Municipal Utility Districts: What are They and How Do They Benefit Developers and Residents?

Municipal Utility Districts: What are They and How Do They Benefit Developers and Residents?

Cities and counties across Texas have utilized municipal utility districts (MUDs) for decades. These special districts help municipalities and developers fund utility projects and develop residential areas, but understanding the nuances of a MUD is key to maximizing its benefits.

MUDs help support planned developments and affordable housing in neighborhoods with a range of amenities. Some of the state’s most prolific master-planned communities like Balmoral and  Harvest Green are served by MUDs. While MUDs have been a success in Texas, there is little understanding of what they are and how they work.

What is a MUD?

A MUD is an alternative financing method that creates an independent, limited government authorized to issue bonds and levy taxes for utility infrastructure. The size varies, but MUDs generally serve communities of a few hundred to a few thousand households. There are more than 900 MUDs in Texas, with many of them sitting outside city limits in extraterritorial jurisdictions (ETJ) where municipal services are not provided.

A MUD is owned by the area it serves. By establishing a utility district, communities can develop in areas where municipal services are not available. Those looking to develop in areas that lack utilities can form a MUD in one of two ways: by petitioning the Texas Commission on Environmental Quality (TCEQ) or through legislation. Whether created through a petition or legislation, the TCEQ is responsible for overseeing the district.

Who Governs MUDs?

The TCEQ is the governing body that oversees MUDs from a regulatory standpoint. The TCEQ oversees what can be reimbursed to the developer through their review and approval of Bond Application Reports that are submitted by a licensed engineer in the State of Texas. The TCEQ regulates the water and sanitary sewer systems and oversees water and sanitary facility design criteria.  All water and sanitary sewer plants owned and operated by MUDs are inspected annually by the TCEQ and inspected for water quality compliance and sewer effluent discharge permitting.

How Financing Works Within a MUD

A MUD relies on property and ad valorem taxes as well as water, sewer and other utility revenues to pay off bonds, which can take between 20 and 30 years. Typically, a developer will fund the initial cost to construct the roads, water, sanitary sewer, and drainage infrastructure necessary to complete a development.  Then, the developer must complete the improvements to create the property tax value necessary to cover the bond debt.  A MUD generally cannot issue bonds for the infrastructure improvements until after the development has created the taxable value great enough to cover the debt created by the bonds. This process of developer reimbursement will generally occur in pieces as the development continues to create taxable value sufficient to cover the outstanding debt.

A MUD can direct tax revenues to other services as bonds are paid down. Originally, utility districts were limited on the services they could provide and what they could finance. Now, MUDs have the authority to provide enhanced services such as solid waste management, parks and recreation and deed restriction enforcement.

Who Operates MUDS?

A MUD board is made up of five members who are property owners or residents within the MUD. There may only be one property owner in a newly created MUD, which is typically a development company. Because of this, Texas law allows five members to be appointed to serve on the board of directors during the MUD’s early stages.

Over time, and as the development grows, public interest in the MUD will build and area residents will begin running for the board. As residents begin running for the board positions, the board make-up will change from the developer appointed board to a resident board.  The property owners within the MUD have the voting powers to elect board members to serve four-year terms. However, terms are staggered so every two years there are two to three seats up for reelection.

Board members are responsible for managing the district and establishing policy in the best interest of district residents, though they are still subject to TCEQ supervision. In addition to five board members, each MUD will have several consultants. For instance, an engineer, attorney and financial advisor are responsible for the daily business of the district while an operator oversees operations and maintenance of the water and sanitary sewer facilities.

Jones|Carter has been working with MUDs and other special districts since 1976. Check out some of the work we’ve done with the utility districts across Texas or visit our Municipal & District Engineering page to learn more about what we do.