Can one Texas water district contract away its budget and operating powers to another district?

Plain-English summary

When one government body signs over too much of its decision-making to another, the law gets nervous. The Chair of the Texas Senate Finance Committee asked the AG about exactly that situation between two neighboring water districts in Denton County. The original district had split into District 1-A and District 1-B, and their operating agreement gave District 1-A a lot of control over District 1-B: preparing District 1-B's facilities budget (with District 1-B's approval needed only if actual costs overran estimates by 12 percent), issuing building permits in District 1-B's territory, contracting for police and emergency services, and restricting how District 1-B could transfer unused capacity. The question was whether those terms cross the line into an illegal surrender of a government's own powers.

The AG would not rule on the specific contract, because construing particular agreements is outside the scope of an AG opinion. What it provided was the legal frame. Texas courts have long held, going back to the 1887 Brenham case and the 1977 Clear Lake City Water Authority decision, that a political subdivision cannot bind itself in a way that restricts the free exercise of its governmental powers or abdicates its governmental functions, even for a reasonable time. That "reserved powers" principle has been applied not just to deals with private companies but also to one government handing power to another.

But the same cases say the real test is what the Legislature has authorized. If the Legislature expressly allows a contract, it is generally valid. Here, two statutes are on point: the Interlocal Cooperation Act, which encourages local governments to contract with each other to provide functions each could perform on its own (and specifically allows contracting for the operation of water and wastewater facilities), and section 49.213 of the Water Code, which lets a district enter contracts, even of unlimited duration, for the operation of its facilities and the exercise of its powers. The limit is section 49.067, under which a district board cannot abrogate its fiscal responsibility. So the AG concluded that one water district may contract for another to perform its rights, powers, and duties, but only as far as the Interlocal Cooperation Act, section 49.213, or other law allows, and only if it does not give away the first district's fiscal responsibility.

Currency note

This opinion was issued in 2016. Subsequent statutory amendments, court decisions, or later AG 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. The Interlocal Cooperation Act and chapter 49 of the Water Code may have been amended since 2016, so confirm the current statutes before relying on these specifics.

What the opinion meant for those who asked

Senator Nelson and the Legislature (as the opinion described it): The opinion answered in general legal terms and declined to construe the specific Denton County operating agreement, explaining that reviewing particular contracts is outside the scope of an AG opinion.

Water districts considering operating agreements (as the opinion described it): The opinion described a district as able to contract for another district to perform its rights, powers, and duties only to the extent authorized by the Interlocal Cooperation Act, section 49.213 of the Water Code, or other state law, and not in a way that abrogates its fiscal responsibilities under section 49.067.

District boards (as the opinion described it): The opinion described the reserved-powers principle as barring a political subdivision from binding itself to restrict the free exercise of its governmental powers or abdicating its governmental functions, while noting the ultimate question is what the Legislature has authorized.

Common questions

Can a Texas water district let another district run its operations?
The AG concluded a district may contract for another to perform its rights, powers, and duties, but only to the extent the Interlocal Cooperation Act, section 49.213 of the Water Code, or other state law authorizes it.

Is there a limit even when a contract is allowed?
Yes. The AG explained the contract cannot abrogate the first district's fiscal responsibilities under section 49.067 of the Water Code, and a district cannot abdicate its governmental functions.

What is the "reserved powers" idea the opinion relies on?
The AG described the rule from Clear Lake City Water Authority and earlier cases that a political subdivision cannot bind itself to restrict the free exercise of its governmental powers or abdicate its governmental functions, even for a reasonable time.

Did the AG decide whether the Denton County agreement was legal?
No. The AG said construing specific contracts is outside the scope of an AG opinion and addressed only the general legal principles.

Does it matter that both parties are governments, not private companies?
The AG noted the principle has been applied not only to delegations to private entities but also to a delegation of power by one political subdivision to another.

Background and statutory framework

Texas courts hold that a political subdivision cannot, by contract, restrict the free exercise of its governmental powers or abdicate its governmental functions, even for a reasonable time (Clear Lake City Water Authority v. Clear Lake Utilities Co., 549 S.W.2d 385; Banker v. Jefferson Cty. Water Control & Improvement Dist. No. 1, 277 S.W.2d 130; City of Arlington v. City of Fort Worth, 844 S.W.2d 875; City of Farmers Branch v. City of Addison, 694 S.W.2d 94). The decisive question, however, is what the Legislature has authorized (City of Brenham v. Brenham Water Co., 4 S.W. 143).

