.



,

              THE      ATTORNEY           GENERAL
                          OF      TEXAS




                           August 30, 1972


    Honorable Hugh C. Yantls, Jr,.   Opinion No. M- 1202
    Executive Director
    Texas Water Quality Board         Re: Whether bonds of Northwest
    Lowlch Building                       Houston Water SUQQ~Y Cor-
    Austin. Texas 78701                   Qoratlon issued pursuant
                                          to contract with-the City
                                          of Houston under Article
                                          llOgj, V.C.S. as obllga-
                                          tlons of the 6it.yunder
                                          Sections 21.601-21.617
                                          Texas Water Code are eilgl-
                                          ble for purchase by the
    Dear Mr. Yantla:                      state, and related queatlons?
          Your recent request for an opinion states that In 1965 the
    City of Rouston became concerned about the lack of water and
    sewer facllltles In that area adjacent to the City known as
    Acre8 Homes. Supported by Resolution of the City Council, three
    Houston residents were requested to form a non-profit water
    supply corporation under the provisions of Article 143&a
    Vernon's Civil Sta&utes,* to acquire or construct the nec&sary
    facllltles to service this area.
         It apparently was contemplatedthat the facilities were
    to be.acquiredwith corporate bond proceeds flowing from a
    contract with the City of Houston, under the provisionsof
    Article llOgj, whereby the City agreed to purchase the facll-
    ltles from the non-profit corporationand in consideration
    therefor was to pay to the corporation periodic amounts neces-
    sary to pay off the corporate bond debt. The City would annex
    that area known as Acres Homes in phases as the various sections
    were provided water and sewer service. The corporationwas
    organized as the Northwest Houston Water Supply Corporationwith
    all Its stock being held In trust by the Mayor of Houston for the
    benefit of the residents of that area.
         It appears that the parties are now In phase three of


    *All references to Articles are to Vernon's Civil Statutes,
    unless otherwise stated.
                               -5087-
       Honorable Hugh C. Yantls, Jr., page 2   (M-1202)


       the four phase plan for annexation of the Acres Homes area.
       Your lnqulrlea with reference to the character of the
       "corporateobligations" of the Northwest Houston Water
       Supply Corporation have been paraphrased for purposes of
       clarity:
                (1) Are bonds of Northwest Houston Water
                Supply Corporation Issued pursuant to and
                Supported by a contract with the City of
                Houston under the Qrovlslons of Article
                1lOgj considered *other obligations"of
                the City of Houston within the provisions
                of Sections 21.601 through 21.612 of the
                Texas Water Code and as such eligible for
                purchase by the State?

                (2) If the bonds of Northwest Houston Water
                Supply Corporationare not considered *other
                obligations"of the City of Houston as that
                term Is used In Section 21.602 (6)(T) of
                the Texas Water Code, would they beaome so
                eligible If they were to bear a aertlflcate
                signed by the Mayor of the City of Houston
                to the effect that the City Is unconditionally
                obligated to pay the bonds f'romIts ad valorem
                tax revenues?
                 (3) Could the provisions of Subchapter I,
                 Chapter 21, Subtitle C of the Texas Water Code
                 (Sections 21.601 - 21.612) be amended so as to
                 Include bonds of this non-profit corporation
                 within the term "other obligations of a political
                 subdlvlaion"where the bonds offered for sale to
                 the State are unconditionallysecured by a con-
                 tract with a political subdlvlalonunder the
                 provisions of Article llOgj?
       Before answering your first question, we must first examine
       the "legal character" of the parties to that oontract hereln-
       above referred to.
ii:,
            In the case of Tarrant County Water Supply Corporation
       v. Hurst-Euless-BedfordIndependent School Dl t I t     1
       3 W 2d 162 (Tex.Clv.AQQ.1963 error ref n.r.e.' ' &5~gthe
       c&k. sQeclflcallyheld that bubllc utility corporations
       of the klnd here under considerationare
:



    Honorable Hugh C. Yantls, Jr.,   Qage 3   (M-1202)


