Could a Texas city guarantee a private company's economic development loan and repay it with property taxes if the company failed to create jobs?

Texas AG Opinion JM-1227: City Guarantees of Private Loans

Plain-English summary

The City of Marlin wanted to take part in a Texas Department of Commerce program. Under the proposed deal, the department would lend money that reached a private company, and Marlin would contractually promise that the jobs would get created. If the company fell short, Marlin would repay a pro rata share of the loan based on how many qualifying jobs actually materialized. The city had no other funds for that, so the obligation would be a general obligation requiring a tax levy. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

The Falls County District Attorney asked whether the Texas Constitution allowed it. The Attorney General said the arrangement made Marlin a guarantor of a private entity's obligations, and "[o]n its face, such an arrangement would violate the prohibitions against a city's lending its credit to a private entity." Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

Voters had added article III, section 52-a in 1987 to open a path around those older bars, and the opinion accepted that it was meant to create exceptions to them. But section 52-a "does not itself expand the authority of cities to lend credit: it merely authorizes the legislature to do so." Enabling legislation was still required. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

The city pointed to Government Code section 481.191(a). The AG rejected it. That section is about the Department of Commerce administering federal community development block grant funds, and it mentions neither cities nor the lending of credit. The opinion reasoned that a legislature meaning to expand city lending power under section 52-a would at least say so expressly, as other statutes did. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

Currency note

This opinion was issued in 1990. 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.

Common questions

What did the older constitutional provisions forbid?

Article III, section 51 barred the legislature from authorizing a city to grant public money to a private entity. Section 52 barred it from authorizing a city to lend its credit to a private entity. Article XI, section 3 provided that no county, city, or other municipal corporation shall become a subscriber to the capital of any private corporation or association, make any appropriation or donation to it, or in anywise loan its credit. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

What did the 1987 amendment actually do?

It let the legislature provide for programs, loans, and grants of public money for purposes including economic development and diversification, eliminating unemployment or underemployment, agricultural innovation, and expansion of transportation or commerce. It also required voter approval where a political subdivision's bonds for such a program are payable from ad valorem taxes. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

How did the AG know section 52-a was aimed at those older bars?

The opinion cited the House Research Organization's Special Legislative Report on the 1987 constitutional amendments and referendum propositions, noting it specifically mentioned article III, sections 51 and 52, and article XI, section 3 as the impediments section 52-a was intended to overcome. It also cited a Texas Legislative Council information report. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

Why didn't the recodification of section 481.191 help?

Because it changed nothing of substance. The opinion noted section 481.191 moved into the Government Code in 1989 as part of a nonsubstantive recodification, derived from former article 4413(301), which was enacted in 1987 as part of the bill creating the Department of Commerce. Neither that recodification nor the transfer of block grant administration from the Department of Community Affairs suggested any implicit intent to exercise the legislature's authority under section 52-a. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

What would enabling legislation have looked like?

The opinion pointed to statutes that make specific reference to article III, section 52-a, listing V.T.C.S. articles 46d-2, 725d, 8358, 1182m, and 6674v.2 as examples. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

Background and statutory framework

Section 481.191(a) directed the department to administer, under the federal Omnibus Budget Reconciliation Act of 1981, the state's allocation of federal funds provided under the community development block grant nonentitlement program authorized by Title I of the Housing and Community Development Act of 1974 (42 U.S.C. section 5301 et seq.). Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

The recodification came through Acts 1989, 71st Leg., ch. 4, § 3.01, at 235, and the predecessor article was adopted at Acts 1987, 70th Leg., ch. 374, at 1823. That 1987 bill moved administration of the community development block grant program from the Department of Community Affairs to the new Department of Commerce. The opinion cited Attorney General Opinion H-1276 (1978) for the Department of Community Affairs' prior authority over the program. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

The opinion closed by noting the requester had not suggested any other statute that would authorize the city to participate in the proposed transaction. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

Citations and references

• Tex. Const. art. III, §§ 51, 52, 52-a
• Tex. Const. art. XI, § 3
• Gov't Code § 481.191(a)
• V.T.C.S. art. 4413(301)
• V.T.C.S. arts. 46d-2, 725d, 8358, 1182m, 6674v.2
• 10 T.A.C. § 178.13
• 42 U.S.C. § 5301 et seq.
• Acts 1989, 71st Leg., ch. 4, § 3.01, at 235; Acts 1987, 70th Leg., ch. 374, at 1823
• House Research Organization's Special Legislative Report, 1987 Constitutional Amendments and Referendum Propositions, August 17, 1987
• Texas Legislative Council Information Report No. 87-2, September 1987
• Attorney General Opinion H-1276 (1978)

Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1227
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1990/jm1227.pdf

Original opinion text

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

October 2, 1990

Honorable Thomas B. Sehon
District Attorney
Falls County Courthouse
P. O. Box 413
Marlin, Texas 76661

Opinion No. JM-1227

Re: Questions regarding article III, section 52-a, of the Texas Constitution (RQ-1779)

Dear Mr. Sehon:

You ask several questions about a program administered by the Texas Department of Commerce. Specifically, you ask about a project proposed by the City of Marlin. See generally 10 T.A.C. § 178.13. Your questions arise because of the following aspect of the proposed transaction:

[I]f Marlin enters into this arrangement it would be required to contractually agree with T.D.O.C. that it would take responsibility for the creation of the jobs by the private entity. If the private entity fails or otherwise is unable to provide the jobs as stated in its application, the contract between T.D.O.C. and Marlin would provide that Marlin would be responsible for repaying a pro rata portion of the loan based upon the actual number of qualified jobs which were created. The program is thus structured as an indirect loan from T.D.O.C. to the private entity. However, Marlin would be required in effect to guarantee the performance of the private entity. . . . The obligation of Marlin, if it should ever become due and owing, would be a general obligation of the city for which it would be required to levy taxes, as the City has no other funds available to make the repayment. Marlin would be unable to pay the debt out of current-year funds.

