This week, the city agreed to charge businesses and religious organizations equally, and the churches agreed to drop their lawsuit.
The Magnolia City Council discussed the case in closed session on Tuesday and decided to reach an agreement with Magnolia Bible Church, Magnolia’s First Baptist Church, and Believers Fellowship.
The churches had been fighting the city’s utility rate structure for nearly three years. According to the city’s court briefs, the system carves out a new category for tax-exempt organizations and charges them at a higher rate than commercial entities in city limits. Non-profits and religious groups like churches, even if they are inside city limits, pay a rate equal to businesses outside city limits.
The new system also put a dent in the Magnolia Independent School District’s budget when it was implemented, reportedly hiking the district’s annual water costs from $180,000 to $720,000.
City officials said the system was meant to help tax-exempt organizations share the burden.
“The solution [that was] developed [involved] the creation of the [institutional] customer class for the utility customers who do not pay taxes to the city and who have atypical usage patterns compared to the other customers to offset their portion of the debt service payment,” the city administrator told a Texas legislative committee in 2019.
At the time, the Texas Senate Committee on Water and Rural Affairs was considering a bill that would have required cities to charge non-profits and businesses at the same rate for utilities. The bill passed the Senate but never moved in the House.
While the unequal system attracted attention in the legislature, the courts were more concerned with procedural matters. At the heart of the case was a dispute about how the churches were notified of the new rate system before it was implemented.
After approving the utility rate system in March of 2018, the city then sought a judgment from a court that the new system was valid without personally notifying affected parties like the churches. Instead, the city published announcements of the court proceedings in two newspapers. The district court ruled that the rate system was valid.
The three churches sued the city and were granted a new trial by the district court, a decision that an appellate court upheld. If allowed to continue, the case could have continued to explore a previously unnoticed conflict between two different realms of the law.
The Expedited Declaratory Judgment Act (EDJA) lets cities seek validation from courts for their bond projects. The city argued that this law should have prevented the district court from granting a new trial for the churches.
On the other hand, the churches argued more successfully that the Texas Rules of Civil Procedure allow a defendant to seek a new trial up to two years after a final judgment, even a judgment authorized by the EDJA.
Texas courts had previously not addressed a potential fault line between these two areas of the law. The decision to let a new trial continue at district court split the appellate court 2 to 1.
The churches have agreed to dismiss their lawsuit no more than five days after final judgment by the district court.
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