Despite facing numerous stresses in the past two years--the COVID-19 pandemic, high unemployment, and major hurricanes--Texas municipal utility district (MUD) ratings on the whole were stable. MUDs' inherent strengths of traditional market value growth patterns, debt issuance oversight, and resilience in the wake of major storms shined as upgrades outpaced downgrades between 2020 and 2021.

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MUDs' Connection To Environmental, Social, And Governance Risks

Environment

Drainage services can help combat environmental risks.  MUDs and water control improvement districts provide drainage services throughout districts; we consider this a fundamental credit strength. Drainage services typically involve the creation of detention ponds or infrastructure directing the flow of storm water, mitigating acute and chronic flooding that can occur following heavy rainfall, severe weather, and hurricanes. Despite the frequency of large storms, especially in the Houston area along the coast, the sector has not experienced widespread declines in market values or downgrades. Hurricane Harvey was one of the most devastating storms in the state and the U.S., based on insured losses, and caused significant property damage due to its high winds and flooding; nevertheless, most MUDs in the region did not report year-over-year declines in total market value as a result.

Social

Long-term population growth has provided social uplift.  The Austin and Houston areas (where most rated MUDs are concentrated), much like the rest of the state, continue to experience solid population and economic growth. In the last year alone, the state added about 1,000 new residents per day. As reported by the U.S. Census Bureau, since 2010, Texas led the nation, adding about 4 million new residents, a 16% bump in a decade. The population influx fuels demand for housing, supporting annual market value growth of local governments, including MUDs and supporting operations, through property tax collections that fund substantial debt service costs.

Governance

State oversight enhances governance structure.  MUDs issue debt to fund and facilitate the construction of infrastructure in the designated district. The Texas Constitution requires that all debt secured by tax revenues be approved by district voters. In addition, the state has empowered the Texas Commission on Environmental Quality to oversee the following:

• Approval of all debt issuances to help protect against speculative debt issuance or MUDs driving up debt burdens without corresponding market value growth.
• MUDs must complete a bond application report, which is submitted by a licensed engineer in the state.
• The report requires inclusion of a feasibility analysis that details a debt service fund cash flow analysis and projected tax rate under a "no-growth" scenario.
• Consideration of the application occurs in conjunction with financial and project feasibility.

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Cybersecurity

MUDs, like other local governments, are still susceptible to cyber attacks. 

Cyber risks have increasing credit relevance, and MUDs, similar to other local governments, are susceptible to those risks. In the past few years, cyber attacks on U.S. local governments have soared in frequency, occurring indiscriminately across all regions. Robust and multi-layered security, from internal governance to IT software, remain an important shield against such attacks, which are mainly ransomware demands.

In "Cyber Risk In A New Era: U.S. Utilities Are Cyber Targets And Need To Plan Accordingly," published Nov. 3, 2021, on RatingsDirect, we note that while there isn't a single standard for cyber preparedness, industry associations and federal agencies have provided guidance, recommendations, and tools for utilities to assess cyber resilience. In lieu of a single standard, we look to the entity to demonstrate how it incorporates best practices into its asset inventory, risk assessment, and training. We will continue to track cyber resilience in the sector as well as watching for the setting of a standard, which we believe would be beneficial for the industry, as it would determine a minimum floor for cyber resilience and provide guidance for smaller utilities that might not have the sophistication or budget to implement sufficient planning.

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Medians: Districts Have Returned To Their Usual Growth Trend

Notwithstanding some significant difficulties in calendar 2020, the sector remained stable as S&P Global Ratings upgraded six Texas MUDs while downgrading only one. In 2021, more traditional growth patterns have re-emerged; year to date, we have upgraded 14 MUDs and downgraded none. Combined rating actions between 2020 and 2021 represent about 5% of the rated districts.

The average MUD rating lies between 'A' and 'BBB+'

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