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Tennessee General Assembly· HB 794Comp. SB subst.

Utilities, Utility Districts - As enacted, establishes a process for a municipality that operates a sewerage system outside of its corporate boundaries and has imposed a moratorium on new sewer connections outside of its, the official text

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                            PUBLIC CHAPTER NO. 1059

                                                     SENATE BILL NO. 855

                                                              By Taylor

                                            Substituted for: House Bill No. 794

                                                           By Vaughan

AN ACT to amend Tennessee Code Annotated, Title 4; Title 5; Title 6; Title 7; Title 8; Title 12; Title
          13; Title 29; Title 54; Title 64; Title 65; Title 68 and Title 69, relative to municipal utilities.

BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF TENNESSEE:

          SECTION 1. Tennessee Code Annotated, Title 7, Chapter 35, Part 4, is amended by adding
the following as a new section:

                    (a) Definitions. As used in this section, unless the context otherwise requires:

                              (1) "Adjacency area" means the area outside the corporate limits of a
                    participating municipality but contiguous to or adjacent to those limits and situated
                    such that the participating municipality's provision of sewer service to that area could
                    be reasonably construed pursuant to § 7-82-702(b)(1)(E)(i); provided, capacity to
                    serve new customers is available;

                              (2) "Affordable housing trust fund" means a separate fund established by a
                    participating municipality into which surcharge proceeds are deposited and expended
                    solely for affordable housing purposes within the participating municipality's corporate
                    limits;

                              (3) "Commercial development" means any multifamily residential structure that
                    is part of a mixed-use or planned commercial development, or non-residential
                    building, site, or structure to be served by the participating municipality's sewerage
                    system;

                              (4) "Housing surcharge" means a fee or assessment collected for affordable
                    housing within the corporate limits of the participating municipality as authorized by
                    this section for sewer connection of properties located within the adjacency area;

                              (5) "Participating municipality" means an incorporated city or town in this state
                    that operates a sewerage system outside of its corporate boundaries, including cities
                    or towns subject to § 7-35-417(a), and has imposed a moratorium on new sewer
                    connections outside of its corporate boundaries for a period of five (5) or more
                    consecutive years;

                              (6) "Public authority" means any agency, authority, or instrumentality created
                    or authorized by any participating municipality or by two (2) or more participating
                    municipalities acting jointly under a general statute or private act, including, but not
                    limited to, an industrial development corporation organized pursuant to title 7, chapter
                    53, a health, educational and housing facility corporation organized pursuant to title
                    48, chapter 101, part 3, and a housing authority organized pursuant to title 13,
                    chapter 20, part 1; and

                              (7) "Residential lot" means a platted lot or parcel designated for a single-family
                    detached dwelling within an approved single-family residential development.
SB 855

                    (b) Authority to extend sanitary sewer service or allow sewer connection within
          adjacency area upon payment of housing surcharge.

                             (1) A participating municipality may extend sanitary sewer service or allow
                   sewer connection only to property located within an adjacency area if the property
                   owner or developer agrees to pay, or the municipality assesses, a housing surcharge
                   as provided in this section.

                             (2) Property outside the adjacency area is ineligible for sewerage service
                   under this section.

                             (3) The municipality may:

                                       (A) Collect the housing surcharge from the property owner or
                             developer;

                                       (B) Assess the housing surcharge against the property and permit
                             payment over a period not to exceed five (5) years, together with interest at a
                             rate fixed by municipal ordinance;

                                       (C) If authorized by a municipal ordinance, permit the satisfaction of an
                             amount equal to the housing surcharge through the allocation of the increased
                             county ad valorem property tax revenues attributable to the development for a
                             period not to exceed five (5) years; provided, that:

                                                 (i) The allocation is not prohibited by state law;

                                                 (ii) The allocation is approved by the county legislative body
                                       responsible for levying and appropriating the ad valorem property tax
                                       in the adjacency area where the property is located;

                                                 (iii) The allocation is memorialized in a written
                                       intergovernmental agreement, pursuant to title 12, chapter 9, or other
                                       law, between the participating municipality and the county; and

                                                 (iv) The revenues allocated pursuant. to the interlocal
                                       agreement are d~posited i·nto the municipality's affordable housing
                                       trust fund and used only for public purposes in accordance with this
                                       section; or

                                       (D) Collect the housing surcharge using a combination of the methods
                             authorized in subdivisions (b)(3)(A)-(C); provided, that the amount collected
                              must not exceed the amounts authorized by subsection (c).

                              (4) This section does not exempt a property owner or developer from any
                    other fees, charges, or other assessments customarily imposed by the municipality,
                    county, or utility in connection with the development of property or the provision of
                    sewer service. All such fees and charges apply in addition to the surcharge
                    authorized by this section.

