Attorney General Ken Paxton and three churches are challenging the City of Magnolia for a water rate change in 2018 that placed the fees for tax-exempt institutions in the city at a higher rate than commercial institutions.
When the city restructured the rates for water fees, they established a new category for “Institutional/Non-Profit/Tax-Exempt” organizations in addition to the other categories of “Residential,” “Commercial In-City,” and “Commercial Out-of-City.”
According to a brief from the city, the rates under the new category would be equal to the rates for commercial businesses outside of city limits, including “a 50-percent surcharge on the in-city rate, the Major-Maintenance fee, and the Depreciation fee.”
Magnolia’s brief argues that one of the churches would not be affected by the category, since they are already outside of city limits. For the other two churches, they indicate rates have been 10.9 percent and 45.5 percent higher than if they had been charged at the commercial rate.
Magnolia Independent School District (ISD) has also been affected by the rate change, reportedly seeing annual costs go from $180,000 to $720,000.
Concerned about opposition to the rate change from the affected organizations, including the churches and Magnolia ISD, the city sought court approval in November 2018 to avoid litigation for the rate changes.
The city published notices of the court request in The Austin-American Statesman and The Houston Chronicle, but because they did not notify any of the churches directly, the request went unnoticed.
Meanwhile, in early 2019, the churches began seeking legislative relief during the legislative session.
State Sen. Brandon Creighton (R-Conroe) introduced legislation, SB 2322, which would prohibit discriminatory utility rates that charge non-profit organizations at a higher rate than other organizations or businesses.
“The city makes its debt service payments largely from an ad valorem tax,” said Paul Mendes, the Magnolia city administrator, during the bill’s hearing. “Thus the citizens and the businesses pay a disproportionate share of the cost of the utility system that is enjoyed essentially by both taxpayers and non-taxpayers alike.”
Mendes said that the new utility rate system was to make sure that the tax costs were “more fairly apportioned among all customers.”
“I’m pleased to see that Mr. Mendes has clarified that [City Council] did in fact pass these higher discriminatory rates specifically on churches, schools and nonprofits to offset the sales tax and property tax exemption,” said Texas Pastor Council President David Welch during the hearing.
Welch, who was representing the churches at the hearing, noted that they supported sharing the costs of the growing community, but requested that the city charge “churches, schools, and nonprofits the same that they do everybody else.”
While the bill passed the Senate, it was never voted on by the House.
When the churches then sought relief through the courts, they discovered that Magnolia’s earlier actions with the courts prevented them from challenging the new rate structure.
Since they had not been given direct notice about the city’s efforts to obtain an adjudication on the legality of its new rate structure, the churches filed a motion for a new trial, which the district court granted.
Magnolia has appealed the decision for a new trial, which is now ongoing with the Third Court of Appeals.
Attorney General Ken Paxton has joined the three churches — Magnolia Bible Church, Magnolia First Baptist Church, and Believers Fellowship — in defense of the district court’s decision to open a new trial.
While Magnolia’s brief contends that there was “no constitutional deprivation of due process” since the city complied with the requirement to publish notice in the paper, Paxton’s office argued that the lack of direct notice to the churches “shows a troubling lack of candor on the part of the City.”
“Notice by publication…generally suffices,” reads the attorney general’s brief. “But it is the bare minimum required. If an issuer knows of likely claimants, it can (and often does) provide additional notice, beyond the minimum publication notice required.”
First Liberty Institute, a non-profit legal organization dedicated to religious liberty issues, has also supported the churches and defended them in an appellate hearing on Wednesday.
“There was no question that Magnolia’s city leaders knew these churches wanted to challenge the city’s water fee scheme,” said Jeremy Dys, special counsel at First Liberty Institute.
“The churches attended multiple public hearings, sent letters, sought a legislative fix, and even provided written notice that they were going to sue. And, still, city leaders denied these churches a fair opportunity to challenge the water fee scheme by seeking approval from a court several hours away.”
Daniel Friend is a reporter for The Texan. While recently finishing his degree in Political Science from Azusa Pacific University, he also interned in the U.S. Senate and co-authored a book on C. S. Lewis’s science fiction trilogy. In his spare time, he might be reading up on Dostoevsky or attempting to write a novel.