                                   The Attorney          General of Texas
                                                     March 28, 1986
   JIM MATTOX
   Attorney General



   Supreme Court Building          Mr. WilliamN. Kifby                 OpinionNo. JM-460
   P. 0. Box 12548                 colmtliseioner
                                               of Education
   Austin. TX. 78711-2548
   512/47,2501
                                   Texas EducationAgency               Re: Effect of refunding those
   Telex 9101874.1387              1701 N. CongressAvenue              bonds originallyguaranteedunder
   Telecopier    51214750288       Austin.Texas 78701                  the Texas Bond GuaranteeProgram

   714 Jackson,    Suite 700       Dear Mr. Kirby:
   Dallas, TX. 752024508
   214/742-8944                        Your letter requestingsn opinionof this office reads in part:

                                               The Texas bond guarantee program was esta-
   4824 Alberta Ave.. Suite 160
                                            blished in 1983 pursuantto the provisionsof the
   Et Paso, TX. 799052793
   915i533-3464
                                            Constitutionof Texas, articleVII, section5, and
                                            the enabling statute, Texas Education Code,
                                            section 20.901 et seq. Through this program the
“‘Ii    Texas,    Suite 700                 bond i~,suesof local school districtsare secured
     msto”, TX. 77002.3111                  by the corpus and income of the PermanentSchool
   713n23eaS
                                            Fund. This guarantee results in better bond
                                            ratingsand lower interestrates for Texas school
   506 Broadway, Suite 312                  districts. Since its inception,218 bond issues
   Lubbock. TX. 794063479                   worth $1.250.505.000have been guaranteed. We
   W&747-5233                               estimate that the guarantee program already has
                                            saved Texas school districtsand their taxpayers
   4309 N. Tenth. Suite B                   millious of dollars. At present, 25 districts
   McAllen, TX. 78501-1885                  have psuding applicationsfor the guarantee of
   51218824547                              bonds worth $122,480.000.

   200 Main Plaza, Suite 400
                                               . . . .
   San Antonio,    TX. 792052797
   512r225-4191                                In the past year, 33 bond issues guaranteedby
                                            the PermanentSchool Fund have been defeased and
                                            refundedpursuantto Texas Revised Civil Statutes
   An Equal Opportunity/
   Affirmative Action Employer
                                            Annotated.article 717k, or Texas EducationCode,
                                            section,20.05. These refunded bonds are in the
                                            principalauountof about $336,010,000.

                                               The questionhas arisenwhether such bonds that
                                            have been fully defeased and refunded are still
                                            guaranteedby the PermanentSchool Fund. If full
                                            provls~~onhas been made for the papnent of the
                                            bonds uo that they are no longer consideredout-
                                            8tandir.gfor purposes of the guarantee,then the
                                            securities currently pledged to their payment


                                                             p. 2104
Mr. WilliamN. Kirby - Page 2   (JM-460)




         pursuant to the guaranteecould be reallocatedto
         guarantee pending applicationsfrom other dis-
         tricts. This resultwould allow us to reinstitute
         the guarantee program ou a limited basis, thus
         producing addlt:tonalsavings for Texas school
         districtsand 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 UndertakingsIl. at 4.. Public bonds issued by states and their
political subdivisions constitute contracts within constitutional
provisions prohibiting l.arrimpairing the obligation of contract.
U.S. Const. art. I, 510; TIXK.Coast. art. I. 116; DetermanV. 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., renderedvoid
and of uo effect by anothw instrument. Sea BlacELaw      Dictionary,
376 (5th cd. 1979). -Cf. .-
                          C:ttyof HcAllea~Daniel, 211 S.W.2d 944,
947-48 (Tex. 1948).

     "Refunding"has been defined as a replacementof one obligation
with another,includingth,zsellingof new securitiesfor the purpose
of redeemingthose outstareitng.    See 64 Am. Jur. 2d Public Securities
and Obligations5261, at 295. Thzited authorityalso asserts that
refundingbonds are not or.lpobligationsin themselvesfor what they
purport to be on their face and under the statutespursuant to which
they are issued, but are authorizedextensionsand continuationsof
the obligationsrepresentrrd     by the bonds refunded; that refunding
bonds do not create new i.cbtbut merely continue an existing debt.
Id. 1267, at 301.
-
    As you note, articleVII, section5 of the Texas Constitutionwas
amendedin 1983 to provide:

             (b) The legislatureby law may provide for
          using the permanent school fund and the income
          from the permeue~~t
                            school Tund to guaranteebonds
          issuedby schoold.istricts.

