Why City Councils Tend to Prefer Public Improvement Districts over Municipal Utility Districts
Tighter annexation rules for Texas cities have now been in place for two years. One result is that cities are increasingly considering public improvement districts (PIDs). That’s a trend we noted last year, and if anything it’s strengthened in the last twelve months. Here, I’d like to briefly review some of the reasons why PIDs often prove more appealing than municipal utility districts (MUDs) for city councils seeking to shape growth at their edges. Many of the same factors also make PIDs attractive in redevelopment contexts as well.
First, let’s establish that a PID is a special district that enables an assessment (based on linear footage or square feet) to be placed on property which is used to fund or reimburse capital costs to facilitate higher quality projects with better and more amenities than would have been constructed otherwise. PIDs are:
- Not a separate political entity, as they are city or county controlled;
- Typically created when a developer petitions a city or county for creation;
- City or county levies assessments to pay for the construction of certain improvements —typically water, sewer, drainage, roads, landscaping based on acreage or linear footage;
- Improvements paid by Cash flow or issuance of bonds.
PIDs are established to accomplish huge range of improvements—even up to and including supplemental business-related services for the improvement of the district, including advertising and business recruitment and development.
From the city’s perspective, some of the most appealing aspects of the PID are:
- PID debt is non‐recourse to the City; the bonds are backed only by the assessments on property within the PID;
- PID assessment/lien are subordinate only to governmental ad valorem taxes;
- All City costs incurred as a result of creating the PID (staff, legal, consultants, engineers, etc.) should be paid by the developer via a cash escrow deposit with the City and are ultimately reimbursable from bond proceeds when the bonds sell;
- The issuance of PID debt by the City does not reduce the City’s bonding capacity.
With respect to the flow of funds, the City keeps all of its ad valorem and sales tax revenues. Ongoing administrative requirements can be contracted to a third party, answering to the City, which is paid for by PID assessments. The City will employ the services of Bond Counsel, Financial Advisor, Bond Underwriter, Trustee, City Attorney, City PID Consultant & Professional Appraisal all reimbursed from PID Bond proceeds or developer agreement.
PIDs typically come into existence at the request of the developer and upon approval by the City, as outlined in the following process summary:
- PID Petition submitted by developer
- Preliminary Service and Assessment Plan (SAP) submitted
- City Council accepts PID Petition
- Property Appraisal paid by developer, approved by City
- Public Hearing to approve creation of PID
- Preparation of revised Service and Assessment Plan (SAP)
- Initiate Preparation of Bond Documentation (City Atty, FA, Bond Counsel, Underwriter, Trustee, Underwriter’s Counsel)
- Public Hearing to Approve SAP and Levy Assessments
- City Council Review & Approval of Bond Issue
- Bond Underwriters Sell Bonds: Limited Offering Special Assessment Revenue Bonds
- Initiate Construction of infrastructure improvements
To determine whether PIDs are a good fit for your city or county, one of the key factors is the estimated special assessment revenue to be generated through the life of the project. That’s a key focus for Cities as they engage with their municipal financial advisor and bond counsel.
From the conversations we’ve had, and the work we continue to do, we expect the trend toward PIDs is likely to continue. Perhaps most important is the fact that no separate political entity is created. That’s in contrast to MUDs, which have a separate board—which can sometimes go in a direction the City doesn’t desire.
If you would like more information or to discuss in more details how public improvement districts or other special districts can be a financing tool, contact UMB Bank Public Finance.
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