                               ATTORNEY GENERAL OF TEXAS
                                             GREG        ABBOTT




                                                  March 14.2011



Ms. Gail Lowe, Chair                                    Opinion No. GA-0848
State Board of Education
1701 North Congress Avenue                              Re: Whether the State Board of Education may
Austin, Texas 78701-1494                                contract to pay attorney fees out of the corpus of the
                                                        Permanent School Fund without an appropriation
                                                        specifically for that purpose (RQ-0920-GA)

Dear Ms. Lowe:

         You ask whether the State Board of Education (the "Board") may contract to pay attorney
fees out of amounts recovered for the Permanent School Fund (the "PSF") without an appropriation
specifically for that purpose and, if so, whether the Board may contract to pay a contingency fee
without following the process provided in chapter 2254 of the Government Code. 1 As you explain,
the Board is responsible for investing and managing the PSF. Request Letter, supra note 1, at 1-3;
see also TEX. CONST. art. VII, §§ 2,4,5 (establishing the PSF, authorizing the Board to direct the
investment of proceeds in the PSF, and providing for the use, distribution, management, and
investment of assets in the PSF). Your fiduciary counsel has advised "that ascertaining whether [the
Board has1suffered an economic loss, as a result of the decline in value of assets it currently holds
or in the past held, caused by improper action or inaction of a third party, is a proper and necessary
part of discharging its fiduciary duty in monitoring and overseeing its assets." Request Letter, supra
note 1, at 2. You contemplate directing your fiduciary counsel to evaluate potential claims and,
where appropriate, the Board would contract with outside counsel to pursue litigation to recover
amounts due to the PSF. Id. You wish to know if the Board is authorized to contract to pay for such
legal services out of any amounts recovered, without a specific legislative appropriation for that
purpose. Id. You also wish to know if the Board is authorized to agree to pay such attorney fees on
a contingency basis without following the procedures provided in chapter 2254 of the Government
Code. Id. at 3.'

       An administrative agency such as the Board has only those powers expressly or impliedly
conferred by statute or the constitution. Tex. Mun. Power Agency v. Pub. Uti/' Comm 'n of Tex. ,253


          ISee Letter from Gail Lowe, Chair, Texas State Board of Education, to Honorable Greg Abbott, Attorney
General of Texas at 2-3 (Sept. 23, 2010) (on file with the Opinion Committee, also available at http://www
.texasattorneygeneral.gov) [hereinafter Request Letter].

         2you acknowledge that any contract to utilize outside counsel would be subject to approval by this office. Id.
at 3; TEx. GOV'T CODE ANN. § 402.0212(a) (West 2005).
Ms. Gail Lowe - Page 2                         (GA-0848)



S.W.3d 184, 192-93 (Tex. 2007); see also TEX. CONST. art. VII, § 8 (requiring the Legislature to
provide for a State Board of Education, which "shall perform such duties as may be prescribed by
law"); Tex. Att'y Gen. Op. No. GA-0456 (2006) at 4 (discussing the Board's powers as an
administrative agency). Express powers are those that "the law confers upon [an agency] in clear
and express statutory language." In re Entergy Corp., 142 S.W.3d 316, 322 (Tex. 2004). Also, a
state agency generally has those implied powers that are "reasonably necessary to fulfill its express
functions or duties." Pub. Util. Comm'n of Tex. v. City Pub. Servo Bd. of San Antonio, 53 S.W.3d
310,316 (Tex. 2001). However, an "agency may not. .. on a theory of necessary implication from
a specific power, function, or duty expressly delegated, erect and exercise what really amounts to a
new and additional power or one that contradicts the statute, no matter that the new power is viewed
as expedient for administrative purposes." Pub. Util. Comm'n of Tex. V. GTE-Southwest, Inc., 901
S.W.2d 401, 407 (Tex. 1995) (quoting Sexton V. Mount Olivet Cemetery Ass'n, 720 S.W.2d 129,
137-38 (Tex. App.-Austin 1986, writ ref'd n.r.e.); accord Tex. Indus. Energy Consumers v.
CenterPoint Energy Houston Elec., LLC, 324 S.W.3d 95,106 (Tex. 2010).

        No provision of the constitution or any statute expressly authorizes the Board to utilize funds
belonging to the PSF to pay attorney fees. See TEX. CONST. art. VII, § 8; TEX. EDUC. CODE ANN.
§ § 7.102 (West 2006) ("State Board of Education Powers and Duties"), 43.001-.020 (West 2006 &
Supp. 2010) (chapter 43, providing for school finance and fiscal management of PSF and available
school fund). You suggest, however, that the authority to pay attorney fees out ofPSF funds that the
attorneys recover may be implied from the Board's "organic authority to manage the affairs of the
PSF" under article VII, section 5(f) of the constitution. See Request Letter, supra note 1, at 2-3
(citing TEX. CONST. art. VII, § 5(f)). Thus, we must determine whether the authority to commit PSF
funds to pay private attorneys without a legislative appropriation to that effect may be implied as
reasonably necessary to accomplish the Board's constitutional function and duties under article VII,
section 5(f).

