Sunfield MUD annexation memo.pdf
MEMORANDUM TO:
The Honorable Mayor and City Council
FROM:
Chance Sparks, Assistant City Manager
THROUGH:
Kenneth Williams, City Manager
Date:
July 27, 2017
Re:
Annexation of Sunfield Municipal Utility District
_____________________________________________________________________________________ The City Council requested information regarding annexation of portions of the Sunfield Municipal Utility District (MUD). In response, this memo provides some relevant general background on MUDs, Sunfield agreement background, descriptions of Buda’s annexation authority in each of Sunfield’s four MUDs, and concluding implications of Buda annexing one of the MUDs.
Municipal Utility District Background
A Municipal Utility District (MUD) is one of several types of special districts that function as independent, limited governments. The purpose of a MUD is to provide a developer an alternate way to finance infrastructure, such as water, sewer, drainage, and road facilities. Managed by a Board elected by property owners within the MUD, a MUD may issue bonds to reimburse a developer for authorized improvements and the MUD will utilize property tax revenues and user fees received from water and sewer services operated by the MUD to repay the debt. As the MUD pays off its debt, more of its tax revenue can be directed to other services. Originally, MUDs were very limited in what they were allowed to finance and what services they could provide. Over time, MUDs began taking on more responsibilities and providing enhanced services for the residents, such as parks and recreation, deed restriction enforcement, and solid waste service. This can present a challenge for cities annexing MUDs, as municipal annexation service plans require provision of equivalent services. MUDs rely on the County to provide police and road maintenance services and Emergency Service Districts (ESDs) for provided fire protection and EMS. Texas law requires that MUDs be annexed in their entirety; a City cannot annex just a portion. If the City annexes a MUD before its bonds are paid in full, the City must assume the balance of MUD debt and reimburse the developer for any un-bonded facilities. The developer of a MUD who is prevented from being reimbursed through bonds issued by the District must be paid by the annexing city all the actual costs and expenses incurred in connection with developing the district that are eligible for reimbursement from bond proceeds under the rules of the TCEQ.
Page 1 of 4
Some cities pay a portion of this debt by enacting post-annexation surcharges to property owners formerly part of a MUD as provided for by state law. This is a charge on a homeowner’s utility bill and is calculated based on the amount of debt that the City absorbs at the time of annexation. If full purpose annexation is deferred until the MUD bonds are paid in full, this development would be excluded from the City’s tax base for that period of time, reasonably decades.
Relevant Sunfield Agreement Background
Restrictions on the City’s ability to annex the property within Sunfield MUD No. 1 go back to May 2003, when the City consented to the creation of Winfield MUD No. 1. That agreement designated Winfield District No. 2 as the “master district” that would be responsible for coordinating the provision of water, sewer, drainage, and other services and facilities to itself and Districts 1, 3 and 4. Ultimately, MUD No. 4 was actually designated as the Master District. In the consent agreement, the City agrees not to annex District No. 1 prior to the installation of 90% “of the facilities for which District 1, or District 2 as the master district for Districts 1, 2, 3 and 4, has the right to install or cause to be installed under this Agreement.” Two years after the consent to the creation of District No. 1, the City entered into an interlocal agreement with the City of Austin exchanging portions of each city’s ETJ. This Agreement essentially brought MUD’s 3 and 4 within Buda’s ETJ and moved MUD No. 2 into Austin’s ETJ. In September 2006, the City entered into a Strategic Partnership Agreement between the City of Buda and Sunfield MUD No. 1. That agreement clarified the annexation provisions initially set out in the consent agreement from 2003. It established a “Conversion Date” which provided that conversion to full purpose annexation could occur no sooner than the earlier of the following dates: (1) 30 years after the effective date of the SPA (October 3, 2036); or (2) upon the issuance of bonds necessary for 90% of the utility infrastructure necessary for the District (such determination is not to be based on the bonds authorized, but rather on the bonds necessary to provide facilities for the development of all land within the District). If the City wishes to convert to full purpose annexation, but the parties cannot agree on the determination of the conversion date, they will submit the matter to binding arbitration; the City would need to notify the District of its belief that the 90% threshold has been met. The agreement also specifies that upon conversion to full purpose annexation, the City assumes all obligations, liabilities, indebtedness and assets of the District, as provided by law. Also in September 2006, the City entered into an “Economic Development Agreement between the City of Buda and 2428 Partners” which incorporated the terms of the Strategic Partnership Agreement into the Economic Development Agreement. In November 2006, the City entered into a development agreement with the Shops at Sunfield. The property subject to this agreement is wholly within Sunfield MUD No. 1; the agreement provides that the property subject to the agreements shall not be subject to full purpose annexation during the term of the agreement until the conversion date established in the Strategic Partnership Agreement.
