Can a Texas home-rule city set up a nonprofit corporation to issue bonds for a community project?

Plain-English summary

Texas City, a home rule city, wanted to help an at-risk-children project get off the ground without putting taxpayer money on the line. The plan was to charter a non-profit corporation with no stock, have the city commission approve its articles and appoint its board, and let the corporation issue bonds to buy and fix up a vacant building. That building would then be leased to a mix of city, county, state, and private social, educational, and community groups that serve at-risk children. A state senator asked the Attorney General whether the city was allowed to do this.

The opinion said yes, with conditions. Home rule cities in Texas start with broad power: they can do anything the legislature has not forbidden. No statute banned this kind of sponsorship. The harder questions came from the Texas Constitution, which forbids a city from lending its credit, giving away public money, or owning stock in a corporation. Drawing on a 1971 opinion about a nearly identical City of Waco plan, the Attorney General explained that bonds paid back only from the project's own revenue (here, lease payments plus a mortgage on the building) are not a city "debt" and do not lend the city's credit, and that a corporation with no stock and no members does not make the city a stockholder. So, taking the city's word that no city funds or credit would back the bonds or otherwise aid the corporation, the plan passed constitutional muster. A footnote added one caution: if city employees did staff work for the corporation, that would be a grant of public money, allowed only for fair consideration, for a public purpose, and with proper controls.

The senator also asked whether it mattered that some of the agencies in the building would serve people who do not live in Texas City. The opinion said no. The constitution does bar transfers of public funds to other governments or to private parties, but since no city money was financing the corporation or the building, there was no prohibited transfer regardless of who the agencies served.

Finally, the opinion addressed whether a city commissioner could also sit on the new corporation's board. Two old doctrines might have stood in the way. The rule against holding "incompatible offices" did not apply, because a seat on a private nonprofit board is not a public office. And the common-law conflict-of-interest rule had been replaced by chapter 171 of the Local Government Code, which flatly allows a local official to serve on a private nonprofit board so long as he or she is not paid for it. So a commissioner could serve as a director, just not for compensation.

Currency note

This opinion was issued in 1992. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The Texas Non-Profit Corporation Act has since been recodified into the Business Organizations Code, and the cited constitutional and Local Government Code provisions may have been amended, so confirm current law before relying on anything described here.

Background and statutory framework

The request, from the Chairman of the Senate Committee on Health and Human Services, asked whether a home rule city may sponsor a non-profit, no-share corporation. The City of Texas City wanted to sponsor a corporation under the Texas Non-Profit Corporation Act (V.T.C.S. art. 1396-1.01 et seq.); the city commission would approve the articles of incorporation, authorize the incorporators to file them with the secretary of state, and appoint the board, and the corporation would issue bonds to finance acquisition and renovation of a vacant building to be leased to city, county, state, and private social, educational, and community organizations serving at-risk children. (The opinion expressed no view on whether such bonds would be tax-exempt under the federal Internal Revenue Code, and it addressed only state-law authority, not whether the city's charter authorized the action.)

Authority to sponsor the corporation. The Texas Constitution grants home rule cities all the power of self-government not expressly denied by the legislature (Tex. Const. art. XI, § 5; Lower Colorado River Authority v. City of San Marcos, 523 S.W.2d 641 (Tex. 1975); Forwood v. City of Taylor, 214 S.W.2d 282 (Tex. 1948)), and prohibits a home rule city from enforcing legislation inconsistent with state law or the constitution. The opinion was aware of no legislation prohibiting the sponsorship. Article III, section 52 provides that cities and other governmental entities are not authorized to lend credit or grant public money or a thing of value in aid of any individual, association, or corporation, or to become a stockholder in such a corporation; article XI, section 3 contains similar prohibitions (barring a city from subscribing to the capital of a private corporation, making an appropriation or donation to it, or in any way loaning its credit). The question was whether the city's plan amounted to a lending of credit or a holding of stock.

In Attorney General Opinion M-1023 (1971), the office considered whether a City of Waco plan to form a non-profit, no-share corporation to issue bonds to acquire and improve land for industrial development would violate article III, section 52 or article XI, section 3. That opinion concluded there would be no lending of the city's credit and no granting of public money or thing of value, based on the city's assurances that it would not be liable for the bond indebtedness (see also Attorney General Opinion MW-85 (1979) ("it is clearly established that 'debt' and 'lending of credit' do not occur when bonds are issued which are payable solely from revenues"); cf. Attorney General Opinion JM-1227 (1990)). On the stock-holding question, M-1023 concluded the constitutional prohibitions did not apply because the city would merely charter a no-stock non-profit corporation with no members.

