Untitled Texas Attorney General Opinion ( 2004 )

ATTORNEYGENERAL OF TEXAS
GREG ABBOTT
December 6.2004
The Honorable James L. Keffer Opinion No. GA-0276
Chair, Committee on Economic Development
Texas House of Representatives Re: Whether a home-rule city may extend a Tax
Post Office Box 2910 Code, chapter 3 11 reinvestment zone’s termination
Austin, Texas 78768-2910 date beyond the date provided in the ordinance
designating the zone (RQ-023%GA)
Dear Representative Keffer:
You ask whether a home-rule city may extend a Tax Code, chapter 3 11 reinvestment zone’s
termination date beyond the date provided in the ordinance designating the zone.’
I. Factual and Legal Background
Your question involves a reinvestment zone authorized by chapter 3 11 of the Tax Code, the
Tax Increment Financing Act, see TEX. TAX CODE ANN. 5 3 11.001 (short title) (Vernon 2002). See
Request Letter, supra note 1, at 1. You indicate that a home-rule city created a reinvestment zone
by ordinance in 1986, see id., before the legislature repealed and codified chapter 31 l’s statutory
predecessor, former article 1066e. * “The ordinance provides a 22 year life for the zone. The
participating taxing units include the City, the County, and the Independent School District.” Id.
at 2. You indicate that “the zone continues to serve the purposes identified in Chapter 311 ofthe Tax
Code,” id., and that the city “wishes to extend the life of the zone beyond 2008 if legally
possible,” id. at 1.
“Tax increment financing is designed to aid cities and towns in financing public
improvements in blighted or underdeveloped areas.” City ofEl Paso v. El Paso Cmty. Cdl. Dist.,
‘See Letter from Honorable James L. Keffer, Chair, Committee on Economic Development, Texas House of
Representatives,to Honorable Greg Abbott, Texas Attorney General (June 10,2004) (on file with Opinion Committee,
also nvaihbk af http://www.oag.state.tx.us)[hereinafterRequest Letter].
‘SeeAct ofMay 1, 1987,70thLeg., R.S., ch. 191, $5 1 (adding title 3 to the Tax Code), 12 (repealing former
article 1066e), 13 (“This Act is enacted pursuant to Article III, Section 43, of the Texas Constitution. This Act is
intended as a recodification only, and no substantivechange in the law is intended by this Act.“), 1987 Tex. Gen. Laws
1410,1411-58, 1466.
The Honorable James L. Keffer - Page 2 (GA-0276)
729 S.W.2d 296, 296 (Tex. 1986). Chapter 311 establishes a tax increment financing scheme in
which
the existing tax revenues of each “taxing unit” are frozen; the tax
increment financing bonds are sold, the improvements are
constructed; the “blighted area” is revitalized; property values soar
and ad valorem tax revenues increase. The increased tax revenues
over and above the tax increment base are then used to retire the tax
increment financing obligations
El Paso Cmty. Coil. Dist. Y. City of El Paso, 698 S.W.2d 248, 250 (Tex. App.-Austin 1985, writ
granted), rev’d on other grounds, 729 S.W.2d 296 (Tex. 1986). Because tax increment financing
implicates the constitutional requirement that ad valorem taxation be “equal and uniform,” see TEX.
CONST. art. VJII, 9 l(a); see generally Tex. Att’y Gen. Op. No. MW-337 (1981): the legislature
drafted chapter 3 1 l’s statutory predecessor, the Tax Increment Financing Act of 198 1, to take effect
upon the voters’ approval of article VIII, section l-g. It provides
(a) The legislature by general law may authorize cities, towns,
and other taxing units to grant exemptions or other relief from ad
valorem taxes on property located in a reinvestment zone for the
purpose of encouraging development or redevelopment and
improvement of the property.
(b) The legislature by general law may authorize an
incorporated city or town to issue bonds or notes to finance the
development or redevelopment of an unproductive, underdeveloped,
or blighted area within the city or town and to pledge for repayment
of those bonds or notes increases in ad valorem tax revenues imposed
on property in the area by the city or town and other political
subdivisions.
TEX. CONST. art. VI& 5 l-g (emphasis added). The adoption of article VIII, section l-g(b) ensured
the constitutionality of the Tax Increment Financing Act of 1981. See Tex. Att’y Gen. Op. No.
JC-0152 (1999) at 3 (citing City of El Paso, 729 S.W.2d at 296-97).
Section 311.003(a) authorizes the governing body of a municipality by ordinance to
“designate a contiguous geographic area in the jurisdiction of the municipality to be a reinvestment
‘In Attorney General Opinion MW-337, this office concluded that a 1979 tax increment financing provision
violated the equal and uniform requirement by “causingan unequal distribution of the ad valorem tax burden.” Tex.
