             THE        ATJXBRNEY                  GENERAL


                          AUSTIN.   TEXAS     78711


                                April 2, 1971

Honorable Ben Barnes                        Opinion No ~ M-825
Lieutenant Covernor
State Capitol Building                      Re :    Whether a constitutional
Austfn. Texas 78711                                 amendment is necessary in
                                                    order to empower, political
                                                    subdivisions    to Issue in,-
Dear Covernor‘ Barnes :                             dustrlal   revenue ,bonds.
     Your request     for an opfnion   on the above subject         matter,
asks the following     question:
           “Would a constitutional    amendment be required
     in order to empower political     subdivisions   to Issue
     induatrfal   revenue bonds such as is outlined in the
     attached act entitled,     ‘The Texas Industrial   Develop-
     ment Act I D”
       “The Texas Industrial   Development Act” enclosed wfth your
request authorizes     cities, counties and navigation dfstricts
to fssue revenue bonds for the purpose of acqufrfng property
,for industrfal   development purposes and to lease, .su.ch proper~ty,
“‘upon such terms and conditions     as the governing body may deem
advisable     and as ahall not confl$ct   with the provisfons  of
tads Act ~”
     Subdivfsfon     a of Section   5 provfdes:
            “All bonds issued by a city or county or navf-
     gatfon district    under the authority of this Act                  ”
     shall be lfmfted obligatfons     of the city or county
     or navigation district,      Bonds and interest   coupons           .,
     issued under the authorfty of thisAct,       shall not
     constftute   or gfve, rise to a pecunfary lfabilfty
     of the cfty or county OP navigatfon district       or a ,’          ‘:
     charge against its general credit,     (emphasis ours,),
     or taxfna oowers.     Such lfmftatfon  shall be plainly
     stated upon the face of each of such bonds.”
      Section 5.Z~of Article   III of the Constitution of Texas ~
prohibits   the lending of fts credit by any political    subdivisions,
and makes no dfstfnctfon     between the general OP special credit

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Honorable    Ben Barnes,   page 2          (M-825)


of such subdivisions.       Section    52 of Article   III    provides:
              “The Legislature   shall have no power to
        authorize any county, city,      town or other polit-
        ical corporation    or subdivision   of the State to
        lend its credit or to grant public money or thing
        of value In aid of, or to any individual,      association
        or company; ~Dr D”
        The questions raised as to the legality        of    “The Texas Indus-
trial    Development Act” are:
              (1) Whether the issuance of Industrial           revenue
        bonds would violate the State Constitution’s           credit
        clauee; and,
             (2)   Whether the issuance of such bonds to finance
        the building of factory ahd similar Industrial  facilities
        would serve a valid public purpose,
      A number of Texas casea and Attorney General Opinions in-
dicate that if the “Public Purpose Doctrine” Is satisfied;      then
“Credit Clause” is rendered inapplicable    by virtue of any private
benefit having become subordinate to the general public necessity.
These cases and,opinions   have for the most part been Interpretive
of Article  III  Section 51 of the Constitution    dealing withy ,.  ,..
grants of public monies rather than lending the public credit,
but we believe the principles   involved apply equally to both
concepts ~ State v. City of Austin, 160 Tex. 348, 331 S.W.2d
737 (1960); Brown v, Galveston     97 Tex, 1 75 S.W. 488 (,1903);
52 Tex. JUP. 2d 754 7 7 State’of     Texas i3& 0 Attorney Qeneral’s
Opinions Nos. V-106; 71450) and C-530 (1965 '.
      Our consideration  of this problem is, by virtue of the
preceding    suthorities  narrowed to a consideration  of whether
OP not tnr issuance of’industrial   revenue bonds is for a valid
public purpose o
   4 In Bland v. City of Taylor, 37 S.W.2d 291 (Tex. Civ, App.
1931, aff. I.23Tex. 39, 67 S.W.2d 1033) the Court of Civil Appeals
observed :
               “What constitutes a public purpose as contra-
        distinguished   from.a private purpose for which
        public funds may be applied has, been repeatedly     ‘,
        before the courts of practically   every State In


