                                               KEN PAXTON
                                          ATTORNEY GENERAL OF TEXAS




                                               January 17, 2017



 Mr. Lloyd B. Tisdale                                       Opinion No. KP-0128
 President
 San Jacinto River Authority                                Re: Whether certain financial transactions of
 Post Office Box 329                                        the San Jacinto River Authority comply with
 Conroe, Texas 77305                                        the Public Funds Investment Act and the
                                                            Public Funds Collateral Act (RQ-0118-KP)

 Dear Mr. Tisdale:

         You ask whether five particular financial transactions contemplated by the San Jacinto
 River Authority ("Authority") fully comply with the Public Funds Investment Act ("PFIA") and
 the Public Funds Collateral Act ("PFCA"). 1 At the outset, we note that your questions involve the
 consideration of many fact issues. Because such fact intensive inquiries are beyond the scope of
 an attorney general opinion, we cannot approve of the proposed transactions as a matter oflaw but
 can offer only general guidance.

         We begin with an overview of the two statutes you raise. The PFIA, chapter 2256 of the
  Government Code, generally governs the investment of public funds under the control of the
 governing body of certain entities. See TEX. Gov'T CODE § 2256.003; see also id. § 2256.001
  (providing that chapter 2256 "may be cited as the Public Funds Investment Act"). It authorizes
 investment of public funds "in investments authorized under this subchapter in compliance with
 investment policies approved by the governing body and according to the standard of care
 prescribed by Section 2256.006." Id. § 2256.003(a) (applying to local governments); see also id.
  §§ 2256.002(7) (defining "local government" to include "a district or authority created under ...
  Section 59, Article XVI, Texas Constitution" such as the Authority), 2256.009-.016 (enumerating
·the types of authorized investments). You indicate that sections 2256.009 and 2256.010 are
 relevant to the types of investments you describe. See Request Letter at 2-3.

        Section 2256.009 authorizes the investment of public funds in obligations of or guaranteed
 by governmental entities, and can include:

                  (1) obligations, including letters of credit, of the United States or its
                  agencies and instrumentalities; [and]


          1
           See Letter from Mr. Lloyd B. Tisdale, President, San Jacinto River Auth., to Honorable Ken Paxton, Tex.
  Att'y Gen. at 6-10 (July 20, 2016), https://www.texasattomeygeneral.gov/opinion/requests-for-opinion-rqs
  ("Request Letter").
Mr. Lloyd B. Tisdale - Page 2                           (KP-0128)




                  (4) other obligations, the principal and interest of which are
                  unconditionally guaranteed or insured by, or backed by the full faith
                  and credit of, this state or the United States or their respective
                  agencies and instrumentalities, including obligations that are fully
                  guaranteed or insured by the Federal Deposit Insurance Corporation
                  or by the explicit full faith and credit of the United States[.]

Id. § 2256.009(a)(l), (4) (excluding investments listed in subsection 2256.009(b)); but see id.
§ 2256.009(b) (identifying types of investments that are not authorized investments). Section
2256.010 provides that

                  [a] certificate of deposit or share certificate is an authorized
                  investment ... if the certificate is issued by a depository institution
                  that has its main office or a branch office in this state and is:

                         (1) guaranteed or insured by the Federal Deposit Insurance
                         Corporation ... ; [or]

                         (2) secured by obligations that are described by Section
                         2256.009(a) ... [.]

Id. § 2256.010(a)(l )-(2). By its plain language, subsection 2256.0 IO(a)(2) expressly incorporates
the types of secured investments authorized in subsection 2256.009(a). See id.

