Rarely has the absurdity factor at City Hall been so high as on June 22, when in a public session of the Houston City Council it was revealed that the Galleria has fallen on hard times and is in dire need of some taxpayer-funded economic development.
This distressing and, no doubt, surprising news was delivered to councilmembers by John Breeding, a tall, affable-looking man with glasses, chubby cheeks and a thick head of carefully blow-dried hair. Breeding is president of the Uptown Houston Improvement District, an organization that represents the shared interests of Galleria-area property owners.
The city hasn't spent enough money on the roads in Uptown, Breeding told Council, resulting in horrendous traffic jams that shoppers find annoying to no end. Later this year, Breeding said, the Mills Corporation will be opening one of its patented megamalls, 45 minutes away on the Katy Prairie, and "in order to have a fighting chance," the Uptown area needs $235 million to improve streets, build parking garages and construct an air-conditioned "pedestrian network."
According to Breeding, the Uptown district, which levies a 14-and-a-half-cent ad valorem tax on its member property owners, can't afford to provide these amenities itself, having dropped a wad four years ago on the boulevard-spanning arches and intergalactic overhangs that adorn the area's intersections. So Breeding proposed that the city create a tax-increment reinvestment zone, or TIRZ, whereby the city, Harris County and the Houston Independent School District would agree to freeze ad valorem rates on more than 1,000 acres of land in the Galleria area for 30 years.
Cash for improvements within the zone would come from the sale of tax-exempt revenue bonds issued by a nonprofit "redevelopment authority," whose board members are appointed by City Council and other local elected officials. Presumably the improvements would cause land values in the zone to rise. The subsequent increase in property taxes generated the increment would then be collected by the redevelopment authority to pay off the bond debt. According to Uptown's financing plan, the project would cost $410 million, including $175 million in interest.
Not surprisingly, some councilmembers were compelled to question the wisdom of committing nearly a half-billion dollars of taxpayer money to improve what is already some of the most improved, if not the richest, real estate in Texas. After grousing that Uptown's sidewalks are "only two and a half feet wide," William Miller of the Tanglewood Corporation, which owns a shopping center on Post Oak Boulevard between Westheimer and San Felipe, drew an immediate rebuke from District F representative Ray Driscoll.
"Have you ever been to Gulfton, Mr. Miller?" asked Driscoll, whose southwest Houston Council district is home to some of the city's roughest, most neglected neighborhoods. "They don't have sidewalks, let alone sidewalks that are only two and a half feet wide. There are pregnant women walking down the sides of the roads."
District E Councilmember Rob Todd took a swipe at the Uptown district for its attempt to create a TIRZ before a major change in state law goes into effect on September 1. After that, school districts that choose to participate in TIRZ projects will likely lose some state education funding. Without the participation of HISD, which could contribute more than $200 million of its future income to the Uptown zone, the projects would likely collapse.
"Almost a quarter of a million dollars would be shifted from the education of children to safer streets for shoppers," Todd said. "What you're saying is, I may be able to get to the Galleria ten minutes quicker, but the kid ringing up my purchase won't be able to read."
Todd and Driscoll raised valid points about tax-increment financing, which their colleagues absorbed with palpable indifference. Several councilmembers didn't even attend the public session. Those who did drifted in and out of Council chambers, seemingly far removed from the possible implications of forgoing millions and millions of dollars in revenue. A few appeared almost charmed by the sharp-suited men who appeared before them, hat in hand, representing some of the richest corporate landowners in town.
At one point Staman Ogilvie, an executive with Hines Interests, developers of the Galleria (recently valued at $1.6 billion), offered the opinion that a TIRZ in Uptown would be "wise public policy." He called the mall "the golden goose of the city" that, together with the surrounding retail centers, generates millions of dollars annually in property and sales tax revenues for the city, county and school district some of which would likely be siphoned off by the Katy Mills megamall unless the city of Houston created a TIRZ.
"That was a very effective presentation, and well thought-out," gushed District D councilman Jew Don Boney, before lobbing a few harmless questions toward Ogilvie, who stirred the collective soul of the room by invoking the Galleria as "a rare civic amenity."
A decade ago, as a decidedly radical activist, Boney, given the chance, would have laid into a well put-out whitey like Staman Ogilvie on, say, the ever-widening gap between the rich and the poor. Then again, a decade ago, the city wasn't in the habit of promising huge sums of property tax revenue to private developers, at least not publicly.
As recently as two years ago, the number of tax-increment zones in Houston could be counted on one hand. But since 1997, the city's use of this "economic development tool" a term universally applied to the TIRZ concept has increased significantly. To date, City Council has authorized the creation of 17 TIRZs, all but five in the last two years. According to the city, the projects planned for those zones could cost taxpayers almost $2 billion over the next 30years, money that might otherwise go to the city, county and HISD.
