Building debt

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John D. Harden/DRC
A chained gate leads into the Talley Ranch water district. Many of the water districts in Denton County’s eastern half are rural and sit undeveloped as developers wait for growth that’s expected to spread from Tarrant and Dallas counties.
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$2 billion in bonds approved in districts formed by developers

It’s a few minutes past noon on a frigid Tuesday morning and only a handful of motorists are traveling along Hames Road in northeast Denton County.

This region of the county just east of Aubrey and Pilot Point is known for its open pastures, quiet ranches and clear air, marred only by the occasional haze of dust kicked up by a tractor traveling the unpaved roads.

It’s also home to a series of obscure government agencies that are quietly building up more than $2 billion in debt in Denton County. The county ranks fifth among Texas counties with 62 of the little-known special water districts, a type of government entity used by developers to finance infrastructure for residential and commercial developments.

And while voters are needed to approve the projects, it doesn’t take many of them. Only a dozen voters have cast ballots in water district elections in the past seven years, and projects totaling more than $700 million have been approved in two elections that each drew only one voter each.

Those scant votes clear the way for property and utility taxes to be levied against home buyers and other property owners in the new developments to pay off the tax bonds that are sold to finance them. So far, tax rates as high as $1.25 per $100 in property valuation have been levied, or $2,500 per year for a $200,000 home without any exemptions.

The developers, meanwhile, get payment in full for construction of the projects, allowing them to develop their projects with little financial risk.

“It’s an art used by developers to get either cheap [land] or to pay development cost — or part of it — and pass it on to the homeowners,” said John Baen, a University of North Texas real estate professor.

Developers, however, say the special districts are key to development in rural areas without water or sewer service.

“If done correctly, a [water district] can be a great catalyst for an area that otherwise would not develop for years,” said Van Nichols, a developer who formed a district near Pilot Point last year.

Sara Bronin, a professor at the University of Connecticut School of Law and the author of a 2007 law review paper, “Wrestling With MUDs to Pin Down the Truth About Special Districts,” said the municipal utility districts have mushroomed for two reasons.

“First, they allow developers to quickly grow a government in a previously undeveloped area,” she said, “and second, because developers’ influence on the state Legislature has allowed special districts to be created more easily.”

Decades of disputes

Water districts have been around in Texas for more than a century, and in Denton County since the 1950s.

They were originally created to develop water and sewer services for communities needing infrastructure. With set boundaries and the ability to levy and collect taxes, water districts were able to work independently from cities and counties, similar to the way most independent school districts work.

In the 1960s, water districts were scrutinized by state lawmakers amid concerns the districts were subject to abuse because they were easy to create and had minimal transparency and unlimited tax and bond powers, according to 1968 and 1971 state legislative reports reviewed by the Denton Record-Chronicle.

In the last 20 years, however, lawmakers have taken steps to make it easier for developers to create water districts by streamlining the process, according to the Record-Chronicle’s analysis of state documents.

The districts began to proliferate in Denton County and elsewhere in the state after a 1995 decision by the Texas attorney general’s office that halted the state’s detailed investigations of water district elections, a move that severely limited the state’s oversight of the districts.

Today’s districts can do a little more than build just water infrastructure, said Baen, the UNT professor.

In 2003, the state Legislature passed and voters approved a constitutional amendment authorizing utility districts in certain counties — including Denton County — to use bond proceeds to build parks and recreational facilities. And in Denton County and some other counties, certain districts are also allowed to build roads.

Districts can be set up by petitioning the appropriate government agency — a local city, if the property is within the city’s extraterritorial jurisdiction, or the county. A confirmation election is then held to approve creation of the district. The districts are typically run by a board of directors, handpicked by the project developers, until elections can be held.

The primary point of contention between municipal leaders and developers of water districts is over consent.

Water districts generally originate when a developer asks a city to provide water infrastructure within its extraterritorial jurisdiction, or ETJ, an area contiguous to a city that is a likely target for city expansion.

If the city denies or fails to provide the infrastructure within three months of the request, developers can then ask the Texas Commission on Environmental Quality for permission to create a water district based on the city’s failure to provide services.

If the city consents to creation of the water district, the developer then must seek approval from the state Legislature for creation of a district. A Legislature-created district has authority to provide not only water and sewer services but also to build roads.

There are also other ways developers can create districts that bypass any state or local review.

Districts created by the state are allowed to split into multiple districts and to annex property, even if it is not contiguous or within the same county. State lawmakers expressed concerns in 2006 that water districts could be created in such a way, but they did not take steps to regulate that ability.

Mixed reviews

Within the last decade, Denton County has doubled its number of special districts by adding 31 new ones. Of the 62 districts now in the county, only 11 are inactive.

