Can a Texas city, county, or school district invest its public money in a bank-run money market mutual fund?

Texas AG Opinion JM-975: Public Funds and Money Market Mutual Funds

Plain-English summary

In 1987 the Texas Legislature passed the Public Funds Investment Act, a law meant to give cities, counties, school districts, and other public bodies more room to invest the money they hold. One provision let them put bond proceeds into "common trust funds or comparable investment devices owned or administered by banks domiciled in this State." The senator who sponsored the bill, Ike Harris, had been fielding questions about what that phrase covered. Specifically, could a public body invest in a "bank-oriented" money market mutual fund, a mutual fund run through a Texas bank's investment services and holding only safe government obligations? He asked the Attorney General.

The answer was no, and the reason has nothing to do with how safe the fund is. It comes down to a single sentence in the Texas Constitution. Article III, section 52 says the Legislature has no power to let any county, city, town, or other political subdivision lend its credit, give away public money, or become a stockholder in any "individual, association or corporation." That last part is the sticking point. When you buy into a mutual fund, you get "units of participation," which represent a proportionate slice of everything the fund owns. The Attorney General concluded that a unit of participation in a private, for-profit fund is really just a share of stock by another name. And if it is a share of stock, then a city that buys it becomes a stockholder in a company, which the Constitution flatly forbids.

The Attorney General walked through decades of Texas cases to get there. The key move was defining what "association" and "company" mean in section 52. Back in 1859, in Mills v. State, the Texas Supreme Court read those words broadly to mean people acting together, through officers or agents, to carry out a business enterprise, not just formally chartered corporations. When the current Constitution was written in 1876, the drafters used those same words, so the ban on becoming a "stockholder" reaches non-corporate private ventures that pool capital. A string of insurance cases, most importantly Lewis v. Independent School District of Austin (1942) and City of Tyler v. Texas Employers' Ins. Ass'n, applied this rule to hold that a city or school district cannot become a member or stockholder in a mutual insurance company, even to buy itself a policy. A mutual fund, the office reasoned, is the same kind of thing: a private enterprise of aggregated capital operated for gain, whose securities (whether corporate stocks or government bonds) are just its assets, not the enterprise itself.

The Attorney General also drew on the U.S. Supreme Court's decision in Investment Company Institute v. Camp, which described a bank's mutual investment fund and called each investor's stake a "proportionate interest in fund assets," language that fits a share of stock just as well. And the office distinguished a mutual fund investment from an ordinary bank deposit. The court held in Lawson v. Baker that depositing public money in a bank, even at interest, is not a loan or an investment, so the state depository laws are constitutional. Putting money into a fund and getting units of participation is different: the money is put at risk in a common venture and the return depends on how fund managers use the assets.

The office had already said much of this two years earlier in Opinion JM-570, which held that ordinary money market mutual fund shares were not eligible for city investment because no statute authorized it. Senator Harris's question was whether the 1987 Act fixed that gap for bank-oriented funds. The Attorney General's answer: the Act could not fix it, because the barrier is constitutional, not merely statutory. A 1986 amendment to section 52 had carved out one narrow exception, allowing public funds to be spent on certain mutual insurance policies, but that change did not touch the broader ban on investing public money in private enterprises of pooled capital. So the bottom line: insofar as the Public Funds Investment Act authorized public bodies to invest in bank-oriented money market mutual funds or other private securities, it conflicted with article III, section 52 of the Texas Constitution.

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.

Texas public-investment law changed substantially after this opinion. The Legislature rewrote and recodified the Public Funds Investment Act into the Government Code, and it later addressed the eligibility of money market mutual funds and similar pooled investments for public entities under carefully defined conditions. Because the analysis here turned on a constitutional provision as it stood in 1988 and on a since-repealed civil-statute article, anyone deciding today what a Texas governmental entity may lawfully invest in should consult the current Public Funds Investment Act in the Government Code and current constitutional interpretation, not the article and section numbers used here.

Who this opinion affected (as of 1988)

Cities, counties, school districts, and other public bodies: The opinion told them they could not invest public funds or bond proceeds in bank-oriented money market mutual funds, despite the apparent authorization in the 1987 Act, because doing so would make them unconstitutional stockholders in a private company.

The Legislature: The opinion signaled that expanding public investment authority into private pooled funds would require a constitutional amendment, not just a statute.

Banks and fund sponsors: The opinion foreclosed marketing bank-oriented money market funds to Texas governmental entities as an authorized public investment.