Att’y Gen. Op. No. MW-337(1981) at 5 (“All other property would have 100%of its value taxed to meet the ordinary
needs of the city, but district property would have only a part of its value taxed for that purpose, causing an unequal
distribution ofthe ad valoremtaxburden.“) (citationsomitted);see also HOUSE S~DY GROUP, BILLANALYSIS, Tex. S.J.
Res. 8, 67th Leg., 1st C.S. (1981) (explaining the view that tax increment financing violates the equal and uniform
requirement because “the earmarking of tax-incrementrevenw to pay for improvements within the tax-incrementzone
meant that pmperty within the zone was not contributing its fair share to the city’s general fund”).
The Honorable James L. Keffer - Page 3 (GA-0276)
zone to promote development or redevelopment of thenarea if the governing body determines that
development or redevelopment would not occur solely through private investment in the reasonably
foreseeable future.” TEX. TAX CODE ANN. 5 311.003(a) (Vernon 2002). To be designated as a
reinvestment zone, the area must meet certain statutory criteria. See id. 3 3 11.005; see also Tex.
Att’y Gen. Op. No. JC-0152 (1999) at 7 (noting that article VIII, section l-g(b) limits tax increment
financing to an area that is “unproductive, underdeveloped, or blighted” and that Tax Code section
3 11.005 generally comports with that constitutional requirement). Before adopting an ordinance
providing for a reinvestment zone, the governing body, among other things, must prepare a
preliminary reinvestment zone financing plan, which must be sent to each taxing unit that levies
taxes on real property in the proposed zone, and must hold a public hearing on the creation of the
zone. S``TEX.TAXCODEANN. 5 311.003(b)-(c)(V emon 2002). The ordinance designating an area
as a reinvestment zone must, among other things, describe the boundaries of the zone, provide that
the zone take effect immediately upon passage of the ordinance, and provide a date for termination
of the zone. See id. 5 3 11.004(a)(l), (3)-(4).
After a reinvestment zone’s creation, for the zone’s duration, participating taxing units that
tax real property in the reinvestment zone, with certain exceptions, must pay the tax increment into
the tax increment fund. Id. 5 3 11 .Ol 3.4 In any particular tax year, the tax increment is calculated by
subtracting “the tax increment base,” which is the total appraised value of taxable real property in
the reinvestment zone for the year in which the zone was designated, from the current total appraised
value of taxable real property in the reinvestment zone. See id. 5 311.012. “In general, the ‘tax
increments’ are taxes derived by a taxing unit from the difference between the appraised value of all
taxable real property located in a reinvestment zone for that year less the appraised value of the
property when the zone was established. In other words, they are taxes attributable to the increased
value of the real property in the zone presumably due to its development.” Tex. Att’y Gen. Op. No.
E-0300 (2000) at 8 n.8 (citing Tax Code section 311.012). The tax increment fund is used to
finance improvements within the zone. See TEX. TAX CODE ANN. 5 3 11.014(a)-(c) (Vernon 2002).
‘Whetherand to what extent a particular taxing unit is required to pay the tax increment into the tax increment
fund will depend upon a number of factors. See, e.g., TEX.TAXCODEANN. $5 311.0125(d)(Vernon Supp. 2004-05)
(“If a taxing unit enters into a tax abatement agreement authorized by this section, taxes that are abated under that
agreement are not considered taxes to be imposed or produced by that taxing unit in calculating the amount of: (1) the
tax increment ofthat taxing unit; or (2) that taxing unit’s deposit to the tax increment fund for the reinvestmentzone.“),
311.013(b) (“Each taxing unit shall pay into the tax increment fund for the zone an amount equal to the tax increment
produced by the unit, less the sun oE (1) property taxes produced fromthe tax increments that are, by contract executed
before the designation ofthe area as a reinvestmentzone, required to be paid by the unit to anotherpolitical subdivision;
and (2) a portion, not to exceed 15 percent, of the tax increment produced by the unit as provided by the reinveshnent
zone financing plan or a larger portion as provided by Subsection (f).“), 311.013(d)-(e)(certain taxing units are not
required to pay a tax increment into the tax increment fund if improvements are not undertaken in the zone within three
years), 311.013(f) (“A taxing unit is not required to pay into the tax increment fund any of its tax increment produced
from property located in a reinvestmentmne designated under Section 3 11.005(a)OIin an area added to a reinvestment
zone under Section 311.007 unless the taxing unit enters into an agreement to do so with the governing body of the
municipality that created the zone. A taxing unit may enter into an agreementunder this subsection at any time before
or after the zone is created or enlarged. The agreement may include conditions for payment of that tax increment into
the fund and must specify the portion of the tax increment to be paid into the fund and the years for which that tax
increment is to be paid into the fund. The agreement and the conditions in the agreement arc binding on the taxing unit,
the municipality, and the board of directors of the zone.“).
