Could the Port Arthur Economic Development Corporation pay a $300,000 grant and sales-tax refund promised to a private retailer?

TX AG Opinion GA-0264: Could Port Arthur’s EDC fund the retailer agreement?

Plain-English summary

Port Arthur had agreed to pay a private retailer a $300,000 grant and refund part of the sales tax generated by a new store. The city later adopted a joint resolution stating that its section 4A economic development corporation would fund the grant and half the refund. The Attorney General examined whether the EDC could make those payments after the Legislature amended the Development Corporation Act in 2003.

The city and EDC were separate legal actors. Although the city appointed the EDC’s directors, approved its programs and expenditures, and exercised statutory oversight, the EDC’s powers were vested in its board. The city could not enter a contract or spend section 4A tax proceeds on the EDC’s behalf. The EDC board had to authorize a contract or expenditure by final official action in an open meeting.

House Bill 2912 changed the Act effective June 20, 2003. It narrowed section 4A projects to those creating or retaining primary jobs, added “expenditure” to the project definition, required performance agreements for direct incentives, and eliminated the direction to construe the Act liberally. Former law continued only for a project undertaken or approved before the effective date.

Under former law, the project definition covered costs associated with land, buildings, equipment, facilities, targeted infrastructure, or improvements promoting business development. It did not include a free-standing grant or sales-tax refund to induce a retailer to open a store. Gaut had arguably supported some non-project contracts that promoted economic development, but later amendments and opinions had limited that reasoning and still required the development corporation’s board to make the initial factual determination.

Any payment also had to satisfy article III, section 52(a) of the Texas Constitution. The EDC board had to find in good faith that the expenditure served an EDC public purpose and impose controls ensuring that purpose was carried out. The record did not show that the board had made those findings or entered a controlling agreement.

To qualify under House Bill 2912’s grandfather clause, the EDC itself had to have begun or contractually committed to the project, formally approved it by board action, or have voter approval for a specific project before June 20, 2003. City action was not enough. Because the EDC board had not approved the grant or refund in an open meeting before that date—and because the payments were not a project under former law—the grandfather clause did not apply.

Currency note

This opinion was issued in 2004. 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.

Who this opinion affected (as of 2004)

Economic development corporation boards: Their powers and tax proceeds could be exercised only through board action; city resolutions could not substitute for an EDC vote.

City councils: Creating and supervising an EDC did not authorize the city to contract or spend tax proceeds in the corporation’s name.

Private businesses seeking incentives: An incentive required authority under the applicable version of the Act, valid corporate approval, and constitutional public-purpose controls.

Taxpayers: Section 4A sales-and-use taxes remained public funds subject to the Texas Constitution’s prohibition on gifts or donations to private entities.

Common questions

Could the city bind the EDC through the retailer agreement?
No. The opinion said the EDC was authorized to contract for itself through official board action; the city could not contract on its behalf.

Were a cash grant and sales-tax refund a “project” under the pre-2003 Act?
No. The former definition covered costs tied to specified property, facilities, infrastructure, and improvements, not the stand-alone payments described.

Did Gaut authorize the payments anyway?
At most, Gaut arguably supported non-project economic-development contracts under former law. The EDC still needed its own board findings, approval, contract, and constitutional controls, which the submitted record did not show.

What counted as “undertaken or approved” before June 20, 2003?
The opinion identified an EDC project already begun or contractually committed, formally approved by the board, or specifically approved by voters. A later city-and-EDC resolution did not establish timely approval.

Could the EDC simply donate public tax proceeds to the retailer?
No. Article III, section 52(a) prohibited gifts. The board needed a good-faith public-purpose determination and sufficient contractual or other controls.

Background and statutory framework

Port Arthur created the EDC under section 4A of the Development Corporation Act of 1979. The city’s 2002 agreement promised the retailer a grant and municipal sales-tax refunds, but the EDC was not a party. In December 2003, the city council and EDC board jointly adopted a resolution assigning payments to the EDC; the EDC board later rescinded its resolution.

House Bill 2912 amended the general definition of “project,” section 4A’s authorized purposes, and the rules for incentives. Its section 14 grandfathered only projects undertaken or approved before June 20, 2003 under the law then in effect.

The Act placed all corporate powers in the board, required board action as a body, and subjected final decisions to the Open Meetings Act. The creating city retained approval and oversight functions but did not acquire the board’s contract or expenditure authority.

The constitutional analysis applied the public-purpose test reflected in Young and City of Coleman: a public entity needed a good-faith public-purpose finding and controls that ensured the public objective would be achieved.

Citations

Constitution and statutes:

• Tex. Const. art. I, § 16; art. III, § 52(a)
• Development Corporation Act of 1979, former Tex. Rev. Civ. Stat. art. 5190.6, §§ 2, 4, 4A, 11, 14, 17, 21-23, 25, 38, 40
• Tex. Gov’t Code §§ 312.002, 551.087, 551.102
• Tex. Local Gov’t Code ch. 378; § 378.004

Cases:

• Gaut v. Amarillo Econ. Dev. Corp., 921 S.W.2d 884 (Tex. App.-Austin 1996, no writ)
• Young v. City of Houston, 756 S.W.2d 813 (Tex. App.-Houston [1st Dist.] 1988, writ denied)
• City of Coleman v. Rhone, 222 S.W.2d 646 (Tex. Civ. App.-Eastland 1949, writ ref’d)

Related opinions:

• Tex. Att’y Gen. Ops. JC-0109 (1999); JM-120 (1983); JC-0488 (2002); JC-0118 (1999); JC-0362 (2001); GA-0086 (2003); GA-0188 (2004); GA-0078 (2003); MW-85 (1979)
• Tex. Att’y Gen. LOs 95-072, 92-086, 97-061, 94-037

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0264
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2004/ga0264.pdf

Original opinion text

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

ATTORNEY GENERAL OF TEXAS

GREG ABBOTT

October 27, 2004

The Honorable Allan B. Ritter
Chair, House Pensions and Investments Committee
Texas House of Representatives
Post Office Box 2910
Austin, Texas 78768-2910

Opinion No. GA-0264

Re: Whether the Port Arthur Economic Development Corporation may grant funds and
refund sales taxes to a private corporation (RQ-0218-GA)

Dear Representative Ritter:

You ask whether the Port Arthur Economic Development Corporation (the “EDC”) may
grant funds and refund sales taxes to a private corporation.1

I. Background

A. Factual Context: The Agreement

The City of Port Arthur (the “City”) established the EDC in 1996 under section 4A
of the Development Corporation Act of 1979, TEX. REV. CIV. STAT. ANN. art. 5190.6 (Vernon 1987
& Supp. 2004-05) (“article 5190.6” or the “Act”), “to act on behalf of the City in the promotion and
development of new and expanded enterprises, including certain projects, as defined in the Act.”
Your query arises from a very specific fact situation involving an agreement the City signed in
December 2002, which is described in official Port Arthur City Council (the “City Council”)
resolutions provided by the City.

