(a) This section applies to:
(1) a municipality that annexes all or part of the area in a water control and improvement district, fresh water supply district, or municipal utility district organized for the primary purpose of providing municipal functions such as the supplying of fresh water for domestic or commercial uses or the furnishing of sanitary sewer service or drainage service; or
(2) a municipality:
(A) that, by incorporation of the municipality, includes in the municipality all or part of the area in a district described by Subdivision (1); and
(B) the governing body of which adopts, by a vote of at least two-thirds of its entire membership, an ordinance making this section applicable to the municipality.
(b) This section does not apply if the district includes area located in more than one municipality.

(c) The municipality succeeds to the powers, duties, assets, and obligations of the district as provided by this section. This section does not prohibit the municipality from continuing to operate utility facilities in the district that are owned and operated by the municipality on the date the area becomes a part of the municipality.
(d) If all the area in the district becomes a part of the municipality, the municipality:
(1) shall take over all the property and other assets of the district;
(2) assumes all the debts, liabilities, and obligations of the district; and
(3) shall perform all the functions of the district, including the provision of services.
(e) The governing body of the municipality by ordinance shall designate the date on which the duties and the assumption under Subsection (d) take effect. The date must be set for a day within 90 days after the date the area becomes a part of the municipality. If the governing body fails to adopt the ordinance, the duties and the assumption automatically take effect on the 91st day after the date the area becomes a part of the municipality. The district is abolished on the date the duties and assumption take effect.
(f) If only part of the area in the district becomes a part of the municipality, the governing bodies of the municipality and the district may make contracts relating to the division and allocation between themselves of their duplicate and overlapping powers, duties, and other functions and relating to the use, management, control, purchase, conveyance, assumption, and disposition of the property and other assets, debts, liabilities, and obligations of the district.
(g) If only part of the area in the district becomes a part of the municipality, the district may contract with the municipality for the municipal operation of the district’s utility systems and other property and for the transfer, conveyance, or sale of those systems and that property, regardless of kind or location inside or outside municipal boundaries, to the municipality on terms to which the governing bodies of the district and municipality agree. That operating contract may extend for a period, not to exceed 30 years, stipulated in the contract and is subject to amendment, renewal, or termination by the mutual consent of the governing bodies. The contract may not impair the obligation of another contract of the municipality or district. In the absence of such a contract, the district may continue to exercise the powers and other functions that it was authorized to exercise before the area became a part of the municipality, and the municipality may not, without the district’s consent, duplicate the services rendered by the district in the district. However, the municipality may perform in the district all other municipal functions in which the district is not engaged.
(h) If a district bond, warrant, or other obligation payable in whole or in part from property taxes is assumed under this section by the municipality, the governing body shall levy and collect taxes on all taxable property in the municipality in an amount sufficient to pay the principal of and interest on the bond, warrant, or other obligation as it becomes due and payable. The municipality may issue refunding bonds or warrants to refund bonds, warrants, or other obligations, including unpaid earned interest on them, that is assumed by the municipality. The refunding bonds or warrants must be issued in the manner provided by Chapter 1207, Government Code. A refunding bond must bear interest at the same rate or at a lower rate than that borne by the refunded obligation unless it is shown mathematically that a different rate results in a savings in the total amount of interest to be paid.
(i) If all the area in the district becomes a part of the municipality and if the district has outstanding bonds, warrants, or other obligations payable solely from the net revenues from the operation of any utility system or property, the municipality shall take over and operate the system or property and shall apply the net revenues from the operation to the payment of the outstanding revenue bonds, warrants, or other obligations as if the district had not been abolished. The municipality may combine the district system or property with the municipality’s similar system or property if:
(1) the municipality has no outstanding revenue bonds, warrants, or other obligations payable from and secured by a pledge of the net revenue of its own utility system or property; or
(2) the municipality:
(A) has outstanding obligations payable from and secured by a pledge of net revenues sufficient to meet the outstanding obligations; and
(B) those revenues have produced, during the five-year period before May 30, 1959, an annual surplus in an amount sufficient to meet the annual obligations for which the district revenues are pledged.
(j) If the municipality combines the systems or property as provided by Subsection (i), it shall levy on all property subject to taxation by the municipality an annual property tax at a rate that, when combined with other available municipal funds and revenues, is sufficient to pay the principal of and interest on the outstanding obligations.
(k) If all the area in the district becomes a part of the municipality, the municipality, unless the refunding authorized by Subsection (l) has been accomplished, shall separately operate the district and municipal systems and property and may not commingle revenue if the municipality has outstanding bonds, warrants, or other bonded obligations payable from and secured by a pledge of the net revenue of its own utility system or property and does not have an amount annually accruing to its surplus revenue fund that exceeds the amount of the fund pledged to the payment of outstanding municipal obligations and that is sufficient to meet the annual obligations for which the district revenues are pledged. The municipality shall perform the duties and other functions imposed by law or contract on the governing body of the district relating to the district’s outstanding bonds, warrants, or other obligations and shall separately perform the duties and other functions relating to the bonds, warrants, and other obligations of the municipal system. The municipality may allocate overhead expenses between any two or more systems in direct proportion to the gross income of each system.
(l) The municipality may issue revenue refunding bonds in its own name for the purpose of refunding outstanding district revenue bonds, warrants, or other obligations, including unpaid accrued interest on them, that are assumed by the municipality under this section. The municipality may combine different issues of district and municipal revenue bonds, warrants, or other obligations into one series of revenue refunding bonds and may pledge the net revenues of the utility systems or property to the payment of the refunding bonds as the governing body considers proper. Except as otherwise provided by this section, Chapter 1502, Government Code, applies to the revenue refunding bonds, but an election for the issuance of the bonds is not required. Refunding bonds must bear interest at the same rate or at a lower rate than that borne by the refunded obligations unless it is shown mathematically that a different rate results in a savings in the total amount of interest to be paid.