Can a consolidated Texas municipal utility district charge different debt tax rates in different areas?

Plain-English summary

State Representative William A. Callegari, who chaired the House Committee on Government Efficiency and Reform, asked the Attorney General four questions about what happens to existing debt when two municipal utility districts (MUDs) consolidate. The setting was Harris County Municipal Utility Districts 364 and 365, which had discussed merging. One district was hesitant because the other's debt service obligations ran several years longer than its own, so the question was whether a consolidated district could charge different debt service tax rates on the property in each former district.

On the first question, the opinion explained that Water Code section 54.731(a) expressly protects the original districts' debts after consolidation and lets those debts be paid by taxes levied on the land in the original districts "as if they had not consolidated." The harder part was the Texas Constitution's requirement in article VIII, section 1(a) that taxation be "equal and uniform." The opinion walked through long-standing Texas case law holding that absolute equality is not required; equal and uniform taxation means people in the same class are taxed alike, and a tax classification is valid if it is not unreasonable, arbitrary, or capricious and operates equally within the class. The opinion concluded that, as a general matter, a court would likely find that tax classifications based on land ownership in the original districts do not violate article VIII, section 1(a). Because the request letter gave no detail on the proposed rates or how they would be set, the opinion could not determine whether this particular consolidation plan was constitutional.

On the second question, the opinion concluded that a consolidated MUD may levy yet a third, different debt service tax rate on property it later annexes that was never part of either original district. Chapter 49 of the Water Code governs annexation; when land is annexed by landowner petition, the district must require the petitioner to assume a share of the outstanding obligations and may tax the annexed property to pay that share. That rate, like the others, must not be unreasonable, arbitrary, or capricious, and the MUD sets it in the first instance.

On the third question, the opinion concluded that the consolidated MUD may levy a single district-wide debt service tax to fund debt the district itself issues after consolidation. Such ad valorem obligations need voter approval, and once approved, section 54.601 authorizes a continuing direct annual tax on all taxable property in the district. That district-wide tax can be imposed in addition to the section 54.731 taxes on the original districts' land for their pre-consolidation debts.

On the fourth question, whether the original districts' bond covenants required the consolidated district to levy a single rate on all its property, the opinion declined to answer. Resolving it would require construing the specific language of the bond covenants, and reviewing or construing specific contracts is outside the scope of an Attorney General opinion.

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later Attorney General 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.

What the opinion meant for those who asked

Consolidating MUDs and their boards (as the opinion held for them): The opinion told the districts that section 54.731(a) lets the pre-consolidation debts be paid by taxes on the original districts' land as if no merger occurred, and that a court would likely uphold different rates by original district as consistent with equal-and-uniform taxation, provided the classifications are reasonable and operate equally within each class.

On a particular consolidation plan (where the opinion stopped): The opinion did not bless any specific set of rates. It said that without details on the proposed rates and how they would be set, it could not determine whether the plan complied with article VIII, section 1(a). It described that as a determination left to be made on the facts.

On annexed land (as the opinion described it): The opinion read chapter 49 to let the consolidated district set a separate rate on later-annexed property based on that property's proportionate share of debt, with the district setting the rate in the first instance within the same reasonableness limits.

On new post-merger debt (as the opinion described it): The opinion read section 54.601 to authorize, after voter approval, one district-wide ad valorem tax on all property in the consolidated district to fund debt the district issues after consolidation, on top of the original-district taxes for old debt.

On the bond covenants (declined): The opinion declined to say whether the original districts' bond covenants forced a single district-wide rate, because answering would require construing specific contract language, which is outside the scope of an AG opinion.

Common questions

Can a merged municipal utility district keep charging the old districts' separate debt tax rates?
According to the opinion, yes. Water Code section 54.731(a) protects the original debts and lets them be paid by taxes on the original districts' land as if the districts had not consolidated.

