DALLAS - Trying to finance badly needed improvements, a South Texas water district has been forced to confront its history of illegally collecting possibly millions of dollars of property taxes while under state oversight for two decades, according to documents and interviews.

The Duval County Conservation and Reclamation District has stalled in its efforts to obtain $795,000 in financing from the Texas Water Development Board's bond-financed revolving fund. The money would pay to replace a water tower and make other improvements in the poor county, located west of Corpus Christi.

However, the board was surprised to learn the district has illegally raised its unlimited tax levy for debt service to as much as three times what was needed to retire $2.5 million of bonds originally approved by voters on June 7, 1965.

Financial audits, state officials. and district spokesmen confirm the long-standing practice of taxing for operations and management when voters have never authorized the levy. Even more surprising to some is the fact that the unauthorized collections have persisted since 1974, when the district was placed in the conservatorship of the Texas Water Commission because of past fiscal mismanagement.

Lana Lutringer, chief of the finance section of the water development board, said Duval County officials have not been formally rejected, but the state agency will not consider a funding request until the district shows it can operate without the unauthorized taxes.

"We're not going to turn them away unless they cannot demonstrate a sound financial condition," she said. "We just don't have anything yet that says they can pay for their operations and debt service."

In an effort to demonstrate its finances, the district recently raised its water rates from a statewide low of 75 cents per 1,000 gallons to $1. That is one-third the average charged by neighboring water systems. At the same time, the district has pledged next year to levy only for the debt service due bondholders in 1994.

Still, Rudy Bazan, the district's manager for two years, sees it as a first step toward obtaining state financing. "They want us to correct our problems first," he said.

District and state officials said the water district has collected possibly millions of dollars in property taxes since the 1960s, when its unlimited tax bonds were sold. This year alone, the district's 11 cent per $100 assessed valuation levy generates $500,000, which is an estimated $335,000 more than is needed to make semiannual payments to bondholders.

The district is scheduled to pay $165,975 in semiannual principal and interest payments to holders of its 5.25% coupon bonds in 1993. The bonds are rated Baa by Moody's Investors Service, which declined to comment.

"The district has been overcharging [taxpayers] all this time, since the district sold the bonds," Bazan said in. an interview.

In a Dec. 9 letter to the neighboring Nueces River Authority concerning the practice of collecting unauthorized taxes, Bazan described the actions his district was taking to prepare to finance its needs. Among them, he wrote that his board "wants to move toward becoming legal on the tax" it collects.

Under Texas law, the district can only raise the property tax to a level necessary to assure debt service is paid. However, the district cannot levy taxes to pay other expenses without the voter approval Duval County apparently lacks.

In their annual report, auditors wrote that the district's own lawyer said voters have not given express authority to collect taxes for operations. They noted that questions about the practice were first raised 12 years ago by the district board and the Texas Water Commission, though neither took action to stop the collection of the unauthorized tax.

Even though the practice has continued for years, no one knows for certain how much in unauthorized taxes has been collected. In a 1991 audit, officials noted that no taxpayer - mostly absentee oil companies - has attempted to recover any money. Also, it is not clear how much of a liability the district could face if taxpayers ever decide to sue.

"They've never gotten voter approval to do what they've been doing," said Dean Robbins, director of water utilities at the Texas Water Commission, when asked about the district's tax collections.

The district has continued the practice even since being placed under the commission's special conservatorship in 1974. While the commission monitors the finances of all of the state's nearly 1,000 water districts, state officials ordered the appointment of a conservator after a financial scandal.

Robbins said the conservatorship of the Duval County district has been loosely enforced because of the belief that financial problems prompting the oversight had been resolved.

"It appears the conservatorship has been vacant for two or three years, and the district has now asked us to remove it," he said.

In defending his agency, Robbins noted that the commission has ill-defined powers in statutes that give the conservator no express power to directly intervene when it sees improper activity. As a result, the commission must ask an agency such as the Texas Attorney General's office to take action. That has not happened.

The Texas Attorney General's office could not be reached for comment.

For instance, one lawyer familiar with state law said the commission would have to ask the attorney general to file suit to stop the district from collecting an unauthorized tax rather than just order officials to do so.

Some in the bond community were surprised to learn that the district has continued to collect an unauthorized tax for years. The Texas Water Commission has a reputation of strong oversight, which helped the state avoid massive defaults of development-driven bonds after the Texas economy soured in the 1980s.

"This just somehow fell through the cracks." said one bond industry source familiar with the case. One reason may be that the staffs and boards of the district and the water commission have changed several times since the conservatorship began, he said.

Others were split over just how much power the water commission has to police the district. Two Houston investment bankers who work with water districts said the commission's greatest power comes before the sale of bonds, which the agency must approve. After that, the commission can only pressure, not force, a district to act.

Also, a leading bond lawyer said that conservatorship is not outlined in the state water code, but added that the Texas Water Commission has strong power over the districts.

"The water commission has, as I read the code, the power to do damn near anything they want with these districts," he said.

In 1974, state officials felt it was necessary to place the district in conservatorship because of financial mismanagement and political patronage that sent one political boss to jail. But the scandal was only the latest in a long history of mismanagement and political corruption that has filled the history of the poor South Texas county.

In 1948, the county and its political barons gained national attention when the now-famous Ballot Box 13 in Duval County mysteriously showed an extra 203 votes in the Democratic primary for Lyndon B. Johnson. The votes, all written in alphabetical order, gave LBJ a thin 87-vote victory in the Senate race and prompted his nickname of "Landslide Lyndon."

Besides its Political reputation, Duval County is known as one of the poorest areas in Texas. Nearly 39% of the 13,079 residents live in poverty and unemployment is consistently double-digit in an area where the major industries are ranching and oil, according to the 1993 Texas Almanac.

Despite its poor surroundings, the district has managed to accumulate at least $650,000 in reserves, while collecting the unauthorized tax, according to the 1991 audit.

Today, Bazan said, the district is working hard to distance itself from its troubled history and to show that its operations are sound. He said that no one knows for certain how much was collected in the unauthorized taxes since the 1960s, though some estimate it could total several million dollars.

Bond lawyers and State officials say they are not certain if property taxpayers could or would sue for the return of illegally collected taxes. They also say they do not know how it would affect the bonds, which are scheduled to be retired in 1996.

Asked about the possibility of taxpayer suits, Bazan said no one has made such threats.

"I don't know where we would pay for it. We're broke."

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