On December 17, 2002, the City and Target Corporation (the “Corporation”) entered into a
“Grant and Sales Tax Refund Agreement for Retail Facility Redevelopment and Expansion Between
the City of Port Arthur and Target Corporation” (the “Agreement”). See City Letter, supra note 1.2

1See Letter from Honorable Allan B. Ritter, Chair, House Pensions and Investments Committee, Texas House
of Representatives, to Honorable Greg Abbott, Texas Attorney General (May 3, 2004) (on file with the Opinion
Committee; also available at http://www.oag.state.tx.us) [hereinafter Request Letter], attaching Letter from Mark T.
Sokolow, City Attorney, City of Port Arthur, to Honorable Allan B. Ritter, Chair, House Pensions and Investments
Committee, Texas House of Representatives (Apr. 1, 2004) [hereinafter City Letter] and Letter from James E.
Wimberley, McPherson Monk Hughes Bradley Wimberley & Steele L.L.P., Counsel for the EDC (Mar. 31, 2004)
[hereinafter EDC Letter].

2Letter from Mark T. Sokolow, City Attorney, City of Port Arthur, to Beverly McGaffey, Opinion Committee,
Office of the Attorney General (July 14, 2004) (attaching Ordinance No. 96-08) (on file with the Opinion Committee)
[hereinafter City Letter of July 14, 2004].

(Resolution No. 03-371, Ex. A). In pertinent part, the City agreed to pay the Corporation a $300,000
“grant” within thirty days of the Corporation opening a retail store in the City. See id. (Resolution
No. 03-371, Ex. A, § 2.01). The City also agreed to refund to the Corporation a portion of sales tax
proceeds from retail sales at the store over a certain term. See id. The Agreement states that “[o]nly
the City Portion of the Total Tax shall be subject to this Agreement.” Id. The Agreement is between
and is signed on behalf of the City and the Corporation; the EDC is not a party to the Agreement.
See id. (Resolution No. 03-371, Ex. A, at 1,6). In a December 12, 2002 resolution authorizing the
City’s city manager to approve the Agreement, however, the City Council noted that “the Section
4A Economic Development Corporation can fund projects that will promote economic development,
increase employment and commercial business development and expansion.” Id. (Resolution No.
02-367, at 1-2).

In December 2002, before entering into the Agreement, the City Council also created a
neighborhood empowerment zone encompassing the proposed retail store pursuant to chapter 378
of the Local Government Code. See id. (Resolution No. 02-366). Section 378.004 of the Local
Government Code authorizes a municipality that establishes a neighborhood empowerment zone to
“enter into agreements, for a period of not more than 10 years, for the purpose of benefitting the
zone, for refunds of municipal sales tax on sales made in the zone.” TEX. LOC. GOV’T CODE ANN.
§ 378.004 (Vernon Supp. 2004-05).

Approximately a year later, on December 16, 2003, at a joint meeting, the City Council and
the EDC’s board of directors jointly adopted a resolution “pertaining to the [EDC’s participation in]
the Target Project.” City Letter, supra note 1 (Resolution No. 03-371). The resolution states that
when the City signed the Agreement, “it was contemplated . . . that the City of Port Arthur was
acting on its own behalf and on behalf of its affiliated” EDC; that the EDC “would pay the sum of
$300,000 within thirty (30) days of the opening of the store”; and that the City and the EDC “would
each rebate 50% of the sales tax collected.” Id. (Resolution No. 03-371, at 1). In the resolution, the
City Council resolved that the EDC would pay the Corporation $300,000 “in compliance with the
agreement.” Id. (Resolution No. 03-371, at 2, § 2). The City Council also resolved that the EDC
would pay the Corporation half the sales tax rebate provided in the Agreement. See id. (Resolution
No. 03-371, at 2, § 3). However, later in December 2003, the EDC board of directors rescinded the
resolution and withdrew from participating in the Target project “unless and until the EDC Board
received a written opinion from the Attorney General confirming the EDC’s ability to participate.”
EDC Letter, supra note 1, at 3.

On March 30, 2004, the City Council authorized the City director of finance to pay the
Corporation $300,000 from a City account “as an interim loan to the project until an Attorney
General Opinion is received.” City Letter, supra note 1 (Resolution No. 04-117, § 2). Pursuant to
the resolution, the EDC will repay the City “if an Attorney General Opinion finds this expenditure
is an eligible EDC project.” Id. (Resolution No. 04-117, § 3). The resolution indicates that the City
will seek an opinion on the EDC’s authority to make the $300,000 payment. See id. (Resolution No.
04-117, § 4).

We have not been provided with official EDC documents regarding its board of directors’
official actions with respect to the Agreement or an EDC project related to the Agreement (aside

from the December 2003 joint resolution, which the EDC board of directors later rescinded). A brief
submitted on the City’s behalf states that “public action in open sessions of city council meetings
evidencing the city’s intent to fund the joint incentive package with the EDC took place as early as
the spring of 2002” and that “correspondence, contact and meetings between the city manager and
officials of the EDC occurred in December, 2002.” The brief further asserts that

the project was being undertaken by both the city and the EDC as
early as December, 2002, when information was provided to the
director ofthe EDC. Subsequent letters between the counsel for EDC
and the city manager and city attorney; and later, a meeting between
the city manager and officials of the EDC in executive session,
further document the undertaking.

