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    Honorable Harry P. Burleigh           Opinion No. M-980
    Executive Director
    Texas Water Development Board         Re:   Does the "cumulative
    301 West Second Street                      average effective rate"
    Austin, Texas 78711                         referred to in Article
                                                8280-9, Section 12(g),
                                                V.C.S., have included
                                                in its computation the
                                                current outstanding
                                                interest on long-term
    Dear Mr. Burleigh:                          federal contracts?

              In your recent letter you request this Office to
    render an opinion on the following question:

                   "Does the 'cumulative average effective
              rate' referred to in Article 8280-9, Section
              12(g), V.C.S., have included in its computa-
              tion the current outstanding interest on long-
              term federal contracts?"

               In connection with the above question, you advise that
    Section 49-d of Article III of the Constitution of Texas author-
    izes the Texas Water Development Board to enter into long-term
    contracts with the federal government for the acquisition and
    development of storage facilities in reservoirs.   Such contracts
    when executed shall constitute general obligations of the State
    of Texas in the same manner and with the same effect as state
    bonds issued under the authority of Section 49-c of Article III
    of the Constitution of Texas. The Legislature, pursuant to
    constitutional authority, has prescribed terms and conditions
    under which the Texas Water Development Board can sell or
    transfer its interest in any acquired storage facilities.
    Article 8280-9, Sec. 12(e), 12(f) and 12(g), Vernon's Civil
    Statutes. Section 12(g), which prescribes a formula that the
    Texas Water Development Board is to use in determining the sales
    price of the State's interest in a project acquired under a
    contract, reads in part as follows:
                   ,I. . . the price shall be the sum of the
              'direct cost of the Board in acquiring same,’

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Honorable Harry P. Burleigh, page 2 (M-980)



          . . ., plus an interest charge thereon of one-
          half of one percent (l/2 of 1%) per annum from
          the date of acquisition of such facilities by
          the Board, plus interest at the cumulative
          average effective rate on all Texas Water
          Development Bonds sold up to the date of the
          sale of such facilities for each of those
          vears or nortions of vears on which the Board
          paid interest to the other party(ies) to the
          contract, Elus the Board's cost of operating
          and maintaining the facilities being sold or
          transferred from the date of acquisition to
          the date of transfer, less any payments re-
          ceived by the Board from the lease of such
          facilities or the sale of water therefrom."
          (Emphasis added.)

           Your question is directed to that portion of the
formula which provides that the selling prioe of the facilities
is to include "interest at the cumulative average effective
rate 'on all Texas Water Development Bonds sold up to the date
of the sale of such facilities."

          The term "Texas Water Development Bonds" is referred
to in Section 49-c of Article III of the Constitution as
follows:

               "The bonds authorized herein or permitted
          to be authorized by the,Legislature shall be
          called 'Texas Water Development Bonds,' shall
          be executed in such form, denominations and
          upon such terms as may be prescribed by law,
                 0, (Emphasissadded.)
          . . . .,

It is apparent from this reference that long-term federal con-
tracts were not intended to come within the meaning of the term
Texas Water Development Bonds.

          As further evidence that long-term federal contracts
are not to be included within this portion of the formula we
note that the cumulative average effective interest rate is to
be determined from the Texas Water Development Bonds sold up
to the date of the sale of the facility.

          Once we have determined the cumulative average effec-
tive interest rate from rates applicable to Texas Water Develop-
ment Bonds sold up to the time of the sale of the facility, we



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Honorable Harry P. Burleigh, page 3 (M-980)



are faced with a further difficulty of interpretation in apply-
ing this rate to the "direct cost" of the facility for the
purpose of arriving at this portion of the selling price.
"Direct cost" is defined in Article 8280-9, Sec. 12(f) as
II     the principal amount the Board pays or agrees to pay for
s;ch ;acilities."

          If the rate on bonds is applied to the total "direct
cost" of the facility, we might recover an interest charge
without regard to the source of the cost element. If bond money
finances the whole cost of the facility to be sold, no problem
exists. On the other hand, if the facility is financed in
part by bond money and in part through long-term federal con-
tracts, then the application of our previously defined cumulative
average effective interest rate to the whole of the "direct
cost" might fail to account for all of the interest paid out on
the federal contract applicable to the facility in question
to the extent that the interest rate on federal contracts
exceeded the cumulative average effective interest rate on bonds.
This procedure would not account for all of the interest costs
incurred in purchase of the facility.

