Attorney General Opinion JM-0460

JIM MATTOX Attorney General The Attorney General of Texas March 28, 1986 Supreme Court Building P. 0. Box 12548 Austin. TX. 78711-2548 512/47,2501 Telex 9101874.1387 Telecopier 51214750288 Mr. William N. Kifby colmtliseioner of Education Texas Education Agency 1701 N. Congress Avenue Austin. Texas 78701 Opinion No. JM-460 Re: Effect of refunding those bonds originally guaranteed under the Texas Bond Guarantee Program 714 Jackson, Suite 700 Dallas, TX. 752024508 214/742-8944 Dear Mr. Kirby: Your letter requesting sn opinion of this office reads in part: 4824 Alberta Ave.. Suite 160 Et Paso, TX. 799052793 915i533-3464 “‘Ii Texas, Suite 700 msto”, TX. 77002.3111 713n23eaS 506 Broadway, Suite 312 Lubbock. TX. 794063479 W&747-5233 4309 N. Tenth. Suite B McAllen, TX. 78501-1885 51218824547 200 Main Plaza, Suite 400 San Antonio, TX. 792052797 512r225-4191 An Equal Opportunity/ Affirmative Action Employer The Texas bond guarantee program was esta- blished in 1983 pursuant to the provisions of the Constitution of Texas, article VII, section 5, and the enabling statute, Texas Education Code, section 20.901 et seq. Through this program the bond i~,sues of local school districts are secured by the corpus and income of the Permanent School Fund. This guarantee results in better bond ratings and lower interest rates for Texas school districts. Since its inception, 218 bond issues worth $1.250.505.000 have been guaranteed. We estimate that the guarantee program already has saved Texas school districts and their taxpayers millious of dollars. At present, 25 districts have psuding applications for the guarantee of bonds worth $122,480.000. . . . . In the past year, 33 bond issues guaranteed by the Permanent School Fund have been defeased and refunded pursuant to Texas Revised Civil Statutes Annotated. article 717k, or Texas Education Code, section, 20.05. These refunded bonds are in the principal auount of about $336,010,000. The question has arisen whether such bonds that have been fully defeased and refunded are still guaranteed by the Permanent School Fund. If full provls~~on has been made for the papnent of the bonds uo that they are no longer considered out- 8tandir.g for purposes of the guarantee, then the securities currently pledged to their payment p. 2104 Mr. William N. Kirby - Page 2 (JM-460) pursuant to the guarantee could be reallocated to guarantee pending applications from other dis- tricts. This result would allow us to reinstitute the guarantee program ou a limited basis, thus producing addlt:tonal savings for Texas school districts and 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 Undertakings Il. at 4.. Public bonds issued by states and their political subdivisions constitute contracts within constitutional provisions prohibiting l.arr impairing the obligation of contract. U.S. Const. art. I, 510; TIXK. Coast. art. I. 116; Determan V. 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., rendered void and of uo effect by anothw instrument. Sea BlacELaw Dictionary, 376 (5th cd. 1979). Cf. C:tty of HcAllea~Daniel, 211 S.W.2d 944, - .- 947-48 (Tex. 1948). "Refunding" has been defined as a replacement of one obligation with another, including th,z selling of new securities for the purpose of redeeming those outstareitng. See 64 Am. Jur. 2d Public Securities and Obligations 5261, at 295. Thzited authority also asserts that refunding bonds are not or.lp obligations in themselves for what they purport to be on their face and under the statutes pursuant to which they are issued, but are authorized extensions and continuations of the obligations representrrd by the bonds refunded; that refunding bonds do not create new i.cbt but merely continue an existing debt. Id. 1267, at 301. - As you note, article VII, section 5 of the Texas Constitution was amended in 1983 to provide: (b) The legislature by law may provide for using the permanent school fund and the income from the permeue~~t school Tund to guarantee bonds issued by school d.istricts. Anticipating adoption of the constitutional amendment, the legislature in 1983 enacted statutory provisions to Implement the new authority - statutes whi.ch are now codified as subchapter E of the 1. Subsection (a) of that constitutional provision establishes as the permanent school fund "[tlhe principal of all bonds and other funds, and the principal arising from the sale of lands hereinbefore set apart to said school fund," and establishes as the available school fund (to be applied twuu~.lly to the support of the publfc free schools) "all the interesi: derivable therefrom and the taxes herein authorized and levied." p. 