Could one Texas city charge impact fees and include capital improvements for service provided inside another city?

TX AG Opinion DM-0319: Could one city impose impact fees inside another?

Plain-English summary

A state senator asked how Local Government Code chapter 395 applied while Leon Valley and San Antonio negotiated a wastewater agreement. The dispute centered on whether San Antonio, as the regional wastewater collector, could provide capital improvements and collect impact fees within another municipality.

The Attorney General concluded that section 395.011(c) allowed one municipality to contract with another to provide capital improvements inside the receiving city’s boundaries. The providing municipality could charge impact fees in that area only when the municipalities had contracted accordingly and the provider complied with chapter 395. The opinion distinguished an ordinary interlocal cooperation contract, under which section 395.011(c) did not itself authorize the provider to charge an impact fee within the receiving city.

The opinion also concluded that a contracted area outside the provider’s corporate limits and extraterritorial jurisdiction could be included in its capital improvements plan. Although chapter 395 defined a “service area” by reference to corporate boundaries and extraterritorial jurisdiction, the Attorney General read the provisions together. Limiting the plan to those boundaries would conflict with section 395.011(c)’s express authority to provide improvements outside them and would prevent the provider from calculating the full improvements and costs needed for the contracted area.

Section 395.0455 concerned systemwide land-use assumptions, not capital improvements plans. Its phrase “all of the area subject to the jurisdiction of the political subdivision” included an area where the municipality collected impact fees under section 395.011. The separate definition of “capital improvements plan” and the harmonized reading of “service area” supplied the authority to include the outside contracted area in the plan.

The senator’s third question assumed that chapter 395 offered no mechanism for collecting impact fees inside another municipality. Because the opinion rejected that premise, it did not answer the third question.

Currency note

This opinion was issued in 1995. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Who this opinion affected (as of 1995)

Municipal utility providers: A city providing contracted capital improvements inside another municipality could collect impact fees there when the agreement authorized the fees and chapter 395 was followed.

Receiving municipalities: A city could contract for another municipality to provide utility capital improvements and could agree that the provider would collect impact fees within its boundaries.

Municipal planners: The provider could account for the contracted outside area in the capital improvements plan and, for systemwide land-use assumptions, treat the fee area as within its chapter 395 jurisdiction.

Developers in the receiving area: The opinion treated chapter 395 compliance as a condition of any impact fee imposed by the providing municipality.

Common questions

Could a city provide wastewater capital improvements inside another city?
Yes. The opinion read section 395.011(c) to authorize that arrangement by contract.

Could the providing city charge impact fees there?
Yes, but only if the municipalities contracted for that result and the provider complied with chapter 395.

Did a standard interlocal cooperation agreement automatically authorize impact fees?
No. The opinion said a municipality could contract for wastewater services under Government Code chapter 791, but the provider could not charge an impact fee inside the receiving municipality under that arrangement alone.

Could the outside area appear in the provider’s capital improvements plan?
Yes. The opinion construed “service area” to include an area served under a section 395.011(c) contract.

Did DM-0319 decide every mechanism for imposing an intercity impact fee?
No. It declined the third question because that question assumed chapter 395 supplied no mechanism, an assumption the earlier conclusions had already rejected.

Background and statutory framework

Chapter 395 financed capital improvements needed for new development through impact fees. It defined capital improvements to include qualifying water, wastewater, drainage, flood-control, and roadway facilities, and defined impact fees as charges on new development used to fund or recoup attributable capital-improvement costs.

The 1987 Impact Fee Act first appeared as V.T.C.S. article 1269j-4.11. During House consideration of Senate Bill 336, an amendment added the language later codified as section 395.011(c), expressly addressing improvements beyond a municipality’s boundaries and extraterritorial jurisdiction. The Legislature codified the act in chapter 395 in 1989 without intending substantive change.

Also in 1989, the Legislature added section 395.0455 to streamline the adoption of land-use assumptions, capital improvements plans, and impact fees. Section 395.0515 allowed simultaneous adoption, while section 395.0455 allowed systemwide land-use assumptions instead of separate assumptions for each service area.

