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                                                  The Attorney           General of Texas
                                                                  April 8, 1983
    JIM MATTOX
    Attorney General


                                                 Honorable Henry Wade                 Opinion No. JM-23
    Supreme      Court Building
                                                 District Attorney
    P. 0. BOX 12546
    Austin,    TX. 76711.     2546
                                                 601 Elm Street                       Re:   Use of repurchase agree-
    5121475-2501                                 Dallas, Texas   75202                ments for short term investment
    Telex    9101674.1367                                                             of county funds
    Telecopier      5121475.0266
                                                 Dear Mr. Wade:
    1607 Main St.. Suite 1400
    Dallas. TX. 75201-4709                            You ask whether Dallas County may utilize "repurchase agreements"
    2141742-6944                                 for short term investments of idle county funds. Your letter defines
                                                 a repurchase agreement as "an agreement   for the sale of a specified
                                                 security to a county for a specified time at a specified rate of
    4624 Alberta           Ave.. Suite     160
    El Paso. TX.           79905-2793
                                                 interest [with a provision that at] the maturity or due date, the
    915/533-3464                                 seller automatically repurchases the specified security."
P
                                                      An in-depth explanation of the nature of a repurchase transaction
    1220    Dallas        Ave.,   Suite   202
    Houston.     TX.         77002.6966
                                                 is found in Securities and Exchange Commission v. Miller, 495 F.Supp.
    7131650-0666                                 465 (s.D.N.Y. 1980). Although it is in the form of a sale, a
                                                 repurchase agreement is essentially a short-term collateralized loan.
                                                 See Matter of Legel. Braswell Government Securities Corporation, 648
    SO6 Broadway.             Suite 312          gd   321 (5th Cir. 1981). Cf. First National Bank of Las Vegas, New
    Lubbock.  TX.            79401-3479
                                                 Mexico v. Estate of Russell. 657 F.2d 668 (5th Cir. 1981). In
    6061747-5236
                                                 essence. the county
                                                                   . expects
                                                                       .     to advance cash to a financial institution
                                                 that will then be obligated to return the cash to the county, plus an
    4309 N. Tenth.     Suite 6                   additional amount as interest, at a specified time. At the time the
    McAllen.     TX. 76501-1665                  money is advanced, government  securities of a value equal or nearly
    5121682.4547
                                                 equal to the amount advanced will be "sold" to the county by the
                                                 financial institution and later "resold" by the county to the bank in
    200 Main Plaza, Suite 400                    return for repayment of the sum advanced (plus interest).
    San Antonio.  TX. 76205.2797
    5121225-4191                                      The law is settled that a county may only do that which the
                                                 constitution and statutes expressly or impliedlv authorize it to do.
     An Equal           Opportunity/             Canales v. Laughlin, 214 S.W.2d 451, 453 (Tei. 1948); Anderson v.
     Affirmative          Action     Employer    Wood, 152 S.W.2d 1084, 1085 (Tex. 1941). Thus. the threshold question
                                                 is whether any statute authorizes Dallas County to utilize the
                                                 repurchase agreement that you have described. The only statute found
                                                 that arguably applies is article 2549, V.T.C.S., subsection (c) of
                                                 which reads:

                                                              (c) Unless expressly prohibited by law or
                                                           unless it is in contravention of any depository
                                                           contract between a county and any depository bank,




                                                                             p. 101
Honorable Henry Wade - Page 2   (JM-23)




          the Commissioners Court may     direct   the county
          treasurer to:

             (1) withdraw any amount of funds of the county
          that are deposited in a county depository and that
          are not required immediately to pay obligations of
          the county or required to be kept on deposit under
          the terms of the depository contract; and

             (2) invest    those funds  in  direct   debt
          securities of    the United States.   (Emphasis
          added).

     Does a "buyer" in a repurchase transaction "invest" funds in
securities of the United States? In Fithel v. Saltes, 11 S.W.2d 815
(Tex. Civ. App. - Galveston 1928, writ ref'd), the "sale" and
"repurchase" of a partnership interest was deemed a security
arrangement rather than a bona fide transfer of the business. In
Texas, the nature of a transaction is determined by its substance, not
its form. Notwithstanding the terminology used by the parties, we
believe the described "repurchase" transaction is a loan of money
secured by government securities rather than an investment in such
securities.

     In view of our conclusion that neither article 2549 nor any other
statute authorizes the proposed transaction, we need not determine
whether   a   statute   allowing   such   a   transaction would     be
constitutionally valid.   See Tex. Const., art. III, 052; Brazoria
County v. Perq, 537 S.W.2d9     (Tex. Civ. App. - Houston [lst Dist.]
1976, no writ) (prohibition against lending the credit of the state or
any political subdivision thereof). Cf. Lina v. Eastland County, 39
S.W.2d 599 (Tex. Comm'n App. 1931, holding approved); State ex rel.
Graham v. City of Olympia, 80 Wash.2d 672, 497 P.2d 924 (1972); Valley
National Bank of Phoenix v. First National Bank of Holbrook, 83 Aria.
286, 320 P.2d 689 (1958); Bannock County v. Citizens' Bank 6 Trust
Company, 53 Idaho 159, 22 P.2d 674 (1933).

