Can a Texas county use the interest earned on its bond money to add to the principal and pay for more construction on the same project?

Texas AG Opinion JM-1026: Can a County Add Bond Interest to Principal to Finish a Project?

Plain-English summary

Williamson County sold $16.5 million in bonds to build a new courthouse and jail, parked the money in investments while it lined up the work, and earned a healthy amount of interest along the way. Then the construction bids came in higher than the county had planned for. The commissioners court wanted to sweep that earned interest back into the construction fund so it could afford the building it had in mind. The county attorney asked whether that was allowed.

The Attorney General said yes, as a general matter. The controlling idea is an old common-law rule: interest is an "accretion" to the fund that earns it, so it becomes part of the principal unless the law pulls it out and sends it somewhere else (Sellers v. Harris County). A commissioners court has authority to issue bonds to build a courthouse and jail, but the statutes did not say anything specific about where the interest on the invested proceeds had to go. With no statute directing the interest into, say, the debt-repayment (sinking) fund, the default rule applied and the interest stayed with the principal.

The county's real worry was an earlier opinion, JM-545 (1986), which it thought might forbid this. The Attorney General explained why JM-545 did not control. That opinion dealt with road bonds issued under a specific part of the Texas Constitution (article III, section 52), and it turned on an unusual fact pattern: a county had sold $3 million in road bonds but spent less than $1 million on roads, paying for road work out of its regular budget instead, so that the bond money functioned as a standalone investment pool. JM-545 said using bond debt to create an investment fund "as an independent or exclusive undertaking" is not a purpose the constitution sanctions. Williamson County's situation was the opposite. It wanted to spend the interest on the exact project the bonds were sold to build, not to run an investment scheme on the side.

So the answer came down to this: absent a statute, a bond covenant, or some other instrument that separates the interest from the principal (or caps what can be spent on the building, or otherwise requires a different result), the interest could be added to principal and used to finance the courthouse/jail. The Attorney General was careful to note the limits of the answer. The county had not sent in its bond covenants, so the opinion did not decide whether anything in those documents might change the outcome.

The opinion closed with a housekeeping point. JM-545 had "disapproved" two older opinions about school district bonds (C-537 and R-1174). Because those opinions did not involve the same constitutional provision that drove JM-545, the Attorney General said they should have been distinguished rather than disapproved, and told readers to disregard that disapproval.

Currency note

This opinion was issued in 1989. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The statutes and constitutional provisions on county bonds have been amended and recodified since 1989, and rules governing the investment of public funds and arbitrage on tax-exempt bonds (including federal tax requirements that can force earned interest to be handled a particular way) have developed considerably. A county deciding today how to treat interest on bond proceeds should check the current statutes, its own bond covenants and the applicable federal tax rules, not just this common-law reading from 1989.

Who this opinion affected (as of 1989)

County commissioners courts: The opinion told them that, by default, interest earned on invested bond proceeds becomes part of the principal and can be spent on the project the bonds funded, unless a statute or the bond documents say otherwise.

County attorneys and bond counsel: The opinion flagged the pieces that could change the answer, namely a statute or a bond covenant that separates the interest or caps project spending, and reminded them that the bond covenants had to be examined in each case.

Anyone reading Attorney General Opinion JM-545: The opinion narrowed JM-545 to its facts (a county using road-bond proceeds as a standalone investment) and told readers to disregard JM-545's disapproval of the two earlier school-bond opinions (C-537 and R-1174).

Common questions

Can a Texas county add interest from bond investments to the principal?
As a general rule, yes. The Attorney General concluded that under the common-law rule, interest earned on invested bond proceeds becomes part of the principal fund unless it is lawfully separated from it.

Does that mean the county can spend the interest on the project?
Yes, if the interest is part of the principal, it can be used to finance the project the bonds were issued for, unless a statute, bond covenant, or other instrument prevents it.

Didn't an earlier opinion (JM-545) say counties can't do this?
Not in this situation. JM-545 dealt with road bonds under article III, section 52 of the constitution and a fact pattern where bond proceeds were used as a standalone investment. The Attorney General distinguished it and said it did not bar spending interest on the very project the bonds funded.

What could change the answer?
A statute, a bond covenant, or another instrument that separates the interest from the principal, directs it into the sinking fund, or caps how much can be spent on the building. Because the county had not submitted its bond covenants, the opinion did not decide whether those documents required a different result.

Background and statutory framework

Williamson County issued and sold $16.5 million in bonds to build a new county courthouse and jail complex. The proceeds were invested and earned a sizable amount of interest, some of which had been moved to the interest and sinking fund and some of which remained in the principal construction account. When construction bids came in higher than expected, the commissioners court wanted to transfer the interest to the principal so it could afford the complex it had envisioned. The county attorney asked whether the interest earned from the investment of the construction bond proceeds could be added to the principal to provide additional construction funds. The county had not submitted the bond covenants or other relevant documents, so the Attorney General answered the narrow legal question on the information provided.

