Can Texas pay off bonds for renovating the State Capitol with direct legislative appropriations instead of lease payments?

Texas AG Opinion JM-970: Paying for Capitol Renovation with Bonds

Plain-English summary

In the late 1980s, Texas was planning a major renovation of its historic State Capitol, and the question was how to pay for it. The tool was a state agency called the Texas Public Finance Authority, which can raise money by selling bonds. A member of the House asked the Attorney General a specific structural question: could the Authority sell bonds for the Capitol renovation and then have the Legislature simply appropriate money directly to the Authority each year to pay off the bonds, skipping the usual step of a lease between the Authority and the State Preservation Board?

The Attorney General said no. To see why, you have to understand the difference between the two ways of paying off these bonds, because that difference is the whole ballgame under the Texas Constitution.

The normal, constitutional way works like this. The Authority issues "revenue bonds." A revenue bond is a special kind of bond that, by law, is not a debt of the state. Nobody can force the state to pay it out of general tax dollars. Instead, the bonds get paid from a specific revenue stream, here, lease payments. The Authority leases the building (or the improvements) to a state agency, that agency makes lease payments, and those payments service the bonds. This structure had already survived a court challenge. In Texas Public Building Authority v. Mattox (1985), the Texas Supreme Court upheld it, including against an argument that the lease-payment appropriations violated the Constitution. The key, the court said, was that the state agencies had pre-existing legal authority to sign leases, so when the Legislature later appropriated money to make those lease payments, it was paying an obligation "provided for by pre-existing law." That is exactly what the Constitution requires.

The plan the House member asked about tried to cut out the lease. Instead of the State Preservation Board paying rent that services the bonds, the Legislature would just hand money straight to the Authority to pay bond principal and interest. And that is where it runs into article III, section 44 of the Texas Constitution. Section 44 says the Legislature may not grant money out of the Treasury to anyone on a claim that was not provided for by pre-existing law. Its whole purpose, the courts have said, is to stop "raids" on the state Treasury for obligations the state never actually took on.

Here is the trap. The statute authorizing these bonds says, in plain terms, that the bonds are not legal obligations of the state. The state has expressly declared that it does not owe this money. So if the Legislature then appropriated Treasury funds to pay the bonds directly, it would be paying a claim that, by the state's own statute, is not a legal obligation and is not provided for by pre-existing law. That is precisely what section 44 forbids. The Attorney General put it bluntly: an appropriation to pay these bonds would not just be unauthorized, it would be an appropriation to pay for something the Legislature had specifically proclaimed itself not obligated to pay.

Someone had suggested a clever workaround: that a direct appropriation to the Authority is not really an appropriation "on a claim," because paying the bonds on time avoids any default and therefore avoids any lawsuit or "claim" ever being filed. The Attorney General rejected that too. If bondholders did sue the state for payment, appropriating money to pay them would clearly violate section 44. The Legislature cannot dodge the constitutional bar by paying, in advance, money it is not obligated to pay, just to keep those claims from ever arising. Because the office found the direct-appropriation plan unconstitutional under section 44, it did not need to decide the narrower statutory question of whether article 601d-2 even allows bonds to be issued without a lease.

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 Public Finance Authority statutes (articles 601d and 601d-2, V.T.C.S.) have been amended and recodified since 1988, and the State Capitol renovation they addressed was long ago completed. Anyone dealing with state bond financing or the constitutional limits on appropriations today should consult the current Government Code provisions governing the Texas Public Finance Authority and current case law on article III, section 44, rather than the 1988 article and section numbers used here.

Who this opinion affected (as of 1988)

The Legislature and the Texas Public Finance Authority: The opinion steered them back to the lease-based revenue-bond structure the Supreme Court had blessed, and away from paying revenue bonds with direct appropriations.

The State Preservation Board: The opinion confirmed the Board's lease role was central to a constitutional financing structure for the Capitol renovation.

Bond purchasers and bond counsel: The opinion signaled that direct-appropriation repayment of these non-obligation revenue bonds would not pass constitutional muster, affecting how the deal had to be structured.

Common questions

Could Texas pay Capitol renovation bonds with direct legislative appropriations?
No. In this opinion the Attorney General concluded that paying the bonds through direct appropriations to the Authority, rather than through lease payments, would violate article III, section 44 of the Texas Constitution.

