Can a Texas city or county invest public money in mutual funds that hold only government adjustable-rate mortgages?

Plain-English summary

Texas governments, cities, counties, school districts, hospital districts, and similar public bodies, cannot just invest taxpayer money in anything they like. A state law, the Public Funds Investment Act, lists the kinds of investments they are allowed to make. The chair of the House Financial Institutions Committee asked the Attorney General a focused question: can those entities put public funds into a money market mutual fund whose entire portfolio is adjustable-rate mortgages issued or guaranteed by federal agencies, the kind of mortgages packaged by Fannie Mae, Freddie Mac, and Ginnie Mae?

The Attorney General concluded yes, with two conditions. The Act (in section 2(a)(1)) lets these entities invest in "obligations of the United States or its agencies." A mortgage issued or guaranteed by a federal agency is such an obligation. And section 2(d) of the Act specifically allows a listed entity to put a limited slice of its money into a particular kind of money market mutual fund, one that is SEC-registered, charges no load (no sales commission), keeps a short average maturity (120 days or less), aims to hold its share price steady at $1, and holds only the obligations described in section 2(a). A mutual fund made up entirely of federal-agency adjustable-rate mortgages fits that description, because those mortgages are section 2(a) obligations.

The opinion addressed one likely objection. When section 2(d) was added in 1989, witnesses describing typical money-market holdings mentioned things like Treasury bills and commercial paper, not adjustable-rate mortgages. But the opinion read section 2(d) as describing the eligible funds in general terms, not freezing the list of permissible underlying investments to whatever was common in 1989. So as long as the fund's adjustable-rate mortgages fall within a category of obligations listed in section 2(a), and the fund meets section 2(d)'s other requirements, a listed entity may invest in it.

The two conditions matter. First, the fund itself has to satisfy all of section 2(d)'s requirements. Second, the entity may invest only the limited portion of its money that section 2(d) permits: no more than 20 percent of its monthly average fund balance (excluding bond proceeds) across such funds, and no more than 10 percent of any single fund's total assets.

Currency note

This opinion was issued in 1993. 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 Public Funds Investment Act has since been recodified into chapter 2256 of the Government Code and amended many times, and the categories of authorized investments, percentage limits, and fund requirements have changed (Texas tightened public-fund investment rules after local-government investment losses in the mid-1990s), so confirm current law before relying on anything described here.

Background and statutory framework

The question concerned section 2 of the Public Funds Investment Act of 1987 (the PFIA), V.T.C.S. article 842a-2. Section 2(a) lists the public and nonprofit entities the Act covers, an incorporated city or town, a county, a public school district, a district or authority created under article III, section 52(b)(1) or (2), or article XVI, section 59, of the Texas Constitution, an institution of higher education as defined by Education Code section 61.003, a hospital district, a fresh water supply district, or any nonprofit corporation acting on behalf of any of these, and authorizes them to purchase, sell, and invest their funds in, among other things, "obligations of the United States or its agencies and instrumentalities" (§ 2(a)(1)). Section 2(d), added in 1989, additionally lets a listed entity invest in an SEC-registered, no-load money market mutual fund with a dollar-weighted average portfolio maturity of 120 days or less, whose assets consist exclusively of the obligations described in section 2(a) and whose objectives include maintaining a stable net asset value of $1 per share, subject to caps: no more than 20 percent of the entity's monthly average fund balance (excluding bond proceeds) in such funds, and no investment in any one such fund exceeding 10 percent of that fund's total assets. (Section 270.2a-7 of part 17 of the Code of Federal Regulations sets the conditions a registered investment company must satisfy to hold itself out as a money market fund; 17 C.F.R. § 270.2a-7.)

