The Texas House released the first batch of interim reports from House committees on Thursday. Reports from nine committees were posted online. One of those reports came from the House Committee on Special Purpose Districts. Their interim report to the 85th Legislature includes background, analysis, and recommendations. Below is a spotlight on the recommendations directly from the report; however, for complete details please refer to the report.
In the days and weeks to come, the House will post reports from other committees as the reports are completed.
Charge #1 – Best practices in creation, management, and expansion of Municipal Management Districts
Recommendation No. 1. Notice of Legislative Creation
Adequate notice of legislation relating to MMD creation or annexation is critical to protect the interests of property owners. Only with adequate notice can property owner support or opposition be accurately determined.
The Texas Constitution and various Texas statutes provide extensive requirements for notices of intent to introduce legislation regarding MMDs and other types of special purpose districts.
In general:
- 30 days prior to the introduction of legislation creating an MMD, a notice must be published in the newspaper (as required by Article XVI, Section 59, Texas Constitution and Chapter 313, Government Code);
- Prior to the introduction of legislation creating an MMD, a notice must be mailed to all cities and counties with jurisdiction and the Governor (as required by Article XVI, Section 59, Texas Constitution and Chapter 313, Government Code); and
- 30 days prior to the introduction of legislation creating an MMD, a notice must be mailed to all landowners who would be subject to an assessment by the MMD (as required by Section 313.006, Government Code).
These notice requirements can and should be improved. There are four areas of improvement that were outlined in oral testimony to the Committee and oral and written testimony to the Senate Committee on Intergovernmental Relations. These additional notice requirements can be adopted by the Committee and enforced through Committee practices and procedures without changes to law.
The four recommendations are explained in detail in Appendix 1. In summary, the Committee should:
- Adopt policies that confirm that all required notices relating to the creation of MMDs have occurred prior to considering an MMD creation or annexation bill;
- Adopt procedures to confirm that written notice has been provided to any and all special purpose districts within the boundaries of a proposed MMD or annexation;
- Ensure that the same notices given to landowners for an MMD creation are given for a bill to annex land into an existing MMD; and
- Ensure that in addition to the one required landowner notice, a second notice to landowners is mailed after a bill has been filed that includes the bill number(s) of the legislation proposing to create the MMD.
Recommendation No. 2. Committee Process and Procedures
a. Use of MMD Standard Language
b. Committee Checklist
For bills proposing the creation of a special purpose district or an amendment to an existing special purpose district, the Committee has historically required submission of a “Checklist.” This Committee Checklist elicits basic information about the bill, its proponents, and the proposed district.
The Committee Checklist should be updated and enhanced to provide additional information concentrated on the most important aspects to be considered. A proposed Committee Checklist is attached as Appendix 3.
The Committee Checklist can perform important functions in addition to gathering information, including:
1. Enforce existing and additional notice requirements outlined in Recommendation No. 1;
2. Enforce the use of the MMD Standard Language described in Recommendation No. 2a;
3. Clearly differentiate between the various types of special district legislation heard by the Committee and focus on the relevant questions and issues by type;
4. Document local support for the creation of an MMD; and
5. Confirm that a bill proposing to create an MMD does not contain provisions that the Committee or the Legislature generally consider unacceptable.
Historically, the Committee and other legislative committees and offices have taken the position that certain provisions require special explanation before they may be included in an MMD creation bill. It is reasonable to expect that this list may evolve over time. One of the benefits of a Committee Checklist is the ability to update it from session to session. An initial list of such provisions for MMD legislation could include:
1. The power of eminent domain;
2. Elections to be held on non-uniform election dates;
3. Levy of sales tax in excess of the maximum rate allowed by general law;
4. Issuance of water, sewer, and drainage bonds without TCEQ approval (as required by Section 375.208, Local Government Code);
5. Issuance of bonds secured by property taxes without an election; and
6. Levy of a property tax without an election.
Furthermore, a bill that proposes to annex land into an existing MMD is generally required to
demonstrate notice to and support of landowners.
A Committee Checklist that focuses on these questions would serve as a substantive tool for the
Chairman, Committee members, and staff.
Recommendation No. 3. Legislation to Update Chapter 375, Local Government Code
In the 84th Legislative Session, Representative Dennis Paul introduced HB 3097. A Committee Substitute was adopted by this Committee, testimony was taken, and CSHB 3097 was reported favorably to the House. Subsequently, a point of order was sustained and the bill did not pass.