              I,
               . . . not munlclpal~or governmental
         ;E;e;ef#,. . , Neither wolulda corporation
                 nder the Qrovlslons of Article
         143ka be a political aubdlvlslon." (at
         Q. 163).
         On February 15 1972, this office In Opinion M-1070
    sQeclflcally held that the Northwest Houston Water Supply
    Corporationwas not a "Qolltlcalsubdlvlslon"as that
    term Is used In Sections 21.601 through 21.612 of the
    Texas Water Code.
         There la no question that we are here dealing with
    two separate legal entitles which do not look to each other
    for their Identity or existence. The Northwest Houston
    Water Supply Corporation, Incorporatedunder the provisions
    of Article 149a Is not a part of the City of Houston nor
    could It be considered as one of Its agencies or departments.
    The relatlonshlpwhich the parties bear to one another would
    be determined by contract, but we do not believe any such
    contract could operate to change the "legal nature" of the
    parties as they existed at the time the contract was made.
    This same Qrlnclple would apply to any security which the
    city or the corporation might contemplate lssulng. No
    contract between the parties could convert a bond, note or
    warrant of the City of Houston Into an obligation of the
    corporations,nor vice-versa.
         It Is contended by the attorneys for one of the lnter-
    ested partlea that the bonds Issued by the Northwest Houston
    Water Supply Corporationare eligible for purchase by the
    Texas Water DevelopmentBoard under Section 21.601, et seq.,
    Texas Water Code, because they are "obll ations" of the City
    of Houston within the meaning of SetJEdFIXE(7)       In
    support of this proposition,the following addltloAa1 facts
    and considerationsare presented:
             "2. Northwest Houston Is a non- roflt
        corporation organized under Article 1I:
                                              34a
        Vernon's Texas Civil Statutes at the reqiest
        of the City, and all of the siock Is held In
        trust by the Mayor of Houston for the benefit
        of the residents of the City and the residents
        of the Acres Homes area adjacent to the City.
              "3. The corporate charter prohibits dividends

                                -5889-
Honorable Hugh C. Yantla, Jr.; page 4          (M-1202)


    and requires that all profits of the corporation
    be paid out to the cities, towns, and other entitles
    with whom the corporation does business. No business
    has ever been conducted except with the City of
    Houston.
         “4. The Mayor and City Council of Houston
    appoint the corporation'sdirectors and all of
    the corporation'sactions are subml&ed to the
    City for approval.
         “5. The basic contract between the City and
    Northwest Houston Water Supply Corporation and
    all supplementalcontrac~ts,require the foilowing:
              (a) Approval by the Mayor and City
         Council of the City of Houston of the plan
         Of finanCing   QrOQOSed   QrOjeCtS;

               (b) Approval by the City's Director of
          Public Works of plans, speclflcatlons,and
          contract documents;
              (c) Approval by the Houston City Council
         of constructionbids and QrOQOSSd awards of
         construction contracts; and
              (d) Approval by the Houston City Council
         of the resolution authorizing Issuance of the
         bonds.
          “6. The contracts obligate the City of Houston
     to pay directly to the bond paying agent sums,suffl-
     clent to pay the principal of and Interest on the
     bonds, just as the City does for Its own bonds.
         “7. The contracts require those payments to be
    made from a continuing direct annual ad valorem tax
    on all taxable property within the City, as Is the
    case with general obligation bonds Issued by the
    city.
          “8. The City Ordinance authorlzlng the contracts
     levies the ad valorem tax required to make such prln-
     clpal and Interest payments.
          “9. The City Ordinance approving the bond       reso-