Why is a lease payment allowed but a direct appropriation not?
Because the state agency had pre-existing legal authority to enter the lease, so appropriations to make lease payments are provided for by pre-existing law. The bonds themselves are declared not to be obligations of the state, so directly appropriating money to pay them is paying a claim the state never legally owed.

What does article III, section 44 actually prohibit?
It bars the Legislature from granting money out of the Treasury to an individual on a claim that was not provided for by pre-existing law. Its purpose is to prevent raids on the state Treasury.

Does paying bonds early to avoid a lawsuit get around the rule?
No. The Attorney General concluded the Legislature cannot avoid section 44 by appropriating money for payments it is not obligated to make just to prevent bondholder claims from arising.

Background and statutory framework

The Texas Public Finance Authority (originally the Texas Public Building Authority) was created by the 68th Legislature, with general provisions in article 601d, V.T.C.S. Under article 601d, the Authority may issue and sell bonds to finance, acquire, construct, repair, and renovate buildings used by state agencies (section 9). Section 13 provides that the bonds are payable solely from revenue as provided by the Act, that they are not a debt of the state or any state agency, and that they must say so on their face; section 12(a) lets the Authority provide for payment of principal and interest by pledging rents from leasing a building to the state or from any other lawfully available source. The Legislature must specifically authorize any project, and the bonds must be approved by the attorney general (sections 10, 16).

Soon after article 601d was enacted, the attorney general refused to approve a proposed bond issuance for a state office building, and the Authority sought mandamus. In Texas Public Building Authority v. Mattox, 686 S.W.2d 924 (Tex. 1985), the Texas Supreme Court upheld the scheme. It rejected the argument that the bonds created state debt in violation of article III, section 49, because article 601d expressly provides the bonds are not debts of the state, and it rejected an argument under article III, section 44 (as well as challenges under article I, section 17; article III, section 49a; and article VIII, section 6).

The Legislature then enacted article 601d-2 to finance renovation of the State Capitol (Acts 1987, 70th Leg., ch. 626). It authorizes the Authority's board to issue and sell bonds for that purpose (section 2), deposits the proceeds to the account of the State Preservation Board (section 3(a)), and appropriates them to the Board for Capitol repair and renovation (section 3(b)). Section 4 lets the board provide for repayment from any lawfully available source and directs the State Preservation Board, from appropriated funds, to pay the Authority under a lease agreement an amount sufficient to service the bonds. Section 6 authorizes the Board to enter lease agreements, and section 5 subjects article 601d-2 bonds to several provisions of the Public Finance Authority Act, including section 13's revenue-bond limitation. The question was whether the Authority could issue bonds without a lease and repay principal and interest from direct legislative appropriations. The opinion observed that article 601d-2 clearly contemplates payment from lease revenue and incorporates section 13, but it did not need to resolve the statutory lease question because it concluded the direct-appropriation proposal fails under article III, section 44.

Article III, section 44 directs the Legislature to provide by law for the compensation of officers and contractors but bars it from granting, by appropriation or otherwise, any money out of the Treasury to any individual on a claim, real or pretended, not provided for by pre-existing law. This means no money may be appropriated unless, when the appropriation is made, some valid law already makes the claim a legal obligation of the state (Austin National Bank v. Sheppard, 71 S.W.2d 242 (Tex. 1934); State v. Perlstein, 79 S.W.2d 143 (Tex. Civ. App. - Austin 1934, writ dism'd)). In Mattox, the court held that appropriations to make lease payments did not violate section 44 because the state agencies had pre-existing authority to enter leases, so appropriations in furtherance of those authorized contracts are provided for by pre-existing law, and section 44's purpose of preventing "raids" on the Treasury was not implicated. The proposal here is different: it involves appropriations made directly to the Authority to pay bond principal and interest, and article 601d-2 expressly provides the bonds are not legal obligations of the state and are revenue bonds. An appropriation to pay principal and interest would therefore be both unauthorized by pre-existing law and an appropriation to pay for something the Legislature had expressly proclaimed itself not obligated to pay (see Attorney General Letter Advisory No. 107 (1975)). The office also rejected the suggestion (drawn from a law-review discussion of moral-obligation bonds) that such an appropriation is not "on a claim" because it averts default and thus averts lawsuits; if bondholders sued the state for payment, an appropriation to pay those claims would clearly violate section 44, and the Legislature cannot circumvent section 44 by appropriating money for payments it is not obligated to make in order to prevent claims not provided for by pre-existing law. An appropriation to the Authority to pay bondholders is, in effect, an appropriation to individuals (see generally Austin National Bank v. Sheppard, 71 S.W.2d 242 (Tex. 1934)).