You ask first whether article III, sections 51 and 52, and article XI, section 3, prohibit the city from becoming, in effect, a guarantor for a private entity.

Article III, section 51, prohibits the legislature from authorizing a city to grant public money to a private entity. Article III, section 52, of the Texas Constitution prohibits the legislature from authorizing a city to lend its credit to a private entity. Article XI, section 3, provides in part:

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.

The proposal you describe would require the City of Marlin to serve as a guarantor of the obligations of a private entity. On its face, such an arrangement would violate the prohibitions against a city's lending its credit to a private entity.

In 1987, however, the voters amended the Texas Constitution by adding the following provision:

Notwithstanding any other provision of this constitution, the legislature may provide for the creation of programs and the making of loans and grants of public money, other than money otherwise dedicated by this constitution to use for a different purpose, for the public purposes of development and diversification of the economy of the state, the elimination of unemployment or underemployment in the state, the stimulation of agricultural innovation, the fostering of the growth of enterprises based on agriculture, or the development or expansion of transportation or commerce in the state.

bonds or other obligations of a county, municipality, or other political subdivision of the state that are issued for the purpose of making loans or grants in connection with a program authorized by the legislature under this section and that are payable from ad valorem taxes must be approved by a vote of the majority of the registered voters of the county, municipality, or political subdivision voting on the issue. An enabling law enacted by the legislature in anticipation of the adoption of this amendment is not void because of its anticipatory character.

Tex. Const. art. III, § 52-a. We think it is clear that section 52-a was intended by the legislature, and by the voters who adopted it, to create exceptions to the pre-existing constitutional prohibitions on the lending of public credit. See House Research Organization's Special Legislative Report, 1987 Constitutional Amendments and Referendum Propositions, August 17, 1987 (specifically mentioning the provisions of article III, sections 51 and 52, and article XI, section 3, as constitutional impediments that section 52-a was intended to overcome); see also Texas Legislative Council Information Report No. 87-2, Analyses of Proposed Constitutional Amendments and Referenda Appearing on the November 3, 1987 Ballot, September 1987. Article III, section 52-a, however, does not itself expand the authority of cities to lend credit: it merely authorizes the legislature to do so. Consequently, enabling legislation would be necessary to authorize the transaction in question.

You suggest that section 481.191(a) of the Government Code authorizes the transaction. That section, which deals with the authority of the Department of Commerce, provides:

The department shall, under the federal Omnibus Budget Reconciliation Act of 1981 . . . administer the state's allocation of federal funds provided under the community development block grant nonentitlement program authorized by Title I of the Housing and Community Development Act of 1974 (42 U.S.C. section 5301 et seq.).

The subject matter of section 481.191(a) of the Government Code is the Department of Commerce. It mentions neither cities nor the lending of credit. We think that if the legislature intended to expand the authority of cities to lend credit pursuant to article III, section 52-a, it would, at the very least, specifically mention cities' lending of credit, or section 52-a. See, e.g., V.T.C.S. arts. 46d-2, 725d, 8358, 1182m, 6674v.2 (all making specific reference to article III, section 52-a).

Also, the substance of section 481.191(a) significantly predates article III, section 52-a. Section 481.191 was moved into the Government Code in 1989 as part of a nonsubstantive recodification. Acts 1989, 71st Leg., ch. 4, § 3.01, at 235. It was derived from former article 4413(301), V.T.C.S., which was enacted in 1987. Article 4413(301) was adopted as part of a bill creating the Department of Commerce. Acts 1987, 70th Leg., ch. 374, at 1823. That bill transferred the administration of the community development block grant program from the Department of Community Affairs to the newly-created Department of Commerce. Id. § 1 (section 2.003(b) of the new act); see Attorney General Opinion H-1276 (1978) (Department of Community Affairs has authority to administer program established by the Federal Housing and Community Development Act of 1974). Neither the nonsubstantive recodification nor the transfer of authority from the Department of Community Affairs to the Department of Commerce suggests an implicit intent on the part of the legislature to exercise its authority under article III, section 52-a.

For the reasons set out above, we conclude that section 481.191(a) does not expand the authority of cities to lend credit to private entities. You have not suggested to us any other statute that would authorize the city to participate in the proposed transaction.

SUMMARY

Section 481.191 of the Government Code is not enabling legislation for article III, section 52-a, of the Texas Constitution.

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

RENEA HICKS
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Sarah Woelk and William Walker
Assistant Attorneys General