The Cinco Municipal Utility District No. 1, located near Houston, has disclosed that the Internal Revenue Service is auditing $5.2 million of revenue bonds it issued in 2002 to finance water and sewer infrastructure.
In a material event notice filed last week with the Municipal Securities Rulemaking Board’s EMMA system, the district said it learned of the audit July 6, when it received a letter from the IRS announcing the examination.
However, the notice also said the letter was dated April 2 and does not explain the three-month discrepancy.
The notice did not state whether the audit was random or examining specific issues, and merely that the IRS is looking into “the tax-exempt status of the bonds.”
The municipal utility district said it is in the process of complying with the requests of the IRS, but did not detail exactly what is being requested.
The MUD is one of 16 such districts, authorized as a political subdivision by the state of Texas and created in 1985 by the Legislature.
The utility districts issue bonds to reimburse the costs incurred developing water and sewer infrastructure.
MUD No. 1 covers water, wastewater and storm drainage facilities in roughly 246 acres of land near Houston, according to bond documents.
It also is a regional provider of waste collection and treatment facilities, as well as water supply and delivery facilities to the area, and has been contracted to provide water and wastewater treatment to other districts in the area, covering about 5,345 acres.
The bonds were issued to reimburse the construction costs for several water supply projects, including water wells and water collection lines, the bond documents said.
The area serviced includes over 8,000 residential lots, three elementary schools, two junior high schools, and a high school.
It also is home to several commercial and recreational properties, including the Willow Fork Country Club and Golf Course and the Golf Club at Cinco Ranch, according to documents.
Allen Boon Humphries Robinson LLP in Houston represented all the districts, including MUD No. 1, but could not be reached for comment.
Vinson & Elkins LLP served as bond counsel on the deal, but no longer represents the district, sources at the firm said Monday.
First Southwest Co. was the district’s financial adviser. Financial Guaranty Insurance Co. insured the bonds.
The bonds were offered competitively, with William R. Hough & Co., now part of RBC Capital Markets, selected to underwrite the bonds after the competitive offering.
District officials and attorneys for the MUD did not return calls for comment.