The opinion harmonized those procedural provisions with section 395.011(c). It concluded that the contracted area had to be included when necessary to identify the full capital improvements and costs for service the provider was authorized to supply.

Citations

Statutes:

• Tex. Local Gov’t Code §§ 42.021, 43.056, 395.001, 395.011-.014, 395.042-.0515, 402.001
• Tex. Gov’t Code ch. 791; § 791.011
• V.T.C.S. art. 1269j-4.11

Secondary authorities:

• 13 Eugene McQuillin, The Law of Municipal Corporations § 37.11 (3d ed. 1987)
• 2B Norman J. Singer, Statutes and Statutory Construction § 53.01 (5th ed. 1992)
• Bray, Caudill & Owen, Once More, the Trilogy, In Retrospect: An Essay on the Virtues of Development Agreements in Texas, 32 S. Tex. L. Rev. 1 (1991)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0319
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1995/dm0319.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES

ATTORNEY GENERAL

January 25, 1995

The Honorable O. H. “Ike” Harris
Committee on State Affairs
Texas State Senate
P.O. Box 12068
Austin, Texas 78711

Opinion No. DM-319

Re: Whether section 395.011(c) of the Local Government Code authorizes a
municipality to contract to provide capital improvements to an area outside its
corporate boundaries and extraterritorial jurisdiction if the area lies within the
boundaries of another municipality and related questions (RQ-669)

Dear Senator Harris:

You asked us several questions involving the proper interpretation of chapter 395
of the Local Government Code, which provides a method by which municipalities and
certain other governmental entities may finance capital improvements necessary to
accommodate new development. See generally Bray, Caudill, & Owen, Once More, the
Trilogy, In Retrospect: An Essay on the Virtues of Development Agreements in Texas, 32
S. TEX. L. REV. 1, 12-14 (1991). You provided the following factual background for this

request:

The City of Leon Valley is currently in negotiations with the City of
San Antonio in regard to a wastewater contract. The City of San
Antonio is the regional collector for all wastewater. ... Negotiations
between the City of San Antonio and several suburban municipalities
are currently at an impasse due to a difference in interpretation of
[chapter 395 of the Local Government Code].

We understand that the suburban municipalities believe the City of San Antonio may
collect impact fees for the wastewater service pursuant to a contract for collection if the
city recognizes them as impact fees belonging to the city and includes them accordingly in
its capital improvements plan. We understand, on the other hand, that the City of San
Antonio contends that the impact fees belong to the suburban municipalities and that the
municipalities themselves are obligated to pay for the wastewater collection service.

You first ask whether section 395.011(c) of the Local Government Code confers
upon a municipality the authority to contract to provide capital improvements to an area

outside the municipality’s corporate boundaries and extraterritorial jurisdiction if the area
is within the boundaries of another municipality. Section 395.011(c) provides as follows:

A municipality may contract to provide capital improve-
ments,1 . . . to an area outside its corporate boundaries and extra-
territorial jurisdiction2 and may charge an impact fee3 under the

1In the context of chapter 395 of the Local Government Code, “capital improvement” designates

any of the following facilities that have a life expectancy of three or more years
and are owned and operated by or on behalf of a political subdivision:

(A) water supply, treatment, and distribution facilities, wastewater
collection and treatment facilities, and storm water, drainage, and flood control
facilities, whether or not they are located within the service area; and

(B) roadway facilities.

Local Gov't Code § 395.001(1). “Service area,” as mentioned in (A) above, means “the area within the
corporate boundaries or extraterritorial jurisdiction, ..., of the political subdivision” that the capital
improvements will serve. Id. § 395.001(9); see infra note 2 (defining “extraterritorial Jurisdiction”). But
see infra pages 6-7 (construing definition of “service area”).