Common questions

Could a Texas public body invest in a bank-run money market mutual fund under the 1987 Act?
No. In this opinion the Attorney General concluded that units of participation in such a fund are the functional equivalent of shares of stock, and article III, section 52 of the Texas Constitution forbids a political subdivision from becoming a stockholder in a corporation, association, or company.

Why does it matter that the fund only held government securities?
The Attorney General said it did not change the result. The government bonds are just the fund's assets. The fund itself is still a private enterprise of pooled capital operated for gain, and the investor's stake is still a stock-like interest in that enterprise.

Is putting public money in a mutual fund the same as depositing it in a bank?
No. A bank deposit, even one bearing interest, is not a loan or investment (that is the holding of Lawson v. Baker), and it is constitutional. Buying units of participation in a fund puts the money at risk in a common venture, which the Constitution treats differently.

Did it take a constitutional amendment to allow this kind of investment?
The opinion's logic pointed that way. Because the obstacle was article III, section 52 itself, the Attorney General concluded the Legislature could not authorize the investment by statute alone.

Background and statutory framework

The 70th Legislature enacted the Public Funds Investment Act of 1987 (House Bill 1488), codified as article 842a-2, V.T.C.S., to expand public bodies' investment authority. Section 2(b) authorized investment of bond proceeds in "common trust funds or comparable investment devices owned or administered by banks domiciled in this State" consisting solely of certain eligible obligations. The phrase "common trust funds ... administered by banks" tracks the class of funds excluded from the definition of "investment company" under the federal Investment Company Act of 1940, referring to a common trust fund maintained by a bank for the collective investment of money it holds as trustee, executor, administrator, or guardian (15 U.S.C. section 80a-3(c)(3); Property Code section 113.171; Shannon v. Frost Nat'l Bank of San Antonio, 533 S.W.2d 389 (Tex. Civ. App. - San Antonio 1975, writ ref'd n.r.e.)). A common trust fund typically sells units of participation, each an equal undivided interest in the fund's portfolio, resembling the participation of shareholders in a corporation (Presnall v. Stockyards Nat'l Bank, 151 S.W. 873, 876 (Tex. Civ. App. - Texarkana 1912), aff'd, 194 S.W. 384 (Tex. 1917)).

Article III, section 52(a) of the Texas Constitution provides that, with stated exceptions, the Legislature has no power to authorize any county, city, town, or other political corporation or subdivision to lend its credit or grant public money in aid of, or to, any individual, association, or corporation, or to become a stockholder in such corporation, association, or company. None of the section's exceptions embrace loans to or investments in private enterprises or their shares. If units of participation in a mutual fund are the equivalent of shares of stock in a corporation, association, or company, the Legislature cannot authorize such investments (Lewis v. Independent School District of Austin, 161 S.W.2d 450, 452 (Tex. 1942)).

In Investment Company Institute v. Camp, 401 U.S. 617 (1971), the United States Supreme Court considered a national bank's plan to operate a mutual investment fund; the customer's investment was added to the fund and a written evidence of participation expressed in "units of participation" the customer's proportionate interest in fund assets. The Court held that operating the fund involved the bank in the underwriting, issuing, selling, and distributing of securities in violation of federal law as it then read (12 U.S.C. section 24). The Court described a mutual fund as an open-end investment company, an issuer of redeemable securities under the Investment Company Act of 1940 (15 U.S.C. sections 80a-2(a)(21), 80a-3, 80a-5(a)(1), 80a-4(2)). The characterization of a unit of participation as a "proportionate interest in the fund assets" could equally describe a share of stock.

Money paid to banks for such investment purposes is not the equivalent of a deposit. In Lawson v. Baker, 220 S.W. 260, 269 (Tex. Civ. App. - Austin 1920, writ ref'd), the court upheld the state depository statute, reasoning that the general depositing of money in a bank depository, with or without interest, subject to the depositor's check or demand, is not a loan or investment.