        The PFCA, chapter 2257 of the Government Code, governs the collateral requirements for
deposits of certain public funds. 2 See id. §§ 2257.001-.114; see also id. § 2257.001 (providing
that chapter 2257 "may be cited as the Public Funds Collateral Act"). Generally, chapter 2257
requires deposits of public funds to be secured by an eligible security as collateral for the protection
of public money. See id. § 2257.021. The PFCA sets out what constitutes an eligible security,
prescribes the required total value of the eligible security used to secure a deposit, and governs the
contracts between the public entity and a depository and between a depository and its custodian.
See id. §§ 2257.002(4) (defining "eligible security"), 2257.022 (setting amount of required
collateral), 2257.024 (providing for contract with depository bank), 2257.041 (governing a
depository's deposit of security with custodian). For purposes of your questions, it is important to
note that an eligible security under the PFCA can be an authorized investment security under
provisions of the PFIA. See id. §§ 2257.002(4)(8) (defining "eligible security" to include an
investment security), 2257.002(5)(C) (defining "investment security" to include "a security in
which a public entity may invest under Subchapter A, Chapter 2256").




           2
             The phrase "deposit of public funds" in chapter 2257 refers to funds of a public entity that the Comptroller
 does not manage under chapter 404 and that are held as a demand or time deposit by an authorized depository
 institution. TEX. GOV'T CODE§ 2257.002(3).
Mr. Lloyd B. Tisdale - Page 3                  (KP-0128)



        In your first question, you inquire whether the Authority would "be fully in compliance
with the requirements of the PFIA if it deposited $200,000 of its funds in a time deposit account
fully insured by the FDIC[.]" Request Letter at 6; see also 12 U.S.C. § 1821(a)(l)(E) (establishing
$250,000 as the standard maximum deposit amount for purposes of the Federal Deposit Insurance
Act). In this question you frame the legal issue as whether a time deposit account is an "other
obligation[], ... including obligations that are fully guaranteed or insured by the [FDIC]" under
Government Code subsection 2256.009(a)(4). Request Letter at 6. You note that this office has
previously determined that a "demand deposit" account could be an "other obligation" under
section 2256.009. Id. at 7; see Tex. Att'y Gen. Op. No. GA-0834 (2011) at 1 ("We have found
nothing in statutory or case law that would indicate that a demand account cannot be properly
deemed an 'other obligation' under section 2256.009 of the Government Code.").

        In contrast to a "demand deposit," a "time deposit" is a "deposit for which there is in force
a contract providing that neither the whole nor a part of the deposit may be withdrawn by check
or otherwise before the expiration of the period of notice that must be given in writing in advance
of a withdrawal." TEX. Gov'T CODE§ 404.001 (7) (defining "time deposit" for purposes of chapter
404, Government Code, governing Comptroller's management of the State treasury); see also TEX.
Loe. Gov'T CODE § 105.001(5). The primary difference between the two types of accounts is
when the depositor may withdraw funds. Nothing in the language of section 2256.009 suggests
that this distinction would prevent a time deposit from qualifying as an investment under that
section. Thus, consistent with Opinion GA-0834, a court could conclude that a time deposit
account fully insured by the FDIC is within the scope of an "other obligation" under subsection
2256.009(a)(4 ).

        You next ask whether the Authority would

               be fully in compliance with the requirements of the PFIA and the
               PFCA if it placed $10,000,000 of its funds in a certificate of deposit
               issued by a depository institution that has its main office or a branch
               office in Texas and is backed by a federal home loan bank letter of
               credit securing the full deposit amount and any accrued interest[.]

Request Letter at 7. Under section 2256.010, a certificate of deposit must be (1) guaranteed or
secured by the FDIC; or (2) secured by obligations that are described by subsection 2256.009(a).
See TEX. Gov'T CODE § 2256.0lO(a). Because $10,000,000 is in excess of the FDIC deposit
insurance, you suggest a subsection 2256.009(a)(l) obligation can secure the amount in excess of
$250,000. Subsection 2256.009(a)(l) authorizes an investment in "obligations, including letters
of credit, of the United States or its agencies and instrumentalities." Id. § 2256.009(a)(l ), see also
id. § 2257.002(4)(F) (providing that a letter of credit from a federal home loan bank is an "eligible
security"); see also Request Letter at 7. The language of subsection 2256.009(a)(l) provides that
a letter of credit can be an obligation of the United States or its agencies or instrumentalities. TEX.
Gov'T CODE § 2256.009(a)(l). Given the clear language of the statute, you argue that the
dispositive issue is whether a federal home loan bank is such an agency or instrumentality of the
United States. See Request Letter at 7-8.
Mr. Lloyd B. Tisdale - Page 4                (KP-0128)