2Section 395.001(9) of the Local Government Code, defining “service area,” requires a political
subdivision to determine its extraterritorial jurisdiction in accordance with chapter 42 of the Local
Government Code. Pursuant to section 42.021 of the Local Government Code, a municipality’s
extraterritorial jurisdiction is the unincorporated area contiguous to the municipality’s corporate
boundaries that is located within a specified distance of the boundaries.

3An “impact fee,” sometimes referred to as a “capital recovery fee,” is a fee imposed upon new
development to pay for public facilities that new growth necessitates. See Hearings on H.B. 1011 Before
the House Comm. on Nat. Res., 70th Leg. (Apr. 8, 1987) (statement of Lyle Johansen, Executive
Director, Texas Ass'n of Builders) (copy available from House Committee Coordinator); Bray, Caudill, &
Owen, Once More, the Trilogy, In Retrospect. An Essay on the Virtues of Development Agreements in
Texas, 32 S. TEX. L. REV. 1, 13 (1991). Section 395.001(4) defines “impact fee” as

a charge or assessment imposed by a political subdivision against new
development . . . to generate revenue for funding or recouping the costs of capital
improvements or facility expansions necessitated by and attributable to the new
development. The term includes amortized charges, lump-sum charges, capital
recovery fees, contributions in aid of construction, and any other fee that
functions as described by this definition. The term does not include:

(A) dedication of land for public parks or payment in lieu of the dedication
to serve park needs;

(B) dedication of rights-of-way or easements or construction or dedication
streets, sidewalks, or curbs if the dedication or construction is required by a valid
ordinance and is necessitated by and attributable to the new development; or

(C) lot or acreage fees to be placed in trust funds for the purpose of
reimbursing developers for oversizing or constructing water or sewer mains or
lines.

contract, but if an impact fee is charged in that area, the municipality
must comply with this chapter.4 [Footnotes added.]
The legislature codified chapter 395 in 1989. See Acts 1989, 71st Leg., ch. 1,
§ 82(a). The legislature intended the codification to be nonsubstantive. See Acts 1989,
71st Leg., ch. 1, § 82(a); see also Acts 1989, 71st Leg., ch. 566, § 1(a). The legislature
enacted chapter 395’s predecessor, V.T.C.S. article 1269j-4.11, in 1987 as Senate Bill

336. See Acts 1987, 70th Leg., ch. 957, §§ 1-11; Bray, Caudill, & Owen, supra, at 12.

In 1987, during the second reading of Senate Bill 336 on the House floor,

Representative Millsap added to section 2 of the bill the sentence that is now codified as

section 395.011(c) of the Local Government Code—the subsection about which you

inquire. Debate on S.B. 336 on the Floor of the House, 70th Leg. (May 21, 1987)

(statement of Representative Millsap) (tape available from House Video/Audio Services).

Representative Millsap explained the addition simply as an amendment concerning a city’s

extraterritorial jurisdiction. Id. We found no other legislative history indicating the
legislature’s intent.

On its face, section 395.011(c) authorizes a municipality to contract to provide
capital improvements to an area outside its corporate boundaries and extraterritorial
jurisdiction and to charge an impact fee under the contract. See 13 E. McQUILLIN,
MUNICIPAL CORPORATIONS § 37.11, at 51 (3d ed. 1987) (stating that, in general,
municipal corporation lacks authority to provide improvements beyond its corporate limits
unless legislature has provided otherwise). Nothing in the statute limits a municipality to
contracting to provide capital improvements only to areas outside the corporate
boundaries of another municipality.5 Nor does the statute limit a “providing” municipality
to charging impact fees only in areas outside the corporate boundaries of the “receiving”
municipality.

Section 402.001(b) of the Local Government Code authorizes a municipality to
purchase or operate a utility system within its boundaries. See also Local Gov't Code
§ 43.056(a) (requiring municipality that proposes to annex area to provide, “by any of the

4The purpose of the Impact Fee Act, codified as chapter 395 of the Local Government Code, is to
create a uniform process by which a political subdivision may consider, adopt, and assess impact fees.
Bray, Caudill, & Owen, supra note 3, at 12. Consequently, chapter 395 is largely procedural, although it
also limits the kinds of capital improvements a political subdivision may fund with impact fees. Id.; see
Local Gov't Code §§ 395.012, .013.