The Honorable James L. Keffer - Page 4 (GA-0276)
Section 3 11 .017 governs a reinvestment zone’s termination:
(a) A reinvestment zone terminates on the earlier of:
(1) the termination date designated in the ordinance creating
the zone or an earlier termination date designated by an ordinance
adopted subsequent to the ordinance creating the zone; or
(2) the date on which all project costs, tax increment bonds,
and interest on those bonds have been paid in full.
(b) The tax increment pledged to the payment of bonds and interest
on the bonds may be discharged and the reinvestment zone may be
terminated if the municipality that created the zone deposits or causes
to be deposited with a trustee or other escrow agent authorized bylaw
funds in an amount that, together with the interest on the investment
of the funds in direct obligations of the United States, will be
sufficient to pay the principal of, premium, if any, and interest on all
bonds issued on behalf of the reinvestment zone at maturity or at the
date fixed for redemption of the bonds, and to pay any other amounts
that may become due, including compensation due or to become due
to the trustee or escrow agent.
Id. § 311.017. In addition, afterall project costs and all tax increment bonds or notes issued for a
reinvestment zone have been paid, and subject to any agreement with bondholders, “any money
remaining in the tax increment fund shall be paid to the municipality and other taxing units levying
taxes on property in the zone in proportion to the municipality’s and each unit’s respective share of
the total amount of tax increments derived from taxable real property in the zone that were deposited
in the fund during the fund’s existence.” Id. 5 311.014(d).
II. Analvsis
You inform us that no bonds or notes have been issued to fund projects for the reinvestment
zone and that, as a result, “the issue is whether Section 3 11.017(a)(l) prohibits an extension of the
termination date of the [zlone.” Request Letter, supra note 1, at 3. As you point out, section
3 11 .017(a)( 1) expressly authorizes a municipality to adopt a subsequent ordinance providing for an
earlier termination date than the date in the original ordinance designating the reinvestment zone.
But neither section 3 11.017 nor any other provision in chapter 3 11 authorizes a municipality to
amend the designating ordinance or to adopt a subsequent ordinance extending the termination date.
Your letter contends that this absence of statutory authority is not dispositive because a home-rule
city, which looks to the legislature only for limitation on its power, does not require such a grant of
authority. See id. at 2-3.
“A municipality is a home-rule municipality if it operates under a municipal charter that has
been adopted or amended as authorized by Article XI, Section 5, of the Texas Constitution.” TEX.
The Honorable James L. Keffer - Page 5 (GA-0276)
UC. GOV’T CODEANN. 5 5.004 (Vernon 1999). A home-rule municipality “has full power of local
self-government.” Id. 9 5 1.072(a). However, article XI, section 5 provides that “no charter or any
ordinance passed under said charter shall contain any provision inconsistent with the Constitution
of the State, or of the general laws enacted by the Legislature of this State.” TEX. CONST.art. XI,
5 5. Thus, while it is true that “[clitics adopting a home rule charter have the full power of self
government and look to the Legislature only for limitations on their power,” City of San Antonio v.
City ofBoerne, 111 S.W.3d 22, 27 n.5 (Tex. 2003), the constitution and general laws limit their
authority, see TEX. CONST.art. XI, $ 5.
Article VIII, section 1 of the Texas Constitution requires that taxation “shall be equal and
uniform.” TEX. CONST.art. VIII, 5 1(a). This requirement applies to home-rule cities. See Aycock
v. CityofForf Worth, 371 S.W.2d 712,715 (Tex. Civ. App.-Ft. Worth 1963, writrefdn.r.e.)(“That
the taxing authority in the instant case was a City under the Home Rule Amendment would give it
no greater latitude in . taxation or the controls regulating such in our Constitution and statutes, for
as the state and county government is confined so it is likewise confined.“). Article VIII, section l-
g(b) provides an exception to this requirement, permitting “[tlhe legislature by general law” to
“authorize an incorporated city or town” to pledge “increases in ad valorem tax revenues imposed
on property in the area by the city or town and other political subdivisions” for the area’s
redevelopment. TEX. CONST. art. VJJI, 5 l-g(b) (em ph asis added); see discussion supra pp. 2-3.
Thus, in the case of tax increment financing permitted by article VIIJ, section l-g(b), a home-rule
city does not exercise full power of local self-government but rather must look to general law
implementing section l-g(b) for the authority to engage in tax increment financing.