To read section 52, the opinion turned to Mills v. State, 23 Tex. 295 (1859), where the Texas Supreme Court examined a provision of the 1845 Constitution barring creation of any "corporate body" with banking or discounting privileges (Tex. Const. art. VII, section 30 (1845)) and an 1840 statute reaching any "Corporation, Company, or Association of individuals" exercising such privileges. The court held that "company" meant persons acting together for the prosecution of enterprises, and that "association" was a synonym for company, signifying persons acting together through officers or agents in important enterprises (23 Tex. at 302-304). When section 52 of the 1876 Constitution was written to bar political subdivisions from becoming a stockholder in a "corporation, association or company," it used those same words, exhibiting a determination that the prohibition reach participation in non-corporate private enterprises of aggregated capital. That is the construction Texas courts have given the provision (Lewis, supra; McCaleb v. Continental Casualty Co., 116 S.W.2d 679 (Tex. 1938); Southern Casualty Co. v. Morgan, 12 S.W.2d 200 (Tex. Comm'n App. 1929, judgment adopted); City of Tyler v. Texas Employers' Ins. Ass'n, supra).

The leading case is Lewis v. Independent School District of Austin, decided in 1942 before the current final sentence was added to section 52(a). It followed earlier authority. In Middleton v. Texas Power & Light Co., 185 S.W. 556, 562 (Tex. 1916), the court said the Texas Employers' Insurance Association (created with the Workmen's Compensation Law) was not a private corporation but an agency for administration of the law. A decade later, in City of Tyler v. Texas Employers' Ins. Ass'n, 288 S.W. 409 (Tex. Comm'n App. 1926), the Commission of Appeals held that the "stockholder" provision of section 52 prohibited the Legislature from letting political subdivisions become members of the association, calling it a corporation on the mutual plan whose subscribers are stockholders. On rehearing, the Commission denied it had overruled Middleton, explaining that whether the association was "technically a corporation or not," its nature was such that municipal corporations could not become subscribers without violating constitutional limitations (294 S.W. 195, 196 (1927)). Southern Casualty Co. v. Morgan read City of Tyler to hold that the Legislature lacks power under section 52 to authorize a municipal corporation to become in effect a stockholder in the Texas Employers' Insurance Association (12 S.W.2d 200). And in McCaleb v. Continental Casualty Co., the Texas Supreme Court explained that section 52 bars municipal corporations from taking out a policy in a mutual insurance company that would require the city to become a member or stockholder (116 S.W.2d at 680).

When Lewis reached the Texas Supreme Court, it framed the question as whether the Legislature could constitutionally authorize a school district (a political corporation) to buy a mutual insurance policy, and held it could not: section 52 prohibits cities from becoming members of a mutual insurance association whose subscribers are stockholders. The court called the constitutional language "clear and unambiguous" and quoted Judge Speer's admonition from City of Tyler that public policy cannot be contrary to the express provisions of the Constitution (Lewis, 161 S.W.2d at 452-453).

The opinion was persuaded that units of participation in a mutual fund operated as a private enterprise, whether "bank-oriented" or not, are the functional equivalents of shares of stock within section 52. The 1986 amendment adding a final sentence to section 52(a) (allowing public funds for premiums on certain nonassessable mutual life, health, or accident insurance policies and annuity contracts) did not otherwise alter the scope of the prohibition, which continues to bar investment of public funds in other private enterprises of aggregated capital whatever their nomenclature. Courts of other states have read their constitutions similarly (In re Lion Capital Group, 49 Bankr. 163 (S.D.N.Y. 1985); Board of Trustees of the Public Employees' Retirement Fund of Indiana v. Pearson, 459 N.E.2d 715 (Ind. 1984); Public Housing Administration v. Housing Authority of Bogalusa, 137 So.2d 315 (La. 1961); cf. Louisiana State Employees' Retirement System v. State, 423 So.2d 73 (La. Ct. App. 1st Cir. 1982), writ denied, 427 So.2d 1206 (1983)). Accordingly, insofar as the Public Funds Investment Act of 1987 purports to authorize political corporations and subdivisions to invest public funds in bank-oriented money market mutual funds or securities of private entities, it conflicts with article III, section 52.

Citations

Constitutional and statutory authority:

• Article III, section 52(a), Texas Constitution (no lending of credit to or becoming a stockholder in any individual, association, or corporation)
• Article VII, section 30, Texas Constitution (1845) (bar on corporate bodies with banking or discounting privileges)
• Article 842a-2, V.T.C.S. (Public Funds Investment Act of 1987)
• 15 U.S.C. §§ 80a-2(a)(21), 80a-3, 80a-3(c)(3), 80a-4(2), 80a-5(a)(1) (Investment Company Act of 1940)
• 12 U.S.C. § 24 (national bank securities underwriting)
• Property Code § 113.171 (common trust funds)

Cases:

• Investment Company Institute v. Camp, 401 U.S. 617 (1971)
• Lewis v. Independent School District of Austin, 161 S.W.2d 450 (Tex. 1942)
• City of Tyler v. Texas Employers' Ins. Ass'n, 288 S.W. 409 (Tex. Comm'n App. 1926), aff'd on rehearing, 294 S.W. 195 (1927)
• Mills v. State, 23 Tex. 295 (1859)
• Presnall v. Stockyards Nat'l Bank, 151 S.W. 873 (Tex. Civ. App. - Texarkana 1912), aff'd, 194 S.W. 384 (Tex. 1917)
• Lawson v. Baker, 220 S.W. 260 (Tex. Civ. App. - Austin 1920, writ ref'd)
• Shannon v. Frost Nat'l Bank of San Antonio, 533 S.W.2d 389 (Tex. Civ. App. - San Antonio 1975, writ ref'd n.r.e.)
• Middleton v. Texas Power & Light Co., 185 S.W. 556 (Tex. 1916)
• McCaleb v. Continental Casualty Co., 116 S.W.2d 679 (Tex. 1938)
• Southern Casualty Co. v. Morgan, 12 S.W.2d 200 (Tex. Comm'n App. 1929, judgment adopted)
• In re Lion Capital Group, 49 Bankr. 163 (S.D.N.Y. 1985)
• Board of Trustees of the Public Employees' Retirement Fund of Indiana v. Pearson, 459 N.E.2d 715 (Ind. 1984)
• Public Housing Administration v. Housing Authority of Bogalusa, 137 So.2d 315 (La. 1961)
• Louisiana State Employees' Retirement System v. State, 423 So.2d 73 (La. Ct. App. 1st Cir. 1982), writ denied, 427 So.2d 1206 (1983)

Prior Attorney General opinions referenced: JM-23 (1983), JM-545 (1986), JM-570 (1986), JM-832 (1988), JM-932 (1988).

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-975
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1988/jm0975.pdf

Original opinion text

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

October 31, 1988

Honorable O. H. "Ike" Harris
Chairman
Economic Development Committee
Texas State Senate
P. O. Box 12068
Austin, Texas 78711

Opinion No. JM-975

Re: Whether public funds may be invested in bank-oriented money market mutual funds pursuant to article 842a-2, V.T.C.S. (RQ-1345)

Dear Senator Harris:

Your letter requesting an opinion from this office reads in part:

The 70th Legislature of Texas passed House Bill 1488 enacting The Public Funds Investment Act of 1987, now codified in Article 842a-2, Vernon's Annotated Texas Civil Statutes (the 'Act'), in order to grant public bodies an expansion of their investment authority. As a sponsor in the Senate of the companion bill to H.B. 1488 and as Chairman of the Committee on Economic Development which heard and passed such bill, I have received a number of inquiries from representatives of public bodies and financial institutions as to the proper interpretation of Section 2(b) of the Act which authorizes investment of bond proceeds in 'Common trust funds or comparable investment devices owned or administered by banks domiciled in this State' (emphasis added) which consist solely of certain eligible obligations described in the Act ('Eligible Obligations'). (Emphasis in original.)

. . . .

In [Attorney General Opinion] JM-570, you held that traditional money-market mutual fund shares were not eligible for investment of city funds (even though the funds were restricted to holding federal securities) because no Texas statute authorized such investment. The question now is whether H.B. 1488 succeeded in overcoming that statutory deficiency if the mutual fund is an integral part of a Texas bank's management and investment services. Accordingly, your opinion is respectfully requested as to whether a bank-oriented money market mutual fund of the type described below constitutes a 'comparable investment device owned or administered by a bank domiciled in this State,' within the meaning of the Act, such that a public body that otherwise complies with the requirements of the Act may lawfully invest its bond proceeds in such fund. (Emphasis added.)

"Common trust funds . . . administered by banks" refers to the classification of funds excluded from the definition of "investment company" by the Federal Investment Company Act of 1940, referring to "any common trust fund or similar fund maintained by a bank exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank in its capacity as a trustee, executor, administrator, or guardian." 15 U.S.C. section 80a-3(c)(3); see Prop. Code section 113.171; Shannon v. Frost Nat'l Bank of San Antonio, 533 S.W.2d 389 (Tex. Civ. App. - San Antonio 1975, writ ref'd n.r.e.). It is explained:

Basically, the common trust funds maintained by banks are investment companies in purpose and mode of operation, and, without the exception in the 1940 Act, they would be regulated by the Act.

T. Frankel, 1 The Regulation of Money Managers, ch. V(G), section 10.2, at 422.

As your letter requesting an opinion advises, the common trust fund typically sells units of participation in the fund, each representing an equal, undivided interest in its portfolio of securities, and, in the event of a dissolution of a common trust fund, the owners of units of participation will receive, pro rata, subject to the rights of creditors, the proceeds of such sale less the liabilities of the fund. As described, participation in such funds is similar to the participation of shareholders in corporations organized for private gain. In Presnall v. Stockyards Nat'l Bank the court said:

It is generally agreed that shares in an incorporated company are the aliquot parts of the capital stock, and merely give to the owner a right to his share of the profits of the corporation while it is a going concern and to a share of the proceeds of its assets when sold for distribution in case of its dissolution and winding up. The shares do not give to their owners any right in the property itself of the company. That remains in the artificial body called the corporation. The right of the individual shareholder, according to the amount put into the fund of the corporation, is therefore of an incorporeal nature, though of value, not capable of manual delivery.

151 S.W. 873, 876 (Tex. Civ. App. - Texarkana 1912), aff'd, 194 S.W. 384 (Tex. 1917).

Your specific question asks whether a bank-oriented money market mutual fund "of the type described below" constitutes a "comparable investment device" within the meaning of the Public Funds Investment Act of 1987, and you draw several parallels between the particular fund you describe and a "common trust fund." If we assume the bank-oriented money market mutual fund to be "a comparable investment device," a question arises as to whether it is an "individual, association or corporation" to which political corporations and subdivisions are forbidden to lend credit or in which they cannot become stockholders.

Article III, section 52(a), of the Texas Constitution reads:

Sec. 52 (a) Except as otherwise provided by this section, 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 whatsoever, or to become a stockholder in such corporation, association or company. However, this section does not prohibit the use of public funds or credit for the payment of premiums on nonassessable life, health, or accident insurance policies and annuity contracts issued by a mutual insurance company authorized to do business in this State.

None of the later-stated exceptions in section 52 embrace loans to, or investments in, private enterprises or their shares.

If "units of participation" in a mutual fund are the equivalent of shares of stock in a corporation, association or company within the contemplation of article III, section 52, of the Texas Constitution, such investments cannot be authorized by the legislature. See Lewis v. Independent School District of Austin, 161 S.W.2d 450, 452 (Tex. 1942). See also City of Tyler v. Texas Employers' Ins. Ass'n, 288 S.W. 409 (Tex. Comm'n App. 1926, judgment adopted), aff'd on rehearing, 294 S.W. 195 (1927). [Footnote 1]

In Investment Company Institute v. Camp, 401 U.S. 617 (1971), the United States Supreme Court considered the plan of a national bank to go into the business of operating a mutual investment fund. As described by the court:

Under the plan the bank customer tenders between $10,000 and $500,000 to the bank, together with an authorization making the bank the customer's managing agent. The customer's investment is added to the fund, and a written evidence of participation is issued which expresses in 'units of participation' the customer's proportionate interest in fund assets. Units of participation are freely redeemable, and transferable to anyone who has executed a managing agency agreement with the bank. The fund is registered as an investment company under the Investment Company Act of 1940. The bank is the underwriter of the fund's units of participation within the meaning of that Act. The fund has filed a registration statement pursuant to the Securities Act of 1933. The fund is supervised by a five-member committee elected annually by the participants pursuant to the Investment Company Act of 1940. The Securities and Exchange Commission has exempted the fund from the Investment Company Act to the extent that a majority of this committee may be affiliated with the bank, and it is expected that a majority always will be officers in the bank's trust and investment division. The actual custody and investment of fund assets is carried out by the bank as investment advisor pursuant to a management agreement. (Emphasis added.)

401 U.S. 617, at 622-623.

A federal law provided that a national bank "shall not underwrite any issue of securities or stock." 12 U.S.C. section 24. After observing that a bank which operates an investment fund has a particular investment to sell, the court held that the operation of the investment fund involved a bank in the underwriting, issuing, selling and distributing of securities in violation of the federal law as it then read. Camp, 401 U.S. 617, at 639.

In the course of reaching its decision, the court noted:

A mutual fund is an open-end investment company. The Investment Company Act of 1940 defines an investment company as an 'issuer' of 'any security' which 'is or holds itself out as being engaged primarily . . . in the business of investing . . . in' securities . . . . 15 U.S.C. sections 80a-2(a)(21), 80a-3(i)(i). An open-end company is one 'which is offering for sale or has outstanding any redeemable security of which it is the issuer.' 15 U.S.C. section 80a-5(a)(1). An investment company also includes a 'unit investment trust': an investment company which, among other things, 'is organized under a . . . contract of . . . agency . . . and . . . issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities . . . .' 15 U.S.C. section 80a-4(2). (Emphasis Added.)