The Interlocal Cooperation Act encourages local governments to contract with one another and specifically authorizes contracting to obtain or provide water supply or wastewater treatment facilities, or their operation (Tex. Gov't Code §§ 791.001, 791.011, 791.026). The Water Code lets a district contract, even for unlimited duration, for the operation of its facilities and the exercise of its powers, while barring a board from abrogating its fiscal responsibility (Tex. Water Code §§ 49.213, 49.067). Districts organized under article XVI, section 59 of the Texas Constitution have the powers conferred by law (Tex. Const. art. XVI, § 59; Tex. Const. art. III, § 52). Because no court had mapped the precise limits of one district's delegation under section 49.213, the AG advised only that such a contract is valid to the extent authorized by statute and not abrogating fiscal responsibility, noting related case law (Kirby Lake Dev., Ltd. v. Clear Lake City Water Auth., 320 S.W.3d 829; Clear Lake City Water Auth. v. Kirby Lake Dev., Ltd., 123 S.W.3d 735).

Citations

Constitutional and statutory provisions:

• Tex. Const. art. XVI, § 59 (powers of conservation and reclamation districts conferred by law)
• Tex. Const. art. III, § 52 (related limitation on political subdivisions)
• Tex. Gov't Code § 791.001 (Interlocal Cooperation Act policy)
• Tex. Gov't Code § 791.011 (authority to contract for a function each party may perform)
• Tex. Gov't Code § 791.026 (contracts for water supply / wastewater facilities; prevails over other-law limits)
• Tex. Water Code § 49.213 (district contracts, including unlimited-duration operating contracts)
• Tex. Water Code § 49.067 (professional-services contracts; board cannot abrogate fiscal responsibility)

Cases:

• Clear Lake City Water Authority v. Clear Lake Utilities Co., 549 S.W.2d 385, 391 (Tex. 1977)
• Banker v. Jefferson Cty. Water Control & Improvement Dist. No. 1, 277 S.W.2d 130, 134 (Tex. Civ. App.-Beaumont 1955, writ ref'd n.r.e.)
• City of Arlington v. City of Fort Worth, 844 S.W.2d 875, 878 (Tex. App.-Fort Worth 1992, writ denied)
• City of Farmers Branch v. City of Addison, 694 S.W.2d 94, 96 (Tex. App.-Dallas 1985, writ ref'd n.r.e.)
• City of Brenham v. Brenham Water Co., 4 S.W. 143, 149 (Tex. 1887)
• Kirby Lake Dev., Ltd. v. Clear Lake City Water Auth., 320 S.W.3d 829, 843 (Tex. 2010)
• Clear Lake City Water Auth. v. Kirby Lake Dev., Ltd., 123 S.W.3d 735, 751 (Tex. App.-Houston [14th Dist.] 2003, pet. denied)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0063
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2016/kp0063.pdf

Original opinion text

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

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

February 3, 2016

The Honorable Jane Nelson Opinion No. KP-0063
Chair, Committee on Finance
Texas State Senate Re: Whether a water supply district may
Post Office Box 12068 assign to another district certain duties and
Austin, Texas 78711-2068 rights, including approval of the annual
budget and contracting for certain services
(RQ-0045-KP)

Dear Senator Nelson:

You ask whether a water supply district may assign to another district certain duties and rights under an operating agreement, including approval of aspects of the annual budget and contracting for certain services. [1] Your questions concern an agreement between Denton County Fresh Water Supply District No. 1-A ("District 1-A") and Denton County Fresh Water Supply District No. 1-B ("District 1-B"). Request Letter at 1.

You inform us that the original district that became District 1-A and District 1-B was approved by the voters as a fresh water supply district in 1983 and subsequently converted into a water control and improvement district subject to chapters 49 and 51 of the Water Code. Id. You state that the original district was divided by election in 1995 into the present District 1-A and District 1-B. Id. You further state that the districts provide water and sewer services pursuant to agreements with the Upper Trinity River Authority and the City of Lewisville (the "City"). Id. In connection with these services, you inform us, the districts entered into an operating agreement "to provide for the orderly operation and maintenance of the water and sewer facilities within the Districts" and which assigns District 1-A operational responsibility. Id. at 1-2. You state that the operating agreement "and this operational responsibility has led to continuing disputes between the Districts." Id. at 2.