Authority to Annex in Each Sunfield MUD A map of the respective MUD boundaries is provided below. Page 2 of 4
Sunfield MUD No. 1. As discussed above, the City has contractually limited its ability to annex MUD No. 1. The City must wait until issuance of 90% of the bonds necessary to construct the district’s facilities, or September 2036, whichever is sooner. Sunfield MUD No. 2. Because MUD No. 2 is now within the City of Austin’s ETJ, it cannot be annexed by the City of Buda. Sunfield MUD No. 3. Because MUD No. 3 is not contiguous to the city limits, the City is not able to unilaterally annex the district at this time. Should the City limits become contiguous to the District, then the City may annex the District, but the City would assume all of the District’s debts, liabilities, and obligations pursuant to Local Government Code Section 43.075. Sunfield MUD No. 4. Because MUD No. 4 is not contiguous to the city limits, the City is not able to unilaterally annex the district at this time. Should the City limits become contiguous to the District, then the City may annex the District, but the City would assume all of the District’s debts, liabilities and obligations pursuant to Local Government Code Section 43.075. Annexation of MUD No. 4 would also result in the City assuming all obligations to purchase water from the GBRA pursuant to existing raw water contracts between 2428 Partners and GBRA. Under the existing “Contract for Raw Water Service,” which expires in 2050, the City would be obligated to pay for an annual commitment of up to 3,136 acre-feet per year; however, the contract provides the water purchaser with the right to terminate the agreement upon 30 days notice. Under the “water delivery” contract between the GBRA and 2428 Partners, which also runs through the end of 2050, the City may become obligated to pay monthly fees designed to reimburse the GBRA for the design, construction, maintenance and operation of the raw water delivery system. The water delivery contract also includes an obligation to pay for a pro rata share of debt service coverage. The agreement also contractually fixes water rates at an amount sufficient to make prompt payment of all the contractual payments contained. Annexation of MUD no. 4 would also include the obligations set forth in the existing wastewater operating agreement between 2428 Partners, Sunfield MUD No. 4 and the GBRA. This would include any debt associated with the wastewater treatment plant located in MUD No. 4.
Concluding Implications of Annexing Sunfield MUD
Following conversion to full purpose annexation and dissolution of the District, all of the obligations, liabilities, indebtedness, and assets of the District, including but not limited to the District’s Bonds, shall be assumed by the City. Given that the MUD tax rate is $0.9000 and Buda’s tax rate is $0.3704, it is likely Buda would need to substantially increase the City’s I&S tax rate to absorb the indebtedness. Likewise, Buda would need to increase M&O funds to properly maintain the additional assets. In addition, certain contractual circumstances require satisfaction. In particular, staff would need to carefully assess whether the 90% bond-issuance threshold has been achieved. Satisfaction of the 90% threshold appears unlikely given the large amount of undeveloped commercial property around U.S. Foods, which would require significant MUD bond-supported infrastructure to develop. Likewise, staff would need to determine whether the language of the Sunfield Agreement exempts the requirement for a 3-year annexation plan and constitutes voluntary consent to annexation, as it involves more than 100 occupied parcels. Page 3 of 4
Page 4 of 4
The Honorable Mayor and City Council
FROM:
Chance Sparks, Assistant City Manager
THROUGH:
Kenneth Williams, City Manager
Date:
July 27, 2017
Re:
Annexation of Sunfield Municipal Utility District
_____________________________________________________________________________________ The City Council requested information regarding annexation of portions of the Sunfield Municipal Utility District (MUD). In response, this memo provides some relevant general background on MUDs, Sunfield agreement background, descriptions of Buda’s annexation authority in each of Sunfield’s four MUDs, and concluding implications of Buda annexing one of the MUDs.
