Can a Texas school district give a private education foundation free office space, and can trustees sit on the foundation's board?

Plain-English summary

Trustees of an independent school district set up a private, non-profit, tax-exempt education foundation to raise money for the district and its students. The same people sat on the district's board and the foundation's board. The district let the foundation use an office on school property and provided incidental items like phones, copy machines, and electricity, while the foundation paid the district back for long-distance calls and copy paper. A state senator asked the Attorney General three things: whether providing the free office and items broke any law, whether trustees could also sit on the foundation's board, and whether the arrangement violated a long-running school desegregation court order.

On the first question, the Attorney General found no state or federal statute that flatly bans a school district from giving office space and services to such a foundation. Education Code section 23.26 gives trustees the exclusive power to manage the schools and to accept donations, and it vests school property in the trustees, who hold it in trust for school purposes. So the statute allowed the district to accept the foundation's gifts and, assuming a school purpose was served, to supply the foundation with office space and other school property. The catch was constitutional. Article III, section 52(a) of the Texas Constitution bars a school district from granting public money or a thing of value to a person or corporation. Drawing on its 1981 opinion about the University of Texas Law School Foundation (MW-373), the office explained that such a grant is constitutional only if it serves a public purpose appropriate to the district's function, adequate consideration flows back to the public, and the district keeps enough control to ensure the public purpose is actually achieved. Whether those conditions were met here was a fact question the Attorney General could not answer; the board had to decide it in the first instance.

On the second question, the Attorney General concluded that Local Government Code section 171.009 lets a school trustee serve as an unpaid director of a private non-profit corporation that does business with the district. The office cautioned, though, that section 171.009 does not insulate a trustee from a possible civil suit for breach of fiduciary duty to the foundation if the district's and the foundation's interests ever collide. A newer statute, Education Code section 23.201, also restricts contracts between a district and a business entity in which a trustee has a "significant interest," but whether an unpaid foundation director has such an interest is a fact question outside the opinion process.

On the third question, the desegregation orders in United States v. Texas, the Attorney General said the orders were too extensive, and the facts provided too thin, to decide whether this arrangement violated them. That concern belonged with the Texas Education Agency in the first instance.

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 Education Code was substantially recodified in 1995 (the provisions discussed here, such as former section 23.26, were renumbered), and the conflict-of-interest statutes have been amended; confirm the current provisions and any later opinions before relying on anything described here.

Background and statutory framework

The arrangement looked tidy: board members of an independent school district created a non-profit foundation to support the district, and the district housed the foundation in a school office with incidental utilities while the foundation reimbursed consumables. Three separate bodies of law bore on whether that was lawful.

The first was the school district's own authority. Education Code section 23.26 gave the trustees the exclusive power to manage and govern the district's schools, the power to receive donations and other funds coming legally into their hands, and ownership of all school property, which they hold in trust for school purposes. The Texas Supreme Court had confirmed the trust character of school property in Texas Antiquities Committee v. Dallas County Community College District and in Love v. City of Dallas. So the statutory side was permissive: trustees could accept the foundation's gifts and, if a school purpose was served, supply the foundation with office space and other school property.

The second was the constitutional limit on gifts of public value. Article III, section 52(a) prohibits a school district from granting public money or a thing of value to a person or corporation. The office had analyzed the parallel legislative provision, article III, section 51, in Attorney General Opinion MW-373 (1981), which approved the University of Texas providing office space, utilities, and telephone service to the UT Law School Foundation. MW-373 set the test: the grant must serve a public purpose appropriate to the institution's function, adequate consideration must flow to the public, and the institution must keep controls over the foundation to ensure the public purpose is met. Applied here, those were fact questions for the board, not the Attorney General.

