MUDs Are Un­scathed By Har­vey

The Bond Buyer - - Front Page - By Richard Wil­liamson

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.

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