Citations

Constitutional and statutory authority:

• Article III, section 44, Texas Constitution (no appropriation on a claim not provided for by pre-existing law)
• Article 601d, V.T.C.S. (Public Finance Authority Act; revenue bonds; not a state debt)
• Article 601d-2, V.T.C.S. (State Capitol renovation bond financing)

Cases:

• Texas Public Building Authority v. Mattox, 686 S.W.2d 924 (Tex. 1985)
• Austin National Bank v. Sheppard, 71 S.W.2d 242 (Tex. 1934)
• State v. Perlstein, 79 S.W.2d 143 (Tex. Civ. App. - Austin 1934, writ dism'd)

Prior Attorney General materials referenced: Attorney General Letter Advisory No. 107 (1975).

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-970
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1988/jm0970.pdf

Original opinion text

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

October 25, 1988

Honorable Mike Millsap
House Administration
Texas House of Representatives
P. O. Box 2910
Austin, Texas 78769

Opinion No. JM-970

Re: Constitutionality of a plan to finance renovation of the Capitol (RQ-1468)

Dear Representative Millsap:

You ask about the authority of the Texas Public Finance Authority to issue bonds under article 601d-2, V.T.C.S. Specifically, you ask whether the authority may, without executing a lease with the State Preservation Board, issue bonds for the renovation of the State Capitol and provide that the payment of principal and interest on the bonds will be paid from appropriations made directly to the Texas Public Finance Authority.

The Texas Public Finance Authority (the authority) was created by the 68th Legislature and was originally called the Texas Public Building Authority. Acts 1984, 68th Leg., 2d C.S., ch. 5, at 15 (repealing original version of Public Building Authority Act, Acts 1983, 68th Leg., ch. 700, at 4360). A 1987 enactment changed the name of the authority from the Texas Public Building Authority to the Texas Public Finance Authority. Acts 1987, 70th Leg., 2nd C.S., ch. 75, p. 234. The general provisions governing the authority are set out in article 601d, V.T.C.S.

Under article 601d the authority may issue and sell bonds for the financing, acquisition, construction, repair, and renovation of buildings used by state agencies. V.T.C.S. art. 601d, section 9. Section 13 states that the bonds are payable "solely from revenue as provided by this Act"; and section 12(a) states that the authority may provide for the payment of the principal and interest on the bonds by (1) pledging all or part of the designated rents, issues and profits from leasing a building to the state or (2) from any other source lawfully available to the authority. Section 13 provides that bonds issued under article 601d are not a debt of the state or any state agency and that the bonds must contain on their face a statement to that effect. Id. section 13. The legislature must specifically authorize any project for which bonds are sold under article 601d, and the bonds must be approved by the attorney general. Id. sections 10, 16.

Soon after the enactment of article 601d, the authority proposed a bond issuance to finance the construction of a state office building for the Texas Youth Commission and the Texas Rehabilitation Commission. The attorney general, arguing that the bond issuance would violate several constitutional provisions, refused to approve the proposed bond issuance. Therefore, the authority applied to the Texas Supreme Court for a writ of mandamus directing the attorney general to approve the bond issuance. Texas Public Building Authority v. Mattox, 686 S.W.2d 924 (Tex. 1985). The attorney general argued that the bond issuance would be in violation of article III, section 49, which prohibits the creation of debt "by or on behalf of the state." The court rejected that argument by pointing out that article 601d expressly provides that the bonds are not debts of the state and not a pledge of the state's full faith and credit. The court also rejected the attorney general's argument that the proposed bond issuance would violate article III, section 44, which prohibits the appropriation of money to any individual on a claim that is not provided for by pre-existing law. [Footnote 1] We will return to the court's discussion of article III, section 44, after we examine the provisions of the statute you ask about, article 601d-2, V.T.C.S.