The third was conflicts of interest. Chapter 171 of the Local Government Code preempts the common law of conflicts for local public officials and applies to school trustees. It generally requires an official with a "substantial interest in a business entity" to disclose it and abstain. But section 171.009 makes it lawful for a local official to serve on the board of a private non-profit corporation when the official receives no compensation. A footnote traced how an earlier opinion (JM-1006, 1989) had applied the common law to bar such service, and how the Legislature's 1989 enactment of section 171.009 appeared to overrule that result. Layered on top was Education Code section 23.201, enacted in 1993, which bars a district from contracting with a business entity in which a trustee has a "significant interest"; the office had read that statute in DM-240 (1993) to target self-dealing, and said whether an unpaid foundation director holds a "significant interest" requires fact-finding beyond the opinion process. Even so, the office warned that immunity from the conflicts statute does not prevent a civil suit for breach of fiduciary duty, citing Blocker v. State, so a trustee would be well-advised to avoid conduct that could give rise to one.

Finally, the desegregation litigation. United States v. Texas produced a 1970 federal district court finding that TEA practices had perpetuated segregation, affirmed on appeal, followed by decades of orders covering student assignment, faculty, transportation, extracurricular activities, and facilities. Given the breadth of those orders and the minimal facts supplied, the Attorney General declined to decide whether this office-space arrangement ran afoul of them and pointed the district to TEA.

Common questions

Could the school district legally give a private foundation free office space?
No statute flatly prohibited it. Education Code section 23.26 let the trustees accept the foundation's gifts and supply it with office space and other school property if a school purpose was served. But article III, section 52(a) of the Texas Constitution added conditions, and whether they were satisfied was a fact question for the board.

What did the Constitution require before the district could provide the space?
Under the test the office drew from Opinion MW-373, the arrangement had to serve a public purpose appropriate to the district's function, adequate consideration had to flow back to the public, and the board had to keep enough control over the foundation to ensure the public purpose was actually achieved.

Could a school trustee also sit on the foundation's board?
Yes, without pay. Local Government Code section 171.009 makes it lawful for a local official to serve as a director of a private non-profit corporation that does business with the district as long as the official receives no compensation or other remuneration.

Did serving on both boards carry any risk for the trustee?
The Attorney General cautioned that section 171.009 does not insulate a trustee from a civil suit for breach of the fiduciary duty owed to the private foundation if the district's and foundation's interests conflict. It cited Blocker v. State and advised trustees to avoid conduct that could trigger such a claim.

Did the arrangement violate the school desegregation orders?
The office could not say. The orders in United States v. Texas were too extensive, and the facts too sparse, for the opinion process to resolve. The district's compliance concerns belonged with the Texas Education Agency first.

Citations

Constitutional and statutory provisions discussed:

• Tex. Const. art. III, § 52(a) (no grant of public money or thing of value); art. III, § 51 (legislative counterpart)
• Tex. Educ. Code § 23.26 (management power; donations; property held in trust)
• Tex. Educ. Code § 65.31(e) (university authority to accept gifts on terms and conditions)
• Tex. Educ. Code § 23.201 (school-trustee conflict-of-interest contract bar)
• Tex. Local Gov't Code § 171.002, § 171.009 (substantial interest; unpaid non-profit board service)
• 19 T.A.C. § 61.192 (donations to a school district)

Cases discussed:

• Texas Antiquities Committee v. Dallas County Community College District, 554 S.W.2d 924 (Tex. 1977)
• Love v. City of Dallas, 40 S.W.2d 20 (Tex. 1931)
• Blocker v. State, 718 S.W.2d 409 (Tex. App.—Houston [1st Dist.] 1986, no writ)
• United States v. Texas, 321 F. Supp. 1043 (E.D. Tex. 1970), aff'd, 447 F.2d 441 (5th Cir. 1971), cert. denied, 404 U.S. 1206 (1972)
• United States v. Texas, 628 F. Supp. 304 (E.D. Tex. 1985)

Prior Attorney General opinions referenced: MW-373 (1981), JM-958 (1988), JM-1006 (1989), H-1309 (1978), DM-240 (1993).