In enacting implementing legislation for article VIII, section l-g(b), the legislature has
required amunicipal governing body that creates a reinvestment zone to provide a date for the zone’s
termination in the ordinance designating the zone, see TEX. TAX CODEANN. 4 3 11.004(a)(1)(4)
(Vernon 2002), and has authorized a governing body to adopt a subsequent ordinance providing for
an earlier termination date, see id. 5 3 11 .017(a)(l). Significantly, however, the legislature has not
authorized a governing body to amend the designating ordinance to change the termination date or
to adopt a subsequent ordinance providing for a later termination date.
We construe chapter 3 1 l’s express provisions to preclude a municipal governing body from
acting to extend a reinvestment zone’s duration. Tax increment financing diverts the tax increment
from taxing units’ general revenues to the tax increment fund, which is generally used to finance
improvements only within the zone. See id. $5 311.012-,014; see also id. 5 311.010(b) (permitting
use of tax increment fund revenues to pay the cost of providing affordable housing or areas of public
assembly in or out of the zone). After a zone’s termination, taxing units no longer pay the tax
increment into the tax increment fund, and all taxes on property formerly in the zone are directed to
general revenues. The legislature, in implementing article VIII, section l-g(b), has required
municipal governing bodies to establish reinvestment zones’ duration at the outset and has expressly
permitted zones’ early termination but not their extension. This indicates that the legislature intends
reinvestment zones, and tax increment financing, to exist for predetined periods and does not
intend chapter 311 to authorize cities to extend them indefinitely. See TEX. GOV’T CODE ANN.
5 311,023(l)-(2), (5) (Vernon 1998) (in construing a statute, a court may consider, among other
things, the object sought to be attained, the circumstances under which the statute was enacted,
The Honorable James L. Keffer - Page 6 (GA-0276)
and the consequences of a particular construction). Moreover, given tax increment financing’s
implications for equal and uniform taxation, it is appropriate to strictly construe chapter 311. Cf: N.
Alamo Water Supply Corp. v. Willacy County Appraisal Dist., 804 S.W.2d 894,899 (Tex. 1991)
(“Statutory exemptions from taxation are subject to strict construction because they undermine
equality and uniformity by placing a greater burden on some taxpaying businesses and individuals
rather than placing the burden on all taxpayers equally.“).
Furthermore, because the legislature has not authorized it by general law, a city ordinance
or ordinance amendment extending a reinvestment zone’s duration would not fall within the article
VIII, section l-g(b) exception to the general equal and uniform requirement and would therefore
violate article VIII, section 1. See Tex. Att’y Gen. Op. No. JC-0152 (1999) at 5 (“[T]ax increment
financing in an area that is not ‘unproductive, underdeveloped, or blighted’ within the meaning of
article VIII, section l-g(b) is not authorized by the constitution, and, moreover, would violate article
VIII, section 1.“) (citations omitted).
Finally, your letter also suggests that a city’s authority to amend an ordinance designating a
reinvestment zone in order to change the termination date is inherent in the city’s authority to enact
the designating ordinance, citing section 5 1.001 ofthe Local Government Code. See Request Letter,
supra note 1, at 2. However, section 5 1.001 merely generally authorizes the governing body of any
municipality, regardless of its form of government, to “adopt, publish, amend, or repeal an
ordinance, rule, or police regulation” to carry out its authority. See TEX. Lot. GOV’T CODE ANN.
5 51.001 (Vernon 1999). This statute does not authorize a city to adopt or amend an ordinance to
carry out authority that the city does not have or where such an ordinance or amendment would
conflict with the constitution or general law. See, e.g., id. revisor’s note (2) (“The revised law omits
as unnecessary the source law provision that ordinances. may not be ‘contrary to the Constitution
of this State.’ The principle that a municipality may not adopt an unconstitutional ordinance . . . is
obvious and requires no statement in a statute.“).
Because such an ordinance or ordinance amendment would conflict with both the constitution
and chapter 3 11, we conclude that a home-rule city may not act to extend a reinvestment zone’s
termination date beyond the date provided in the ordinance designating the zone.5
‘As this office has concluded in the past, chapter 3 11permits a municipalityto create a new reinvestment zone
with boundaries identical to a terminated zone. See Tex. Att’y Gen. op. No. DM-390 (1996). However, the tax
increment base for the new reinvestment zone would be based on the total appraised value of taxable real property in
the zone for the year the new mne was designated,not the year the terminatedzone was designated. See TEX.TAXCODE
ANN.5 311.012 (Vemon2002).
The Honorable James L. Keffer - Page 7 (GA-0276)
SUMMARY
A home-rule city may not extend a Tax Code, chapter 311
reinvestment zone’s termination date beyond the date provided in the
ordinance designating the zone.
Very truly yours,
BARRY R. MCBEE
First Assistant Attorney General
DON R. WILLETT
Deputy Attorney General for Legal Counsel
NANCY S. FULLER
Chair, Opinion Committee
Mary R. Crouter
Assistant Attorney General, Opinion Committee