Voters have approved the sale of more than $2 billion in tax bonds in Denton County since 2007. Bonds have not yet been sold for all of those districts, but the debt will add to the $350 million in debt already outstanding among water districts in the county, according to records from the Texas Bond Review Board.

The districts get mixed reviews from local leaders.

“Special districts have been around forever, but the difference now is how they are being used,” said Denton County Commissioner Hugh Coleman, who has scrutinized the districts in recent years.

Denton County needs more jobs, not more real estate development, he said.

“Large amounts of high-density housing in the unincorporated areas will only result in our community becoming a bedroom community for Dallas, with large amounts of commuters placing strains on our transportation infrastructure and pressure on our already crowded schools,” Coleman said.

But proponents of water districts say the districts flourish because of the demand for new homes, and that no one is forced to buy or rent a home within a water district.

Water districts can help developers replenish the housing supply, according to attorneys who represent the districts. The supply of homes for sale in Denton County reached the lowest point in at least three decades in November, when less than a two-month supply was on the market, according to the Real Estate Center at Texas A&M University.

And growth is expected to continue. Denton County has more than 670,000 residents, and state analysts predict the county will have more than 1.1 million residents by 2030.

About 45,000 of the county’s residents — about 7 percent — lived within a water district as of last August, an increase of nearly 10 percent from 2012, according to the bond review board.

Texas is adding 1,000 people a day, and that kind of growth brings growing pains, said state Rep. Myra Crownover, R-Denton.

“Special districts are an important tool for development in Texas,” Crownover said. “Is there room for improvement? Probably. The trick is finding a way to prevent bad behavior from a few bad actors without unnecessarily burdening responsible development.”

Contention in Pilot Point

Nichols, the developer who owns all the property in the Eland Farms water district near Pilot Point, had his land annexed by a nearby, noncontiguous water district after he failed to reach an agreement with the Pilot Point City Council last year.

“Unfortunately, it became clear that we would not be able to reach an agreement with the city, so we elected to include the property in an existing district as our next best alternative,” Nichols said.

Pilot Point officials indicated they felt helpless during the negotiations, with a staff report last year noting that the district was likely coming whether they wanted it or not. At times during the council’s executive sessions last year, heated conversation about the development could be overheard from behind closed doors spilling into council chambers for the public to hear.

“With the toll road extension imminent, and the possibility of an outer loop, northern Denton County is poised for tremendous population growth and a strong real estate market, making the need for utility districts to attain optimum development unnecessary,” Pilot Point Mayor Pete Hollar said.

Local planners say water districts can be nightmares for growing cities because typically they are created within a city’s ETJ. If the city decides to annex an area that already has a water district, then the city must assume all the debt held by the district.

Bronin, the Connecticut professor, says the way developers use the districts contradicts their original purpose. She says utility districts are intended to be controlled by the general public, but in Texas they are controlled instead by real estate developers.

Residents’ concerns

Just over a year ago, about 1,000 acres just east of Northlake sat empty, much like the rural land in northeastern Denton County near Pilot Point.

Today, developers have already completed construction on the first few houses in a 2,500-home, master-planned community known as Harvest, which is also expected to include about 130 acres of offices, shops and restaurants.

The development sits in two water districts, Belmont Fresh Water Supply districts No. 1 and No. 2.

And just a couple of miles to the east on the other side of Interstate 35W, two other water districts known as Canyon Falls No. 1 and No. 2 await construction of another 1,800 homes.

Residents approached by the Record-Chronicle say they were lured to the area by the rural environment, but say they’ll probably move once the new developments begin to grow and clog traffic.

Several residents spoke out against the Harvest and Canyon Falls developments at a Northlake Town Council meeting in November 2012.

“I feel sure that as a resident of Northlake, you would not welcome a development like this on your street or road,” Donna Gardner, a 19-year resident of Northlake, told the council. “Just picture rooftops after rooftops, lots of traffic, noise and the quiet scenic landscape gone. How does this maintain a rural atmosphere?”

Attorneys who represent water districts say residents fail to see the districts’ importance to the region and state.

“Most folks I encounter that are opposed to districts either don’t understand them or are simply opposed to more government in whatever form it takes,” said Misty Ventura, an attorney with Shupe Ventura Lindelow & Olson.

Mounting debt

The amount of outstanding debt among utility districts in Denton County jumped from $42 million to more than $350 million from 2000 to 2013, according to the bond review board.

The records, however, do not include voter-approved debt of districts that have yet to sell their bonds. That amount, which has already been approved by voters, exceeds $2 billion.

