Critics tried limiting zones — and failed
Tax increment financing has spawned hundreds of development zones across Texas since it was first authorized under state law in the 1980s. A handful of critics, lawmakers and city officials have tried reining in the program over the years, yet it keeps growing unhindered.
Even the earliest attempts to narrow the use of these zones have been undercut over time, making it easier to trap tax dollars for decades in areas that have a tax increment reinvestment zone, or TIRZ, while other neighborhoods struggle.
The 1981 law that first allowed the zones, for instance, originally included a sunset provision, like those in Texas’ other tax incentive laws. The provision said that the TIRZ law would expire in 1991 unless lawmakers renewed it. The clause later vanished, removing a layer of legislative oversight.
Early TIRZ bills also sought to limit the share of a city’s total property value that could be tied up in zones that had outstanding debt to 5 percent. By the time the program became law in 1981, however, 15 percent of a city’s tax base could be tied up in TIRZs. And when Houston was approaching that limit in 2011, lawmakers raised the ceiling to 25 percent. The city is now nearing that, too.
Steve Wolens, a Dallas attorney who, as a state representative, sponsored the 1981 bill that created TIRZs in Texas, said he has watched the law’s restrictions loosened “to my chagrin.”
“I wanted it to be very narrow,” he said. “We didn’t want it abused; we didn’t want taxes to be given away lightly.”
Recent reform efforts also have stalled.
Houston Republican state Sen. Paul Bettencourt — once joined by Democrat Sylvia Garcia, now a congresswoman and then a state senator — has repeatedly filed bills to rein in TIRZs.
Bettencourt has proposed limiting the share of citywide property value in TIRZs to 10 percent, not the current level of 25 percent. New zones would be able to last only 10 years rather than indefinitely.
Existing zones, under Bettencourt’s plan, wouldn’t be able to extend their lifetimes and couldn’t update their project plans if the median value of property inside the zone exceeded the citywide median value. The measures all failed to become law, but Bettencourt vowed to try again in the legislative session that begins in January.
“There’s no way the voters would have approved this expansive, aggressive, unelected government if it was on the ballot in 1981,” Bettencourt said. “If you could have taken a snapshot 40 years (in the future) and said, ‘Here’s what you’re approving,’ they wouldn’t have done it.”
A missed opportunity
Houston city leaders also could set clearer guidelines for the state’s largest TIRZ system. They’ve failed to do so.
The City Council in 1990 passed nonbinding rules suggesting that zones be created only in areas with poor infrastructure where property values had fallen by at least 20 percent over the prior decade — then waived that policy with each zone it created since 1995.
Houston could adopt an updated policy in the form of a binding ordinance. Or the new mayor voters will elect in the fall of 2023 — Mayor Sylvester Turner is term-limited and cannot run again — could take a new approach.
Yet the outcome is far from certain.
Mayor Bill White took office at the start of 2004, just a few years after most of the city’s TIRZs at the time had been created. White wasn’t sure he liked what he was inheriting.
In his first year in office, White met with the volunteer board members who oversee each zone. Then, in his second year, White secured a change to state law that let the city charge the TIRZs higher fees.
In an October 2005 letter to City Council members, White said he had spent “dozens of hours” understanding the purposes and projects of each zone but still 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.”
Most of Houston’s zones, White said, had either failed; succeeded thanks to market forces outside their control; or fulfilled their purpose and should be disbanded. Ultimately, White and his top aides settled on terminating at least nine zones.
Yet that didn’t happen. White said he couldn’t muster enough support from his council colleagues.
“Many if not most of the council members felt particularly protective of the TIRZs within their districts,” White said in an interview.
Turner, too, took office in 2016 as a TIRZ skeptic. Seven years into his term, he and White remain the only Houston mayors not to have created a zone since the program’s inception.
The transition team Turner assembled upon his election recommended that he use TIRZ funds to shore up the city budget — and he did so, wringing $22.6 million in fees out of the zones last year, up from $5.4 million the year he took office.
Yet Turner also has expanded 16 zones and extended the lives of 10. This, too, was among his advisers’ recommendations. They believed dissolving a TIRZ — aiming to return its cash to City Hall to be spent anywhere in Houston — would be fruitless because of the city’s revenue cap, which limits how much property tax collections can grow every year.
