Is a hospital district's charitable affiliate a 'political subdivision' in Texas?

Plain-English summary

State Senator Royce West, chair of the Senate Committee on Jurisprudence, asked the Attorney General two questions about a charitable organization that a hospital district may create under section 281.0565 of the Health and Safety Code. The specific entity was the Parkland Center for Clinical Innovation, set up to support the Dallas County Hospital District (Parkland Health and Hospital System). First, is that charitable organization a "political corporation or subdivision" of the State for purposes of article III, section 52(a) of the Texas Constitution? Second, if so, does section 281.0518 let it enter a joint venture with a for-profit company that would develop and sell technology and intellectual property?

The AG began with a point about the hospital district itself, separate from the charity question. The district is unquestionably a political subdivision subject to article III, section 52(a), the constitutional provision that bars the Legislature from authorizing a political subdivision to give away public money or property. A transfer is not an unconstitutional gift if the subdivision gets return consideration and the deal serves a public purpose. The Texas Supreme Court's three-part test asks whether the transfer's purpose is to accomplish a public purpose rather than benefit private parties, whether the subdivision keeps public control over the assets involved, and whether the subdivision receives a return benefit. So to the extent any technology, intellectual property, or other thing of value in the planned venture belongs to the district, the AG said the district could not hand it to the Center or a for-profit partner without meeting that test.

On the actual question, whether the Center is itself a political subdivision, the AG could not give a clear yes or no. Because the Center is not a county, city, or town, article III, section 52(a) reaches it only if it is a "political corporation or subdivision." Texas courts describe a political subdivision as having features like a geographic area and boundaries, public elections, public officials, taxing power, and a general public purpose. By those markers the Center looks private: the request stated it has no territory, no taxing or bonding power, and no elections, so under that case-law test it is likely not a political subdivision. But the AG noted two complications pulling the other way. The same statute, subsection 281.0565(c), designates such a charitable organization as a "unit of local government" for purposes of the Texas Tort Claims Act, which could signal a legislative intent to treat it like a local government in other contexts too, and if it is generally a unit of local government it is likely also a political subdivision.

The AG also raised an alter-ego concern. If the financial and governance ties between the Center and the district are tight enough, the Center might not count as a genuinely separate private entity at all. A prior opinion (JC-0407) had found a hospital-district HMO so closely affiliated, its board appointed by and serving at the district's pleasure, its reserves funded by the district, its assets reverting to the district on dissolution, that it could not be treated as private. The Center shares some of those features, such as having its board appointed by Parkland's Board of Managers, though the relationship did not appear as close. Given all of this, the AG said it could not advise definitively whether a court would treat the Center as a political corporation or subdivision under article III, section 52(a). Because the second question depended on a "yes" to the first, the AG did not address it directly, but cautioned that any joint venture the Center pursues must still strictly comply with its authorizing statute, section 281.0518.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later Attorney General 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.

What the opinion meant for those who asked

Senator West (as the opinion described it): The opinion concluded it could not definitively advise whether a court would treat the Parkland Center for Clinical Innovation as a political corporation or subdivision subject to article III, section 52(a). It did not reach the second, contingent question about joint ventures, but stated that any joint venture the Center contemplates must strictly comply with the authorizing statute, section 281.0518.

The hospital district (Parkland) (as the opinion described it): The opinion described the district as a political subdivision squarely subject to article III, section 52(a), so it explained that any district-owned technology, intellectual property, or thing of value placed into the venture would have to satisfy the Texas Supreme Court's three-part public-purpose, public-control, and return-benefit test.

The Center and similar hospital-district charities (as the opinion described it): The opinion described the Center as looking private under the traditional political-subdivision factors, but flagged the statute's "unit of local government" designation for tort-claims purposes and the close-affiliation (alter-ego) concern as reasons it could not rule out political-subdivision status. It did not decide whether an entity with only a pending tax-exemption application qualifies as a charitable organization under section 281.0565.

Common questions

Is a hospital district's charitable affiliate a political subdivision in Texas?
The AG could not say for sure. Under the usual factors (territory, elections, taxing power), such an affiliate looks private, but a statutory "unit of local government" designation and close ties to the district left the AG unable to advise definitively.

What is article III, section 52(a)?
The AG described it as the constitutional provision barring the Legislature from authorizing a county, city, town, or other political subdivision to lend its credit or grant public money or anything of value to a private individual, association, or corporation.

Can a hospital district give technology or property to a private partner?
Only if it meets a test. The AG explained that a district transfer is not an unconstitutional gift when it serves a public purpose, keeps public control over the assets, and brings the district a return benefit, citing the Texas Supreme Court's three-part test.

