Case Information

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THE ATTIONEY EENERAL. OF TEXAS

Geraid C. Mena AUSTIN 11. TEXAS

Honorable Geo. A. Hight
Chief Accountant
Board of County and District Road Indebtedness Austin, Texas

Dear Sir:

Opinion Number 0-3320 Re: Authority of Board under subsection (m) of House Bill 688, Forty-sixth Legislature, to purchase bonds at a premium for cancellation and increase the annual sinking fund requirement out of the interest saved to absorb the premium paid.

We have your letter of July 17, in which you request our opinion on the following question: "Whether or not the Board has ample authority, under the above quoted provision, to purchase such bonds at a premium for cancellation and increase the annual sinking fund requirement out of the interest saved to absorb the premium on bonds cancelled?"

The section of the law quoted in your letter, subsection (m) of Section 6 of House Bill 688, passed by the Forty-sixth Legislature, Regular Session, 1959, reads as follows: "The Board of County and District Road Indebtedness shall have and possess full authority to invest all such sinking funds, including all future sinking funds acquired in any manner whatsoever, in any allible obligations of the various political subdivisions of this State, which mature within the current biennian in which such securities are purchased and where there is on hand a sufficient amount of money or securities to the credit of any one political subdivision to retire some of its outstanding obligations, whether than due or not. The Board of County and District Road Indebtedness may if it deems it advisable, purchase and cancel said obligations of such particular political subdivisions. Irrespective of maturity dates."

You have outlined the following example for our consideration:

A county has outstanding $\$913,000$ term bonds

*2 Hon. Geo. A. High' page 82 maturing 1959 with no optional features. The annual sinking fund requirement on this issue is $\$23,075.00$ of which the State pays $93.56\%$ . There has accumulated in the State's portion of the sinking fund requirement of this issue since January 1, 1933 the sum of $\$189,300.73$ .

We think the following conclusion proper under the state of facts outlined. Each bond stands as a separate contrast and by its terms premises the return of the principal amount plus interest until maturity at so much per annum. A term issue, such as is outlined, premises not only the return of the principal amount represented thereby but also a sum to be realized as income thereon. For example, a $\$1,000$ bond bearing interest at $5\%$ and maturing in 1959 would represent a premise to pay $\$50.00$ each year for nineteen (19) years, that is, 1941 to 1959 , or $\$950.00$ plus the principal amount of $\$1,000$ . Therefore, the aggregate sum the borrower has pledged itself to pay is $\$1,950$ . There being no provision for prior payment it becomes certain that the debtor is liable for $\$1950$ at the maturity date, 1959.

To purchase such a bond at any time prior to maturity it is only reasonable to assume that something more than per must be paid therefor. A consideration would be due for the seller's foregoing his right to exset the full amount represented by the contract appearing in the face of the bond. Such consideration is generally referred to as a premium but if it is purchased by the debtor for cancellation it would be more appropriate to call it a prepayment of interest.

In the instant case the State of Texas through your Board has undertaken to compensate the counties and defined road districts of the State for money expended in the construction of State highways and has allocated so much money each year toward the payment of a term issue which matures 19 years hence, or 1959. Pending that time the funds lie unused and the State pays interest at the given rate throughout those 19 years or so long as funds for this purpose are made available by succeeding legislatures. Clearly, the State's obligation to pay cannot extend beyond two years; therefore, if the Board pursuant to the above quoted statutes purchased for cancellation bonds maturing beyond the blemnium, the premium or interest prepayment should not exceed the amount it would be obliged to pay under the contract for that blemnium. In other words, using the example above cited, the Board would not be justified in paying a premium in excess of $\$100$ per each $\$1,000$ bond. This $\$100$ represents interest at $5\%$ for two years and is the maximum amount the State would be called upon to pay.

Each blemnial appropriation provides both the interest and principal accruals for the sueceeding blemnium and we see no legal obstacle to the Board's purchasing for cancellation bonds eligible under the "Bond Assumption Act" and paying therefor a premium, so long as such premium does not exceed the funds made available for the particular bonds for the ensuing blemnium.

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Yon. Geo. A. High' page 83

Your attention is dircoted to the fact that the amount that can be legally expended by the Board would be in ratio to the portion that the State has undertaken to pay. The established percentage of eligibility of participation in the onecent (18) gasoline tax allocated to the Board of County and District Read Indebtedness represents the maximum funds available for such purpose.

You are, therefore, advised that in our opinion the Board has ample authority to purchase such bonds at a premium for cancellation and increase the annual sinking fund requirement out of the interest saved to absorb such premium, so long as said premium does not exceed the amount actually appropriated for interest payments thereon.

Trusting that the foregoing fully answers your inquiry, we are

Very truly yours A'TORNEY GENERAL OF TEXAS By /a/ Clarence E. Crowe Clarence E. Crowe Assistant

A'PROVED AUG. 9, 1941 /2/ Grover Sellers FIRST ASSISTANT ATTORNEY GENERAL CEC-s:jrb APPROVED OPINION COMMITTEE BY REK, Chairman