KBS Reference Desk: Payment Guarantee Requests Due to COVID-19

Q:        Our district is negotiating a contract for transportation services. The vendor has asked us to guarantee payment for a minimum number of 180 days of service. Under the contract, this guarantee payment would be owed to the vendor even if services are interrupted or not provided due to another COVID-19 district closure and the requisite 180 days of service are not met. Should the district agree to this contract provision?

A:        No. The district should not agree to this provision, as it would likely be considered an impermissible grant of public funds under the Constitution and laws of this state.

Permissible use of public funds by governmental entities, such as state agencies and political subdivisions is an age-old, legal concept rooted in important public policy sentiment. Article III, Section 53 of the Texas Constitution provides, in pertinent part, that the Legislature shall have no power to grant, or to authorize any county or municipal authority to grant, any extra compensation, fee or allowance to a public officer, agent, servant or contractor, after service has been rendered, or a contract has been entered into, and performed in whole or in part.

More specifically, this constitutional provision was adopted to prevent counties or municipalities (interpreted to include independent school districts) from freely giving away public moneys for services previously rendered or for which no valid legal authorization existed and for which the public would receive no return (emphasis added). Lee v. El Paso Cty., 965 S.W.2d 668, 673 (Tex. App.—El Paso 1998, pet. denied).  Stated differently, the school district must have a valid legal basis, such as receipt of an actual service, of which the public (or district) would be able to receive a return or benefit in order to grant or commit public funds to a vendor under a contract. Absent this criteria, the granting of public funds to the contractor would likely be viewed as payment of “extra compensation”—any sum given in addition to the contract price or salary, such not merely for being greater or less than the contract, but properly because it is outside the contract (Dallas Cty. V. Lively, 167 S.W. 219, 220 (Tex. 1914)—which is prohibited under Article III, Section 53 of the Texas Constitution.

For specific questions or additional information regarding payment of guaranteed amounts under contracts in light of COVID-19, please consult with your local school law attorney.

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