Working Every Angle

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

That said, Litke then set about rewriting the city's policy in such a way that "nothing but a judgment" was plenty good enough to justify the Village Enclaves TIRZ. Litke's new policy set out three criteria the city should consider before approving a TIRZ.

First, he said, there must be a real need for the subsidy. In other words, it must be "reasonably clear" that the project would not be financially viable without a subsidy. Second, the amount of the subsidy must not exceed the benefit gained, meaning the developer should be reimbursed for only those costs that result in a public good, such as a new street or water main. And finally Litke decided that such "incentives" should comply with the "letter and spirit" of the state TIRZ law.

By the end of July 1996 Litke had satisfied himself that Peacock's project could qualify for a TIRZ. He sent Lanier a memo recommending the city proceed with the Village Enclaves TIRZ, "[s]ubject to a final review of this project under state TIRZ law."

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.

However, on September 10, 1996, one day before the City Council hearing on the Village Enclaves TIRZ, a Finance and Administration official produced an internal analysis of the proposal that challenged Litke's interpretation of both the state law and the city's policy.

"The justification for the project's eligibility based on the city's guidelines is weak," wrote the F&A official, who happened to be the same Bill Calderon who is now a deputy assistant in the city planning department and a staunch defender of the city's TIRZ policy. "This area is not blighted."

Calderon concluded that the Village Enclaves TIRZ could be approved only if Council granted an exception to its own policies. Calderon did, however, agree with Litke on one point: Peacock's proposal would set an undesirable precedent. "If the city does consider using [tax-increment financing] in a manner that is beneficial to developers," Calderon wrote, "we can expect to see many more such requests for this kind of assistance."

It's unclear if Calderon's views, which he provided to a higher-ranking F&A official, were ever shared with City Council, which approved the Village Enclaves TIRZ a week later. One thing's for sure, though: The policy Litke initiated with Village Enclaves became the standard by which councilmembers judged all subsequent TIRZ proposals.

Indeed, the city ordinances that designate the Upper Kirby, Galleria and Memorial City areas as tax-increment zones include a clause that states, "the city hereby excepts the proposed zone from compliance with any city reinvestment zone guidelines Š that the zone does not meet."

Eight months after it created the Village Enclaves zone, Council voted to expand it from 41 acres to more than 1,000 acres. In a deal struck with the Houston Independent School District, which had balked at committing future taxes to the zone, the city approved a plan that would dedicate TIRZ revenues for the construction of a new school near the proposed subdivision.

Actually, it was the second time the city and HISD had agreed to commit future tax revenues to fund school construction. A few months before, in January 1997, the city had created the Old Galveston/Howard Road TIRZ, on the east side, solely to pay for a new high school.

To some councilmembers, including those who had been supporters of the city's TIRZ policy, the use of tax-increment reinvestment to build schools not only clashed with state law, but was a slap in the face to voters, who had rejected a $390 million bond issue proposed by HISD the previous year.

"I said it at the time, and I still believe it," says Councilman Orlando Sanchez, who has opposed the city's recent use of tax-increment financing. "Those zones circumvented the will of the majority of voters who opposed the bond issue."

Sanchez was also among a minority of councilmembers who voted against a brazen policy initiative introduced by Brown early last month that was designed to squeeze every possible TIRZ dollar out of HISD. Brown proposed that HISD increase its participation in ten zones created before this year by nearly $500 million over 30 years. In a carefully worded memo to councilmembers, Brown explained that the additional funds wouldn't actually be used in the zone, but would be returned to HISD "for educational purposes."

The question Brown skillfully evaded was this: If the money was only going to be returned to the school district, why not just let HISD keep it?

The answer is that until September 1, school districts were allowed to take the taxable value of land in TIRZs "off the books," thereby artificially lowering their tax bases. The lower HISD's tax base, the more funds it receives through the Texas Education Agency's school-financing mechanism. Every dollar the district sends to a TIRZ, even if it's immediately returned, is replaced by the state.

If this isn't exactly like money laundering, it's certainly close. While completely legal, it is at the least unseemly, especially considering the timing: The city had just forwarded seven newly created zones to the HISD board of trustees for consideration. The district's participation was crucial to those projects, and the windfall created when Council approved Brown's proposal no doubt put trustees in an accommodating mood.

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