After the Supreme Court upheld the provisions of article 601d, the legislature enacted article 601d-2 to provide a means to finance renovation of the State Capitol. Acts 1987, 70th Leg., ch. 626, p. 2407. Article 601d-2 authorizes the board of directors of the authority to issue and sell bonds for that purpose. V.T.C.S. art. 601d-2, section 2. Proceeds from such bonds are to be deposited in the state treasury to the account of the State Preservation Board. Id. section 3(a). Article 601d-2 appropriates those funds to the State Preservation Board for projects for the repair and renovation of the State Capitol. Id. section 3(b). Section 4 of article 601d-2 provides:

(a) The board [of the Public Finance Authority] may provide for the repayment of the principal and interest on the bonds issued under this Act from any source of funds lawfully available to the board.

(b) From funds appropriated for the purpose, the State Preservation Board shall pay to the board under a lease agreement an amount determined by the board to be sufficient to:

(1) pay the principal and interest on the bonds;

(2) maintain any reserve fund necessary to service the debt; and

(3) reimburse the authority for other costs and expenses incurred by the authority relating to a project under this Act or to outstanding bonds.

(c) Bonds payable from money appropriated by the legislature shall not mature or be subject to redemption before September 1, 1989, and the date of the first interest payment to be made from appropriated money shall not be scheduled to occur before September 1, 1989.

Section 6 provides that the State Preservation Board may enter into lease agreements under article 601d-2 and may spend appropriated funds or other funds for the purpose of making lease payments. Section 5 provides that bonds issued under article 601d-2 are subject to a number of provisions of the Public Finance Authority Act, including section 13, which provides that bonds issued under article 601d are not a debt of the state or any state agency and that the bonds must contain on their face a statement to that effect. Your question is whether the authority may, without executing a lease with the State Preservation Board, issue bonds for the renovation of the State Capitol and "repay the principal of and interest on the bonds from direct legislative appropriations for that purpose."

Although the authority's power to issue bonds for the repair and renovation of the State Capitol is not explicitly made dependent on the existence of a lease with the State Preservation Board, article 601d-2 clearly contemplates that bonds issued pursuant to that article will be paid from revenues from a lease with the State Preservation Board. Also, the incorporation of section 13 of the Texas Public Finance Authority Act, which provides that the bonds are to be revenue bonds, [Footnote 2] indicates that the legislature intended that the bonds would be payable from revenue from the lease of the State Capitol to the State Preservation Board. However, we need not determine whether the legislature intended article 601d-2 to give the authority power to issue bonds without executing a lease with the State Preservation Board because we conclude that the proposal you ask about would not be permissible under article III, section 44, of the Texas Constitution.

Article III, section 44, of the Texas Constitution provides:

The Legislature shall provide by law for the compensation of all officers, servants, agents and public contractors, not provided for in this Constitution, but shall not grant extra compensation to any officer, agent, servant, or public contractors, after such public service shall have been performed or contract entered into, for the performance of the same; nor grant, by appropriation or otherwise, any amount of money out of the Treasury of the State, to any individual, on a claim, real or pretended, when the same shall not have been provided for by pre-existing law; nor employ any one in the name of the State, unless authorized by pre-existing law.

This means that no money may be appropriated unless, at the time the appropriation is made, there is already in force some valid law constituting the claim to be paid a legal and valid obligation of the state. Austin National Bank v. Sheppard, 71 S.W.2d 242 (Tex. 1934); State v. Perlstein, 79 S.W.2d 143 (Tex. Civ. App. - Austin 1934, writ dism'd).

In Texas Public Building Authority v. Mattox, 686 S.W.2d 924, the court responded to the attorney general's argument that appropriations for the purpose of making lease payments to the authority would violate article III, section 44, as follows:

The Attorney General argues that any appropriation by the Legislature to make rental payments to the Authority pursuant to the lease agreement must necessarily violate the article III, section 44 prohibition against the making of grants of money out of the State Treasury to an individual on a claim when the same shall not have been provided for by pre-existing law. The execution of the Lease Agreement between the Authority and the Commission under the precise terms contained therein is expressly authorized by Section 12 of the Act. The manner of repayment of the bonds and the manner in which the rents and fees to be paid by the Commission are to be calculated are likewise expressly authorized by the Act. We believe that when expressly authorized by a pre-existing statute, an appropriation of funds in furtherance of an authorized project does not violate article III, section 44.