        The Federal Home Loan Bank Act created the Federal Home Loan Bank ("FHLB ") system
to provide a reliable source of funds to homebuyers. See generally 12 U.S.C. §§ 1421--449.
Twelve regional banks comprise the system along with the Office of Finance. 12 C.F .R. § 1273 .1.
The twelve regional banks are federally chartered but privately capitalized, privately owned, and
managed independently of the government. See 12 U.S.C. §§ 1426 (providing for capital
structure), 1427 (vesting management in a privately elected board of directors). Each regional
bank is authorized to make secured advances to its member banks. Id. § 1430. And each regional
bank has the power to borrow and give security and to pay interest thereon, and to issue debentures,
bonds, or other evidences of obligation therefor. Id. § 1431.

        Judicial treatment of an FHLB as an agency or instrumentality of the United States varies
depending on the context. In the context of a dispute involving attorneys' fees between different
FHLBs, the Ninth Circuit Court of Appeals, in a frequently cited opinion, determined that the
FHLB is "a federal instrumentality organized to carry out public policy and its functions are wholly
governmental." Fahey v. 0 'Melveny & Myers, 200 F.2d 420, 446 (9th Cir. 1952). But a more
recent, unreported decision from a federal district court distinguished Fahey 's conclusion based
on subsequent federal legislative changes to the FHLB system that reduced government control
over FHLBs. See Fed. Home Loan Bank ofSan Francisco v. Deutsche Bank Secs., Inc., 2010 WL
5394742, *9 (N.D. Cal. 2010) (unpublished) (noting that "Congress removed the power of Federal
Home Loan Banks to serve as agents of the federal government in supervising federal savings and
loan institutions"). In Deutsche Bank Securities, the court used a six-factor test to determine that
the FHLB of San Francisco was not a governmental agency for purposes of the Federal Tort Claims
Act. See id. at **9-11 (citing In re Hoag Ranches v. Stockton Prod. Credit Ass 'n, 846 F.2d 1225,
1227-28 (9th Cir. 1988)). The six Hoag factors are:

               ( 1) the extent to which the alleged agency performs a governmental
               function; (2) the scope of government involvement in the
               organization's management; (3) whether its operations are financed
               by the government; (4) whether persons other than the government
               have a proprietary interest in the alleged agency and whether the
               government's interest is merely custodial or incidental; (5) whether
               the organization is referred to as an agency in other statutes; and
               (6)·whether the organization is treated as an arm of the government
               for other purposes ....

Id. at *9. Other federal courts have utilized the same six-factor test to determine that other FHLBs
are not a government "agency." See Fed. Home Loan Bank of Seattle v. Barclays Capital, Inc.,
No. Cl0-0139 RSM, 2010 WL 3662345, at *2--4 (W.D. Wash., Sept. 1, 2010) (unpublished), Fed.
Home Loan Bank of Seattle v. Deutsche Bank Secs., Inc., 736 F. Supp. 2d 1283, 1287-88 (W.D.
Wash. 2010). In Texas, in the unemployment compensation context, the Texas Supreme Court
adopted an opinion that determined, after considering holdings from three other states, that the
member banks of the FHLB system are not instrumentalities of the federal government. See Tex.
Unemp't Comp. Comm'n v. Metro. Bldg. & Loan Ass'n, 139 S.W.2d 309, 312-13 (Tex. Civ.
App.-Austin 1940, writ ref'd); see also Rheams v. Bankston, Wright & Greenhill, 756 F. Supp.
1004, 1008 (W.D. Tex. 1991) (holding the FHLB of Dallas is not a "federal agency" in a federal
 jurisdiction context).
Mr. Lloyd B. Tisdale - Page 5                        (KP-0128)