Doesn't the "equal and uniform" tax rule forbid different rates within one district?
The opinion concluded it generally does not, as long as the rate classifications are not unreasonable, arbitrary, or capricious and everyone within a class is taxed the same. Texas courts have long held that equal and uniform taxation does not require absolute equality.

Will the Attorney General say whether our specific rate plan is legal?
No. The opinion said it could not determine whether the particular plan was constitutional without details on the rates and how they were set; that turns on the facts of each plan.

Can the merged district tax everyone at one rate for debt it issues after the merger?
Yes. The opinion concluded that after voter approval, section 54.601 lets the consolidated district levy one district-wide ad valorem tax on all its property for post-consolidation debt, in addition to the original-district taxes for pre-merger debt.

Do the old bond covenants require a single district-wide rate?
The opinion did not decide this. It declined because the answer depends on the specific language of the bond covenants, and construing specific contracts is outside what an AG opinion does.

Background and statutory framework

After two or more districts consolidate, the debts of the original districts are protected and may be paid by taxes levied on the land in the original districts as if they had not consolidated, or from contributions under the consolidation agreement. Tex. Water Code Ann. § 54.731(a) (West 2002); see also id. § 54.730. A statute is presumed constitutional, and the Legislature is presumed to intend compliance with the Texas and federal constitutions. Walker v. Gutierrez, 111 S.W.3d 56, 66 (Tex. 2003); Tex. Gov't Code Ann. § 311.021(1) (West 2005). Article VIII, section 1(a) of the Texas Constitution requires that taxation be equal and uniform, but Texas courts have long held that absolute equality is an unattainable ideal the constitution does not require, and that the mandate is satisfied when persons in the same class are taxed alike under classifications that are not unreasonable, arbitrary, or capricious. Briscoe Ranches, Inc. v. Eagle Pass Indep. Sch. Dist., 439 S.W.2d 118, 120 (Tex. Civ. App.-San Antonio 1969, writ ref'd n.r.e.); Norris v. City of Waco, 57 Tex. 635, 641, 1882 WL 9558, at *5 (Tex. 1882); Weatherly Indep. Sch. Dist. v. Hughes, 41 S.W.2d 445, 447 (Tex. Civ. App.-Amarillo 1931, no writ); Hurt v. Cooper, 110 S.W.2d 896, 900-01 (Tex. 1937); Tarrant Appraisal Dist. v. Colonial Country Club, 767 S.W.2d 230, 234 (Tex. App.-Fort Worth 1989, writ denied); Enron Corp. v. Spring Indep. Sch. Dist., 922 S.W.2d 931, 936 (Tex. 1996).

Chapter 49 of the Water Code governs annexation of land in general-law districts, including these MUDs. Tex. Water Code Ann. §§ 49.301-.302 (West 2008). When land is annexed by petition, the district must require the petitioner to assume a share of the outstanding obligations and may tax the annexed property to pay that share. Id. § 49.301(b). Ad valorem obligations issued by a consolidated MUD are subject to voter approval, and once approved, the district may levy a continuing direct annual ad valorem tax on all taxable property in the district. Id. §§ 54.505 (West Supp. 2010), 54.733 (West 2002), 49.301(b); id. § 54.601 (West 2002). The MUDs here were created by the Texas Natural Resource Conservation Commission (now the Texas Commission on Environmental Quality) under article XVI, section 59 of the Texas Constitution and are general-law districts subject to chapter 49. Id. § 49.001(a)(1) (West 2008); Tex. Const. art. XVI, § 59; Save Our Springs Alliance, Inc. v. Lazy Nine Mun. Util. Dist., 198 S.W.3d 300, 308 (Tex. App.-Texarkana 2006, pet. denied).

The opinion declined to construe the original districts' bond covenants, citing the rule that this office does not review or construe specific contracts.