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Honorable Ben Barnes,     page 3         (M-825)



      the Union and the S.uprerne Court of the United States,
      but no court has undertaken to lay down with minute
      detail an inexorable  rule that would dlstlngulsh  one
      from the other,   Obviously no such rule could be
      laid down., DD' (37 S,W. 2d 291, at p..293).
       We regard the question as extremely difficult,       especially
In view of the fact that our search has uncovered no Texas case
OP authority    lnvolvlng   the constltutlonallty   (public purpose)
of the Issuance of industrial       revenue bonds.   In rendering this
opinion,   then, ordinarily    our function would be to ahtlclpate,,,
as best we can, the holding of the courts If and when the question
should be presented to them, but where ouropfnlon          affects   the
validity   of bonds additional      problems are involved.     The Attormy
General approves the issuance of practically        all types of public
securities   Issued in Texas as to their legality,      based upon his
examination of the underlying legal proceedings authorizing
the actual issue,       In this instance we are asked to give our
opinion as to the legality      of bonds in advance of the receipt
of any actual proceeding% authorizing         them and ln a situation
where the constltutlonallty      of their statueory authori.zation
has bean questioned.
      Outside this jurisdiction   there are. two dlametrlcally
opposed views as to the constitutionality     of industrial     aid
bonds authorized solely by statute.
                                                      .~...,. .,. ,.~.~
                                                                      .,,....
                                                                           .~   ,3
                                                                                 .
      These views aye best illustrated    by a short historical
resume of decfsions   on this question.    We quote several~excerpts
from the Vanderbilt Law Revlew, Vol. 19 ,(1965),the first          at
pages 31-32, asp followss
             "The United -EtateETSupreme Court's d$flslon      in
      CitlzensQ Savings 8e Loan Assun. v. Topeka,         is pro-
      bably the forebe%r,of    all Judicial   precedents con-
      sidering   the use of municipal bonds to aid Local
      industry,   and for many years It w%s the prlnclpal
      authority on the constitution%l      question involved,,
      Pmsuant to an enabling act of the Kansas legislature,
      Topeka had donated IO0 thousand dollars       of its bonds
      to an lron works company in order to encourage its
      establishment   in the city.    In an action brought
      after the bonds had defaulted,     it was conceded that
      they had been, regularly    famed and that the plaintiff


      2187 u,S. 655 (1875)e
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Honorable        Ben Barnes,    page 4        (M-825)




         was a bona fide purchaser so that the sole
         question was the authority of the Kansas
         legislature   to pass the enabling statute. OO.
         It was held that a tax can only be levied for
         a public purpose and that a contribution    to
         the aid of any manufacturer was not such a
         purpose.    Hence, these bonds were void."
         (emphasis ours).
         Similar     results   followed   In Parkersburg     v. Brown, 106 U.S.
487 (18831, and Cole v. La Grange, 113 U.S. 1 (1885).
         At page 33 this       law review makes this       comment on these
cases:
                "Unfortunately for the innocent holders Involved
         in the Topeka, Parkersburg and La Grange cases, these
         decisions   were not rendered prior to the sale of bonds'
         but several years later when suit was brought for their
         payment, The recent decisions     on this subject have all
         been the result of some type of test case...."
     After the U. S. Supreme Court's decisions   in these three
early  cases, the Court began in Jones v. Portland, 245 U.S. 217
(1917)9 an about-face.   We quote again from the Vanderbilt Law
Review, supra, Volume 19> at page 34:
               "In Jones v. Portland 3' the Court coneldered
         an act of the Maine leglsliture   authorizing   any
         city to establish   a munlcipaI coal and fuel yard
         where such necessities   could be sold at cost.   * 0,0
         This endeavor was approved and the Court added:
               'While the ultimate authority    to determine
         the validity  of legislation    under the Fourteenth
         Amendment is rested in this Court local condltlons
         are of such varying character tha& what Is OP Is
         not a public use in a particular     State Is manifestly
         a matter respecting    which local authority,   leglsla-
         tive and judicial,   has peculiar facilities    for
         securing accurate information,      In that view the
         judgment of the highest court of the State upoh
         what should be deemed a public use in a particular

                                                                        ,.
         30245     U.S. 217 (1917).

