May 16, 2024

A Primer on Houston’s Tax Increment Reinvestment Zones

A Primer on Houston’s Tax Increment Reinvestment Zones

In the last few years, there has been a great deal of media and public attention on the City of Houston’s tax increment reinvestment zones (TIRZs). The TIRZs are a murky, complex world that elude simple explanations or generalizations. It is also very difficult to get good data on them. The City has done a poor job of overseeing the TIRZs and the financial reporting is disjointed and difficult to access.

I am going to share some data in this post that comes from the annual budgets of the TIRZs that must be filed with the City and approved by City Council.1 I want to emphasize that this is budget data, not audited data. Budgets are frequently aspirational and do not always reflect what actually has, or will take place. There also appears to be discrepancies in the way the individual TIRZs prepare their budgets.

All of the TIRZs are required to have annual audits but only about half post their audits online and I have found that getting the others is quite challenging. In the audits I have obtained, I have generally found that the numbers are higher for most items than those shown in the budgets. Hopefully at some point in the future, I will have all of those and can refine these numbers. But I think the budgeted information gives us some idea of the scope and scale of the effect of these entities on the City’s finances and infrastructure.

In the 1980s, the Texas Legislature authorized certain local governments to create TIRZs.  The TIRZ statute authorizes multiple local governmental entities to jointly participate in a TIRZ. School and community college districts have participated in about half of the City’s TIRZs and the County has a slight involvement in four. Most of the entities, and especially HISD, have been reducing their participation. In 2023, about 70% of the TIRZs’ revenue came from the City. The share contributed by other entities will likely continue to decrease in the future.

The statute lists eight criteria for establishing a TRIZ. They cover a number of conditions but generally describe the conditions as “impair the sound growth of the municipality creating the zone, retard the provision of housing accommodations, or constitute an economic or social liability and be a menace to the public health, safety, morals, or welfare in its present condition.”

The TIRZs are governed by a board that is appointed mostly by the City. They operate more or less independently but the City must approve their annual budgets and can replace the board if it is displeased with its performance. The TIRZs are only in existence for a fixed term and must be reauthorized periodically. The entity can also terminate a TIRZ subject to certain wind-down requirements. Generally speaking, the TIRZs should be thought of as subsidiaries of the City.

When a local government creates a TIRZ, the property tax revenue that the local government receives is frozen. Any excess in future years, the “increment,” is retained by the TIRZ which, for the most part, must be spent on improvements within the boundary of TIRZs. It is very important to understand that the creation of a TIRZ reduces the future property tax revenues for the sponsoring entity(ies).

The City has created twenty-eight TIRZs, of which twenty-five are currently active. This is a map from the City’s GIS system that shows the boundaries of the TIRZs.  As you can see, a very small geographic portion of the City benefits from having a TIRZ. Many neighborhoods which clearly fit the criteria for establishing a TIRZ do not have one.

Click on the image for an inactive map.

However, because the TIRZs’ boundaries have been gerrymandered to maximize the taxable value within them, about 25% of the City’s property tax base lies within a TIRZ, according to the most recent Texas Comptroller’s TIRZ report. Further, within their zones, they now capture about 45% of the taxable value. The City’s last audit (p.98) found that the City contributed $186 million of its property tax revenue to its TIRZs, which was about 12.5% of its total property tax collections.

The combined budgets for the TIRZs indicate they have plans to construct $7.4 billion of improvements in their boundaries, of which a little over $3 billion have already been completed. To put that in some perspective, the City’s capital improvement plan (CIP) has $11.5 billion scheduled over the next five years. At this point, only one billion of the TIRZs’ projects are currently included in the CIP. Nonetheless, the TIRZs’ projects are a very significant component of the City’s total infrastructure spending.

According to the budget information, the TIRZs have racked up $790 million in debt with an annual debt service of about $70 million. However, I found several audits with higher outstanding debt balances than the budget data shows. So, I suspect the total outstanding debt is closer to one billion.

This debt is repayable from the TIRZs’, i.e., the City’s, future property tax collections. Normally, issuing debt backed by property taxes requires voter approval but the Texas Attorney General’s office has ruled that TIRZ bonds do not require a vote. The City currently has about $3 billion in outstanding bonds backed by property taxes, not counting the TIRZ bonds. If the TIRZs were to complete their planned improvements, they would need to borrow something in the range of another $2 billion.

Last year, the TIRZs spent about $13 million on administrative expenses and professional fees. They also doled out over $22 million to developers under reimbursement agreements. The City has exercised very poor oversight of the TIRZs’ operations and there have been several scandals regarding their operations.

The TIRZs currently hold a little over $400 million in cash for future projects and about another $100 million for future debt service and other uses. One of the other uses in about a half a dozen of the TIRZs’ agreements, is a requirement to contribute some of their income to affordable housing. Most do this in the form of direct grants to the City's Housing Authority, which last year totaled to $4.8 million. However, in an unusual transaction, the Uptown TIRZ issued $102 million in bonds for affordable housing. Of course, the Uptown TIRZ also constructed the notorious Silver Line along Post Oak at a cost of approximately $200 million. I have yet to sort out exactly how the affordable housing money has been used.

As you can see from this introduction, the TIRZs’ finances are incredibly complex and the lack of clear financial data has made their operations nearly impenetrable to the general public. I will endeavor to shed more light on this shadowy, convoluted world in my future posts on these entities.


Note 1 - This is a link where you can access information regarding the TIRZs including their budgets.

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