Can a Texas school district rent classrooms from a nonprofit foundation and help it issue bonds to build them?

Texas AG Opinion JM-1000: Can a School District Rent Classrooms From a Foundation and Back Its Bonds?

Plain-English summary

A fast-growing Texas school district had a classroom problem and a creative idea for solving it. Citizens would set up a nonprofit foundation, the foundation would borrow money by issuing bonds, use the money to buy a site and put up removable modular classrooms, and then lease the buildings to the district. The rent would cover the bond payments. Under one version of the plan the district would just rent. Under a second version, once the bonds were paid off the foundation would hand the buildings and land over to the district, and up front the school board would pass a resolution blessing the foundation's plans and consenting to the bonds. A House committee chairman asked the Attorney General to walk through what the district could and could not legally do.

The Attorney General split the plan into parts. The renting was fine. School trustees have express power to rent "school houses" and to accept donations, so they can lease the portable classrooms and later take a gift of the buildings, as long as they follow the basic budgeting rules: the district cannot obligate itself beyond the current fiscal year in a way that creates a debt, and the money has to be budgeted for the year the rent comes due. Whether any particular lease actually gives the district fair value for its money is a question of fact that the Attorney General's office does not resolve; that is for the trustees, and potentially a court, to judge.

Selling the land to the foundation was not fine. Texas law lets a school district sell its land only under tight conditions: the proceeds have to go toward more convenient or desirable school property, construction or repair of school buildings, or the local maintenance fund, and, crucially, the land has to be property the district no longer needs for school purposes. Here the whole point was to put classrooms on that land and lease them back, so the land was obviously still needed for school purposes. Because the district could not honestly say the land was surplus, it had no authority to convey it to the foundation. That answer made the competitive-bidding questions about selling the site moot.

The board's plan to "consent" to the foundation's bonds was the other problem. An independent school district's trustees have only the powers the law gives them expressly or by necessary implication, and there is no authority for a school board to approve a private foundation's organization and activities or to sign off on its bond issuance. Because the trustees simply lacked that power, the Attorney General did not need to decide whether such consent would cross the constitutional line in article III, section 52(a), which bars a school district from lending its credit to a private entity. He did add a caution: the second plan, with its long chain of advance commitments, might run into the rule that a political subdivision cannot tie itself up in arrangements that could later control or embarrass it in carrying out its governmental duties.

Currency note

This opinion was issued in 1988. 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 provisions cited here have been recodified. The former Education Code sections on trustees' powers, renting school houses, accepting donations, selling district land, and budgeting (sections 20.48, 23.26, 23.30, 23.47, and related provisions) were reorganized when the Education Code was substantially rewritten, and the numbers used here no longer track current law; lease-purchase and public facility financing options for school districts have also been expanded by later legislation. The Local Government Code competitive-bidding provisions and the constitutional limit on lending public credit remain, but have their own later interpretations. Anyone structuring a school district facility financing today should consult the current Education Code, current bond and public-facility-corporation statutes, and legal counsel rather than the 1988 provisions here.

Who this opinion affected (as of 1988)

School districts and their trustees: The opinion told them they could rent classroom space from a private foundation and accept donated buildings within budget limits, but could not sell district land still needed for schools or consent to a foundation's bond issuance.

Nonprofit foundations set up to finance school facilities: The opinion signaled that a district could be a tenant and donee, but could not sell the foundation the underlying school land or formally back its bonds.

Bond counsel and school finance planners: The opinion narrowed the lease-back financing structure by removing the land sale and the district's bond consent from the available tools.

Common questions

Can a Texas school district rent classroom buildings from a private foundation?
Yes. In this opinion the Attorney General concluded that trustees may rent classroom space for fair value from a nonprofit foundation and accept a donation of the buildings, as long as the district does not create debt beyond the current fiscal year and the money is budgeted.

Can the district sell its land to the foundation for the project?
No. A district may sell land only when it is no longer needed for school purposes. Because the land would be used for classrooms, it was still needed for school purposes, so the district had no authority to sell it.