Texas City's brief asserted that the sole security for the bonds would be revenue from leasing the project facilities plus a mortgage (deed of trust) on the facilities, that no city funds or resources would be used to pay the bonds or maintain the project, and that the city's credit would not be pledged directly or indirectly. Assuming those assertions were true and that no city funds or resources would aid the corporation in any other manner, the opinion agreed the plan was constitutionally permissible (Attorney General Opinion M-1023), and concluded, relying on M-1023, that establishing a no-share corporation would not contravene the prohibition against a city holding stock. A footnote cautioned that the brief also stated city officers and employees would perform staff functions for the corporation; providing personnel to the corporation would constitute a grant of public money, permissible only if made for adequate consideration, for a public purpose, and accompanied by controls ensuring the funds are used only for a public purpose (Attorney General Opinions MW-89 (1979); see also JM-1229, JM-1146 (1990); JM-1030 (1989)).

Service to non-residents. Article III, section 52 prohibits transfers of funds between governmental entities as well as between governmental entities and private entities or individuals (Harris County Flood Control District v. Mann, 140 S.W.2d 1098 (Tex. 1940); San Antonio Independent School District v. Board of Trustees of San Antonio Electric & Gas System, 204 S.W.2d 22 (Tex. Civ. App.—El Paso 1947, writ ref'd n.r.e.)). Because no city funds would finance the corporation or its facility, the opinion concluded the proposal would not result in a prohibited transfer of funds to any other governmental entity, private entity, or individual, even though some agencies in the building would serve non-residents of Texas City.

City commissioner serving as a director. The common-law prohibition against holding incompatible offices applies only to dual public offices and was inapplicable, because a position on the nonprofit board is not a public office (Attorney General Opinion H-1309 (1978); see also Attorney General Opinion JM-1065 (1989)). The common-law conflict-of-interest doctrine for local public officials has been superseded by chapter 171 of the Local Government Code (Local Gov't Code § 171.001(1) (defining "local public official"); Attorney General Opinion JM-424 (1986)). Section 171.009 expressly permits a local public official to serve as a member of the board of directors of a private nonprofit corporation when the official receives no compensation or other remuneration from the nonprofit. So a city commissioner may serve as a director of the corporation, provided he or she receives no compensation or other remuneration.

Common questions

Can a Texas home-rule city create a nonprofit corporation to issue bonds for a project?
The opinion concluded yes. Home rule cities have all powers not denied by the legislature, no statute forbade it, and the constitution's bans on lending credit and gifts of public money were not triggered as long as the bonds were payable only from project revenue and no city funds or credit backed them.

Does the city take on the bond debt?
Not under the plan reviewed. The opinion relied on the city's assurance that the bonds would be secured only by lease revenue and a mortgage on the project, with no city funds or credit pledged, so there was no city debt or lending of credit.

What if city employees help run the corporation?
The opinion's footnote warned that providing city personnel to the corporation would be a grant of public money, which is allowed only for adequate consideration, for a public purpose, and with controls ensuring the money is used only for that purpose.

Does it matter that some agencies serve people from outside the city?
No. The opinion concluded that because no city funds would finance the corporation or building, there was no unconstitutional transfer of public funds, regardless of whether the agencies served non-residents.

Can a city commissioner sit on the corporation's board?
Yes, if unpaid. The incompatible-offices rule does not apply because the board seat is not a public office, and Local Government Code section 171.009 expressly allows a local official to serve on a private nonprofit board so long as he or she receives no compensation or other remuneration.

Citations

• Tex. Const. art. XI, § 5 (home rule self-government); art. XI, § 3 (no city subscription/donation/loan of credit to private corporation); art. III, § 52 (no lending of credit, grant of public money, or stockholding)
• Texas Non-Profit Corporation Act, V.T.C.S. art. 1396-1.01 et seq.
• Local Government Code § 171.001(1) (definition of "local public official"); § 171.009 (local official may serve on private nonprofit board if uncompensated)
• Lower Colorado River Authority v. City of San Marcos, 523 S.W.2d 641 (Tex. 1975)
• Forwood v. City of Taylor, 214 S.W.2d 282 (Tex. 1948)
• Harris County Flood Control District v. Mann, 140 S.W.2d 1098 (Tex. 1940)
• San Antonio Independent School District v. Board of Trustees of San Antonio Electric & Gas System, 204 S.W.2d 22 (Tex. Civ. App.—El Paso 1947, writ ref'd n.r.e.)
• Anderson v. City of San Antonio, 67 S.W.2d 1036 (Tex. 1934)
• Davis v. City of Taylor, 67 S.W.2d 1033 (Tex. 1934)
• Attorney General Opinions M-1023 (1971), MW-85 (1979), MW-89 (1979), JM-1227 (1990), JM-1229 (1990), JM-1146 (1990), JM-1030 (1989), H-1309 (1978), JM-1065 (1989), JM-424 (1986)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0194
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1992/dm0194.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; garbled case names were verified against the official reporters. The linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

