A battle is brewing over the question of who should pay for the cost of extending water and sewer services in new El Paso developments.

As housing developments extend further out into the desert along the periphery of El Paso’s city limits, El Paso Water executives have figured residents within the city are subsidizing home builders’ costs by an average of $2 to $3 on their monthly water bills, CEO John Balliew said in December. That’s because El Paso home builders are paying just a fraction of what it actually costs the utility to provide water and sewer services to increasingly outlying neighborhoods, according to consultants hired by El Paso Water.

The utility’s consultants said the city’s home builders should be paying El Paso Water $15.6 million extra per year – or thousands of additional dollars per new home they build – to cover the utility’s construction costs. 

Transferring the costs to home builders, however, could prompt firms to leave El Paso and construct homes outside of the city limits, taking new property tax revenue with them, homebuilding industry advocates argue. 

City Council on Monday will hold the first in a series of meetings to debate hiking the so-called “impact fees.”

The impact fees that homebuilders pay to El Paso Water to extend service lines to their new housing developments have remained unchanged since 2009. However, overall construction costs – what El Paso Water must pay to build out water and sewer lines – have increased by about 56% since 2009, according to the financial consulting firm Raftelis, which was hired by El Paso Water.

That imbalance suggests El Paso City Council should increase the impact fees, which will lower the costs on current El Paso Water ratepayers, the consultants said. 

“Everything else being equal, (El Paso Water is) issuing less debt with more impact fee revenues,” said Andrew Rheem, a senior manager with Raftelis. “Impact fees and debt are the two kinds of things that offset each other.”

El Paso Water only charges impact fees to firms building homes in three high-growth areas: the West Side, in the area generally surrounding Transmountain Road and Interstate 10; in the Northeast, largely north of Sean Haggerty Drive; and in portions of the Far East Side, east of Joe Battle Boulevard and south of Zaragoza Road.

Across those three areas, El Paso Water identified $1.25 billion in projects it has to fund and build over the next 10 years to meet water demand from new customers. 

El Paso Water and the city, which appoints the board that governs the water utility, are required by state law to re-evaluate impact fees every five years. The last time impact fees came up was in 2019, when City Council declined to increase the fees. 

Now, the council will hold meetings over the coming weeks to consider increasing impact fees.

Two city representatives – Cassandra Hernandez of District 3 and Chris Canales of District 8 – told El Paso Matters last week that the current impact fees are unfair and place too much burden on El Paso households instead of on home builders.

City Council has a chance to “determine whether development costs continue to be unfairly shouldered by El Pasoans – disproportionately affecting our most vulnerable communities – or shifted appropriately to developers,” Hernandez said. “The evidence is clear. There’s a clear disparity.” 

In the West Side, the builders pay a current impact fee of just under $1,600 per home. Based on the cost of El Paso Water’s construction in that area, home builders should instead be paying the water utility more than $3,250 per home, the consultants said. In the Northeast, the consultants say the impact fee should increase from under $1,500 to nearly $5,700 per home. 

The numbers on the East Side are even more stark because El Paso Water still has to spend another $600 million to complete a major expansion of the Roberto Bustamante Wastewater Treatment Plant. The state’s environmental regulator required El Paso Water to boost treatment capacity at the plant to handle 12 million additional gallons of sewage per day as the East Side continues to expand. And El Paso Water is also building a $100 million water purification plant that will serve the East Side with drinking water.

Because of those major projects to serve East Side growth, home builders should be paying an impact fee of nearly $18,000 per home in that part of town, according to Raftelis’ calculation. That would be more than 10 times the $1,600 fee now in place.

To arrive at those figures, Raftelis consultants took the city’s estimates on how many new homes will be built in each of the three impact fee areas over the next decade. Next, the consultants got estimates from El Paso Water about which projects are needed to provide new water and sewer service and how much those projects cost in each area. The total cost for new-growth projects across the city is $1.25 billion.

Raftelis divided the project costs in each area by the number of new homes those projects will serve, and then cut the final fee amount in half to credit home developers for the tax revenue their completed development will eventually produce. 

In all, Rafetlis calculated that El Paso Water ratepayers are paying about 88% of the cost of building out water and sewer service to new housing developments. El Paso Water should be collecting $17.6 million annually in impact fees from home builders, according to Raftelis, compared with impact fee revenue of about $2 million per year currently. 

“Everyone else pays for that development,” said Arturo Duran, El Paso Water’s finance chief. 

Canales acknowledged homebuilders may balk at the idea of the City Council increasing their costs by thousands of dollars for every home they construct, especially on the East Side. If the fees had been increased in 2014 or in 2019, this time around the fee increase wouldn’t seem so massive, he said.  

Plus, there’s developable land within the city that already has utilities connected and doesn’t require the extra infrastructure costs of far-flung housing projects. Inner-city developments might be smaller than the current projects that sprawl into the desert, but it’s not City Council’s role to maximize home builders’ profits, Canales said. 

Industry advocates want City Council to either keep the impact fees as is or enact only a small increase. 

Boosting impact fees “would really damage the city more than anything,” said Ray Adauto, executive vice president of the El Paso Association of Builders.

“People are going to move to where it’s affordable. With high interest rates the way they are right now, and with escalating costs of all kinds, adding more fees is probably not the answer to try and compete with other communities in the southwest,” Adauto said. “And that means locally as well as regionally.”

