Municipal Information Services
6935 Barney Road, Suite 140
Houston, Texas 77092
(713) 690-5277
www.mudhatter.com
September 30, 2010
Municipal Securities Rulemaking Board
Attention: Leslie Carey, Associate General Counsel
1900 Duke Street, Suite 600
Alexandria, Virginia 22314
Re: Proposed Changes to Rule G-23
Rule Making Board:
My name is Ron Welch and I am the proprietor of Municipal Information
Services (MIS) and an economist with the University of Houston’s Institute for
Regional Forecasting (www.uh.edu/irf). Over the last 31 years MIS has compiled
and maintained several data bases with information from and about the ±700 municipal utility districts (MUDs) operating in the Houston Region. I have a Ph.D.
in economics from UH and in 1981 finished my dissertation titled, The True Interest Cost of Municipal Utility District Securities, 1973-1978. Soon after finishing my
dissertation I joined the firm of Juran & Moody and became a financial advisor
for several Houston MUDs, where I continued compiling MUD data. In 1985 I
became an independent and since have served many times as a temporary financial advisor, when dealer-FAs resign to become underwriters for MUD refundings. My point here is that I am intimately familiar with the market for MUD
bonds and provide the most comprehensive up-to-date information about MUDs
to several dealer clients and rating agencies.
Since 1989 Houston area MUDs have sold approximately $12 billion of
bonds in over 2,700 issues, averaging approximately $4,450,000 per issue. While
approximately 40% of those issues were refundings, MUDs’ new money bonds
generally finance water, sewer and drainage infrastructure for real estate subdivisions. One of the main reasons that Houston and Texas did not have the real estate bubbles that burst in other areas of the U.S. is the use of MUDs to provide an
adequate supply of new residential lots and commercial tracts, which prevented a
substantial run-up in real estate prices. Attached hereto is a letter from Dr. Barton Smith, retired director of the Institute for Regional Forecasting, to the Texas
Legislature detailing the importance of MUDs to Houston and Texas.
With respect to the proposed changes to Rule G-23, I generally concur that
a dealer-FA representing an issuer should not be allowed to resign to become the
underwriter on a negotiated issue, unless the issuer is afforded the opportunity to
hire an independent financial advisor to monitor the FA’s structuring and the underwriter’s pricing of the negotiated issue. Texas MUDs can only do negotiated
offerings for their refundings and by the time they refund bonds the municipal
bond market is somewhat familiar with their credit. They most likely will have a
good investment quality rating for their refundings or be able to attain bond insurance to enhance their credit.
I do believe that you should reconsider the change in the rule that would
not allow dealer-FAs to be able to bid on competitive issues in certain cases.
Such a change would be a detriment to small issuers that are new to the municipal bond market, do not qualify for an investment quality rating or cannot obtain
bond insurance. It would be particularly detrimental to newer Texas MUDs,
whose real estate developments are in their early stages. All new money bonds
sold by MUDs have to be competitively bid. Typically, a MUD’s first bond issue
is somewhat less that $10 million and will be unrated, unless in the unlikely case
it can obtain bond insurance. Since the muni market is not familiar with its
credit, generally for its initial offering it will receive only one or two bids and
must rely on dealers retail customers to by its bonds, as institutional buyers generally require bonds of a higher quality. As an issuer, a newer MUD with a dealerFA not only wants that firm to bid on its new money deal, but expects it to do so
in order to keep dealer firms with large bases of retail customers that want to bid
on its bonds from under pricing their issue.
By the time a Texas MUD issues it third or forth new money bond issue,
the muni market is familiar with the credit and, in good market conditions, generally will receive several bids, regardless whether its dealer-FA makes a bid. In
monitoring the MUD bond market over the last 20 years, I have never seen an issue structured by a dealer-FA to specifically benefit its underwriter or to prevent
other potential underwriters from making a bid. I am intimately familiar with all
the dealer-FAs for Houston area MUDs and know they realize their fiduciary duties to their clients. With more than 50 years of experience in the municipal bond
market there are generally accepted industry standards that have been established, which protect Texas MUD issuers from predatory practices that apparently have been used by a few unscrupulous dealer-FAs in other areas of the nation. I do believe that dealer-FAs for MUDs should continue to be allowed to bid
on their clients offerings, so long as they receive permission from their clients
and disclose their fiduciary duty to and relationship with the MUDs they represent to potential customers.