                             -5890-
Honorable Hugh C. Yantls, Jr., page 5   (M-1202)


    lutlon, the Interest rates, and the sale of the
    bonds and authorizing their Issuance reaffirms the
    unconditionalobligation of the City to make the
    payment of principal of and Interest on the,bonds.
          "10. The contracts provide that
               'The City's obligation to levy such
         annual tax and to make the payments on the
         purchase price as herein provided shall
         Inure to the benefit of the owners and holders
         of the aforesald,bondsof the company who
         shall have, In addition to all other remedies
         at law and In e,qulty,the right to enforces
         speolflc performanceof the City!8 obligation
         to levy such annual payments.'
         "11. The contracts, the bond resolutions,and
    the bonds themselves provide for a pledge of the City's
    payments to the paying agent bank as security for the
    bonds. The only security behind the bonds and the
    sole source of payment of the bonds Is ad valorem
    tax revenues of the City. In addition, the bond reso-
    lutions and the contracts sQeclflcallyrefer to rights
    of the bond holders as against the City In the event
    of default. It Is clear that 'all of the Instruments
    were prepared and entered into In the accomplishment
    of a single QurQose~ and must be construed together
    as one Instrument. Guadalupe-Blanc0River Authorlt
                            200 3 W 2d -1.
                           bllgatiotito pay tz'b%s
    from tax revenues Is a part of the contract with the
    bond holders, and the bonds themselves are obligations
    of the City of Houston.
          "12. There Is no unconstitutionalgrant of
     public money or thing of value, lending of credit,
     or grant of special prlvlleges. The City Is con-
     tracting for services It could perform, and Indeed
     Is obligated to perform, for Itself. . . ,
          "13. The levy of ad valorem taxes by the City
     Is not a violation of Article 701, Vernon's Texas
     Civil Statutes. These are not the bonds of the
     City even though they are obligations of the City.
     There Is no constitutionalor statutory relulrement
     for an election to approve the contract or the bonds.

                            -5891-
    Honorable Hugh C. Yantls, Jr., page 6     (M-1202)


         "14. The Interest on the bonds Is exempt from
    Federal Income
            -   _ taxation under rulings of the Internal
    Revenue service,
         "15. The bonds are eligible for purchase and
    unlimited holding by national banks under rulings
    of the Comptroller of the Currency that the bonds
    are general obligations of a state or political
    subdlvlslon."
     Article 1lOgj Is express authority for cities to contract
with non-profit corporationsfor the purpose of acquiring
for the benefit of the cities, water dlstrlbutlonand sani-
tary sewer systems. There Is nothing In this act which would
Indicate that bonds Issued pursuant to any such contract
would be or should be considered as "obligations"of the
cities contracting. The Article In referring to the respon-
slblllty of cities under any such contract states:
         "Such contract may provide for purchase by
    the city. . . of such system.     by periodic
    payments to such. , . corporationby the city. . .
    In amounts which.     will be sufficient to pay
    the principal of and'lntereston the bonds of the
          corporationas they become due." (Ehphasls
    adie;).
     It Is clear that the act considers these bonds "corporate"
bonds and not "municipal"bonds.
      We recognize that It would be to the City of Houston's
advantage If the bonds of the Water Supply Corporationwere
eligible for purchase by the Texas Water Development Board
with funds made available through the water "enhancement
account" as authorized by Article III Section 49-d-l of
the Texas Constitution. Sections 21.601 through 21.612
of the Texas Water Code speaks to "bonda or other obligations
of a political subdlvlslon"as being eligible for purchase
with water quality enhancement funds. Because the water
supply corporation Is not a political subdivlslon their bonds
as such are not eligible. Atty. (lenl.Opinion M-1070, supra.
     We have previously concluded that the bonds Issued pur-
suant to a contract authorized by Article 1lOgj are the bonds
of the corporation and not the City.. Where the statute uses
the term "other obligations of a political ~ubdlvlslon"It
must be construed to have reference'to\securltles of the same
                           -5092-
:




    Honorable Hugh C. Yantls, Jr., ,page7    (M-1202)