Municipal Utility District Background
A Municipal Utility District (MUD) is one of several types of special districts that function as independent, limited governments. The purpose of a MUD is to provide a developer an alternate way to finance infrastructure, such as water, sewer, drainage, and road facilities. Managed by a Board elected by property owners within the MUD, a MUD may issue bonds to reimburse a developer for authorized improvements and the MUD will utilize property tax revenues and user fees received from water and sewer services operated by the MUD to repay the debt. As the MUD pays off its debt, more of its tax revenue can be directed to other services. Originally, MUDs were very limited in what they were allowed to finance and what services they could provide. Over time, MUDs began taking on more responsibilities and providing enhanced services for the residents, such as parks and recreation, deed restriction enforcement, and solid waste service. This can present a challenge for cities annexing MUDs, as municipal annexation service plans require provision of equivalent services. MUDs rely on the County to provide police and road maintenance services and Emergency Service Districts (ESDs) for provided fire protection and EMS. Texas law requires that MUDs be annexed in their entirety; a City cannot annex just a portion. If the City annexes a MUD before its bonds are paid in full, the City must assume the balance of MUD debt and reimburse the developer for any un-bonded facilities. The developer of a MUD who is prevented from being reimbursed through bonds issued by the District must be paid by the annexing city all the actual costs and expenses incurred in connection with developing the district that are eligible for reimbursement from bond proceeds under the rules of the TCEQ.
Page 1 of 4
Some cities pay a portion of this debt by enacting post-annexation surcharges to property owners formerly part of a MUD as provided for by state law. This is a charge on a homeowner’s utility bill and is calculated based on the amount of debt that the City absorbs at the time of annexation. If full purpose annexation is deferred until the MUD bonds are paid in full, this development would be excluded from the City’s tax base for that period of time, reasonably decades.
Relevant Sunfield Agreement Background
Restrictions on the City’s ability to annex the property within Sunfield MUD No. 1 go back to May 2003, when the City consented to the creation of Winfield MUD No. 1. That agreement designated Winfield District No. 2 as the “master district” that would be responsible for coordinating the provision of water, sewer, drainage, and other services and facilities to itself and Districts 1, 3 and 4. Ultimately, MUD No. 4 was actually designated as the Master District. In the consent agreement, the City agrees not to annex District No. 1 prior to the installation of 90% “of the facilities for which District 1, or District 2 as the master district for Districts 1, 2, 3 and 4, has the right to install or cause to be installed under this Agreement.” Two years after the consent to the creation of District No. 1, the City entered into an interlocal agreement with the City of Austin exchanging portions of each city’s ETJ. This Agreement essentially brought MUD’s 3 and 4 within Buda’s ETJ and moved MUD No. 2 into Austin’s ETJ. In September 2006, the City entered into a Strategic Partnership Agreement between the City of Buda and Sunfield MUD No. 1. That agreement clarified the annexation provisions initially set out in the consent agreement from 2003. It established a “Conversion Date” which provided that conversion to full purpose annexation could occur no sooner than the earlier of the following dates: (1) 30 years after the effective date of the SPA (October 3, 2036); or (2) upon the issuance of bonds necessary for 90% of the utility infrastructure necessary for the District (such determination is not to be based on the bonds authorized, but rather on the bonds necessary to provide facilities for the development of all land within the District). If the City wishes to convert to full purpose annexation, but the parties cannot agree on the determination of the conversion date, they will submit the matter to binding arbitration; the City would need to notify the District of its belief that the 90% threshold has been met. The agreement also specifies that upon conversion to full purpose annexation, the City assumes all obligations, liabilities, indebtedness and assets of the District, as provided by law. Also in September 2006, the City entered into an “Economic Development Agreement between the City of Buda and 2428 Partners” which incorporated the terms of the Strategic Partnership Agreement into the Economic Development Agreement. In November 2006, the City entered into a development agreement with the Shops at Sunfield. The property subject to this agreement is wholly within Sunfield MUD No. 1; the agreement provides that the property subject to the agreements shall not be subject to full purpose annexation during the term of the agreement until the conversion date established in the Strategic Partnership Agreement.
