S&P Global Ratings is not taking any ratings actions on Texas municipal utility districts (MUDs) at this time. Hurricane Harvey made land fall along the Texas Gulf Coast on Aug. 26, 2017, causing major flooding within the Houston area, and we maintain public ratings on 364 MUDs in counties within the declared disaster area. Designed to provide basic utility infrastructure to new housing developments, MUDs primarily collect property taxes and use them to pay debt service on bonds sold to build the infrastructure. With little overhead, day-to-day responsibilities, or staff following project completion, MUDs also have limited cash flow or needs beyond property tax receipts. Because of these characteristics, the aftermath of Hurricane Harvey could inflict a greater long-term ratings impact on MUDs when compared with cities and counties, but shorter term impacts will be less likely.

• S&P Global Ratings believes the largest potential long-term rating impact to MUDs would be caused by a decline in the districts' assessed values, which support not only operational revenue but also the district's ability to pay its debt burden, which is a primary driver for our MUD ratings.
• MUDs with comparatively higher tax rates may face some practical taxing limitations as affected areas adjust their tax rates to compensate for declines in assessed values. However, what we view as on average strong financial reserves likely offset any shorter to medium-term impact.
• Offsetting short-term concerns regarding upcoming debt service payments is the fact that most of the MUDs we rate maintain very strong debt service fund balances, with median balances exceeding 90% of maximum annual debt service (MADS).
• S&P Global Ratings believes operational risk for MUDs is less likely to impact ratings, due to the low operational needs of these districts and the median operating reserves above 125% of expenditures for MUDS in the affected area.

The overall value of property in the affected districts is likely to drop due to damage. Whether the property tax collections are affected in the current year or the following year will be determined in part on whether the MUDs receive a reappraisal. Property tax collections, which are billed in October and payable by January of the following year, are based on appraisals as of Jan. 1. This means that property taxes for fiscal 2018 are based on the Jan. 1, 2017, appraisal. However, given the hurricane, and declaration of a disaster area, a MUD may request a reappraisal. Should this request be authorized and the values decline, the district must prorate the tax bills from the date of the disaster, which would impact fiscal 2018 property tax collections. This ability is defined under the Texas Tax Code 23.02, which states that a taxing unit that is located within a declared disaster area may authorize reappraisal of all damaged properties.

Adding to the difficulty of raising revenues after a decline in assessed value is a practical taxing limit. When assessed values fall, increases in tax rates can compensate for this decline. In addition to MUDs, other overlapping municipalities may also need to adjust for their declines in value, thereby putting a potential practical limit on how high MUD tax rates can be raised. This impact may be more pronounced for MUDs with already comparatively high tax rates. However, what we view as on average strong financial reserves can likely provide some cushion in the shorter to medium term, hopefully smoothing a transition to when assessed values strengthen and tax rates can be less pressured.

A majority of our rated MUDs have principal and interest payments due on Sept. 1, 2017, so revenues to provide for that payment have already been accumulated and would not have been affected by the storm. As we continue to monitor our portfolio of rated MUD credits, we will be assessing their ability to make timely debt service payments with money on hand, and the impact of potential declines in tax collections to future debt service payment due dates. Of the MUDs we rate in the affected area, most districts maintain very strong debt service fund balances, with median balances exceeding 90% of MADS. We believe that these high levels of reserves will help districts to manage any near-term payment needs.

Given the limited operational needs of MUDs, which includes property taxes and paying debt service, we believe that the typically high level of operating reserves held by MUDs will mitigate short-term operating risk.