Can a Texas water control and improvement district use surplus debt-service (interest and sinking) fund money to reduce a future bond issuance?

Plain-English summary

The Victoria County Criminal District Attorney, writing for the Victoria County Water Control and Improvement District No. 2, asked the Attorney General what the district may do with leftover money in its interest and sinking (I&S) fund. An I&S fund is the account a district fills with tax money set aside to pay off bond debt. This district paid off all the bond debt for which it had levied I&S taxes but still had a surplus in the fund, apparently because the tax rate had been set higher than needed. The district asked specifically whether it could keep the surplus in the I&S fund and use it to reduce the amount owed on a future bond issuance, without first deciding that a refund to taxpayers was impracticable.

The AG said no. A water control and improvement district created under Texas Constitution article XVI, section 59 has only the powers a statute expressly grants or that are necessarily implied. The Water Code provision governing the I&S fund, subsection 51.436(b), allows the money to be used only to pay bond principal and interest, to cover the costs of assessing and collecting taxes, and to pay certain amounts due under a federal contract. Servicing a future, hypothetical bond is not among those uses. The AG checked the broader Water Code chapter 49 (which applies to all water districts) and found no such authority there either, and noted that when the Legislature wants to let a governmental body spend surplus I&S money, it knows how to say so (it did for counties in a different statute).

The AG reinforced the point with the Texas Supreme Court's decision in Bexar Cnty. Hosp. Dist. v. Crosby, which held that taxes levied to retire specific bonds are held in trust for the bondholders and cannot be used for any purpose other than retiring that debt. Prior AG opinions had drawn the same conclusion. So the district may not spend the surplus on a future potential bond. The AG closed by encouraging the district to reassess whether refunding the surplus to taxpayers is feasible, while noting it does not resolve fact questions like that in an opinion. The AG also flagged, without deciding, that the older opinion the district relied on (JM-142) rested on out-of-state case law rather than the Texas statute, and might be reconsidered in the future.

What this means for you

If you serve on or advise a water control and improvement district

Based on this opinion, surplus money in your I&S fund cannot be repurposed to reduce a future bond issuance. The AG read Water Code subsection 51.436(b) as an exclusive list of permitted uses, and reducing a potential future debt is not one of them. If you have a surplus after retiring bond debt, the AG points you back toward the refund-to-taxpayers path and encourages reassessing its feasibility.

If you are a taxpayer in such a district

The opinion treats debt-service taxes as money held in trust to pay off the specific bonds they were levied for. Where a surplus remains, the AG's analysis favors refunding it to taxpayers rather than letting the district redirect it to other uses.

If you advise local governments on fund transfers

The opinion is a clean application of the limited-powers rule for special districts: check for express or necessarily implied statutory authority, and do not infer a spending power from silence. The AG contrasted the water-district statutes (which lack such authority) with Government Code section 1471.028, where the Legislature expressly let counties spend surplus I&S money.

Common questions

Q: Can the district use leftover I&S money to lower a future bond debt?
A: No. The AG concluded Water Code subsection 51.436(b) lists the only permitted uses of I&S fund money, and reducing a future potential bond issuance is not among them.

Q: Why can't the district just keep and reuse the surplus?
A: Because a water control and improvement district has only the powers a statute grants, and no statute authorizes that use. The Texas Supreme Court has also held such taxes are held in trust for bondholders to retire the specific debt.

Q: What should the district do with the surplus instead?
A: The AG encouraged the district to reassess whether refunding the surplus to taxpayers is feasible, while noting the AG does not decide that fact question in an opinion.

Q: Does the old opinion JM-142 change the answer?
A: No. The AG concluded that regardless of JM-142, no statute authorizes the proposed use, and it noted JM-142 was based on other states' case law and might be reconsidered in the future.

Background and statutory framework

The district is a water control and improvement district created under Texas Constitution article XVI, section 59 and operating under Water Code chapter 51. Chapter 51 lets such a district issue and sell bonds and levy taxes to redeem them (Tex. Water Code §§ 51.402, 51.432, 51.433), and requires several dedicated funds, including an interest and sinking fund that "include[s] all taxes collected" (id. § 51.436(a)). Subsection 51.436(b) limits I&S fund money to three uses: paying bond principal and interest, defraying tax assessment and collection expenses, and paying certain federal-contract amounts.