Parker Brief, supra note 3, at 4. However, the brief also states that the EDC board of directors took
no vote on the project “other than the ratification vote in December, 2003.” Id.

B. Legal Context: 2003 Amendments to the Act

Between December 2002, when the City entered into the Agreement, and December
2003, when the City Council and the EDC jointly stated that the EDC would pay the grant and a
portion of the sales tax rebate, the legislature significantly amended article 5190.6 in House Bill
2912. See Tex. H.B. 2912, 78th Leg., R.S. (2003). Three amendments to article 5190.6 are
particularly important here.

First, as the bill analyses note, House Bill 2912 amends the Act “to refocus the use of the
economic development sales tax on the creation or retention of primary jobs.”4 Under the Act prior
to its amendment in 2003, particularly section 2(11)(A), which defines the term “project,” a section
4A development corporation was authorized to finance costs associated with land, buildings,
equipment, facilities, targeted infrastructure, and improvements “to promote new and expanded
business development.”5 As amended by House Bill 2912, however, section 2(11)(A) of the Act
now limits the purpose of a “project” to “the creation or retention of primary jobs.” TEX. REV. CIV.
STAT. ANN. art. 5190.6, § 2(11)(A), as amended by Act of May 30, 2003, 78th Leg., R.S., ch. 1132,

3Brief from Carl Parker, The Parker Law Firm, to Nancy Fuller, Chair, Opinion Committee, Office of the
Attorney General at 3-4 (June 23, 2004) (on file with the Opinion Committee) [hereinafter Parker Brief].

4HOUSE COMM. ON ECONOMIC DEVELOPMENT, BILL ANALYSIS, Tex. H.B. 2912, 78th Leg., R.S. (2003); SENATE
COMM. ON STATE AFFAIRS, BILLANALYSIS, Tex. H.B. 2912, 78th Leg., R.S. (2003) (Engrossed version); SENATECOMM.
ON STATE AFFAIRS, BILL ANALYSIS, Tex. H.B. 2912, 78th Leg., R.S. (2003) (Committee Report Substitute).

5See infra at 7-8 n.17 (quoting the article 5190.6, section 2(11)(A) definition of “project” prior to the 2003
amendment); see also Tex. Att’y Gen. Op. No. JC-0362 (2001) (discussing a section 4A development corporation’s
authority to undertake projects under former law).

§ 1, 2003 Tex. Gen. Laws 3218, 3218-19.6 As defined by a provision added by House Bill 2912, the
term “primary job” does not include jobs in retail sales. See Act of May 30, 2003, 78th Leg., R.S.,
ch. 1132, § 2, 2003 Tex. Gen. Laws 3218, 3219 (adding section 2(17) defining “primary job”). This
limitation is particularly significant to section 4A development corporations, because section 4A
does not further define the term “project.” By contrast, section 4B defines the term “project” by
reference to section 2 but also contains an additional definition of the term. Compare TEX. REV.
CIV. STAT. ANN. art. 5190.6, § 4A (Vernon Supp. 2004-05) with id. § 4B(a)(2)(A)-(F).

Second, House Bill 2912 amended section 2(11)(A) to include within the definition of
“project” the word “expenditures.” Section 2(11)(A) now provides for expenditures “that are for the
creation or retention of primary jobs” and expenditures for certain limited infrastructure.7 House
Bill 2912 also added section 40 to the Act, which provides that a development corporation may not
“provide a direct incentive to or make an expenditure on behalf of a business enterprise under a
project” unless the corporation enters into a performance agreement with the business enterprise that
includes certain mandated terms. See Act of May 30, 2003, 78th Leg., R.S., ch. 1132, § 12, 2003
Tex. Gen. Laws 3218, 3222-23 (adding section 40).

Third, section 3 of article 5190.6 had directed that “[t]his Act shall be liberally construed in
conformity with the intention of the legislature herein expressed.”8 In House Bill 2912, the

6Section 2(11)(A) now defines “project” in pertinent part as follows:

the land, buildings, equipment, facilities, expenditures, targeted infrastructure, and
improvements (one or more) that are for the creation or retention of primary jobs
and that are found by the board of directors to be required or suitable for the
development, retention, or expansion of manufacturing and industrial facilities,
research and development facilities, transportation facilities (including but not
limited to airports, ports, mass commuting facilities, and parking facilities), sewage
or solid waste disposal facilities, recycling facilities, air or water pollution control
facilities, facilities for the furnishing of water to the general public, distribution
centers, small warehouse facilities capable of serving as decentralized storage and
distribution centers, primary job training facilities for use by institutions of higher
education, and regional or national corporate headquarters facilities.

“Project” also includes job training required or suitable for the promotion
of development and expansion of business enterprises and other enterprises
described by this Act, as provided by Section 38 of this Act.

TEX. REV. CIV. STAT. ANN. art. 5190.6, § 2(11)(A), as amended by Act of May 30, 2003, 78th Leg., R.S., ch. 1132, §
1, 2003 Tex. Gen. Laws 3218, 3218-19 (emphasis added).

See id.

7House Bill 2912 added the following to section 2(11)(A): “‘Project’ also includes expenditures found by the
board of directors to be required or suitable for infrastructure necessary to promote or develop new or expanded business
enterprises limited to streets and roads, rail spurs, water and electric utilities, gas utilities, drainage and related
improvements, and telecommunications and Intemet improvements.” Id.

8Act of May 23, 1979, 66th Leg., R.S., ch. 700, § 3, 1979 Tex. Gen. Laws 1675, 1677.

legislature amended this provision to strike the word “liberally.” Id. § 3, 2003 Tex. Gen. Laws at
3220 (amending section 3(b)).

House Bill 2912 contains a grandfather provision continuing former law in effect for certain
projects. Its amendments “apply only to a project that is undertaken or approved, by an election or
otherwise, on or after the effective date of this Act.” Id. § 14, 2003 Tex. Gen. Laws at 3223. A
project that is undertaken or approved before House Bill 2912’s effective date “is governed by the
law in effect on the date the project is undertaken or approved, and the former law is continued in
effect for that purpose.” Id. House Bill 2912 took effect on June 20, 2003. See id. at 3223.