Citations

Cases:

• Walker v. Gutierrez, 111 S.W.3d 56, 66 (Tex. 2003)
• Briscoe Ranches, Inc. v. Eagle Pass Indep. Sch. Dist., 439 S.W.2d 118, 120 (Tex. Civ. App.-San Antonio 1969, writ ref'd n.r.e.)
• Norris v. City of Waco, 57 Tex. 635, 641, 1882 WL 9558, at *5 (Tex. 1882)
• Weatherly Indep. Sch. Dist. v. Hughes, 41 S.W.2d 445, 447 (Tex. Civ. App.-Amarillo 1931, no writ)
• Hurt v. Cooper, 110 S.W.2d 896, 900-01 (Tex. 1937)
• Tarrant Appraisal Dist. v. Colonial Country Club, 767 S.W.2d 230, 234 (Tex. App.-Fort Worth 1989, writ denied)
• Enron Corp. v. Spring Indep. Sch. Dist., 922 S.W.2d 931, 936 (Tex. 1996)
• Save Our Springs Alliance, Inc. v. Lazy Nine Mun. Util. Dist., 198 S.W.3d 300, 308 (Tex. App.-Texarkana 2006, pet. denied)

Statutes:

• Tex. Water Code Ann. § 54.731(a) (West 2002)
• Tex. Water Code Ann. § 54.730
• Tex. Gov't Code Ann. § 311.021(1) (West 2005)
• Tex. Const. art. VIII, § 1(a)
• Tex. Water Code Ann. §§ 49.301-.302 (West 2008)
• Tex. Water Code Ann. § 49.301(b)
• Tex. Water Code Ann. § 54.505 (West Supp. 2010)
• Tex. Water Code Ann. § 54.733 (West 2002)
• Tex. Water Code Ann. § 54.601 (West 2002)
• Tex. Water Code Ann. § 49.001(a)(1) (West 2008)
• Tex. Const. art. XVI, § 59

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0883
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2011/ga0883.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

ATTORNEY GENERAL OF TEXAS
GREG ABBOTT

September 7, 2011

The Honorable William A. Callegari Opinion No. GA-0883
Chair, Committee on Government Efficiency
and Reform Re: Treatment of existing debt after consolidation
Texas House of Representatives of municipal utility districts pursuant to section
Post Office Box 2910 54.728 of the Water Code (RQ-0961-GA)
Austin, Texas 78768-2910

Dear Representative Callegari:

You ask four questions related to the consolidation of municipal utility districts ("MUDs") and the debt service tax rates that the consolidated district may charge.[1] You tell us that Harris County Municipal Districts 364 and 365 "have discussed the possibility of merging into a single, consolidated district." Request Letter at 1. You further explain that one of the districts is hesitant to do so because the other district's "debt service obligations extend several years beyond" its own. Id. at 2. You therefore ask about the authority of a consolidated district to levy different debt service tax rates on the property within the former boundaries of each district. Id. at 3-4.

You first ask whether "Article VIII, Section 1(a) of the Texas Constitution, which requires that taxation shall be equal and uniform, prohibits a Consolidated MUD from levying different debt service tax rates on the property within each of the former municipal utility districts that consolidated to form the Consolidated MUD for the purpose of funding debt service payment on each district's pre-consolidation debt." Id. at 3. Subsection 54.731(a) of the Water Code expressly authorizes the action about which you ask:

After two or more districts are consolidated, the debts of the original districts shall be protected and may not be impaired. These debts may be paid by taxes levied on the land in the original districts as if they had not consolidated or from contributions from the consolidated district on terms stated in the consolidation agreement.

TEX. WATER CODE ANN. § 54.731(a) (West 2002) (emphasis added); see also id. § 54.730 ("After two or more districts are consolidated, they become one district and are governed as one district, except for the payment of debts created before consolidation ...."). Your question therefore requires us to analyze the constitutionality of levying different debt service tax rates on the property within each of the former municipal utility districts. In doing so, we note at the outset that when reviewing a statute's constitutionality, we presume the act is constitutional. Walker v. Gutierrez, 111 S.W.3d 56, 66 (Tex. 2003); see also TEX. GOV'T CODE ANN. § 311.021(1) (West 2005) (presuming that the Legislature, in enacting a statute, intended to comply with Texas and federal constitutions).