Id. at 625 n. 11.

The characterization of a "unit of participation" by the United States Supreme Court as a "proportionate interest in the fund assets" could be fairly used as a description, also, of a share of stock. See Presnall v. Stockyards Nat'l Bank, supra. Section 52 of article III of the Texas Constitution prevents a county, city or other municipal corporation from becoming "a stockholder" in a "corporation, association or company." It has been suggested, however, that units of participation in bank-oriented money market mutual funds are not the functional equivalents of shares of stock in a profit-seeking enterprise, and that holders of certificates evidencing ownership of such participatory interests would not be "stockholders" within the meaning of the constitution.

The argument suggests that units of participation in a portfolio consisting of governmental obligations are not equivalent to shares of stock within the constitutional prohibition because they are not shares of bank stock, they are not interests in a portfolio of securities consisting of stock in a private corporation, association or company, and the fund itself is not a corporation. However, it must be admitted that such funds, though not organized as corporations, are private enterprises operated for profit or gain, that money invested in such an enterprise is put at risk in a common venture, that the securities in the portfolio of the fund (whether consisting of stocks of private corporations or of government bonds) are merely the assets of the fund and not themselves the enterprise, and that return on the investment depends upon how those assets are used by fund managers.

In Attorney General Opinion JM-570 (1986), to which you refer, we advised that money market mutual funds, including those that deal only in government securities, are private enterprises operated for private gain. We also said:

While it may be true as an abstract matter that an investor in such a fund owns an undivided pro rata interest in the portfolio of short-term obligations owned by the fund, it is true only in the same sense that an investor in the stock of a manufacturing concern can be said to own an undivided pro rata interest in the machinery, buildings, and other assets of the manufacturer. The investor can exercise no personal control over the portfolio of the fund or its disposition, and has no right to reduce to possession any part of it for safekeeping or for any other purpose.

Attorney General Opinion JM-570 (1986), at 5. It was also noted there that an investor in such a fund assumes risks as to the fidelity, accountability and expertise of the fund managers as well as the financial stability and responsibility of the entities whose obligations are represented in the portfolio of the fund. Cf. Attorney General Opinion JM-23 (1983) (repurchase agreements).

Although we concluded in Attorney General Opinion JM-570 (1986) that statutes advanced there by proponents to support investment of public funds in the securities (including participatory "units") of private entities did not provide that support, we did not suggest that statutes purporting to do so, if enacted, would face no constitutional hurdles. See Attorney General Opinions JM-932 (1988); JM-832 (1988); JM-545 (1986); JM-23 (1983) (constitutional issue not addressed). The enterprise represented by a mutual fund such as you describe is one of individuals or entities associated for the purpose of private gain. Although the fund is not incorporated, it is an "association" or "company" within the meaning of the Texas Constitution. Mills v. State, 23 Tex. 295 (1859).

In Mills v. State, supra, the Texas Supreme Court had occasion to examine a provision of the 1845 Texas Constitution that provided, "No corporate body shall hereafter be created, renewed, or extended, with banking or discounting privileges." (Emphasis added.) Tex. Const., art. VII, section 30 (1845). In 1840, the legislature enacted a law declaring "[t]hat any Corporation, Company, or Association of individuals who shall use or exercise banking or discounting privileges in this State, . . . shall be deemed guilty." (Emphasis added.) An Act to Suppress Illegal Banking, Acts 1840, ch. 156, section 1, at 234. The court said:

We think that the statute of 1840, to suppress illegal banking, was enacted for the purpose of carrying into effect this 30th section of the General Provisions of the Constitution. And inasmuch as the exercise of banking and discounting privileges, by companies and associations of individuals, was a violation of the spirit of the constitution, just as much as the exercise of the like privileges by a corporation, the [statute reached not only] the corporate bodies, but also . . . companies, and associations of individuals. (Emphasis added.)

Id. at 302-303. The court said the word, "company," as used, applied to persons acting together for the prosecution of enterprises, and that the word, "association," was used as a synonym for "company." Those words signified, the court concluded, persons acting together, through officers or agents, in the prosecution of important enterprises. Id. at 303-304.