Your overriding concern is whether certain terms in the operating agreement impermissibly contract away certain of District 1-B's legislative functions. Id. First, you state that the operating agreement authorizes District 1-A to prepare a facilities budget for District 1-B's review, but that District 1-A need not obtain District 1-B's approval unless actual expenses incurred on behalf of District 1-B exceed estimated expenses by 12 percent. Id. Second, you state that the operating agreement authorizes District 1-A to issue building permits in District 1-B's territory. See id. at 3. Third, you state that the operating agreement requires District 1-A to contract with the City for police and emergency services and makes District 1-B responsible for its share of these costs. Id. Finally, you state that the operating agreement provides that District 1-B will not transfer, assign, or convey any of the unutilized capacity that has been financed by District 1-B to any party other than District 1-A or an entity approved by it. Id. You ask whether these specific terms in the operating agreement constitute an impermissible abdication of governmental powers as exemplified by the holding in Clear Lake City Water Authority v. Clear Lake Utilities Co., 549 S.W.2d 385 (Tex. 1977). Because "reviewing or construing specific contracts is outside the scope of an attorney general opinion," we cannot definitively answer your question with respect to these specific terms. Tex. Att'y Gen. Op. No. GA-0883 (2011) at 4. We therefore address legal principles applicable to your question in general terms.

In Clear Lake City Water Authority, the Texas Supreme Court stated that, pursuant to principles applicable to political subdivisions, a water "[a]uthority could not, by contract or otherwise, bind itself in such a way as to restrict [the] free exercise of [its] governmental powers, nor could it abdicate its governmental functions, even for a 'reasonable time.'" Clear Lake City Water Auth., 549 S.W.2d at 391 (concluding that a water supply contract for an indefinite term violated this principle); see also Banker v. Jefferson Cty. Water Control & Improvement Dist. No. 1, 277 S.W.2d 130, 134 (Tex. Civ. App.-Beaumont 1955, writ ref'd n.r.e.) (holding that the district could not bargain away its governmental power to sell its surplus water). Although the Clear Lake principle has often been applied to preclude a political subdivision from delegating governmental powers to a private entity, it has also been used to invalidate a delegation of power by one political subdivision to another. See City of Arlington v. City of Fort Worth, 844 S.W.2d 875, 878 (Tex. App.-Fort Worth 1992, writ denied) (holding that a city's "agreement to provide sewer service for an indefinite period of time bargains away a city's governmental responsibilities and abdicates its police power"); City of Farmers Branch v. City of Addison, 694 S.W.2d 94, 96 (Tex. App.-Dallas 1985, writ ref'd n.r.e.) (deciding that a contract whereby one city had unlimited right to discharge sewage into another city's sewer system constituted an impermissible surrender of municipal authority).

In an early opinion concerning a municipal water contract, the Texas Supreme Court explained that the principle is based on what specific action the Legislature has authorized:

It is now universally conceded that powers are conferred on municipal corporations for public purposes; and, as their powers cannot be delegated, so they cannot be bargained or bartered away. Such corporations may make authorized contracts, but they have no power, as a party, to make contracts or pass by-laws which shall cede away, control, or embarrass their legislative or governmental powers, or which shall disable them from performing their public duties. . . . If the legislature had expressly authorized the making of the contract under consideration, it would doubtless be binding, unless there be some constitutional objection to such a law, [and the contract] could not be held to operate ... as a surrender of any power the legislature intended the city government to exercise at all times. The question would then have been determined by a power superior to that of the municipality,-a power from which it derives all the power it has ....

City of Brenham v. Brenham Water Co., 4 S.W. 143, 149 (Tex. 1887) (quotation marks and citations omitted). Thus, while a political subdivision may not contract away a governmental power granted by statute in most instances, whether a political subdivision is authorized to enter into a particular contract involving the exercise of its governmental powers is ultimately a question of what the Legislature has authorized. See Tex. Att'y Gen. Op. No. JC-0377 (2001) at 5 ("Unless expressly authorized by the legislature, a governmental entity may not delegate its legislatively entrusted authority to another entity." (emphasis added)).

