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More MUD muddles

Who needs collateral?

When Houston businessman David Lucyk decided to develop land in northeast Harris County, he lined up a bank loan to pay for water pipes, sewers, roads and a stormwater detention pond.

He offered the bank three items as collateral: land his company owned, an ownership stake in a business, and the promise of money in the future – millions of dollars in payments from a municipal utility district, or MUD, that he helped create to finance his project.

If everything had gone as planned, Harris County Municipal Utility District 402 would have sold tax-exempt bonds to reimburse Lucyk’s company for its infrastructure costs, and Lucyk would have used the money to repay the bank.

MUDs are highly popular among Texas developers, who hold enormous sway over how they’re created and benefit greatly from their ability to issue tax-exempt bonds and levy property taxes to cover infrastructure costs, as Lucyk was counting on. Those infrastructure costs are ultimately passed on to property owners within the MUD’s boundaries, whose property taxes go to repay the bonds.

Taxpayers’ advocates have questioned the transparency of some MUDs and see them as an increasingly problematic way to pay for infrastructure as local government debt increases, given their sweeping power to sell bonds and raise taxes. What happened with Lucyk and MUD 402 became a case in point when things didn’t work out as planned.

Lucyk’s firm defaulted on the bank loan and filed for bankruptcy. But because part of the collateral he offered the bank was proceeds from the MUD’s forthcoming bond sales, future taxpayers were on the hook for his company’s debts.

Hugh Coleman, a Denton County commissioner and critic of special purpose districts, said the state needs to better protect taxpayers by stopping developers from using future MUD bond proceeds as collateral for bank loans. When things go wrong, banks can sell that collateral.

“It’s like buying credit card debt, except you get to buy it for a developer-run governmental entity and the property owners are on the hook to pay the full amount of the debt,” he said.

It’s one thing for a developer to reach an agreement requiring the MUD to reimburse its infrastructure costs with bond proceeds. But by using that deal as collateral to get a bank loan, Coleman said, it often means a developer enters the project under-collateralized. A chunk of the financial risk of development is transferred from the developer to the taxpayers, he added.

[…]

It’s unclear how often future MUD payments to developers are used as collateral and then bought and sold after a bank loan default.

The Texas Commission on Environmental Quality, which along with the legislature creates MUDs at the request of developers, does not track how often those developers go bankrupt.

“TCEQ is not aware of any effects a developer’s bankruptcy has on bonds issued by a district,” said agency spokesman Brian McGovern.

I dunno, that sounds like a nice piece of data to have. I’ll say again, MUDs may have their merits, but I seriously doubt this is the system we’d willingly choose to have if we were designing everything over from scratch. For all the chest-thumping we are subject to by Republican legislators about being zealous watchdogs of taxpayer money, not to mention the fervor to meddle in local affairs, you’d think someone would file a bill to provide more oversight of MUDs. I guess the pander potential is insufficient for that.

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One Comment

  1. Mike says:

    MUD’s are an independent political subdivision, so the state is limited on the oversight they can oppose, like a city or an ISD. As with those political subdivsions, the biggest oversight comes from the voters and residents of the MUD’s. I’ve attended well over a hundred MUD meetings, and other than a handful of times, the only time there have been residents are when they are trying to reach a payment plan on their taxes or a large water bill when they had a water issue. In general, if the elections had a turnout of 5% it would be a huge turnout.

    As to the issue in the article, collateral assignments of MUD receivables are common. Otherwise, the developer could take the receivables and the bank note may go unpaid. Since the obligation of the MUD for reimbursement only occurs when the Developer had spent money on the infrastructure and then property values are in place to support the selling of the bonds, the collateral assignment doesn’t put a burden on the taxpayer. The only difference in this situation, is that upon the selling of the bonds (when the Financial Advisor for the District deems it feasible, based on a no-future growth scenario – and they work for MUD, not the Developer) the money goes the bank not the Developer. So no impact on the District or taxpayers other than of course the Developer is having issues and may not finish the later phases of the development.

    As for whether MUD’s should exist or not, well that is a larger debate. The biggest item to note is that the reason homes are cheaper here is that the reimbursement to the Developer exist. Without them, with the only source to recover the expenses the sale of the lot, the home costs would be $25,000 to $30,000 higher. True, some of that cost is absorbed by the home owner through his property taxes, but overall it creates a more affordable housing market.