                              (5) Notwithstanding a law to the contrary, a participating municipality may
                    deny a sewer extension or connection request for sewerage services in the event the
                    participating municipality lacks sufficient capacity to provide such services as
                    determined by a study, report, or other information and evidence obtained by the
                    participating municipality and the developer requesting the sewer extension or
                    connection is unable or _not willing to financially contribute to necessary upgrades to
                    the participating municipality's sewer system.

                    (c) Housing surcharge amounts.

                              (1) For each residential lot in a single'."family development located within an
                    adjacency area, the housing surcharge must be an amount not to exceed three
                    percent (3%) of the appraised value of the residential lot with improvements, as
                    determined by an independent appraisal, if a principal structure has been constructed
                    or a building permit for a principal structure :has been issued at the time of sewer

            a connection. If a principal structure has not been constructed and building permit for

                    a principal structure has not been issued at the time of sewer c~:mnection, then the
                    housing surcharge may be imposed in the following two (2) stages:

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SB855

                          (A) Not to exceed two and one-half percent (2.5%) of the appraised
                value of the residential lot as improved with subdivision or site infrastructure,
                as determined by an independent appraisal; and

                          (B) Not to exceed three percent (3%) of the value of the building or
                construction, as established at the time of issuance of the building permit.

                (2) For each commercial development located within an adjacency area, the
       housing surcharge shall be an amount not to exceed five percent (5%) of the
       appraised value of the commercial property with improvements, as determined by an
       independent appraisal, if a principal structure has been constructed or a building
       permit for a principal structure has been issued at the time of sewer connection. If a
       principal structure has not been constructed and a building permit for a principal
       structure has not been issued at the time of sewer connection, then the housing
       surcharge may be imposed in the following two (2) stages:

                          (A) Not to exceed five percent (5%) of the appraised value of the
                commercial property as improved with site or subdivision infrastructure, as
                determined by an independent appraisal; and

                          (B) Not to exceed five percent (5%) of the value of the building or
                construction, as established at the time of issuance of the building permit.

       (d) Affordable housing trust fund.

                 (1) Notwithstanding § 7-34-115 or any other law to the contrary, a housing
       surcharge collected pursuant to this section is not revenue derived from public works
       for purposes of§ 7-34-115 and must be deposited into the participating municipality's
       affordable housing trust fund.

                 (2) Revenues in the fund must be used solely to support affordable housing
       projects located within the participating municipality's corporate limits, including
       acquisition, development and construction, rehabilitation, or preservation of affordable
       units pursuant to the rules, requirements, and limitations of the participating
       municipality's affordable housing trust fund.

                 (3) A participating municipality may contribute or pledge revenues in the fund
       to a public authority for the purpose of financing affordable housing projects eligible
       under this section, which such affordable housing projects constitute projects eligible
       to be financed with bonds issued by any such public authority.

                 (4)(A) A participating municipality, through its public authority, is authorized to
                 issue special obligation revenue bonds or notes for the purpose of financing
                 affordable housing projects eligible under this section.

                          (8) Bonds or notes issued under this subdivision (d)(4) must be
                 payable solely from, and secured by a pledge of, all or any portion of the
                 revenues deposited into the municipality's affordable housing trust fund
                 pursuant to this se<;tion, including revenues collected in future fiscal years,
                 and any other legally available funds approved by the governing body of the
                 municipality.

                          (C) Bonds or notes issued under this subdivision (d)(4) do not
                 constitute a general obligation or indebtedness of the municipality, and neither
                 the faith and credit nor the taxing power of the municipality is pledged to the
                 payment thereof.

                          (D) Bonds or notes issued by a participating municipality pursuant to
                 this subdivision (d)(4) must be issued and sold in the manner provided by title
                 9, chapter 21, part 3, except to the extent this subdivision (d)(4) provides
                 otherwise.

                 (5) The participating municipality shall include annual reporting of the fund's
       receipts and expenditures in its budget documents or municipal audit related to all
       housing surcharges.

                 (6)(A) If a developer elects to pay the surcharge in full at the time of
                 connection, rather than through assessment over time, the developer may
                 request and the municipality may reserve an amount of surcharge proceeds
                 equal to the payment within the affordable housing trust fund for the exclusive

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SB 855

                 use and benefit of that developer for a period not to exceed five (5) years from
                 the date of payment.

                           (8) Reserved funds may be applied only to affordable housing projects
                 located within the municipality's corporate limits in which the developer has an
                 ownership interest, development role, or financial participation, as determined
                 by municipal ordinance.

                            (C) Reserved funds must be expended solely for affordable housing
                  purposes consistent with this section and must not be distributed as a cash
                  refund or rebate to the developer.

                            (D) Any portion of the reserved funds not committed or expended
                 within five (5) years of the date of payment revert to the general balance of the
                  affordable housing trust fund and may be used for any eligible purpose under
                 this section.

