Untitled Texas Attorney General Opinion

OFFICE OF THE ATTORNEY GENERAL . STATE OF TEXAS

JOHN CORNYN

April 4,200l

The Honorable David Sibley Opinion No. JC-0362

Chair, Business and Commerce Committee

Texas State Senate Re: Whether the City of Port Arthur Economic

P. 0. Box 12068 Development Corporation may “grant” sales tax

Austin, Texas 78711 funds for a “rehabilitation and job

training/educational facility” (RQ-028%JC)

Dear Senator Sibley:

As an industrial development corporation established under section 4A of the Development

Corporation Act of 1979 (the “Act”), the City of Port Arthur Economic Development Corporation

(the “Corporation”) may expend sales and use tax proceeds to finance the cost of authorized projects,

which include, generally, facilities that promote business development and, more specifically, job

training. See TEX. REV. CIV. STAT. ANN. art. 5 190.6 (Vernon 1987 & Supp. 2001). The Port Cities

Rescue Mission (the “Mission”), a nonprofit organization established to provide shelter to needy

persons, rehabilitates substance abusers, trains them in skills that will enable them to obtain

employment, and places them in jobs at various companies.’ You ask whether the Corporation is

authorized to make a “grant” of section 4A tax revenues to the Mission for “a rehabilitation and job

training/educational facility.” See Request Letter, note 1, at 1. We conclude that the Corporation

is authorized to expend section 4A tax revenues to finance such a facility only if the Corporation’s

board of directors reasonably finds that the facility will promote business development. Any such

expenditure must be made pursuant to a contract or other arrangement which ensures that the funds

will be used for the authorized purpose and otherwise be in compliance with the Act.

The Mission, you inform us, has implemented the “Lazarus Project,” which is a “a two-step

process in which [hardened substance abusers ready to change] live in two separate facilities, are

constantly monitored, have varying degrees of privileges and, subsequently, are placed into

employment while still living in the facility.” The project has successfully “placed twenty-two Port

Arthur residents in gainful employment.” Id. at l-2. While your letter suggests that the Mission

“creates” jobs, it appears that the Mission’s role is limited to placing individuals in available jobs

with local employers. 2 See id. The Corporation would like to enter into a contract with the Mission

with respect to the Lazarus Project “for $5 1,500 to purchase a building, equipment, and supplies to

‘See Letter from Honorable David Sibley, Texas State Senator, to Honorable John Comyn, Attorney General

of Texas (Sept. 26, 2000) (on file with Opinion Committee) [hereinafter Request Letter].

2Telephone Conversation with Mark Sokolow, Port Arthur City Attorney (Dec. 2 1,200O).

The Honorable David Sibley - Page 2 (JC-0362)

provide clients with skills which will enable them to actively seek, obtain, and retain productive

employment .” Id. at 2. Because you are concerned with whether the expenditure “would be in

accordance with requirements and limitations set forth in Section 4A,” id., we presume that you ask

about the Corporation’s authority to use section 4A tax proceeds to pay for the Mission’s facility as

an authorized “project” under the Act.

In addressing your question, we assume that there are no limitations on the expenditure of

the section 4A tax proceeds particular to the Corporation. The authority of a particular development

corporation may be limited by the resolution creating the corporation or ballot language restricting

the use of the section 4A tax. See, e.g., TEX. REV. CIV. STAT.ANN. art. 5 190.6 $5 4(a) (Vernon

Supp. 2001) (resolution creating corporation must specify its purpose); 4A(n) (election on imposition

of tax may limit time tax is imposed); 4A(r) (election on imposition of tax may limit use of tax

proceeds to specific projects). It may also be limited by financing documents relating to the

corporation’s bonds. See, e.g., id. $0 4A(f) (tax proceeds may be pledged to bond debt service);

25(e) (pledge or agreement to secure bonds in effect until bonds are fully paid). In addition, we do

not address the authority of the Corporation to expend funds other than the section 4A tax proceeds.

Lastly, you do not tell us and we do not address the possible non-secular nature of the Lazarus

Project and the issues that may be implicated by the expenditure of public funds for such a project

to the extent it is non-secular.

We begin our analysis of your question with a brief review of the somewhat byzantine

provisions of the Act. The Act generally authorizes a city, county, or a district to create an industrial

development corporation to finance the cost of authorized projects that “promote and develop new

and expanded business enterprises to promote and encourage employment and the public welfare.”

See id. $0 2(13); 21; 23(a)(l)-(7); see also id. 5 2(4) (defining “cost”); (11) (defining “project”).

