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Dubious Deal

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In a letter to Cornyn, first assistant county attorney Michael Stafford pointed out that the Texas Constitution restricts TIRZ projects to "unproductive, underdeveloped or blighted" areas of the city, but that the precise definition of what constitutes such an area is "conspicuously absent" from the state law.

Indeed, the inconsistency has created a loophole that the Brown administration has, as Councilmember Rob Todd put it recently, "driven a mall through." Michael Stevens, an advisor to former mayor Bob Lanier, who exercised a decidedly more judicious TIRZ policy, says "a number" of the tax-increment zones created by Brown don't seem to fit the criteria of state law.

"Once you do that, you are taking away tax revenues rather than giving the city the option of spending it on the other things the city needs to spend money on," says Stevens, who negotiated most of the subsidies given to private developers during the Lanier administration. "The problem is that ten years from now, if you didn't do the TIRZ and the area continued to grow, you would have that revenue to do whatever the city deemed appropriate."

If there ever was a time in Houston's history when real estate developers didn't need a subsidy before getting out of bed in the morning, it's now: Interest rates are low, the job market is solid, and the stock market is at an all-time high. That has combined to generate some of the highest real estate values in Houston's history.

Moreover, few people would argue that taxpayer-funded projects such as the Rice Hotel renovation and the downtown baseball stadium haven't provided plenty of incentive for private development. Yet the Brown administration has nearly doubled — to almost $2 billion — the amount of future property tax revenues that could be diverted away from city, county and HISD coffers to TIRZ projects in the next 30 years. If all proposed zones are passed by Council in the coming weeks, more than 6 percent of the city's taxable land will be inside a tax-increment reinvestment zone.

Under the state Tax Increment Financing Act, no more than 15 percent of a city's land can be inside a TIRZ. But Brown's aggressive use of tax-increment reinvestment suggests some city officials may see that figure as a goal rather than a cap.

Do TIRZs work? That's hard to say, especially in Houston, where most of the zones haven't been in existence long enough to produce much additional property values. Tim Wooten, of the property tax division of the state comptroller's office, says no one knows if tax-increment reinvestment works. While stressing that he is not taking a position on the issue, Wooten says elected officials should demand some analysis of the costs and benefits of a TIRZ before setting policy.

"If I was a decision maker," Wooten says, "and I could participate in these or not participate, I would commission a cost-benefit analysis to show: Will the taxes I'm forgoing in the near term at least be offset — it really should be more than offset — by the enhanced taxes I'm going to receive, long-term? If such is not the case, I would be a little crazy to get into one of these deals."

To be sure, the economics of tax-increment reinvestment are daunting. They are also, of course, based on speculation. The only certainty is that any number of factors could precipitate a downturn in the economy that could have a serious effect on a TIRZ project's finances. After all, TIRZs are typically set up for 30 years. In the past three decades, Houston has experienced three significant economic slumps, the latest of which the city is still dealing with to some degree.

Predicting the long-term value of a tax-increment zone, or any other piece of real estate for that matter, is risky, says Jim Robinson, chief of the Harris County Appraisal District.

"We wish it was possible, but we have difficulty doing projections five years out," Robinson says. "When you get down to it, even trying to predict what values are going to be beyond next year, it gets a little like using a Ouija board."

Yet if there's one thing all TIRZ financing plans have in common, it is that they are almost absurdly optimistic. They all assume property values will rise and remain high for the next 30 years, resulting in more than enough new tax revenues to pay the project costs. There are no alternative scenarios.

Most plans back into their financial projections by first deciding how much money is needed, then adjusting the estimated new value to be generated by the redevelopment project accordingly. One common tactic is known as "front-end loading," cramming most of the projected increases in taxable value into the first few years of the 30-year financing plan.

An example is a recent revision of the Gulfgate Mall TIRZ. Last month the Brown administration expanded the zone to include additional property surrounding the mall that is currently valued at roughly $12 million. According to the developer, Ed Wulfe, more than $45 million in additional value will be created on that property by the year 2004, resulting in an annual increment of nearly $700,000. By 2027, the redevelopment is estimated to produce $20.5 million in additional tax revenues, all of which will be pledged to pay off bonds sold to fund the public improvements.

The trouble is, Wulfe's projections assume not only that the redevelopment will create enormous new value in a down-at-the-heels part of town, but that the project will come off without a hitch. If that's true, one question that needs to be asked is, If there is no downside to TIRZ projects, why are subsidies needed to carry them out?

The answer, it seems, is because developers say they cannot afford it otherwise. That's because the city has long neglected the basics — streets, sewers and utilities — which now need extensive repair and upgrade. Another problem was the city's failure to implement a development code until the 1980s, which encouraged shortsighted development that has made it difficult to launch new projects.

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