Scarcely fifteen years later, using words given meaning by the Mills court, section 52 of article III of the 1876 Constitution was written to deprive the legislature of power to authorize any political subdivision to become a "stockholder" in a "corporation, association or company." In that era, "stock" broadly referred to the capital of an enterprise. The 1859 edition of Bouvier's Law Dictionary defined "stock" as:

The capital of a merchant, tradesman, or other person, including his merchandise, money and credits. In a narrower sense it signifies only the goods and wares he has for sale and traffic. The capital of corporations is also called stock: this is usually divided into shares of a definite value, as one hundred dollars, fifty dollars per share.

2 Bouvier's Law Dictionary (8th ed. 1859), at 550.

In the light of Mills v. State, the reference placed in the new constitution to "stockholders" in associations and companies (as well as to stockholders in corporations), exhibited a plain determination that its prohibition should reach participation in non-corporate, private enterprises of aggregated capital. That is the construction given the provision by the Texas courts. Lewis v. Independent School District of Austin, supra; McCaleb v. Continental Casualty Co., 116 S.W.2d 679 (Tex. 1938); Southern Casualty Co. v. Morgan, 12 S.W.2d 200 (Tex. Comm'n App. 1929, judgment adopted); City of Tyler v. Texas Employers' Ins. Ass'n, supra.

The leading case, Lewis v. Independent School District of Austin, supra, was decided by the Supreme Court of Texas in 1942 before the current final sentence was added to article III, section 52(a) by amendment (November 4, 1986, allowing the purchase of certain mutual policies with public funds), but it did not break new ground. It followed a well marked furrow.

In 1916, the Texas Supreme Court, in Middleton v. Texas Power & Light Co., 185 S.W. 556 (Tex. 1916), said that the Texas Employers Insurance Association (legislatively created in conjunction with the enactment of the Workmen's Compensation Law) was not a private corporation but, instead, was only an agency for proper administration of the law notwithstanding its designation by the legislature as a "corporation." Id. at 562. (It issued no stock or certificates of ownership and, in fact, was not "owned" by anyone in the usual sense, but its "subscribers" aggregated their capital to operate it as a vehicle for their common advantage, sharing in its success to the extent it relieved them of obligations.) A decade later, the Commission of Appeals held in City of Tyler v. Texas Employers' Ins. Ass'n, supra, that the "stockholder" provision of article III, section 52, prohibited the legislature from permitting political subdivisions to become members of the association. The court said the organization was "a corporation engaged in the insurance business on the mutual plan, whose subscribers are stockholders in such corporation." Id. at 412. For that reason, the court said, the constitution forbade cities and towns from "becoming stockholders therein." Id.

On rehearing, the Commission of Appeals denied that it had overruled the Middleton case. The court said the point in the Middleton case was that the association was not a corporation within the meaning of the general law authorizing corporations, but that it did not follow that the association did not have elements of a private corporation, concluding:

We have merely indicated our opinion that the nature of such association, whether 'technically a corporation or not,' is such that municipal corporations cannot become subscribers thereto without violating constitutional limitations. (Emphasis added.)

City of Tyler v. Texas Employers' Ins. Ass'n, 294 S.W. 195, 196.

Later, in Southern Casualty Co. v. Morgan, supra, the Commission of Appeals read the City of Tyler court to have held:

[T]he Legislature is without power (section 52, art. 3, Constitution) to authorize a municipal corporation of the kind involved to become, in effect, a 'stockholder' in the Texas Employers' Insurance Association (substantially a 'mutual' company), and thus to 'lend its credit,' etc., or to make the 'appropriation of public money' (held to be a gratuity) necessary to affecting insurance. (Emphasis added.)

12 S.W.2d 200. Later still, the Texas Supreme Court explained the City of Tyler holding. The court said in McCaleb v. Continental Casualty Co.:

It was also held that by virtue of section 52 of article 3 of our Constitution, Vernon's Ann. St. Const. art. 3, section 52, municipal corporations could not take out a policy of insurance in a mutual insurance company which would require a city to become a member of or stockholder in such insurance company. (Emphasis added.)