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0256
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1993/dm0256.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

September 15, 1993

Honorable William R. Ratliff
Chair
Education Committee
Texas State Senate
P.O. Box 12068
Austin, Texas 78711

Opinion No. DM-256

Re: Whether an independent school district may provide free office space and other items to a private, non-profit foundation (RQ-538)

Dear Senator Ratliff:

On behalf of an independent school district (which you refer to as "the ISD"), you ask whether an independent school district may provide free office space and other items to a private, non-profit foundation. By way of background, you provide the following information:

Members of the ISD's board of trustees set up a private, non-profit, tax-exempt education foundation corporation for the purpose of the financial support of the ISD and its students. The corporation's board of directors are the members who served on the ISD's board of trustees at the time the corporation was founded. The ISD allows the corporation to use an office in the ISD and provides incidental items such as phones, copy machines, and electricity. The corporation reimburses the ISD for such items as long-distance phone calls and copy paper.

We assume that the independent school district trustees do not receive compensation or any other remuneration for serving on the board of directors of the foundation.

First, you ask if "an ISD's provision of a free office and incidental items violate[s] any state or federal statutes." We are not aware of any state or federal statute which would prohibit an independent school district from providing free office space and office services to a foundation such as the one you describe.[1] Generally, the trustees of an independent school district "have the exclusive power to manage and govern the public free schools of the district." Educ. Code § 23.26. Article III, section 52(a) of the Texas Constitution, however, generally prohibits independent school districts from "grant[ing] public money or thing of value, in aid of, or to" a person or corporation, such as the foundation you describe.

In Attorney General Opinion MW-373 (1981), this office considered the relationship between the University of Texas and the University of Texas Law School Foundation, "a nonprofit corporation with the purpose of supporting the educational undertaking of the School of Law of the University of Texas." Attorney General Opinion MW-373 at 1. The memorandum of understanding between the foundation and the university stated, in part, that the law school would provide the foundation with office space, utilities, and telephone service. Id. at 5. This office concluded that the university had the statutory authority to provide the foundation with these items as "terms and conditions" attached to its donations under section 65.31(e) of the Education Code, which provides as follows:

The board is specifically authorized, upon terms and conditions acceptable to it, to accept and administer gifts, grants, or donations of any kind, from any source, for the use by the system or any of the component institutions of the system.

Id. at 2 (quoting Educ. Code § 65.31(e)); see also id. at 5-6.

This office then considered whether the terms of the memorandum of understanding would violate article III, section 51, the legislative counterpart of section 52(a). See id. at 8-11. The opinion stated that the constitutional prohibition

requires that a grant by the university to the foundation must serve a public purpose, appropriate to the function of a university, and that adequate consideration must flow to the public. . . . In addition, the university must maintain some controls over the foundation's activities, to ensure that the public purpose is actually achieved. . . . If these conditions are met, the grant by the public entity is not unconstitutional.

Id. at 9.

As noted above, section 23.26 of the Education Code vests the trustees of an independent school district with "the exclusive power to manage and govern the public free schools of the district." Educ. Code § 23.26(b). The trustees of an independent school district are authorized to "receive bequests and donations or other moneys or funds coming legally into their hands." Id. § 23.26(a); see also id. §§ 20.482 (authorizing board of trustees to invest gifts made to school district to provide college scholarships), 21.903 (authorizing board of trustees to accept bequests for the benefit of the public schools and providing that they may be expended by trustees "for such purposes designated by the donor so long as that purpose is in keeping with the lawful purposes of the schools for the benefit of which the donation was made"); Tex. Educ. Agency, 19 T.A.C. § 61.192 ("[d]onations to a school district shall be used in compliance with statutory provisions. Donations shall not be used as a substitute for adequate financial support as defined in § 61.191 of this title (relating to Fiscal Responsibility)"). In addition, "[a]ll rights and titles to the school property of the district, whether real or personal, shall be vested in the trustees." Educ. Code § 23.26(c). Trustees hold school district property in trust for school purposes. Texas Antiquities Committee v. Dallas County Community College Dist., 554 S.W.2d 924 (Tex. 1977); Love v. City of Dallas, 40 S.W.2d 20 (Tex. 1931); Attorney General Opinion JM-958 (1988). Thus, the use of school property must serve a school purpose.