B. Issues

The City and the EDC wish to know whether the EDC may now pay $300,000 and
refund sales taxes to the Corporation pursuant to the Agreement.10 Both the City and the EDC
appear to agree that paying these funds to the Corporation is not an appropriate section 4A
development corporation project under the Act as amended by House Bill 2912 because locating the
Corporation’s retail store in the City will not create or retain primary jobs as required by section
2(11)(A). Assuming this is the case, the EDC’s authority depends upon (i) whether former law
authorized the EDC to make the payment and refund sales taxes and (ii) if so, whether paying these
funds to the Corporation would constitute a “project” “undertaken or approved” before June 20, 2003
for which former law is continued in effect. Before considering these issues, however, we first
review a section 4A development corporation’s authority to act and the extent to which a city that
has created a section 4A development corporation may contract and expend funds on the
corporation’s behalf. These concerns underlie the facts outlined in the resolutions and the City’s
brief and are essential to the primary issues.

II. Whether a City That has Created a Development Corporation May Act on the
Corporation’s Behalf

Section 4A of the Act authorizes a qualifying city to create a development corporation
governed by that section, see TEX. REV. CIV. STAT. ANN. art. 5190.6, § 4A(b)(1) (Vernon Supp.
2004-05), and, if the voters approve it, authorizes the city to levy a sales and use tax for the benefit
of that corporation, see id. § 4A(d). The Act generally requires each corporation to “have a board
of directors.” Id. § 11(a). More specifically, section 4A provides that a development corporation
is governed by a board of five directors “who are appointed by the governing body of the city and
who serve at the pleasure of the governing body.” Id. § 4A(c). In addition to this authority to
appoint and remove directors, the Act also vests in the creating city power over the corporation’s
governance and operation, such as the authority to approve changes to the corporation’s articles of
incorporation and by-laws and to approve the corporation’s programs and expenditures.11 Indeed,

10See City Letter, supra note 1, at 1; EDC Letter, supra note 1, at 2.

11See TEX. REV. CIV. STAT. ANN. art. 5190.6, §§ 17(a) (Vernon Supp. 2004-05) (“The articles of incorporation
may at any time and from time to time be amended, provided that the board of directors files with the governing body
of the unit under whose auspices the corporation was created a written application requesting that the unit approve such

(continued...)

in outlining development corporations’ general powers, section 23(a)(13) provides that a
development corporation may “exercise all powers necessary or appropriate to effect any or all of
the purposes for which the corporation is organized which powers shall be subject at all times to
the control of the governing body of the unit under whose auspices the corporation was created.”
Id. § 23(a)(13) (emphasis added).

Significantly, however, the powers of a development corporation are vested in the
corporation’s board of directors. See id. § 11(a) (“The corporation shall have a board of directors
in which all powers of the corporation shall be vested.”). The board of directors is required to act
as a body, see id. § 14(b) (“The act of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the board of directors, unless the act of a greater number is
required by the articles of incorporation or the bylaws.”) (emphasis added), and is subject to the
Open Meetings Act, see id. § 11(b) (“The board of directors is subject to the open meetings act.”).12
As a result, the board of directors of a development corporation may not act except by a final official
action taken in an open meeting. See id. §§ 11(a)-(b), 14(b); Tex. Att’y Gen. Op. No. JC-0109
(1999) (concluding that although no statute specifically requires a development corporation to
provide notice of a land sale, a corporation’s board of directors may not take final action on a
land sale except by a final official action in an open meeting after providing notice under the Open
Meetings Act). Although the Open Meetings Act permits a governmental body to deliberate
in executive session regarding economic development negotiations, see TEX. GOV’T CODE ANN.
§ 551.087 (Vernon Supp. 2004-05), “[a] final action, decision, or vote on a matter deliberated in a
closed meeting . .. may only be made in an open meeting that is held in compliance with” the Open
Meetings Act’s notice requirements, id. § 551.102 (Vernon 1994).

Your query specifically involves a development corporation’s authority to enter into contracts
and to expend sales and use tax proceeds. A development corporation has all the powers of a
nonprofit corporation and is authorized to contract on its own behalf. See TEX. REV. CIV. STAT.
ANN. art. 5190.6, § 23(a) (Vernon Supp. 2004-05) (“The corporation shall have and exercise all of
the rights, powers, privileges, authority, and functions given by the general laws of this state to

"(...continued)

amendment to the articles of incorporation, specifying in such application the amendment or amendments proposed to
be made. If the governing body by appropriate resolution finds and determines that it is advisable that the proposed
amendment be made, authorizes the same to be made, and approves the form of the proposed amendment, the board of
directors shall proceed to amend the articles as hereinafter provided.”), 17(b) (“The articles of incorporation may also
be amended at any time by the governing body of the unit under whose auspices the corporation was created at its sole
discretion by adopting an amendment to the articles of incorporation of the corporation by resolution of such governing
body and delivering the articles of amendment to the secretary of state as hereinafter provided.”), 21 (“The unit will
approve all programs and expenditures of the corporation and annually review any financial statements of the
corporation, and at all times the unit will have access to the books and records of the corporation.”), 23(a}(11)
(authorizing a development corporation “to make and alter bylaws not inconsistent with its articles of incorporation or
with the laws of this state with the approval of the unit under whose auspices the corporation was created by resolution
of the governing body for the administration and regulation of the affairs of the corporation”).