This cap doesn’t apply to TIRZ revenue. So Turner’s transition team advised him to “shift the funding responsibility” for projects from the city to TIRZs and free up dollars in the city budget.
The idea that there was no point in ending TIRZs because of the revenue cap was widespread at City Hall. But the Chronicle’s investigation found a forgotten provision in the city charter enacted during the White administration. It states that the city can treat the dissolution of a TIRZ like an annexation and recapture its tax dollars — unhindered by the restrictions of the revenue cap.
Former Mayor Annise Parker — who oversaw most of Houston’s TIRZ expansions and life extensions — said she’s not sure if she would have acted any differently. The larger zones “are still doing significant projects,” she said, and returning the smaller zones’ revenues to the city budget wouldn’t greatly change the city’s fiscal outlook.
Turner didn’t respond to written questions on the topic. Andy Icken, who has served as TIRZ czar under Parker and Turner, said his decisions would not have changed.
“We have acted consistently in the best interest of the city with the information we had at the time,” Icken said. “Our actions would have remained the same.”
Political realities aside, scrapping the entire TIRZ system overnight would be unworkable. Many zones are managing large infrastructure projects, and 10 of them reported carrying a combined $520 million in outstanding debt, according to state data. State law says if a zone is terminated before its obligations are paid off, the city must set aside enough money to pay those debts.
But as White and his aides had noted, some Houston TIRZs had accomplished their mission. Instead of winding down, many zones gained new projects and grew exponentially.
Unconstitutional?
Ultimately, of course, voters hold the power. Some everyday residents have even tried to go after TIRZs on their own.
In 2017, an Uptown business owner and a resident who both opposed a new rapid transit line near the Galleria filed a lawsuit alleging that the state’s most prosperous TIRZ that helped fund the project likely violated the Texas Constitution when City Council created it in 1999.
“It is a matter of general knowledge, and could not have been lost on council and the mayor at the time, that Galleria/Post Oak was among the very wealthiest, if not the wealthiest, part of Houston,” the lawsuit stated. The plaintiffs hired an expert, University of Houston professor Steve Craig, who concluded that Uptown wasn’t economically distressed under “any good-faith definition of economic activity.”
But judges are unlikely to overrule an elected City Council when it declares that an area meets the criteria under state law to create a TIRZ, according to the Texas Municipal League. The plaintiffs dropped the case after Uptown filed its own lawsuit complaining that the litigation was stopping it from issuing bonds.
The plaintiffs’ lawyer, Joe Larsen, said his clients couldn’t match Uptown’s deep pockets.
“I became absolutely convinced that this thing was unconstitutional,” Larsen said of Uptown’s TIRZ. “I think on the merits, we were absolutely right. But it wound up being too tall a project for us to see to fulfillment.”
Stephen Wood, Uptown’s lawyer, said the goal of tax increment financing is to cure many types of neighborhood ailments, not just blight. The poor street network that plagued Uptown for years is exactly the type of problem TIRZs are designed to tackle under state law, he said.
“Back in the ’40s and ’50s when it was a suburban area, there was no traffic and the street layout was just not adequate,” Wood said.
Houston voters will choose a new mayor and council next year. But longtime Houston TIRZ administrator David Hawes, whose firm currently manages six zones, said the prospect of a fundamental shake-up is unlikely.
“Practically every mayor comes in saying, ‘I don’t like TIRZs; TIRZs are bad. You got to get rid of them,’ ” Hawes said. “They get two, three years into their term and they go, ‘Wait a second — I can use it for this, I can use it for that.’ ”
These projects, supporters say, benefit the entire city. Significant renovations in Houston’s most prominent nature refuge, Memorial Park, were funded in part by the expansion of the Uptown TIRZ.
But many Houston neighborhoods are still waiting for basic infrastructure improvements from the city. And the money for those projects can be hard to find.
As Parker put it: “The reason we create TIRZs is because there’s not some infrastructure fairy that comes and puts money under your pillow.”
“Many if not most of the council members felt particularly protective of the TIRZs within their districts.”
Bill White, former Houston mayor