     Anticipating adoption of the constitutionalamendment, the
legislaturein 1983 enacted statutory provisions to Implement the
new authority- statuteswhi.chare now codifiedas subchapterE of the




     1. Subsection(a) of that constitutionalprovision establishes
as the permanentschool fund "[tlhe principalof all bonds and other
funds, and the principalarising from the sale of lands hereinbefore
set apart to said school fund," and establishesas the available
school fund (to be appliedtwuu~.lly
                                  to the supportof the publfc free
schools) "all the interesi:derivable therefromand the taxes herein
authorizedand levied."


                               p. 2105
Mr.   WilliamN. Kirby - Page 3 (JM-460)




                       See Acts 1983, 68th Leg., ch. 154, at 671.
Texas Education Code. --.
Section 20.902 of the Edumtion Code provides that upon approvalby
the commissionerof educazion."bonds Issued under SubchapterA of
this chapter [chapter201,' includingrefundingbonds" are guaranteed
by the PermanentSchool Fund. Section20.903(a)statesthat

           [tlhe commissiov~rmay not approve bonds for
           guarantee if the approval would result In the
           total amount of outstanding guaranteed bonds
           exceedingan amount equal to two times the cost
           value or market value, whichever is less, of the
           permanent scho,,:tfund, exclusive of real
           estate. . . . (Emphasisadded).

That limitationhas promptlrd
                           your question.

    Tou accompaniedyour request for an opinion with information
pertainingto a particularmethod 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 originalbonds 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
           intereston the hcmds. Section20.01 of the Texas
           EducationCode.

              By reason of the refunding,the originalbonds
           are no longer psgable from ad valoram taxation,
           but are payable :?romthe principalof and interest
           on the direct obligationsof the United States
           government purchased with the proceeds of the
           refundingbonds and other moneys belongingto the
           schooldistricts (whichhave been depositedunder
           the escrowagreementto which referenceis made in
           the statute).




     2. SubchapterA of chapter20 of the EducationCoda, consisting
of sections 20.01 through 20.06, concerns school district tax bonds
and maintenancetaxes. Section 20.01 authorizesschool districtsto
issue negotiablecoupon 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 issuanceof refundingbonds
payable from ad valoram taxes "to refund or refinanceall or any part
of any district'soutstani&ngbonds" without an electionunless the
Texas Constitutionrequiresone.

                             p. 2106
Mr. WilliamN. Kirby - Page 4   (JM-460)




     Section20.05 of the UducationCode is part of subchapterA, the
subchapter which concerns the tar bonds that nay be guaranteed
accordingto subchapterE'. Under it, refundingbonds may be delivered
to the present bondholders in exchange for the old bonds to be
refunded,or they nay be so:Ldfor cash with which to pay off the old
bonds in full (principaltnd interest to maturity) or to redeem the
old bonds before maturity (Iprincipaland interest to the redemption
data, plus any redemptionPremium). Or if money is availabletherefor
from other sources, outstaudingbonds way be paid off or redeemed
without issuingrefundingbonds.

     Subsections(g) and (h) of section20.05, SubchapterA, providea
method for paying off or redeemingbonds:

            (g) To refund, bonds or to pay or redeem bonds
         in whole or in part without issuing refunding
         bonds, the governingboard or cosmissionerscourt
         way deposit directly with the paying agent the
         proceeds from thatsale of refundingbonds or any
         other available Cunds or resources. The deposit
         must be In an amount sufficient,after taking into
         accountboth the principaland interestto accrue
         on the assets of tmy escrow account createdunder
         Subsection(h) of this section,to providefor the
         payment or redeulptioa of the bonds and assumed
         obligationsthat are to be refundedor to be paid
         or redeemed. Thr deposit constitutesthe waking
         of firm banking~~d financialarrangementsfor the
         dischargeand f&l payment or redemptionof the
         bonds being refuuzed.
                          --   (Emphasisadded.)

             (h) The governingboard or commissionerscourt
                            escrow or a similar *greentent
         may enter into 1.11.
         with the paying agent with respect to the safe-
         keeping,investment,reinvestment.administration,
         or dispositiono:ithe deposits,but the deposits
         may be invested and reinvested only in direct
         obligations of ,the United States, including
         obligationsthe principalof and Intereston which
         are unconditionr.l,ly guaranteed by the United
         States and that nature or beer interestpayableat
         times and In amountssufficientto provide for the
         scheduledpaymentor redemptionof the bonds. The
         governingboard or cosmissionerscourt shall enter
         into an appropriateescrow or a similaragreement
         if any of the bends are scheduledto be paid or
         redeemedon a daxe later than the next succeeding
         scheduledinterestpayneatdate.

