Does a Texas state agency have to have every construction bond issued and in the bank before it can sign the building contracts?

Texas AG Opinion JM-969: Do All the Bonds Have to Be Sold First?

Plain-English summary

When Texas builds a prison, an office building, or a hospital, it often pays for the project by selling bonds through the Texas Public Finance Authority. That raises a practical sequencing question that had been causing friction. Some agencies, including the Department of Corrections, were insisting that every dollar of bond money for a project be sitting in the treasury and available before they would sign any construction contracts. The Authority's director wanted to know: is that actually required by law, or is it just a preference? He asked the Attorney General.

The answer was that no law imposes a blanket "all the bonds first" rule. But the office walked through the pieces of law the Authority's board does have to keep in mind when timing bond approvals, because a couple of them do constrain the sequence.

The one firm timing rule involves revenue bonds. The statutes require the board to notify the agency when funds are available and to deposit the bond proceeds in the state treasury. One provision says that once the funds are deposited and the comptroller certifies they are available, the agency may begin construction. The Attorney General read that language as showing the Legislature intended construction not to begin until the money is actually there. Importantly, though, there is no matching provision for general obligation bonds, so that certified-funds rule does not carry over to them.

Beyond the bond statutes, ordinary contract law and the Texas Constitution shape the picture. A contract needs consideration to be binding. More significantly, a state agency cannot sign a binding construction contract unless the contract provides for payment. If it tried to, it would be attempting to create a debt without funding, which runs into article III, section 44 of the Texas Constitution, the same provision that bars paying claims not authorized by pre-existing law. And the Legislature cannot appropriate money to pay a claim under a contract that was invalid in the first place.

Here is the part that gives agencies flexibility. Parties can form a binding contract by exchanging promises, and a promise can be conditional. So a state agency is allowed to sign a construction contract that runs longer than the two-year appropriations cycle, as long as the contract says that payment depends on the availability of appropriated funds. The office had confirmed this in earlier opinions. The catch is that if the Legislature later decides not to appropriate the money, the comptroller simply cannot issue a warrant to pay, so the contractor bears the risk that funding never materializes.

The Attorney General also flagged the outer limit of this technique. If a contract makes performance entirely optional with the party who made the promise, that is not real consideration and there is no binding contract at all (a point drawn from the Restatement of Contracts). So an agency can make payment contingent on funding, but it cannot write the deal so loosely that it has promised nothing. Exactly how all of this plays out in any specific contract, the office said, is a fact question it could not resolve in the opinion process.

Currency note

This opinion was issued in 1988. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The Public Finance Authority statutes (articles 601d and 601d-1, V.T.C.S.) and the bond review provisions have been amended and recodified into the Government Code since 1988. Anyone dealing with the timing of state bond issuance and construction contracting today should consult the current Government Code provisions governing the Texas Public Finance Authority and the Bond Review Board, along with current constitutional case law, rather than the 1988 article and section numbers used here.

Who this opinion affected (as of 1988)

The Texas Public Finance Authority: The opinion confirmed the board has discretion over the timing of bond approvals and is not legally required to issue all of a project's bonds before contracts are signed.

State agencies building facilities: The opinion told them construction on revenue-bond projects cannot start until proceeds are deposited and certified available, but that they may sign contracts with funding-contingent payment terms.

Construction contractors: The opinion signaled that a contract making payment contingent on future bond funding shifts real risk onto the contractor if the money never becomes available.

Common questions

Must all bonds for a project be issued before construction contracts are signed?
No. In this opinion the Attorney General found no statute or constitutional provision requiring the Public Finance Authority to issue all of a project's general obligation bonds before construction-related contracts may be formalized.

Is there any timing rule at all?
Yes, for revenue bonds. Construction financed by revenue bonds may not begin until the bond proceeds are deposited in the state treasury and the comptroller certifies the funds are available.

Can a state agency sign a construction contract without the money in hand?
It can sign a contract only if the contract provides for payment; otherwise it would create unconstitutional debt. But the payment obligation can be written to depend on the availability of appropriated or bond funds.

What happens if the funds never come through?
If the Legislature declines to appropriate the funds, the comptroller may not issue a warrant to pay the contractor, so the contractor bears that risk under a funding-contingent contract.

Background and statutory framework

The Texas Public Finance Authority is empowered to issue and sell bonds to finance the acquisition, construction, repair, renovation, or other improvement of buildings and facilities used by state agencies in Travis County (V.T.C.S. art. 601d, section 9). Before issuing bonds, the Legislature must have authorized the specific project (section 10; see also art. 717k-7, approval by the bond review board), and the Authority's financing power does not affect other agencies' authority to build (section 16(a)). Under article 601d-1, the Authority may issue general obligation and revenue bonds for corrections and mental health and mental retardation institutions (sections 4, 5; see Tex. Const. art. III, section 49-h, authorizing the general obligation bonds), with specific projects authorized by the Legislature and issuance or use of proceeds approved by the bond review board (sections 2(d), 10).