Because a section 59 district has only expressly granted or necessarily implied powers (Franklin Cnty. Water Dist. v. Majors, 476 S.W.2d 371 (Tex. App.—Texarkana 1972, writ ref'd n.r.e.); Harris Cnty. Water Control & Improvement Dist. No. 58 v. City of Houston, 357 S.W.2d 789 (Tex. App.—Houston 1962, writ ref'd n.r.e.)), and neither chapter 51, chapter 49, nor the Constitution authorizes spending surplus I&S money on a future bond, the AG concluded the proposed use is not allowed. The AG noted the Legislature expressly authorized counties to spend surplus I&S money elsewhere (Gov't Code § 1471.028; FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868 (Tex. 2000)) but did not do so here. The Texas Supreme Court's decision in Bexar Cnty. Hosp. Dist. v. Crosby, 327 S.W.2d 445 (Tex. 1959), holding that debt-service taxes are held in trust for bondholders, and prior AG opinions confirmed the result.

Citations and references

Statutes:

• Tex. Water Code § 51.436 — permitted uses of interest and sinking fund money
• Tex. Const. art. XVI, § 59 — conservation and reclamation districts
• Tex. Gov't Code § 1471.028 — express county authority to spend surplus I&S money, for contrast

Key cases:

• Bexar Cnty. Hosp. Dist. v. Crosby, 327 S.W.2d 445 (Tex. 1959) — debt-service taxes are held in trust for bondholders
• Franklin Cnty. Water Dist. v. Majors, 476 S.W.2d 371 (Tex. App.—Texarkana 1972) — a section 59 district has only granted or implied powers

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0459
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2024/kp-0459.pdf

Original opinion text

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

March 8, 2024

The Honorable Constance Filley Johnson
Victoria County Criminal District Attorney
205 North Bridge, Suite 301
Victoria, Texas 77901-8085

Opinion No. KP-0459

Re: Authority of a water control and improvement district to use surplus funds from its interest and sinking fund (RQ-0467-KP)

Dear Ms. Johnson:

On behalf of the Victoria County Water Control and Improvement District No. 2 ("District"), you seek our opinion on a matter concerning the District's use of the moneys in its interest and sinking fund.¹

You attach a letter from the District's law firm explaining that the District was created under Texas Constitution article XVI, section 59, is subject to Water Code chapter 51, and is authorized to issue bonds and levy taxes for payment of issued bonds.² The letter further contends that while Water Code section 51.436 limits the types of expenditures a district can make from an interest and sinking fund,³ Attorney General Opinion JM-142 concluded there was an additional authorized use where a water district had surplus moneys in its interest and sinking fund. See Marek Letter at 1–2. Having paid off its bond debt, the District similarly has surplus moneys in its interest and sinking fund and asks about "a potential use" of the surplus. See id. at 3–4.

Authority of a Water Control and Improvement District

Texas Constitution article XVI, section 59, under which the District was created, provides that

[t]he Legislature shall authorize all such indebtedness as may be necessary to provide all improvements and the maintenance thereof requisite to the achievement of the purposes of this amendment. All such indebtedness may be evidenced by bonds of such conservation and reclamation districts, to be issued under such regulations as may be prescribed by law. The Legislature shall also authorize the levy and collection within such districts of all such taxes, equitably distributed, as may be necessary for the payment of the interest and the creation of a sinking fund for the payment of such bonds and for the maintenance of such districts and improvements. Such indebtedness shall be a lien upon the property assessed for the payment thereof. The Legislature shall not authorize the issuance of any bonds or provide for any indebtedness against any reclamation district unless such proposition shall first be submitted to the qualified voters of such district and the proposition adopted.

TEX. CONST. art. XVI, § 59(c). Operating under Water Code chapter 51, which governs water control and improvement districts, the District is authorized to issue and sell bonds to provide and maintain improvements necessary to achieve its purposes. See TEX. WATER CODE §§ 51.402 (authorizing article XVI, section 59 district to issue bonds), 51.432 (authorizing district to sell bonds); see also id. §§ 51.121 (setting out a district's purposes), 51.403 (limiting bond issuance or indebtedness to the amount authorized by the Constitution). Further, a water control and improvement district is authorized to levy taxes to secure payment of its bond indebtedness. See id. § 51.433 (requiring the board to levy a tax on all property inside the district "in a sufficient amount to redeem and discharge the bonds at maturity").