Subsection(i), expresslystates:



                           p. 2107
Mr. WilliamN. 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 refundedbwds are consideredto be defcased
         and may not be licludedin or consideredto bc an
         indebtednessof &e districtfor the purpose of a
         limitationon oui%taudingindebtednessor taxation
         for any other pul:)ose.(Empbasfsadded).

The foregoingprovisions,all found in subchapterA, were added by
Acts 1983, Sixty-eighthLel:J.slature,
                                    chapter256, page 1142, effective
May 27. 1983. Subchapter E, which concerns the constitutionally
authorizedguarantee,does uot containsimilarlanguage. SubchapterE
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 paymentwil:.deprivethe underlyingbonds (the bonds to
be refunded)of any subsectfonE guaranteethat might have originally
protected them, even though the underlying bonds have not been
actually surrenderedby tb,eholders thereof and cancelled. In other
words, would the underlying“refunded”bonds continue to constitute
“outstandingguaranteedbon’ds”for purposes of the section 20.903(a)
limitation?

     Section20.902 of subchapterE providesthat upon approvalby the
commissioner,“bonds Issued under SubchapterA of this chapter, in-
cluding refundingbonds, ere guaranteedby the corpus and incomeof
thenpermsnent school fun&”     (Emphasis added). The provision is
ambiguous because the emphasized words could have either of two
meanings.“Bonds issued,” includingrefundingbonds, could mean that
the holders of new bondds issued to refund current bonds could
themselves be the beaefic:Laries  of the constitutionally-permitted
guaranteeif the commissionerapproved. Or, those words could mean
that the holders of origiDa1bonds so guaranteedare to be protected
by the guaranteeso long as:the school districtremains obligatedto
them, even If the originalbonds are “refunded,”i.e., even though the
original obligationsare extended and continuedby the “refunding”
device.

     An uncodifiedportion of the act adding subchapterE to chapter
20 of the EducationCode helps resolve the ambiguity. Section 2 of
Acts 1983, Sixty-eighthLegislature
                                 , chapter154, page 675, states:

         In accordancewith the provisionsof this Act, the
         commissionerof ciducation
                                 may approvefor guarantee
         any eligiblebonds issued after the effectivedate
         of this Act, in,<Ludingrefundingbonds for bonds
         issued or sold tzfore the effective date of this
         Act. (Emphasisi.dded)
         -                  ~..



                               p. 2108
Mr.   WilliamN. Kirby - Pagf,6     (~~-460)




IIIour opinion,this passage demonstratesa legislativeunderstanding
that the commissionerwill separatelyapprove original and refunding
bonds for participationin the guarantee program. Such an intent,
while not necessarilyincmsistent with the idea that the guarantee
survives the "refunding" of guaranteed bonds, does denigrate the
argumant that by using the!words, "includingrefundingbonds", in
section20.902,the legislatureaxpresslyso provided.

     The "refunding" scheme of subsections (g) and (h) of section
20.05, when coupled with the subsection (i) provision, allows the
complete substitutionof t,hesecurity originallybargained for. As
                                          , the originalbonds are no
you have noted, by reasou af such refunding
longer payable from ad valoram taxation, but are payable from the
principaland intereston the direct obligationsof the United States
purchasedwith moneys deposited in escrow for that purpose. Gener-
ally, where the resourcefcr the payment of bonds is the taxing power
of a politicalsubdivisionas it existedwhen the bonds were issued,
any law which withdraws or limits such .powerand leaves no adequate
means for payment of the b'ondsis forbiddanby constitutionalpro-
visions protectingthe obli.gation of contract. Mobile v. Watson, 116
U.S. 289, 305 (1886). Whether a substitutedmeans of payment is
"adequate"is another question,see Shapleighv. City of San Angelo,
167 U.S. 646. 657 (1897),bwt we=d    not addressit here.

     The question of "adeqmcy" is not controllinghere because the
substitutionof security,qahateverits "adequacy,"cannot constitute
an impairmentof the obligationof contractif the right to make such
substitutionwas a part of the original contractbetween the school
district and the bondholders.' The holders of the bonds took them
with the rights guaranteednnd defined by the statutesin effect at
the time of their issuance.and those statutesbecame 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.:ld265, 266 (Tax. 1932)FCf.
                                                    -   Norton v.
Kleberg County,231 S.W.2d "1.6,718 (Tax. 1950).

