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MUD Districts – Everything that You Need to Know

Posted by on Friday, December 18th, 2020 at 5:46pm.

A Municipal Utility District (MUD) refers to a political entity under the State of Texas that is given authorization by the Texas Commission of Environmental Quality (TCEQ). Their responsibility includes providing water, drainage, sewage, as well as other services related to utility, provided that they are within the boundaries of the MUD.

Counties and cities within Texas have utilized MUDs for several decades already. These districts also assist developers and municipalities in funding utility projects, as well as developing residential areas. Understanding how MUDs work helps in maximizing the benefits that they offer.

What is the Nature of a MUD?

By nature, MUDs offer alternative financing methods that create limited, independent authorities to levy taxes and issue bonds that are useful for utility infrastructure. The actual size may vary, though these MUDs serve communities ranging from a few hundred to thousands of households. As of the moment, there are around 900 MUDs in the state of Texas, with most of them located outside the city limits, in so-called Extraterritorial Jurisdictions (ETJ) wherein different municipal services may not be available.

A Municipal Utility District is owned by the city or county where it serves. With the establishment of a utility district, different communities can still continue to progress despite the absence of municipal services. There are two ways in which a MUD can be formed. One is through legislation, and another is by petitioning under the TCEQ. Regardless of the method in which a MUD is created, it is still the TCEQ that is mainly responsible for the oversight of the district.

How do MUDs Work?

The Board of Directors, all of whom are elected by the public, controls and manages all affairs of the MUD. Still, they are subject to the supervision of the TCEQ. The Board works in establishing policies, taking into consideration the interest of the residents, as well as the individuals who take advantage of utility services. A MUD may implement all needed fees, charges, and taxes so as to offer district service and facilities.

How do MUDs Handle Finances?

A MUD heavily depends on ad valorem and property taxes, including water, sewage, and utility revenues in order to pay bonds off. These typically take up to 20 to 30 years. Generally, developers fund the initial cost involved in constructing water, roads, sanitary sewage, as well as drainage facilities needed in order to progress towards development.

Afterwards, the developer has to complete all improvements needed in order to create the necessary property tax value that will pay the bond debt off. Generally, a MUD cannot produce bonds for the improvements of the infrastructure until the development has already established the taxable value that is huge enough to offset the bond debt. The process involved in developer reimbursement typically happens in pieces as the specific development goes on creating taxable value that is enough to cover any outstanding debt.

As the bonds are paid, a Mud can then direct those tax revenues to different services. Initially, these MUDs were limited to the type of services that they could offer, and the projects that they can finance. Now, however, they have been given the authority to offer enhanced services, including recreation and parks, deed restriction enforcement, as well as solid waste management facilities.

Who is Behind MUDs?

MUDs are operated by the publicly elected Board of Directors. The board is typically composed of five members who are either residents or property owners within the district. It is quite usual in a development company to have one property owner in a MUD that is newly created. For this reason, the law in Texas allows five members to be on the board of the directors, especially during the early stages of the MUDs.

As the development progresses through time, the interest of the public in the MUD will grow and residents will start running to be part of the board of directors. As they do so, the composition of the board will change from a board that is developer appointed, to one that is appointed by residents. The property owners within the district will also start to have voting powers in choosing the members of the board. The members will serve a term of four years. Still, the terms are being staggered, which means that every two years, the reelection of two or three seats happens.

It is the responsibility of the board members to manage the district and establish policies that will serve the interest of the residents of the district. Still, they are subject to the supervision of the TCEQ. Aside from the five board members, every MUD will also coordinate with a number of consultants, including attorneys, engineers, as well as financial advisors.

Are Taxes Higher in MUD?

The tax rates in a MUD, just like other rates involving property taxes, may vary depending on the values of property and debt requirements. The rates typically decline through time as MUDs are built out, while debt and operating service costs are being distributed among homeowners.

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