State officials with the Texas comptroller’s office reported that water district debts were among the fastest-growing debts in Texas in 2011, the last year for which that data is available.

Water districts accounted for $30.3 billion, or almost 16 percent, of all outstanding local government debt statewide three years ago, but even the state has a tough time keeping track of the data, officials said.

“All the information we collected wasn’t easy to find,” said Tom Currah, who works for the Texas comptroller as the assistant director for research and analysis.

Among the local districts with unsold bonds is Denton County’s largest district, the Talley Ranch Water Control Improvement District, which has more than $500 million in approved bonds.

Two other nearby water districts, known as Four Seasons Ranch Municipal Utility District and Smiley Road Water Control and Improvement District, have been authorized to sell an additional $500 million combined.

The debts per capita in utility districts is typically two to three times higher — or more — than the debts per capita in most towns and cities, according to state records.

For instance, the debt per capita for the approximately 2,000 residents in the Denton County Fresh Water District 7 is $16,700, according to Texas Bond Review Board data.

By comparison, the debt per capita in the town of Copper Canyon, which has a smaller population of about 1,300, is about $1,400, according to the data.

Though debts in the utility districts are high, active utility districts generally have stable credit ratings, according to ratings from Standard & Poors.

Standard & Poors analysts say the districts’ credit weaknesses of “high net debt burdens” are mitigated, in part, by their proximity to the economic engine of Dallas-Fort Worth, which fuels residential growth.

Unless specifically stated in bond documents, it is the sole responsibility of the water district to pay off its debt, with no other entity being held responsible, TCEQ spokesman Terry Clawson wrote in an e-mail in response to questions from the Record-Chronicle.

“To assist in making debt payments, a [water district] could increase its tax rate or utility rates, and if necessary, file for bankruptcy. A [water district] must obtain TCEQ’s approval before proceeding into bankruptcy,” he wrote.

12 votes for $2 billion

Most water districts and their respective tax bonds in recent county elections were approved by just a few voters.

It’s taken just 12 voters, for example, spread across seven water districts to approve the issuance of more than $2 billion in tax bonds since 2007.

Although developers have been criticized for placing voters within the boundaries to cast ballots in favor of their districts and to authorize bond sales, the move appears to be common practice and is not prohibited under state law, according to attorneys who represent water districts.

Some notable elections include the May 2010 election in which when one voter cast the sole ballot for the issuance of nearly $400 million in tax bonds for the Smiley Road development near Pilot Point. And in the Talley Ranch election, one voter cast a ballot to approve the issuance of more than $500 million.

In November 2010, two voters living in a mobile home on Fritcher Road approved $292.5 million in bonds and a potential tax levy of $1.20 per $100 in property valuation for the Four Seasons water district.

In November 2012, six voters approved the issuance of about $100 million in tax bonds to jump-start a residential development just north of Argyle. Some of those voters still live in two mobile homes along a dusty road in the Canyon Falls Municipal Utility District, which is located in the ETJ of Argyle, Northlake and Flower Mound. And according to county records, those mobile homes are owned by Canyon Falls Land Partners, the developer of the project.

One year later, in the same district, three residents voted for an additional $146 million in tax bonds.

A few of the voters who voted in recent utility district elections declined to comment or did not respond to repeated requests for interviews regarding their involvement in the elections.

Investigating water districts

State lawmakers admitted in a 1989 legislative report that they were aware developers would routinely move their “friends” into the district and ask them to vote for millions of dollars in tax bonds, “which will have to be paid off by future homeowners in the district.”

Some lawmakers and local leaders say they believe this destroys the integrity of holding an election.

“The elections for their creation are often done by one voter and for large amounts of bonding capacity. This is the equivalent of taxation without representation,” Coleman said.

Oversight has also declined. Prior to 1995, the state conducted “on-the-ground” inspections of elections confirming the creation of a special district if 10 or fewer votes were cast to ensure the validity of the elections, according to a state Senate committee report in 2002. But the state attorney general’s office concluded the inspections were an “unproductive use of resources” and chose to halt the inspections, according to the report and a July 1995 state memo from the attorney general’s office.

During some of the most recent elections involving water districts in Denton County, fewer than five voters were involved, which would have triggered a state inspection prior to 1995.

Attorney general’s office spokesman Tom Kelley, who recently retired, said it’s likely the state halted the investigations because it was probably impossible to keep up with the districts’ growth.

There are more than 2,000 water districts in Texas, according to the TCEQ. And bills for more than 115 utility districts were approved, including two for Denton County, by the Texas Legislature last year.

It’s unclear if the office uncovered any questionable activities. After an open records request was made, officials with the attorney general’s office said records from that time period did not exist. The office’s retention period for records is 15 years, they said.

