Nonprofits, churches and schools in the city of Magnolia said they are grappling with higher water bills via a new utility structure the city rolled out in April that charges them higher rates than local businesses.

Magnolia City Council members unanimously voted this spring to implement higher water rates, revise the rate structure and add an institutional user category, which applies to tax-exempt, nonprofit or government entities.

With the rate adjustment, church leaders said they have seen water bills increase as much as 300 percent. Now, the city may face legal action from local water users.

Institutional leaders do not object to the rate hike but rather to the creation of an institutional category charged higher rates than commercial entities, said Dave Welch, president of the Texas Pastor Council—a group encouraging engagement in social and cultural issues that is representing churches in the city of Magnolia.

Previously, institutions were charged the same rates as businesses.

“Nobody argued with being charged commercial rates. None of the churches asked for discounts. They’re just saying, ‘Treat us like everybody else,’” Welch said.

Welch said the group may look to litigation in the coming weeks if city officials do not move to amend the rates.

“We are going back over the numbers and all the systems to make sure what we did was accurate and correct and so forth. We’ve got the engineers looking at it,” City Administrator Paul Mendes said. “We’ve been threatened with lawsuits.”

Implementing new water rates

City Council members began discussing revising the city’s water and wastewater rates last fall, beginning with a water and sewer rate analysis conducted in fiscal year 2016-17 by engineering firm Jones & Carter. Rates increased for commercial, institutional, and multifamily users as well as for irrigation systems in April, but new single-family rates are not expected to be implemented until later this fall, Mendes said. It is unclear how residential rates will be adjusted.

Mendes previously said rates had to increase to keep up with the rising costs of providing water and wastewater, as this spring’s increase was the first rate hike since 2005. Water expenses increased nearly 246 percent from FY 2004-05 to FY 2017-18, Community Impact Newspaper previously reported.

The new water rate structure includes a base rate determined by the category of the user and a fee structure tiered according to the number of gallons used each month. Wastewater usage is tied to the number of gallons of water used.

With the new rates, the city anticipates collecting more water and wastewater revenue in the upcoming fiscal year, which begins Oct. 1.

The city’s revenue projections for water services—excluding new maintenance and depreciation fees—jump from $990,000 in FY 2017-18 to $1.4 million in FY 2018-19. Wastewater revenue is also slated to increase from $440,000 budgeted in FY 2017-18 to $705,723 in FY 2018-19, according to the Aug. 16 proposed budget. Maintenance and depreciation fees are slated to total $37,800 in FY 2018-19 as well.

As the city anticipates more revenue from water services, some customers have also seen water bills increase

Previously grouped with commercial accounts, institutional users’ monthly water bill for 20,000 gallons of water and wastewater are an estimated 2.5 times higher than that of a commercial user—excluding some fees, according to the city’s tiered fee schedule. However, the increase is less—about 1.5 times higher—for institutions who use 10,000 gallons per month.

“It’s just an attempt to be fair,” Mendes said. “It’s not an attempt to punish or take advantage of churches or anyone else.”

According to a January 2018 report from Jones & Carter, the median annual average usage of institutions was 10,000 gallons per month in 2017.

Community Impact Newspaper reported in December that Mendes said implementing an institutional rate would allow the city to collect funds from these entities in place of taxes or other fees, as these entities do not pay new user fees or property taxes that help fund the maintenance and operations of infrastructure.

However, Mendes said in August the new rate structure was implemented to take the burden off residents. Large water users, such as churches and schools, receive water from the city but service a number of people residing outside Magnolia.

“[The voters are a] very small number. It’s 1,800 [people], but when you talk about the churches, the schools, the institutions—they service a very large area,” he said. “I didn’t say that we were after [institutions] because they didn’t pay taxes. … When you look at all the expenses just to operate the system, we are just trying to be fair across the board.”

Institutions look for relief

Under the new rate structure, churches, nonprofits and Magnolia ISD have seen water bills increase significantly over the last few months, local leaders said.

MISD Assistant Superintendent of Operations Erich Morris said the district anticipates its water expenses increasing hundreds of thousands of dollars this year.

“At this point, we’re continuing to work with the city with hopes that maybe there’s some sort of remedy to limit those effects on us,” Morris said. “It most definitely has our attention.”

Steve Burrell, senior pastor of Magnolia Bible Church, said the church’s monthly water bill increased about 300 percent in recent months.

“The water rates aren’t going to devastate us,” he said. “From a philosophical perspective, we understand that the city has to pay for its water. I know of no church that has an issue or problem with that idea. The problem is specifically targeting churches with higher fees and utility costs with the specific intent of eliminating the property tax exemption.”

Shirley Jensen, president of the board of directors for Society of Samaritans, said the nonprofit also saw a significant increase in its water bill, but SOS has not been substantially affected by the rate change, as council provided some relief for small institutions this summer.

The base rate for institutions using 5,000 gallons of water or less each month was reduced from $120 to $52.50 at the Aug. 14 Magnolia City Council meeting.

“We had to adjust for the little ones, and again [we are] trying to be fair,” Mendes said.

By paying a different water rate, institutions feel singled out by the city, said Sandy Barton, president of the Greater Magnolia Parkway Chamber of Commerce whose membership includes a number of nonprofits.

"Businesses are getting hit; they have less to give to our nonprofits, and our nonprofits were hit even higher than our businesses,” she said. “It’s kind of a difficult spiral for many of our businesses and nonprofits in our community.”

Despite some relief given, Welch said the issue is a matter of principle, not of cost. Welch said he believes the city’s move to group tax-exempt entities into a separate user category is discriminatory and amounts to taxation without representation, as patrons of these entities reside outside city limits and cannot vote in city elections.

"You can call it a fee, but it’s nothing but a tax,” Welch said.

State Rep. Cecil Bell Jr., R-Magnolia, said any attempt to—under the guise of a utility fee—tax those entities exempted from property taxes is unconstitutional.

“Cities and other entities with ratemaking authority do not have the ability to charge a fee intended to collect the value of ad valorem taxes from entities exempted from ad valorem taxes,” Bell said.

Seeking a solution

Welch said city officials have not given an explanation for why an institutional category was created.

“These are probably questions more designed for the engineer. I don’t think any one of us up here [on City Council] is a water professional or a rate expert. I’m not sure that anyone is prepared to answer your question about necessarily where the rate came from,” Mayor Todd Kana said to Welch at an Aug. 14 council meeting.

Council Member Matthew Dantzer declined to comment due to the possible litigation.

Welch said he believes there are three solutions to resolving the issue: Magnolia City Council members revising the rate structure, litigation challenging the city’s actions or advocating for more control of municipal systems during the 2019 Legislative session.

“This isn’t something that our churches or any of us are looking at from a standpoint of aggression; it’s simply a matter of principle,” he said. “We want to move forward on this amicably if we can and find a way to resolve this to where we can put the churches and nonprofits on a level playing field with everybody else.”

According to the Public Utility Commission, the state does not regulate municipal utilities like water rates because city council members chosen by voters are the regulatory authority, PUC Communications Director Andrew Barlow said.

“Customers of municipal water utilities are subject to the decisions of their local government authorities, and so any concerns or complaints they have with them need to be taken up with those authorities,” he said.

If institutions continue to be charged a separate rate, Welch said he believes the city of Magnolia is setting a precedent for municipalities looking to increase revenue.

“We can’t allow this to take place here in Magnolia,” Welch said. “Otherwise, there’s nothing stopping it from happening in 1,900 other cities in Texas.”