Agencies had at times asked the board to have all bond proceeds for a project in the treasury and available before entering any construction contract, and the Department of Corrections had stated that all requested prison-construction funds had to be available before contracting. The Attorney General found no definitive answer in the statutes or constitution, but identified provisions the board must consider.

The bond legislation is inconclusive on such a requirement. On the issuance of revenue bonds, the board must notify the appropriate agency that funds are available and deposit the bond proceeds in the state treasury (art. 601d, section 23; art. 601d-1, section 5). Article 601d-1, section 5 provides that once the funds are deposited and the comptroller certifies that the funds are available, the appropriate agency may begin construction, language indicating a legislative intent that construction not begin until the funds are available. There is no similar provision for general obligation bonds.

General contract-law and constitutional principles also apply. A contract is not binding unless supported by consideration (Stone v. Morrison & Powers, 290 S.W. 538 (Tex. Comm'n App. 1927, holding approved)). A state agency cannot make a binding contract for construction of facilities unless the contract provides for payment; otherwise it would be invalid for attempting to create a debt in violation of article III, section 44 (Fort Worth Cavalry Club v. Sheppard, 83 S.W.2d 660 (Tex. 1935)). The Legislature may not appropriate funds from the treasury in payment of a claim under an invalid contract (Pickle v. Finley, 44 S.W. 480 (Tex. 1898); Tex. Const. art. III, section 44; art. VIII, section 6).

Parties may enter a valid and binding contract by exchanging promises (Teague v. Edwards, 315 S.W.2d 950 (Tex. 1958)), and a conditional promise can provide valid consideration (Beaumont Traction Co. v. Texarkana & Fort Smith Railway Co., 123 S.W. 124 (Tex. 1909); Rose v. San Antonio & Mexican Gulf R. Co., 31 Tex. 49 (1868)). For example, a state agency may enter a binding contract for longer than the two-year term for which appropriations are valid under article VIII, section 6, if the contract states that payment is subject to the availability of appropriated funds (Attorney General Opinions M-656 (1970), M-253 (1968), C-206 (1964)). If the Legislature decides not to appropriate funds to pay the contract, the comptroller may not issue a warrant to the contracting party (Attorney General Opinion C-206 (1964)). Although a state agency might enter a legally binding construction contract making payment contingent on the Authority's future funding actions, that term would raise significant practical problems for the agency and the contractors. Moreover, if performance of the promise is entirely optional with the promisor, it is not consideration for the contract (Restatement (Second) of Contracts section 77 (1981)). How these considerations apply to particular contract situations cannot be determined in the opinion process.

Citations

Constitutional and statutory authority:

• Article III, section 44, Texas Constitution (no debt or payment of claims not provided for by pre-existing law)
• Article III, section 49-h, Texas Constitution (general obligation bonds for corrections and MHMR institutions)
• Article VIII, section 6, Texas Constitution (two-year appropriation limit)
• Article 601d, V.T.C.S. (Texas Public Finance Authority; deposit and availability of revenue-bond proceeds)
• Article 601d-1, V.T.C.S. (general obligation and revenue bonds; certification of available funds)
• V.T.C.S. art. 717k-7 (bond review board approval)

Cases:

• Fort Worth Cavalry Club v. Sheppard, 83 S.W.2d 660 (Tex. 1935)
• Stone v. Morrison & Powers, 290 S.W. 538 (Tex. Comm'n App. 1927, holding approved)
• Pickle v. Finley, 44 S.W. 480 (Tex. 1898)
• Teague v. Edwards, 315 S.W.2d 950 (Tex. 1958)
• Beaumont Traction Co. v. Texarkana & Fort Smith Railway Co., 123 S.W. 124 (Tex. 1909)
• Rose v. San Antonio & Mexican Gulf R. Co., 31 Tex. 49 (1868)

Prior Attorney General opinions referenced: M-656 (1970), M-253 (1968), C-206 (1964).

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-969
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1988/jm0969.pdf

Original opinion text

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

October 24, 1988

Mr. Glen Hartman
Executive Director
Texas Public Finance Authority
P. O. Box 12906
Austin, Texas 78711

Opinion No. JM-969

Re: Whether all bonds to be used to fund a project must be issued before formalization of construction contracts (RQ-1454)

Dear Mr. Hartman:

The Texas Public Finance Authority is empowered to issue and sell bonds in its name to finance the acquisition, construction, repair, renovation, or other improvement of buildings and other facilities for the use of state agencies in Travis County. V.T.C.S. art. 601d, section 9. Before the board may issue and sell bonds, the legislature must have authorized the specific project which the bonds are to finance. Id. section 10; see also V.T.C.S. art. 717k-7 (approval of issuance by bond review board). The authority's power to finance a project does not affect the statutory authority of the State Purchasing and General Services Commission, or any other state agency or institution, to build the buildings. V.T.C.S. art. 601d, section 16(a).