Can the school board consent to or approve the foundation's bonds?
No. The Attorney General concluded that trustees have no power to approve a private foundation's organization and purposes or to consent to its bond issuance, since their authority is limited to powers expressly conferred or necessarily implied.

Did the opinion decide whether the plan violated the constitution?
No. Because the trustees lacked the power to consent in the first place, the Attorney General did not reach whether the consent would violate article III, section 52(a), which forbids a school district from lending its credit to a private entity.

Background and statutory framework

The trustees of an independent school district have exclusive power to manage and govern the public free schools of the district (Educ. Code § 23.26; Trustees of the Independent School Dist. of Cleburne v. Johnson County Democratic Executive Comm., 52 S.W.2d 71 (Tex. 1932)), limited only in that they may not enter agreements outside the governmental purposes of the district; every transaction they approve must relate to the operation of the schools (River Road Neighborhood Ass'n v. South Texas Sports, 720 S.W.2d 551 (Tex. App. - San Antonio 1986, writ dism'd); Royse Indep. School Dist. v. Reinhardt, 159 S.W. 1010 (Tex. Civ. App. - Dallas 1913, writ ref'd)). Their specifically enumerated powers include spending local tax funds for "renting school houses" (Educ. Code § 20.48(c)) and accepting donations (Educ. Code § 23.26(a)). The trustees may therefore rent portable classroom buildings and accept a donation of them, subject to the rule that a district may not expend money except according to a budget item adopted as prescribed by law (Educ. Code § 23.47(a); see also § 4.03(c)). Whether a particular lease results in fair value is a fact question the opinion process cannot resolve.

An independent school district may sell its land only if the proceeds are used for the purchase of more convenient and more desirable school property, the construction or repairing of school buildings, or deposit to the credit of the local maintenance fund, and only if the property is no longer needed for school purposes (Educ. Code § 23.30; Attorney General Opinion O-1570 (1939)). Because the land would be conveyed to a private party that would erect classrooms leased back to the district, the land is precisely needed for school purposes, so the district lacks authority to convey it; the competitive-bidding questions under Local Government Code section 272.001 therefore need not be reached.

The trustees of an independent school district have only the powers expressly conferred by law or necessarily implied from express powers (Harlingen Indep. School Dist. v. C. H. Page & Bros., 48 S.W.2d 983 (Tex. Comm'n App. 1932, judgment adopted)). The board has no power to approve the organization, purposes, and activities of a private foundation or to consent to the issuance of the foundation's bonds. Because the trustees lack that power, the Attorney General did not consider whether the district's consent to a private entity's bonds would violate article III, section 52(a) of the Texas Constitution (forbidding a school district from lending public credit to private individuals, associations, or corporations). The opinion also noted that the second alternative might violate the doctrine preventing a political subdivision from entering arrangements that would potentially control or embarrass it in the exercise of its governmental powers (Clear Lake City Water Auth. v. Clear Lake Utilities Co., 549 S.W.2d 385 (Tex. 1977)).

Citations

Statutory authority:

• Education Code § 4.03(c) (budget adoption); § 20.48 and § 20.48(c) (renting school houses); § 23.26 and § 23.26(a) (trustees' management power; accepting donations); § 23.30 (sale of district land); § 23.47(a) (expenditures according to budget)
• Local Government Code § 272.001 (competitive bidding on land transfers)
• Tex. Const. art. III, § 52(a) (prohibition on lending public credit)

Cases:

• Trustees of the Independent School Dist. of Cleburne v. Johnson County Democratic Executive Comm., 52 S.W.2d 71 (Tex. 1932)
• River Road Neighborhood Ass'n v. South Texas Sports, 720 S.W.2d 551 (Tex. App. - San Antonio 1986, writ dism'd)
• Royse Indep. School Dist. v. Reinhardt, 159 S.W. 1010 (Tex. Civ. App. - Dallas 1913, writ ref'd)
• Harlingen Indep. School Dist. v. C. H. Page & Bros., 48 S.W.2d 983 (Tex. Comm'n App. 1932, judgment adopted)
• Clear Lake City Water Auth. v. Clear Lake Utilities Co., 549 S.W.2d 385 (Tex. 1977)

