Municipal Utility Districts (MUDs)

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Municipal Utility Districts (MUDs)
Article Excerpt

Municipal utility districts provide water and other services in areas where city services are not available. All they ask for in return are tax payments.

When developers build new homes they make certain those homes will have adequate utility services such as water and electricity. Municipal governments typically provide water and wastewater services but many parts of the state are not part of any city’s jurisdiction.

State law allows property owners to create municipal utility districts (MUDs) to provide water and other services to a particular area. A MUD has the authority to issue bonds in order to provide services and fulfill other functions. Homeowners pay taxes to repay MUD bonds. They also elect board members to run the MUD under the supervision of federal, state, and city or county governments.

Owning a home in a MUD can have some advantages over living elsewhere. It can also have disadvantages. Read on to learn more about this feature of Texas law and politics.

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What is a municipal utility district (MUD)?

A MUD is a political subdivision responsible for providing water and wastewater services where other local governments (like a city government) do not provide these services.

A political subdivision is a local government that provides services to residents or the general public. Some political subdivisions provide a broad range of services, while others only provide a few specific services. Examples of political subdivisions include the following:

  • Counties

  • Cities and towns

  • School districts

  • Community college districts

  • Hospital districts

  • River authorities

  • Emergency services districts

  • Water conservation districts

  • MUDs

Cities and towns probably provide the largest range of services such as street maintenance, libraries, waste management, and police. Texas has more than 1,200 special districts, including MUDs, that provide specific services.

MUD for Harris County

Chapter 54 of the Texas Water Code governs MUDs. The state allows two kinds of MUDs:

  • General law MUDs: A developer or a group of property owners petition the Texas Commission on Environmental Quality (TCEQ) for authorization to create a MUD for specified purposes. If any part of the MUD is located within a city’s jurisdiction, the city council must also authorize the creation of the MUD.

  • Special law MUDs: The Texas Legislature passes a bill to create a MUD. For example, the Legislature passed H.B. 3943 in 2013 to create Harris County Municipal Utility District No. 537. That legislation is codified in Chapter 8488 of the Special District Local Laws Code.

Water and sewer services are among the most common functions of MUDs in Texas. A MUD might be necessary for a new development that is beyond the reach of a city water utility company. Other functions of MUDs may include drainage, roads, and parks and recreation.

The state typically appoints the initial board of directors of a MUD. Residents of the MUD will then elect board members. The board oversees the MUD’s operations. It can issue bonds to pay for services. It pays off the bonds through property taxes.

How is a municipal utility district different from a homeowners association?

In some ways, a MUD might appear similar to a homeowners association (HOA). Both a MUD and an HOA have authority over defined areas. Both collect payments from homeowners to cover the costs of the services they provide. That’s where the similarities end.

An HOA is a private organization whose authority comes from contracts and restrictive covenants. A MUD is a government entity with the power to levy taxes. While HOAs may have the authority to foreclose on homeowners who fail to pay HOA dues and assessments, MUDs rely on county governments to collect taxes and enforce delinquencies. MUDs are subject to laws like the Open Meetings Act and the Texas Elections Code.

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MUD Water Tower

How do municipal utility districts collect taxes?

MUD taxes are among many types of local government taxes that appear on homeowners’ property tax bills. Other types of taxes collected by county tax appraisal districts include school districts, community college districts, and hospital districts.

The purpose of a MUD tax is to pay off the bonds used to fund the development of infrastructure in the MUD’s jurisdiction. In principle, MUD taxes should go down as the bonds are paid off.

One way to eliminate MUD taxes is for a city to annex a MUD’s territory. In that situation, the city would pay off the remainder of the bond. Homeowners would then pay city property taxes, which might not be an improvement over the MUD taxes.

Do municipal utility districts affect home mortgages?

It is possible that living in a MUD brings higher taxes, at least for a while after the MUD’s creation. Mortgage lenders might take that into account when evaluating a loan application. Aside from that, MUDs are not likely to present any major concerns for lenders. The fact that a property is located in a MUD shouldn’t have a significant effect on whether or not someone will get a mortgage.

Interested in purchasing a home in a MUD?

Buying a home outside the city doesn’t mean you aren’t afforded reliable utility services. The experienced mortgage lenders at The Wood Group of Fairway can help you determine if the property you’re interested in is eligible for the loan types you qualify for. Plus, we’ll connect you to local real estate agents we’ve formed efficient relationships with.

For now, all you need to do is answer a few easy questions online to see which mortgage options you qualify for!