Zoned Out

Opponents of Houston's special taxing districts applaud a new Texas Attorney General's opinion that says such zones should be restricted to blighted or underdeveloped areas. However, the opinion also appears to leave it up to the city of Houston to decide what constitutes a blighted or underdeveloped area.

After nearly six months of review, the state's lawyers offered findings on special taxing districts that hardly settle the disputes flaring over three zones created by the city last summer.

As is often the case with such opinions, the one signed December 8 by Texas Attorney General John Cornyn is open to interpretation, depending on who has read it.

For critics of the city's use of tax-increment reinvestment zones, or TIRZs, Cornyn's opinion that the area of a proposed zone must be "unproductive, underdeveloped or blighted" validates their belief that some of the TIRZs set up by the city under a 1981 state law are illegal.

"I would be less than honest if I didn't say I'm gratified that another lawyer agrees with what I thought was pretty obvious about the law," says Barry Abrams, an attorney who is part of an ad hoc group of homeowners who are fighting a TIRZ in the Memorial City area.

On the other hand, supporters of the city's aggressive use of tax-increment reinvestment to pay for redevelopment projects say Cornyn has underscored the city's right to decide for itself when and where to designate TIRZs.

"The opinion says exactly what we thought it would say, and we agree with it 100 percent," says Robert Randolph, a public-finance lawyer who acts as legal counsel to a dozen TIRZs created by the city and who has authored significant portions of the state law.

Under a TIRZ, tax revenues in a particular area are frozen. A nonprofit board appointed by elected officials sells bonds to pay for infrastructure improvements, which entices new development that in turn increases property values in the area. Tax revenues above the frozen level, the increments, are diverted from city, county and school district coffers to pay off the bonds.

Since 1991 the city has created 19 such zones, encompassing roughly 7 percent of the city's taxable land value. If all the projects proceed as planned, the zones will cost taxpayers more than $2 billion over the next 30 years.

In late June, after the city moved to set up TIRZs in the Galleria, Memorial City and Upper Kirby areas, Harris County Commissioner Steve Radack asked lawyers for the county to get an A.G.'s opinion on how the city was using tax-increment reinvestment. Radack, along with several city councilmembers, has questioned spending tens of millions of dollars in future tax revenues to subsidize development in bustling commercial areas that clearly are not blighted.

Pending the attorney general's ruling, Commissioners Court has made no decision yet on committing county tax revenue to the three disputed zones. Now that Cornyn has weighed in, the city will likely ask the commissioners for a vote.

In anticipation of that request, the Harris County Attorney's Office is focusing a review on the city ordinance creating the 30-year $235 million Galleria TIRZ. In July the city justified a zone for that area -- which includes some of the most valuable real estate in Texas -- by claiming traffic congestion was driving shoppers to suburban retail centers.

First Assistant County Attorney Mike Stafford says the opinion indicates that the county will need to determine if the city "exercised the required good faith and reasonable descretion" in designating the Galleria area as blighted.

Radack says nothing in Cornyn's ruling changes his view that the city is, in some cases, misusing tax-increment reinvestment.

"Just because the city says it's so doesn't make it so," Radack says. "I would underline that the A.G. says any decision [the city] makes is open to judicial review, and I would hope the city would proceed cautiously."

Indeed, a group of homeowners near Memorial City Mall are prepared to file a lawsuit challenging that TIRZ, claiming the area is not "unproductive, underdeveloped or blighted," and therefore does not meet the standards laid out by the state law.

The county's participation is particularly important to the Memorial City TIRZ, a $258 million project that has already been rejected by Spring Branch Independent School District.

If the commissioners also opt to beg off, more than half of the project's funding will have evaporated and the Brown administration will have to make a decision: reduce the scope of the project significantly or kill the TIRZ outright.

In Randolph's view, however, the city's determination that the area is blighted would likely withstand any legal challenge.

"It's a factual determination made by City Council," Randolph says, "and that determination is final and cannot be reviewed by a court unless the city acted unreasonably."

The recent opinion by Cornyn is merely the latest attempt to clarify a law that has\ been controversial since 1977, when the Legislature first passed a bill to allow cities to redevelop certain "blighted" urban areas using future property tax revenues. The 1977 law, however, required amending the state constitution, a ballot measure that failed in November 1978.

The following year lawmakers passed another TIRZ bill. But in May 1981 then-attorney general Mark White ruled that tax-increment reinvestment violated a constitutional requirement that taxation be "equal and uniform," an opinion that threw the issue back to voters.

In November 1981 a constitutional amendment was approved authorizing TIRZs, but the law was again challenged on constitutional grounds in 1987 in a case that made it to the Texas Supreme Court. While the court upheld the law, it also underscored the legislative restrictions on its application: "Tax increment financing," stated the court's ruling, "is designed to aid cities and towns in financing public improvements in blighted or undeveloped areas."

Until a few years ago the city seemed content to adhere to the spirit of that interpretation, restricting TIRZs to areas that had suffered significant declines in their property tax bases. But beginning late in the administration of Bob Lanier and continuing through Mayor Lee P. Brown's first term, the city has increasingly used tax-increment reinvestment in ways that appear to undercut the intent of the state law.

For example, Council approved a TIRZ for the Upper Kirby District in July, ostensibly as an incentive to entice developers to the area. However, developers were already busy there: Projects valued at more than $100 million were under way by the time the TIRZ was created.

E-mail Brian Wallstin at


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