When the city has considered raising impact fees in the past, home builders have said they’ll dodge the extra expense by instead building houses outside of the city limits and El Paso Water’s service area. That would mean the city loses out on new property tax revenue that the city would otherwise collect from residents living in newly-built homes. 

That’s a scary prospect for city leaders who want to lower El Paso homeowners’ costly tax bills by spreading the property tax burden among more homeowners. 

“If you drive development outside of the city limits, your taxes are going to go up because now you don’t have any new homes being built,” Mayor Oscar Leeser said. “The builders only build so many homes in a year. So he’s gonna look at it (like) ‘Am I going to build them inside the city limits and take an X amount less for the same house? Or am I going to build it outside the city limits and make more profit?’”

And when someone lives in a home just outside the city limits, they’re not paying city taxes but they’re still using the roads, infrastructure and first responders that are funded by tax dollars paid by residents within the city, Leeser argued.  

“I’ve sat in meetings and they’ve threatened to move out of the city limits and build outside the city limits because they’re going to lose revenue,” Leeser said in December. “Before we even bring it to council, I’ll sit down with some of the developers and have the discussion,”

But a major question remains: What effects do impact fees have on growth and new building in El Paso? 

“It’s hard to determine: Is this going to have an impact on growth?” Duran said.

Much of the new home construction in the city since 2009 has taken place in areas where home builders must pay impact fees. And an index of housing prices in El Paso going back to 2004 shows home prices remained stable for years even after impact fees were introduced locally 15 years ago, according to the Texas Real Estate Research Center at Texas A&M University.

Impact fees “certainly may be passed on to homebuyers and effectively incorporated in the price of the home and a mortgage potentially,” said Rheem, the Rafttelis consultant. The amount a home price might rise “ultimately kind of depends on conditions, but it certainly may come into affect the home price.”

The number of new private sector home building permits issued in El Paso County has been on a downward trend for most of the last two decades. In the decade spanning 2013 through 2022 – the most recent year with available data – an average of just more than 3,100 new housing permits were authorized every year in El Paso County.

That was a decline from the prior decade, when El Paso County averaged more than 4,300 new housing permits each year from 2003 through 2012, according to data from the Federal Reserve. 

The addition of tens of thousands of new homes in the past decade has not brought additional people. The number of people living in the city limits — about 677,000 in 2022, the most recent year available — is the same as in 2014. El Paso has spread a stagnant population over a larger area.

And home builders already have, to some degree, shifted outside of El Paso’s city limits, even with impact fees in place today that are lower than the fees other major Texas cities charge to provide utilities to home builders’ developments. The city-owned water utility in San Antonio charges impact fees on most new home developments that range from $7,100 to $7,600 per home.

Between 2020 and 2022 – the most recent year with available data – El Paso County added 2,200 new residents and grew just 0.26%. The population within the city of El Paso declined in that time by a quarter of a percent. 

Over that two-year period, the city of Socorro added more than 3,100 people and saw its population grow by 9%. Sunland Park, New Mexico, and Horizon City in eastern El Paso County each added around 600 new residents and experienced population growth of over 3% between 2020 and 2022, according to the U.S. Census. 

“Most of the building that we’re doing now is in the outlying areas, the outlying cities that are competing with the city of El Paso to get housing population growth,” Adauto said, emphasizing the decline in new building construction starts in El Paso over the last decade. 

However, customers of some of the water utilities outside the city limits – such as the Paseo Del Este Municipal Utility District in far east El Paso County, as well as the Horizon MUD – are subject to a separate property tax that funds their water utility’s projects. And the Lower Valley Water District, another local water provider, receives all of its water from El Paso Water and had to increase its customers’ rates last year in response to a 46% rate hike from El Paso Water.

The water utility across the state line in New Mexico, meanwhile, is still reeling from mismanagement and operator failures that led its director to retire after high-levels of arsenic contaminated the water in Sunland Park and Santa Teresa. 

Adauto and other opponents of impact fees argue El Paso Water should sell off some of  its roughly 160,000 acres of land holdings – including around 21,000 acres within El Paso County – to cover the cost of building out infrastructure to home builders’ developments. The Public Service Board, which governs El Paso Water, purchased much of the land in the 1950s to gain access to water resources, and the PSB on rare occasions sells off land that’s deemed “inexpedient” to the city’s water systems.

Since City Council has declined to raise impact fees since establishing them in 2009, El Paso Water in late 2022 made its own attempt to recoup more money from new housing developments. The utility’s executives tried to enact a surcharge on customers living in newly built homes across the three impact fee areas, which didn’t require City Council approval. But the Public Service Board, which includes the mayor, shot down the infrastructure surcharge early last year. 

“When we had the discussion a while back on the (infrastructure surcharge) … we determined that your existing customers are subsidizing growth to the extent of about $2, $3 a month on their bill,” Balliew, El Paso Water’s chief executive, said. “That’s taking those costs, and applying them to everybody across the city. Instead of just in the area where the growth is going to happen.” 

Ultimately, leaders at El Paso Water think of the impact fee decision as a philosophical question: Should new growth pay the price of new growth, or should ratepayers broadly share the cost of development in the Borderland? 

“At the end of the day, some communities have embraced the idea of impact fees, and El Paso has not,” Balliew said. “That’s the gist of it.”