Proposed Constitutional Amendment Could Help State Achieve Its Conservation Goals

The 2012 State Water Plan (SWP) calls for Texas to meet about a quarter of its projected increase in demand for water through conservation.   To hit that target, the state will have to upgrade its water system – and convince customers to install water-saving technologies.

The SWP has, for instance, endorsed proposals to install low-flow plumbing in the Dallas-Fort Worth area and drip irrigation in the Panhandle.  But how will customers pay for these improvements?

About 60 water-related bills are currently winding through the Texas legislature.  Two of them – S.B. 385 and S.B. S.B. 1227 – would authorize new financial mechanisms that could help.  Both bills could end up channeling bond proceeds toward customer-side conservation improvements.  But in doing so, they could raise concerns about the legality of using public dollars for privately owned improvements.

A third bill – H.J.R. 142 – would address these concerns.  If passed, it would ask voters in the next general election whether to amend the Texas constitution by carving out an exception to a clause prohibiting public expenditures on private projects.  The exception would be for customer-side improvements like low-flow plumbing that conserve water.

To some, it may seem inappropriate for the state to be in the business of helping property owners pay for improvements, water-saving or not.  And in that sense, water conservation is no different from any other ostensible public policy goal that has been cited as justification for a subsidy or tax break.  Given the unique dynamics of water supply, however, more public money is likely to flow toward customer-side improvements in the years ahead.

Historically, utilities have financed new infrastructure through municipal bonds.  This infrastructure has consisted of public works – reservoirs, treatment plants and the like.  But as the SWP hinted, conservation requires new forms of infrastructure.

Customer-side improvements reduce water usage.  The water saved becomes a form of supply.  In that sense, the improvements serve an end purpose similar to dams and pipelines that impound and convey water.

But these improvements are different from traditional water infrastructure in that they are not public works.  They do not appear on utility balance sheets.  Rather, they are installed on private property, and they are owned and operated by water customers, not utilities.

In Texas, as in most states, the constitution includes a clause prohibiting agencies from giving public monies to private entities.   This so-called gift clause is found at Article III, Section 52(a), and provides in relevant part: “Except as otherwise provided by this section, the Legislature shall have no power to authorize any county, city, town or other political corporation or subdivision of the State to lend its credit or to grant public money or thing of value in aid of, or to any individual, association or corporation whatsoever, or to become a stockholder in such corporation, association or company.”

In interpreting the clause, courts have formulated a test requiring that expenditures serve a public purpose and have generally deferred to legislation determinations of what constitutes a public purpose.  To avoid adverse judicial findings, however, Texas has added amendments to the state constitution expressly declaring that certain expenditures that could be seen as sitting on the wrong side of the gift clause serve a public purpose.

Article III, Section 52-a clarifies that economic development expenditures are constitutional, for instance.  Section 52-b provides that the legislature may authorize the state Department of Transportation to spend public monies on toll roads.  (Section 52-b reflects the increasing popularity of public private partnerships as a means of financing transportation infrastructure.)

Mechanisms like contractual assessment or on-bill financing programs have generally been structured in other states so that bonds are used to capitalize funds from which property owners are given loans.  In such programs, public dollars are not used to pay for improvements outright.  Nevertheless, the public bonding authorities lend their credit and theoretically provide benefits to property owners in the form of lower interest rates than could be obtained through private sector borrowing.

Additionally, contractual assessment and on-bill financing programs are simply two options in a suite of policies utilities may use to promote conservation.  Other policies – such as direct cash-equivalent incentives – could come closer to conflicting with the gift clause.

To remove any barriers the gift clause could arguably pose to public expenditures on customer-side conservation improvements, State Rep. Allan Ritter has introduced H.J.R. 142.  If approved, it would add the following Section 52-c to Article III: “Notwithstanding any other provision of this constitution, the legislature may provide for the creation of programs and the making of loans and grants of public money, other than money otherwise dedicated by this constitution to use for a different purpose, for the public purpose of water conservation. In carrying out the public purposes of this section, the legislature may by general law exempt from ad valorem or other taxes all or part of real and personal property used for or services related to water conservation.”

That amendment may not be necessary, particularly if courts are included to uphold legislative determinations that water conservation is a public purpose.  Still, it could help to reduce litigation exposure and clear the path for water districts, utilities and others to more fully and directly finance customer-side improvements.

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