Untitled Texas Attorney General Opinion ( 2011 )

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.
[d. 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. !d. at 3-4.
You first ask whether "Article vrn, Section l(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." [d. 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,
lLetterfrom 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:llwww.oag.state.tx.us/opin
lindex_rq.shtml ("Request Letter").
The Honorable William A. Callegari - Page 2 (GA-0883)
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. Walkerv. 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 VllJ, section l(a) of the Texas Constitution
requires that "[tlaxation shall be equal and uniform." TEx. CONST. art. vm, § 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.Le.). Instead, Texas courts have
consistently held that
[tlaxes 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.2d445, 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 vm,
section l(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 vm, section 1(a) ofthe 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 vm, 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 vm, 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).
The Honorable William A. Callegari - Page 3 (GA-0883)
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. [d. § 49.301(b). The district
is authorized "to levy a tax on [the petitioner's annexed] property in each year while any of the
b()nds, notes, or other obligations payable in whole or in part from taxation are outstanding to pay
their share of the indebtedness." [d. 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. [d. 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
2you 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, npw 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.
WAlER 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).
The Honorable William A. Callegari - Page 4 (GA-0883)
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).
The Honorable William A. Callegari - Page 5 (GA-0883)
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 I (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,
~Z-€jy'~'
. GREG MBOTT
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