Can a Texas agency advance 'start-up costs' to a private company hired to provide public services?

Texas AG Opinion JM-1030: Can an Agency Advance "Start-Up Costs" to a Private Provider?

Plain-English summary

When a government agency hires a private company or nonprofit to deliver a public service, the provider often has to spend money before the first client ever walks through the door: lease space, renovate it, buy furniture and equipment, and train staff. This opinion asked whether Texas mental health authorities could hand a private provider money for those start-up costs up front, and, if so, whether the provider has to pay it back.

The request came from the Texas Department of Mental Health and Mental Retardation. The department and local community centers were contracting with non-governmental entities to provide community-based services to mentally disabled clients, and they wanted to advance start-up costs: space, renovation, utilities, furniture, vehicles, adaptive equipment, training materials, and salaries during the training period before services begin. The worry was the Texas Constitution, which bars the government from making gifts of public credit or public money to private parties (article III, sections 50 and 51).

The Attorney General said the payments are allowed, and explained why the constitutional ban is not triggered. Those provisions exist to stop the government from making a gratuitous gift of public funds to a private party, not to stop the government from paying a private party to accomplish a legitimate public job. The Texas Supreme Court has said as much: an expenditure for a legitimate public purpose is not unlawful just because a private business happens to benefit. So an advance of public money to a private provider is fine if three conditions hold. The spending has to serve a public purpose; the public has to receive adequate consideration in return; and the government has to keep enough control over the funds to make sure the public purpose is actually achieved. The Legislature had already declared community treatment of mentally disabled Texans a public purpose, so the first condition was clearly met.

That framing also answered the repayment question. The Constitution does not demand that the provider repay every dollar of the start-up money, even when the money bought real property or durable equipment. What it demands is a quid pro quo, something of real value flowing back to the public. Full repayment is one way to supply it, but not the only way. The public can also get its value through a contract that guarantees the provider will deliver services for a set period, paired with forgiveness of part of the advance over that time. The Attorney General had approved that kind of service-for-forgiveness arrangement before (for museum grants and for medical-tuition advances tied to a promise to practice in the county).

The opinion declined to bless any specific deal, because no proposed contract was in front of it. It left the details to the judgment of the people who have to sign off: the Commissioner and each community center's board of trustees. Their job is to make sure the consideration and control requirements are actually met, within whatever statutes and departmental rules apply.

Currency note

This opinion was issued in 1989. 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 Mental Health and Mental Retardation Act provisions cited here (the 5547-series in Vernon's Texas Civil Statutes) have since been recodified into the Health and Safety Code, and the agency itself was reorganized into successor health and human services agencies. The constitutional gift-clause analysis (article III, sections 50 and 51) has been developed further in later Texas Supreme Court cases. Anyone weighing a present-day advance of public funds to a private provider should check the current statutes and the more recent case law rather than rely on the 1989 article numbers used here.

Who this opinion affected (as of 1989)

State agencies and local community centers: The opinion confirmed they could advance start-up costs to private contractors delivering public services, provided the arrangement served a public purpose with adequate consideration and retained government control.

Private and nonprofit service providers: The opinion opened the door to receiving up-front funding for space, equipment, and pre-service staff training, in exchange for a binding commitment to deliver the contracted services.

Officials who approve the spending: The opinion placed the front-line judgment on the Commissioner and community-center boards, who have to ensure each transaction meets the constitutional consideration-and-control test.

Common questions

Can a Texas agency pay a private provider's start-up costs before services begin?
Yes. The Attorney General concluded the department and community centers may pay start-up costs to a non-governmental entity that contracts to provide community-based services, subject to constitutional limits.

Doesn't the Texas Constitution ban giving public money to private parties?
It bans gratuitous grants (article III, sections 50 and 51), but the Attorney General concluded those provisions are not violated when public funds are spent for a public purpose, the public receives adequate consideration, and the government retains control over the funds.

Does the private provider have to repay the start-up money?
Not necessarily in full. The Attorney General concluded the constitution does not require total repayment but does require a quid pro quo, which can be met by full repayment or by contractually guaranteed service for a period plus forgiveness of part of the advance.