Related opinions:

• Attorney General Opinions JM-531 (1986), M-1047 (1972), JM-486 (1986), O-1570 (1939), MW-522 (1982)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1000
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1988/jm1000.pdf

Original opinion text

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

December 29, 1988

Honorable Bruce Gibson
Chairman
Committee on Financial Institutions
Texas House of Representatives
P.O. Box 2910
Austin, Texas 78769

Opinion No. JM-1000

Re: Whether a school district may rent a school building owned by a nonprofit foundation under certain circumstances and related questions (RQ-1476)

Dear Representative Gibson:

You request an opinion about certain powers of an independent school district. You report that rapid fluctuations in the population of the district make it difficult to plan for adequate classroom facilities. You describe the following proposal which the district is considering to deal with this problem.

To save money and provide higher quality facilities, the district is interested in using removable classroom facilities acquired through a non-profit corporation that will be created by citizens of the school district to provide adjunct services to the school district as a tax-qualified public foundation. The district will not be officially involved in the creation, organization, or operation of the foundation.

You note that two alternative plans are under consideration using such a foundation to provide for the contemplated classroom facilities.

The foundation will issue bonds or notes to acquire a site and construct or install removable modular classroom buildings. The bonds or notes will be secured by a deed of trust lien on the premises and will be payable solely from rentals paid by the district or a successor tenant or from proceeds of a sale of the property. The district will rent the facilities for a one-year term with the option to extend the tenancy annually for 25 years; the district's obligation will be subject to the budgeting of the necessary amounts. The district will pay rent monthly or semiannually in fixed amounts that equal the amount due in a fiscal year on the foundation's bonds plus any insurance and similar costs. On the date the district ceases to pay rent or the expiration of 25 years, whichever comes first, possession of the property will return to the foundation. The district believes interest on these bonds is subject to federal income taxes.

The second plan is the same as the first except that, before the bonds are issued, the foundation and district will agree that on full payment of the bonds the rental agreement will terminate and the foundation will convey title to the property to the district, which will have agreed in advance to accept the donation of the property. The board of the school district will adopt a resolution approving the foundation's purposes and activities and consenting to the issuance of the foundation's bonds for the described purposes. Under this plan, the district believes the bonds can be issued on a tax-exempt basis under federal law.

We provide you with our opinion on each of the questions you ask in relation to the plans under consideration by the district. We have grouped questions one and two together, along with our answers. Question three is addressed separately.

(1) May the district, under the law of this state (including Section 20.48(c), Education Code), rent a school building owned by a nonprofit foundation created by interested citizens under these circumstances, assuming: (i) the district is not obligated to pay rent or occupy the premises beyond the current fiscal year and does not create a debt; (ii) funds are budgeted for the year in which the rent is due; and (iii) the nonprofit foundation retains title to the facilities?

(2) May the district, under the law of this state (including Section 23.26, Education Code), accept a donation of the property from the foundation after the bonds are paid in full?

The trustees of an independent school district have exclusive power "to manage and govern the public free schools of the district." Educ. Code § 23.26; Trustees of the Independent School Dist. of Cleburne v. Johnson County Democratic Executive Comm., 52 S.W.2d 71 (Tex. 1932); Attorney General Opinion JM-531 (1986); see also Attorney General Opinion M-1047 (1972). The discretion of the trustees is limited only to the extent that they may not enter into agreements outside of the governmental purposes of the district. In other words, every transaction which they approve must relate to the operation of the public schools entrusted to their care. See River Road Neighborhood Ass'n v. South Texas Sports, 720 S.W.2d 551 (Tex. App. - San Antonio 1986, writ dism'd); Royse Indep. School Dist. v. Reinhardt, 159 S.W. 1010 (Tex. Civ. App. - Dallas 1913, writ ref'd); Attorney General Opinion M-1047 (1972).

