Deep in the MUD
In Fort Bend, two voters authorized $188 million in bonds Municipal utility districts have sweeping power to sell bonds, levy taxes
MUD187 came to be when a Houston developer arranged for two people to move their trailer onto a 519-acre site on the edge of Richmond in Fort Bend County, which at the time was an empty field.
As the only “residents” within the municipal utility district’s boundaries, the couple headed for the polls in November 2008. The ballot asked whether the state’s approval of MUD187 should be confirmed and whether the district should be authorized to sell up to $188 million in bonds for water and sewage systems, drainage, parks, recreational facilities, roads and a fire station. The vote was unanimous — 2-0. “That’s not how democracy is supposed to work,” said Clifford Gay, a retired construction superintendent who now lives in Del Webb Sweetgrass, a retirement community that owes its existence to MUD187 — and the taxes it is levying to pay off $24 million in bonds.
Gay and his neighbors wonder how high those taxes might go as more bonds are sold, especially with extraordinary bond issuance costs of 9 percent, according to IRS documents. MUD 187’s bonds are rated Baa3 by Moody’s, which says they may have “certain speculative characteristics.”
Across bright-red Texas, where many politicians tout small government and low taxes, MUDs and other so-called special purpose districts are proliferating — and selling bonds — at a rate many experts inside and outside government find increasingly problematic. They cite high indebtedness, insufficient state oversight, cozy relationships with developers, a lack of responsiveness to citizens and potential conflicts of interest. MUDs can be created either by the Texas Commission on Environmental Quality or the Legislature.
Their spread throughout the prairies that once surrounded Houston and other municipalities has helped fuel “growing unrest” about the property tax burden in Texas, said John
Kennedy, senior analyst for the Texas Taxpayers and Research Association, a nonprofit group based in Austin. Many taxpayers like Gay find it hard to track all the property tax bills they receive from counties, school districts, MUDs and other special purpose districts, Kennedy said.
“Those special purpose districts sort of operate in kind of a semi-netherworld out there,” he added.
There are 1,751 active water districts in Texas, a class of special purpose districts tracked by TCEQ, ranging from large river authorities to tiny irrigation districts, including 949 MUDs, according to the state.
The epicenter of water district financing: Houston’s suburbs.
Forty-four percent of those 1,751 districts are in Harris, Fort Bend and Montgomery counties. Sixtyfive percent of the 949 MUDs are in those three counties — 389 in Harris County, 146 in Fort Bend County and 85 in Montgomery County.
MUDs are the most popular type of water district in Texas with developers, in large part because they hold enormous sway over how they’re created and because MUDs are empowered to issue tax-exempt bonds covering the developers’ infrastructure costs.
Taxpayers’ advocates increasingly view them as a problematic way to pay for infrastructure in the face of climbing local government debt, given their sweeping power to sell bonds and raise taxes.
Since 2000, 207 water districts were created in Harris, Fort Bend, and Montgomery counties, with voters approving more than $39 billion in bonds to be used for various infrastructure projects. There is more than $60 billion in outstanding debt statewide, according to the most recent financial audits that water districts are required to submit to TCEQ.
Water district debt makes up at least 15 percent of Texas’ debt. It’s also the fastest-growing debt, according to recent data from the state Comptroller’s Office.
When a developer successfully petitions the state to create a MUD, TCEQ appoints a temporary governing board, usually chosen by that same developer. The board then typically chooses law firms and other consultants recommended by the developer, instead of competitive bidding to protect taxpayers. When developers turn to state lawmakers for legislation creating MUDs, those bills can become a source of campaign contributions.
Once created, many MUDs hire lobbyists to defend themselves against any attempts to curtail their power, such as barring districts from authorizing the sale of bonds if there are only a few registered voters.
Unlike other governments in Texas, MUDs are not restrained by the Constitution or state law in the amount of debt they can incur. The developers who create them are largely able to determine the size of bond sales needed to reimburse their infrastructure costs in unincorporated areas, with virtually no government scrutiny.
To be sure, MUDs and other special purpose districts play an important role in a state as large, and as rapidly growing, as Texas.
Angela Lutz, a partner in Allen Boone Humphries Robinson, the Houston law firm that created and now represents MUD187, said the development of Del Webb Sweetgrass within an unincorporated area would not have been financially feasible without the MUD to finance infrastructure.
“Cities do not want existing city residents to shoulder the economic burden of utilities to serve new growth,” Lutz said in an email. “Instead, cities want the new residents to pay for the new growth, which is exactly what a MUD does. MUDs allow growth to pay for itself.”
By enabling developers to recover their infrastructure costs through the sale of taxexempt bonds, home prices are lower because those costs are not passed on to buyers, said Merry Leonard, executive director of the Association of Water Board Directors, a Spring-based trade group.
But homeowners pay the cost of those bonds in higher taxes levied by MUD boards that are often less familiar and responsive to them than mayors and city council members.
