Tax Increment Zones (TIRZ) Expansions Designed to Beat Revenue Cap

MARTIN- proposed-expansion-of-the-Midtown-TIRZ-fm-800px

 

 

 

 

 

 

 

 

 

 

 

 

 

Photo Credit: F. Martin – Houston Public Media, Dec 15th  Montrose Town Hall Meeting

The recent attention on TIRZ expansion across the City, from Gulfgate-Hobby Airport, Memorial City, and the delayed but surely to be approved Midtown-Montrose annexation, has created fresh questions and concern. Just last year the Uptown TIRZ annexed Memorial Park, and the SW Houston (Sharpstown) TIRZ, without neighborhood input, annexed portions of the Sharpstown Subdivision. What’s driving the infatuation with tax increment zones inside the City of Houston?

We know that there is nothing a TIRZ can do (tax, borrow, or spend) without the approval of both the Mayor and City Council. The growth of these zones has effectively dedicated city revenue and spending in certain areas. Why generate property tax surplus in some zones, with funds going to perhaps second and third tier projects, when real needs are elsewhere? Why are some zones getting parks and playgrounds while nearby streets outside its boundaries are a decade beyond their useful lifespan? The answer seems to lie within a decades old movement by voters to limit the growth of city government.

In 2004, voters within the City of Houston approved a change to the city charter creating a revenue cap which limits the growth of property tax revenue. In 2006 this cap was raised by an additional $90 million for public safety spending. This year for the first time, the City has bumped into this cap and was required to lower the property tax rate by 1.2%, reducing collections by over $12 million this year.

But a well understood escape hatch to that cap exists. The charter amendment includes the language, “excluding ad valorem tax revenues required by state law to be deposited in a tax increment fund.” This created an incentive for zone expansion and today every single dollar directed to a TIRZ is exempt from the revenue cap. In FY 2014, TIRZ revenue was $135.9 million, ballooning from about $30 million in 2006.

Today every single dollar directed to a TIRZ is exempt from the revenue cap. In FY 2014, TIRZ revenue was $135.9 million.

 

At the recent town hall meeting, held by Council Members Cohen and Robinson, about the Midtown expansion into Montrose, an attendee expressed concern about the city “raiding” the dollars of TIRZ No. 2 (Midtown). Andy Icken from the Mayor’s Office replied that folks should not be concerned because “we manage the TIRZ budgets”. Of course using those TIRZ funds for streets in Montrose is exactly the plan, as the city needs the excess tax increment from Midtown elsewhere. All of those dollars are exempt from the revenue cap.

Not unlike the recent action to tap the Rebuild Houston fund, pools of cash are always attractive and thus the interest in those funds. In FY 2014 TIRZ revenue exceeded planned capital spending on consolidated public improvements ($118.8 million), streets & traffic ($127.1 million) and drainage ($73.2 million).

Almost a decade ago, Mayor White remarked that he had “difficulty explaining in some principled fashion why some portions of the city are covered by a TIRZ, and other similarly situated portions of the city are not”. The White Administration was so concerned about TIRZ inefficiency and the lack of accountability that it proposed the immediate dissolution of six zones and the phasing out of five more by the end of 2006. That of course did not happen and today we have three more, for a total of twenty five such entities.

There have been efforts to slow down and limit this strategy. A proposed Spring Branch TIRZ was blocked by state limits in 2010. As described by Spring Branch Management District Executive Director David Hawes, “the concept… has been put on hold until the 15 percent cap can be dealt with on the state level”.

An official in the Mayor’s Office confirmed the barrier saying, “we have no TIRZ capacity left in the near term.” So as predicted by sometimes lobbyist Hawes, those limits set in place by the State of Texas were modified. In 2011 the Texas legislature increased the amount of taxable appraised property Houston can place inside its TIRZ zones from 15 to 25 percent.

And while city debt within the general fund has grown substantially over the last decade, so has TIRZ debt, mushrooming to almost half a billion dollars. With new bond issues over the next year, TIRZ debt will easily exceed $500 million. The SW Houston (Sharpstown) TIRZ issued almost $50 million in bonds this year, an amount that approaches ten (10) years of revenue.

As another attendee at the Montrose town hall suggested, this TIRZ proliferation has likely resulted in the “balkanization of the City of Houston”. It’s easy to understand that view.

It’s also clear City Hall learned nothing from their clumsy annexation of the Sharpstown subdivision into TIRZ No. 20, as residents were completely in the dark. Meanwhile at the recent Montrose Town Hall meeting a speaker inquired why residential owners were not given proper notice. Mr. Icken replied, “we should have done that.” A lesson apparently not learned in Sharpstown after similar complaints. The response at the SW Houston TIRZ Town Hall meeting in September was direct and succinct. TIRZ and City Officials including Council Member Mike Laster, TIRZ Executive Director Bill Calderon, and Mr. Icken, maintained “we followed the law.”

The City of Houston has implemented an amazing, Enron-like strategy of off-the-books debt and spending which places serious constraints on funding a fair, objective, city-wide project plan. Diverting resources into a TIRZ to avoid the voter approved revenue cap is poor public policy. It’s time for a serious review and I encourage the Mayor and City Council to do so.

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Sources:

1. “Not-so-super TIRZ”, Houston Chronicle, July 24, 2014, www.chron.com/opinion/editorials/article/Not-so-super-TIRZ-5645382.php

2. “City Council trims Houston tax rate to comply with revenue cap”, Houston Chronicle, October 21, 2014, www.chron.com/news/politics/houston/article/Council-trims-city-tax-rate-to-comply-with-5838075.php

3. Financial information – City of Houston CAFR Consolidated Annual Financial Report FY 2014, www.houstontx.gov/controller/cafr.html

4. Financial Information – City of Houston Adopted Budget FY 2014, www.houstontx.gov/budget/14budadopt/

5. City of Houston – City Charter (Article III. Section 1. Taxation), www.houstontx.gov/charter/

6. Impatient council taps ReBuild Houston to speed street projects”, Houston Chronicle, July 9, 2014, www.houstonchronicle.com/news/politics/houston/article/Impatient-council-taps-ReBuild-Houston-to-speed-5610694.php

7. “Spring Branch TIRZ proposal gets pulled at the last minute”, Memorial Examiner, April 21, 2010, www.yourhoustonnews.com/memorial/news/spring-branch-tirz-proposal-gets-pulled-at-the-last-minute/article_315ba200-e825-5d69-b66c-6baa1b878dd1.html

8. Texas Ethics Commission – Lobby List 2009 – David W. Hawes, Hawes Hill Calderon LLP, www.ethics.state.tx.us/tedd/loblst09_02.htm

9. Texas Legislature Online – 82R Legislature – HB 2853, Modification to Chapter 311- TIF Act, www.legis.state.tx.us/tlodocs/82R/billtext/html/HB02853F.HTM

10. Montrose & Sharpstown Public Meetings – Author’s hand written notes

11. “Trimming the TIRZ: Mayor’s initiative to establish stricter oversight of tax increment zones is a first step toward a much needed overhaul”, Houston Chronicle, October 14, 2005, www.chron.com/opinion/editorials/article/Trimming-the-TIRZ-Mayor-s-initiative-to-1951322.php

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