We believe that section 23.26 of the Education Code authorizes the trustees of an independent school district to accept donations and other gifts from a private foundation, and to supply the foundation with office space and the use of other school property, assuming a school purpose is served. The question whether the constitution permits the trustees to supply the foundation with office space and the use of other school property is another matter. We have not been provided with sufficient facts to determine whether this would serve a public purpose, appropriate to the function of an independent school district; whether adequate consideration would flow to the public; or whether the trustees would maintain sufficient controls over the foundation's activities, to ensure that the public purpose is actually achieved. This determination is one to be made by the board of trustees in the first instance. See Attorney General Opinion MW-373 at 9.

Next, you ask if "members of the ISD's board of trustees [can] also be members of the corporation's board." As noted above, we assume that the independent school district trustees do not receive compensation or any other remuneration for serving on the board of directors of the foundation. Conflicts of interest on the part of local public officials are regulated by chapter 171 of the Local Government Code, which preempts common-law conflicts of interest as applied to local public officials. See Local Gov't Code § 171.007(a). This chapter applies to trustees of independent school districts, see id. § 171.001(1), and generally requires an official who has a "substantial interest in a business entity," see id. § 171.002, to disclose that interest and to refrain from participating in actions involving the entity, see id. § 171.004. Section 171.009 provides as follows:

It shall be lawful for 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.

Because chapter 171 generally preempts common-law conflicts of interest,[2] we conclude that section 171.009 permits an independent school district trustee to serve as a director of the foundation, provided he or she receives no compensation or other remuneration for doing so.

In addition, we note that the legislature recently enacted an amendment to the Education Code which specifically governs certain conflicts of interest on the part of school district trustees. See Acts 1993, 73d Leg., ch. 964, § 2 (eff. June 19, 1993). Section 23.201 of the Education Code provides as follows:

(a) The board of trustees of a school district may not enter into a contract with a trustee of the district, the spouse of a trustee, or a business entity in which a trustee or the spouse of a trustee has a significant interest until the trustee's current term has expired or until the trustee has resigned and a successor has been chosen to fill the vacancy. . . .
(b) In this section, the term "business entity" has the meaning provided by Section 171.001, Local Government Code.
(c) For purposes of this section, a person has a substantial interest in a business entity if the person has a substantial interest in the business entity for purposes of Chapter 171, Local Government Code.
(d) This section prevails over Chapter 171, Local Government Code, to the extent of any conflict.

This office recently considered this provision and the meaning of the term "significant interest," concluding in pertinent part:

the intent of this legislation was to proscribe self-dealing. In applying section 23.201, one should focus on the extent to which an individual trustee might benefit from a particular contract.

Attorney General Opinion DM-240 at 5 (1993). Although we find it highly unlikely that an independent school district trustee who serves on the board of directors of a non-profit foundation without compensation or any other remuneration has a "significant" interest in the foundation, such a determination requires the resolution of factual issues and is therefore beyond the purview of the opinion process. See id. ("Whether a particular set of circumstances are included within the meaning of 'significant interest' requires the resolution of factual issues not appropriate to the opinion process.")

Although an independent school district trustee is no longer prohibited by common law from serving as a director of a private, non-profit corporation which has business dealings with the school district if he or she does so without compensation or other remuneration, see supra note 2, we caution that section 171.009 of the Local Government Code does not necessarily insulate the trustee from the possible legal consequences of a conflict of interest which might arise with respect to a particular matter in which the interests of the independent school district and the foundation are at odds. In particular, as the result of such a situation, a trustee, in his or her capacity as director of the foundation, could become the subject of a civil suit for breach of his or her fiduciary duty to the private, non-profit corporation. See Blocker v. State, 718 S.W.2d 409, 415 (Tex. App.—Houston [1st Dist.] 1986, no writ) (holding that directors of non-profit corporation breached their fiduciary duty). Therefore, a trustee would be well-advised to avoid engaging in conduct which might give rise to such a cause of action.