                            (E) The municipality may establish by ordinance the procedures,
                  eligibility requirements, documentation standards, and approval process for
                  use of reserved funds under this subdivision (d)(6)(E).

        (e) Deferred payment - Billing and collection.

                  (1). If the housing surcharge authorized by this section is not paid in full at the
        time of connection, closing, or acquisition of the property and is instead assessed to
        the property owner for payment over a period of time not to exceed five (5) years,
        then the participating municipality must bill the unpaid balance, including authorized
        interest, as a separate line item on the monthly utility bill for the premises served.

                  (2) Subject to subsection (d), for purposes of collection and enforcement, the
        billed installment constitutes a utility service charge and may be collected and
        enforced in the same manner as service charges pursuant to § 7-35-201, including
        combined billing and discontinuance of service for nonpayment.

                  (3) The municipality shall provide written disclosure of the remaining balance
        and payment terms to the property owner upon initiation of billing and upon request
        thereafter.

                  (4) The obligation to pay installments under this subsection (e) applies only to
        the premises served and terminates automatically upon payment in full.

                  (5) As a condition of authorizing deferred payment of the housing surcharge to
        be paid by a subsequent purchaser or property owner, the participating municipality
        shall require the developer to:

                            (A) Include a disclosure of the deferred surcharge obligation, including
                  the amount, payment term, and billing method, in the purchase and sale
                  contract for the affected property; and

                            (8) Provide written evidence to the participating municipality, in a form
                  prescribed by municipal ordinance, demonstrating that the disclosure required
                  by subdivision (e)(5)(A) has been included in the purchase and sale contract
                  prior to conveyance of the property.

        (f) Appeal.

                  A request for sewer service, surcharge assessment, or any related action
        taken under this section is governed exclusively by this section and the implementing
        municipal ordinance.

        (g) Service area limitation'.

                  (1) A participating municipality has exclusive authority ·by ordinance to
        delineate the boundaries of the adjacency area eligible for service under this section
        but is inclusive of the area that could be reasonably construed pursuant to § 7-82-
        702(b)( 1)(E). Any modification of such boundaries must be approved in writing and by
        ordinance enacted by the participating· municipality prior to such modification.

                  (2) Extension of sewer service 'under this section does not expand the
        corporate limits of the participating municipality for any purpose.

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S8855

                    (h) Contractual condition.
                              (1 )(A) Except as provided in subdivision (h)(1 )(8), as a condition to receiving
                              sewerage service under this section, the participating municipality and the
                              property owner or developer shall execute a written connection agreement
                              that incorporates the surcharge obligation, the amount and payment schedule,
                              any interest authorized by this section, and any other conditions of service
                              established by municipal ordinance.
                                        (8) The requirement of subdivision (h)(1 )(A) does not apply when the
                              manner of collecting an amount equal to the housing surcharge is the manner
                              authorized by subdivision (b)(3)(C).
                              (2) The participating municipality shall not authorize the extension or

                    connection of sewer service to any property located within the adjacency area unless
                    and until the sewer connection agreement has been fully executed.

                              (3) All costs associated with any authorized sewer extension or sewer
                    connection must be borne by the property owner or developer.
                    (i) Vested rights.

                              (1) This section does not impair, modify, or supersede vested property rights
                    established pursuant to the Vested Property Rights Act of 2014, compiled in §§ 13-3-
                    413 and 13-4-310.

                              (2) The housing surcharge_, assessment, or other requirements authorized by
                    this section only apply to development applications, sewer extension requests, or
                    sewer. connection requests submitted on or after the date that a municipality
                    establishes the sewer extension policy authorized by this section.

                              (3) This subsection (i) does not limit the authority of a participating municipality
                    to condition new or amended sewer extension or connection approvals on
                    compliance with this section where vested rights have not otherwise been established
                    under state law.
          SECTION 2. The headings in this act are for reference purposes only and do not constitute a
part of the law enacted by this act. However, the Tennessee Code Commission is requested to
include the headings in any compilation or publication containing this act.
          SECTION 3. If Section 1, subdivision (b)(3) or (b)(4), authorizing the allocation of increased
ad valorem tax revenues to satisfy a housing surcharge or its application to any person or
circumstance is held invalid, then the invalidity does not affect other provisions or applications of the
act that can be given effect without the invalid provision or application, and to that end, the
provisions of this act are severable.
          SECTION 4. This act takes effect upon becoming a law, the public welfare requiring it.

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         SENATE BILL NO. 855

PASSED:  April 23, 2026

                                      RANDYM
                         SPEAKER OF THE

                         CAMERO~SEXTON,SPEAKER
                         HOUSE OF REPRESENTATIVES

APPROVED this J;).w:> day of (V)a,,. A  2026

                         K

         ~ l~LJ~
                    BILL LEE, GOVERNOR
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