Why does the affiliate's relationship with the district matter?
The AG explained that if the financial and governance connections are close enough, the affiliate may not be a separate private entity at all. A prior opinion found a hospital-district HMO so closely tied to the district that it could not be considered private.

Did the AG decide whether the Center could enter a for-profit joint venture?
No. Because that question depended on the Center being a political subdivision, which the AG could not determine, the office did not address it directly, but it cautioned that any joint venture must strictly comply with the authorizing statute, section 281.0518.

Background and statutory framework

Subsection 281.0565(b) authorizes certain hospital districts to create a charitable organization to help manage a district health care program (Tex. Health & Safety Code Ann. § 281.0565(b) (West 2010)), with "charitable organization" defined by reference to federal tax-exempt status (id. § 281.0565(a) (West 2010); Internal Revenue Code of 1986 § 501(a), § 501(c)(3), § 501(c)(4)). The constitutional limit is article III, section 52(a) (Tex. Const. art. III, § 52(a)).

The AG treated the district as a political subdivision subject to that provision (Tex. Att'y Gen. Op. No. GA-0188 (2004)), explained that the ban reaches gratuitous transfers (City of Tyler v. Tex. Emp'rs' Ins. Ass'n, 288 S.W. 409, 412 (Tex. Comm'n App. 1926, judgm't adopted)) but not transfers supported by return consideration and a public benefit (Tex. Mun. League Intergov'tl Risk Pool v. Tex. Worker's Comp. Comm'n, 74 S.W.3d 377, 383-84 (Tex. 2002)), and noted a subdivision's authority to contract with a private entity to accomplish its public purpose (Tex. Att'y Gen. Op. No. JC-0335 (2001) at 6-7).

For the Center's status, the AG applied the rule equating "political corporation" and "political subdivision" (Lewis v. Indep. Sch. Dist. of Austin, 161 S.W.2d 450, 452 (Tex. 1942)) and the factors that mark a political subdivision (Bolen v. Bd. of Firemen, Policemen & Fire Alarm Operators' Trs., 308 S.W.2d 904, 905 (Tex. Civ. App.-San Antonio 1958, writ ref'd)). It weighed those against the statute's designation of such charities as units of local government for the Texas Tort Claims Act (Tex. Health & Safety Code Ann. § 281.0565(c) (West 2010); Tex. Civ. Prac. & Rem. Code Ann. §§ 101.001-.109 (West 2005 & Supp. 2013)) and the alter-ego analysis of a closely affiliated hospital-district HMO (Tex. Att'y Gen. Op. No. JC-0407 (2001)). On the joint-venture question it pointed to the statute authorizing specific ventures (Tex. Health & Safety Code Ann. § 281.0518 (West Supp. 2013)).

Citations

Constitutional and statutory provisions:

• Tex. Const. art. III, § 52(a) (prohibition on lending credit or granting public funds to private parties)
• Tex. Health & Safety Code Ann. § 281.0565(a) (West 2010) (definition of "charitable organization")
• Tex. Health & Safety Code Ann. § 281.0565(b) (West 2010) (district authority to create a charitable organization)
• Tex. Health & Safety Code Ann. § 281.0565(c) (West 2010) (charitable organization as a unit of local government for the Tort Claims Act)
• Tex. Health & Safety Code Ann. § 281.0518 (West Supp. 2013) (authorizing specific joint ventures)
• Tex. Civ. Prac. & Rem. Code Ann. §§ 101.001-.109 (West 2005 & Supp. 2013) (Texas Tort Claims Act)
• Internal Revenue Code of 1986 § 501(a), § 501(c)(3), § 501(c)(4) (federal tax-exemption provisions)

Cases:

• City of Tyler v. Tex. Emp'rs' Ins. Ass'n, 288 S.W. 409, 412 (Tex. Comm'n App. 1926, judgm't adopted)
• Tex. Mun. League Intergov'tl Risk Pool v. Tex. Worker's Comp. Comm'n, 74 S.W.3d 377, 383 (Tex. 2002)
• Lewis v. Indep. Sch. Dist. of Austin, 161 S.W.2d 450, 452 (Tex. 1942)
• Bolen v. Bd. of Firemen, Policemen & Fire Alarm Operators' Trs., 308 S.W.2d 904, 905 (Tex. Civ. App.-San Antonio 1958, writ ref'd)

Prior Attorney General opinions:

• Tex. Att'y Gen. Op. No. GA-0188 (2004)
• Tex. Att'y Gen. Op. No. JC-0335 (2001)
• Tex. Att'y Gen. Op. No. JC-0407 (2001)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-1071
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2014/ga1071.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

ATTORNEY GENERAL OF TEXAS
GREG ABBOTT

July 29, 2014

The Honorable Royce West Opinion No. GA-1071
Chair, Committee on Jurisprudence
Texas State Senate Re: Whether a charitable organization formed
Post Office Box 12068 under section 281.0565 of the Health and Safety
Austin, Texas 78711-2068 Code is a political corporation or subdivision of
the State of Texas for purposes of article III,
section 52(a) of the Texas Constitution
(RQ-1180-GA)

Dear Senator West:

You ask whether a charitable organization formed under section 281.0565 of the Texas Health and Safety Code is a "political corporation or subdivision of the State of Texas" for purposes of article III, section 52(a) of the Texas Constitution.[1] If the answer to your first question is yes, you present an additional question of whether section 281.0518 of the Health and Safety Code "authorize[s] such [a] charitable organization to engage in a joint venture with a for-profit entity." Request Letter at 1.

Subsection 281.0565(b) authorizes certain hospital districts to "create a charitable organization[2] to facilitate the management of a district health care program by providing or arranging health care services, developing resources for health care services, or providing ancillary support services for the district." TEX. HEALTH & SAFETY CODE ANN. § 281.0565(b) (West 2010). You tell us that the Parkland Center for Clinical Innovation (the "Center") was created under this subsection to support the Dallas County Hospital District d/b/a Parkland Health and Hospital System (the "District" or "Parkland"). Request Letter at 1-2. You state that the Center now contemplates a joint venture with a for-profit entity wherein the for-profit entity would develop and sell developed technology or intellectual property as well as perform related services. See id. at 2-4. The business structure of the joint venture is not yet defined and could involve different kinds of organizations and structures, and you are concerned about compliance with article III, section 52(a) of the Texas Constitution. See id. at 3.

Article III, section 52(a) prohibits the Legislature from authorizing

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 whatsoever, or to become a stockholder in such corporation, association or company.

TEX. CONST. art. III, § 52(a). Before we address your question about the Center, we must first address a fundamental issue involving the District. The District is a political subdivision subject to article III, section 52(a). See Tex. Att'y Gen. Op. No. GA-0188 (2004) at 2-4 (considering a hospital district's expenditure to its charitable organization under article III, section 52). The prohibition in article III, section 52(a) limits gratuitous transfers or grants of public funds or property. City of Tyler v. Tex. Emp'rs' Ins. Ass'n, 288 S.W. 409, 412 (Tex. Comm'n App. 1926, judgm't adopted). A political subdivision's transfer of public assets or property "is not 'gratuitous' if the political subdivision receives return consideration." Tex. Mun. League Intergov'tl Risk Pool v. Tex. Worker's Comp. Comm'n, 74 S.W.3d 377, 383 (Tex. 2002). Such transfers are permissible so long as the transfer serves a legitimate public interest and affords a clear public benefit in return. Id. The Texas Supreme Court has articulated a three-part test to determine whether a transfer satisfies article III, section 52(a)'s constraints: The entity making the grant or transfer must: (1) ensure that its purpose is to "accomplish a public purpose, not to benefit private parties"; (2) retain public control over the public assets and/or rights associated with the transaction in order to ensure that a "public purpose is accomplished and to protect the public's investment"; and (3) "ensure that the political subdivision receives a return benefit." Id. at 384. You do not provide information about the ownership of the technology and intellectual property at issue here. However, to the extent the technology, intellectual property, or any other thing of value used in conjunction with the anticipated venture is the property of the District, the District may not grant it to the Center or to a for-profit entity without satisfying the Texas Supreme Court's three-part test. See id.; see also Tex. Att'y Gen. Op. No. JC-0335 (2001) at 6-7 (discussing a political subdivision's authority to contract with private entity to ensure the accomplishment of the political subdivision's public purpose).

We now turn to your specific question about the Center. Because the Center is not a county, city or town, article III, section 52(a) applies to the Center only if it is a "political corporation or subdivision." TEX. CONST. art. III, § 52(a); see Lewis v. Indep. Sch. Dist. of Austin, 161 S.W.2d 450, 452 (Tex. 1942) (equating the terms "political corporation" and "political subdivision" in considering whether an independent school district was subject to article III, section 52(a)). In determining whether an entity is a political subdivision, Texas courts have said that "[a] political subdivision contemplates: geographical area and boundaries, public elections, public officials, taxing power and a general public purpose or benefit." Bolen v. Bd. of Firemen, Policemen & Fire Alarm Operators' Trs., 308 S.W.2d 904, 905 (Tex. Civ. App.-San Antonio 1958, writ ref'd). You tell us that the Center "has no geographical area or boundary, has no taxing or bonding power, and is not subject to public elections." Request Letter at 5 (footnote omitted). Under the Bolen analysis, the Center, as you represent it, is likely not a political subdivision.