The city created its first TIRZ in 1990, back when Kathy Whitmire was mayor. The administration of Bob Lanier used tax-increment financing to, for example, kick-start downtown redevelopment and to launch the huge revitalization under way in Midtown. But neither of those former mayors embraced the concept like Lee Brown, whose administration has brought seven new TIRZ proposals to Council in less than two months. Four of those have already been approved, with three more in the works before the state law changes September 1.
If all goes as planned, the city will have 20TIRZs, totaling more than 6 percent of the city's taxable land, in place by summer's end. Moreover, a recent change in the state law allows City Council to turn control of that land, and the giant sums of taxpayer money it could generate, over to an appointed board. Nothing prohibits those board members from having a financial interest in the land, and in fact most of them will, either through outright ownership or because they'll be involved in the redevelopment projects themselves. While taxpayers might expect such an arrangement to include safeguards, oversight by elected officials will be, at best, limited. According to the state Tax Increment Financing Act, the so-called TIRZ redevelopment authority will have "all the powers of a municipality" without the fuss: Board members are not considered public officials.
How much public money is eventually diverted to redevelopment authorities for TIRZ projects is unknown. Once Council approves a tax-increment zone, the project and financing plans are forwarded to Harris County commissioners and the HISD board of trustees, who will decide on whether to participate. In the past, that hasn't been a problem. The county has committed future property tax revenues to 14 of the 16 city-created zones; HISD has agreed to join every one.
Lately, however, the city's current TIRZ policy has struck some elected officials, including a few councilmembers, as overly rapacious. The city's use of tax-increment financing is also the subject of a legal challenge initiated by Harris County Commissioner Steve Radack. Though Radack has generally supported the county's participation in tax-increment zones, he has opposed the Uptown TIRZ from the beginning. He's also critical of proposed zones in the Upper Kirby and Memorial City commercial corridors, which, according to city officials, need massive public improvements to remain competitive with suburban retail centers.
That may be true, Radack says. But is it legal?
On June 28, first assistant county attorney Mike Stafford wrote a letter to the office of Texas Attorney General John Cornyn, requesting clarification of the state Tax Increment Financing Act, which authorizes the creation of a TIRZ. In his letter, Stafford pointed out that, though the Texas Constitution restricts TIRZ projects to "unproductive, underdeveloped or blighted" areas of the city, the precise definition of what constitutes such an area is "conspicuously absent" from the state law.
That inconsistency has opened a loophole the city of Houston has clearly exploited, Radack says, which may not be in the best interests of the public.
"If the law is interpreted that 'blighted' means traffic congestion, it leaves room for all kinds of abuses of what the law is intended for," he says.
Whether or not the state attorney general will agree with Radack is hard to predict. But until such time, Harris County commissioners are unlikely to join any tax-increment zones coming down the pike from the city of Houston.
That, of course, hasn't stopped the Brown administration. On July 7, City Council approved the creation of two more tax-increment reinvestment zones, including a $410 million TIRZ for the Galleria area. Two weeks later, Council gave the go-ahead for a 988-acre zone that straddles I-10 between Gessner and Beltway 8. The latter project was brought to city officials by Metro National Corporation, which owns more than half of the taxable value of the TIRZ, including Memorial City Mall.
Though both proposals passed easily, they were roundly criticized by several councilmembers, in particular Todd and at-large representative Orlando Sanchez. Todd ridiculed any suggestion that either the Galleria or Memorial City Mall really need public money to better serve their customers. For his part, Sanchez seemed to be looking for a reason to support the projects during public debate. In the end, though, he apparently came to the same conclusion reached by Steve Radack.
"As I read the legislation, a TIRZ is a tool to reinvest in areas that have suffered decline, that are drawing more revenues away in the form of services than they're producing," Sanchez said in a recent interview at his City Hall office. "Not for an area that's a little congested and we're afraid we're going to lose a little sales tax revenue."
To be sure, tax-increment reinvestment is mind-numbingly dull and complex, which might explain why elected officials have so readily embraced its use without knowing all that much about it. Equally certain is that tax-increment financing is not your parents' public spending, which is rooted in the ideal that taxes are collected for the benefit of everyone, not just those who pay them.
That ideal is a myth, of course, particularly in Houston, which suffered years of decay as its property tax base migrated to the suburbs and unincorporated areas of Harris County. Meanwhile, federal economic development dollars became almost nonexistent, further decimating inner-city neighborhoods and industries. Moreover, the traditional method local governments use to raise capital for large-scale public improvements multimillion-dollar bond referendums is hugely unpopular with voters, which means it is only selectively supported by politicians and rarely to fund inner-city redevelopment.