Purpose of the Act and the 1989 amendment. The opinion explained that the legislature enacted the PFIA in 1987 to enable certain entities to make investments previously prohibited (Acts 1987, 70th Leg., ch. 889; see Tex. Const. art. III, § 52(e)), and amended it in 1989, adding subsection (d), because the original Act "did not completely satisfy the need for diversification in the management of public funds or the need for specialized investment vehicles to deal with the arbitrage rebate requirements of the Tax Reform Act of 1986" (House Comm. on Financial Institutions, Bill Analysis, C.S.S.B. 1342, 71st Leg. (1989)). The amendments were intended to liberalize the PFIA by permitting listed entities to invest in prime money market instruments and investment securities. (The opinion noted in a footnote that several 1989 enactments amended section 2(a), but because its concern was interpreting section 2(d), it did not need to reconcile the various versions, citing the statutory-construction rule that conflicting statutes passed in the same session repeal one another only if the later expressly repeals the earlier or the provisions are irreconcilably repugnant; Shults v. State, 696 S.W.2d 126, 131 (Tex. App.-Dallas 1985, writ ref'd n.r.e.).)

Adjustable-rate mortgages as section 2(a) obligations. The opinion described an adjustable-rate mortgage as a mortgage whose interest rate is reset periodically, and noted that federal agencies such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae) issue or guarantee such mortgages. Section 2(a)(1) authorizes a listed entity to invest in an obligation of a United States agency, and an adjustable-rate mortgage issued or guaranteed by a federal agency is such an obligation. The opinion observed that 1989 committee testimony describing typical money-market mutual-fund holdings (Treasury bills, commercial paper, and bankers' acceptances) did not mention adjustable-rate mortgages, but concluded that because section 2(d) describes the eligible funds generally, the legislature did not intend to limit a listed entity to funds holding only investments available in 1989.

Conclusion. The opinion concluded that the plain language of subsection (d) authorizes a listed entity to invest a specified portion of its funds in a money market mutual fund that includes in its portfolio adjustable-rate mortgages obligating a federal agency, so long as the fund complies with section 2(d)'s other requirements and the mortgages fall within a section 2(a) category.

Common questions

Can a Texas city or county invest in a mutual fund made up only of federal-agency adjustable-rate mortgages?
The opinion concluded yes, provided the fund meets section 2(d)'s requirements and the entity invests only the limited portion of its money that section 2(d) permits.

Why are these mortgages an allowed investment?
Because adjustable-rate mortgages issued or guaranteed by federal agencies (Fannie Mae, Freddie Mac, Ginnie Mae) are "obligations of the United States or its agencies" under section 2(a)(1), which a money market fund may hold under section 2(d).

Does it matter that adjustable-rate mortgages were not a common money-market holding in 1989?
No. The opinion read section 2(d) as describing eligible funds generally, not limiting them to the specific investments common when the subsection was added in 1989.

Are there limits on how much can be invested?
Yes. Under section 2(d), no more than 20 percent of the entity's monthly average fund balance (excluding bond proceeds) may go into such funds, and the entity's investment in any single fund may not exceed 10 percent of that fund's total assets. The fund must also be SEC-registered, no-load, with a 120-day-or-less average maturity and a $1-per-share stable-value objective.

Citations

• V.T.C.S. art. 842a-2 (Public Funds Investment Act of 1987), § 2(a), § 2(a)(1), § 2(d), § 2(c)(1)
• Tex. Const. art. III, § 52(b)(1), (2); § 52(e); art. XVI, § 59
• Education Code § 61.003 (institutions of higher education)
• 17 C.F.R. § 270.2a-7 (money market fund conditions)
• V.T.C.S. art. 4413(32c) (Interlocal Cooperation Act)
• Acts 1987, 70th Leg., ch. 889; Acts 1989, 71st Leg., chs. 39, 628, 693, 730 (PFIA enactment and amendments)
• Shults v. State, 696 S.W.2d 126 (Tex. App.-Dallas 1985, writ ref'd n.r.e.)
• House Comm. on Financial Institutions, Bill Analysis, C.S.S.B. 1342, 71st Leg. (1989); Tax Reform Act of 1986

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0202
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1993/dm0202.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; garbled case names were verified against the official reporters, and one footnote citation left partly illegible in the scan is noted in brackets. The linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