        Even in contexts unrelated to federal banking, the cases considering the key terms use
different analytical frameworks, yielding different results. The Fifth Circuit used factors from an
Internal Revenue Service Ruling to determine whether an employee sponsored benefit plan was
an agency or instrumentality of the government in an ERISA context. See generally Smith v. Reg'!
Transit Auth., 827 F.3d 412, 417-18 (5th Cir. 2016) (citing IRS Rev. Rul. 89-49). The court set
out the following factors:

                 One of the most important factors to be considered ... is the degree
                 of control that the federal or state government has over the
                 organization's everyday operations.          Other factors include:
                 ( 1) whether there is specific legislation creating the organization;
                 (2) the source of funds for the organization; (3) the manner in which
                 the organization's trustees or operating board are selected; and
                 (4) whether the applicable governmental unit considers the
                 employees of the organization to be employees of the applicable
                 governmental unit.

Id at 419. In the similar context of considering the meaning of a "state instrumentality," a Texas
court of appeals looked to the common meaning of the term instrumentality. See De Santiago v.
W Tex. Cmty. Supervision & Corrs. Dep't, 203 S.W.3d 387, 394 (Tex. App.-El Paso 2006, no
pet.). It defined the term for purposes of the Texas Human Rights Commission Act as a "branch
of the state or a means through which a function of the state is accomplished." Id (citing BLACK'S
LA w DICTIONARY 802 (7th ed. 1999)). Another Texas court of appeals construed "state
instrumentality" under the same act to mean "an entity created pursuant to Texas statutory
authority, and whose purpose includes the performance of public and governmental functions."
Dallas/Fort Worth Int'! Airport Bd v. Funderburk, 188 S.W.3d 233, 237 (Tex. App.-Fort Worth
2006, pet. granted, judgm't vacated w.r.m.).

         However, no cases of which we are aware directly decide whether an FHLB is an agency
or instrumentality of the United States for purposes of the PFIA. Without direct judicial precedent,
a Texas court could look to the Fifth Circuit's recent Smith case and its use ofIRS Ruling 89-49
factors to consider the question. See Smith, 827 F.3d at 417-18. Because of the private ownership,
private management, and private capitalization of an FHLB, only two factors weigh in favor of a
determination that an FHLB is an agency or instrumentality of the United States. A Texas court
utilizing these factors would have a basis to determine that an FHLB is not an agency or
instrumentality of the United States and thus is not within the scope of subsection 2256.009(a)(l). 3

         3
          The federal statute governing FHLBs expressly disclaims the full faith and credit guarantee of the
United States in regard to FHLB obligations. See 12 U.S.C. § 1435. Despite this language, some in the industry
argue that an obligation of an FHLB may be at least implicitly guaranteed as an obligation of the United States. See
generally David Reiss, The Federal Government's Implied Guarantee of Fannie Mae and Freddie Mac's
Obligations: Uncle Sam Will Pick Up the Tab, 42 GA. L. REV. 1019, 1042--43, 1069 (2008) (discussing the implied
guarantee of government-sponsored entities, including FHLBs), Mark J. Flannery and W. Scott Frame, The Federal
Home Loan Bank System: The "Other" Housing GSE, ECONOMIC REVIEW, Third Quarter 2006, at 33, 36.
Nonetheless, the plain language of section 1435 refers to only the United States and not to its agencies or
Mr. Lloyd B. Tisdale - Page 6                         (KP-0128)



Cf Mendrala v. Crown Mortg. Co., 955 F.2d 1132, 1136-38 (7th Cir. 1992) (determining that the
Federal Home Loan Mortgage Corporation was not an agency or instrumentality of the
United States after considering a five-factor test similar to that used in IRS Ruling 89:..49).