In particular, section 4A of the Act authorizes a qualifying city to create an industrial development

corporation governed by that section, see id. @4A(h)(l), and authorizes the city to levy a sales and

use tax for the benefit of that corporation, see id. 3 4A(d). The tax is approved by the voters “for the

promotion and development of new and expanded business enterprises,” id. 8 4A(m), and the

proceeds delivered to the corporation “to use in carrying out its functions.” Id. fj 4A(f). The tax

proceeds may be used to finance authorized project costs. See id. $3 4A(f); 21; 23(a)(6). But see

Gaut v. Amarillo Econ. Dev. Corp., 92 1 S.W.2d 884,887 (Tex. App.-Austin 1996, no writ) (section

4A development corporation is not limited to “projects”). They “may also be used to pay expenses

incurred by the corporation under Section 38 of [the] Act relating to job training.” TEX. REV. CIV.

STAT.ANN. art. 5190.6,§ 4A(f) (Vernon Supp. 2001) (emphasis added).

The section 4A terms “project” and “job training expenses” are defined and expanded upon

by other provisions of the Act. Section 2( 11) of the Act defines “project” and includes two

definitions related to job training. It first defines “project” as “land, buildings, equipment, facilities,

targeted infrastructure, and improvements (one or more) to promote new and expanded business

development or found by the board of directors to be required or suitable for the promotion of

development and expansion of. . . job creation and retention, job training, [or] educational facilities

. . . .” Id. 5 2( 1 l)(A); see also id. 9 2(4) (p roviding that “[clost as applied to a project shall mean and

The Honorable David Sibley - Page 3 (JC-0362)

embrace the cost of acquisition, [and] construction . . . , including . . . the cost of all machinery and

equipment, . . . and other supplies”). Separately, section 2(11) provides that “‘[plroject’ also

includes job training required or suitable for the promotion of development and expansion of

business enterprises and other enterprises described by this Act, as provided by Section 38 of this

Act.” Id. 6 2(1 l)(A) (emphasis added).

Section 38 allows a development corporation to expend tax proceeds for job training,

provided certain conditions are met:

(b) Except as provided by Subsection (c) of this section, a

corporation may spend tax revenue received under this Act for job

training offered through a business enterprise only if the business

enterprise has committed in writing to create new jobs that pay at

least the average weekly wage3 for the county in which the jobs are

to be located.

(c) In a county in which the unemployment rate for the

preceding calendar year equals or exceeds 1.5 times the state average

unemployment rate for the preceding calendar year, a corporation

may spend tax revenue received under this Act for job training

offered through a business enterprise only if the business enterprise

has committed in writing to create new jobs that pay at least 90

percent of the average weekly wage for the county in which the jobs

are to be located.

(d) A corporation may not spend tax revenue received under

this Act for job training in an amount that exceeds more than one-half

the actual cost of the job training.

(e) Unless the project is located in a county in which the

unemployment rate for the preceding calendar year equals or exceeds

1.5 times the state average unemployment rate for the preceding

calendar year, a corporation may not spend tax revenue received

under this Act for job training if other state or federal funds dedicated

to job training are used in the project.

See id. 8 38(b), (c), (d), (e) (footnote added).

The section 38 requirements, in our opinion, are limited to sales tax expenditures for job

training classes. A section 4A corporation is authorized to use sales tax proceeds to finance the cost

31n section 38, “‘average weekly wage’ has the meaning defmed by the labor market information division of

the Texas Workforce Commission.” See TEX.REV. CIV. STAT.ANN. art. 5190.6, 0 38(a) (Vernon Supp. 2001).

The Honorable David Sibley - Page 4 (JC-0362)

of a “project.” See id. $0 4A(f); 23(a)(l), (6). “Project” is defined to include a facility promoting

job training and job training expenses. See id. 8 2( 11) (emphasis added). The facility definition of

project does not reference section 38. See id. And the section 4A provision specifically authorizing

use of the tax proceeds to “pay expenses incurred by the corporation under Section 38 of [the] Act

relating to job training[,]” by its tern-is, does not relate to a facility. See id. 6 4A(f). Moreover,

section 38, by its terms, does not apply to a facility. Rather, it applies to a sales tax expenditure for

“job training offered through a business enterprise” or, in other words, job training courses or

programs. See id. 0 38(b).4

The section 4A and section 2( 11) requirement that a project promote business development,

in our opinion, applies to both types of job training projects. As discussed earlier, section 2( 11)

expressly defines a “project” to include facilities “to promote new and expanded business

development or found by the board of directors to be required or suitable for the promotion of

development and expansion of. . . job creation and retention, job training,” and “job training

required or suitable for the promotion of development and expansion of business enterprises.” Id