Chapter 51 requires a water control and improvement district to establish several different funds for specific purposes. See, e.g., id. §§ 51.351(a) (requiring a construction fund for the deposit of bond proceeds), 51.352(a) (requiring a maintenance fund for the maintenance, repair, and operation of the properties and plant), 51.353 (providing for an amortization and emergency fund). Relevant here, a water control and improvement district must have an interest and sinking ("I&S") fund to "include all taxes collected" under chapter 51. Id. § 51.436(a). Subsection 51.436(b) provides that money in the I&S fund "may be used only: (1) to pay principal and interest on the bonds; (2) to defray the expenses of assessing and collecting the taxes; and (3) to pay principal and interest due under a contract with the United States if bonds have not been deposited with the United States." Id. § 51.436(b); see also id. § 51.437 (authorizing certain investments of money in the I&S fund).

Attorney General Opinion JM-142

Attorney General Opinion JM-142 involved a water control and improvement district with a surplus in its I&S fund. Tex. Att'y Gen. Op. No. JM-142 (1984). At issue in the opinion was the question whether the district could spend the surplus on any lawful purpose of the district. See id. at 2–3. After noting a lack of direct authority and after considering judicial opinions from other states where surplus moneys in an I&S fund could be expended only where the expenditure was specifically authorized by statute, the opinion rejected the proposition and concluded that surplus I&S moneys may be refunded to taxpayers. Id. at 7. It added "in the event that such refund is impracticable," the "surplus levy may be transferred to the general maintenance fund." Id. (citing Morton v. Baker, 494 S.W.2d 122 (Ark. 1973); Lawrence v. Jones, 313 S.W.2d 228 (Ark. 1958)) (noting that funds in the maintenance fund could be spent only as authorized by the Water Code).⁴

District's Surplus

The District informs us that it "paid off all debt for which Interest and Sinking ad valorem taxes were assessed" during the 2019–20 fiscal year, but still had moneys in its I&S fund. Marek Letter at 3 (quoting Exhibit B at 29). The District believes the surplus resulted from the erroneous setting of the tax rate higher than necessary to retire the bond debt.⁵ See id. The District explains that the surplus comprises two distinct amounts: (1) the money that existed as of the end of the 2020 fiscal year; and (2) additional money coming into the fund as a result of the tax levy in October of 2020 that taxpayers still paid. Id. In reliance on Opinion JM-142, the District undertook a fact-finding inquiry into the feasibility of a refund, concluding it was impracticable to refund the moneys in the first amount because of the difficulty of determining when the surplus accrued and to which specific taxpayers the surplus was attributable. See id. But the District concluded that it was practicable to refund the moneys in the second amount because the tax assessor-collector could furnish a list of taxpayers and their payments on the October 2020 levy. Id. The District later learned that the tax assessor-collector could not furnish a list of taxpayers and their 2020 payments. Id. It reconsidered the question of the practicability of a refund as to the second amount and determined that a refund of the second amount was also impracticable. See id. Then the District approved a transfer of a portion of the money from the two amounts to the general maintenance fund. Id.

Subsequently, the tax assessor-collector's office informed the District that it could, after all, provide a list of the taxpayers who had paid and in what amounts and gave that list to the District in February of 2022. Id. at 4. But upon review of the list, the District's two administrative employees determined that the list contained inconsistencies too numerous and significant to sort out when compared to the public records of tax payments. Id. Given the nature of the inconsistencies and the capacity of the two employees, the District contemplates reaffirming its determination that a refund of the second amount is impracticable but inquired about an alternative use. Id. The District specifically asks whether it can "maintain the surplus in the I&S fund and use it to reduce the amount owed on a future issuance of bonds . . . without finding that a refund would be impracticable[.]" Id.