Enter tax-increment reinvestment, which was hatched almost 50 years ago in California so cities could match the funding offered through state and federal programs. Now 43 states have laws authorizing local governments to pledge tomorrow's tax revenues to carry out today's public works. While each state has its own guidelines for using tax-increment reinvestment, the principle is the same everywhere: Publicly funded improvements will draw private investment to an area that wouldn't otherwise be attractive to developers.
The bottom-line question, of course, is do they work? In Houston, at least, no one yet knows. According to city records, only two TIRZs Lamar Terrace and Midtown, the first two created have seen any increase in property values within the zone. Most of the 17 existing zones were approved in the the last two or three years and are just getting off the ground.
However, proponents of tax-increment financing say the concept is infallible. Indeed, the presumption is that a TIRZ project pays for itself by creating taxable value where none existed before. And because TIRZ improvements are funded solely through increases in property tax revenue within the zone, the worst that happens if redevelopment fails to materialize is that there are no increments and nothing changes.
Hundreds, if not thousands, of tax-increment zones have been created around the country, yet there have been relatively few attempts to analyze their costs and benefits. The best information comes from California and Illinois, where the concept has been used longer and more extensively than anywhere else. While these studies don't explicitly recommend or discourage tax-increment reinvestment, they make one thing quite clear: The more it's used, the more controversy it generates.
Ed Gilliland of the Council for Urban Economic Development, a Washington, D.C., group that advises the nonprofit sector on development issues, says tax-increment reinvestment has experienced something of a backlash the past few years.
"It's a circular debate," Gilliland says. "If you do a zone and the revenues increase, the money is not going back to the city, but to the zone. So, you could say that it's limiting money to the city treasury, or you could say it's money they wouldn't have had anyway. How do you make an argument either way?"
In Houston, the person responsible for brokering that argument is city planning department director Bob Litke, who has been a powerful advocate for the aggressive use of TIRZs to spur economic growth. Litke evaluates the merits of each proposed TIRZ using the all-important "but for" test that is, but for the TIRZ, redevelopment would not occur.
"We take a look at whether or not development has taken place, and if so, what kind of development," Litke says. "We also consider what kind of market analysis there is that suggests the potential is there, but something just isn't right because it isn't happening. Our final decision is based on a strong judgment factor that this is an area that if we did have public intervention, it's likely that it would force development."
In other words, the "but for" standard is really nothing more than good old-fashioned real estate speculation. Is that something city government should be involved in? Not according to Barry Klein, president of the Houston Property Rights Association and a private consultant who specializes in tax-related issues.
"The city's own studies show that the demand for development was there well before they started using this incentive," says Klein, who points to the most recent property tax revenues, which according to the Harris County tax-assessor collector exceeded $1.4 billion in 1998, a $95 million increase over the previous year.
Klein has long been critical of the city's TIRZ policy, arguing that it doesn't encourage new development but simply moves it from one area to another. David Merriman, an economics professor at Loyola University of Chicago, agrees. Merriman and a colleague studied TIRZ activity in Chicago dating back to 1984. Their conclusion? "We found no evidence that tax-increment zones actually stimulate new development in the Chicago metropolitan area," says Merriman.
To the contrary, Merriman says, cities that use tax-increment financing may actually stunt the growth of the whole city. The reason is that a TIRZ makes little or no contribution to the economy beyond the borders of the zone, says Steven Craig, a professor of economics at the University of Houston.
Craig argues that "specialized tax breaks" like TIRZs don't work and, in fact, the Brown administration's liberal use of them at a time when the local economy is booming may hurt the city in the long run.
"The more special things you do for developers, the more you inhibit development, because it's all the other people you have to worry about," Craig says. "Every time you give one person a tax break, you've just squashed five other people because you've raised their tax burden."
Craig says a more effective incentive would be to take advantage of the good times and cut property taxes. "That's one way government saves for a rainy day, so that, if it has to, it can raise taxes later to pay for the stuff that's needed. With the way property values are increasing, I keep waiting for Brown to talk about tax cuts."
To the contrary, in June, during the city's annual budget process, Brown rejected the call by several councilmembers to cut anywhere from two to seven cents off the city's ad valorem rate of roughly 66 cents per $100 in property valuation. Harris County commissioners have also expressed a desire to cut the county's tax rate, even while they are preparing to ask voters to approve more than $500 million in bond issues this November to fund an expansion of the Port of Houston and construction of the $119 million Civil Justice Center.
If passed, the new debt would end up costing the county an additional $20 million to $30 million a year. Such fiscal pressures might explain county officials' growing annoyance with the city's TIRZ policy.
"Just from a philosophical perspective, there is a limit to what we can do at the county," says Harris County Judge Robert Eckels. "We spend money on the justice system, on social services and health care, children's protective services. The issue becomes, are we going to take money away from our budget to subsidize development?"
Particularly when that development does little to ease the county's burdens. State law on tax-increment reinvestment restricts expenditures to certain public improvements, such as roads and utilities, that are normally funded by the city's capital improvements budget.
