Texas has developed a reputation as an urbanizing state that’s grown fast but maintained home affordability. From Houston's lack of zoning, to the rampant town center construction across greater Dallas-Fort Worth, lighter land-use regulation has brought increased supply and downward price pressure statewide.
The prime example may be the municipal utility district (MUD). This is a financing authority that helps developers form independent governments that can issue bonds and tax residents to fund infrastructure — in short, that can get a new city built.
In a typical scenario, developers assemble greenfield land in an unincorporated jurisdiction. They find private financing to build the infrastructure, form a governing board, and erect and begin selling homes. Once the development is generating enough revenue, the MUD — which is regulated by the Texas Commission on Environmental Quality — reimburses the developer and acquires the bond debt for certain infrastructure.
Texas has over 900 MUDs, with a heavy concentration around Houston. They are generally suburban-style neighborhoods with cul-de-sacs, big retention lakes and upscale public amenities. But some — such as The Woodlands, a community of 116,000 residents north of Houston, and perhaps the best-known MUD — include dense, New Urban-style town centers in the mix.
I see three advantages of MUDs. The first is that they provide relatively affordable housing in what is often an upscale setting. Bridgeland, an 11,400-acre community being built by the publicly traded Howard Hughes Corporation, has new townhomes starting in the upper $200,000s, while The Woodlands, which is several decades older, has far cheaper listings. The raw supply of housing from Houston’s MUDs has put downward pressure on home prices elsewhere in the metro area.
A second benefit is that MUDs aren't as prone to insolvency as other developments. One common critique of sprawl development is that the overstretched infrastructure, supported by too few households per acre, creates maintenance costs that become unmanageable and are socialized onto outsiders. MUDs mostly avoid that.
Much of the infrastructure that would normally be "public" — roads, parks, drainage, sewer, water — is built upfront by the developers, meaning they’re the main risk-bearers. With time, the costs are spread around, but mostly to those living inside the MUD. Many MUD utilities are funded through user fees. In many cases, homeowners pay an incremental property tax above what they pay to counties. Roads are the most common thing MUDs transfer to county jurisdiction, while the MUD can contract with the county to provide other services, such as advanced public security. Crucially, writes realtor Julie Lehrer, “MUD [tax] rates ... generally decline over time as the MUD’s operating and debt service cost are shared by more homeowners.”
Texas MUDs aren't unique — many states have alternative governing districts that can be used to levy special taxes or develop unincorporated areas. But “the Texas MUD,” says Howard Cohen, an attorney specializing in MUD transactions, “is more or less the gold standard in terms of these types of districts and how the national bond market views the stability.”
MUDs are essentially a small step toward a private city model. That idea has grown in appeal far beyond Texas, with theorists such as NYU economist Paul Romer advocating for “charter cities” and German entrepreneur Titus Gebel pumping “Free Private Cities.” The premise is that smaller governing entities should be able to open within larger ones and set their own rules. The perceived benefit is that this will create competition between governments, making them reform and improve services to retain residents. The criticism is that it will cause Balkanization, so that it’s harder, say, to plan large public infrastructure projects or unified school districts.
MUDs aren’t entirely autonomous, so they don’t exactly mirror either these benefits or criticisms. MUDs still must follow county and state rules, sometimes join existing school districts and eventually have elected governing boards as in a conventional city. But they inch in the privatized direction: The developer can plan the city (counties in Texas don’t have zoning power), set tax rates and otherwise run things as they wish. This helps MUDs adapt to market forces and population demands in a way that traditional U.S. cities haven't.
That is in part because after some MUDs went bankrupt in the 1980s, the state strengthened financial accountability rules, so MUDs needed to be in better fiscal position before developers could transfer infrastructure. Now bankruptcies are rare, and even when they occur, those costs are contained within the MUD. This brings discipline to a community model that provides cheap housing and hyperlocal, relatively autonomous self-governance.
[This article was originally published by Governing Magazine.]
Scott Beyer owns and manages The Market Urbanist.
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