5In the factual situation you present, we note that the City of San Antonio is negotiating with
representatives of other municipalities to provide wastewater services to those municipalities. We are
uncertain as to whether the city will provide wastewater services for the entire municipality or for an area
within the municipality. Because the suburban municipalities themselves are involved in the negotiations,
we need not consider whether a property owner whose land was inside the corporate boundaries of one
municipality may, on his or her own behalf, contract with another municipality to provide wastewater
services for his property.

methods by which it extends the services to any other area of the municipality,” for
extension of municipal services to annexed area). If a municipality chooses to provide
utility service to all or some of its citizens by contract with a providing municipality, we
believe that it may. Furthermore, if the receiving municipality chooses to pay for the
capital improvements that the providing municipality requires by permitting the providing
municipality to charge impact fees, we believe that the receiving municipality may. If a
providing municipality desires to charge an impact fee in the receiving area, it may do so
only if the contract with the receiving municipality complies with chapter 395 of the Local
Government Code. See Local Gov’t Code § 395.011(a). Furthermore, the providing
municipality may charge an impact fee only in accordance with chapter 395. See id.
§ 395.011(c).6

In short, we conclude that section 395.011(c) authorizes a municipality to contract
to provide capital improvements to an area inside the corporate boundaries of another
municipality. Additionally, section 395.011(c) authorizes the providing municipality to
charge an impact fee within the corporate boundaries of the receiving municipality, but
only if the parties have contracted accordingly and if the providing municipality complies
with chapter 395 of the Local Government Code. Cf. 13 E. MCQUILLIN, THE LAW OF
MUNICIPAL CORPORATIONS § 37.11, at 51 (3d ed. 1987) (stating general rule that one
municipality may not tax its own residents for improvement within limits of another
municipal corporation).

You next asked whether, under section 395.0455 of the Local Government Code,
A providing municipality that contracts to charge an impact fee to an area within the
jurisdiction of another municipality may include the area in the providing municipality’s
capital improvements plan. Section 395.0455(a), which pertains to “Systemwide Land
Use Assumptions,” provides in pertinent part as follows:

(a) In lieu of adopting land use assumptions7 for each service
area, a political subdivision may, except for storm water, drainage,
flood control, and roadway facilities, adopt systemwide land use
assumptions, which cover all of the area subject to the jurisdiction of
the political subdivision for the purpose of imposing impact fees
under this chapter. [Footnote and emphasis added.]

6A municipality also may contract with a providing municipality for wastewater services under
section 791.011 of the Interlocal Cooperation Act, Gov't Code ch. 791. Under such an interlocal
cooperation contract, however, the providing municipality may not charge an impact fee within the
corporate boundaries of the receiving municipality. See Local Gov't Code § 395.011(c).

7Section 395.001(5) of the Local Government Code provides that “[l]and use assumptions
includes a description of the service area and projections of changes in land uses, densities, intensities,
and population in the service area over at least a 10-year period.” See supra note 1 (defining “service
area”).

