                   TEE        ATTORNEY              GENERAL
                                  OF      TEXAS



                                  July    31, 1990



Honorable   Garry Mauro                     Opinion       No.   JM-1201
Commissioner
General Land Office                         Re:   Authority  of the Veterans'
Stephen F. Austin Bldg.                     Land Board to make certain     in-
1700 N. Congress Ave.                       vestments    (RQ-1833)
Austin, Texas    78701

Dear   Mr.    Mauro:

       Your    letter     asks:

             Can   the   Veterans    Land    Board,    under    the
             authority   granted by TEX. CONST. Article        III,
             SS 49-b and     49-b-1,    invest    moneys    of the
             Veterans     Land     and    Housing      Funds    not
             immediately   committed    to paying principal     and
             interest on the bonds       or to other. specified
             purposes,   in the following        investments,    or
             otherwise     enter       into     the      following
             transactions,    authorized    by TEX.     NAT.   RES.
             CODE 55 161.173(b)     and 162.004:

             (a)    A direct security             repurchase     agreement,
                    5 161.173(b)(4):

             (b)       Call   option     contracts,       5 161.173(b)(5);

             (C)    Reverse repurchase             agreements,
                    5 161.173(b)(6):

             (d)    Collateralized  mortgage   obligations
                    fully secured by    securities   issued   or
                    guaranteed   by the Government     National
                    Mortgage Association,    5 161.173(b)(7)?

      Pursuant to sections 49-b and 49-b-l of article III       of
the Texas Constitution,    the Veterans'  Land Board administers
the Veterans'    Land Fund and the Veterans'  Housing Assistance
Fund.   .$&R Nat. Res. Code 55 161.001 et sea.     The veterans'
land fund is used to     purchase  land for resale to  veterans.
Ses Attorney   General Opinion    JM-774 (1987).   The veterans'




                                             P-    6352
Mr.   Garry    Mauro   - Page   2    (JM-1201)




housing assistance   fund    is used for  the purpose of   making
home mortgage   loans    to   veterans.   $i&s Attorney   General
Opinion JM-289   (1984).    Both funds are augmented  by proceeds
from bond sales.

     Section 49-b of article III states that bonds                  sold   for
the Veterans' Land Fund are to be repaid from it,

             but the   moneys of said Fund        which are        not
             immediately     committed    to  the   payment         of
             principal   and   interest    on such    bonds,       the
             purchase   of lands as herein provided,       or      the
             payment of expenses as herein provided may             be
             invested    in bonds      or  obligations     of      the
             United States until such funds are needed             for
             such purposes.

Similarly,  section 49-b-l(e)            provides that   bonds sold        for
the benefit of the Veterans'            Housing Assistance   Fund are       to
be repaid from that fund,

             but the    money     of   the    fund    which    is   not
             immediately      committed     to   the    payment      of
             principal    and    interest     on such     bonds,    the
             making    of   home     mortgage    loans     as   herein
             provided,     or   the    payment     of   expenses     as
             herein provided may be         invested in bonds        or
             obligations    of    the United     States until       the
             money is needed for such purposes.

See   also    Tex.   Const.   art.   III,    § 49-b-l(d).

      The   question     before    us   is whether       the    types     of
investment   about which you inquire are "bonds or obligations
of   the   United    States"     within    the   meaning     of   the   two
constitutional     provisions.     If they are, the legislature         may
certainly   designate    which "obligations      of the United States"
are suitable    for   investment   on   behalf of the funds; but          if
they are not, the legislature         cannot authorize      investment    in
other securities,       disregarding    the    constitutional       intent.
See Powell v. State, 17 Tex. Ct. App. 345 (1884).

      Section 49-b     of article     III was    added to   the    Texas
Constitution   in 1946.     Section 49-b-1, creating      the   Housing
Assistance   Fund, was    added in 1983.        Prior to 1956,     there
was no constitutional     provision    concerning    the investment    of
land fund money not      immediately     needed for land    purchases.
In 1949, when the legislature        passed an enabling    act for the
constitutional    provision     adopted    three years    earlier,     it




                                            P. 6353
Mr. Garry   Mauro   - Page   3   (JM-1201)




provided that moneys set aside to pay principal    and interest
on its bonds could be   invested by the Veterans'   Land   Board
*in bonds of the United States, or the State of Texas, or of
the several counties   or municipalities   or other   political
subdivisions of the   State of Texas."   m    Acts 1949,    51st
Leg., ch. 318 5 9, at 595 (V.T.C.S. art. 5421m, repealed).