January 28, 1993

Honorable Jim Tallas
Chairman
Committee on Financial Institutions
Texas House of Representatives
P. O. Box 2910
Austin, Texas 78768-2910

Opinion No. DM-202

Re: Whether the Public Funds Investment Act, V.T.C.S. article 842a-2, authorizes cities, counties, and certain other public entities to invest public funds in mutual funds holding only adjustable rate mortgages that United States agencies have issued (RQ-334)

Dear Representative Tallas:

You have requested an interpretation of section 2 of the Public Funds Investment Act of 1987 (the "PFIA"), V.T.C.S. article 842a-2. Section 2 states in pertinent part as follows:

(a) An incorporated city or town, a county, a public school district, a district or authority created under Article III, Section 52(b)(1) or (2), or Article XVI, Section 59, Texas Constitution, an institution of higher education as defined by Section 61.003 of the Education Code, a hospital district, a fresh water supply district, or any nonprofit corporation acting on behalf of any of those entities may, in accordance with this Act, purchase, sell, and invest its funds and funds under its control in the following:

(1) obligations of the United States or its agencies and instrumentalities;¹

. . . .

(d) In addition to the [obligations] described by Subsection (a) of this section, an entity listed in that subsection may, in accordance with this Act, purchase, sell, and invest its funds and funds under its control in [a Securities and Exchange Commission]-registered, no-load² money market mutual fund with a dollar-weighted average portfolio maturity of 120 days or less whose assets consist exclusively of the obligations that are described by Subsection (a) of this section and whose investment objectives include seeking to maintain a stable net asset value of $1 per share. No entity listed in Subsection (a) of this section is authorized by this Act to invest in the aggregate more than 20 percent of its monthly average fund balance, excluding bond proceeds, in money market mutual funds described in this subsection, or to invest its funds or funds under its control, excluding bond proceeds, in any one money market mutual fund in an amount that exceeds 10 percent of the total assets of the money market mutual fund.

(Footnotes added.) You ask whether section 2(d) of the PFIA authorizes the public and nonprofit entities listed in section 2(a) to invest their funds and funds under their control in money market mutual funds holding only adjustable rate mortgages that United States agencies have issued. We conclude that it does, provided that the mutual fund meets the requirements set out in section 2(d) and that the listed entity invests in the mutual fund only that portion of its money that section 2(d) permits.

The legislature enacted the PFIA in 1987 to enable certain entities to make investments that previously had been prohibited. See Acts 1987, 70th Leg., ch. 889, § 2, at 2985; see also Tex. Const. art. III, § 52(e). In 1989 the legislature amended the PFIA by, among other things, adding subsection (d), because, "[a]s important as the Public Funds Investment Act was, it did not completely satisfy the need for diversification in the management of public funds or the need for specialized investment vehicles to deal with the arbitrage rebate requirements of the Tax Reform Act of 1986." House Comm. on Financial Institutions, Bill Analysis, C.S.S.B. 1342, 71st Leg. (1989); see Acts 1989, 71st Leg., ch. 628. The legislature intended the amendments to liberalize the PFIA by permitting the listed entities to invest their funds and funds under their control in prime money market instruments and investment securities. See House Comm. on Financial Institutions, Bill Analysis, C.S.S.B. 1342, 71st Leg. (1989); Hearings on S.B. 1342 Before the Senate Comm. on State Affairs, 71st Leg. (Apr. 12, 1989) (testimony of Senator Leedom, sponsor of S.B. 1342) (tape available from Senate Staff Services).