The legislature added section 395.0455(a) to chapter 395 of the Local Government
Code in 1989, following the codification. See Acts 1989, 71st Leg., ch. 566, § 1(b)
(House Bill 1786). House Bill 1786, which proposed adding section 395.0455 to the
Local Government Code, added to chapter 395 other sections, all of which the legislature
hoped would streamline the process a political subdivision must use to adopt impact fees.
See House Comm. on State Affairs, Bill Analysis, H.B. 1786, 71st Leg. (1989); Hearings
on H.B. 1786 Before the House Comm. on State Affairs, 71st Leg. (Apr. 25, 1989) (state-
ment of Representative Laney, author of bill) (tape available from House Video/Audio
Services); Hearings on H.B. 1786 Before the Senate Comm. on Intergovernmental
Relations, 71st Leg. (May 25, 1989) (statement of Senator Armbrister) (tape available
from Senate Staff Services). Senator Armbrister, who presented the bill to the Senate
Committee on Intergovernmental Relations, explained that the process adopted in 1987,
with the enactment of V.T.C.S. article 1269j-4.11, was a burdensome one for cities
because the statute required a city separately to adopt two plans, a land use assumption
plan and a capital improvements plan. Id.; see also Hearings on H.B. 1786 Before the
House Comm. on State Affairs, supra (statement of Frank Turner, Planning and
Transportation Director for City of Plano). Thus, the municipality was required to hold
two separate hearings and comply with statutory notice requirements for each hearing.
Hearings on H.B. 1786 Before the Senate Comm. on Intergovernmental Relations, supra
(statement of Senator Armbrister). To alleviate the problem, House Bill 1786 proposed,
among other things, allowing municipalities to use area-wide adoption plans for each
service area. Id.; see also id. (statement of Carl Shahady, representing Texas Municipal
League). The municipality therefore avoids having to adopt a land use assumption plan
for each individual service area. Id.

Initially, we note that, in your second question, you cited section 395.0455 of the
Local Government Code, which applies only to the adoption of systemwide land use
assumptions, although you asked about a capital improvements plan. While both are
necessary to the adoption of an impact fee, the two are distinct. A land use assumption
describes the service area and projects changes, e.g., changes in land uses, densities,
intensities, and population, that the municipality believes will occur in the service area
within the ensuing ten years. Local Gov't Code § 395.001(5). A capital improvements
plan, on the other hand, identifies capital improvements or facility expansions8 for which a
local government may assess impact fees. Id. § 395.001(2); see id. § 395.014 (prescribing
requirements for capital improvements plan).

Prior to the 1989 amendments to chapter 395, a political subdivision considered
and adopted the land use assumptions and capital improvements plans separately.
Furthermore, the political subdivision had considered the land use assumptions and capital

8Section 395.001(3) of the Local Government Code defines “facility expansion” as “the
expansion of the capacity of an existing facility that serves the same function as an otherwise necessary

new capital improvement, in order that the existing facility may serve new development. The term does
not include the repair, maintenance, modernization, or expansion of an existing facility to better serve
existing development.”

improvements on a service-area-by-service-area basis, rather than a systemwide basis.9
Since the 1989 amendments to chapter 395, a political subdivision, including a
municipality, may abbreviate the procedure described above in two ways: first, pursuant
to section 395.0515(a), the political subdivision may adopt the land use assumptions, the
capital improvements plan, and the impact fee simultaneously; and second, pursuant to
section 395.0455(a), the political subdivision may adopt systemwide land use assumptions,
which cover all of the area subject to the political subdivision’s jurisdiction for the purpose
of imposing impact fees instead of only the area within a single service area. But see id.
§ 395.0515(d) (prohibiting political subdivision from consolidating hearings on land use
assumptions and capital improvements plan if person timely requests, in writing, separate
hearings).

Section 395.0455 expressly authorizes a political subdivision, including a
municipality, to adopt land use assumptions that cover “all of the area subject to the
jurisdiction of the political subdivision for the purpose of imposing impact fees under
[chapter 395].” We believe that, in the context of section 395.0455, “all of the area
subject to the jurisdiction of the political subdivision” includes all of the area from which a
municipality collects impact fees pursuant to section 395.011. Under section 395.011, of
course, that area may be located within the corporate boundaries of another municipality.
Section 395.0455 pertains only to land use assumptions, however, it does not affect a
municipality’s jurisdiction to prepare a capital improvements plan covering the area within
the corporate boundaries of another municipality.