      Even after section 49-b was amended in 1956, see S.J.R.
No. 2, Acts      1955, 54th     Leg., at    1811, to     state that     the
"portion     of   the   Veterans'      Land    Fund    not    immediately
committed    for the purchase      of lands may be invested in short
term United States bonds or obligations            until such funds are
needed for the purchase        of lands," the statute continued          to
state    that   fund     moneys     could   be     invested    in     other
securities.     a     Acts 1957, 55th Leg., ch. 238, 5 2, at 493.
In 1967, article III, section 49-b, was amended to make                 the
investment    proviso     read, "in    bonds   or   obligations    of   the
United States" m        H.J.R. 17, Acts 1967, 60th Leg., at 2984.
The same year article 5421m (the former statute) was amended
to track that language.         See   Acts 1967, 60th Leg., ch.         129
% 3, at 271.      Later,    in 1977, the     statute was repealed        by
the enactment     of the Natural Resources        Code, which     provided
in section 161.173(b):

         Money in    the fund  that is not      immediately
         committed   to paying principal   of and interest
         on the bonds, to the purchase of land, or        to
         the payment of expenses     as provided    in  this
         chapter   may    be   invested    in    bonds
         obligations   of  the United    States until    t:i
         funds are needed for these purposes.

Acts 1977,   65th Leg.,   ch. 871   5 1, at    2345.    From         1967,
therefore,  until  1989,   the  constitutional      provision          and
statutory  law were harmonious.

      When section 49-b   was      amended   in   1967,   the   following
language was incorporated:

              This   Amendment     being   intended     only   to
          establish   a basic framework       and not to be      a
          comprehensive    treatment    of the Veterans'     Land
          Program,    there    is hereby      reposed    in   the
          Legislature     full    power   to   implement      and
          effectuate   the    design    and objects     of   this
          Amendment,    including     the power    to   delegate
          such duties, responsibilities,         functions,   and
          authority   to the Veterans'       Land Board as     it
          believes   necessary.




                                     P. 6354
Mr.   Garry    Mauro   - Page   4   (JM-1201)




H.J.R. 17,    Acts 1967,    60th  Leg., at    2986.     In    1989   the
legislature   relied upon    this language    -- twenty-two        years
after its appearance    in the constitution     -- as its authority
to "clarify and interpret I1 the constitutional       phrase      "bonds
or other    obligations  of   the   United States."        It   amended
section    161.173(b)   of   the    Natural   Resources       Code     to
authorize   the investment   of Land Fund and Housing Assistance
Fund moneys in     eight categories     of financial     instruments,
four of them     about which   you have asked.       See Acts      1989,
71st Leg., ch. 720, 5 2, at 3268.l

      So long as the section 49-b "investment"         provision   read
"in United States bonds or        obligations"   it might have     been
barely arguable that the word "obligations,"          as used in     the
constitution,    was not intended to      be modified   by the    words
"United States.1'     But once the constitutional      provision    was
changed in 1967 to read "bonds or obligations          of the    United
States," there      could be   no such    argument.    The   provision
permits investments      of  Veterans'   Land   Fund money,    risking
loss, &      upon the credit      of the United States.      *     U.S.
Const.    art.   I,   5 8;   &      Weston        Citv   Council      of
mrleston,      2 Pet. 481, 7 L.Ed. 449 (li29).

      We do   not    think   the "full   power   to   implement    and
effectuate   the design and objects" of section 49-b         includes
the power to "clarify and interpret"        its provisions   in a way
at   odds   with     its   plain  language,     or   to  usurp     the
interpretive    powers of the    judicial branch.     w    Powell   v.
S+z;:,,A;rra:    Armadillo   Bail Bonds v. State, 772 S.W.2d       193
     .     . - Dallas 1989, no pet.).




       1.     The   initial   section   of the enacting   bill   declared:

             Article III,      Sections     49-b and    49-b-1,    of   the
       Texas Constitution      established    basic frameworks     for the
       veterans     land   program      and   the   veterans'      housing
       assistance    program.    Those    sections gave the       legisla-
       ture full power to implement and effectuate            the   design
       and objects     of   those    sections     and   the   legislature
       proposes by     this   Act    to clarify     and   interpret     the
       provisions    in those sections authorizing        certain     money
       in the    veterans   land    fund and    the veterans'      housing
       assistance    fund to be invested in bonds or          obligations
       of the    United States      and to    be used    to pay    certain
       expenses.




                                        P. 6355
Mr.   Garry   Mauro   - Page   5   (JM-1201)




      The phrase,     llbonds of  the United   States,"   refers    to
credit instrumentalities      of the federal government.     And the
phrase, nobligations       of the  United States,"    when    coupled
with     "bonds      of     the   United     States,"      signifies
instrumentalities     of the same character.    See Rockford      Life
  S.     . v.   llinois DeD’t of Revenue,    482 U.S. 182     (1987);
Smith v. Davis, 323 U.S. 111 (1944).