2105 Mr. William N. Kirby - Page 3 (JM-460) Texas Education Code. See Acts 1983, 68th Leg., ch. 154, at 671. --. Section 20.902 of the Edumtion Code provides that upon approval by the commissioner of educazion. "bonds Issued under Subchapter A of this chapter [chapter 201,' including refunding bonds" are guaranteed by the Permanent School Fund. Section 20.903(a) states that [tlhe commissiov~r may not approve bonds for guarantee if the approval would result In the total amount of outstanding guaranteed bonds exceeding an amount equal to two times the cost value or market value, whichever is less, of the permanent scho,,:t fund, exclusive of real estate. . . . (Emphasis added). That limitation has promptlrd your question. Tou accompanied your request for an opinion with information pertaining to a particular method 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 original bonds 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 interest on the hcmds. Section 20.01 of the Texas Education Code. By reason of the refunding, the original bonds are no longer psgable from ad valoram taxation, but are payable :?rom the principal of and interest on the direct obligations of the United States government purchased with the proceeds of the refunding bonds and other moneys belonging to the school districts (which have been deposited under the escrow agreement to which reference is made in the statute). 2. Subchapter A of chapter 20 of the Education Coda, consisting of sections 20.01 through 20.06, concerns school district tax bonds and maintenance taxes. Section 20.01 authorizes school districts to issue negotiable coupon 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 issuance of refunding bonds payable from ad valoram taxes "to refund or refinance all or any part of any district's outstani&ng bonds" without an election unless the Texas Constitution requires one. p. 2106 Mr. William N. Kirby - Page 4 (JM-460) Section 20.05 of the Uducation Code is part of subchapter A, the subchapter which concerns the tar bonds that nay be guaranteed according to subchapter E'. Under it, refunding bonds may be delivered to the present bondholders in exchange for the old bonds to be refunded, or they nay be so:Ld for cash with which to pay off the old bonds in full (principal tnd interest to maturity) or to redeem the old bonds before maturity (Iprincipal and interest to the redemption data, plus any redemption Premium). Or if money is available therefor from other sources, outstauding bonds way be paid off or redeemed without issuing refunding bonds. Subsections (g) and (h) of section 20.05, Subchapter A, provide a method for paying off or redeeming bonds: (g) To refund, bonds or to pay or redeem bonds in whole or in part without issuing refunding bonds, the governing board or cosmissioners court way deposit directly with the paying agent the proceeds from that sale of refunding bonds or any other available Cunds or resources. The deposit must be In an amount sufficient, after taking into account both the principal and interest to accrue on the assets of tmy escrow account created under Subsection (h) of this section, to provide for the payment or redeulptioa of the bonds and assumed obligations that are to be refunded or to be paid or redeemed. Thr deposit constitutes the waking of firm banking~~d financial arrangements for the discharge and f&l payment or redemption of the bonds being refuuzed. (Emphasis added.) -- (h) The governing board or commissioners court may enter into 1.11. escrow or a similar *greentent with the paying agent with respect to the safe- keeping, investment, reinvestment. administration, or disposition o:i the deposits, but the deposits may be invested and reinvested only in direct obligations of ,the United States, including obligations the principal of and Interest on which are unconditionr.l,ly guaranteed by the United States and that nature or beer interest payable at times and In amounts sufficient to provide for the scheduled payment or redemption of the bonds. The governing board or cosmissioners court shall enter into an appropriate escrow or a similar agreement if any of the bends are scheduled to be paid or redeemed on a daxe later than the next succeeding scheduled interest payneat date. Subsection (i), expressly states: p. 2107 Mr. William N. 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 refunded bwds are considered to be defcased and may not be licluded in or considered to bc an indebtedness of &e district for the purpose of a limitation on oui%tauding indebtedness or taxation for any other pul:)ose. (Empbasfs added). The foregoing provisions, all found in subchapter A, were added by Acts 1983, Sixty-eighth Lel:J.slature, chapter 256, page 1142, effective May 27. 