         Some evidence suggests that the Legislature amended subsection 2256.009(a)(l) to
expressly include the language "letters of credit" to make clear its intent that the subsection
included "a letter of credit from a Federal Home Loan Bank to serve as collateral for deposit of
public funds." HOUSE RESEARCH 0RG., BILL ANALYSIS, Tex. H.B. 2957, 77th Leg., R.S. (2001).
Though such a statement provides some insight into the Legislature's intent, we hesitate to rely
heavily on this statement to determine whether an FHLB is an "agency or instrumentality" under
the PFIA because the House Research Organization's Bill Analysis is "not an official paii of the
legislative process nor an official expression of the views of the Texas House of Representatives.''
HOUSE RESEARCH ORG., About the HRO, available at http://www.hro.house.state.tx.us (last visited
Oct. 26, 2016). Moreover, the fact that an FHLB letter of credit may be an "eligible security"
under the PFCA is not clear evidence that the Legislature contemplated an FHLB to be an agency
or instrumentality of the United States for purposes of the PFIA. See TEX. Gov'T CODE
§ 2257.002(4)(F).

       Given the lack of key jurisprudence, we cannot predict whether a Texas court would
determine as a matter oflaw that an FHLB is an agency or instrumentality of the United States for
purposes of the PFIA. Thus, we cannot advise you that this proposed transaction complies with
the PFIA or the PFCA.

        In your third question you ask whether the Authority would

                 be fully in compliance with the requirements of the PFIA and the
                 PFCA if it placed $10,000,000 of its funds in a certificate of deposit
                 issued by a depository institution that has its main office or branch
                 office in Texas and is backed by a letter of credit from an agency or
                 instrumentality of the United States, other than [an FHLB], in an
                 amount securing the full deposit and any accrued interest[.]

Request Letter at 8. Besides location, you do not provide us any information about the type of
depository institution at issue here, other than it is not an FHLB. You tell us only that the
depository institution is an agency or instrumentality of the United States, mirroring the language
of the statute. See Request Letter at 8-9. To the extent the depository institution about which you
ask is factually such an agency or instrumentality and is not limited by any governing statute in
guaranteeing its obligations in a manner similar to section 1435, title 12, to the United States Code,
a court would likely determine that a certificate of deposit investment secured by a letter of credit

instrumentalities. Cf 12 U.S.C. § 2279aa-12(a)(2) (expressly disclaiming full faith and credit of certain obligations
of "the United States, or any other agency or instrumentality of the United States"). In the event a court were to
determine an FHLB is an agency or instrumentality of the United States, absent express reference to agencies or
instrumentalities of the United States, this provision might not limit the authority of an agency or instrumentality to
guarantee its own obligations.
Mr. Lloyd B. Tisdale - Page 7                         (KP-0128)



from such entity comports with the statute. Absent more information about the institution,
however, we cannot advise you about the legality of this proposed transaction under the PFIA or
the PFCA.

          You next question whether the Authority would

                 be fully in compliance with the requirements of the PFIA and PFCA
                 if it placed $10,000,000 ofits funds in a certificate of deposit issued
                 by a depository institution that does not have a main or office branch
                 in Texas and is backed by a letter of credit from an agency or
                 instrumentality of the United States in an amount securing the full
                 deposit amount and any accrued interest[.]

Request Letter at 9. Because you inquire about a certificate of deposit, we consider section
2256.010, which is specific to certificate of deposits. "A certificate of deposit or share certificate
is an authorized investment under this subchapter if the certificate is issued by a depository
institution that has its main office or a branch office in this state and is" guaranteed as provided by
subsection 2256.0lO(a)(l)-(3). TEX. Gov'T CODE§ 2256.0lO(a)(l)-(3). As the investment you
describe is not with a depository institution with a main or branch office in Texas, it does not
satisfy the plain language of the first component under section 2256.010. 4 Without this first
component, the analysis does not even reach the question of whether the guaranty or security is
sufficient under subsection 2256.009(a)(4). Thus, a court would likely determine that this
transaction does not comply with the PFIA. As such, we do not consider issues under the PFCA.