      Long before the      phrase, "bonds or      obligations      of   the
United States," was utilized         in article III, section          49-b,
of the Texas     Constitution,     the   characteristics     of    federal
credit instrumentalities       were firmly established.         In    Smith
v   Da is   s nra. the United       States Supreme Court held          such
i&tr&eAtayities        to   be     characterized     by    (1)     written
documents,    (2) the     bearing    of   interest,     (3)    a binding
promise by     the   United    States to    pay   specified      sums     at
specified      dates,      and     (4)     specific       congressional
authorization    that    pledges    the   faith and     credit     of   the
United States in support of the promise to pay.              323 U.S. at
115.

      None of the four financial    instruments   about which      you
ask meet those criteria.     None purchase a binding promise by
the United States to pay     specified   sums at specified      dates
to the    funds.   All represent    instrumentalities      of   third
parties,   not of  the United States.      They are described       by
the 1989    act amending   section   161.173(b)   of   the    Natural
Resources   Code as:

              (4) a direct    security repurchase      agree-
          ment under which the board buys, holds for         a
          specified   time,   and   then   sells   back    any
          investments  described   in Subdivisions    (1) and
          (2) of this subsection;

              (5) a contract     written by    the board     in
          which the   board    grants   the   purchaser     the
          right to purchase     securities   in the    board's
          marketable     securities     portfolio      at      a
          specified  price during a specified      period and
          for which the board is paid a fee;

              (6) a reverse security repurchase        agree-
          ment under which the board sells and after         a
          specified    time   buys   back   any  investments
          described   in Subdivisions    (1) and (2) of this
          subsection:




                                       P. -6356
Mr.    Garry    Mauro   - Page    6   (JM-1201)




               (7)    a collateralized   mortgage   obligation
           fully secured by securities.issued       or guaran-
           teed    by   the   Government   National   Mortgage
           Association     (GNMA).

Acts    1989,    71st   Leg.,    ch. 720,    § 2, at 3268.

      Assuming    that    the   terms,     "investments     described      in
subdivisions     (1) and (2)"       and "securities       in the   board's
marketable    securities    portfolio,"     as   used in the     foregoing
excerpts    from    the     amended     statute,      refer   to     credit
instrumentalities      of the United States, the consideration            to
flow to the fund from each of the contemplated               transactions
is merely a promise       from a third party regarding        the    manner
in which       the     third     party    will     deal     with     credit
instrumentalities      of  the   United States.        Such third     party
obligations    do not become      obligations     of the United      States
merely    because     the   assets      which    are   the   subject      of
speculative     transactions        with     the     third    party      are
obligations    of   the    United States.        See   Attorney    General
Opinions JM-570      (1986);    JM-23 (1983) (distinguishing          Bathe
Halsev Stuart      Shields Inc.      v. Universitv       of Houston,     638
S.W.Zd 920 (Tex. App. - Houston 1982, writ ref'd                 n.r.e.));
a    Attorney   General     Opinion JM-975      (1988).     "Investment~~'
in them are     not investments        in obligations      of the    United
States.

      Repurchase   agreements    concerning    federal credit instru-
mentalities   recently have been held not "obligations            of   the
United States" by a number         of courts.    Massman    Constr.    Co.
V.  Director of Revenue,     765    S.W.Zd 592 (MO. 1989); Bora         v.
Deoartment   of Revenue,     774   P.2d   1099 (Ore.     1989); In     re:
Sawver Estate,      546  A.2d    784    (Vt.   1987);    Deoartment     of
Revenue v. Paae,      541 So.2d 1270       (Fla. App. 1989):      Canital
Preservation    Fund v. DeDartment       of Revenue,    429 N.W.2d     551
 (Wis. App. 1988); Andras v.        Illinois Deu't of Revenue,         506
N.E.2d 439 (Ill. App. 1987), cert denied, 485 U.S. 960,                108
S.Ct. 1223     (1988).   "Repurchase      agreement"    is   defined    by
article 842a-2, section 2(c)(3), V.T.C.S.,           to include direct
security    repurchase     agreements        and    reverse      security
repurchase   agreements.     Cf, Educ. Code § 53.02(11).

      A "call option" is a promise to sell a security    in  the
future at a price fixed today.     The seller agrees to deliver
the security  for a set    price (the "strike price") during    a
limited time.   As   described  by the  United States Court   of
Appeals  for the Seventh Circuit:




                                            P. 6357
Mr.   Garry   Mauro   - Page   7   (JM-1201)




          The buyer pays a sum (the 'premium')   for   the
          [call option].   The strike price exceeds    the
          current   market   price   of   the   security.
          Sellers are betting that    the price will   not
          exceed the strike   price during the   duration
          of the   option; buyers   are betting  that   it
          will.

B ard of Tr de of   itv of Chicaa       Set rities and Exchanae
C&m'n,   883aF.2d 5:5    527   (7th"&.   19:9).   A call option
contract  is not an "hbligation   of the United States."

