Half Billion $ Tax Diversion: Westchase 380 is a ‘Synthetic TIRZ’ (Part Two)

Westchase District Aerial Shots

 

 

 

 

 

 

 

 

 

 

 

Image courtesy westchasedistrict.com

UPDATE: The title was modified to correct the impression that this 380 abatement avoids the property tax revenue cap. It does not. In fact recent discussion and a proposal last year in the remaining months of the Parker Administration brought forward a proposal to convert this agreement to an actual TIRZ. TIRZ funds are not subject to the voter initiated, voter approved property tax cap.

With serious financial challenges facing the City of Houston, and in an apparent complete lack of recent memory about the layoffs and struggles of just a few years ago, City Council approved an economic development agreement last fall with the Westchase District (WD). During the term of the agreement the plan could transfer almost $500 million in property taxes from the city wide general fund, to a special account for projects exclusively within the small footprint of Westchase. This is the latest in an ongoing series of tax diversions, and it will almost certainly tie the hands of future elected officials, restricting their ability to properly manage city operations.

This arrangement might be considered a “synthetic TIRZ” (Tax Increment Reinvestment Zone) as it is based on the model of the twenty five current TIRZ established within the City of Houston boundaries. As a reminder:

“A TIRZ works by locking in the dollar amount that the city receives in property tax revenue. If rising property values cause revenues to grow above that figure, they’re redirected to a TIRZ fund controlled by an appointed board that is supposed to improve local infrastructure and help foster business development.”

Boundaries which identify the properties to be included, along with establishing a base “appraised value” year, and a level of participation are all that’s needed. Then a portion (or all) of the “incremental” or additional taxes created by rising property values ABOVE the base year are directed to the “zone” or fund.

But this is not a TIRZ with all the protections and safeguards enumerated in Texas law under Chapter 311, the Tax Increment Financing Act. This is an agreement made under Chapter 380, a deal between the COH and the Westchase Management District, a political subdivision of the State of Texas. The base year “appraised value” was defined as Jan 1, 2011, and the contract will transfer 2/3’s of all additional property tax revenue above that base year to the WD for at least the next ten years.

EXHIBIT – MAP

Westchase 380 Thumbnail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In the presentation to the City Council committee on development, this program was described as self-funding and all about future tax revenue. But the details reveal that the program base year was set on January 1st 2011, almost three years before City Council approval. As we know, property values have jumped dramatically in the last three years, with city wide appraised value climbing almost 26 %. How else to explain a $4 million windfall barely six months into the program:

“Though as much as $4 million could be available to Westchase District by as early as mid-2014, Irma Sanchez, Westchase District’s vice president of projects, noted the money will not sit idle for long. “We already have a long-range plan in place that envisions a number of various-sized parks, reconstruction and widening of several key roads, expansion of our hike and bike trails and additional beautification projects,” she said.”

This $4 million is almost certainly tax revenue from current values (2011-2013), which in FY 2014 went to the city wide general fund, but which will now be diverted to Westchase. This is not self-funding but a diversion!

Funds directed to a TIRZ or 380 Zone are funds not available for Police, Fire, or other myriad critical projects.

The first project appears to be a $25 million (yes, twenty five) proposed seven acre Festival Park, described as a smaller version of Discovery Green, almost completely funded with what would otherwise be city wide resources.
The SW Houston Redevelopment Authority (TIRZ #20) is directing $1 million to Lansdale and Crain Park this year, with $2 million in future years for Sharpstown Park, but that is peanuts compared to the resources directed to Westchase.

The Westchase District will almost certainly issue debt to jump start the program, and with that in place, the immortality of both the District and the 380 program will be assured.

Why wouldn’t they just create a TIRZ? Simply because Texas law is almost certainly a barrier, with specific limits on how much property tax revenue a city may silo inside a series of zones. In the last post I mentioned the issues with the failed creation of the Spring Branch TIRZ:

“An agenda item at the Spring Branch Management District board meeting last Thursday would have authorized consultant Hawes Hill Calderon to proceed with the creation of a tax increment reinvestment zone.
The board never got that far. Executive Director David Hawes and board chairwoman Patricia Maddox learned just before the meeting from District A Councilmember Brenda Stardig’s office that the city of Houston would soon be bumping up against the statutory limit of 15 percent of tax revenues in TIRZes and the chances of the city approving the TIRZ were nil.
The city’s looming budget problems, coupled with the creation of two new TIRZes as part of a multi-jurisdictional deal for a stadium for the Houston Dynamo, spelled at least temporary doom for the Spring Branch TIRZ.”

In 2010, there was indeed a cap of 15% on property tax revenues directed to TIRZ entities. The first plan appears to have been an explicit exemption for Spring Branch via HB 2772 in 2011 in the 82nd Legislature. Yes there is a statutory limit, but under this bill Spring Branch would be exempt. It seems this approach didn’t have legs but a second bill (HB 2853, June 2011) , modified the restrictions, which among other things raised the limit substantially.

That didn’t keep WD leaders and others from pursuing a 380 funding mechanism, free from the very specific restrictions of the TIF Act (Chapter 311), most notably the cap on property tax diversions. Under this approach there appears to be no limit.

How will the Mayor and City Council be able to manage the city effectively when as much as one third to one half of tax revenue is not under their control?

It is not clear that any of the protections afforded by the TIF Act apply at all to this new “synthetic” version. Since the Westchase District has not been considered a “component unit” of the City of Houston like the Houston Zoo, Houston First Corp., and every single TIRZ, their financial statements are opaque. They do not publish any financial information online and my requests for an annual report were filled with a hard copy, printed version that I had to pick up at their office on Richmond. They refused to provide a PDF or digital version.

With City of Houston property taxes now being directed to WD control, it will be important for there to be more transparency and accountability. The WD will now be spending not just their “assessment” of 9 cents, but ad valorem taxes that were previously directed to the general fund.

The question for Sharpstown and for other neighborhoods is how will this impact our ability to acquire city wide resources to improve our communities? With the creation of a third powerhouse political “borough”, Westchase joins Downtown and Uptown, as almost separate municipalities. They have their own unelected leadership, collect taxes, and issue debt, all of which is done without direct voter involvement as these are appointed bodies.

At least our single family subdivision is outside the boundaries of a TIRZ right? NOPE! The TIRZ #20 annexed 109 homes inside the Section 2 portion of our community. What do they have in mind and how did this happen under our noses?

Stay Tuned!

Not-so-super TIRZ? That’s just the Latest Diversion (Part one)

 

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