What if the money is spent on real property or equipment?
The same rule applies. The opinion addressed that possibility directly and concluded the constitutional test is about public purpose, consideration, and control, not about recovering the specific assets purchased.

Who decides whether a particular deal is constitutional?
In the first instance, the governing body: the Commissioner of Mental Health and Mental Retardation or a community center's board of trustees, subject to applicable statutes and departmental rules.

Background and statutory framework

The Commissioner asked essentially identical questions about the authority of the department and of community centers established under article 5547-203, V.T.C.S. (both are agencies of the state), combined by the Attorney General into two: (1) whether the department and community centers may pay start-up costs to a non-governmental entity that has contracted to provide community-based services to mentally disabled clients, and (2) if so, whether those start-up costs must be repaid when the entity spends them for the intended purpose, including on real property or nonconsumable items like furniture and appliances. The anticipated start-up costs included purchase or lease of space, renovation, utilities, purchase or lease of personal property (furniture, appliances, vehicles, adaptive equipment, training materials, sheltered-workshop equipment), salaries and related costs of employees during pre-service training, and other preparation costs.

The Mental Health and Mental Retardation Act lets both the department and community centers contract with private parties. The department is authorized under article 5547-202, section 2.13, to cooperate, negotiate, and contract with local agencies, hospitals, private organizations and foundations, community centers, physicians, and persons to plan, develop, and provide community-based services. Community centers are similarly authorized under article 5547-203, section 3.12(a), to make contracts with local agencies and with qualified persons and organizations to provide portions of those services.

The Commissioner expressed concern that advance payment of start-up costs to a non-governmental entity might contravene sections 50 and 51 of article III of the Texas Constitution, which prohibit the grant of public credit (section 50) and public money (section 51) to private individuals or entities. The Texas Supreme Court has said the purpose of these provisions is to prevent the application of public funds to private purposes, that is, to prevent the gratuitous grant of such funds to any individual or corporation. See, e.g., State v. City of Austin, 331 S.W.2d 737, 742 (Tex. 1960). The Court has also said that an expenditure for the direct accomplishment of a legitimate public and municipal purpose is not rendered unlawful by the fact that a privately owned business may be benefited thereby. Barrington v. Cokinos, 338 S.W.2d 133, 140 (Tex. 1960).

The Attorney General noted this office had approved advance payments of public funds to private parties for a public purpose (for example, a grant to a private firefighters' museum, and prepayment of authorized travel expenses) and had given limited approval to spending public funds to improve realty owned by private parties. The constitutional provisions are not violated when public funds are expended for a public purpose, the public receives adequate consideration, and the governmental body retains control over the funds to ensure the public purpose is achieved. Whether a particular expenditure meets those requirements is, at least in the first instance, within the sound discretion of the governing body proposing the payment (Dodson v. Marshall, 118 S.W.2d 621 (Tex. Civ. App. 1938)). The Legislature identified the community placement and treatment of mentally disabled individuals as a public purpose in its statement of public policy: article 5547-201, section 1.01(c), states that when appropriate and feasible, mentally ill and mentally retarded persons shall be afforded treatment in their own communities, and subdivision (d) states that the public policy is for such services to be the responsibility of local agencies and organizations to the greatest extent possible.

On the second question, the Attorney General concluded that the constitution does not require total repayment of advanced funds but does require a quid pro quo. That can be accomplished by total repayment or by contractually guaranteed service for a certain period coupled with forgiveness of a portion of the amount advanced, with the required period of service left to the governing body's discretion. Because no proposed contract had been provided, the Attorney General declined to speculate about contractual provisions and left it to the discretion of the Commissioner and the board of trustees of a community center to assure that the constitutional requirements of consideration and control are met, subject to applicable statutes and departmental rules.