CSHB 3097 proposed key and comprehensive reforms to Chapter 375, Local Government Code, the general law governing MMDs. The reforms proposed by CSHB 3097 address most, if not all, of the criticisms of MMDs that have been brought to the Committee. Key components of CSHB 3097 include:
1. A majority-in-value of landowners requirement for petitions to create new MMDs through the TCEQ;
2. The ability of the owners of a majority of the assessed value of property subject to assessment by the MMD to recommend the appointment of persons to the MMD board of directors; and
3. A lowering of the threshold of landowner petitions required for dissolution of an MMD from “75% or more” to “at least two-thirds.”
The Committee should consider CSHB 3097 or similar legislation consistent with CSHB 3097 that enacts the three key points outlined above.
Charge #2 – Conduct legislative oversight and monitoring of all special purpose districts under the committee’s jurisdiction and the implementation of relevant legislation passed by the 84th Legislature.
Conclusion
For years, Texans have made the conscious decision to live and reside in MUDs. Most individuals did not accidentally purchase a home within a MUD—they made the intentional decision to live in a community with affordable housing costs and trustworthy infrastructure that is governed by their neighbors. Informed consumers choose to purchase homes in MUDs. Texas law requires potential homebuyers to receive multiple instances of notice before purchasing a home in a MUD. The first notice comes at the time a potential homebuyer signs an earnest money contract. A second notice is then provided to the homebuyer at closing. This notice contains information about the MUD’s tax rate, voted bond authorization, and bonds that have been issued. No other form of government issues such a notice to its potential residents.
Moreover, in order to provide additional data to potential homebuyers, MUD taxes are typically levied on properties before houses are sold. This also informs mortgages companies. It ensures that MUD taxes are considered in qualifying the purchaser and in calculating the amounts to be properly escrowed through monthly mortgage payments. By providing for multiple disclosures and specific data on tax rates and bonds, potential homebuyers are assured of exactly what their financial obligations will be as a result of buying a home in a MUD.
Policy makers in the State of Texas have always valued development generated by the private sector, where ideas and innovations are quicker to the marketplace and financial liquidity is expeditiously unleashed. By utilizing the MUD model, developers have embraced this free market ethos, allowing for development and home building that would not otherwise occur. MUDs induce developers and homebuilders to lend and invest their private capital (from banks, investors, and Wall Street financiers) into public infrastructure. Along with the funding comes the private sector expertise and the influence of the profit motive on construction and project management. No other form of local government has so dramatically convinced the private sector to invest in public infrastructure. It is a true public/private partnership. The inducement is that if the developer invests — and performs by building infrastructure and developing lots and building homes — the developer is entitled to reimbursement of its investment in public utility infrastructure. Without the certainty of reimbursement upon performance, there would be no inducement for developers.
It is important to recognize that the performance-based reimbursement model embraced by MUDs requires developers to cover all costs relating to the initial build out of infrastructure. MUDs are a reimbursement model; the developer bears the financial risk. This stands in stark contrast to other models (common in other states) that allow for the issuance of “raw land” or “dirt” bonds. The upfront payment of utility costs ensures that the developer has “skin in the game” and the MUD model of performance-based-reimbursement shifts the financial risk from the taxpayer to the developer.
While the number of MUDs in Texas has grown over years, the growth is simply commensurate with the increased population and prosperity that our State has experienced. More than anything, market forces dictate the creation of a MUD. As such, when the supply of housing is low, demand grows for the creation of MUDs and the development of homes. The private market evaluates this supply and demand and assumes the risk of moving forward by injecting private capital. By reacting in real time to demands in the housing market, Texans enjoy a steady supply of housing, leading to a market that behaves rationally and avoids wild fluctuation in pricing. Not only does this provide predictability to potential buyers and those associated with the real estate market, it also assists existing homeowners by providing for regularity in year-to-year tax assessments.
MUDs have proven their utility and value to the citizens of Texas over the past several decades. Homes in MUDs are more affordable because the cost of infrastructure is removed from the initial purchase price. MUDs provide a locally elected form of governance that allows neighbors to work with neighbors in a fashion that more resembles a small business in terms of efficiency, but with the openness and accountability expected and required of a political subdivision. By encouraging the development of desirable communities with homes at affordable prices, MUDs have been and will continue to be an extremely attractive option for developers and homebuyers alike. By harnessing private capital and private sector expertise, MUDs have made considerable contributions to the free market economic ideals embraced by our State and have repeatedly added value to the Texas real estate market and economy as a whole.