Analysis

As a water control and improvement district created under the authority of article XVI, subsection 59(a) of the Texas Constitution, the District has only those powers expressly granted by statute or implied as an incident to its express powers. See Franklin Cnty. Water Dist. v. Majors, 476 S.W.2d 371, 373 (Tex. App.—Texarkana 1972, writ ref'd n.r.e.); Harris Cnty. Water Control & Improvement Dist. No. 58 v. City of Houston, 357 S.W.2d 789, 795 (Tex. App.—Houston 1962, writ ref'd n.r.e.). Irrespective of Opinion JM-142, neither article XVI, section 59 of the Texas Constitution nor Water Code chapter 51 authorize the District to expend surplus I&S fund moneys as it suggests. See generally TEX. CONST. art. XVI, § 59; TEX. WATER CODE §§ 51.001–.875. In particular, subsection 51.436(b) does not include the servicing of potential future bond indebtedness as an authorized use of moneys in an I&S fund. TEX. WATER CODE § 51.436(b). Additionally, Water Code chapter 49, which is generally applicable to all water districts, contains no provision authorizing such use of surplus I&S fund moneys. See generally id. §§ 49.001–.512. The Legislature knows how to authorize the expenditure of surplus moneys in an I&S fund, and it made no provision for an expenditure such as the District describes. See, e.g., TEX. GOV'T CODE § 1471.028 (providing express authority to a county to expend surplus funds in an I&S fund); FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 885 (Tex. 2000) (relying on principle of statutory construction that the Legislature knows how to enact laws effectuating its intent).

The Texas Supreme Court considered a similar surplus in a hospital district's I&S fund and stated that the hospital district holds "in trust for the bondholders taxes levied specifically to retire certain bonded indebtedness" and that such funds could be used for no purpose other than "the retirement of that bonded indebtedness." Bexar Cnty. Hosp. Dist. v. Crosby, 327 S.W.2d 445, 448 (Tex. 1959). Relying on the Bexar County opinion, prior opinions from this office concluded that "absent specific statutory authority to the contrary, mon[eys] in an interest and sinking fund may be used for no other purpose than the one for which it was created." Tex. Att'y Gen. Op. No. DM-66 (1991) at 4; see also Tex. Att'y Gen. Op. Nos. JH-1254 (1978) at 2, M-841 (1971) at 2. Accordingly, a court would likely conclude that a water control and improvement district may not spend surplus I&S moneys to reduce a future potential bond indebtedness. Moreover, while we generally do not determine facts in attorney general opinions, we encourage the District to reassess the feasibility of providing a refund of the surplus moneys to taxpayers.

SUMMARY

A court would likely conclude that a water control and improvement district may not use surplus moneys in its interest and sinking fund to reduce indebtedness related to a future potential bond issuance.

Moreover, while we generally do not determine facts in attorney general opinions, we encourage the District to reassess the feasibility of providing a refund of the surplus moneys to taxpayers.

Very truly yours,

KEN PAXTON
Attorney General of Texas

BRENT E. WEBSTER
First Assistant Attorney General

LESLEY FRENCH
Chief of Staff

D. FORREST BRUMBAUGH
Deputy Attorney General for Legal Counsel

AUSTIN KINGHORN
Chair, Opinion Committee

CHARLOTTE M. HARPER
Assistant Attorney General

Footnotes:

¹ See Letter from Honorable Constance Filley Johnson, Victoria Cnty. Crim. Dist. Att'y, to Honorable Ken Paxton, Tex. Att'y Gen. at 1 (July 8, 2022), https://texasattorneygeneral.gov/sites/default/files/request-files/request/2022/RQ0467KP.pdf ("Request Letter").

² See Letter from Robert E. McKnight, Jr., Marek, Griffin & Knaupp, to Off. of the Att'y Gen., Op. Comm. (June 14, 2022) (hereinafter "Marek Letter"), https://texasattorneygeneral.gov/sites/default/files/request-files/request/2022/RQ0467KP.pdf.

³ An interest and sinking fund is an account consisting of revenue set aside to pay interest and principal on bonds or other debts as it matures. See 35 David B. Brooks, Texas Practice Series, County and Special District Law § 17.8.

⁴ You do not ask us to reconsider or expand the options for disposing of surplus I&S moneys set forth in Opinion JM-142. See generally Marek Letter at 1–5. We note, however, that the reasoning in JM-142, issued over 50 years ago, was based solely on other states' case law rather than on a plain text reading of the operative Texas statute. This office may in the future consider overruling or withdrawing Opinion JM-142 to the extent it is inconsistent with current Texas law or principles of statutory construction employed by modern Texas courts.

⁵ You do not ask, and we do not opine on any issues regarding the miscalculation of taxes.