Citations

Cases:

• State v. City of Austin, 331 S.W.2d 737 (Tex. 1960) (purpose of the constitutional provisions is to prevent gratuitous grants of public funds to private parties)
• Barrington v. Cokinos, 338 S.W.2d 133 (Tex. 1960) (a public-purpose expenditure is not unlawful merely because a private business benefits)
• Dodson v. Marshall, 118 S.W.2d 621 (Tex. Civ. App. 1938) (the public-purpose determination is, in the first instance, within the governing body's discretion)

Constitutional and statutory authority:

• Tex. Const. art. III, § 50 (no grant of public credit to private parties)
• Tex. Const. art. III, § 51 (no grant of public money to private parties)
• V.T.C.S. art. 5547-202, § 2.13 (department may contract with private parties for community-based services)
• V.T.C.S. art. 5547-203, § 3.12(a) (community centers may contract with qualified persons and organizations)
• V.T.C.S. art. 5547-203, § 3.01(c) (community centers as agencies of the state)
• V.T.C.S. art. 5547-201, § 1.01(c), (d) (public policy favoring community-based treatment by local agencies)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1030
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1989/jm1030.pdf

Original opinion text

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

THE ATTORNEY GENERAL OF TEXAS

March 23, 1989

Mr. Dennis R. Jones
Commissioner
Texas Department of Mental Health and Mental Retardation
P.O. Box 12668
Austin, Texas 78711-2668

Opinion No. JM-1030

Re: Authority of the Texas Department of Mental Health and Mental Retardation to transfer funds for start-up costs to a private entity that contracts to provide community-based services to clients of the department, and related questions (RQ-1582)

Dear Mr. Jones:

You ask identical questions regarding the authority of the Texas Department of Mental Health and Mental Retardation [the Department] and mental health/mental retardation community centers. We have combined your four questions into two for the purposes of this opinion.

Do the Texas Department of Mental Health and Mental Retardation (TDMHMR) and mental health/mental retardation community centers established pursuant to article 5547-203, V.T.C.S. (community centers), have the authority to pay 'start up costs' to a non-governmental entity which has contracted to provide community-based services to mentally disabled clients of the department?

If the answer to the first question is affirmative, and if the funds were expended by the non-governmental entity for the purpose of which they were paid, must the 'start up costs' be repaid to the department or the community center? In responding to this question, please consider the possibility that such funds could be used to purchase or improve real property, or to purchase furniture, appliances and other nonconsumable items.

We have combined your questions because the considerations are the same: both the Department and community centers established pursuant to article 5547-203, V.T.C.S., are agencies of the state. See generally V.T.C.S. art. 5547-201; V.T.C.S. art. 5547-203, § 3.01(c). See also Attorney General Opinions M-1266 (1972); C-584 (1966).

In your letter you explain that the anticipated start-up costs may be as follows:

a. purchase or lease of space in which to provide services;

b. renovation of such space as necessary;

c. payment of utilities for such space;

d. purchase or lease of personal property such as furniture, appliances, vehicles, adaptive equipment, training materials and sheltered workshop equipment;

e. salaries, fringe benefits, travel and per diem costs of employees during the period of training necessary prior to initial service contact with the disabled persons; and

f. other costs associated with the preparation to provide services.

The Mental Health and Retardation Act enables both the Department and community centers to contract with private parties. The Department is authorized under article 5547-202, section 2.13, V.T.C.S., to "cooperate, negotiate and contract with local agencies, hospitals, private organizations and foundations, community centers, physicians and persons to plan, develop and provide community-based mental health and mental retardation services." (Emphasis added.) Community centers are similarly authorized under article 5547-203, section 3.12(a), V.T.C.S., to "make contracts with local agencies and with qualified persons and organizations to provide portions of these services." (Emphasis added.)

You express concern that advance payment of start-up costs to a non-governmental entity might contravene sections 50 and 51 of article III of the Texas Constitution. Those sections prohibit the grant of public credit (section 50) and public monies (section 51) to private individuals or entities. The Texas Supreme Court has declared that the purpose of these and similar constitutional provisions is to "prevent the application of public funds to private purposes; in other words, to prevent the gratuitous grant of such funds to any individual or corporation whatsoever." See, e.g., State v. City of Austin, 331 S.W.2d 737, 742 (Tex. 1960). The Supreme Court has also said "an expenditure for the direct accomplishment of a legitimate public and municipal purpose is not rendered unlawful by the fact that a privately owned business may be benefited thereby." Barrington v. Cokinos, 338 S.W.2d 133, 140 (Tex. 1960).