8 2( 11); see also id. 6 38 (requiring “business enterprise” to commit in writing to create new jobs

as a condition to sales tax expenditure for job training). More importantly, the section 4A sales and

use tax is authorized, approved, and levied only “for the promotion and development of new and

expanded business enterprises.” See id. 0 4A(m). In an election to adopt the tax, section 4A(m)

specifically directs that the “the ballot shall be printed to provide for voting for or against the

proposition: ‘The adoption of a sales and use tax for the promotion and development of new and

expanded business enterprises at the rate of of one percent.“’ Id. 9 4A(m). Tax proceeds,

of course, may be used only for the purpose authorized by the legislature and approved by the voters.

See Tri-City Fresh Water Supply Dist. No. 2 v. Mann, 142 S.W.2d 945, 948 (Tex. 1940) (taxing

power may be exercised only for purposes distinctly included in constitutional or legislative

provision); Robbins v. Limestone County, 268 S.W. 9 15,919 (Tex. 1925) (taxes levied and collected

for particular purpose may not be diverted to purposes other than for which they were voted). Thus,

use of the section 4A tax proceeds is limited to projects that promote business development.

In sum, section 4A tax proceeds may be expended to finance the cost of a “project.” A

“project” includes: (1) job training facilities, or (2) job training expenses. The section 38

requirements - that tax proceeds may be used to pay up to one-half of the cost of job training only

if a business enterprise has committed to creating new jobs that pay at least the “average weekly

wage for the county” or ninety percent of that wage in a high unemployment county and no other

state or federal funds are used for such purpose except in a high unemployment county - do not

4See also HOUSECOMM.ON ECON.DEV., BILL ANALYSIS,Tex. H.B. 1916,76th Leg., R.S. (1999) (“Worker

training is a major issue for companies wishing to relocate to Texas[,] and some economic development corporations

would like to be able to offer [these] companies funds for job training to make relocating more attractive to those

companies. The ability to use economic development tax money for job training could be a spur to economic

development in areas with an acute shortage of trained workers.“); Hearings on Tex. H. B. I91 6 Before the House Comm.

on Econ. Dev., 76th Leg., R.S. (Mar. 22, 1999) (statement of Rep. Oliveira, sponsor of legislation enacting section 38:

“The bill would amend section 4A to allow sales tax revenues . . . to be used to pay for the expense incurred by a

business that wants to get certain job training done.“) (audio tape available from House Video/Audio Services).

The Honorable David Sibley - Page 5 (JC-0362)

apply to the first type of a project, i.e., a job training facility. Both job training project types,

however, must promote business development.

You ask about the use of the section 4A tax proceeds for the Mission’s “rehabilitation and

job training/educational facility.” See Request Letter, supra note 1, at 1. The funds will be used to

purchase a “building, equipment, and supplies, ” that will be used for job training, i. e., a job training

facility. See id. at l-2. Thus, section 38 does not apply. But we must determine whether this facility

is an authorized facility project of the first kind? We conclude that it is an authorized facility project

only if it promotes business development. While we think it unlikely that the facility directly

promotes business development, we cannot say as a matter of law that it does not.

The facility in question would appear to promote social rehabilitation, given your description

of the facility (“rehabilitation and job training/educational facility”) and the purpose (“provide

shelter”) and operation (“rehabilitate substance abusers”) of the Mission. See id. (“Lazarus Project,”

is a “a two-step process in which [hardened substance abusers ready to change] live in two separate

facilities, are constantly monitored, have varying degrees of privileges, and, subsequently, are placed

into employment while still living in the facility.“). While rehabilitation of habitual substance

abusers clearly promotes societal well-being, we think it unlikely that it directly promotes business

development by, for example, creating or attracting additional jobs, as required by the Act and as

contemplated by the voters when they approved the section 4A tax for that purpose.

But the determination of whether a particular project will promote the economic development

purposes of the Act is, in general, a question of fact within the discretion of the board of directors

of the development corporation in the first instance, subject to judicial review for abuse of discretion.