12See generally Tex. Att’y Gen. Op. No. JM-120 (1983) at 3-4 (concluding that section 11(b) of the Act
effectively repeated section 14(c), which provides that “[a]ny action required by this Act to be taken at a meeting of the
directors of a corporation or any action which may be taken at a meeting of the directors may be taken without a meeting
if a consent in writing, setting forth the action to be taken, shall be signed by all of the directors. Such consent shall have
the same force and effect as a unanimous vote.”).

nonprofit corporations incorporated under the Texas Non-Profit Corporation Act. . . but to the extent
that the provisions of the general laws are in conflict or inconsistent with this Act, this Act
prevails.”); Gaut v. Amarillo Econ. Dev. Corp., 921 S.W.2d 884, 887 (Tex. App.—Austin 1996, no
writ) (“As a non-profit corporation, [a section 4A development corporation] has the power to make
contracts and incur liabilities.””). Moreover, to enter into a contract, a development corporation must
do so pursuant to an official act of its board of directors, in which its authority is vested and which
may take final action only in an open meeting. See TEX. REV. Civ. STAT. ANN. art. 5190.6, §§ 11(a)-
(b), 14(b) (Vernon Supp. 2004-05). No provision in the Act authorizes a city’s governing body to
enter into a contract on behalf of a section 4A development corporation it has created.

In addition, this office has concluded that section 4A vests the authority to expend sales and
use tax proceeds in the development corporation, not the city. See Tex. Att’y Gen. Op. No. JC-0488
(2002) at 3. The Act contemplates that a section 4A development corporation will use its sales and
use taxes for projects that its board of directors initiates and that the city’s governing body has the
authority to review. See TEX. REV. Civ. STAT. ANN. art. 5190.6, §§ 4A(f), 21 (Vernon Supp. 2004-
05). Specifically, after the tax has been approved by the voters and the Comptroller remits tax
proceeds to the city, the city “shall deliver the proceeds to the corporation to use in carrying out its
functions.” Id. § 4A(f) (emphasis added). The Act provides that the governing body of a city that
has created a development corporation “will approve all programs and expenditures of the
corporation,” id. § 21, thus authorizing the governing body to disapprove programs and expenditures,
but the Act does not authorize the city’s governing body to spend the development corporation’s
sales and use taxes. Section 4A sales and use tax proceeds may not be expended unless authorized

by the development corporation’s board of directors’ final official action in an open meeting. See
id. §§ 11(a)-(b), 14(b).

III. Whether Former Law Authorized the Grant and Sales Tax Refund

A. Authority under Article 5190.6 and Gaut

You ask about the EDC’s authority prior to the 2003 amendments to pay the
Corporation the $300,000 grant and the sales tax refund described in the Agreement. See supra note

1. Generally, a section 4A development corporation may use sales and use taxes (i) to finance costs
   of projects;13 (ii) for job training;14 and (iii), to a limited extent, for promotional purposes.15 The
   authority of a particular development corporation may be limited by the resolution creating the
   corporation or ballot language restricting the use of the section 4A tax. See, e.g., TEX. REV. CIV.
   STAT. ANN. art. 5190.6, §§ 4(a) (Vernon Supp. 2004-05) (the resolution creating a corporation must
   specify its purpose), 4A(n) (the election on imposing a tax may limit the time the tax is imposed),
   4A(r) (the election on imposing a tax may limit the use of tax proceeds to specific projects). It may
   also be limited by financing documents relating to the corporation’s bonds. See, e.g., id. §§ 4A(f)

13See TEX. REV. CIV. STAT. ANN. art. 5190.6, §§ 4A(f), 21, 23(a)(6) (Vernon Supp. 2004-05); see also id. §§
2(4), (11) (defining “cost” and “project”), 4A(i) (limiting a section 4A development corporation’s authority to undertake
certain projects and specifically authorizing others).

14See id. §§ 2(11)(A), 4A(f), 38.

15See id. § 4A(b).

(tax proceeds may be pledged to bond debt service), 25(e) (a pledge or agreement to secure bonds
is in effect until the bonds are fully paid). The ballot language authorizing the EDC tax did not limit
its use to a specific project,16 and we assume there are no bond-related limitations on the EDC’s
authority.

The City resolutions suggest that the grant and sales tax refund constituted a “project” under
former law; neither the City nor the EDC suggest that they might be authorized as spending for job
training or promotional purposes. Unlike section 4B of the Act, section 4A does not contain a
separate definition of the term “project.” Thus, prior to June 20, 2003, the Act authorized a section
4A development corporation to finance the costs of projects as that term was generally defined in
section 2(11)(A). Section 2(11)(A) defined “project” to include, in pertinent part, land, buildings,
equipment, facilities, targeted infrastructure, and improvements, that “promote new and expanded
business development.” Id. § 2(11)(A).17 Section 2(4) broadly defined the term “‘cost” to include
various expenses associated with a project.18 In addition, prior to 2003, section 4A(i) limited a

16See City Letter of July 14, 2004, supra note 2 (Ordinance No. 95-68).
17Prior to House Bill 2912, section 2(11)(A) defined the term “project” in pertinent part as follows:

(A) “Project” shall mean the land, buildings, equipment, facilities,
targeted infrastructure, and improvements (one or more) fo promote new and
expanded business development or found by the board of directors to be required
or suitable for the promotion of development and expansion of manufacturing and
industrial facilities, job creation and retention, job training, educational facilities,
research and development facilities, transportation facilities (including but not
limited to airports, ports, mass commuting facilities, and parking facilities), sewage
or solid waste disposal facilities, recycling facilities, air or water pollution control
facilities, facilities for the furnishing of water to the general public, distribution
centers, small warehouse facilities capable of serving as decentralized storage and
distribution centers, and facilities for use by institutions of higher education, and for
the promotion of development or redevelopment and expansion, including costs of
administration and operation, of a military base closed or realigned pursuant to
recommendation of the Defense Closure and Realignment Commission... .

TEX. REV. CIV. STAT. ANN. art. 5190.6, § 2(11)(A), as enacted by Act of May 23, 1979, 66th Leg., R.S., ch. 700, § 2(12),
1979 Tex. Gen, Laws 1675, 1676, as renumbered by Act of May 20, 1999, 76th Leg., R.S., ch. 973, § 1, 1999 Tex. Gen.
Laws 3722, 3722-23, as last amended by Act of May 22, 2001, 77th Leg., R.S., ch. 850, § 1, 2001 Tex. Gen. Laws 1698,
1698 (emphasis added).

