MUDs Are Unscathed By Harvey
DALLAS – Hundreds of Texas municipal utility districts recovering from Hurricane Harvey will not see their credit ratings immediately affected, according to S&P Global Ratings.
The longer-term impact of the storm is less certain.
“The largest potential longterm rating impact to MUDs would be caused by a decline in the districts’ assessed values, which support not only operational revenue but also the district’s ability to pay its debt burden,” S&P analysts wrote in a report last week.
“MUDs with comparatively higher tax rates may face some practical taxing limitations as affected areas adjust their tax rates to compensate for declines in assessed values,” the report said. “However, what we view as on average strong financial reserves likely offset any shorter to medium-term impact.”
Ronald Welch, an economist and real estate agent who tracks developments in 700 MUDs in the Houston area and serves on the board of one, said that bondholders have nothing to fear in the aftermath of Harvey.
“I assure you, these MUDs are so flush with cash, they have enough money to pay their debt service for 2018 before they even set their tax rate,”
Welch said. “It was devastating, but it could have been a lot worse.”
About 75% of bonds issued for MUDs in the Houston area also carry bond insurance, Welch noted.
The 669 active districts that Welch covers have a total taxable value of $206.4 billion as of the 2015 assessments, with outstanding debt of $9.29 billion. That translates to a debt-to-value ratio of 4.5%. With 2.7 million people living in the MUDs, the per-capita debt comes to $3,433.
Three weeks after Harvey made landfall north of Corpus Christi, 35 water treatment facilities in the region are inoperable, according to the Texas Council on Environmental Quality. Primarily created to provide water treatment, sewage facilities, streets and other infrastructure for new housing subdivisions, MUDs are regulated by the TCEQ.
To date, about 2,238 drinking water systems have been affected by Harvey, according to TCEQ. Of those 1,924 systems are fully operational, 161 have boil-water notices, and 52 are shut down. About 40 wastewater treatment facilities are inoperable out of 1,144 in the region, officials said.
“The agencies are aware that releases of wastewater from sanitary sewers are occurring as a result of the historic flooding and are actively working to monitor facilities that have reported spills,” TCEQ said in an update Friday.
Estimates of the damages from Harvey range from $40 billion on the low end, to $190 billion in an estimate from AccuWeather.
With Hurricane Irma hitting Florida three weeks after Harvey landed in Texas, total damages from the two could be as high as $290 billion, according to AccuWeather.
This is the first time in the history of record keeping that two Category 4 or higher hurricanes, Harvey and Irma, have struck the U.S. mainland in the same year, according to the service.
While the city of Houston was the largest population center affected by Harvey, the city is surrounded by hundreds of MUDs designed to provide housing for the fast-growing Houston-Galveston-Baytown area. While some of the MUDs are recent issuers of debt, some of the older districts are debt free.
Just to the east of the Houston Metro area, the port and refinery city of Beaumont lost its water supply until the TCEQ lifted its final “boil water” notice on Friday. The city supplies 22 million gallons of water per day to its customers.
S&P rates 364 MUDs in the disaster area of southeast Texas and the Coastal Bend region.
The districts primarily collect property taxes and use them to pay debt service on bonds sold to build infrastructure. With little overhead, day-to-day responsibilities, or staff following project completion, MUDs also have limited cash flow or needs beyond property tax receipts, S&P says.
“Because of these characteristics, the aftermath of Hurricane Harvey could inflict a greater long-term ratings impact on MUDs when compared with cities and counties, but shorter-term impacts will be less likely,” analysts said.
The overall value of property in the affected districts is likely to drop due to damage, the S&P report said. Whether the property tax collections are affected in the current year or the following year will be determined in part on whether the MUDs receive a reappraisal.
Property taxes are billed in October and payable by January of the following year. In the wake of Harvey, however, a MUD may request a reappraisal.
“Should this request be authorized and the values decline, the district must prorate the tax bills from the date of the disaster, which would impact fiscal 2018 property tax collections,” analysts said.
“Adding to the difficulty of raising revenues after a decline in assessed value is a practical taxing limit,” they noted. “When assessed values fall, increases in tax rates can compensate for this decline. In addition to MUDs, other overlapping municipalities may also need to adjust for their declines in value, thereby putting a potential practical limit on how high MUD tax rates can be raised.”
The impact of the tax cap may be more pronounced for MUDs with already comparatively high tax rates.
“However, what we view as on average strong financial reserves can likely provide some cushion in the shorter to medium term, hopefully smoothing a transition to when assessed values strengthen and tax rates can be less pressured,” analysts said.
While Texas Gov. Greg Abbott said he thinks the state will need “far in excess” of $125 billion in federal relief dollars, U.S. Rep. Sheila Jackson Lee, D-Houston, called for a record-breaking $150 billion aid package on Tuesday.
President Trump’s request for $7.9 billion for emergency funding won passage in the House Wednesday, and the White House said it expects to seek an additional $6.7 billion soon.
“You’re going to see very rapid action from Congress,” Trump told Texans about approving recovery dollars. “We’re going to get your funding.”
In the half-dozen storms that caused at least $1 billion in damages immediately before Hurricane Katrina in 2005, the federal government contributed funds to cover only 17% of estimated damages in federal aid, on average, according to research by CNN.
In storms including Katrina and afterward, federal spending averaged 62% of estimated damages, the network reported, peaking at 72% of Katrina’s damages and 80% of Sandy’s damages.
The U.S. spent $12.8 billion after Hurricane Ike caused $34.8 billion in damage to Texas in 2008, and it spent $9 billion after Rita caused $23.7 billion in damage in Texas and Louisiana in 2005, CNN said.
As MUD boards begin to assess the damage, they and other issuers need to begin thinking about disclosure issues, according to Barron Wallace, partner at the Houston-based law firm Bracewell.
“With the process of rebuilding and restoring services underway, issuer and conduit borrower officials may begin to consider whether it is appropriate to provide disclosure to market participants regarding the economic impact of Hurricane Harvey and/or the impact of the storm on infrastructure and longterm operations,” Wallace said.
Although natural disasters such as Harvey do not require an event notice under Rule 15c2-12, disclosure relating to such storms provided outside of the context of an offering is generally voluntary, Wallace said.
“If an issuer or conduit borrower (each, an “Obligated Person”) chooses to voluntarily provide disclosure regarding Hurricane Harvey, it is important to discuss such disclosure with consultants, such as financial advisors and legal counsel (e.g., bond counsel and/or disclosure counsel),” Wallace said in a statement.