December 31, 1992

Honorable Chet Brooks
Chairman
Committee on Health and Human Services
Texas State Senate
P. O. Box 12068
Austin, Texas 78711

Opinion No. DM-194

Re: Whether a home rule city may sponsor a non-profit, no-share corporation, and related questions (RQ-441)

Dear Senator Brooks:

You have requested an opinion regarding whether a home rule city may sponsor a non-profit, no-share corporation. You explain that the City of Texas City (the "city"), a home rule city, would like to sponsor a non-profit, no-share corporation incorporated pursuant to the Texas Non-Profit Corporation Act, V.T.C.S. article 1396-1.01 et seq. The city commission would approve the corporation's articles of incorporation, authorize the incorporators to file the articles with the secretary of state, and appoint the corporation's board of directors. The corporation would issue bonds to finance the acquisition and renovation of a vacant building that would be leased to city, county, state and private social, educational, and community organizations to provide services to at-risk children.[1]

[1] This office expresses no opinion as to whether bonds issued by such a corporation would be tax-exempt under the United States Internal Revenue Code.

You first ask whether the city has the authority to sponsor such a corporation.[2] The Texas Constitution grants home rule cities all the power of self-government not expressly denied them by the legislature. Tex. Const. art. XI, § 5; see Lower Colorado River Auth. v. City of San Marcos, 523 S.W.2d 641 (Tex. 1975); Forwood v. City of Taylor, 214 S.W.2d 282 (Tex. 1948). The Texas Constitution prohibits a home rule city from enforcing any legislation inconsistent with state laws or the state constitution. Tex. Const. art. XI, § 5. We are not aware of any legislation which prohibits the city from sponsoring such a corporation. Article III, section 52 of the Texas Constitution, however, provides that various governmental entities, including cities, are not authorized "to lend . . . credit or to grant public money or thing of value in aid of, or to any individual, association or corporation whatsoever, or to become a stockholder in such corporation, association or company." Similar prohibitions are contained in article XI, section 3 of the Texas Constitution.[3] Thus, we must consider whether the city's proposal is prohibited by these constitutional provisions as a lending of credit or a holding of stock in a corporation.

[2] We consider only whether the city is authorized to sponsor such a corporation under state law. You do not ask, and we do not address, whether the city's charter authorizes it to do so. See, e.g., Anderson v. City of San Antonio, 67 S.W.2d 1036, 1037 (Tex. 1934); Davis v. City of Taylor, 67 S.W.2d 1033, 1034 (Tex. 1934).

[3] Article XI, section 3 provides: "No county, city, or other municipal corporation shall hereafter become a subscriber to the capital of any private corporation or association, or make any appropriation or donation to the same, or in anywise loan its credit; but this shall not be construed to in any way affect any obligation heretofore undertaken pursuant to law or to prevent a county, city, or other municipal corporation from investing its funds as authorized by law."

In Attorney General Opinion M-1023 (1971), this office considered whether a City of Waco plan to form a non-profit, no-share corporation to issue bonds for the purpose of acquiring and improving land for an industrial development would violate article III, section 52 or article XI, section 3 of the Texas Constitution. This office concluded that there would be no lending of the city's credit and no granting of public money or thing of value based on the city's assurances that it would not be liable for the bond indebtedness. Attorney General Opinion M-1023 at 7; see also Attorney General Opinion MW-85 (1979) at 3-4 ("it is clearly established that 'debt' and 'lending of credit' do not occur when bonds are issued which are payable solely from revenues"); cf. Attorney General Opinion JM-1227 (1990). With respect to the question of whether the city would engage in the constitutionally prohibited activity of holding stock, that opinion concluded that "the constitutional prohibitions do not apply to the situation outlined in your letter, inasmuch as the City will merely charter a no-stock non-profit corporation and there shall be no members of the corporation." Attorney General Opinion M-1023 at 7-8; see also Attorney General Opinion MW-85 at 3.