This office has issued a number of opinions approving the advance payment of public funds to private parties for the achievement of a public purpose. See, e.g., Attorney General Opinions MW-423 (1982) (grant to private museum honoring firefighters); H-1010 (1977) (payment of medical tuition as partial compensation for promise that student will practice medicine in county); H-74 (1973) (prepayment of state employees' authorized travel expenses); V-1067 (1950) (advance payment by the state of annual rent on business machines).

This office has also issued several opinions granting limited approval of the expenditure of public funds for the improvement of realty owned by private parties. Attorney General Opinions JM-551 (1986) (Southwest Texas State University may expend state funds on permanent improvements on property held in trust); MW-514 (1982) (Texas Technical University may expend public funds for permanent improvements on property owned but subject to reverter); H-403 (1974) (Department of Agriculture may expend public funds to erect, repair or maintain improvements on leased property); M-512 (1969) (Department of Public Welfare may expend funds to refurbish a leased building).

The constitutional provisions were exhaustively examined in the opinions cited above, and we need not reiterate the logic that allows payment of public funds to private entities. It is sufficient here to restate the principle that the constitutional provisions are not violated when public funds are expended for the achievement of a public purpose, when the public receives adequate consideration in return, and when the governmental body retains control over the use of the funds to ensure that the public purpose is achieved. See generally Wilatt, Constitutional Restrictions on Use of Public Money and Public Credit, 38 Tex. Bar J. 413 (1975); see also Attorney General Opinions JM-551 (1986); MW-373 (1981).

Generally, the determination of whether a particular expenditure of public funds meets those constitutional requirements is left, at least in the first instance, within the sound discretion of the governing body that proposes to pay public funds to a private entity. Dodson v. Marshall, 118 S.W.2d 621 (Tex. Civ. App. 1938); Attorney General Opinions JM-551 (1986); MW-423 (1982); MW-373 (1981); H-1260 (1978); H-403 (1974).

We believe that the legislature has identified the community placement and treatment of mentally disabled individuals as a public purpose through its statement of public policy in several sections of the Mental Health and Mental Retardation Act. Section 1.01(c) of article 5547-201, V.T.C.S., states in part "[i]t is the policy of this state that when appropriate and feasible, mentally ill and mentally retarded persons shall be afforded treatment in their own communities," and subdivision (d) of that section states "[t]he public policy of this state is that mental health and mental retardation services be the responsibility of local agencies and organizations to the greatest extent possible."

The second question, regarding repayment of advanced funds, is directly related to the constitutional requirements of consideration and control. As noted above, the determination of whether or not a transaction fulfills those constitutional requirements is, in the first instance, within the discretion of the governing body of the political subdivision or agency.

While we believe that the constitution does not require total repayment, it does require a quid pro quo. While that can be accomplished by total repayment, it can also be accomplished by contractually guaranteed service for a certain period of time coupled with forgiveness of a portion of the amount advanced. See, e.g., Attorney General Opinions MW-423 (1982) (Historical Commission could grant funds to private museums, if museum is contractually required to serve the public for a certain period of time); H-1010 (1977) (county could advance medical tuition on condition that student would act as county health officer, with forgiveness of part of tuition payment after a certain period of service). As noted in Attorney General Opinion MW-423 (1982), the period of service required to assure that the public receives adequate consideration is within the discretion of the governing body.

You have not provided us with a proposed contract, and we decline to speculate about possible contractual provisions. We must leave it within the discretion of the Commissioner of Mental Health and Mental Retardation and the board of trustees of a community center to assure that the constitutional requirements of consideration and control are met. Of course, all transactions are subject to applicable statutes and departmental rules.

SUMMARY

The Texas Department of Mental Health and Mental Retardation and mental health/mental retardation community centers may contract with private parties to plan and to provide for community-based services to mentally disabled clients. Both the Department and community centers may pay "start-up costs" to non-governmental parties, provided that the public receives adequate consideration and the governmental body retains enough control over the expenditure of the funds to assure that the public purpose of community-based mental health/mental retardation services is actually fulfilled.

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 Karen C. Gladney
Assistant Attorney General