Subsection 281.0565(c), however, specifically provides that "[a] charitable organization created by a district under this section is a unit of local government for purposes of [the Texas Tort Claims Act]." TEX. HEALTH & SAFETY CODE ANN. § 281.0565(c) (West 2010); see TEX. CIV. PRAC. & REM. CODE ANN. §§ 101.001-.109 (West 2005 & Supp. 2013) ("Texas Tort Claims Act"). The Legislature's decision to designate entities like the Center as units of local government for purposes of the Tort Claims Act could suggest an intent that these entities be treated like units of local governments in other contexts as well. If the Center is generally a unit of local government, it is likely also a political subdivision.

We caution further that, depending on the extent of the financial and governance connection between the Center and the District, the entities could be so closely connected that the Center could not be considered a separate, private entity. The close relationship between a hospital district and a health maintenance organization ("HMO") created under a similar provision in chapter 281 required us to consider a similar issue in a previous opinion. See Tex. Att'y Gen. Op. No. JC-0407 (2001). Invoking the idea of a corporate alter-ego, Opinion JC-0407 stated that the nonprofit HMO was so closely affiliated with the hospital district "that we hesitate to conclude that it is a private entity." Id. at 4. In JC-0407, the facts indicated that the HMO's board of directors was appointed by and served at the pleasure of the hospital district's board. See id. at 2, 4. The hospital district funded the necessary reserves for the HMO. Id. at 4. In addition, the HMO's assets would revert to the hospital district in the event of the HMO's dissolution. Id. Based on the close relationship between the two entities, JC-0407 concluded that the HMO could not validly be considered a private entity separate from the hospital district. The relationship between the District and the Center, as you describe it, share some attributes—namely the appointment of the Center's board by Parkland's Board of Managers—of the relationship considered in JC-0407. While the relationship between the Center and the District does not appear to be as close as the relationship considered in JC-0407, based on the information made available to us, we cannot advise you definitively that the District and the Center are sufficiently distinct so as to be considered separate entities for purposes of article III, section 52(a). For these reasons, we cannot definitively advise you whether a court would determine that the Center is a "political corporation or subdivision" subject to article III, section 52(a).

Because your second question is contingent on a determination that the Center is a political corporation or political subdivision, we do not address it directly. However, to the extent the question presumes that the Center, absent direct constraint from article III, section 52, may engage in any multitude of possible joint ventures, we advise you that any joint venture contemplated by the Center must nonetheless strictly comply with any authorizing statute. See TEX. HEALTH & SAFETY CODE ANN. § 281.0518 (West Supp. 2013) (authorizing specific joint ventures for the Dallas County Hospital District or its nonprofit charitable organization).

SUMMARY

We cannot definitively advise you whether a court would determine that the Parkland Center for Clinical Innovation, created under section 281.0565 of the Health and Safety Code, is a political corporation or subdivision subject to article III, section 52(a) of the Texas Constitution.

Very truly yours,

GREG ABBOTT
Attorney General of Texas

DANIEL T. HODGE
First Assistant Attorney General

JAMES D. BLACKLOCK
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

Charlotte M. Harper
Assistant Attorney General, Opinion Committee

[1] Letter from Honorable Royce West, Chair, Senate Comm. on Jurisprudence, to Honorable Greg Abbott, Tex. Att'y Gen. at 1 (Jan. 29, 2014), http://www.texasattorneygeneral.gov/opin ("Request Letter").

[2] A "'charitable organization' means an organization that is exempt from federal income tax under Section 501(a) of the Internal Revenue Code of 1986 by being listed as an exempt organization in Section 501(c)(3) or 501(c)(4)" of the Code. TEX. HEALTH & SAFETY CODE ANN. § 281.0565(a) (West 2010). You indicate that the Center is "currently authorized to operate as an organization that is exempt from federal income tax under Section 501(a) of the Code by being listed as an exempt organization in Section 501(c)(3) of the Code during the pendency of the [Center's] application." Request Letter at 2. You do not ask about, and we do not opine on, whether an entity with only a pending application is a charitable organization under section 281.0565.