                                THE   ATTORNEY             GEXERAL
                                          OF    TEXAS


                                            May 26. 1987
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A-Ey          0RSWRa.L

                  Honorable Ray Parabee                 Opinion No. JM-709
                  Co-Chairman
                  Joint Special Committee on            Re: Constitutionality of proposed
                     Cogeneration                       statute authorizing state agencies
                  Texas State Senate                    to contract for the installation,
                  P. 0. Box 12068                       operation and financing of co-
                  Austin, Texas   78711                 generation units

                  Honorable James E. (Pete) Laney
                  Co-Chairman
                  Joint Special Committee on
                     Cogeneration
                  Texas House of Representatives
                  P. 0. Box 2910
                  Austin, Texas   78769

                   Gentlemen:

                        As Co-Chairmen of the Joint Special Committee on Cogeneration,
                   you ask whether article III, section 49, of the Texas Constitution
                   prohibits contracts between state agencies and third-party vendors for
                   the installation, operation, and financing of cogeneration units to be
                   repaid over a period of years from energy savings. You indicate that
                   the coemittee intends to recommend legislation authorizing state
                   agencies to enter into such contracts. Your concern is that article
                   III, section 49, a section that prohibits the state from creating debt
                   or authorizing the creation of debt on behalf of the state, prevents
                   such contracts.

                         Section 49 of article III provides:

                                No debt shall be created by or on behalf of the
                             State, except to supply casual deficiencies of
                             revenue, repel invasion, suppress insurrection.
                             defend the State in war, or pay existing debt; and
                             the debt created to supply deficiencies in the
                             revenue, shall never exceed in the aggregate at
                             any one time two hundred thousand dollars.

                   Tex. Const. art. III, 549. A history of controversy surrounds this
                   provision. See generally Attorney General Opinion JR-666 (1987). It
                   is not necessary to repeat that history in detail here.

                        The Texas Supreme Court has consistently upheld methods of
                   avoiding this constitutional prohibition which involve the issuance of



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Honorable Ray Farabee
Honorable James E. (Pete) Laney
Page 2    (a-l-709)




bonds that are not secured by the full faith and credit of the state.
For example, in Texas National Guard Armory Board v. McGraw, 126
S.W.2d 627 (Tex. 1939). the court upheld the creation of an authority
to issue bonds to acquire buildings to be leased to the state for a
rental amount adequate to maintain the buildings, to pay the interest
on the bonds, and to eventually retire the bonds. In the Armory Board
case, the court relied on the fact that the whole process depended
upon the execution of a new lease every two years. Without an
"optional" two-year renewal, the state would be obligated beyond
current revenues, see Tex. Const. art. VIII, 56, and would therefore
be in violation ofarticle III, section 49. See Armory Board, 126
S.W.2d at 634-35. In Texas Turnpike Authority vxhepperd,    279 S.W.Zd
302 (Tex. 1955). the court upheld the creation of a turnpike authority
to finance a highway system by issuing bonds payable solely from
highway tolls and concessions.      Even if highway revenues were
insufficient to retire the bonds, bondholders had no recourse against
the credit of the state. 279 S.W.2d at 305. The court relied on the
Armory Board case and determined that this financing plan did not
create a debt in violation of article III, section 49. of the Texas
Constitution. See 279 S.W.Zd at 304.        In Texas Public Building
Authority v. Mat=,   686 S.W.Zd 924, 928 (Tex. 1985). the court again
relied on the Armory Board case.       The court upheld legislation
creating an agency to issue and sell bonds to finance the acquisition,
construction, and improvement of buildings used by state agencies.
The principal and interest on the bonds were to be repaid by pledging
all or part of the designated rents, issues, and profits from leasing
a building to the state or by obtaining funds from any other lawful
source. The court held that the act did not create a debt of the
state. 686 S.W.Zd at 928.

     You have not submitted to this office specific proposed legisla-
tion outlining the essential terms that the proposed cogeneration
contracts would include. So long as such legislation and contracts
executed pursuant to the legislation comply with the guidelines set
forth in the Building Authority case, Texas courts would not find the
legislation invalid under section 49 of article III. The situation
presented by your request is somewhat different than that presented in
the Armory Board case and its progeny. In these cases, legislation
created an agency to issue bonds to finance certain projects. Your
request involves a contract with a private party to build cogeneration
units. Application of the principles announced by the Texas Supreme
Court to your situation would require that the private party agree
that its recourse is not against the credit of the state.

     You indicate that the contemplated legislation would authorize
contracts for the private construction, operation, and maintenance of
cogeneration units for which a state agency would pay an amount of
money over a period of years, based on a percentage of the amount of
money operation of the unit saved the agency. You indicate that
payment would continue until an amount determined by the contract had
been paid. Some contracts may require payment for less than five



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Honorable Ray Farabee
EIonorable($smgsgF.(Pete) Lauey
Page 3      -




years, others may require payment for more than seven years. In w
of Tyler v. L.L. Jester 6 Co., 78 S.W.    1058, 1062 (Tax. 1904), the
Texas Supreme Court held that a contract for the delivery of water for
a number of years did not create an unconstitutional debt of the city
because the liability of the city arose only upon the city’s    use of
water during each year. In Charles Scribner's Sons v. Marrs, 262 S.W.
722 (Tex. 1924), the supreme court upheld a contract between the State
Textbook Commission and a private party to purchase books for five
years because the state's obligation was not to buy a fixed number of
books over five years but to buy only the number of books needed in
any given year, to be purchased out of the current fund for that year.
In City of Big Spring v. Board of Control, 404 S.W.Zd 810 (Tex. 1966),
the supreme court considered an agreement by the city to furnish a
state hospital with water "as long as the State of Texas shall in good
faith retain and operate said hospital on said site." The court
upheld the contract. See 404 S.W.Zd at 814-15. This office has
considered previously theexpress language that contracts must contain
in order to comply with article III, section 49, of the Texas
Constitution. See, e.g., Attorney General Opinions M-656 (1970);
M-253 (1968). Without specific legislation to review, however, it is
impossible to determine conclusively whether the contemplated
contracts violate article III, section 49, or other constitutional
provisions.

                             SUMMARY

               Legislation authorizing state agencies to
          enter into contracts with third-party vendors
          for the installation, operation, and financing
          of cogeneration units to be repaid from energy
          savings that follows the guidelines in Texas
          Public Building Authority v. Mattox, 686 S.W.Zd
          924 (Tex. 1985) and Charles Scribner's Sons V.
          Mars, 262 S.W. 722 (Tex. 1924). would not create
          ZZdebr in violation of article III. section 49, of
          the Texas Constitution.




                                       Attorney General of Texas

JACK HIGWTOWER
First Assistant Attorney General

MARY KELLER
Executive Assistant Attorney General




                            p. 3279
Honorable Ray Farabee
Honorable James E. (Pete) Laney
Page 4   (JM-709)




JUDGE ZOLLIE STRAKLET
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Jennifer Riggs
Assistant Attorney General




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