A brief submitted by the city suggests that the city's plan would not run afoul of article III, section 52 or article XI, section 3 because

[t]he sole security for the payment of the Bonds will be the revenue generated from the leasing of the Project facilities and a mortgage (deed of trust) of the Project facilities. No City funds or other City resources will be used to pay the Bonds or maintain the Project, and the credit of the City will not be pledged, directly or indirectly, to secure the Bonds.

Assuming that these assertions in the city's brief are true and additionally that no city funds or resources will be used to aid the corporation in any other manner,[4] we agree that the city's plan is constitutionally permissible. See Attorney General Opinion M-1023 at 7. Relying on Attorney General Opinion M-1023, we also conclude that the city would not contravene the constitution's prohibition against holding stock in a corporation by establishing a no-share corporation.[5] Id. at 7-8.

[4] We note that the brief also states that "City officers and employees will perform staff functions for the corporation if directed to do so by the City Commission. . . . City personnel will not perform staff functions for the Corporation without appropriate compensation to the City." The contribution of personnel to the corporation would constitute a grant of public money. Attorney General Opinion MW-89 (1979). Such a grant is permissible only if it is made for adequate consideration, accomplishes a public purpose and is accompanied by controls that ensure that it is used only for a public purpose. See generally Attorney General Opinions JM-1229, JM-1146 (1990); JM-1030 (1989).

[5] Because we have concluded that this home-rule city is not precluded by statute or the constitution from establishing the corporation, we need not address your questions regarding whether the City of Texas City Industrial Development Corporation or various governmental subdivisions may issue tax-exempt bonds for this purpose.

You ask also if "there would be a legal issue of the corporation's financing a facility allowing for the relocation of service agencies that provide services to some non-residents of Texas City?" Article III, section 52 of the Texas Constitution prohibits transfers of funds between governmental entities, as well as transfers between governmental entities and private entities or individuals. See, e.g., Harris County Flood Control Dist. v. Mann, 140 S.W.2d 1098 (Tex. 1940); San Antonio Indep. Sch. Dist. v. Board of Trustees of San Antonio Elec. & Gas Sys., 204 S.W.2d 22 (Tex. Civ. App.—El Paso 1947, writ ref'd n.r.e.). We understand from the city's brief, however, that no city funds will be used to finance the corporation or its facility. Therefore, we conclude that the proposed corporation would not result in a transfer of funds between the city and any other governmental entity, private entity or individual.

Finally, you also ask whether the common-law doctrines prohibiting the holding of incompatible offices or conflicts of interest would preclude a city commissioner from serving as a director of the proposed corporation. The prohibition against holding incompatible offices applies only to dual public offices and is therefore inapplicable here because a position on the board of the non-profit corporation is not a public office. See Attorney General Opinion H-1309 (1978) at 1 (concluding that doctrine prohibiting holding of incompatible offices does not apply where one office is not a public office); see also Attorney General Opinion JM-1065 (1989) at 2-3 (concluding that position on board of non-profit corporation is not a public office).

The common-law doctrine prohibiting conflicts of interest of local public officials, including city commissioners, has been superseded by chapter 171 of the Local Government Code. See Local Gov't Code § 171.001(1) (defining "local public official"); Attorney General Opinion JM-424 (1986) (concluding that predecessor statute modified common law regarding conflicts of interest). That chapter contains a provision which expressly permits a local public official "to serve as a member of the board of directors of private nonprofit corporations when such officials receive no compensation or other remuneration from the nonprofit corporation or other nonprofit entity." Local Gov't Code § 171.009. Thus, chapter 171 of the Local Government Code permits a city commissioner to serve as a director of the corporation, provided he or she receives no compensation or other remuneration for doing so.

SUMMARY

The city's proposal to establish a non-profit, no-share corporation does not run afoul of article III, section 52 or article XI, section 3 of the Texas Constitution. The common-law doctrine prohibiting the holding of incompatible offices does not preclude a city commissioner from serving as a director of the proposed corporation. The common-law doctrine prohibiting conflicts of interest does not preclude a city commissioner from serving on the corporation's board of directors because chapter 171 of the Local Government Code expressly permits a city commissioner to do so, provided he or she receives no compensation or other remuneration.

Very truly yours,

DAN MORALES
Attorney General of Texas

WILL PRYOR
First Assistant Attorney General

MARY KELLER
Deputy Assistant Attorney General

RENEA HICKS
Special Assistant Attorney General

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by Mary R. Crouter
Assistant Attorney General