Working Every Angle

The city of Houston is exploiting loopholes in state law to lavish big bucks on private developers

In the spring of 1996, city planning director Bob Litke had a problem: Under what circumstances should the city give public money to private developers?

The problem arose after homebuilder Steve Peacock asked for $2 million to build the streets, water and sewer lines, and storm-water drainage to support a new subdivision on 41 acres of raw land in far west Houston.

Litke was, at first, inclined to reject Peacock's proposal. At the time, Litke believed the city should subsidize only private development inside the Loop, where historically developers have been wary of higher land costs and an uncertain market.

Upper Kirby property owners  claim that the bustling district  is "unable to compete in the marketplace."
Upper Kirby property owners claim that the bustling district is "unable to compete in the marketplace."
"TIRZs work," says state Representative Garnet Coleman. But he has concerns about how they are being used by the city.
"TIRZs work," says state Representative Garnet Coleman. But he has concerns about how they are being used by the city.

There was also the issue of fairness. As Litke pointed out in a May 1996 memo to Public Works and Finance and Administration officials, other developers had built successful projects in the same area without the benefit of tax dollars.

"Granting a subsidy to the Peacock development may set a precedent that is not in the City's best interests to follow," the planning director wrote. "Using general fund monies to finance new infrastructure in middle income residential development -- where the market is likely to deliver a saleable product in the future -- may not be an equitable expenditure of public monies."

Despite his misgivings, Litke was under a mandate from then-mayor Bob Lanier to offer greater incentives to encourage more development throughout the city. To that end, the planning director focused on Peacock's request that the city create a tax-increment reinvestment zone, or TIRZ, which allows cities, counties and school districts to reimburse the developer's cost of laying in public infrastructure using future property tax revenues generated by the development.

Until Peacock came along, the city had used tax-increment reinvestment sparingly, for good reason: Each zone requires the local taxing entities to commit millions of dollars of revenue to a specific project for a long period of time, usually 30 years. Moreover, because taxpayers outside the zone get little in return, the state law that authorizes the creation of TIRZs restricts their use.

City Council created the city's first TIRZ in December 1990 and at the same time adopted its own policy regarding the use of tax-increment reinvestment. The city's basic criteria for creating a TIRZ were nearly identical to those in the state law -- or at least they were until Litke adjusted the guidelines to accommodate Steve Peacock.

In short, Litke's new policy not only changed significantly the city's use of TIRZs, it circumvented the state law at nearly every turn. In the three years since it was amended, the city's TIRZ policy has rendered the Tax Increment Financing Act of 1981 unrecognizable.

Just how much the statute has been manipulated became clear this summer, when the administration of Mayor Lee Brown fast-tracked seven new TIRZs past City Council, which agreed to forgo nearly $2 billion in property tax revenue over the next 30 years to fund specific projects. Some 7 percent of the city's taxable land is now within a TIRZ and controlled by appointed boards that are authorized to administer the zones' project and financing plans, with minimal oversight by elected officials.

To be sure, under Brown the city has created new zones in areas that are in fact starved for public improvements. The Fourth and Fifth wards, for example, have been neglected for so long that they clearly meet the TIRZ statute's requirements that there be "a substantial number" of substandard and deteriorated buildings; that there be "unsanitary or unsafe conditions"; and that an area be "a menace to the public health, safety, morals or welfare in its present condition."

Equally certain is that none of that is true of the Galleria, Upper Kirby and Memorial City areas, which were also designated tax-increment zones by Council in July. Even state legislators such as representatives Garnet Coleman and Scott Hochberg, both of whom have been active in shaping the Tax Increment Financing Act through the years, say the city has butchered the original intent of the law.

"I have some concerns," says Coleman. "The intent of the law is to develop communities that would not develop on their own, to create growth and life where it wasn't before. I don't know why there's a TIRZ in Upper Kirby. The market is driving that area fine."

Indeed, Upper Kirby is perhaps the most egregious example of the city's rapacious TIRZ policy -- and how it has already turned out to be a bad deal for taxpayers. Earlier this summer a group of property owners and developers asked the city to create a tax-increment zone, moaning that the bustling commercial corridor that straddles the Southwest Freeway between Buffalo Speedway and Shepherd is unable to "compete in the marketplace."

What wasn't mentioned in the developers' plan is that the Upper Kirby area is more competitive than ever. Long before the proposal was presented to City Council, some $110 million of new development, including at least three large apartment complexes, two shopping centers, a hotel and a supermarket, was under way or already completed -- a fact that discredits the plan's contention that "development in the zone will not occur solely through private investment in the reasonably foreseeable future."

By including development that occurred before the zone was even created, the Upper Kirby TIRZ essentially fabricates the impact of the zone. It will also cost taxpayers about $35 million in revenue -- the taxes that would normally be collected from the new development over the 15-year life of the TIRZ.

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