Are funds a Texas state agency inherits from a dissolved state program 'public funds'?

Plain-English summary

The chair of the Texas Health Services Authority asked the AG a practical investment-policy question. The Texas Health Insurance Risk Pool had been created to provide coverage to Texans who could not get it from commercial insurers. After federal health-insurance law changed, the Legislature abolished the Pool through Senate Bill 1367 and, as part of winding it down, sent $5 million of the Pool's money to the Authority to use for any purpose in the Authority's enabling statute. The Authority, a public-private collaborative that promotes the electronic exchange of health records, was updating its investment policies and wanted to know whether the Public Funds Investment Act applies to that $5 million.

The Act governs how certain governmental entities invest their "funds," defined as public funds in the custody of a state agency or local government that are not required to be deposited in the state treasury and that the entity has authority to invest. The Authority appeared to be a state agency for the Act's purposes (the Act covers a nonprofit corporation acting on behalf of a governmental entity), and the question assumed the Authority had investment authority. That left one issue: are these "public funds"? The Act does not define the phrase.

The AG used the definition a court of appeals had adopted from prior AG opinions: public funds are funds belonging to the State, raised by operation of some general law and appropriated for a public purpose, as opposed to "special" funds that are collected for the sole benefit of contributors and merely held by the State as custodian. Applying that test, the AG concluded a court would likely treat the $5 million as public. The Pool had amassed the money by assessing penalties against insurers under general law, and a monetary penalty paid to the government becomes public funds. Although the Pool could originally use the money only for premium discounts, it did not hold the money in trust for the people who got those discounts; the Legislature's power to abolish the Pool and redirect the money to a different public purpose showed the money belonged to the State. And the Authority does not hold the funds in trust or as a custodian now, because it may spend them on any of its statutory purposes. On those characteristics, the AG concluded the funds are public and governed by the Public Funds Investment Act.

Currency note

This opinion was issued in 2017. 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.

What the opinion meant for those who asked

The requesting Authority (as the opinion described it): The opinion answered that a court would likely conclude the $5 million the Authority received from the Pool's dissolution are public funds under the Public Funds Investment Act, which bears on the investment policies the Authority was updating.

Other state agencies and nonprofit corporations acting for the government (as the opinion described them): The opinion explained the Act's "funds" definition and noted that a nonprofit corporation acting on behalf of a governmental entity can be a state agency for the Act, so the public-funds analysis turns on the character of the money, not the label of the holder.

Public investment officers (as the opinion described them): The opinion laid out the markers that distinguish public funds from special funds (whether the money belongs to the State or is merely held in custody, and whether it can be spent on a public purpose or only for particular individuals), which guide whether the Act governs a given pot of money.

Common questions

What makes money "public funds" under the Public Funds Investment Act?
The opinion used the definition that public funds belong to the State, are raised by operation of general law, and are appropriated for a public purpose, in contrast to special funds collected for the benefit of contributors and merely held by the State as custodian.

Why weren't these treated as money held in trust for insureds?
The opinion explained the Pool did not hold the money in trust for people who received premium discounts, and the Legislature's ability to abolish the Pool and redirect the money to a different public purpose showed the funds belonged to the State.

Does a penalty paid to the government count as public funds?
The opinion cited authority that a monetary penalty paid to the government becomes public funds, and the Pool had built up this money through penalties assessed against insurers under general law.

Does it matter that the Authority is a public-private collaborative?
No. The opinion noted the Act covers a nonprofit corporation acting on behalf of a governmental entity, so the Authority appeared to be a state agency for the Act's purposes.

Background and statutory framework

The Public Funds Investment Act governs the investment of "funds" controlled by certain governmental entities (Tex. Gov't Code § 2256.003(a)), defining "funds" as public funds in the custody of a state agency or local government that are not required to be deposited in the state treasury and that the entity has authority to invest (Tex. Gov't Code § 2256.002(3)). The Act's definition of "state agency" includes a nonprofit corporation acting on behalf of a governmental entity (Tex. Gov't Code § 2256.002(13)). The Authority is a public nonprofit corporation the Legislature described as a public-private collaborative, established to improve the health care system by coordinating electronic health-record exchange, with broad statutory purposes including a statewide health information exchange (Tex. Health & Safety Code §§ 182.001, 182.051(b), 182.101). The Pool had collected the money through penalties and interest assessed against insurers for late claim payment (Tex. Ins. Code §§ 843.342(m), 1301.137(l)).