A commissioners court has statutory authority to issue county bonds to build a courthouse and jail. Article XI, section 2 of the Texas Constitution provides that construction of jails, courthouses, bridges, and certain other improvements be provided for by general law, and the Legislature has authority to grant a county power to issue bonds for such construction (Mitchell County v. City Nat'l Bank of Paducah, Ky.). The statutes, however, did not address where the interest on invested bond proceeds should go.

The county raised the possibility that Attorney General Opinion JM-545 (1986) prohibited adding the interest to principal. JM-545 concerned the disposition of interest earned on the invested proceeds of road bonds issued by Austin County under article 6702-1 (the County Road and Bridge Act), section 4.411(b) of which provided that such road bonds be issued as authorized by article III, section 52, of the Texas Constitution. That constitutional provision authorizes the Legislature to empower counties to issue bonds for specified purposes, including the construction, operation, and maintenance of roads. JM-545 held that the use of public debt in the form of bonds to create a fund for investment "as an independent or exclusive undertaking" is not a purpose sanctioned by article III, section 52. That holding rested on a narrow set of facts: Austin County had authorized $3 million in road bonds but spent less than $1 million for road purposes, paying for some road improvements out of the regular county budget rather than charging them against the bond proceeds.

The Attorney General concluded that JM-545 did not prohibit Williamson County from adding interest earned on its courthouse/jail bond proceeds to the principal. The common-law rule is that interest, as an accretion to the principal fund earning it, becomes part of the principal unless lawfully separated from it (Sellers v. Harris County; Dawson v. Baker). The AG also cited Attorney General Opinion H-1167 (1978) (interest on a constitutional fund for state college and university construction is first applied to retire bonds and then to finance additional permanent improvements) and an annotation on the disposition of interest earned on special municipal funds (143 A.L.R. 1341 (1943)). Finding no statute separating the interest from the principal, and lacking the bond covenants, the AG applied the common-law rule: absent a statute, bond covenant, or other instrument that allocates the interest differently (for example, separating it into the sinking fund, or capping project expenditures below the amount that adding interest would produce), the interest may be added to the principal to finance the project for which the bonds were issued.

The opinion also corrected the record on JM-545's treatment of two earlier opinions. JM-545 had disapproved Attorney General Opinion C-537 (1965) (a school board may deposit interest earned by excess school bond proceeds in the sinking fund created to retire the indebtedness) and Attorney General Opinion R-1174 (1978) (construing a provision of the Education Code to permit the use of such interest for other purposes). Because C-537 and R-1174 dealt with school district bonds rather than county bonds issued under article III, section 52, the constitutional basis of JM-545's holding was not relevant to them, and they should have been distinguished rather than disapproved. Accordingly, the AG said, their disapproval by JM-545 should be disregarded.

Citations

Statutory and constitutional authority:

• Tex. Const. art. XI, § 2 (construction of jails, courthouses, bridges, and certain other improvements to be provided for by general law)
• Tex. Const. art. III, § 52 (Legislature may empower counties to issue bonds for specified purposes, including roads)
• Tex. Rev. Civ. Stat. art. 6702-1, § 4.411(b) (County Road and Bridge Act; road bonds issued as authorized by art. III, § 52)

Cases:

• Sellers v. Harris County, 483 S.W.2d 242 (Tex. 1972) (interest is an accretion to the principal fund and becomes part of it unless lawfully separated)
• Mitchell County v. City Nat'l Bank of Paducah, Ky., 43 S.W. 880 (Tex. 1898) (Legislature may grant a county power to issue bonds for a courthouse and jail)

Related opinions:

• Attorney General Opinion JM-545 (1986) (road bonds under art. III, § 52; bond proceeds may not be used for investment as an independent or exclusive undertaking); distinguished here
• Attorney General Opinion H-1167 (1978) (interest on a constitutional construction fund); Attorney General Opinions C-537 (1965) and R-1174 (1978) (school district bonds; disapproval by JM-545 to be disregarded)

Reference:

• Annot., 143 A.L.R. 1341 (1943) (disposition of interest earned on special funds of municipalities)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1026
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1989/jm1026.pdf

Original opinion text

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

THE ATTORNEY GENERAL OF TEXAS

March 8, 1989

Honorable Billy Ray Stubblefield
Williamson County Attorney
P. O. Box 1078
Georgetown, Texas 78627

Opinion No. JM-1026

Re: Whether Williamson County may use the interest earned from investment of bond proceeds for the construction of its courthouse/jail complex to fund additional construction on the project (RQ-1510)

Dear Mr. Stubblefield:

You inform us that Williamson County has issued and sold $16.5 million in bonds to build a new county courthouse and jail complex. The proceeds from the sale of the bonds were invested and have earned a sizable amount of interest. Some of the interest has been transferred to the interest and sinking fund, and some remains in the principal construction account.

The bids for construction of the project received by the Williamson County Commissioners Court were all higher than expected. The commissioners court would like to transfer the interest on the bond proceeds to the principal amount so that they can afford the kind of courthouse/jail complex that they had envisioned. You ask the following question:

May the interest earned from the investment of Courthouse/Jail complex construction bonds proceeds be added to the principal amount, in order to provide additional construction funds for completion of the project?