Sincerely,
R L Welch
Ronald L. Welch, Ph.D.
cc: Mary L. Schapiro, Chairman
U.S. Securities & Exchange Commission
UNIVERSITY
of
HOUSTON
INSTITUTE FOR REGIONAL FORECASTING A
DIVISION OF THE CENTER FOR PUBLIC POLICY DEPARTMENT OF ECONOMICS August 23, 2010
Members ofthe Texas Legislature Austin, Texas Re: The Importance of Municipal Utility Districts (MUDs) to Texas
Dear Legislator:
During the past 6 months, I've been asked by hosts ofnational media representatives why Texas has fared better than most other states during this recent serious recession. While there are several valid answers to such a question, invariably I stress the fact that even though the state had its fair share ofsub-prime mortgages, Texas did not get caught up in a speculative housing market bubble with home prices far exceeding the financial capabilities 0 f families. Of course, the immediate response to that answer is "Why did home prices remain so low during the excessive national housing boom?" That also has multiple answers, but I emphasize that the primary reason prices remained subdued is because new housing costs remained low, and that the latter phenomenon was due to the low costs of developing residential subdivisions in Texas compared with most other locations in the country. Furthermore, I explain that low cost development can largely be attributable to the use of municipal utility districts in the state. At the housing market's peak in 2007, Texas home prices were on average about 25% lower than the national average on a price per square foot basis, and new home prices were about 32% lower. In comparison to many areas in California, Washington State, and portions ofthe east coast, prices in Texas were 50% lower. Yet, even now after these areas have experienced a severe home price correction, Texas prices are still about a third lower than in those cities that experienced a housing price bubble and then a bust. Friends in Colorado, where I enjoy a second home, are stunned at the fact that housing in
Houston averages about $70 per square foot, while the same quality home in the greater
Denver area (in fact, all along the Rocky Mountain bench) is over $125 per square foot.
Learning.
Leading~M
204 McElhinney Hall
Houston, TX 77204-5019
7131743-3869
•
Fax: 7131743-3969
Page 2
A residential lot in Texas that would sell fur $30,000 still sells for nearly $75,000 in
Colorado, despite the slowdown in construction there. Indeed, low land costs associated
with significantly reduced development costs are a major reason Texas home prices are
extraordinarily low and have been so for several decades.
In other states public sector constraints make development a long, drawn out nightmare,
significantly raising the costs of creating new residential lots. Part ofthe problem is that
local governments are attempting to manage development to their fiscal advantage since
most have to bear the burden ofputting in place much ofthe social infrastructure needed
to support a new subdivision. As a consequence, they are often excessively cautious in
permitting developments that entail uncertain fiscal consequences. Indeed, many
communities in the U.S. practice what urban and housing economists call "fiscal zoning",
permitting only the development they are certain will produce a fiscal dividend for them.
While many developments do eventually get permitted, the costs ofthe lengthy permitting
process is often extremely high, both in terms oflegal and administrative fees and in terms
ofthe opportunity costs of a much longer period oftime that the developer must hold zero
income producing land while negotiating all the obstacles to get a permit. Of course, these
extra costs ultimately get passed on to the consumer ofhousing in terms ofhigher lot
prices and hence home prices. Recent research published in the economics literature also
suggests that the consumer gets hit with high prices because the restrictive nature of the
permitting process typically results in an under-supply of developed land ready to be
utilized in residential building.
The use of MUDs in Texas eliminates many ofthe administrative problems and fiscal
worries that development might impose upon the local public sector. MUDs are a
remarkably easy way to eliminate the risks to the public sector ofhaving to "front end"
much ofthe infrastructure cost ofnew home development while at the same time
eliminating the developer's costs and risks associated with the onerous permitting process
fuund in so many places in this country. MUDs are a win-win solution for all parties
involved: the developer's costs are lower, home owners buy housing at much lower prices,
and the public sector is not laden with fiscal burdens that can stretch their budgets,
entangle them in debt issuance issues, and risk shifting tax incidence on to their existing
constituencies. Ultimately, the home buyer does pay for the benefits ofthe infrastructure
provided through annual tax levies and user fees, but this is how it should be. Those who
receive the benefits pay. But, in paying through MUDs monthly and annually, the home
owner can indirectly take advantage ofthe tax-free borrowing capabilities ofthe MUDs
(unavailable to developers who would pass the costs on in form ofhigher home prices)
and this will lower the amortization costs ofthe infrastructure improvements and allow
them to pay for the benefits over time as they are enjoyed. Furthermore, in harmony with
homeowners associations they are able to retain a remarkable degree ofself governance
over future capital improvements in the neighborhood.
At the Institute for Regional Forecasting, we've stressed for decades the important
comparative advantage ofa low cost environment (for both households and businesses)
Page 3
that Texas enjoys. While such benefits in general are obvious, what's less obvious is the
role MUDs play. By keeping home prices down, Texas can maintain higher ''real
incomes" without having higher wages and salaries. The high real incomes attract quality
high skilled labor, while reasonable nominal (market) wages and salaries attract businesses.
The bonus benefit that has become clear is that these same forces are now acting as a
major contnbutor to the amelioration ofa serious recession in Texas at the same time
many other parts of the nation still find themselves in the mire of the worst financial crisis
to hit the U.S. since the Great Depression.
Sincerely,
Barton Smith, Ph.D.
Director