Under the authority of article 601d-1, V.T.C.S., the Public Finance Authority may issue general obligation bonds and revenue bonds and distribute bond proceeds to certain agencies for corrections institutions and mental health and mental retardation institutions. V.T.C.S. art. 601d-1, sections 4, 5; see Tex. Const. art. III, section 49-h (authorizing general obligation bonds). Specific projects must have been authorized by the legislature, and the bonds may not be issued or the bond proceeds used to finance a project unless the issuance or project has been approved by the bond review board. V.T.C.S. art. 601d-1, sections 2(d), 10.

You inform us that agencies undertaking a construction project have on occasion asked the board of directors of the authority to have all proceeds from the bond issue necessary to fund a given project in the treasury and available for expenditure before they enter into any contract related to the construction. Recently, representatives from the Texas Department of Corrections stated that all the funds requested for prison construction had to be available for disbursement prior to their entering into any contracts for projects to be built with bond proceeds. On the basis of this information, you ask the following question:

[W]hat constitutional or legislative authority, if any, requires that all bonds to be used to fund a given project to completion must be issued before construction-related contracts may be formalized.

On examination of the relevant statutes and constitutional provisions, we find no definitive answer to your question. However, we can point out certain provisions of law, the effect of which must be considered by the board in determining the timing of bond approvals.

The legislation governing the Public Finance Authority is inconclusive as to such a requirement. On the issuance of revenue bonds, the board is required to notify the appropriate agency that the funds are available and to deposit the bond proceeds in the state treasury. V.T.C.S. art. 601d, section 23; V.T.C.S. art. 601d-1, section 5. "Once the funds are deposited and the comptroller of public accounts has certified that the funds are available . . . the appropriate [agency may begin construction]." V.T.C.S. art. 601d-1, section 5 (emphasis added); see also V.T.C.S. art. 601d, section 23. The underlined language indicates the intent of the legislature that construction not begin until the funds are available. There is not, however, a similar provision pertaining to the issuance of general obligation bonds.

Also relevant to your question are some of the general rules of contract law which apply to the state and private parties alike and constitutional provisions applicable to the state of Texas. A contract is not binding unless it is supported by consideration. Stone v. Morrison & Powers, 290 S.W. 538 (Tex. Comm'n App. 1927, holding approved). A state agency moreover cannot make a binding contract for construction of facilities unless the contract provides for payment; otherwise, it would be invalid for attempting to create a debt in violation of article III, section 44, of the Texas Constitution. Fort Worth Cavalry Club v. Sheppard, 83 S.W.2d 660 (Tex. 1935). The legislature may not appropriate funds from the treasury in payment of a claim under an invalid contract. Pickle v. Finley, 44 S.W. 480 (Tex. 1898); State v. [name not legible], 236 S.W.2d 816 (Tex. Civ. App. - Austin 1951, writ ref'd); Tex. Const. art. III, section 44; art. VIII, section 6.

Parties may enter into a valid and binding contract by exchanging promises. Teague v. Edwards, 315 S.W.2d 950 (Tex. 1958); [case name and volume not legible], S.W. 1101 (Tex. 1923). A conditional promise can provide valid consideration for a contract. Beaumont Traction Co. v. Texarkana & Fort Smith Railway Co., 123 S.W. 124 (Tex. 1909); Rose v. San Antonio & Mexican Gulf R. Co., 31 Tex. 49 (1868). For example, a state agency may enter into a binding contract for a longer time than the two-year term for which appropriations are valid under article VIII, section 6, of the constitution if the contract states that payment thereunder is subject to the availability of appropriated funds. Attorney General Opinions M-656 (1970); M-253 (1968); C-206 (1964). If, however, the legislature decides not to appropriate funds in payment of the contract, the comptroller may not issue a warrant in payment to the party contracting with the state. Attorney General Opinion C-206 (1964).

Thus, although a state agency might be able to enter into a legally binding construction contract which makes payment contingent on the Public Finance Authority taking actions in the future to provide funding for the contract, this contract term would raise significant practical problems for the agency which needs a new facility and the construction companies interested in building it. Moreover, if under a particular contract, performance of the "promise" is entirely optional with the person who made the promise, it is not consideration for the contract. Restatement (Second) of Contracts section 77 (1981). How these legal considerations would apply to particular contract situations cannot be determined in the opinion process.

SUMMARY

Construction financed by revenue bonds issued by the Texas Public Finance Authority may not begin until the bond proceeds are deposited in the state treasury and the comptroller has certified that the funds are available. No statute or constitutional provision requires the Texas Public Finance Authority to issue all general obligation bonds needed to fund a given project to completion before construction-related contracts may be formalized. The state may not make a binding contract without provision for payment, although payment provisions may be contingent on the availability of funds.

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