Authority to Annex in Each Sunfield MUD A map of the respective MUD boundaries is provided below. Page 2 of 4
Sunfield MUD No. 1. As discussed above, the City has contractually limited its ability to annex MUD No. 1. The City must wait until issuance of 90% of the bonds necessary to construct the district’s facilities, or September 2036, whichever is sooner. Sunfield MUD No. 2. Because MUD No. 2 is now within the City of Austin’s ETJ, it cannot be annexed by the City of Buda. Sunfield MUD No. 3. Because MUD No. 3 is not contiguous to the city limits, the City is not able to unilaterally annex the district at this time. Should the City limits become contiguous to the District, then the City may annex the District, but the City would assume all of the District’s debts, liabilities, and obligations pursuant to Local Government Code Section 43.075. Sunfield MUD No. 4. Because MUD No. 4 is not contiguous to the city limits, the City is not able to unilaterally annex the district at this time. Should the City limits become contiguous to the District, then the City may annex the District, but the City would assume all of the District’s debts, liabilities and obligations pursuant to Local Government Code Section 43.075. Annexation of MUD No. 4 would also result in the City assuming all obligations to purchase water from the GBRA pursuant to existing raw water contracts between 2428 Partners and GBRA. Under the existing “Contract for Raw Water Service,” which expires in 2050, the City would be obligated to pay for an annual commitment of up to 3,136 acre-feet per year; however, the contract provides the water purchaser with the right to terminate the agreement upon 30 days notice. Under the “water delivery” contract between the GBRA and 2428 Partners, which also runs through the end of 2050, the City may become obligated to pay monthly fees designed to reimburse the GBRA for the design, construction, maintenance and operation of the raw water delivery system. The water delivery contract also includes an obligation to pay for a pro rata share of debt service coverage. The agreement also contractually fixes water rates at an amount sufficient to make prompt payment of all the contractual payments contained. Annexation of MUD no. 4 would also include the obligations set forth in the existing wastewater operating agreement between 2428 Partners, Sunfield MUD No. 4 and the GBRA. This would include any debt associated with the wastewater treatment plant located in MUD No. 4.
Concluding Implications of Annexing Sunfield MUD
Following conversion to full purpose annexation and dissolution of the District, all of the obligations, liabilities, indebtedness, and assets of the District, including but not limited to the District’s Bonds, shall be assumed by the City. Given that the MUD tax rate is $0.9000 and Buda’s tax rate is $0.3704, it is likely Buda would need to substantially increase the City’s I&S tax rate to absorb the indebtedness. Likewise, Buda would need to increase M&O funds to properly maintain the additional assets. In addition, certain contractual circumstances require satisfaction. In particular, staff would need to carefully assess whether the 90% bond-issuance threshold has been achieved. Satisfaction of the 90% threshold appears unlikely given the large amount of undeveloped commercial property around U.S. Foods, which would require significant MUD bond-supported infrastructure to develop. Likewise, staff would need to determine whether the language of the Sunfield Agreement exempts the requirement for a 3-year annexation plan and constitutes voluntary consent to annexation, as it involves more than 100 occupied parcels. Page 3 of 4
Page 4 of 4