     The provisionsof subeections(g), (h), and (i) of subchapterA
and those of subchapterE wcze anactedduring the same sessionof the
legislature. They are in mri materia and are to be read together,
oue with referenceto thF;her, as though embodiedin a single act.
See 53 Tax. Jur. 2d Statutes05186. 188, at 280, 286. In that light,
rhc "guarantee"provisionsTE subchapterE were anacted in contespla-
tlou of the "refunding"prcavisions of subchapterA; and the require-
ment of section 20.903 thaz the total amount of outstandingguaran-
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 languageof section20.05, subsection(i), statingthat if a


     3. We understandthat all the bonds to be "refunded"here were
issued after the effectivedates of the constitutionalamendmantand
the 1983 legislation.This opinionis limitedto those circumstances.


                                 p. 2109
     Mr.   WilliamN. Kirby - Pago 7 (JM-460)




     "refunding"escrow agreementas describedhas been entered into, the
     refunded bonds are to be consideredto be defeased and may not be
     includedin or consideredto be an indebtednessof the district"for
     the purposeof a limitationon outstandingIndebtednessor taxation-or
     for any other purpose." (Lmphasisadded).

          The language of the other statute authorizing a similar
     "refunding"mechanism,artLcle 717k, V.T.C.S., is not so strong,but
     when its provisionsare analysed,the effect is the same. Section 7
     of article 717k provides !:hatwhen a deposit of funds in sufficient
     amounthas been depositedvith the state treasurerin accordancewith
     the statute,the deposit

                shall constitutethe making of firm banking and
                financialarrangementsfor the dischargeand final
                payment or redemption of the obligationsbeing
                refunded.

     This languagewas added to the statute in 1969, effectiveJune 14,
     1969. See Acts 1969, 61st Leg., ch. 783, at 2316. Section 7A of
     articlemk, which providesfor an escrow arrangementsimilarto that
     describedin subsection(1,)of section 20.05 of the EducationCode,
     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, effectiveJune 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"judicialgloss with respect to refundingbonds. See City of
     McAllen V. Daniel, 211 S.W.:!d944, 947 (Tex. 1948). Absenzsrepre-
     sentationor unconscionablebehavior on the part of government,so
     long as the bonds to be Irefundedpursuant to the mechanism of a
     particularprovisionwere ::ssuedsubsequentto the date the provision
     became applicableto such bonds, the mechanismmay be utilizedvithout
     impairingthe obligationof the bonds because the statutoryprovision
     became a part of the contra,ct
                                  when the bonds were issued.

          We have not been furnished the agreements involved, but no
     suggestionhas been made th,atthe terms of the statutesor the bonds
     are materiallymisleadingto the investingpublic. 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,dTrust 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
     districtad valorembonds which incorporatedthe provisionsof section
     20.05 of the EducationCode as amanded in 1983, or the4provlsionsof
     article717k, V.T.C.S., section7A, as amendedin 1985, at the time

,-
          .  As amanded in 1969. for refundingaccomplishedpursuant to
     section7 of article717k.


                                    p. 2110
Mr. WilliamN. Kirby - Page!8    (JM-460)




they were issued,may be rc!f:unded
                                 pursuantto those provisionswithout
impairingthe obligationof the bonds, and when such refundinghas
been accomplishedpursuant to the statutorymachanism,the refunded
bonds no longer constitute"outstandingguaranteedbonds" within the
meaning of section20.903of the EducationCode limitingthe amount of
bonds which may be guarantcled
                             by the permanentschool fund.

                             SUMMARY

             School districtad valorem bonds incorporating
          the provisionsof statutesrespectingrefundingof
          the bonds may be refundedpursuanttheretowithout
          impairing the obligationof the bonds, assuming
          the investingpublic has not been misled. When
          such refundinghas been accomplished,the refunded
          bonds no longer constitute"outstandingguaranteed
          bonds" within thatmeaning of the statute limiting
          the amount of bonds which may be guaranteedby the
          permanentschool fund.


                                         Very ruly yours

                                         Lt /+lztQ
                                         JIM
                                              A
                                                MATTOX
                                         AttorneyGeneralof Texas

JACKHIGRTOWER
First AssistantAttorney   Gtmaral

MARYKRLLRR
ExecutiveAssistantAttorncby
                          General

ROBERT GRAY
SpecialAssistantAttorneyGeneral

RICK GILPIN
Chairman,OpinionCommittee:

Preparedby Bruce Youngbloc,d
AssistantAttorneyGaneral




                               p. 2111
