital improvement project-leaves open the particular items for which
bond proceeds will be spent to achieve that purpose. Obviously, a number of steps are necessary to
completing a construction project that do not involve the physical construction of the project, such
as finding a site, obtaining architectural and engineering plans, awarding and reviewing contracts, and
ensuring compliance with relevant building requirements and specifications. Although more
extraordinary, arbitration also may be a similarly necessary step. For instance, when a city is required
by contract or otherwise to arbitrate disputes before proceeding with construction, arbitration may be
a necessary step to completing the project; without arbitration, there may be no project. If arbitration
is reasonably necessary to effectuate construction of the project, then legal fees for the arbitration arc
reasonably necessary to the construction of the project.
Whether arbitration is a reasonably necessary step to achieve construction of a particular
public improvement project is a determination that depends on facts, such as the contract terms
governing the parties; the alternatives to arbitration; the likelihood that the arbitration will result in
completion of the project; the sources of funds, other than bond funds, available to the issuer for
arbitration costs; the amount necessary to construct the project and the available bond proceeds for
that purpose; and the amount of the arbitration costs. Consequently, that determination is beyond the
scope ofthe opinion process. See, e.g., Tex. Att’y Gen. Op. Nos. JC-0020 (1999) at 2 (investigation
and resolution of fact questions cannot be done in opinion process); DM-383 (1996) at 2 (questions
of fact are inappropriate for opinion process); DM-98 (1992) at 3 (questions of fact cannot be resolved
The Honorable Riley J. Simpson - Page 5 (X-0127)
in opinion process); H-56 (1973) at 3 (improper for Attorney General to pass judgment on matter that
would be question forjury determination); M-187 (1968) at 3 (Attorney General cannot make factual
findings). Rather, as Barrington suggests, it is generally a determination to be made by the bond
issuer’s governing body in the first instance, subject to judicial review for abuse of discretion. See
Barrington, 142 S.W.2d at 142 (if governing body acts illegally, unreasonably, or arbitrarily, a court
may so adjudge).
The Honorable Riley J. Simpson - Page 6 (JC-0127)
SUMMARY
Proceeds of bonds approved by voters to construct a public
improvement project may be used to pay legal fees for arbitration of
a contract relating to construction of that project if the arbitration is a
reasonably necessary step to effectuate construction of the project.
Whether arbitration is a reasonably necessary step toward construction
of an approved project in a particular instance is a determination to be
made by the governing body of the bond issuer, subject to judicial
review.
Attorney General of Texas
ANDY TAYL.OR
First Assistant Attorney General
CLARK KENT ERVIN
Deputy Attorney General - General Counsel
ELIZABETH ROBINSON
Chair, Opinion Committee
Sheela Rai
Assistant Attorney General - Opinion Committee