As a corollary to the general public policy against delegating authority, the Legislature has expressed public policy in the Interlocal Cooperation Act (the "Act") "to increase the efficiency and effectiveness of local governments by authorizing them to contract, to the greatest possible extent, with one another." TEX. GOV'T CODE § 791.001. The Act authorizes local governments to contract or agree to "provide a governmental function or service that each party to the contract is authorized to perform individually." Id. § 791.011(a), (c)(2). The Legislature has specifically authorized one political subdivision to contract with another "to obtain or provide part or all of: (1) water supply or wastewater treatment facilities; or (2) a lease or operation of water supply facilities or wastewater treatment facilities." Id. § 791.026(a) (emphasis added). "The powers granted by [section 791.026] prevail over a limitation contained in another law." Id. § 791.026(g).

Additionally, article XVI, section 59 of the Texas Constitution specifically requires the Legislature to define the powers of districts organized under that constitutional provision. TEX. CONST. art. XVI, § 59 (providing that these districts have "such powers of government ... as may be conferred by law"); see also id. art. III, § 52(b). Section 49.213 of the Water Code provides that a "district may enter into contracts with any person or any public or private entity in the performance of any purpose or function permitted by a district." TEX. WATER CODE § 49.213(b). Subsection (c) provides further:

A district may enter into contracts, which may be of unlimited duration, with persons or any public or private entities on the terms and conditions the board may consider desirable, fair, and advantageous for:

(5) the maintenance and operation of any works, improvements, facilities, plants, equipment, and appliances of the district or of another person or public or private entity;

and

(7) the exercise of any other rights, powers, and duties granted to a district.

Id. § 49.213(c). Specifically, a district board is authorized to enter into "a contract for technical, scientific, legal, fiscal, or other professional services." Id. § 49.067(b). But "[t]he board through such action cannot abrogate its fiscal responsibility." Id.

Thus, both section 49.213 of the Water Code and the Interlocal Cooperation Act expressly authorize a district to contract with another district for the operation of water and sewage facilities "on the terms and conditions the [district] may consider desirable, fair, and advantageous." Id. § 49.213(c)(5); TEX. GOV'T CODE § 791.026(a). Under section 49.213 of the Water Code, the agreement may govern "the performance of any purpose or function permitted by a district" and "the exercise of any other rights, powers, and duties granted to a district." TEX. WATER CODE § 49.213(b), (c)(7). But no judicial opinion of which we are aware has determined the extent to which one water district may delegate its "rights, powers, and duties" in an operating agreement under section 49.213, or determined the fiscal responsibilities that a water district board may not abrogate under section 49.067. [2] Accordingly, we may only advise that a court would likely conclude that one water district may contract for another water district to perform the rights, powers, and duties of the first only to the extent the contract is authorized by the Interlocal Cooperation Act, section 49.213 of the Water Code, or other state law and does not abrogate the first district's fiscal responsibilities under section 49.067 of the Water Code.

SUMMARY

A governmental entity may not delegate its legislatively entrusted authority to another entity except as authorized by the Legislature. A court would likely conclude that one water district may contract for another water district to perform the rights, powers, and duties of the first only to the extent the contract is authorized by the Interlocal Cooperation Act, section 49.213 of the Water Code, or other state law and does not abrogate the first district's fiscal responsibilities under section 49.067 of the Water Code.

Very truly yours,

KEN PAXTON
Attorney General of Texas

CHARLES E. ROY
First Assistant Attorney General

BRANTLEY STARR
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

WILLIAM A. HILL
Assistant Attorney General, Opinion Committee

[1] See Letter from Honorable Jane Nelson, Chair, Senate Fin. Comm., to Honorable Ken Paxton, Tex. Att'y Gen. at 1 (Aug. 12, 2015), https://www.texasattorneygeneral.gov/opinion/requests-for-opinion-rqs ("Request Letter").

[2] Cf. Kirby Lake Dev., Ltd. v. Clear Lake City Water Auth., 320 S.W.3d 829, 843 & n.10 (Tex. 2010) (construing contract as not violating the "reserved powers doctrine" and noting that subsection 49.213(c)(4) of the Water Code now expressly allows water districts to enter into contracts of unlimited duration); Clear Lake City Water Auth. v. Kirby Lake Dev., Ltd., 123 S.W.3d 735, 751 (Tex. App.-Houston [14th Dist.] 2003, pet. denied) (rejecting a water authority's argument that it cannot contractually surrender its legislative discretion to decide whether and how to allocate public funds, holding that section 49.213(c)(4) and other statutes authorized the particular agreement and "[n]othing in the statutes governing the Authority limits its ability to pay its contractual obligations, and Texas courts have routinely enforced contracts requiring water districts to pay in the future").