The purpose of the article III, section 44 proscription is the prevention of 'raids' upon the State Treasury by private individuals or entities. We consider inapposite authorities such as Austin National Bank v. Sheppard, 123 Tex. 272, 71 S.W.2d 242 (1934) because here, the Legislature itself has created the Authority and authorized the execution of contracts between it and state agencies, which contracts do not otherwise violate the state constitution. Appropriations made in furtherance of those contracts are fully 'provided for by pre-existing law.' Thus, appropriations made in the future by the Legislature in fulfillment of the Commission's obligations under the Lease Agreement with the Authority are not proscribed by article III, section 44.

686 S.W.2d at 929. In short, the Supreme Court found that appropriations to the authority for the purpose of making lease payments were proper because the state agencies involved had pre-existing authority to enter into leases for building space. The proposal you ask about, however, would involve legislative appropriations made directly to the authority for the purpose of paying principal and interest on the bonds. Article 601d-2 expressly provides that the bonds are not legal obligations of the state and that they are revenue bonds. Thus, not only would an appropriation for the purpose of paying principal and interest on bonds issued under article 601d-2 be unauthorized by pre-existing law, it would be an appropriation to pay for something that the legislature had expressly proclaimed itself unobligated to pay. See Attorney General Letter Advisory No. 107 (1975).

It has been suggested that the proposal you ask about would not violate article III, section 44, because an appropriation to the authority would not be an appropriation "on a claim." [Footnote 3] See Jones, The Future of Moral Obligation Bonds as a Method of Government Finance in Texas, 54 Tex. L. Rev. 314, 328-30 (1976). The suggestion is that appropriation to the authority would avert default on the bonds and would necessarily avert the assertion of any "claims," i.e., lawsuits. We disagree with that suggestion. If bondholders did sue the state for payment, an appropriation to pay those claims would clearly violate article III, section 44. Certainly it follows that the legislature cannot circumvent article III, section 44, by appropriating money for payments it is not obligated to make in order to prevent the assertion of "claims" not provided for by pre-existing law. Therefore, we conclude that the proposal you ask about would be impermissible under article III, section 44, of the Texas Constitution.

SUMMARY

A proposal whereby the Texas Public Finance Authority would issue "revenue" bonds and provide that principal and interest on the bonds would be paid from direct legislative appropriations would be impermissible under article III, section 44, 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

RICK GILPIN
Chairman, Opinion Committee

Prepared by Sarah Woelk
Assistant Attorney General

[Footnote 1] The attorney general also argued that the proposed bond issuance would be in violation of Article I, section 17; Article III, section 49a; and Article VIII, section 6, of the Texas Constitution. The court rejected all of those arguments.

[Footnote 2] Article 601d gives the authority power to lease a building financed with bonds issued under that article to any person or entity if the state fails or refuses to pay rental on the building. V.T.C.S. art. 601d, section 12(d). Thus, there would be a potential source of revenue from which to pay principal and interest on the bonds even if the legislature failed to appropriate money for the lease of a building financed under article 601d. However, even if there were a lease between the authority and the State Preservation Board, bonds issued under article 601d-2 would look less like revenue bonds than bonds issued under article 601d since the legislature did not even attempt to give the authority power to lease the State Capitol to a person or entity other than the state. On the subject of a lease of the State Capitol to the State Preservation Board from the authority, it is interesting to note section 11(a) of article 601d, which provides: "Property financed by the authority under this Act does not become part of other property to which it may be attached or affixed or into which it may be incorporated, regardless of whether the other property is real or personal. The rights of the State Preservation Board in property financed by the authority under this Act are those of a lessee, and a person claiming under or through the State Preservation Board does not acquire any greater rights with respect to that property." That section tracks section 7 of article 601d-2, V.T.C.S. Both provisions overrule the common law rule that fixtures become part of the real property to which they are attached. The provisions are important to the schemes provided for in articles 601d and 601d-2 in instances in which the bond money is used for repair or renovation of existing state buildings because they allow the state to assume the role of lessee of improvements to state buildings. It is hard to imagine what the substance of the state's leasehold would be, however, if bonds issued under article 601d or 601d-2 were used, for example, for sand-blasting.

[Footnote 3] It has also been suggested that an appropriation to the authority would not be an appropriation to an individual. We think, however, that an appropriation to the authority for the purpose of paying bondholders is, in effect, an appropriation to individuals. See generally Austin National Bank v. Sheppard, 71 S.W.2d 242 (Tex. 1934).