    nature or character as bonds (I.e. warrants certlflcatesof
    obligation, etc.) and may not be lnterpreteibroadly to ln-
    elude any or all types of obligations of a political sub-
    dlvlslon.1 The fact that the City of ,Houstonhas direct
    "obllgatlons"under a contractwith the Northwest Water
    Supply Corporation pursuant to Article llOgj, Is thus not
    sufficient to make the corporate bonds Issued pursuant
    to the contract, eligible as "other obilgatlons"of the
    City of Houston as that term Is used In Sectlon~21.602 (6)(7).
         In your second question you have suggested that If the
    bonds of the water supply corporation bear a certificate
    signed by the mayor of the City of Houston, citing the City's
    unconditional obligation to pay the bonds that they then
    might be considered "other obligations" 04 the city for
    water enhancement loan purposes.
         We find nothing In our statutes that would authorize
    the City of Houston to act as an accommodationlndorser or
    surety on the bonds of a separate entity. The authority of
    the City Is one In contract pursuant to Article llOgj, and
    Its responslbllltlesare contained therein and confined
    thereto. It Is generally recognized that without legislative
    authority, a city may not legally become a guarantor, ln-
    dorser or surety for the payment of bonds or other obligations
    of another corporate entity. McQulllln, Municipal Corporations,
    Vol..15, Section 39.10. As stated earlier In this opinion,
    we are here concerned with a non-municipalbond, and should
    the city wish to have outstanding Its general obligation bonds
    to cover the proposed projects It would be necessary to comply
    with the requirementsof Artlcie 701, which reads, In part,
              "The bonds of       an IncorporatedCity. , .
         shall never be lsau;d: 1 unless a proposltlon
         for the Issuance of such bonds shall have been first
         submitted to the qualified voters. . .'I


        'Noscltur A. Soclls (It Is known,from Its associates 1
    Vent. 225.) The doctrine means that general and speclfld words
    are associated with and take color from each other, restricting
    general words to sense analogous to less general. 53 Tex.Jur.2d
                              ; Farmers.'& MechanIcat Nat, Bank v.
                              .w. 1120(1911) calvert v. Austin
                                365 S.W.2d 212 (Tex Cl       19b
                              I;I
                                v. State,140 Fla. 794,viAg~Q40.3~4,(1g3g).

                                -5893-
Honorable Hugh C. Yantls, Jr,, page 8   (M01202)


     One cannot accomplish indirectly that which It has no
authority to do In the first Instance.
     As a matter of Information.the orooosed contract be-
tween the parties covering Phasd 3 of‘thk project, which
you forwarded~to this office as part of your background
Information, calls for a water supply and distribution
system as well as certain sewage facllltles, excludln
speclflcallya sewage treatment plant, to be
with the bond proceeds.
     Even If the-bonds were conslder$_bonds of the
                                                 . City
                                                      . of
Houston they would still not be ellglble for Qurcnase oy
the Texas Water Development Board, for Section 21.601 does
not contemplate their Inclusion but sQeclflcally states:
         "The purpose of this subchapter Is to
    provide for making loans of water quality
    enhancement funds authorized by Article fI1,
    3 t1      - -1 of the Texas Constitution
    t~cQo~?tlcal s~bdlvlsionsof the state fo$
    uiilng
    maximum federal grants for the constrmctlon
    Of treatment Works." (Emphasis SUpplied).
     It is also noted that the QMceedS realized from the
sale of these bonds must be used In constructionof treat-
ment works exclusively,and we are aware of no exception
that would Include a waterworks system.
     Your final question lnvolvss.the possibilityof amending
Subchapter I of Chapter 23 of the Water Code to include bonds
of such a non-profit corporationas here exists within the
term "other obligations of a political subdivision."
      While Article III, Sections 50 and 52, Texas Constitution,
declares that the legislature has no power to give or to lend
or to authorize the giving, lending or pledging of the credit
of the state In aid of any person or corporation,whether
municipal or other, the courts have held that It doe?.not pro-
hibit the legislature from authorizinga state or gcvernmental
agency to use the credit of the state for governmental,public
or state purposes. State v. Dallas, 319 S.W.2d 767, affirmed,
160 Tex. 348, 331 S.W.2d 73'/(19 t3f;Aransas Pass v. Keelln
112 Tex. 339, 247 S.W. 818 (1923 ; Brazos River Conservatlo?
& Reclamation Dlst. v. McGraw 126 Tex. 506 91 3 W 2d bb5
-Cl93b); Hlghway Comm. v. Vaugh, 288 S.W. 835 (Tei.tiV.AQQ.