18Section 2(4), which the legislature did not amend in 2003, provides as follows:

“Cost” as applied to a project shall mean and embrace the cost of
acquisition, cleanup, construction, reconstruction, improvement, and expansion,
including the cost of the acquisition of all land, rights-of-way, property rights,
easements, and interests, the cost of all machinery and equipment, financing
charges, inventory, raw materials and other supplies, research and development
costs, interest prior to and during construction and for one year after completion of
construction whether or not capitalized, necessary reserve funds, cost of estimates
and of engineering and legal services, plans, specifications, surveys, estimates of
cost and of revenue, other expenses necessary or incident to determining the

(continued...)

section 4A development corporation’s authority to undertake certain projects to provide
transportation facilities, solid waste disposal facilities, or air or water pollution control facilities, but
specifically authorized a project to provide a general aviation business service airport or port-related
facilities, neither of which is relevant here.19 Significantly, section 2(11)(A) limited a section 4A
development corporation to expending sales and use taxes for costs associated with land, buildings,
equipment, facilities, targeted infrastructure, or improvements that would promote new and
expanded business development and did not authorize a section 4A development corporation to use
such taxes to grant funds or to refund sales taxes to a corporation for opening a retail store.

As we have noted, House Bill 2912 added the word “expenditure” to the definition of the
term “project” in section 2(11)(A). Arguably, the term “expenditure” could embrace “grants” or
“sales tax refunds,” which would permit a section 4A development corporation to use sales and use
tax proceeds for expenses beyond costs associated with land, facilities, and other tangible items,
provided that the expenditure complies with section 40 of the Act. See id. § 40 (House Bill 2912
requirement that a development corporation may not “provide a direct incentive to or make an
expenditure on behalf of a business enterprise under a project” unless the corporation enters into a
performance agreement with the business enterprise). However, the term “expenditure” was not
included in section 2(11)(A) before the 2003 amendment.

The City suggests that the EDC’s participation in the Agreement is supported by Gaut. See
Parker Brief, supra note 3, at 2. In Gaut, the City of Amarillo had established the Amarillo
Economic Development Corporation (“AEDC”) and levied a sales and use tax under section 4A of
the Act. See Gaut, 921 S.W.2d at 885-86. The court considered a challenge to a contract between
the AEDC and American Airlines pursuant to which the AEDC made payments to the airline
company to provide jet service to the City of Amarillo. See id. Gaut, the plaintiff, contended that
the AEDC’s payments to the airline company were illegal because the contract was not a project
under the Act. See id. at 887. The court agreed that the “contract is not the type of project that

18(...continued)

feasibility and practicability of acquiring, cleaning, constructing, reconstructing,
improving, and expanding any such project, administrative expense and such other
expense as may be necessary or incident to the acquisition, cleanup, construction,
reconstruction, improvement, and expansion thereof, the placing of the same in
operation, and the financing or refinancing of any such project, including the
refunding of any outstanding obligations, mortgages, or advances issued, made or
given by any person for any of the aforementioned costs.

TEX. REV. CIV. STAT. ANN. art. 5190.6, § 2(4) (Vernon Supp. 2004-05).

19See TEX. REV. CIV. STAT. ANN. art. 5190.6, § 4A(i), as enacted by Act of May 27, 1989, 71st Leg., R.S., ch.
877, § 2, 1989 Tex. Gen. Laws 3871, 3872, as renumbered by Act of May 10, 1991, 72d Leg., R.S., ch. 184, § 1, 1991
Tex. Gen. Laws 802, 803, as last amended by Act of March 11, 1993, 73d Leg., R.S., ch. 12, § 3, 1993 Tex. Gen. Laws
49, 50-51, and Act of May 22, 1993, 73d Leg., R.S., ch. 1022, § 2, 1993 Tex. Gen. Laws 4424, 4424-25 (“Except as
provided by this subsection, the corporation may not undertake a project the primary purpose of which is to provide
transportation facilities, solid waste disposal facilities, or air or water pollution control facilities. However, the
corporation may provide those facilities to benefit property acquired for a project having another primary purpose. The
corporation may undertake a project the primary purpose of which is to provide: (1) a general aviation business service
airport that is an integral part of an industrial park; or (2) port-related facilities to support waterborne commerce.”).

involves the construction, acquisition, sale, lease, or purchase of a building.” Id. However,
“liberally construing the Development Corporation Act in conjunction with the Non-Profit
Corporation Act,” the court disagreed “that the AEDC is limited to considering only projects as
defined by the Development Corporation Act.” Id. The court noted that the AEDC had the power
to contract and incur liabilities. Id. Given that authority and the “summary judgment evidence
reflecting the probable enhancement to the Amarillo economy as well as the economic benefits to
the residents of the Texas panhandle” resulting from the jet service contract, the court concluded that
the contract was within the stated purpose of the Act. See id. at 887-88.

Arguably, relying on Gaut, the Act could have been construed prior to House Bill 2912 to
authorize a section 4A development corporation to use sales and use tax proceeds to promote
economic development by means other than projects defined in the Act, including entering into a
contract to grant funds and refund sales taxes to a private corporation to promote economic
development. In 1999, however, this office questioned the Gaut court’s construction of the Act and
suggested that 1997 amendments to the Act superseded the court’s construction. See Tex. Att’y Gen.
Op. No. JC-0118 (1999) at 6.

Moreover, attorney general opinions construing the Act prior to the 2003 amendments
stressed that the determination whether a particular project or expenditure would promote business
development was a question of fact within the discretion of the board of directors of the development
corporation in the first instance, subject to judicial review for abuse of discretion. See Tex. Att’y
Gen. Op. No. JC-0362 (2001) at 5 (‘the determination of whether a particular project will promote
the economic development purposes of the Act is, in general, a question of fact within the discretion
of the board of directors of the development corporation in the first instance”).20 Thus, even if one
could argue that Gaut authorized the EDC to enter into the Agreement, it does not appear that the
EDC made the necessary determination to support the Agreement. See Parker Brief, supra note 3,
at 3-4 (stating that the EDC took no vote with respect to the Agreement). Although the governing
body of a city that has created a development corporation may disapprove a project or expenditure
that the development corporation has proposed or approved, the City was not authorized to make the
initial determination that a project or expenditure would promote economic development. See part
Il, supra; see also Tex. Att’y Gen. Op. No. GA-0086 (2003) at 3 (concluding that whether a
proposed statue “would serve a promotional purpose is a question of fact for the [development corporation’s] board of directors to resolve in the first instance, subject to judicial review, and,
... [the] City Council’s supervisory authority’).