          Your final question is whether the Authority would be

                 fully in compliance with the PFIA and the PFCA if it made a
                 $500,000 money market deposit backed by another obligation listed
                 in Section 2256.009(a), such as [an FHLB] letter of credit, to the
                 extent the amount of the deposit and any accrued interest exceed the
                 maximum amount of FDIC insurance[.]

Request Letter at 10. In GA-0834, this office determined that a demand deposit account could be
deemed to be an "other obligation" for purposes of subsection 2256.009(a)(4). See Tex. Att'y Gen.
Op. No. GA-0834 (2011) at 1. The transaction at issue in Opinion GA-0834 involved an amount
within the insurance limit of the FDIC. The issue here is whether a deposit of public funds in an
amount over the federally insured amount of $250,000 can be an investment under subsection
2256.009(a)(4) where the excess amount is "backed by another authorized entity or obligation of
such entity" in subsection 2256.009(a)(4). Request Letter at 10.

       In addition to "obligations that are fully guaranteed or insured by the [FDIC]," subsection
2256.009(a)(4) includes "other obligations, the principal and interest of which are unconditionally
guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or

          4 Because   we conclude that it does not meet the first component, we do not address whether it meets the
second.
Mr. Lloyd B. Tisdale - Page 8                 (KP-0128)



their respective agencies and instrumentalities." TEX. Gov'T CODE§ 2256.009(a)(4). The PFCA
sets the amount of the required "total value of eligible security." Id. § 2257.022(a). It does not
expressly require the collateral amount to be held in a singular type of security. Thus, a court
would likely agree that amounts in excess of the FDIC minimum insurance could be secured or
collateralized by other eligible securities. But again, without more factual information about the
other entities or obligations about which you ask, we cannot determine whether this transaction
complies with the PFIA. If, 'factually, the security is in a sufficient amount for the excess, and is
fully guaranteed by the United States or its agencies or instrumentalities, and does not otherwise
have a limitation akin to section 1432, title 12, to the United States Code, it is consistent with the
language of subsection 2256.009(a)(4 ).
Mr. Lloyd B. Tisdale - Page 9                 (KP-0128)



                                      SUMMARY

                       Consistent with Texas Attorney General Opinion GA-0834
               (2011 ), a court could conclude that a time deposit account fully
               insured by the Federal Deposit Insurance Corporation is within the
               scope of an "other obligation" under Government Code subsection
               2256.009(a)(4).

                       Given the varied state of the relevant jurisprudence, we
               cannot predict whether a Texas court would determine as a matter
               of law that a federal home loan bank is an agency or instrumentality
               of the United States within the scope of Goveniment Code
               subsection 2256.009(a)(l ).

                       To the extent a depository institution is an agency or
               instrumentality of the United States and is not otherwise limited by
               any governing statute in guaranteeing its obligations in a manner
               similar to section 1435, title 12, United States Code, a court would
               likely determine that a certificate of deposit investment secured by
               a letter of credit from such entity comports with subsection
               2256.009(a)(l) of the Government Code.

                        Under Government Code subsection 2256.0lO(a)(l)-(3), a
               deposit of funds in a certificate of deposit must be to a depository
               institution that has its main office or a branch office in this State.

                      A court would likely conclude that a money market deposit,
               in an amount exceeding the amount of FDIC insurance could be
               secured by another obligation in Government Code subsection
               2256.009(a)(4).

                                              Very truly yours,




                                              KEN PAXTON
                                              Attorney General of Texas



JEFFREY C. MATEER
First Assistant Attorney General
Mr. Lloyd B. Tisdale - Page 10            (KP-0128)



BRANTLEY STARR
Deputy First Assistant Attorney General

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

CHARLOTTE M. HARPER
Assistant Attorney General, Opinion Committee