      Nor   do     we    think     that     collateralized       mortgage
obligations    secured or guaranteed      by the Government      National
Mortgage   Association    are llobligations of the United States."
Rockford   Life In s. c . v. IllinOiS       DeD't Of Revenue,       m.
A brief submitted with your request suggests that because                  a
regulation    promulgated    by the    Office of the Comptroller          of
the Currency,     12 C.F.R. § 1.110, defines "obligations           of the
United States"      for some    purposes to      include    "obligations
issued, insured, or guaranteed        by a department      or an    agency
of   the    United    States,"      the    language     of   the      Texas
Constitution    should be construed      as broadly.     The regulation
you cite    was    adopted in     1982.     Consequently,    it    is   not
useful in interpreting        language in     the Texas     Constitution
that was adopted in 1967.        The Rockford     and Smith cases,        in
contrast,     significantly     predate     the   1967   amendment        to
article III, § 49-b.       We think those Supreme Court cases are
more reliable sources for determining           the legislature's       and
the voters' understanding       of the phrase "obligations        of    the
United    States."      Therefore,    we    conclude    that    mortgages
guaranteed   by the     GNMA are not     "obligations    of the     United
States" for purposes        of article III,      section 49-b, of       the
constitution.

      The meaning    of "bonds    or   obligations    of   the   United
States" as used in article       III, section 49-b, of the        Texas
Constitution   was fixed by previous decisions        of the    Supreme
Court of the United States at the time the phrase was             added
to section 49-b in     1967.   a     Powell    v. State, suora.       It
was not changed     by the use    of the same     phrase in     section
49-b-l when    that section    was    adopted in     1983.     (Section
162.004 of    the Natural    Resources    Code   merely states      that
Housing Assistance    Fund   money   "may  be   invested   in   invest-
ments authorized    for the   veterans    land fund.")     The   phrase
meant in 1967.     and means now,     credit instrumentalities        of
the federal government,      Smith v.     Davis, m,         and it    is
beyond the power of the      legislature    to give it a different
meaning by legislative     "clarification     and interpretation."




                                       P. 6358
Mr.   Garry    Mauro   - Page    8     (JM-1201)




      Powell v. Stab,    suora,   involved a statute    purporting
to interpret   constitutional   language  in a way that   departed
from the    established  meaning.     The holding  in Powell    was
explained   by the Texas Court of Criminal Appeals in Lvle       V.
w,       193 S.W. 680, 682 (Tex. Grim. App. 1917):

           After  the   adoption    of the    Constitution     of
           1845   the    Legislature    passed      a    statute
           declaring    the   term   'jeopardy'     to   have    a
           meaning therein     given, and     in the    case   of
           Powell v. State, the      decision was that       this
           statute was    void because     the definition      of
           'jeopardy'   which    it undertook    to    make   was
           different   from the meaning which the term had
           prior to the adoption of the Constitution          and
           which   the   Constitution      by   its     adoption
           without change of the      term had made its       own
           definition.

See al        Armadillo   Bail       Bonds   v. State,   suora   (usurpation   of
judicizy      powers).

      In our opinion,      section 161.173(b),      as amended,      con-
travenes   sections    49-b and     49-b-l of    article III     of   the
Texas Constitution       insofar as     it purports    to   permit    the
investment   of   moneys    in the    Veterans'    Land Fund     or   the
Veterans'    Housing    Assistance       Fund   in direct       security
repurchase    agreements,      call    option    contracts,      reverse
repurchase   agreements,      or collateralized     mortgage     obliga-
tions.

                                 SUMMARY

               The Veterans'      hand Board    may not    invest
           moneys of     the   Veterans'   Land   Fund   or    the
           Veterans'   Housing Assistance       Fund in    direct
           security repurchase       agreements,    call   option
           contracts,    reverse repurchase     agreements,     or
           collateralized     mortgage obligations.      Insofar
           as   section      161.173(b)     of    the    Natural
           Resources     Code,    as  amended,    purports      to
           authorize    such transactions,     it is violative




                                             P-   6359
Mr. Gamy     Mauro   - Page     9    (JM-1201)




           of sections 49-b and 49-b-l                 of article   III   of
           the Texas Constitution.




                                                  JIM      MATTOX
                                                  Attorney  General        of Texas

MARY IZHLLZR
First Assistant      Attorney       General

LOU MCCREARY~
Executive  Assistant     Attorney       General

JUDGE ZOLLIE STEAKLEY
Special Assistant  Attorney           General

RENEA HICKS
Special Assistant      Attorney       General

RICK GILPIN
Chairman,  Opinion     Committee

Prepared by BNCe   Youngblood
Assistant Attorney  General




                                         P-     6360