Some attorneys say developers prefer making sure their developments are as clean as possible to avoid scrutiny.

“In my experience, voters are not promised anything in return for their vote,” Ventura said.

At least twice, in 2002 and again in 2008, state legislative committees recommended making changes to voter affidavits to validate a voter’s intent.

Committees recommended adding two lines: “I was not promised anything of value in return for voting for any proposition on the ballot,” and “It is a criminal offense to falsely swear to a statement known to be untrue.”

But changes were never made, and the affidavits are still relatively the same as they were in 1995, Kelley said. Those affidavits now must be filed with the attorney general’s office, but no inspections are done.

In 2011, state Sen. Jane Nelson, R-Flower Mound, filed a bill to restore “the integrity of [water district] elections to assure that they are established for their intended purpose.”

The bill would have required voters in an election to establish a water district or to issue bonds for that district to have lived in the district for a year prior to the election. But the bill was left in committee and died.

Bronin said it can be difficult passing water district legislation because of the amount of influence wielded by lobbyists representing real estate developers and attorneys.

Door to transparency

In the most recent legislative review of water districts from 2010 and 2011, lawmakers have said the districts need more controls on certain activities, better transparency and governance, and improved communication with residents of the district.

Many residents are unaware that they may be living within or near a water district, according to the state Senate report, “Invisible Government: Special Purpose Districts in Texas.”

Last year, House Bill 738, which added more transparency to how utility districts are created, was passed by the state Senate and House and then signed by the governor.

It was the first legislation of its kind in years.

Crownover, the Texas House representative from Denton, filed and authored the bill, and said it received mixed reviews. The bill gives county commissioners authority to address TCEQ before the state approves a district in a city’s ETJ.

But it wasn’t easy getting the bill through.

“The tricky part of being a legislator is finding the right balance,” Crownover said. “HB 738 was designed to address a specific problem in the process and I believe we have addressed that problem. I think it is too early to tell whether or not more legislation is needed.”

The bill is designed to give commissioners in each county the authority to review each district seeking creation in an effort to keep track of each development.

Historically, it’s an unpopular move to introduce legislation that tries to regulate or limit what developers can do with their land, Bronin said.

But that hasn’t stopped residents, city and county leaders from expressing their contempt for utility districts.

In 2013, mayors from Krugerville, Cross Roads and Pilot Point expressed concern about the effects special districts would have on their cities’ services and school districts. They contacted Coleman, who went to Austin to oppose the passage of two bills authored by state Rep. Pat Fallon, R-Frisco, that would create two districts.

The group of city leaders said they were afraid the master-planned communities would lure more residents than the local school districts and infrastructure could handle.

Fallon’s bills passed after being merged with a bill authored by state Rep. Scott Sanford, R-McKinney, that created similar districts.

Sanford said he had no problem carrying a bill that included creating special districts in a county he did not represent, but said last year that he wouldn’t support a special district in Collin County because of districts’ ability to set higher-than-average tax rates.

Critics also contend the water districts can create uneven taxation and unevenly provide infrastructure.

Wayne Feiden, a planning consultant from Massachusetts, said poorly planned districts can lead to quick but inefficient development, “which in the long term costs taxpayers.”

Looking ahead

Some areas of Texas welcome the districts because they allow cash-strapped cities to develop without taking on additional debt.

The state estimates there are more than 2,000 water districts in Texas. The Houston area is home to more than 500 utility districts, the most condensed area for water districts in the state.

And according to legislative hearings, testimony minutes and recordings, many municipal leaders in that area prefer using the districts to create important infrastructure.

Local officials in Denton County say the county isn’t ready for that kind of growth.

“We need the right kind of development, not just development right now,” Coleman said.

However, those who represent water districts say the growth is coming whether locals want it or not, and that water districts could help the region prepare. They note that many of the developments will not be built until the Dallas North Tollway extension project is at least underway.

The extension would provide a link between downtown Dallas and cities in Denton County, but officials said recently they have not yet determined a project cost or likely start date for construction.

For now, officials can look to the water districts along I-35W, which are beginning to break ground, to study the impacts the districts could have on the county. Any changes to oversight of the districts will have to wait until the next legislative session in 2015 or later.

“I am always looking for ways to make special taxing districts more accountable and more responsive to community concerns, and I will continue to explore this issue,” said Nelson, the state senator.

“The difficulty is always finding solutions that will garner the support necessary to become law because attitudes toward these districts vary dramatically across the state.”

JOHN D. HARDEN can be reached at 940-566-6882 and via Twitter at @Jdharden.


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