116 S.W.2d 679, 680 (Tex. 1938).

Nevertheless, when the Lewis case came before the Court of Civil Appeals in 1941, the intermediate court was persuaded that the City of Tyler and Southern Casualty Co. holdings were merely "obiter" to be dismissed as not controlling. Lewis v. Independent School District, 147 S.W.2d 298, 303 (Tex. Civ. App. - Beaumont 1941), rev'd, 161 S.W.2d 450 (Tex. 1942). The appeals court concluded that the school district in the Lewis case made no loan of its credit to the mutual insurance company from which it purchased workmen's compensation coverage, that the school district did not become a stockholder in the insurance company or a subscriber to its capital stock by its purchase of the insurance policy, and it quoted from a North Carolina case to the effect that a "stockholder" is the owner of shares in a corporation having capital stock represented by shares, and that a mutual company is without "stock" or "stockholders." Id. at 302.

When the Lewis case reached the Texas Supreme Court, the court characterized the question as whether the legislature could constitutionally authorize the school district, a political corporation, to purchase a policy of mutual insurance. Citing the City of Tyler case, among others, it said:

This Court has held that Section 52 of Article 3 of our Constitution prohibits cities from becoming members of a mutual insurance association whose subscribers are stockholders in such company.

Lewis, 161 S.W.2d 450, 452.

It held the school district to be prohibited by the Texas Constitution from taking a policy in the mutual company, saying:

The language used in the Constitution is clear and unambiguous. It specifically prohibits the School District from becoming a stockholder in a corporation, association, or company. Whether the public policy announced in the Constitution is wise or unwise is not for this Court to decide. As said by Judge Speer, in the case of City of Tyler v. Texas Employers Ins. Ass'n., Tex.Com.App., 294 S.W. 195, 197: 'It is not a question of expediency, for upon that point we might all agree, but expediency cannot substitute the judgment of the municipality for that of the judgment of the framers of the Constitution. Public policy cannot be contrary to the express provisions of the Constitution. When that instrument speaks, the matter is indelibly settled, and its wisdom cannot be questioned.' (Emphasis added.)

Id. at 452-453.

We are persuaded that "units of participation" in a mutual fund operated as a private enterprise, whether "bank-oriented" or not, are the functional equivalents of shares of stock within the meaning of article III, section 52 of the Texas Constitution. As a consequence, it is not within the power of the Texas Legislature to permit municipalities to invest public funds therein and to thereby become "stockholders" in an association or company within the meaning of that provision.

In 1986, subsection (a) of article III, section 52 was amended to add a final sentence to the general prohibition:

However, this section does not prohibit the use of public funds or credit for the payment of premiums on nonassessable life, health or accident insurance policies and annuity contracts issued by a mutual insurance company authorized to do business in this state.

Although the 1986 amendment added a sentence which now expressly allows the use of public funds to purchase certain mutual policies, the amendment did not otherwise alter the scope of the constitutional prohibition, and we believe it continues to prohibit the investment of public funds in other private enterprises of aggregated capital, whatever might be their nomenclature.

In recent years, the courts of other states have accorded a similar reading to prohibitory provisions found in their own constitutions. See In re Lion Capital Group, 49 Bankr. 163 (S.D.N.Y. 1985); Board of Trustees of the Public Employees' Retirement Fund of Indiana v. Pearson, 459 N.E.2d 715 (Ind. 1984); Public Housing Administration v. Housing Authority of Bogalusa, 137 So.2d 315 (La. 1961). Cf. Louisiana State Employees' Retirement System v. State, 423 So.2d 73 (La. Ct. App. - [1st Cir.] 1982), writ denied, 427 So.2d 1206 (1983).

In our opinion, insofar as the Public Funds Investment Act of 1987 (article 842a-2, V.T.C.S.) purports to authorize political corporations and political subdivisions to invest public funds in bank-oriented money market mutual funds or securities of private entities, it conflicts with the constitutional provision.

SUMMARY

Insofar as article 842a-2, the Public Funds Investment Act of 1987, purports to authorize political corporations and political subdivisions to invest public funds in bank-oriented money market mutual funds or other securities of private entities, it conflicts with article III, section 52, of the Texas Constitution.

Very truly yours,

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU MCCREARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Bruce Youngblood
Assistant Attorney General

[Footnote 1] Money paid to banks for such investment purposes are not the equivalent of "deposits." In Lawson v. Baker, 220 S.W. 260 (Tex. Civ. App. - Austin 1920, writ ref'd), the state depository statute was attacked on grounds that the placement of state funds on deposit with banks amounted to an unconstitutional loan or investment of public funds. The court concluded that deposits authorized by the statute in question were not loans or investments. It reached that conclusion by reasoning with other jurisdictions that the general depositing of money in a bank depository, with or without interest, subject to the check or demand of the depositor, is not a loan or investment. Id. at 269.