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Honorable    Ben Barnes,     page 5            (M-825)




     State    is entitled      to the highest        respect.'"31
     At page 37 this        law review article         states:
            "The various state courts considering       the validity
     of industrial     development bonds have had much.more
     difficulty    resolving    the problems presented under the
     state constitutions       than In satisfying   the requirements~~'
     of the fourteenth amendment. In' addition to the. uni-,
     versally    implied requirement that the taxing and
     borrowing powers of a state are subdect to the publ,ic
     purpose doctrine,      almost every state constitution
     speclflcalPy     prohibits   the use of the credit of the
     state or any of its polit        al subdivisions   for the
     aid of any private party. JiGI
      Nevertheless,    the ma,jorit,y of state courts which have faced
and dealt with the problem have upheld the bonds on the theory
that the relief     of unemployment caused by underdevelopment of
Industry, and the resultant      poverty and human hardship are indeed
public purposes for which the states can use private industry
for the accomplishment of such public purpose.
     Again we quote from           the Vanderbilt        Law Hev,lew, supra,         at
pages 38-39:
                                                                ,...,....,..,.,.
                                                                              ,~ .,...,..,,,,,..
             "The first   contrary decision   was reached in Florida
     where the tour% not only found that a proposed revenue
     bond arrangement violated      the specific    constitutional
     prohibltfon     against the lending of credit but added
     that any financlhg of private enterprise          by the use
     of public funds was en%lrely foreign to our constitu-
     tional system no matter how worthwhile the undertakfng.49
     As opposed to the decisions       in Kentucky and Alabama,
     this court did not place any signlflcance          on the fact                        .*:..
     %hat revenue bonds would no% involve any municipal                                        ,'
     liability    OP tax,    On the contrary,    ft states that,
     once the bonds were sold, the proceeds would be public
     funds and could no% be expended in aid of any private

                                                                                .’




     31T.d. at 221,
     44Note,    108 V.Pa.L.Hev,        95 (1959).
     QqS%a%ev, Town of North Miami, 59 So.2d 779 (Fla,.1952).

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Honorable Ben Barnes,      page 6            (M-825)




     enterprise 050 There had been no enabling legislation
     nor any vote of the electorate       on the Florida
     proposal D However, the court took pains to avoid
     any implication    that a specific    legislative    deter-
     mination of public purpose would have changed
     its decision,   stating that:      ‘There are certain’
     limits beyond which the Legfslature         cannot go.
     It cannot authorize a munfcfpality        to spend public
    .money or lend or donate, directly        or Indirectly,
     public property for a purpose which Is not publfc.
     A legfslatfve   determlnatio     may be persuasive,
     but it fs not conclusive.’ r:1
            “The Florlda decision   was followed in Nebraska?2
     and Idaho.53     The Nebraska court felt that the deci-
     sions in three of its sister     states approving revenue
     bonds were based on ‘fundamental fallacies      of reason-,
     it-s, ’ and that the proposed arrangement ‘would con-
     stitute   a death blow to the private enterprise     system
     and reduce the Constitution     to a shambles in so far
     as ft. protectfon    of private enterprise   is concerned~‘.
      D o 34
            “On the other hand, the Supreme Court of Maryland,
  ; ‘in approving an issue of general obligation   bonds,
      stated that the Constitution  does not wrfte the doctrine
      of lafssez  faere fnto the law and expressly rejected


     50This reasoning      was followed in Ohfo where the court
invalidated anfndustrfal       mortgage program financed by state
revenue bonds *
     5lState    v. Town of North Miami, supra note &LIPat 785.
     j2state    ex r-e ~ Beck   v ~ city   of   York,   164 Neb. 223, 82
N.W,2d 269 (1957).
     5%illage     of Moyie Springs         v. Aurora Mfg. Co,,    82 Idaho
337, 353 P,2d 76-rt1960).
     %.tate     ex rel.   Beck v. Cfty of York,          supra note 52, at
231, 82 N,W. 2d at 274.               ,