“You have one mayor to complain to about water, sewer, police, fire, parks,” said Bennett Sandlin, executive director of the Texas Municipal League. “In these developer-led areas, you have got a MUD providing water, you have a fire district providing fire, you have a contract to provide police, you have nine different property taxes. You don’t know who to complain to. It can turn into a mess.” Yearslong planning
When Del Webb Sweetgrass held its grand opening in April 2011, 3,000 prospective buyers turned out to tour what was billed as a community for “active adults” over 55, featuring a 27,000-squarefoot recreation center, indoor and outdoor swimming pools, bocce, tennis and pickleball courts, a fishing pavilion, outdoor barbecue area and walking trails.
Del Webb, a subsidiary of homebuilder PulteGroup, is a leading national creator of communities for those who plan to retire or already have done so, having built its first in Sun City, outside Phoenix, in 1960.
A total of 1,500 homes priced from the $130,000s were planned on the 519 undeveloped acres outside Richmond, 25 miles southwest of downtown Houston. Since then, Del Webb Sweetgrass has been named repeatedly as one of the top active adult communities in America.
But planning for the glitzy opening began years earlier, when CW Richmond, a limited partnership controlled by the head of the Houston-based Caldwell Companies, decided to develop the land on which those retirement homes would be built. The developer turned to a Houston law firm that specializes in creating MUD sand other water districts, Allen Boone Humphries Robinson. It creates them, it represents them and it does the legal work so they can sell bonds.
Known as AB HR, the firm prepared the petition asking the state in 2007 to create MUD187.
A year later, TCEQ approved the request and appointed five “temporary” members to the district’s board of directors, all recommended by the developer.
In 2008, those “temporary” board members held their first meeting, joined by three ABHR attorneys. Among the first items on the agenda: Hire a law firm.
The board’s pick: ABHR, to work as both general counsel and bond counsel. No other firms were considered.
“At the organizational meeting of the MUD it is typical for the board of directors to hire the consultants recommended by the developer,” said Lutz, the ABHR partner who attended the meeting.
The board also called for an election in November 2008, with eight issues on the ballot.
MUD187’s electorate consisted of Joe Williams and his wife, Clarie Williams, who said the developer arranged to have their trailer moved onto the grounds so they could vote.
Records show that Joe and Clarie — who now live in Williamson County, north of Austin — were to be paid $12 per hour to serve as election judge and alternate judge, respectively. Clarie Williams, a retired secretary, declined to say whether they received other pay or benefits.
They voted to confirm the MUD’s existence. They voted to turn the “temporary” board members into newly elected ones. And they voted to authorize MUD 187 to sell up to $188 million in bonds for water and sewage systems, drainage, parks and recreational facilities, roads and a fire station, the maximum amount of indebtedness based on an estimate from its engineering firm. The bonds couldn’t be sold until they’d been authorized by a “majority vote of the resident electors” of the district.
Gene Pfalzgraf, who has lived in Del Webb Sweetgrass since 2013, said CW Richmond and many other developers have used a “technicality” in state law that allows them to move a few “electors” onto undeveloped land to create municipal utility districts or other special purpose zones. It’s up to lawmakers to remedy a situation, he said, that essentially gives developers the ability to levy and raise taxes.
“I’m not sure they’d put in the time and effort to look at it unless somebody raised enough hell,” said Pfalzgraf, a former member of the Chelford City Municipal Utility District board of directors.
It wasn’t the only election in which the Williamses were the only eligible voters.
CW Richmond petitioned the board of an existing special use district that had been dormant for years, Levee Improvement District 6, to expand its boundaries by 519 acres. LID 6 in 2007 hired ABHR as its general counsel and bond counsel, and the firm prepared annexation documents.
After the annexation was approved, the Williamses voted 2-0 in 2008 to authorize the levee district to sell $157 million in bonds for levee, flood protection and drainage projects.
Craig Johnson, an associate professor of public finance at Indiana University, said law firms that are hired by developers to create municipal utility districts should not be allowed to later do general legal and bond work for those same MUDs. ABHR no longer represents CW Richmond, but it does the legal work when MUD 187 asks TCEQ for approval to sell bonds and use the proceeds to reimburse its former client, CW Richmond.
“That is clearly a conflict of interest,” Johnson said.
Lutz said there is no conflict of interest because ABHR’s contracts ended with the developer before the law firm began to work for MUD 187. The MUD’s board has the option at any time to terminate its contracts with the law firm. High issuance costs
The wide concrete streets that run throughout Del Webb Sweetgrass and the utilities that serve its stylish one-floor homes that come in Garden, Classic and Estate designs have been paid for with proceeds from $24 million in bonds sold so far by MUD 187. Those Baa3 ratings from Moody’s for recent bond sales mean they are considered “medium-grade and as such may possess certain speculative characteristics.” The number 3 puts an issuer at the lowest end of that category. Moody’s said MUD 187’s rating reflected its “rapidly growing but modestly sized tax base, healthy reserves benefiting limited operations, and elevated debt profile.”
Given that medium-grade rating, the MUD selected underwriters whose bids committed $175,150 from their commissions for the purchase of bond insurance, which lowered the interest rate the district must pay bondholders over the next 25 years from 4.1 percent to 3.5 percent. The money spent on bond insurance is part of the overall “issuance cost” of the bonds, which includes all legal fees, underwriters’ commissions and other related expenditures.
