DALLAS – Most municipal utility districts in coastal regions of Texas enter 2018 on solid ground four months after Hurricane Harvey swept ashore, according to credit analysts and other economic reports.
“On the whole, the hurricane's negative effect on the sector was slight, with only 3% of the portfolio experiencing pressure, and the positive rating actions outweighed the negative,” S&P Global Ratings analyst Joyce Jung wrote in a recent report on the sector. “Moreover, we expect continued stability in the sector for the next two years.”
S&P rates about 430 MUDs, including 364 that were in Hurricane Harvey's path.
“Overall in 2017, we affirmed the vast majority of MUD ratings, raised 30 ratings, and lowered none,” Jung said. “In addition, we revised the outlook on 25 MUD ratings (including those affected by the storm); of those outlook revisions, 10 were positive and 15 were negative.”
By other measures, the hurricane appears to have had little economic impact on Southeast Texas as business has surged in the aftermath of Harvey’s Aug. 27 landfall.
In suburban Fort Bend County west of Houston, most cities saw sales tax revenue rise in Texas Comptroller Glenn Hegar’s December report, with revenue in the affluent city of Sugar Land growing by more than 26% compared to the same period last year. The communities west of Houston were some of the hardest hit by flooding.
The Fort Bend County Assistance District No. 2, which provides roads and services for MUDs in the county, reported a nearly 73% increase in sales tax revenue. MUDs generally do not levy sales taxes but rely on property taxes.
In Brazoria County, the towns of Alvin and Angleton saw sales tax revenues rise by more than 13% while the Gulf Coast city of Freeport suffered a 24% decline.
To the south of Houston, the small Galveston County town of Bayou Vista recorded a more than 400% year-over-year increase in revenue. League City in the same county enjoyed a 33% increase in sales tax revenue.
In Houston, sales tax revenue shot up more than 17% for the reporting period, which covered sales in October, tabulated in November and reported in December.
In the industrial suburb of Baytown east of Houston, sales tax revenue surged 26%.
The city of El Lago in Harris County near the National Aeronautics and Space Administration’s headquarters, sales tax revenues for the period jumped 178%, according to the Comptroller’s office.
Near the Louisiana border, the industrial city of Beaumont enjoyed a 22% lift in sales tax revenue while neighboring Port Arthur, home to one of the world’s largest refineries, saw its revenues surge 25%.
Corpus Christi, south of Houston, stood near the eye of the storm when it landed in the Coastal Bend region. Corpus Christi’s sales tax revenue was up 9.5% in the December report. Nearby Port Aransas, which took a direct hit from the storm, saw its sales tax revenue fall more than 27% in the latest report.
Texas’s strong economy has lifted the major urban areas out of harm's way and moderated the debt burdens of the MUDs located in those areas, according to S&P.
Only 14 of S&P’s negative outlook revisions were due to the potential for a material deterioration in MUDs' tax bases following Hurricane Harvey. Analysts are watching to see how key credit factors such as level of reserves and direct property taxes for debt and operations will be affected.
Shortly after the storm's landfall, S&P assessed 364 MUDs, or 84% of its total MUD portfolio, within the disaster-declared area.
“According to our analysis, fewer than 10% of the MUDs within the Houston MSA experienced various degrees of street or home flooding and only 3% of the MUDs expect what we consider a substantial assessed valuation loss,” Jung said. “In addition, most of these MUDs did not authorize a reappraisal of damaged properties, making the potential negative impact of AV loss in the current year less likely. Any damage or decline will likely show up in fiscal 2019, giving the districts time to adjust the tax rate as needed.”
The districts are usually created in fast-growing areas at the request of real estate developers seeking tax-exempt financing of infrastructure improvements to serve future development. The majority of infrastructure districts are located within or have direct access to Texas' four largest metro areas. Houston-area districts account for about 84% of S&P’s total portfolio.
“Although we don't expect Hurricane Harvey to have a lasting impact on Houston-area MUDs, increasing occurrences of weather-related natural disasters pose a potential threat to their long-term credit stability,” Jung noted. “Given Houston's proximity to the Gulf Coast, if the potential to experience flooding is left unchecked, the tax bases of Houston-area districts could deteriorate further.”
The districts' capital needs could rise due to the need to improve the current infrastructure and levee system to mitigate future natural disaster-related risks, further straining their debt metrics, Jung said.
“An increase in the number of regional disasters over time could reduce demand for certain housing despite infrastructure improvement,” Jung said. “As a result, the district's debt burden could rise while its tax base deteriorates.”
In a recent report from the Texas Workforce Commission, leisure and hospitality employment rebounded by adding 34,700 jobs in October after experiencing its largest monthly decline in September due to hurricane-affected business closures. Over the year, this industry has gained 41,000 jobs. Employment in the trade, transportation, and utilities category grew by 10,300 jobs, and the professional and business services category expanded by 6,300 jobs.
Statewide, unemployment fell to 3.9%, the lowest rate in more than 40 years. In the Houston metro area, the rate was slightly higher at 4.1% compared to the 3% rate in the Dallas Fort Worth area.
“Despite the downturn in the oil-related industry and the effects of Hurricane Harvey, Texas' economy remains resilient, and AV growth in the four major MSAs has been strong,” Jung wrote. “Texas' economic indicators such as employment and population growth consistently outpace the national average each year due to a robust economy, a favorable tax environment, a low cost of conducting business, and a low cost of living, which have led to positive rating actions outpacing the negative in the past eight years.”