1983. Subchapter E, which concerns the constitutionally authorized guarantee, does uot contain similar language. Subchapter E 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 payment wil:. deprive the underlying bonds (the bonds to be refunded) of any subsectfon E guarantee that might have originally protected them, even though the underlying bonds have not been actually surrendered by tb,e holders thereof and cancelled. In other words, would the underlying “refunded” bonds continue to constitute “outstanding guaranteed bon’ds” for purposes of the section 20.903(a) limitation? Section 20.902 of subchapter E provides that upon approval by the commissioner, “bonds Issued under Subchapter A of this chapter, in- cluding refunding bonds, ere guaranteed by the corpus and incomeof then permsnent school fun&” (Emphasis added). The provision is ambiguous because the emphasized words could have either of two meanings. “Bonds issued,” including refunding bonds, could mean that the holders of new bondds issued to refund current bonds could themselves be the beaefic:Laries of the constitutionally-permitted guarantee if the commissioner approved. Or, those words could mean that the holders of origiDa1 bonds so guaranteed are to be protected by the guarantee so long as: the school district remains obligated to them, even If the original bonds are “refunded,” i.e., even though the original obligations are extended and continuedby the “refunding” device. 20 An uncodified portion of the act adding subchapter E to chapter of the Education Code helps resolve the ambiguity. Section 2 of Acts 1983, Sixty-eighth Legislature , chapter 154, page 675, states: In accordance with the provisions of this Act, the commissioner of ciducation may approve for guarantee any eligible bonds issued after the effective date of this Act, in,<Luding refunding bonds for bonds issued or sold tzfore the effective date of this Act. - (Emphasis ~. i.dded) . p. 2108 Mr. William N. Kirby - Pagf, 6 (~~-460) III our opinion, this passage demonstrates a legislative understanding that the commissioner will separately approve original and refunding bonds for participation in the guarantee program. Such an intent, while not necessarily incmsistent with the idea that the guarantee survives the "refunding" of guaranteed bonds, does denigrate the argumant that by using the! words, "including refunding bonds", in section 20.902, the legislature axpressly so provided. The "refunding" scheme of subsections (g) and (h) of section 20.05, when coupled with the subsection (i) provision, allows the complete substitution of t,he security originally bargained for. As you have noted, by reasou af such refunding , the original bonds are no longer payable from ad valoram taxation, but are payable from the principal and interest on the direct obligations of the United States purchased with moneys deposited in escrow for that purpose. Gener- ally, where the resource fcr the payment of bonds is the taxing power of a political subdivision as it existed when the bonds were issued, any law which withdraws or limits such .power and leaves no adequate means for payment of the b'onds is forbiddan by constitutional pro- visions protecting the obli.gation of contract. Mobile v. Watson, 116 U.S. 289, 305 (1886). Whether a substituted means of payment is "adequate" is another question, see Shapleigh v. City of San Angelo, 167 U.S. 646. 657 (1897), bwt we=d not address it here. The question of "adeqmcy" is not controlling here because the substitution of security, qahatever its "adequacy," cannot constitute an impairment of the obligation of contract if the right to make such substitution was a part of the original contract between the school district and the bondholders.' The holders of the bonds took them with the rights guaranteed nnd defined by the statutes in effect at the time of their issuance. and those statutes became a Dart of. and timem, the contracts. Baukers Life Co. v. Breckenridge' Independent School District, 97 S.W.2d-933, 937 (Tex. 1936). See Empire Gas & Fuel Coi v. State, 47 S.W.:ld 265, 266 (Tax. 1932)FCf. Norton v. Kleberg County, 231 S.W.2d "1.6, 718 (Tax. 1950). - The provisions of subeections (g), (h), and (i) of subchapter A and those of subchapter E wcze anacted during the same session of the legislature. They are in mri materia and are to be read together, oue with reference to thF;her, as though embodied in a single act. See 53 Tax. Jur. 2d Statutes 05186. 