As your request letter indicates, different tax rates within a single utility district could raise constitutional concerns. Request Letter at 3. Article VIII, section 1(a) of the Texas Constitution requires that "[t]axation shall be equal and uniform." TEX. CONST. art. VIII, § 1(a). However, Texas courts have long recognized that absolute equality and uniformity in taxation is an unattainable ideal and not required by the constitution. Briscoe Ranches, Inc. v. Eagle Pass Indep. Sch. Dist., 439 S.W.2d 118, 120 (Tex. Civ. App.-San Antonio 1969, writ ref'd n.r.e.). Instead, Texas courts have consistently held that

[t]axes are said, within the meaning of the constitution, to be "equal and uniform," when no person nor class of persons in the taxing district, whether a state, county, or other municipal corporation, is taxed at a different rate than are other persons in the same district upon the same value or the same thing, and where the objects of taxation are the same by whomsoever owned, or whatever they be.

Norris v. City of Waco, 57 Tex. 635, 641, 1882 WL 9558, at *5 (Tex. 1882); Weatherly Indep. Sch. Dist. v. Hughes, 41 S.W.2d 445, 447 (Tex. Civ. App.-Amarillo 1931, no writ). The constitutional mandate of equal and uniform taxation requires only that all persons falling within the same class must be taxed alike. Hurt v. Cooper, 110 S.W.2d 896, 900-01 (Tex. 1937). Thus, article VIII, section 1(a) is satisfied when a tax classification is not unreasonable, arbitrary, or capricious and when it operates equally on persons or property within the class. Tarrant Appraisal Dist. v. Colonial Country Club, 767 S.W.2d 230, 234 (Tex. App.-Fort Worth 1989, writ denied); see also Enron Corp. v. Spring Indep. Sch. Dist., 922 S.W.2d 931, 936 (Tex. 1996) (explaining that the Legislature may constitutionally draw distinctions in the manner in which market value of property is determined for ad valorem tax purposes).

In your request letter, you do not provide us with details about the proposed tax rates for the original districts or how those rates would be set, so we cannot determine whether your particular consolidation plan comports with article VIII, section 1(a) of the Texas Constitution. However, as a general matter, so long as the different rates charged to the classifications are not unreasonable, arbitrary, or capricious and individuals within those classifications are treated equally, a court would likely conclude that tax classifications based on land ownership in the original districts of a consolidated MUD do not violate article VIII, section 1(a) of the Texas Constitution. See Tex. Att'y Gen. Op. No. GA-0653 (2008) at 5 (concluding that it would not violate article VIII, section 1(a) for a regional transportation authority to collect a sales and use tax at different rates in different subregions of the authority, all other constitutional requirements being met).

Assuming an affirmative answer to your first question, your second question is whether a consolidated MUD may levy a third different debt service tax rate on property the consolidated MUD annexes that was never part of either original district. Further, you ask how the debt service tax rate should be set for the newly annexed property. Request Letter at 3-4. Chapter 49 of the Water Code governs the annexation of land in general law districts, including the municipal utility districts that you ask about.[2] See TEX. WATER CODE ANN. §§ 49.301-.302 (West 2008). When land is annexed by petition of landowners, a district "shall require the petitioner or petitioners to assume their share of the outstanding bonds, notes, or other obligations" of the district. Id. § 49.301(b). The district is authorized "to levy a tax on [the petitioner's annexed] property in each year while any of the bonds, notes, or other obligations payable in whole or in part from taxation are outstanding to pay their share of the indebtedness." Id. Section 49.301 thereby permits a MUD to levy a different debt service tax rate on property annexed that was not part of the original district based on the annexed property's proportionate share of debt. Id. As with the different rates charged to the original districts, the different rates charged to annexed property must not be unreasonable, arbitrary, or capricious and individuals within those classifications must be treated equally. It is up to the MUD, in the first instance, to comply with the statutory directives to determine the debt service rate to levy on annexed property.