The Act does not define "public funds," so the AG applied the definition a court adopted from prior opinions (San Antonio Bldg. & Constr. Trades Council v. City of San Antonio, 224 S.W.3d 738, 746 (Tex. App.—San Antonio 2007, pet. denied); Tex. Att'y Gen. Op. No. GA-0257 (2004)), looking to whether the money belongs to the State or is held in a custodial role and whether it can discharge a public purpose. The AG concluded the funds are public because they were raised through penalties under general law (Phil H. Pierce Co. v. Watkins, 263 S.W. 905, 906 (Tex. 1924); Sterling v. Alexander, 99 S.W.3d 793, 800 (Tex. App.—Houston 2003, pet. denied)), belong to the State (shown by the Legislature's abolition of the Pool and redirection of the money), and are not held in trust now because the Authority may use them for any of its purposes (cf. Tex. Att'y Gen. LO-96-023 (1996)). The opinion did not address the Authority's investment authority, which the question assumed (Tex. Att'y Gen. Op. No. GA-0768 (2010)), and described the Pool's history under Tex. Health Ins. Risk Pool v. Sigmundik, 315 S.W.3d 12, 13 n.1 (Tex. 2010).

Citations

Statutes:

• Tex. Gov't Code §§ 2256.002(3), 2256.002(13), 2256.003(a)
• Tex. Health & Safety Code §§ 182.001, 182.051(b), 182.101
• Tex. Ins. Code §§ 843.342(m), 1301.137(l)

Cases:

• Tex. Health Ins. Risk Pool v. Sigmundik, 315 S.W.3d 12 (Tex. 2010)
• San Antonio Bldg. & Constr. Trades Council v. City of San Antonio, 224 S.W.3d 738 (Tex. App.—San Antonio 2007, pet. denied)
• Phil H. Pierce Co. v. Watkins, 263 S.W. 905 (Tex. 1924)
• Sterling v. Alexander, 99 S.W.3d 793 (Tex. App.—Houston 2003, pet. denied)

Other authority:

• Tex. Att'y Gen. Op. No. GA-0257 (2004)
• Tex. Att'y Gen. Op. No. GA-0768 (2010)
• Tex. Att'y Gen. LO-96-023 (1996)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0142
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2017/kp0142.pdf

Original opinion text

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

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

April 17, 2017

David Fleeger, M.D. Opinion No. KP-0142
Chair, Board of Directors
Texas Health Services Authority Re: Whether certain funds received by
5900 Southwest Parkway, Building 2, Suite 201 the Texas Health Services Authority are
Austin, Texas 78735 public funds under the Public Funds
Investment Act, chapter 2256 of the
Government Code (RQ-0136-KP)

Dear Dr. Fleeger:

    The Legislature created the Texas Health Insurance Risk Pool ("Pool") to provide health insurance to Texans who were unable to obtain coverage from commercial insurers. See Tex. Health Ins. Risk Pool v. Sigmundik, 315 S.W.3d 12, 13 n.1 (Tex. 2010) (describing function of Pool). In the wake of changes to federal law pertaining to health insurance, the Legislature abolished the Pool through passage of Senate Bill 1367. [1] As part of the Pool's dissolution, Senate Bill 1367 distributed $5 million in funds controlled by the Pool to the Texas Health Services Authority ("Authority"). [2] You inform us that the Authority is updating its investment policies and ask whether the Public Funds Investment Act ("PFIA"), a law generally governing investment of public funds, applies to the $5 million transferred from the Pool. [3]

    To answer your question, we must further expound on the funds' origin. The Pool originally amassed these funds by collecting penalties and interest payments assessed against health insurance companies for late payment of claims. See Senate Bill 1367, § 6(e); TEX. INS. CODE §§ 843.342(m), 1301.137(l). The Legislature then authorized the Pool to use these funds for the purpose of financing premium discounts on its health insurance policies to qualified Texans based on financial need. [4] When these funds were no longer necessary to fund premium discounts upon dissolution of the Pool, Senate Bill 1367 provided for the distribution of $5 million of these funds to the Authority to be used for any purpose specified in its enabling statute. See Senate Bill 1367, § 6(e)(1). The Authority is a public-private collaborative established by the Legislature to improve the health care system in the State by promoting and coordinating the exchange of electronic health records. See Request Letter at 1; TEX. HEALTH & SAFETY CODE § 182.001. The Authority's enabling statute vests it with the power to pursue a multitude of purposes, including establishing a statewide health information exchange. TEX. HEALTH & SAFETY CODE § 182.101.

    The PFIA generally governs the investment of "funds" under the control of certain governmental entities. TEX. GOV'T CODE § 2256.003(a). The Legislature defined "funds" for purposes of the PFIA as "public funds in the custody of a state agency or local government that: (A) are not required by law to be deposited in the state treasury; and (B) the investing entity has authority to invest." [5] Id. § 2256.002(3) (emphasis added). The $5 million in funding at issue is currently in the custody of the Authority, which appears to meet the definition of a state agency for purposes of the PFIA. [6] To determine whether the PFIA applies, however, we must establish whether these are "public funds."

    Yet, as you observe, the PFIA does not define the term. See Request Letter at 2. This office previously used the following definition, adopted by a court of appeals, to define "public funds" for purposes of the PFIA:

            [Public funds are] funds belonging to the state or to any county or political subdivision of the state; more specifically taxes, customs, moneys, etc., raised by the operation of some general law, and appropriated by the government to the discharge of its obligations, or for some public or governmental purpose; and in this sense it applies to the funds of every political division of the state wherein taxes are levied for public purposes. The term does not apply to special funds, which are collected or voluntarily contributed, for the sole benefit of the contributors, and of which the state is merely the custodian.