B. Constitutional Limitations

In addition, the EDC’s authority to pay money to a private corporation is and was
limited by the Texas Constitution. Section 4A taxes are public funds subject to article III, section

20See also Tex. Att’y Gen. LO-95-072, at 3 (the determination whether a section 4B development corporation
may construct sanitary sewer lines in an existing residential subdivision must be made by the board of directors in the
first instance subject to review for abuse of discretion), LO-92-086, at 2 (concluding that it was within the discretion of
a section 4A development corporation in the first instance to characterize the use of sales tax proceeds to finance bonds
for the Texas State Technical College System Extension Center as the promotion of commercial or economic
development given the statute governing such centers).

52(a). See TEX. CONST. art. III, § 52(a) (“the Legislature shall have no power to authorize any
county, city, town or other political corporation or subdivision of the State to lend its credit or to
grant public money or thing of value in aid of, or to any individual, association or corporation’); Tex.
Att’y Gen. Op. No. JC-0118 (1999) at 9.7" As a result, section 4A development corporations are
prohibited from making gifts or donations of section 4A sales and use tax proceeds. See Tex. Atty
Gen. Op. No. JC-0118 (1999) at 8 (a development corporation may not make a gift or donation of
section 4B tax proceeds); see also Tex. Att’y Gen. LO-97-061, at 4-5 (the Act does not permit a
section 4A development corporation to make gifts of public funds), LO-94-037, at 3 (the Act does
not authorize section 4A development corporations to make gifts).

Like any other entity subject to this constitutional limitation, a section 4A development
corporation “will avoid violating article III, section 52” if its governing body “(i) determines in good
faith that the expenditure serves a public purpose and (ii) places sufficient controls on the
transaction, contractual or otherwise, to ensure that the public purpose is carried out.” Tex. Att’y
Gen. Op. Nos. GA-0188 (2004) at 4, GA-0078 (2003) at 4 (citing Young v. City of Houston, 756
S.W.2d 813, 814 (Tex. App.—Houston [1st Dist.] 1988, writ denied); City of Coleman v. Rhone, 222
S.W.2d 646, 649 (Tex. Civ. App.—Eastland 1949, writ ref’d)). These requirements apply equally to
section 4A tax expenditures for project costs, see Tex. Att’y Gen. Op. No. JC-0118 (1999) at 9 (sales
and use tax expenditures for project costs “must be pursuant to a contractual or other arrangement
sufficient to ensure that the funds are used for the purposes authorized”), and for non-project
expenditures arguably authorized by Gaut, which itself involved a contract between the AEDC and
the airline pursuant to which the development corporation received valuable consideration, see id. ;
see also Tex. Att’y Gen. LO-94-037, at 3 (no provision in section 4A or the Act specifically
authorizes development corporation to make grants; “the act requires that any ‘grant’ by [the section
4A development corporation] . . . be made under [a] contractual or other arrangement sufficient to
ensure that the funds granted are actually used in furtherance of the purposes of the act”).

Again, although the creating city’s governing board has the power to disapprove a proposed
development corporation contract, the city may not enter into a contract on the development
corporation’s behalf. The corporation’s board must make the requisite determinations and approve
and bind the corporation to a contract in final official actions taken in open meetings. See part Il,
supra. The facts presented by the City do not indicate that the EDC’s board of directors made such
determinations or imposed the requisite contractual controls. See part IA, supra.

21In 1979, this office concluded that the Act did not implicate article III, section 52 because no public moneys
were involved in the expenditures authorized under the Act at that time. See Tex. Att’y Gen. Op. No. MW-85 (1979)
at 3, Later, the legislature amended the Act to add sections 4A and 4B authorizing the collection and expenditure of sales
and use taxes. See TEX. REV. CIV. STAT. ANN. art. 5190.6, §§ 4A(a)-(b), (d), 4B(a), (d), (g) (Vernon 1987 & Supp. 2004-
05). Thereafter, Attorney General Opinion JC-0118 concluded that “[e]xpenditure of sales and use tax proceeds is
unquestionably the expenditure of public moneys within the meaning of article III, section 52(a). The constitutional
requirement that any expenditure be made pursuant to a contractual or similar arrangement is not nullified by section 22
of the Act providing that a development corporation ‘is not intended to be and shall not be a political subdivision or a
political corporation within the meaning of the constitution and the laws of the state, including without limitation Article
Ill, Section 52... .’” Tex. Att’y Gen. Op. No. JC-0118 (1999) at 9. As Attorney General Opinion JC-0118 noted,
“While the legislature may exempt a development corporation from the application of other legislative enactments, it
has no authority to exempt a development corporation from the application of a constitutional provision.” Id.

In sum, prior to House Bill 2912, the Act as construed by the court in Gaut arguably might
have authorized the EDC to pay $300,000 and a sales tax refund to the Corporation if the EDC’s
board of directors had determined in good faith that the expenditures would promote business
development. In addition, article III, section 52(a) of the Texas Constitution required the EDC’s
board of directors (i) to determine that such expenditures of section 4A sales and use tax proceeds
were for a public purpose of the EDC, and (ii) to impose contractual controls to ensure that the funds
would be used for the purposes authorized, neither of which it appears to have done.

IV. Whether the Payments Constitute a Project Undertaken or Approved Before June 20,
2003

Under House Bill 2912’s grandfather provision, section 14, former law is continued in effect
only for projects undertaken or approved before June 20, 2003:

The changes in law made by this Act apply only to a project
that is undertaken or approved, by an election or otherwise, on or
after the effective date of this Act. A project that is undertaken or
approved before the effective date of this Act is governed by the law
in effect on the date the project is undertaken or approved, and the
former law is continued in effect for that purpose.

Act of May 30, 2003, 78th Leg., R.S., ch. 1132, § 14, 2003 Tex. Gen. Laws 3218, 3223 (effective
June 20, 2003) (emphasis added).

