DALLAS - A central Texas municipal utility district that has been in default for years is seeking to reorganize under Chapter 9 bankruptcy.

Grimes County Municipal Utility District No. 1 has debt of $1.86 million from its 1974 issue of water and sewer revenue bonds, according to its filing with the Texas Commission on Environmental Quality, which must authorize the bankruptcy filing.

"It is in the best interest of the district and essential to the orderly conduct of the business of the district that this application be approved by the TCEQ at this time," the district wrote in its filing earlier this month.

The MUD, about 70 miles northwest of Houston, was created as a housing subdivision but ended up with only three utility connections, according to Debi Loockerman, auditor with the TCEQ. The district is seeking a new developer for the property, she said.

There are no indications when the district last made a payment on its unrated bonds, if ever. Approval of a bankruptcy filing could take three months, she said.

While Texas has experienced a downturn in housing values due to the prolonged recession, none of the state's other MUDs have reported any financial distress, Loockerman said.

MUDs are special-purpose governmental units of the state of Texas. Regulated by the TCEQ, a MUD's primary function is to provide water, wastewater, and, in some cases, drainage services within its boundaries. A MUD may sell bonds, levy and collect taxes, provide and charge for water and sewer services, build infrastructure, condemn property, enforce restrictive covenants, and make regulations to accomplish its purposes.

MUDs are managed by an elected board of directors, and each director is a resident or a property owner in the district. An attorney representing the Grimes County MUD could not be reached for comment.

In March, Standard & Poor's upgraded 250 Texas MUDs based on findings that the sector was generally deserving of a lower risk profile.

"Typically, we constrain the ratings on the debt issued by many of these districts because of their limited purpose and size, lack of professional management, and, in our opinion, very high debt burdens," wrote analysts James Breeding and Horacio Aldrete-Sanchez. "We believe, however, that these entities warrant a higher rating because of their historically stable financial positions, with what we consider generally high reserve levels, and low tax delinquency rates. While high debt burdens relative to other GO credits are the norm for these districts, in our view, state oversight, coupled with managed debt issuance, offsets this weakness."

The majority of the ratings were in the triple-B category, with a a few in the A category. Only eight MUDs in Texas carry ratings in the double-A category, with none rated triple-A.

"Given the limited purpose and service responsibilities of these districts, debt service as a percent of operating expenditures tends to be what we consider very high," analysts wrote. "For most districts, we understand that additional bonds are likely to be issued. Generally speaking, however, additional bonding is not likely to substantially alter current debt profiles, we believe, since ongoing tax base growth has historically offset the need for tax rate increases."

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