See San Antonio Bldg. & Constr. Trades Council v. City of San Antonio, 224 S.W.3d 738, 746 (Tex. App.—San Antonio 2007, pet. denied) (adopting Texas Attorney General's definition of public funds to construe PFIA (citations omitted)); see also Tex. Att'y Gen. Op. No. GA-0257 (2004) at 3 ("Public funds in section 2256.002(3) denotes funds that belong to the investing entity collected by virtue of some general law, and that are designated to a public purpose." (quotation marks omitted)). In applying this definition, this office looked to several characteristics to determine whether funds may be characterized as public, including: whether the funds belong to the State or are held merely in a custodial role and whether the State may use the funds to discharge a public purpose or draw upon them only to benefit particular individuals. See Tex. Att'y Gen. Op. No. GA-0257 (2004) at 3 ("The funds were not public funds because they did not belong to the state, because the Department held them as a mere custodian, and because they would not be used to discharge a general public purpose."). Thus, for example, child-support payments submitted to a state agency and held by the State as a custodian for transmittal to private beneficiaries are special, rather than public funds, because the State holds the funds merely in a custodial role for the benefit of the contributors. See id. ("[F]unds a state agency possesses merely as a custodian, for the benefit of contributors, are not public funds." (quotation marks omitted)).

     Looking to the characteristics of the $5 million in funding at issue, a Texas court would likely conclude that for purposes of the PFIA the funds are more akin to public, rather than special funds. Here, the Pool amassed the funds by assessing penalties against insurers through operation of a general law. See Phil H. Pierce Co. v. Watkins, 263 S.W. 905, 906 (Tex. 1924) (defining general laws as "[l]aws which apply to and operate uniformly upon all members of any class of persons, places, or things"); see also Sterling v. Alexander, 99 S.W.3d 793, 800 (Tex. App.—Houston 2003, pet. denied) ("A monetary penalty paid to the government becomes public funds."). Moreover, although the Legislature initially specified that the Pool could use the funds only to provide premium discounts, the Pool did not hold the money as a custodian or in trust for individuals who qualified for the discount. Rather, these funds belong to the State as evidenced by the Legislature's abolishment of the Pool and transfer of the funds to the Authority to be used for an entirely different public purpose. Cf. Tex. Att'y Gen. Op. No. GA-0257 (2004) at 3-4 (concluding charges to municipal utility customers not public funds where funds did not belong to utility but were held in trust to pay for nuclear decommissioning costs and utility would return any excess funds to customers). Nor are the funds currently held in trust or custodial capacity, as the Authority may use the money for any of its purposes. Cf. Tex. Att'y Gen. LO-96-023 (1996) at 2 (concluding money deposited in court registry pending outcome of litigation not public funds, as court holds money in trust for litigants and may not use funds for another purpose); see also S.B. 1367, § 6(e)(1) (Authority may use funds for any purpose specified in its enabling statute). Based on these characteristics, a court would likely conclude that the funds are public and governed by the PFIA.

                                 SUMMARY

                 A court would likely conclude that funds received by the Texas Health Services Authority as a result of the dissolution of the Texas Health Insurance Risk Pool are public funds under the Public Funds Investment Act.

                                        Very truly yours,

                                        KEN PAXTON
                                        Attorney General of Texas

JEFFREY C. MATEER
First Assistant Attorney General

BRANTLEY STARR
Deputy First Assistant Attorney General

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

ASHLEY FRANKLIN
Assistant Attorney General, Opinion Committee

[1] See Act of May 21, 2013, 83d Leg., R.S., ch. 615, 2013 Tex. Gen. Laws 1640, 1640-42 ("Senate Bill 1367").

[2] See id. § 6(e)(1).

[3] See Letter from David Fleeger, M.D., Chair, Bd. of Dirs., Tex. Health Servs. Auth., to Honorable Ken Paxton, Tex. Att'y Gen. at 1-2 (Sept. 19, 2016), https://www.texasattorneygeneral.gov/opinion/requests-for-opinion-rqs ("Request Letter").

[4] Act of May 18, 2009, 81st Leg., R.S., ch. 265, § 4, 2009 Tex. Gen. Laws 724, 725 (enacting former Insurance Code section 1506.260), repealed by Senate Bill 1367, § 8(b).

[5] Your question assumes the Authority has investment authority; therefore, we do not address this issue. See Tex. Att'y Gen. Op. No. GA-0768 (2010) at 2 ("[T]he PFIA is generally in addition to or cumulative of a governmental entity's investment authority granted by other law." (quotation marks omitted)).

[6] The Authority is a public nonprofit corporation described by the Legislature as a public-private collaborative. TEX. HEALTH & SAFETY CODE §§ 182.001, .051(b). Entities subject to the PFIA include a nonprofit corporation acting on behalf of a governmental entity. See TEX. GOV'T CODE § 2256.002(13) (defining state agency to include nonprofit corporation acting on behalf of governmental entity).