You have not submitted additional facts nor have you provided us copies of the bond covenants or other documents relevant to the bond issuance. Our opinion will answer your narrow legal question in the context of the information before us and will not speculate at length about all other circumstances which might suggest a different result.

The commissioners court of a county has statutory authority to issue county bonds to build a county courthouse and jail. V.T.C.S. arts. 718; 2370-13, § 3. See also Tex. Const. art. XI, § 2 (construction of jails, court-houses, bridges, and certain other improvements shall be provided for by general law); Mitchell County v. City Nat'l Bank of Paducah, Ky., 43 S.W. 880 (Tex. 1898) (legislature has authority to grant county power to issue bonds for the construction of bridges and a courthouse and jail). The statutes do not address the question you ask. You however raise the possibility that Attorney General Opinion JM-545 (1986) prohibits you from adding the interest earned from investment of bond proceeds to the principal amount. See also Attorney General Opinion JM-530 (1986).

Attorney General Opinion JM-545 (1986) concerned the disposition of interest earned on the invested proceeds of road bonds issued by Austin County under article 6702-1, V.T.C.S., the County Road and Bridge Act. Section 4.411(b) of that act provides that road bonds issued thereunder "shall be issued . . . as contemplated and authorized by Article III, Section 52, of the Texas Constitution." Article III, section 52, of the constitution authorizes the legislature to empower counties to issue bonds for specified purposes, including the construction, operation, and maintenance of roads. Attorney General Opinion JM-545 stated that the "use of public debt in the form of bonds to create a fund for investment as an independent or exclusive undertaking is not a purpose sanctioned by article III, section 52, of the Texas Constitution." Attorney General Opinion JM-545 at 5 (emphasis in original). Austin County authorized the sale of three million dollars worth of road bonds but had spent less than one million dollars for road purposes. Id. at 4. In the meantime, the costs of some county road improvements were paid from the regular county budget, instead of being charged against the bond proceeds. Id. The holding of Attorney General Opinion JM-545 was based upon a specific and narrow set of facts, which indicated that bond proceeds were used for investment as "an independent or exclusive undertaking."

The holding of Attorney General Opinion JM-545 thus does not prohibit Williamson County from adding interest earned from the investment of courthouse/jail bond proceeds to the principal amount, to provide additional construction funds. The common law rule is that interest, as an accretion to the principal fund earning it, becomes part of the principal unless lawfully separated from it. Sellers v. Harris County, 483 S.W.2d 242 (Tex. 1972); Dawson v. Baker, [volume illegible] S.W. 272 (Tex. Civ. App. - Austin 1920, writ ref'd). See also Attorney General Opinion H-1167 (1978) (interest on constitutional fund for state college and university construction is first applied to retire bonds and then to finance additional permanent improvements); Annot. 143 A.L.R. 1341 (1943) (disposition of interest earned on special funds of municipalities).

As already stated, we find no statute that separates the interest from the principal fund. You have not submitted the bond covenants to us; therefore, we do not consider whether any provision of the bond covenants would separate the interest on the bond proceeds from the proceeds and place it in the sinking fund, limit expenditures for building the courthouse/jail complex to an amount that would be exceeded by adding interest to principal, or for any other reason require a departure from the common law rule. In the absence of a statute, bond covenant, or other provision or instrument that otherwise allocates the interest earned on bond proceeds, the common law rule applies to the interest, and the interest may be added to the principal amount to finance the project for which the bonds were issued.

Attorney General Opinion JM-545 disapproved two earlier opinions of this office, stating as follows:

Attorney General Opinion C-537 (1965) held that a school board might deposit interest earned by excess school bond proceeds in the sinking fund created to retire the indebtedness. To the extent the opinion suggests the board possessed discretion to do otherwise, it is disapproved. A similar question was presented in Attorney General Opinion R-1174 (1978), which construed section . . . 20.42 of the Education Code to permit the use of such interest for other purposes. To that extent, it is disapproved, also.

Attorney General Opinion JM-545 at 7.

Attorney General Opinions C-537 and R-1174 dealt with school district bonds, not county bonds issued under article III, section 52, of the Texas Constitution. Thus, the constitutional basis of the holding in Attorney General Opinion JM-545 was not relevant to the two prior opinions, and they should have been distinguished, rather than disapproved. Their disapproval by Attorney General Opinion JM-545 should accordingly be disregarded.

SUMMARY

According to the common law rule, interest, as an accretion to the principal fund earning it, becomes part of the principal unless lawfully separated from it. This rule applies to interest earned on the investment of the proceeds of bonds issued by Williamson County to build a courthouse/jail complex, and the interest may be added to the principal amount and used to finance the project for which the bonds were issued unless a statute, bond covenant, or other provision or instrument prevents this allocation.

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 Susan L. Garrison
Assistant Attorney General