Finally, you ask if "an ISD's provision of free office [space] and incidental items violate[s] either an order entered by the federal district court in United States v. Texas, Civ. A. No. 5281 (E.D. Tex.), or Texas Education Agency ("TEA") requirements resulting from that order." United States v. Texas was filed on March 6, 1970. In late 1970, the federal district court found that the policies and practices of TEA had frequently encouraged or resulted in the continuation of the vestiges of racially segregated education in Texas. United States v. Texas, 321 F. Supp. 1043, 1057 (E.D. Tex. 1970), aff'd, 447 F.2d 441 (5th Cir. 1971), cert. denied, 404 U.S. 1206 (1972). Thereafter, an order was issued encompassing student assignments and transfers, and district boundaries. In addition, orders were included regarding students, faculty, staff, transportation, extracurricular activities, and facilities. See United States v. Texas, 447 F.2d 441 (5th Cir. 1971). These orders required TEA to take numerous actions to facilitate and encourage desegregation. TEA was prohibited, for example, from permitting school extracurricular activities which would result in segregation or discrimination. See id. at 445-46. TEA was ordered to suspend the accreditation of school districts operating extracurricular activities in a discriminatory manner and to reduce their funding. See id. at 446. Since 1970, numerous additional orders have been issued in the action. See generally United States v. Texas, 628 F. Supp. 304, 306-07 (E.D. Tex. 1985).

Given the extensive scope of these orders and the very minimal facts you have provided, this office is unable to determine whether the relationship between the independent school district and the foundation violates any of the court's orders. The independent school district's concerns with respect to compliance with the orders in United States v. Texas would be more appropriately directed to the TEA in the first [instance].

SUMMARY

Section 23.26 of the Education Code authorizes the board of trustees of an independent school district to accept donations and other gifts from a private foundation, and to supply the foundation with office space and the use of other school property, assuming a school purpose is served. The question whether article III, section 52(a) of the Texas Constitution prohibits the board from supplying the foundation with office space and the use of other school property depends upon whether this would serve a public purpose, appropriate to the function of an independent school district; whether adequate consideration would flow to the public; and, whether the board would maintain sufficient controls over the foundation's activities to ensure that the public purpose is actually achieved.

Section 171.009 of the Local Government Code permits the trustee of an independent school district to serve as a director of a private, non-profit corporation which does business with the school district, provided he or she receives no compensation or other remuneration for doing so. The determination whether section 23.201 of the Education Code prohibits the board of trustees of an independent school district from entering into a contract with a business entity for which a trustee serves on its board of directors without compensation or any other remuneration requires the resolution of factual issues and is therefore beyond the purview of the opinion process.

DAN MORALES
Attorney General of Texas

WILL PRYOR
First Assistant Attorney General

MARY KELLER
Deputy Attorney General for Litigation

RENEA HICKS
State Solicitor

MADELEINE B. JOHNSON
Chair, Opinion Committee

[1] We do not consider the legality of relationships such as this one created by the very recently enacted school finance reforms. See Acts 1993, 73d Leg., ch. 347.

[2] In Attorney General Opinion JM-1006 (1989) (dated January 12, 1989), this office concluded that the common-law doctrine of conflicts of interest of a state agency prohibited a member of a board from serving without compensation on the board of a non-profit corporation; chapter 171 was inapplicable because the county judge was not compensated for his services, and the common law of conflicts of interest therefore continued to apply. See also Attorney General Opinion H-1309 (1978). The legislature, in enacting section 171.009 in 1989, appears to have overruled this opinion, at least with respect to local public officials' service on the boards of private non-profit corporations. See Acts 1989, 71st Leg., ch. 475, § 2, at 1648 (eff. Aug. 28, 1989).