Additionally, the specifically enumerated powers of the trustees include the power to spend local tax funds for "renting school houses," Educ. Code § 20.48(c), and to accept donations. Educ. Code § 23.26(a). Thus, the trustees of the school district may arrange to rent portable classroom buildings and to accept a donation of the buildings from a private foundation, subject to the limitations discussed below.

As a matter of law, an independent school district may not expend money except according to a budget item adopted in due course as prescribed by law. Educ. Code § 23.47(a); see also § 4.03(c). Of course, the question of whether the trustees have properly exercised these powers in relation to a particular transaction concerning the lease of classroom space ("school houses") also is in part a question of fact. See River Road; Royse City, supra. Thus, whether or not a lease transaction results in fair value for the school district is a question of fact which this office cannot resolve. See, e.g., Attorney General Opinion JM-486 (1986).

You also ask:

Under Section 272.001(b)(5), Local Government Code, may the district, without competitive bidding, sell a site for the school facilities to the foundation for development in accordance with the rental agreement if the foundation's bond issue includes, and the foundation pays to the district, an amount equal to the fair market value of the property that will be paid to the district?

An independent school district may sell its land only if the proceeds of the transfer are used for "the purchase of more convenient and more desirable school property" or for "the construction or repairing of school buildings" or for deposit "to the credit of the local maintenance fund of the district." Educ. Code § 23.30 (emphasis added). Additionally, the property must no longer be needed for school purposes. Attorney General Opinion O-1570 (1939). Because, under the facts you have provided, the land in question will be conveyed to a private party which will erect structures on it which will be leased back to the school district and used as classrooms, the district can hardly claim that the land is "no longer needed for school purposes." In fact, under such a plan, the land is precisely needed for school purposes. The district thus lacks the authority to convey the land to a private foundation for such purposes. We, therefore, need not reach questions concerning the application of section 272.001 of the Local Government Code.

Additionally, several aspects of the proposed transactions contained in the second proposal raise questions about the authority of the school district to proceed with its participation in such a plan. You relate that, under that arrangement, the district, before bonds are issued by a private foundation, must agree that:

(1) on full payment of the bonds the rental agreement will terminate and the foundation will convey title to the property to the district, which will have agreed in advance to accept the donation of the property;

(2) The board of the school district will adopt a resolution approving the foundation's purposes and activities and consenting to the issuance of the foundation's bonds for the described purposes.

You cite no authority for the district to enter into these arrangements, and we can find none. Cf. Educ. Code § 20.48; see also Attorney General Opinion MW-522 (1982).

The transaction which you have described to us requires the trustees to take action that is beyond the powers of an independent school district. The trustees of an independent school district have the powers expressly conferred on them by law or necessarily implied from express powers. Harlingen Indep. School Dist. v. C. H. Page & Bros., 48 S.W.2d 983 (Tex. Comm'n App. 1932, judgment adopted). More specifically, the board of trustees of the district has no power to approve the organization, purposes, and activities of a private foundation and "[to] consent [to] . . . the foundation's bonds for the described purposes." (Emphasis added.) Thus, we need not consider whether the district's "consent" to the issuance of bonds by a private entity may violate article III, section 52(a) of the Texas Constitution, which forbids independent school districts from lending public credit to private individuals, associations, or corporations. We also note that the arrangements in the proposed second alternative may violate the doctrine which prevents a political subdivision from entering into arrangements that would potentially control or embarrass it in the exercise of its governmental powers. See Clear Lake City Water Auth. v. Clear Lake Utilities Co., 549 S.W.2d 385 (Tex. 1977).

SUMMARY

The board of trustees of an independent school district may rent classroom space for fair value in a transaction with a private foundation. Educ. Code § 20.48. The board may accept the donation of portable classroom buildings from such a foundation. Educ. Code § 23.26. An independent school district may sell its land only if the proceeds of the transfer are used for "the purchase of more convenient and more desirable school property" or for "the construction or repairing of school buildings" or for deposit "to the credit of the local maintenance fund of the district." Educ. Code § 23.30. The trustees of an independent school district have no power to "consent" to the issuance of bonds by a private foundation.

Very truly yours,

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU MCCREARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by D. R. Bustion, II
Assistant Attorney General