We note that, while section 395.001(2) of the Local Government Code defines
“capital improvements plan” without limiting the scope of a plan to a service area, other
sections of chapter 395 appear to do so. See id. § 395.014(a), (b); 395.049(c)(4);
395.0515(a). For purposes of chapter 395, a “service area” is “the area within the
corporate boundaries or extraterritorial jurisdiction . . . of the political subdivision” that
the capital improvements will serve. See id. § 395.001(9). Construing “service area” in
the various provisions of chapter 395 to limit a capital improvements plan only to the area

9Prior to the adoption and effective date of House Bill 1786, a political subdivision had to notice
and conduct a public hearing to consider land use assumptions within a “designated service area” that the
municipality then would use to develop a capital improvements plan. Id. § 395.042; see id. § 395.044
(containing notice requirements for hearing on land use assumptions). After the hearing on the land use
assumptions, the political subdivision had to vote on an ordinance, order, or resolution approving the land
use assumptions. Id. § 395.045.

Once the political subdivision had approved the land use assumptions, it could provide for the
development of a capital improvements plan. Id. § 395.046. Upon completion of the capital
improvements plan, the governing body of the political subdivision had to notice and conduct a public
hearing on the capital improvements plan and the imposition of an impact fee. Id. § 395.047; see id.
§ 395.049 (containing notice requirements for hearing on capital improvements plan and impact fee).
Within thirty days after the public hearing, the political subdivision must have voted to approve or
disapprove the adoption of the capital improvements plan and the imposition of the impact fee. Id.
§ 395.051.

within a municipality’s corporate boundaries and extraterritorial jurisdiction is, we believe,
problematic, given the legislature’s express statement in section 395.011(c) that a
municipality may contract to provide capital improvements outside those areas. 2B N.
SINGER, STATUTES AND STATUTORY CONSTRUCTION § 53.01, at 229-30 (5th ed. 1992)
(stating that courts must construe statutes harmoniously if such construction is
reasonable); 67 TEX. JUR. 3D Statutes § 133, at 740 (1989) (stating presumption that
legislature intended provisions relating to same subject to operate harmoniously).
Furthermore, a providing municipality will be unable to determine the true extent of
capital improvements and the true cost unless it may include in its calculations all of the
area for which it is authorized to provide such improvements. Accordingly, we construe
the definition of “service area” to include all of that area to which a municipality is
authorized to provide capital improvements, either because the area is within the
municipality’s corporate boundaries or extraterritorial jurisdiction or because the
municipality has contracted with another municipality to provide capital improvements to
that area.10

You predicated your third question upon a finding that chapter 395 provides no
mechanism by which a municipality may charge impact fees within another municipality.
Because we have concluded that a providing municipality may collect impact fees under a
contract with the other municipality or by the consent of the other municipality, we need
not answer the third question.

10As we stated above, see supra page 3, Representative Millsap proposed adding the statutory
predecessor to section 395.011(c) of the Local Government Code on the floor of the House during
second reading of Senate Bill 336. The definition of “service area,” which provided substantially as
does currently, had been added previously. See C.S.S.B. 336, Senate Comm. on Economic Development,
Acts 1987, 70th Leg.

SUMMARY

Section 395.011(c) of the Local Government Code authorizes a
municipality to contract with another municipality to provide capital
improvements to an area inside the corporate boundaries of the
second municipality. Section 395.011(c) authorizes the municipality
that wishes to provide the capital improvements to charge an impact
fee within the corporate boundaries of the municipality that wishes to
receive the capital improvements if the municipalities have contracted
accordingly and the providing municipality complies with chapter
395 of the Local Government Code.

Section 395.011(c), in conjunction with the definition of “capital
improvements plan” in section 395.001(2), authorizes a municipality
that contracts to provide capital improvements to an area outside its
corporate boundaries and extraterritorial jurisdiction to include the
area in the municipality’s capital improvements plan.

Yours very truly,

DAN MORALES
Attorney General of Texas

JORGE VEGA
First Assistant Attorney General

SARAH J. SHIRLEY
Chair, Opinion Committee

Prepared by Kymberly K. Oltrogge
Assistant Attorney General