                           -5894-
Honorable Hugh C ~ Yantls,'Jr., page 9   (M-1202)


1926, error ref.); 52 Tex.Jur. 754, State of Texas, Sec.
42.
     Under the facts presented,and If a proper statutory
enactment were enacted, the City of Houston would be con-
tracting for Qubllc~governmentalservices which It may
legally perform and for which It Is obligated under the
law to provide. The ~contracts call for the improvement
and enlargement of specific water and sewage systems owned
and to be acquired by the City of Houston and for the bene-
fit of the general public within such City, and in accordance
with agreed contractual.plans. The parties to the contracts
are obligated In quid pro quo contracts. The City Is
authorized legally to so oontractfor such a Qubllcbeneflt
and governmental QurQo%e, and It therefore does not constl-
tute a grant of money to the non-proflkcorporatlon for
Individual or private purposes or an unconstitutionallend-
ing or pledging of credit by the City In aid of the corp-
oration. San Antonio River Authority v. Shepperd, 157 Tex.
73, 299 S.W.= 920, 928 (1957).
     It Is therefore-ouropinion that the.QroViSiOnSof
Subchapter I, Chapter 21, Subtl,tleC of the Texas Water
Code (Sections 21.601 - 21.612),could be amended In such
a ,wayas to Include bonds of such a non-profit corporation
within the term "other obligations,of a political aub-
division" where the bonds offered for sale to the State
are uncondltlonally~securedby a contract with the political
subdlvlslonunder the provisions of Article 1lOgj. .A8
stated In Attorney General Opinion No. w-1229(1961),  the
determln:tlonof what constitutesa public governmental
purpose        has been held to be primarily a legislative
function subject to review by the courts when abused and
the determinationof the legislative body of the matter has
been held to be not subject to b,ereversed except In Instances
where such determlnatlonnlspalpably and manifestly arbi-
trary and Incorrect.       See also In accord, Attorney
General Opinion No. c-530(1965) and authorities therein
cited, holding that the benefit; to the state,or governmental
entity Is In the nature of considerationand that the funds
expended or loaned are not an unconstitutionalgift or loan
even though private persons are benefitted therefrom, and
that the courts will look to the character of the use for
which the money Is expended or loaned, not who receives It.
81 C.J.S. 1148, States, Sec. 133.


                             -5895-
Honorable Hugh C. Yantis, Jr., page 10    (M-I202)


                    SUMMARY
          Bonds of the Northwest Houston Water Supply
     Corporation Issued pursuant to and supported by
     a contract with the City of Houston pursuant to
     the provisions of Article llOgj, V.C.S are not
     to be considered as "other obligations"of the
     city as that term is used In Subchapter I, Chap-
     ter 21 of the Texas Water Code,
         A certificate appearing on the bonds of
    the Northwest Houston Water Supply Corporation,
    signed by the Mayor of the City of Houston to
    the effect that the City is unconditionally
    obligated to pay said bonds from ad valorem tax
    revenues of the City 1s not sufficient to render
    such bonds "other obilgations" of such city as
    that term is used In Subchapter I, Chapter 21 of
    the Texas Water Code.
         A proper statutory.amendmentto Subchapter
    I, Chapter 21 of the Texas Water Code which
    would Include bonds of such a non-profit corpo-
    ration as herein described, and under the facts
    and conditions presented; within the term "other
    obligations of a political subdivision"as uaed
    In said Chapter could be upheld as not in contra-
    vention of Article III Sections 50 and 52 of the
    Texas Constitution prohibiting the lending of credit
    to any Individual, association or corporation.
                               Vedtruly   yours,




Prepared by Robert B. Davis
Assistant Attorney Qeneral
APPROVED:
OPINION COMMITTEE
Kerns Taylor, Chairman
W. E. Allen, Co-Chairman


                              -5a96-
Honorable Hugh C. Yantls, Jr., page 11   (M-1202)


Roger Tyler
William Craig
V. F. Taylor
Robert Lemens
SAMUEL D. MCDANIEL
Staff Legal Assistant
ALFRED WALKER
Executive Assistant
NOLA WHITE
First Assistant




                           -5a97-