        Article VII, section 5(f) provides:

               Notwithstanding any other provision of this constitution, in managing
               the assets of the permanent school fund, the State Board of Education
               may acquire, exchange, sell, supervise, manage, or retain, through
               procedures and subject to restrictions it establishes and in amounts it
               considers appropriate, any kind of investment ... that persons of
               ordinary prudence, discretion, and intelligence, exercising the
               judgment and care under the circumstances then prevailing, acquire
               or retain for their own account in the management of their affairs, not
               in regard to speculation but in regard to the permanent disposition of
               their funds, considering the probable income as well as the probable
               safety of their capital.

TEX. CONST. art. VII, § 5(f). By its terms, subsection 5(f) recognizes the Board's management
authority and authorizes the Board to establish procedures and restrictions to "acquire, exchange,
Ms. Gail Lowe - Page 3                                    (GA-OS4S)




sell, supervise, manage, or retain" any kind of investment according to the constitutionally mandated
standard of judgment and care. Id. We believe that a court would likely conclude that the authority
to commit PSF funds to pay private attorneys without a legislative appropriation is not reasonably
necessary to accomplish the Board's constitutional function and duties under article VII, section 5(f).
To the contrary, a court would likely conclude that such use of PSF funds would contradict article
vn, section 5.
        Article vn, section 5 specifies and limits the permissible uses of PSF funds, prohibiting
the Legislature from "enact[ing] a law appropriating any part of the permanent school fund ... to
any ... purpose" except as the section provides. Id. § 5(c). The section provides for use of the PSF
to make distributions to the available school fund, to guarantee certain bonds, and to provide for the
administration of a bond guarantee program established under the section. Id. § 5( a), (d)-(e). Lastly,
section 5(b) provides that the "expenses of managing permanent school fund land and investments
shall be paid by appropriation from the permanent school fund." Id. § 5(b).

        The very nature of the PSF requires that these constitutional limitations on use apply to assets
that properly belong to the PSF but have not yet been recovered .. The constitution establishes
the PSF as a permanent endowment made up of property set aside for that purpose, including all
investment of properties belonging to the fund. See id. §§ 2, 4, 5(a); TEX. EDUC. CODE ANN.
§ 43.001(a)(4), (5) (West 2006). As this office has determined, "recoverable permanent school fund
lands and other property are part of the corpus of that endowment, and must be treated as such, even
before they are actually recovered." Tex. Att'y Gen. Op. No. DM-316 (1995) at 3.

        Consequently, the Board may not contract to pay attorney fees from property or funds that
properly belong to the PSF unless such use is permitted by article vn, section 5. The only use of
PSF funds allowed in article vn, section 5 that conceivably could apply to the payment of attorney
fees is found in section (5)(b), which allows the payment of management expenses from the
PSF, but only by legislative appropriation. See TEX. CONST. art. vn, § 5(b); Tex. Att'y Gen. Op.
No. GA-0293 (2005) at 2 (determining that article vn, section 5(b) limits management expenses to
amounts appropriated by the Texas Legislature).3 Consequently, we conclude that the Board is not
authorized to contract for attorney fees payable from amounts due to the PSF without a legislative
appropriation for that purpose.

        You also ask whether the Board may enter into a contract for legal services providing for a
contingency fee without following the process in chapter 2254 of the Government Code. Request
Letter, supra note I, at 3. Assuming such a contract is authorized, it would be subject to chapter
2254, subchapter C of the Government Code, which applies to all contracts by a state governmental



          'Vie do not here determine whether attorney fees may reasonably be said to constitute ''management expenses"
that have been provided for by legislative appropriation, which is a matter for the Board to determine in the fllst instance,
subject to judicial review. See TEX. CONST. art. VII, § 5(b). See also Request Letter, supra note 1, at 3 (suggesting that
attorney fees may be an "indirect cost" rather than a management expense requiring an appropriation under article VII,
section 5(b), citing Tex. Att'y Gen. Op. No. GA-0293 (2005».
Ms. Gail Lowe - Page 4                        (GA-0848)



entity for legal services providing for a contingency fee. TEX. GOV'T CODE ANN. § 2254.102(a)
(West 2008). A "state governmental entity" subject to the subchapter is "the state or a board,
commission, department, office, or other agency in the executive branch of state government created
under the constitution or a statute of the state." Id. § 2254.101(3)(A). As the Board is a board
created under the constitution, we conclude that, to the extent that it may enter into a contingency
fee contract for legal services, it must comply with chapter 2254; subchapter C of the Government
Code.
Ms. Gail Lowe - Page 5                       (GA-0848)



                                       SUMMARY

                      Article VII, section 5 of the Texas Constitution does not
              authorize the State Board of Education to utilize funds from the
              Permanent School Fund to pay attorney fees without an appropriation
              for that purpose by the Legislature. To the extent that the Board may
              enter into a contingency fee contract for legal services, it must comply
              with chapter 2254, subchapter C of the Government Code.




DANIEL T. HODGE
First Assistant Attorney General

DAVID J. SCHENCK
Deputy Attorney General for Legal Counsel

JASON BOATRIGHT
Chair, Opinion Committee

William A. Hill
Assistant Attorney General, Opinion Committee
