Reposting a great article concerning MUDs

Municipal utility districts continue to grow outside Round Rock; annexation unlikely

As a matter of necessity, the employees of the Round Rock Public Library have become experts on city residency laws.

That is because with increasing frequency the city’s librarians have found themselves informing first-time visitors that they are not actually residents of the city of Round Rock but instead reside within a municipal utility district, or MUD. The discrepancy in addresses not only affects people’s ability to gain a free library card, but also the property taxes they pay, the fire and police services they receive and in which elections they are allowed to participate.

“We have a lot of people … who don’t know they are purchasing a house in a MUD or understand what a municipal utility district is,” Round Rock Library Director Michelle Cervantes said.

There are approximately 37,000 people living in the 13 MUDs that lie within the city of Round Rock’s extraterritorial jurisdiction, or ETJ—unincorporated areas the city holds the rights to annex but is under no obligation to do so.

Those living within the MUDs share the same Round Rock mailing address as the city’s residents but are excluded from municipal services such as police, fire department and water services as well as street maintenance. If a family living in a MUD wishes to obtain a city of Round Rock library card, the family is required to pay a $40 annual fee—a service that is free for city residents—and if the family uses a city pool or signs up for a parks and recreation program, it pays nonresident rates.

Another surprise to many new MUD residents comes in the form of taxes. Because MUDs fund and maintain their own water and wastewater infrastructures, their property tax rates can more than double Round Rock’s. In addition, MUD residents must also pay a Williamson County emergency services district tax for fire protection, and in some cases, separate homeowners association fees for parks and pools maintenance.

“When you buy a home in a utility district, you actually get a form that is called a notice of disclosure, [that informs people they are living in a MUD]” said Mike Petter, general manager for the Brushy Creek MUD.

“But the reality is it is one of [approximately] 40 forms you sign when you close on your property. So people move in and they look at the mailing address that says Round Rock, and they assume that is where they live. The reality is that is just where the post office is.”

Defining a MUD

By its most basic definition, a MUD is a funding mechanism used to spur residential development.

Created by either the Texas Commission on Environmental Quality or by an act of the Texas Legislature, MUDs are technically state-regulated water districts. Individual MUDs are overseen by an elected board of directors that is responsible for the management, finances and policies within the MUD’s defined area.

“When these MUDs are created, they issue debt to help develop their own infrastructure,” Round Rock Finance Director Cheryl Delaney said. “They are their own taxing entity. They usually provide their own water, wastewater and solid waste services. They are kind of like a mini city themselves.”

The advantage of MUDs for developers lies in the districts’ ability to take on debt by issuing bonds. The bonds allow developers to pass on the cost of building road and water infrastructure to the future homeowners, who pay off the MUD’s bond debt with property tax revenue.

Cities such as Round Rock also benefit from the residential populations MUDs bring into their immediate area. Essentially, MUD residents help build up the city’s commercial property and sales tax bases by providing a workforce and consumers while at the same time saving the city the cost of funding police, fire and municipal services to new neighborhoods.

“The common knowledge is that cities typically lose money on rooftops,” said Mike Freeman, owner of Mike Freeman Properties, a Round Rock real estate firm. “If any development wants to happen outside [the city limits], it’s pretty much going to need to be a MUD.”

Benefits of a MUD

There are approximately 15,000 people residing within the Brushy Creek MUD in Round Rock’s southwestern ETJ. Founded in 1977, Brushy Creek’s board of directors has injected millions of dollars into the district’s parks, recreation and infrastructure.

Rebecca Tullos, a Brushy Creek resident since 1992, has served on the board of directors off and on for 10 years and as board president since 2012. Tullos believes some of the advantages of living in a MUD include a closer-knit community and greater access to parks and recreation.

“The quality of life for our residents is at the top of the list of goals for the board of directors,” Tullos said.

Williamson County Commissioner Lisa Birkman is also a resident of Brushy Creek and formerly served on the district’s board of directors.

“Generally speaking, it’s a great place to raise your kids,” she said. “Usually the MUDs are a little more affluent neighborhoods with really nice homes and a good quality of life for living here.”

By financing MUDs’ infrastructure through bonds, developers are also able to lower housing costs by avoiding the impact fees cities charge for new construction. Homeowners are also usually allowed to use their MUD property tax payments as a deduction on their federal income taxes.

Enforcement

As a county commissioner representing many of the MUDs in Round Rock’s unincorporated areas, Birkman said she often deals with residents frustrated with the lack of regulations in the districts. Birkman has dealt with a wide range of complaints, ranging from semitrailers being parked on residential streets to the use of fireworks to poorly maintained yards and houses. In most cases, however, the county is limited in its ability to act on residential complaints in the unincorporated areas.

“State laws are written to give certain protections for neighborhoods in cities, not [in ETJs],” Birkman said. “If you live in many places in Texas where [land] is unincorporated, it is just farmland and rural, so those restrictions aren’t needed. But we are under different circumstances in a MUD.”

For most residents living in MUDs, their ability to uphold standards in their neighborhood is limited to whether they belong to a homeowners association, or HOA. As opposed to city ordinances, which carry police authority, however, an HOA’s powers are limited to fines and warning letters.

“You don’t have police power with an HOA,” Freeman said. “With the city of Round Rock, if I try to park my car on the grass, they drive by and write me a ticket and tell me to move my car. In an HOA, they notify [residents] and tell them they have a time period to rectify the situation.”

Annexation

While the residents and leadership of the MUDs surrounding Round Rock have worked in different ways to improve their amenities and quality of life, many recognize there would be advantages to being annexed into the city of Round Rock.

The city of Round Rock, however, has never annexed a MUD, and if it were ever to do so it would require a significant analysis of the costs and benefits of what could be gained by adding hundreds, if not thousands, of new rooftops to the city.

The obstacles to annexation for MUDs are numerous.

For one, MUDs are built on debt used to pay for their infrastructure. If the city were to annex a MUD, state law mandates the city would also assume any debt the district was carrying. There are also the additional factors of the city taking on the financial burden of maintaining any parks and recreation systems the respective MUDs have created. Finally, the city would have to consider the cost of the additional police and fire services.

Much of the costs for maintaining these services within the city of Round Rock are offset by commercial property and sales taxes. MUDs, however, typically contain little to no commercial properties.

The Teravista communities are divided into three MUDs—two located within Round Rock’s northern ETJ and one within Georgetown’s ETJ. Founded in 1998, the districts’ management has developed a long-term strategy it believes could one day help the chance of its residents being annexed. In Teravista, all of the costs of building and maintaining the pools, parks and golf course are funded by the HOA, not the MUD, as is the case in Brushy Creek.

“Where it makes it sometimes challenging for cities to annex districts is when districts get a little bit convoluted with the recreation stuff,” said Rainer Ficken, senior project manager for Newland Communities, the developer for Teravista. “That is why we purposely keep [Teravista MUDs] focused only on providing the water and wastewater and drainage infrastructure.

“Long term, when the city does enter the point they would want to annex that area, they are truly just annexing the utilities. … The city is not taking over any of the swimming pools or open space or amenities.”

Before considering annexing a MUD, the city of Round Rock will also have to determine the costs and benefits to the residents already living within the city’s limits. For a MUD such as Brushy Creek, which currently carries a debt of more than $40 million and an annual operating budget of $11 million, the chances of annexation are “zero,” Round Rock Mayor Alan McGraw said.

“It boils down to the dollars-and-cents discussion,” he said. “If you bring [MUDs] in and the services and debt far outweigh the revenue, then it is the rest of the city that is having to make up the difference, and that is not fair to them.”

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August 1, 2013

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