"It's a great deal for the city," says county commissioner Radack, who wants to know what the Texas attorney general has to say about it. "It's a great deal if they can convince us to go along, because that's just one less penny they have to spend on their responsibilities.
"I'm sure they laugh every time they see the county spend money on a TIRZ."
Surprisingly, tax-increment reinvestment was not a particularly favored form of subsidy during the administration of former mayor Bob Lanier. Lanier, who was famous for using everything from the Metro sales tax to restructured bond debt to free up cash to meet the city's needs, had a philosophical opposition to tax-increment financing, suggesting that it could "balkanize" the city into rich and poor areas.
During his second term, however, Lanier launched his Neighborhoods to Standards program and dedicated his administration to the revitalization of downtown and the Inner Loop. At that point, he, like other urban politicians before him, found tax-increment reinvestment to be quite useful.
Lanier's first TIRZ (and the city's second) was created in Midtown and is considered by many to be a classic use of tax-increment reinvestment. The conditions certainly demanded something: acres of vacant land, whole blocks of substandard buildings, a crumbling and obsolete infrastructure. The Lanier administration also created a TIRZ in the Market Square area to spur development around the Rice Hotel, whose purchase and redevelopment were also to be funded with public subsidy.
By the time he left office at the end of 1997, Lanier had warmed considerably to tax-increment reinvestment and had spread a range of TIRZ projects, from single-family housing construction to new schools, throughout the city. While Lanier's strategy had its critics, nary a peep of complaint about the city's use of tax-increment reinvestment came from councilmembers or the county commissioners.
That's because everyone supported Lanier's goal of bringing residents back to inner-city neighborhoods by enticing developers to build inner-city housing. That hadn't happened in many years, chiefly because suburban home builders have their streets and utilities paid for through municipal-utility districts, which issue bonds to support the development of raw, unincorporated land.
"Lanier was absolutely dead focused on getting the city of Houston on the same foothold as those areas outside the city limits," says Michael Stevens, who, as Lanier's special assistant for housing and inner-city revitalization, controlled the city's economic development subsidies. "The tough part of all this and Lanier and I had to deal with it a lot is how much should someone get. Because, as someone who's been in the development business, I know that if I get this amount of money, I'd be happy. But if I got more than that, I'd be ripping off the public."
Brown succeeded Lanier in January 1998, promising to implement something called Neighborhood-Oriented Government to encourage citizen participation in community redevelopment projects. But if tax-increment reinvestment is Brown's idea of neighborhood-oriented government, or NOG, as it's known, someone forgot to tell the neighbors. Residents who live adjacent to two zones, in particular City Park and the recently approved Memorial City TIRZ, say Brown has ignored their concerns and instead of NOG is advocating DOG, or developer-oriented government.
Indeed, hundreds of residents from the solid, middle-class subdivisions that surround the City Park zone are still trying to stop Greg Baxter, who intends to develop an apartment complex and shopping center on 108 acres of vacant land along White Oak Bayou near East T.C. Jester. The protesters were encouraged when they learned Baxter had apparently misled city officials about the environmental condition of the site. Nonetheless, city officials shrugged off the possibility that City Park, a former gas and oil field, could be contaminated, and though Baxter has reportedly done additional environmental testing, he hasn't shared the results with anyone.
The Brown administration has also ignored some angry residents from the subdivisions that border the Memorial City TIRZ, a situation that turned nasty July 20, when more than 1,200 residents crammed the Memorial High School auditorium for a public hearing on the zone. Brown had originally planned on attending but didn't. If he had, the mayor would have learned that the support that exists for the Memorial City TIRZ comes from developer Metro National.
The developer's plans call for $98 million in road widening and construction, street lighting, traffic signals, and water, sewer and drainage improvements. While city officials argue that those public improvements are needed to protect the existing retail businesses in the area, Metro National is also hoping to cram in more than $1 billion in new development, including ten million square feet of new office and retail space and 3,000 units of rental housing.
One woman, a former schoolteacher, called the plan ludicrous and earned a standing ovation from the crowd when she accused the city of trying to turn Memorial City into a "magnet urban center."
"We don't want to live in one," she said.
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But thanks to tax-increment reinvestment, she and her neighbors won't have a say in the matter. Nor is anyone asking the approval of the city, county or HISD taxpayers who could be forgoing as much as $334 million in property tax revenues over the next 30 years to benefit Metro National Corporation. That's nearly twice the amount of public money voters grudgingly approved for a downtown baseball stadium in 1997, but at least someone bothered to ask.
With a seemingly endless supply of public money available and no voter approval needed, the TIRZ proposals are drawing in developers who are lining up before a City Council that seems only too willing to accommodate them.
"What's happened," Radack says, "is some people have figured out there is a California gold rush going on right here in Harris County."
Next week: Your future tax dollars at work.