As such, issuance costs have become an important measure of a government’s efficiency and are closely tracked because they reduce the amount that’s actually spent on infrastructure. Think of them as the $1.50 that’s often charged when withdrawing cash from an ATM, only in muchlarger amounts.
Earlier this year, the Texas Public Policy Foundation, a conservative think tank, published research by Marc Joffe, principal consultant at Public Sector Credit Solutions, a California-based nonprofit, that found issuance costs from 11 to 14 percent for bond sales by six public improvement districts in the Dallas suburbs.
Joffe had earlier reviewed the cost of 812 bond sales nationally since 2012 and, in a study released last year, found that the average cost was 1 percent of the bond’s principal amount.
The Chronicle used Internal Revenue Service forms to determine that issuance costs for the $24 million in bonds sold by MUD 187 were 9 percent, or $2,204,664. Those forms showed that $11 million in bonds that have also been sold by LID 6 to protect Del Webb Sweetgrass homeowners from Brazos River flooding had issuance costs of 11 percent, or $1,157,300.
The forms, prepared and signed by ABHR on behalf of MUD 187 and LID 6, itemize the issuance costs, beginning with fees for the underwriter, a financial services firm that buys the bonds and then markets them to individual and institutional investors. Other issuance expenses include fees paid to ABHR as bond counsel; to Fulbright & Jaworski as disclosure counsel, which is in charge of ensuring that all relevant information about the government entity has been disclosed to potential investors; and to First Southwest Co., a financial firm that advises the districts on bond sales.
Johnson, the Indiana Universi- ty professor, said issuance costs of 9 and 11 percents were “just outrageous. It shouldn’t get more than 2 to 3 percent.”
He said municipal utility districts should be required to select bond counsel through competitive bidding, as they must do by state law for underwriters, to ensure the best deal for taxpayers. Otherwise, he said, “it seems like it is just kind of an insider’s deal.”
Lutz, the ABHR partner, said she had not calculated the issuance costs and the board’s president, David Vrshek, said he had not analyzed the issue. Lutz said Joffe’s study last year is not an “apples-to-apples comparison” because it included several different types of local governments.
She also said the cost of selling MUD bonds in Texas includes complying with “rigorous” regulatory oversight by TCEQ, which review sall applications to sell bonds.
Brian McGovern, a spokesman for TCEQ, said that oversight does not involve the cost of selling bonds. “Issuance costs, such as legal fees and fiscal agent fees, are negotiated between the individual or entity providing the service and the district requesting the services,” he said. “The TCEQ does not participate in these negotiations or establish bond issuance rates.” Property tax concerns As anyone with a home mort- gage knows, interest payments over a 25-year term can approach or even exceed the principal amount, depending on the interest rate. Clifford Gay and fellow homeowners in Del Webb Sweetgrass now receive property tax bills from MUD 187 and LID 6 sufficient to retire the $35 million in bonds sold so far plus $17 million in interest. Those property taxes could continue to rise as more bonds are sold — and MUD 187 alone has $164 million in remaining bond authorization, according to documents prepared for poten- tial investors.
In 2010, the MUD 187 board set the property tax rate so that annual taxes for a typical house valued at $130,000 would equal about $1,300. Since then, the board has lowered that bill to about $1,260. For that same house, the LID 6 board set the property tax rate at about $650 per year.
Gay said the amount of property taxes he pays to MUD 187 and LID 6 are considerably more than the amounts charged by Fort Bend County for services. He’s concerned that his property tax could skyrocket if MUD 187 sells tens of millions of dollars in additional bonds.
At the same time, there have been efforts to reduce taxes: MUD 187’s board has adopted a $10,000 homestead exemption for homeowners who are over 65 or disabled, along with the recent slight reduction in the tax rate.
Lutz said MUD 187 only plans to sell additional bonds needed to reimburse the developer for costs, not all $164 million it has the power to issue. Based on TECQ rules, the district only can sell bonds if it has adequate appraised property values, she said.
As of late last year, 772 homes were occupied in Del Webb Sweetgrass and there were 451 vacant lots available for home construction. Peter Barnhart, executive vice president of the Caldwell Companies, which controls the developer CW Richmond, said there are plans to sell about 150 more lots to the builder, Pulte Homes.
Fort Bend County Judge Robert Hebert said he understands residents who may be concerned about whether they’re getting value for property taxes paid to LID 6.
But without levee construction, the Brazos River this year would have flooded Del Webb Sweetgrass, said Hebert, who added that the levee also has reduced the amounts that residents pay for flood insurance.
Richmond Mayor Evalyn Moore said the development wouldn’t have happened without the creation of MUD187.
“Richmond would not have been able to put in the infrastructure required,” she said.
It’s unlikely that Richmond will annex MUD 187 anytime soon, Moore said. The district’s debt, combined with Richmond’s, would trigger an increase in the city’s property tax rate, she said, adding that the city probably will have to wait until more of MUD 187’s debt load is paid off.
That leaves Gay, 76, and his neighbors paying the bills.
“The taxes to repay the debt are eating into my savings,” he said.