See TEX. REV. CIV. STAT. ANN. art. 5190.6, 9 2(11) (Vernon Supp. 2001); Tex. Att’y Gen. LO-95-

072, at 3 (determination whether section 4B development corporation may construct sanitary sewer

lines in existing residential subdivision must be made by board of directors in first instance subject

to review for abuse of discretion); LO-92-086, at 2 (concluding that it was within discretion of

section 4A development corporation in first instance to characterize use of sales tax proceeds to

finance bonds for Texas State Technical College System extension center as promotion of

commercial or economic development given statute governing such centers). But see Tex. Att’y

Gen. LO-97-06 1 (concluding that based on information provided, board of directors had no basis for

determining that expenditure of sales tax proceeds to support Clarendon College would promote

economic development). Here we cannot say as a matter of law that the Corporation’s board of

directors would have no basis for determining that a facility described to us as a “rehabilitation and

job training/educational facility” promotes business development. CJ Tex. Att’y Gen. LO-97-061.

Accordingly, the Corporation may expend section 4A tax proceeds to finance a “rehabilitation and

job training/educational facility” if its board of directors finds that such a facility promotes business

development. The board’s determination must, of course, be reasonable in that it is supported by

facts. See id. at 3 n.7 (“Clearly, the determination that an expenditure is within the purposes of the

‘Notwithstanding the characterization of the Mission’s facility, we do not believe that it is an “educational

facility” as those terms are commonly used and understood.

The Honorable David Sibley - Page 6 (JC-0362)

act must be supported by the facts.“); Tex. Att’y Gen. LO-95-072 (board’s determination subject to

review for abuse of discretion). Additionally, the expenditure must comply with other applicable

requirements of the Act.

Finally, we note that you ask whether the Corporation is authorized “to provide a grant” to

the Mission for the “rehabilitation and job training/educational facility,” although you also indicate

that the expenditure will be pursuant to a contract. Because we are unclear as to how the expenditure

will be made, we briefly address this issue. The Act gives a development corporation broad authority

to contract with a “user” of a “project” to finance the project. See TEX. REV. CIV. STAT.ANN. art.

5 190.6, 9 23(a)(1)-(5) (V emon Supp. 2001). The term “user” includes a private, nonprofit entity,

such as the Mission. See id. 8 2(15). But no provision in the Act expressly authorizes a

development corporation to make a “grant.” See id. fj 23; Tex. Att’y Gen LO-94-037, at 3 (“[Wle

find no provision in section 4A or elsewhere in the act . . . by which the legislature has specifically

authorized development corporations formed thereunder to make ‘grants.“‘); see also Tex. Att’y

Gen. Op. No. JC-0118 (1999) at 8-9 (Act does not authorize gift or donation of sales tax proceeds;

sales tax expenditures even for project costs must be pursuant to a contract). But see TEX. REV. CIV.

STAT.ANN. art. 5 190.6, $23(a)(4) (V emon Supp. 2001) (1999 amendment authorizing development

corporation to “donate” property to an institution of higher education “for a legal purpose of the

institution upon such terms and conditions as the corporation’s board of directors may deem

advisable and that are not in conflict with the provisions of this Act.“). We have previously stated

that any expenditures of sales tax funds, including those for authorized projects, must be made

pursuant to a contract or other arrangement sufficient to ensure that the funds are used for the

purposes authorized, consistent with the constitutional restrictions on the expenditure of public funds

and the requirements of the Act. See TEX. CONST.art. III, 9 52; Tex. Att’y Gen. Op. No. JC-0118

(1999) at 8-9; Tex. Att’y Gen. LO-97-061, at 4-5, LO-94-037, at 3. Consequently, any sales tax

expenditure for the Mission’s “rehabilitation and job training/educational facility” must be made

pursuant to a contract or other arrangement that ensures that the funds will be used for the authorized

purpose and in compliance with the Act.

The Honorable David Sibley - Page 7 (JC-0362)

SUMMARY

The City of Port Arthur Economic Development Corporation is

authorized to expend sales and use tax proceeds to finance the Port Cities

Rescue Mission’s “rehabilitation and job training/educational facility” only

if the Corporation’s board of directors reasonably finds that such a facility

promotes business development and otherwise complies with the

Development Corporation Act of 1979, article 5 190.6 of the Revised Civil

Statutes. The Act does not expressly authorize a “grant” for the Mission’s

facility. Instead, any sales tax expenditure for such a facility must be made

pursuant to a contract or other arrangement that ensures that the funds will be

used for the authorized purpose and otherwise be in compliance with the Act.

Attorney General of Texas

ANDY TAYLOR

First Assistant Attorney General

CLARK KENT ERVlN

Deputy Attorney General - General Counsel

SUSAN D. GUSKY

Chair, Opinion Committee

Sheela Rai

Assistant Attorney General - Opinion Committee