     Our attention has been drawn to the recent case of Bathe Halsey
Stuart Shields, Incorporated v. University of Houston, 638 S.W.2d 920
(Tex. App. - Houston [lst Dist.] 1982, writ ref'd n.r.e.), in which it
was held that an obligation undertaken by the university to sell and
then repurchase securities under a repurchase agreement did not
constitute a prohibited "debt" within the meaning of article III.
section 49 of the Texas Constitution. We do not think the holdings of
the court on the questions that were before it control the result
here.

     A transaction may create a debt in the ordinary sense -- &,    an
obligation to repay -- without creating a "debt" in the constitutional
sense because the Texas Constitution classifies as debts only those
obligations not expected by the parties to be repaid from current



                                p. 102
Honorable Henry Wade - Page 3   (JM-23)




revenues or from some fund already on hand. See Charles Scribner's
Sons v. Marrs, 262 S.W. 722, 725 (Tex. 1924); McNeil1 v. City of Waco,
33 S.W. 322 (Tex. 1895). The University of Houston court concluded
that the repurchase transaction at issue there generated funds from
which the university expected to discharge its obligation, and
observed:

          all that is needed to avoid characterization as a
          debt   [in the constitutional sense] is an
          expectation that the obligation will or can be
          paid with current revenues or revenues created by
          the transaction.

638 S.W.2d. at 925. The court's determination that such a transaction
does not create a debt in the constitutional sense is not inconsistent
with the conclusion of other courts that it is a collateralized loan
transaction.

     The University of Houston opinion focused on the authority of the
university to sell, that is borrow against, government securities it
already owned. The court's attention was not directed to situations
where a public agency for the first time acquires possession of a
security as part of a repurchase agreement. It said a repurchase
agreement "is a reacquisition of an original investment and is.
therefore, an investment agreement involving government securities."
638 S.W.2d, at 926. Furthermore, it described repurchase agreements
as an "investment tool. . . consonant with the very general plenary
investment powers given the University." (Emphasis added). Id. In
the context of that case (from the seller's point of viewrboth
statements are accurate. Since the authority to borrow, however, may
exist whether or not there is any authority to invest, the
determination of the 'ipowerto invest" question was immaterial to the
outcome of the case.     The court's discussion of the ooint is not
authoritative precedent. See Southern Union Life Insurance Company v.
White, 188 S.W. 266, 268 (Tex. 1916) (effect of dicta).

     In our opinion, the "buyer" in a repurchase transaction invests
in the evidence of indebtedness (the repurchase agreement) and not in




     1. Compare V.T.C.S. art. 2549(c) ("in direct debt securities of
the United States") with V.T.C.S. art. 6252-5a ("in direct obligations
       or in certificate of deposit . . . secured by a pledge of
se&rities of the kind heretofore specified"). Taking out loans to
obtain cash with which to make investments in government securities is
certainly consonant with the possession of investment powers, but such
undertakings are not themselves investments. Borrowing does not
constitute- "investing." See Laurie v. Miller, 45 S.W.2d 172 (Tex.
Comm'n App. 1932, holding approved).




                                p. 103
Honorable Henry Wade - Page 4      (JM-23)




                                                                     2
the securities temporarily surrendered to secure the indebtedness.
See Sims v. Russell, 236 Ala. 562, 183 So. 862. 864 (1938) (investment
oftrust funds in loans secured by bond and mortgage on realty is not
an investment in realty). For that reason, we advise that Dallas
County may not legally utilize repurchase agreements for short term
investments of idle county funds.

                                SUMMARY

             Dallas   County   may  not   legally  utilize
          repurchase agreements for short term investments
          of idle county funds.


                                          -&j&l-&
                                                   MATTOX
                                           Attorney General of Texas



TOM GREEN
First Assistant Attorney General

DAVID R. RICHARDS
Executive Assistant Attorney General

Prepared by Bruce Youngblood
Assistant Attorney General

APPROVED:
OPINION COMMITTEE

Susan L. Garrison, Chairman
Jon Bible
Rick Gilpin
Jim Moellinger
Nancy Sutton
Bruce Youngblood




     2. If the "buyer" disposes of the security in the interim and
gambles on replacing it later he has not made an investment in the
security disposed of or later acquired. He has merely engaged in
speculative trading of "futures." See Hopper v. Tancil, 3 S.W.2d 67,
70 (Tex. Comm'n App. 1928, judgmt adopted) (speculation).




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