188, at 280, 286. In that light, rhc "guarantee" provisions TE subchapter E were anacted in contespla- tlou of the "refunding" prcavisions of subchapter A; and the require- ment of section 20.903 thaz the total amount of outstanding guaran- teed bonds shall not axced. two times the cost value or market value of the permanent school fuud (whichever is less), must be read with the language of section 20.05, subsection (i), stating that if a 3. We understand that all the bonds to be "refunded" here were issued after the effective dates of the constitutional amendmant and the 1983 legislation. This opinion is limited to those circumstances. p. 2109 Mr. William N. Kirby - Pago 7 (JM-460) ,- "refunding" escrow agreement as described has been entered into, the refunded bonds are to be considered to be defeased and may not be included in or considered to be an indebtedness of the district "for the purpose of a limitation on outstanding Indebtedness or taxation or - for any other purpose." (Lmphasis added). The language of the other statute authorizing a similar "refunding" mechanism, artLcle 717k, V.T.C.S., is not so strong, but when its provisions are analysed, the effect is the same. Section 7 of article 717k provides !:hat when a deposit of funds in sufficient amount has been deposited vith the state treasurer in accordance with the statute, the deposit shall constitute the making of firm banking and financial arrangements for the discharge and final payment or redemption of the obligations being refunded. This language was added to the statute in 1969, effective June 14, 1969. See Acts 1969, 61st Leg., ch. 783, at 2316. Section 7A of articlemk, which provides for an escrow arrangement similar to that described in subsection (1,) of section 20.05 of the Education Code, was added in 1979, but at that time it applied only to the refunding of "revenue" bonds. See Acts 1979, 66th Leg., ch. 832, at 2182. In 1985, however, it wasamended, effective June 8, 1985,. to apply to bonds payable from ad valorem taxes as well. See Acts 1985, 69th - Leg., ch. 318, at 2513. The phrase, "firm banking arrsngemants," has acquired a "final payment" judicial gloss with respect to refunding bonds. See City of McAllen V. Daniel, 211 S.W.:!d 944, 947 (Tex. 1948). Absenzsrepre- sentation or unconscionable behavior on the part of government, so long as the bonds to be Irefunded pursuant to the mechanism of a particular provision were ::ssued subsequent to the date the provision became applicable to such bonds, the mechanism may be utilized vithout impairing the obligation of the bonds because the statutory provision became a part of the contra,ct when the bonds were issued. We have not been furnished the agreements involved, but no suggestion has been made th,at the terms of the statutes or the bonds are materially misleading to the investing public. Cf. United States V. Sioux Nation of Indians, 448 U.S. 371 (1980); UnGd States Trust Company of New York V. New Jersey, 431 U.S. 1 (1977); Continental Illinois National Bank au,d Trust Company of Chicago V. State of Washington, 696 F.2d 692 (!F:hr. 1983). cert. denied, 460 U.S. 1077 (1983). Under such CircumXances, we are of the opinion that school district ad valorem bonds which incorporated the provisions of section 20.05 of the Education Code as amanded in 1983, or the4provlsions of article 717k, V.T.C.S., section 7A, as amended in 1985, at the time . As amanded in 1969. for refunding accomplished pursuant to section 7 of article 717k. p. 2110 Mr. William N. Kirby - Page! 8 (JM-460) they were issued, may be rc!f:unded pursuant to those provisions without impairing the obligation of the bonds, and when such refunding has been accomplished pursuant to the statutory machanism, the refunded bonds no longer constitute "outstanding guaranteed bonds" within the meaning of section 20.903 of the Education Code limiting the amount of bonds which may be guarantcled by the permanent school fund. SUMMARY School district ad valorem bonds incorporating the provisions of statutes respecting refunding of the bonds may be refunded pursuant thereto without impairing the obligation of the bonds, assuming the investing public has not been misled. When such refunding has been accomplished, the refunded bonds no longer constitute "outstanding guaranteed bonds" within that meaning of the statute limiting the amount of bonds which may be guaranteed by the permanent school fund. Very ruly yours Lt /+lztQ A JIM MATTOX Attorney General of Texas JACKHIGRTOWER First Assistant Attorney Gtmaral MARYKRLLRR Executive Assistant Attorncby General ROBERT GRAY Special Assistant Attorney General RICK GILPIN Chairman, Opinion Committee: Prepared by Bruce Youngbloc,d Assistant Attorney Ganeral p. 2111