Annexation agreements provide millions to MUDs, city of Houston

In a region devoid of a central form of governance, limited purpose annexation agreements between the city of Houston and municipal utility districts have helped fund millions of dollars in improvements in Cy-Fair and other areas of unincorporated Harris County since 2003.

The agreements also tax residents outside of Houston and take the last available 1 percent of sales tax revenue from an area that could use the money for other purposes. None of the revenue received by the city is required to be spent within the taxed districts, according to city officials.

“I think at their heart, they’re a money grab by the city of Houston,” Harris County Judge Ed Emmett said. “And they get MUDs involved on the basis of, ‘We promise not to annex you.’ But the city of Houston isn’t annexing MUDs anyway.”

Limited purpose annexation was born out of the 1999 Texas Legislature, said Nicole Smothers, manager of the community sustainability division for the city of Houston. Through limited purpose annexation, cities and MUDs can split 1 percent of sales tax revenue in commercial areas where it is available, and the city agrees not to annex the districts for a period of time—usually 30 years.

Since the turn of the millennium, hundreds of MUDs across Harris County have entered into such agreements—by far the most of any region in the state.

“These water districts are being called on to provide services,” said Michael Cole, counsel for MUD No. 191 and the Fountainhead MUD in the Willowbrook area.

“You’re better able to serve the communities you represent through an additional revenue stream.”

Although utility districts receive property tax revenue and revenue through utility fees, MUDs would not be able to receive sales tax revenue without the help of LPAs.

A MUD can spend the sales tax revenue on whatever that district was authorized to spend money on by the Texas Legislature, Smothers said, whether it is water and sewer infrastructure, parks and pathways, public safety or roads.

“[LPA] was seen as a way to bring revenue to this community for its development,” said Barbara Thomason, president of the Houston Northwest Chamber of Commerce. “What makes LPAs a challenge is there are so many of them. Cooperation and collaboration between them is a challenge.”

While the MUDs are spending money within their boundaries, the city of Houston is not required to spend any of the revenue within the region that is partially annexed.

However, Smothers said MUDs can negotiate with the city of Houston for the city to provide certain services, such as law enforcement, fire protection and the running of domestic animals, as long as the services are reasonable. Cole said sales tax revenue provided to the city also helps pay for infrastructure that residents of these districts outside Houston use, such as roadways.

“[Houston] used to be able to annex those areas,” Cole said. “It’s not really able to annex anymore. It had to come up with some strategy for supplementing that lost income.”

One piece of legislation under consideration this session could change the funding formula for the strategic partnership agreements that accompany LPAs. House Bill 2389, co-authored by state Rep. Patricia Harless, R-Spring, would require both MUDs and cities to spend 50 percent of all funding from the agreements on infrastructure within the annexed districts.

“The city does nothing for the money they receive, and it’s been a constant concern of mine,” Harless said. “We have $6 million leaving District 126 every year to the city of Houston for nothing.”

Cole said he believes the MUDs and city would not have to provide funding for many of the infrastructure improvements if the county would increase property tax revenue to fund those improvements.

“It’s a little disingenuous [on the] part of the county to say they need the funds,” he said. “The county is basically not providing the services, and [it does not] have the political will to raise taxes by 1 or 2 cents to fund these services.”

Although revenue from the LPA agreements continues to rise, the number of LPAs has plateaued.

“We’ve had fewer [requests] in [recent] years from MUDs in part maybe because they exist where people have wanted them,” Smothers said. “The available sales tax also is a factor, as [Metropolitan Transit Authority of Harris County] takes 1 cent of the sales tax, and a lot of the [emergency services districts] through elections have taken the other cent.”

Even if the region does not see changes to LPAs in the near future, Emmett said Houston and Harris County need to consider changes to how the two entities fund and provide services to county residents.

“MUDs were created to be a bridge in unincorporated areas that would eventually be annexed by the city,” Emmett said. “If the city of Houston has no intention of annexing these areas, let’s find a way for the counties and MUDs to work together.”