We understand that an "adjustable rate mortgage" is a mortgage in which the interest rate on the loan is reset periodically. Certain federal government agencies, such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae), issue or guarantee adjustable rate mortgages. We note that a witness who testified before the House Committee on Financial Institutions in 1989 did not include adjustable rate mortgages as an example of the investments money market mutual funds typically made at that time. See Hearings on H.B. 1751 Before the House Comm. on Financial Institutions, 71st Leg. (Apr. 17, 1989) (testimony of Warren Evans, Director of Revenue and Taxation for the City of Dallas) (tape available from House Committee Coordinator) (stating that a money market mutual fund might have investments in treasury bills, commercial paper, and bankers' acceptances). Nevertheless, section 2(d) explicitly authorizes an entity listed in section 2(a) to invest a specified portion of its funds and funds under its control "in [a] SEC-registered, no-load money market mutual fund . . . whose assets consist exclusively of the obligations that are described by Subsection (a) of this section." Because subsection (d) describes generally the money market mutual funds in which the listed entities could invest, we do not believe that the legislature intended to limit such an entity to investing in mutual funds that invested only in investments available in 1989. Thus, so long as the adjustable rate mortgages in which the money market mutual fund invests fall within one of the categories of obligations listed in section 2(a) of the act, we believe that a listed entity may invest in that money market mutual fund.

As stated above, section 2(a)(1) of the PFIA authorizes a listed entity to invest in an obligation of a United States agency. As you have described it, an adjustable rate mortgage that a federal government agency has issued or guaranteed constitutes an obligation that falls within the scope of section 2(a)(1). Accordingly, the plain language of subsection (d) authorizes a listed entity to invest a specified portion of its funds and funds under its control in a money market mutual fund that includes in its portfolio adjustable rate mortgages obligating an agency of the federal government (so long as the money market mutual fund complies with the other requirements of section 2(d)).

SUMMARY

The Public Funds Investment Act, V.T.C.S. article 842a-2, authorizes cities, counties, and certain other public and nonprofit entities to invest their funds and funds under their control in mutual funds holding only adjustable rate mortgages that obligate United States agencies, provided that the mutual fund complies with section 2(d) of the act, and provided that the entity invests only that portion of its money in the mutual fund that section 2(d) permits.

DAN MORALES
Attorney General of Texas

WILL PRYOR
First Assistant Attorney General

MARY KELLER
Deputy Assistant Attorney General

MADELEINE B. JOHNSON
Chair, Opinion Committee

¹ The legislature amended section 2(a) four times in 1989. See Acts 1989, 71st Leg., ch. 39, § 1; id. ch. 628, § 1, at 2099-100; id. ch. 693, § 4, at 3199-200; id. ch. 730, § 1, at 3333. One of the enactments amends the PFIA to include in the list of authorized investments those made pursuant to the PFIA by a district or authority created under article III, section 52(b)(1) or (2), or article XVI, section 59, of the Texas Constitution; one amends the PFIA to include a hospital district and a fresh water supply district; one amends the PFIA to include obligations of districts or authorities organized under article III, section 52, or article XVI, section 59, of the Texas Constitution; and one amends the PFIA to include a public funds investment pool created under the Interlocal Cooperation Act (V.T.C.S. article 4413(32c)). Because our primary concern here is interpreting section 2(d), we need not reconcile these versions. See Shults v. State, 696 S.W.2d 126, 131 (Tex. App.-Dallas 1985, writ ref'd n.r.e.) (quoting Wright v. [party name illegible in scan], 1__ S.W.2d 82, 85 (Tex. 1946)) (stating rule that when conflicting statutes are passed during the same legislative session, the latter provision repeals the former only if the latter provision expressly repeals the former, or if the provisions are irreconcilably repugnant). For purposes of this opinion, we will use the version of subsection (a) found in the enactment that added subsection (d). Acts 1989, 71st Leg., ch. 628, § 1, at 2099-100.

² Section 270.2a-7 of part 17, Code of Federal Regulations, establishes the conditions a registered investment company must satisfy to hold itself out to investors as a money market mutual fund. See 17 C.F.R. § 270.2a-7(b). For purposes of section 2 of the PFIA, "bond proceeds" is defined to mean "the proceeds from the sale of bonds and funds maintained for debt service purposes." V.T.C.S. art. 842a-2, § 2(c)(1).