Because the Act expressly defines the term “project,” the term in section 14 must be
construed according to those definitions as they existed under prior law. See TEX. GOV’T CODE
ANN. § 312.002(b) (Vernon 1998) (terms of art in civil statutes are to be construed according to their
particular meaning). For a section 4A development corporation, the term “project” prior to June 20,
2003 was defined by section 2(11)(A) and, in some cases, further governed by section 4A(i).
Accordingly, in the case of a section 4A development corporation, section 14 continues former law
only for projects within the scope of section 2(11)(A) and 4A(i).

Furthermore, a project must have been “undertaken or approved” before House Bill 2912’s
effective date. Neither the Act, House Bill 2912, nor case law defines these terms in connection
with a project and, as a result, we construe them according to their common meanings. See id.
§ 312.002(a) (words in civil statutes that are not terms of art shall be given their ordinary meaning).
The verb “undertake” means to “take in hand, enter upon, or set about” or, more specifically, “to put
oneself under obligation to perform,” WEBSTER’S NINTH NEW COLLEGIATE DICTIONARY 1287 (9th
ed. 1990); see also BLACK’S LAW DICTIONARY 1527 (7th ed. 1999) (defining “undertake” as “‘to take
on an obligation or task” or “to give a formal promise; guarantee’’), and therefore we construe the
term “undertaken” to include projects that a development corporation had already begun or to which
it had already contractually obligated itself. The verb “approve” means “to give formal or official
sanction to,” WEBSTER’S at 98; see also BLACK’S at 98 (defining “approve” to mean “to give formal
sanction to; to confirm authoritatively”), and we construe the term “approved” to include a project
that a development corporation approved by official board action. In addition, the Act authorizes

a city that establishes a section 4A development corporation to “allow the voters to vote on a ballot
proposition that limits the use of the sales and use tax to a specific project.”” TEX. REV. CIV. STAT.
ANN. art. 5190.6, § 4A(r) (Vernon Supp. 2004-05); see also id. § 4A(s)(1) (authorizing a city that
has created a section 4A development corporation to submit to the voters a ballot proposition that
authorizes the corporation to use the sales and use tax, including any amount previously authorized
and collected, for a specific project or for a specific category of projects, including a sports venue
and related infrastructure, that does not qualify under section 4A but qualifies under section 4B).
In referencing projects approved by election in the first sentence of section 14, the legislature
recognized that the electorate may approve specific projects. Accordingly, we construe section 14’s
second sentence to continue former law for a specific project approved by the voters at an election
prior to House Bill 2912’s effective date. Taken together, the term “undertaken” refers to projects
that are already underway whereas the term “approved” refers to projects that have been officially
approved but not yet begun.

Thus, in the case of a section 4A development corporation, section 14 continues former law
only for projects as defined under section 2(11)(A) (and, in some cases, further governed by section
4A(i)) prior to June 20, 2003. Moreover, for former law to continue, the project must be one that,
before June 20, 2003, (i) the development corporation had already begun or had contractually
committed itself to, (ii) the development corporation’s board of directors had officially approved
but not yet begun, or (iii) the voters had approved pursuant to section 4A(r)-(s) of the Act. The
development corporation’s board of directors should be able to demonstrate that a project was
“undertaken or approved before the effective date of this Act” either by reference to some final
official action taken by the board in an open meeting prior to June 20, 2003, or by reference to the
terms of an election held under section 4A(r)-(s) prior to that date.

Based on the City’s statement that the EDC board of directors did not vote on the EDC’s
participation in the Agreement at an open meeting prior to June 20, 2003, it appears that the EDC
had neither undertaken nor approved the Agreement or a project associated with the Agreement prior
to that date. See Parker Brief, supra note 3, at 3-4. Thus, even if the EDC’s participation in the
Agreement constituted a “project” under former law, section 14 would not grandfather it.

Finally, we also must consider the extent to which House Bill 2912 affects a section 4A
development corporation’s authority to make non-project expenditures that were not included within
the meaning of the term “project” under former law but which might have been supported by Gaut.
By narrowing projects’ authorized purpose to primary job creation, requiring and strictly governing
contracts for expenditures and direct incentives, and striking the direction that the Act shall be
liberally construed, House Bill 2912 effectively superseded Gaut. House Bill 2912’s implications
for Gaut-based contracts entered into prior to its effective date may raise impairment of contract
issues. See TEX. CONST. art. I, § 16 (prohibiting laws impairing the obligation of contracts). In the
matter under consideration, however, such issues would arise only if the EDC’s board of directors
entered into a contract prior to June 20, 2003 agreeing to pay the grant and to refund sales taxes.
Based on the brief and official documents submitted by the City, which refer to the Agreement but
not to any contract or agreement entered into by the EDC’s board in an official final action at an
open meeting prior to June 20, 2003, that does not appear to be the case. See part I.A, supra; Parker
Brief, supra note 3, at 3-4.

SUMMARY

House Bill 2912 significantly amended the Development
Corporation Act of 1979, TEX. REV. CIV. STAT. ANN. art. 5190.6, but
contained a grandfather provision continuing former law for a project
undertaken or approved before the bill’s June 20, 2003 effective date.
The Port Arthur Economic Development Corporation is now
authorized to grant funds and refund sales taxes to a private
corporation to promote economic development if former law
authorized it to do so and if paying these funds constitutes a “project”
“undertaken or approved” before June 20, 2003. The development
corporation’s board of directors must demonstrate that a project was
“undertaken or approved” either by reference to some final official
action taken by the board in an open meeting prior to June 20, 2003,
or by reference to the terms of an election held under section 4A(r)-(s)
of the Act prior to that date. The grant and sales tax refund were not
a “project” under former law. Moreover, because development
corporation’s board of directors did not vote to make the grant or
sales tax refund at an open meeting prior to June 20, 2003, they
would not fall within the House Bill 2912 grandfather provision.

Very truly yours,

GREG ABBOTT
Attorney General of Texas

BARRY R. MCBEE
First Assistant Attorney General

DON R. WILLETT
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Mary R. Crouter
Assistant Attorney General, Opinion Committee