Your third question is whether a consolidated MUD can "legally levy a district-wide debt service tax rate for the purpose of funding debt service obligations on debt issued by the Consolidated MUD after consolidation." Request Letter at 4. Any ad valorem tax obligations issued by a consolidated MUD are subject to voter approval. See TEX. WATER CODE ANN. §§ 54.505 (West Supp. 2010), 54.733 (West 2002), 49.301(b) (West 2008). Once affected voters have given the requisite approval, section 54.601 of the Water Code authorizes a district to, "[a]t the time bonds payable in whole or in part from taxes are issued, ... levy a continuing direct annual ad valorem tax ... on all taxable property within the district." TEX. WATER CODE ANN. § 54.601 (West 2002). Thus, the Legislature has authorized the consolidated MUD to levy a tax on all property within the district to fund debt service obligations on debt issued after the district is consolidated. This debt service tax can be imposed in addition to any taxes levied under Water Code section 54.731 on the land in the original districts for the payment of debts created before consolidation. See id. § 54.731.

In your final question, you ask whether the original districts' bond covenants, which required the preexisting MUDs to levy a debt service tax upon all taxable property within the district, also require the consolidated MUD "to levy a single debt service tax rate on all taxable property within its boundaries." Request Letter at 4. Definitively answering your question will require analyzing the specific language of the bond covenants because the answer would depend upon the specific promises the original MUDs made to the bondholders. Because reviewing or construing specific contracts is outside the scope of an attorney general opinion, we cannot answer your final question. See Tex. Att'y Gen. Op. No. GA-0828 (2010) at 3 n.3 (explaining that this office does not review or construe specific contracts).

SUMMARY

A court could conclude that tax classifications based on land ownership in the original districts of a consolidated municipal utility district would not violate article VIII, section 1(a) of the Texas Constitution. In doing so, the court would have to first find that the divergent tax rates are not unreasonable, arbitrary, or capricious and additionally find that individuals within those classifications are treated equally.

A consolidated municipal utility district may levy a different debt service tax rate on annexed property that was not part of the original district.

Under Water Code section 54.601, the Legislature has authorized a consolidated municipal utility district to levy one tax rate on all property within the district to fund debt service obligations on debt issued after district consolidation.

Very truly yours,

GREG ABBOTT
Attorney General of Texas

DANIEL T. HODGE
First Assistant Attorney General

DAVID J. SCHENCK
Deputy Attorney General for Legal Counsel

JASON BOATRIGHT
Chair, Opinion Committee

Virginia K. Hoelscher
Assistant Attorney General, Opinion Committee

[1] Letter from Honorable William A. Callegari, Chair, House Committee on Government Efficiency and Reform, to Honorable Greg Abbott, Attorney General of Texas at 3-4 (Apr. 15, 2011), https://www.oag.state.tx.us/opin/index_rq.shtml ("Request Letter").

[2] You explain in your request letter that Harris County Municipal Districts Nos. 364 and 365 were each created by orders of the Texas Natural Resource Conservation Commission, now known as the Texas Commission on Environmental Quality ("TCEQ"), pursuant to article XVI, section 59 of the Texas Constitution. Request Letter at 1. Municipal utility districts created by TCEQ are general law districts, subject to chapter 49 of the Water Code. See TEX. WATER CODE ANN. § 49.001(a)(1) (West 2008); Save Our Springs Alliance, Inc. v. Lazy Nine Mun. Util. Dist., 198 S.W.3d 300, 308 (Tex. App.-Texarkana 2006, pet. denied) (explaining that municipal utility districts created by TCEQ are general law districts).