In the recent past, the citizens of Houston voted to limit the power of the City Council on two occasions. The first was to limit its ability to raise property taxes. The second was to prohibit it from incurring any more debt to finance street and drainage projects in two separate referendums. Many City Council members and some of our mayors have chaffed at the voters restricting their discretion in this manner. To counter the voters’ wishes, they have employed a number of devices to avoid the restrictions. By far, the most effective tool City Council has used in this regard has been its tax increment reinvestment zone (TIRZ) program.
Dodging the Property Tax Cap.
In 2004, voters approved a referendum limiting the annual increase in the total property taxes the City could assess without going back to the voters for approval. In calculating how much Council could raise taxes without voter approval, the referendum provided “ad valorem tax revenues required by state law to be deposited in a tax increment fund” would be excluded.1
This exception meant that the more property the City Council could stuff into the TIRZs, the more it could exceed the voter-imposed limitation. So, stuff it has since 2004, approving ever more TIRZs, extensions to the lives of expiring TIRZs, and dozens of annexations, thus excluding hundreds of millions of dollars from the voter-imposed limitation. As of 2022, City Council had effectively shielded 12% of the City’s property tax roll from the voter-imposed limitation. This percentage will likely continue to grow over time, assuming that Council continues to approve more extensions and annexations. Considering it approved several last week, that is probably a pretty good bet.
I have also been amazed at how brazenly City Council members admit that one motivation for expanding the TIRZs is to sidestep the voter-imposition limitation on tax increases. It always seemed to me that if they were so convinced that increases above the limitation were necessary, they should just go to the voters and ask their permission instead of coming up with schemes to dodge the limitation voters mandated.
That is precisely what former mayor Bill White did in 2006. Facing a dramatic decline in the ranks of the Houston Police Department, White asked the voters to approve adding $90 million to the limit for public safety. The voters readily agreed, passing the measure by a wide margin.
However, there was another provision in the 2006 referendum which was hugely consequential but largely overlooked until recently. The provision stated that if a TIRZ were dissolved or the City’s participation was reduced, the property tax increment that would come back to the City would be added to the limitation calculation. In other words, the City would be held harmless if it decided to reduce the amount of property tax money going to the TIRZs.
However, because this provision's language is somewhat obtusely worded2, it went almost completely unnoticed for a decade. In that interim, a succession of Council members and other City officials routinely opined that TIRZs could not be dissolved because the City would “lose” the revenue the TIRZs were receiving.
However, a mayoral candidate in 2015 who called for reforming the TIRZ system pointed out that the provision held the City harmless if a TIRZ was dissolved. Later, Houston Chronicle reporter Mike Morris came to the same conclusion. Ultimately the City Attorney confirmed this reading of the provision. Nonetheless, we continue to hear somewhat regularly a Council member cite this misreading as a justification for essentially making TIRZs perpetual.
Dodging the Prohibition on Borrowing for Streets & Drainage.
In 2010 and again in 2018, voters approved a charter amendment that created a drainage fee for street and flood control infrastructure and specifically barred the City from borrowing any money for those purposes in the future. Some of you will recall that I campaigned against these referendums, partly because I believe the pass-as-you-go model is not sound financially. But the voters decided differently.
Since 2010, the City has nominally complied with the referendum by not seeking any new bond debt for streets or drainage. However, nothing in the referendum prohibited TIRZs from borrowing for this purpose. Even better, even though the City’s property tax revenues service TIRZ bonds, no vote is required to issue them.
As a result, in the last ten years, the TIRZs have pigged out on bonds. Their combined total now stands at nearly a billion dollars, and the issuance of TIRZ bonds has wiped out the reduction in City bonds resulting from the pay-as-you-go requirement imposed by voters.
Council members also make little attempt to hide their endorsement of using TIRZ debt to skirt the pay-as-you-go voter-imposed requirement. In a recent Council discussion, one member frankly stated that a particular project in his district would not be possible were it not for the ability of a TIRZ in his district to issue bonds.
Conclusion
While I like the idea of requiring Council to ask for voter approval to exceed some level of property taxes, I am not crazy about the current form of the limitation. Also, as I have previously stated, I think the pay-as-you-go model is a bad idea. But dammit, this is what Houstonians voted for, and by the way, they did so by wide margins. It is disrespectful to the citizens of our City for officials to seek devices to subvert their mandates and, especially to do so as blatantly as they do.
Much has been written about the recent election results as a repudiation of an elite mindset in which officials believe they know better than the people who elected them on how they should govern. The results make me wonder if a similar day of reckoning is coming to the City.
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Note 1 – Houston City Charter, Article III, Section 1(a).
Note 2 – The original charter amendment increases the cap for any property tax revenues from annexations. The 2006 amendment included language which stated, “amounts resulting from termination of or reduced participation in a tax increment reinvestment zone shall be treated in the same manner as revenues from annexed.” This language is found in Section 21 of the City charter, apart from the main provision establishing the limitation on raising taxes. The two sections must be read together to understand the effect of the termination or reduction in participation of a TIRZ. I suspect that convoluted drafting to hold the City harmless from reducing TIRZ participation is why many initially missed it.