          This difficulty may be overcome by adding the entire
interest on the federal contracts applicable to a particular
facility to the cost of its operation and maintenance as provided
in the fourth item of Section 12(g). However, this would create
an additional interest charge not authorized.  This is because
the cumulative average effective interest rate on bonds sold
applied to the "direct cost" of the facility will automatically
account for all the interest cost connected with a particular
facility, except where the interest rate on the federal contract
exceeds the cumulative average effective interest rate on
bonds. There is no necessity at this date based upon the exist-
ing federal contracts, to require a separate collection of the
interest cost on long-term federal contracts under maintenance
and operating costs.

          The only circumstance where recovery of such interest
as a component of maintenance and operation expense is justifiable
would occur in the event the cumulative average effective interest
rate'were applied against that portion of the direct cost of the
facility which could be attributable solely to bond money.
If that were done, then the interest on the cost applicable
to long-term federal contracts, if any, could be recovered as
an item under maintenance and operation.  This method of cost
recovery would avoid the afosesaid difficulties of double or
additional interest charges inherent in the other suggested

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Honorable Harry P. Burleigh, page 4 (M-980)



methods, and would permit total cost recovery in compliance with
the constitutional and statutory requirements. We are, of
course, aware that nothing in this opinion should be understood
as preventing the State from securing the highest possible
price for the sale of these facilities. We are only concerned
herein with interpreting the statutory requirements for es-
tablishing a minimum selling price which accounts for all the
cost elements.

          As a result of the foregoing analysis; we are of the
opinion that the phrase "cumulative average effective rate",
referred to in Section 12(g) of Article 8280-9, Vernon's
Civil Statutes, does not have included inits computation the
current rate of interest being charged the State on long-term
federal contracts, but that any attempts to determine selling
price of a particular facility must consider that the rate of
interest on such federal contracts might exceed the cumulative
average effective rate. To the extent it does, care should be
taken to fully recover the excess, without at the same time
requiring collection of what would amount to a double or addi-
tional interest charge not authorized by the statute. To this
end, we are of the further opinion that the cumulative average
effective rate should be applied only to that portion of the
"direct cost" of the facility attributable to monies from the
sale of Texas Water Development Bonds, and that the interest
paid on long-term federal contracts connected with the develop-
ment of the facility be collected under maintenance and operating
expenses.  In no event, however, should the selling price of the
facility, determined in this manner, be less than the actual
total cost of the facility. To illustrate our holding:    assume
a $100,000 facility which was financed partly ($50,000) by
Texas Water Development Bonds and partly ($50,000) by long-
term federal contracts. The cumulative average effective
rate on Texas Water Development Bonds sold to date is 5%.
The rate of interest paid on the federal contracts is 6%. The
selling price encompassing only the items with which we are
here concerned would be determined as follows:

          Direct cost of the facility            $100,000

          Plus: (1) 5% of $50,000 (bond money)      2,500
                (2) 6% of $50,000 (federal
                    contract money) set out as
                    maintenance and operation
                    expense                         3,000

          TOTAL SELLING PRICE                    $105,500




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    Honorable Harry P. Burleigh, page 5(M-980)



    In this example, application of the 5% to the entire $100,000
    of "direct cost" would result in only $5,000 added to the
    selling price, leaving us $500 short of the total cost. If
    it were permissible to add in the $5,000 and still add the
    6% on federal contracts to maintenance and operation expense,
    we would sanction an interest charge of $8,000 ($5,000 +
    $3,000) which would materially exceed the total expense.
    Our opinion is that this would not be a proper interpretation of
    what the Legislature intended inArticle  8280-9, Sec. 12(g),
    supra.

                               SUMMARY

                   The phrase "cumulative average effective
              rate", referred to in Section 12(g) of Article
              8280-9, Vernon's Civil Statutes, does not in-
              clude in its computation the current rate of
              interest being charged the State on long-term
              federal contracts.  The computation of actual
              interest expense incurred and ta be recovered
              as an item of selling price shall be made by
              applying the cumulative average effective
              rate to only that portion of the "direct cost"
              of the facility which is attributable to monies
              from the Texas Water Development Fund, and by
              including the actual interest paid on long-
              term federal contracts connected with the
              development of the facility in the category
              of maintenance and operat'ng expenses.
                                      A




    Prepared by James H. Quick
    Assistant Attorney General

    APPROVED:
    OPINION COMMITTEE:

    Kerns Taylor, Chairman
    W. E. Allen, Co-Chairman




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Honorable Harry P. Burleigh, page 6   (M-980)



Roger Tyler
Marietta Payne
Jack Goodman
John Reeves

SAM MCDANIEL
Staff Legal Assistant

ALFRED WALKER
Executive 'Assistant

NOLA WHITE
First Assistant




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