Everything You Wanted To Know About MUDs But Were Too Afraid To Ask

Feb 22, 2016

The City of Austin recently got some backlash for the way it agreed to fund a new MUD – or municipal utility district. The Pilot Knob development will in part be paid for by diverting roughly $80 million from the Austin Water Utility – and by raising customers’ bills.

But let’s back up a bit. What is a municipal utility district, exactly?

How is a MUD created?

A MUD is created at the state level, in one of two ways: by either bringing a bill to be approved by the state legislature, or petitioning the Texas Commission on Environmental Quality. In the latter process, city consent is always required. If a MUD is created by bill, part of that bill can require city approval.

Here, Virginia Collier with the City of Austin breaks it down, plus describes which route was used to create the Pilot Knob MUD:

How is a MUD financed?

If a MUD is approved, the developer is issued bonds to pay for utilities. The taxes for MUD residents are determined by how much debt is owed – so it behooves a MUD to keep growing. Thereby, more people shoulder the weight of the debt.

The Lakeway MUD does a nice job of explaining the finances on their website:

“MUDs are a developer’s tool. Instead of putting in infrastructure and getting investment back through lot sales, which make lot prices much more expensive, MUDs provide developers a vehicle for getting their investment back through the sale of bonds, which are repaid with property taxes.”

Listen to Jerry Rusthoven with the City of Austin sum up MUD finances:

How is a MUD governed?

Think of a MUD as its own, tiny government. A Board of Directors is elected by the residents.

Pat Reilly sits on the Board of Directors for River Place MUD in Northwest Austin. That MUD is in the process of transitioning to full-purpose annexation (meaning, residents will soon become full residents of the City of Austin). But in the meantime, Reilly explains what he and his fellow board members are responsible for:

So a MUD is a MUD forever, right?

Not exactly. In the past few years, the City of Austin changed its MUD requirements so that any MUD seeking city consent also had to abide by some city rules – including accepting limited-purpose annexation at the same time as MUD creation. That means the MUD gets some city rights, such as being subject to city code. But residents are not allowed to vote in city elections, and they are not charged Austin taxes.

Listen to Jerry Rusthoven explain why MUDs usually are not fully annexed until several decades have passed: