Opinion No. ( 1984 )

Honorable Carl A. Parker Chairman Senate Education Committee Texas State Senate P.O. Box 12068, Capitol Station Austin, Texas 78711

Re: Whether an officer of a banking institution who serves as a member of the board of a higher education authority is subject to article 988b, V.T.C.S.

Dear Senator Parker:

You have asked the following two questions relating to the bill frequently referred to as the Local Officials Conflict of Interest Bill:

(1) Is an official of a banking institution serving as a member of the board of directors of a higher education authority a `local public official' under the provisions of article 988b, V.T.C.S.?

(2) If so, and if the financial institution with which such board member is associated, or an affiliated institution such as a bank holding company arrangement, makes student loans guaranteed by a higher education authority, does such board member then violate the provisions of article 988b by participating in a vote or decision of the board of directors if his bank or financial institutions affiliated therewith receives interest income on an eligible student loan or proceeds paid in the event of default on such loan from the guarantee fund of the higher education authority?

We conclude that a member of the board of directors of a higher education authority is a local public official within the meaning of the Local Officials Conflict of Interest Bill and, therefore, is subject to the applicable provisions of the act. It is our opinion that a board member with a substantial interest in a lending institution violates the provisions of that act by knowingly participating in a vote or decision of the board of directors if the member can reasonably foresee that such action will result in receipt of interest income to the lending institution from eligible student loans.

Section 1(1), article 988b, V.T.C.S. defines a "local public official" as:

a member of the governing body or another officer, whether elected or appointed, paid or unpaid, of any district (including a school district), county, city, precinct, central appraisal district, transit authority or district, or other local governmental entity who exercises responsibilities beyond those that are advisory in nature.

A higher education authority is created under chapter 53 of the Texas Education Code by the governing body of a city or cities. Sec. 53.11. An authority is a "body politic and corporate" which may sue and be sued and may make, amend, and repeal its bylaws. Sec. 53.13. It is a governmental body which is subject to the Open Meetings Act, article 6252-17, V.T.C.S., and to the Open Records Act, article 6252-17a, V.T.C.S. See Attorney General Opinion MW-177 (1980). It is a local governmental entity which is governed by its board of directors. Sec. 53.14. A member of such a board clearly exercises responsibilities beyond those that are advisory in nature and is subject to the provisions in article 988b which prohibit certain conduct.

A local public official commits a Class A misdemeanor under section 3(a)(1) of article 988b, except in those instances provided in section 5, (which provides inter alia for abstention from voting on matters in which the official is interested) if he knowingly

participates in a vote or decision on a matter involving a business entity in which the local public official has a substantial interest if it is reasonably foreseeable that an action on the matter would confer an economic benefit to the business entity involved. . . .

The elements of the offense involve several factual determinations, one of which is whether a local public official has a substantial interest in the business entity. Under section 2 of the act, a person has a substantial interest in a business if:

(1) the interest is ownership of 10 percent or more of the voting stock or shares of the business entity or ownership of $2,500 or more of the fair market value of the business entity; or

(2) funds received by the person from the business entity exceed 10 percent of the person's gross income for the previous year. . . .

Also, an interest of a person related in the first or second degree by either affinity or consanguinity to the local public official is a "substantial interest." Sec. 2(c).

A local public official must knowingly participate in a vote or decision on a matter prohibited by article 988b to violate the provisions of that act. Section 3(a)(1) appears to refer to an action on a matter if it is reasonably foreseeable that the action will confer any economic benefit to the business entity in question, regardless of the source or the amount of economic benefit.

The student higher education loans in question usually are made by private lending institutions at interest rates lower than the generally available rates. We understand that until the loan is in pay-back status, the holder of the loan receives from the federal government an interest subsidy payment for the facial amount of the interest plus a variable lenders special allowance that brings the interest income up to the regular market level of interest. When the loan is in pay-back status, the student borrower pays the interest subsidy payments on remaining unpaid balances, and the federal government continues payment of the lenders special allowance. In case of default, the higher education authority guaranteeing the loan pays the student's unpaid principal and interest. We believe that the interest income to a lending institution that it receives as the holder of a guaranteed student loan constitutes an economic benefit within the meaning of article 988b.

Therefore, assuming that a member of the board of directors of a higher education authority has a "substantial interest" in a lending institution, we believe the board member violates the provisions of article 988b if the member knowingly participates in a vote or decision of the board when the member can reasonably foresee that such action will result in the lending institution receiving interest income on eligible student loans or receiving any other economic benefit from the higher education authority's student loan program.

SUMMARY A member of the board of directors of a higher education authority is a public official within the meaning of article 988b, V.T.C.S. Such a board member with a substantial interest in a lending institution violates that act by knowingly participating in a vote or decision of the board of directors if the member can reasonably foresee that such action will result in interest income to the lending institution from guaranteed student loans.

Very truly yours,

Jim Mattox Attorney General of Texas

Tom Green First Assistant Attorney General

David R. Richards Executive Assistant Attorney General

Prepared by Nancy Sutton Assistant Attorney General