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Honorable Ben Barnes,     page 7        (M-825)




     the reasonfng of the Florida and Nebraska cases.55
     The Nebraska decfsfon was overridden by a specific
     constitutional amendment. Sfmflar amendments have
     been adopted in four other states,  and the bonds   ‘,
     upheld without amendment imat least twelve states. j6:i
     At page 42 of this    Vanderbilt   Law Review,    supra,   Volume 19,
Is the following:
            !Ie 0 0 e The constitutfonal     arguments In the
     state courts have almost all followed the same pattern,
     and the difference    between those decisions       upholding
     the acts and those declaring       them Invalid appears to
     be a matter of emphasis.       The question has been whether.
     the public benefit is an Incident of the aid to private
     enterprise,    or whether the use of private enterprise
     is merely an aid to a municfpallty        in, accomplishing
     the real purpose of the bonds.         This difference    is
     one of degree and more of an economic debate that,
     has been, and presumably will continue to be, a
     matter of some controversy.        Although the greater
     number of courts have upheld the bond Issues, there
     Is a cleati conflict   in the state decisions       and no
     statute could be safely implemented without the-
     approval of the highest court of the par%lcular State.”
     (emphasis ours)
      In view of the language in Bland v. Cfty of Taylor, supra,
wherefn the COW% indfcates       that public ouroos~e fs a auestlon
which can only be determined by cbnsfderat&n          of the fa~cts fn
any particular   situation,   any attempt by the Attorney Cieneral,
to qpeculate what our Supreme Court might hold In a case in-
volving thfa questfon of constftutfonalfty         in view of a split
of authorities   in other states     particularly    where bonds were
outstanding,   would  involve  a  r&k   so  great to  the. credit of
this State and fts political      subdivisions,   that the Attorney


       55City of Frostburg v. Jenkins       215 Md. 9 136 A.2d 852
(1957)3     This case  contains an  excellent   aumma~yof the several
constitutional    problems involved.
     56The amendments and decfsfons         are set out fn the appendix.




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Honorable Ben Barnes,    page 8         (M-825)




General fn all candor, cannot undertake ft.   This .has long'
been the Attorney Qeneral's policy.   See A~ttorney General
Opinion No. 0-3106 (1941).
      In states where this risk has been taken and outstanding
public obllgatfons      have been declared void, the credit and
financing ability      of the state and all its subdivisions        have
been interrupted     for years.    Traditionally,     the municipal bond
market will not touch, under any circumstance,           securitieb
which are tainted by even the slfghtest           hint or suggestion of
unconstltutfonalfty.
                           SUMMARY
            Absent a definitive   decision by the Supreme ,;',',;'         ',
     Court,of Texas, and'in the light oft a'splf~tof~          %,,,',
     authorities    on the question In otherstates,      this
     office    will not speculate and advise how the Texas
     Supreme Court would rule on the constitutionality
     of the proposed statute (The Texas Industrial
     Development Act) to empower political      subdlvislo~r!s
     to Issue fndus%rfal revenue bonds, based upon a
     legislative    declaration  of public purpose.
                                    Very truly    yours,
                                    CRAWFORD C. MARTIN
                                    Attorney General of Texas



                                   ,By+g&$L&@&
                                      First
                                           “‘‘
                                             ,,;
                                              ,,~‘,
                                              Assistant
Prepared by Joseph H, Sharpley
Assistapt Attorney General
APPROVED:
OPINION COMMITTEE
Kerns Taylor, Chairman
W. E. Allen, Co-Chairman
Houghton Brownlee
John Banks
John Grace
J. C. Davis
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Honorable Ben Barnes,   page 9       (M-825)




MEADEF,. GRIFFIN
Staff Legal Assistant
ALFREDWALKERS
Executive Assistant




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