Texas has built a reputation as an urbanizing state that has grown rapidly but has maintained home affordability. From Houston’s lack of zoning to rampant downtown construction in the greater Dallas-Fort Worth area, lighter land use regulation across the country has resulted in increased supply and price pressures.
The best example of this is the municipal utility district (MUD). This is a funding agency that helps developers form independent governments that can issue bonds and tax residents to fund the infrastructure – in short, that a new city can build.
In a typical scenario, developers are assembling greenfield land in an unincorporated jurisdiction. You can find private funding to build the infrastructure, set up a board of directors, and build and sell houses. Once the development generates enough revenue, the MUD – regulated by the Texas Commission on Environmental Quality – will reimburse the developer and purchase the bond debt for a particular infrastructure.
Texas has over 900 MUDs, with a strong focus around Houston. They are generally suburban neighborhoods with cul-de-sacs, large retention lakes, and upscale public amenities. But some – like The Woodlands, a community of 116,000 north of Houston, and perhaps the best-known MUD – contain dense New Urban-style city centers.
I see three advantages of MUDs. First, they offer relatively affordable housing in an often upscale setting. Bridgeland, a 11,400 acre community being built by the listed Howard Hughes Corporation, has new townhouses as of 2019 the top $ 200,000, while The Woodlands, which is several decades older, far cheaper offers listing. The raw housing supply from Houston’s MUDs has put pressure on home prices elsewhere in the metropolitan area.
A second benefit is that MUDs are not as prone to bankruptcy as other developments. A frequent criticism of urban sprawl is that the overburdened infrastructure, which is supported by too few households per hectare, causes maintenance costs that become unmanageable and are socialized to outsiders. MUDs usually avoid this.
Much of the infrastructure that would normally be “public” – roads, parks, drainage, sewers, water – is built in advance by the developers, which means they are the main risk takers. Over time, the costs are distributed, but mostly among those who live in the MUD. Many MUD utilities are funded by usage fees. In many cases, homeowners pay an additional property tax in excess of what they are paying to Counties. Roads are the most common thing MUDs transfer to the district jurisdiction, while the MUD can contract with the district to provide other services like enhanced public safety. Crucial writes broker Julie Teacher, “MUD [tax] Interest rates … generally decrease over time as the MUD’s operating and debt servicing costs are shared by more homeowners. “
Texas MUDs are not unique – many states have alternate government districts that can be used to collect special taxes or develop unincorporated territories. But “the Texas MUD,” says Howard Cohen, an attorney specializing in MUD transactions, “is more or less the gold standard when it comes to these types of districts and how the national bond market views stability.”
MUDs are essentially a small step towards a private city model. This idea has gained traction well beyond Texas. Theorists like NYU economist Paul Romer advocate “charter cities” and the German entrepreneur Titus Gebel pumps “Free Private Cities”. The premise is that smaller administrative units should be able to open up within larger ones and make their own rules. The perceived benefit is that this will lead to competition between governments, driving them to reform and improve services to keep residents. The criticism is that there will be Balkanization, making it more difficult, for example, to plan large public infrastructure projects or uniform school districts.
MUDs are not completely autonomous, so they do not accurately reflect these advantages or criticisms. MUDs still have to follow county and state rules, sometimes joining existing school districts, and eventually having an elected board of directors just like in a conventional city. But they are moving in the privatized direction: the developer can plan the city (counties in Texas have no zoning), set tax rates and otherwise regulate everything at will. This helps MUDs adapt to market forces and population demands in ways that traditional US cities do not.
That’s partly because after the bankruptcy of some MUDs in the 1980s, the state tightened rules on financial accountability so MUDs had to be in a better tax position before developers could transfer infrastructure. Now bankruptcies are rare, and even when they do occur, Costs are included within the MUD. This brings discipline into a community model that offers cheap housing and hyperlocal, relatively autonomous self-government.