Texas City Attorney s Association June 10, 2005 S. Padre Island, Texas A HITCHIKER S GUIDE TO THE GALAXY OF ECONOMIC DEVELOPMENT ENTRY 593: LIMITATIONS ON MUNICIPAL AUTHORITY RELATING TO ECONOMIC DEVELOPMENT Debra A. Drayovitch Taylor, Olson, Adkins, Sralla & Elam, L.L.P. 6000 Western Place, Suite 200 Fort Worth, Texas 76107 ddrayovitch@toase.com (817) 332-2580
DEBRA A. DRAYOVITCH TAYLOR, OLSON, ADKINS, SRALLA & ELAM, L.L.P. 6000 Western Place, Suite 200 Fort Worth, Texas 76107-4654 (817) 332-2580 (817) 332-4740 FAX 620 West Hickory Denton, Texas 76201 (940) 383-2674 E-mail: ddrayovitch@toase.com Debra A. Drayovitch practices in the areas of public and municipal law. She received a B.A. degree with honors from the University of Texas and her juris doctor degree from Southern Methodist University School of Law. Debra has served as City Attorney for the City of Greenville, Texas; as Deputy City Attorney for the City of Arlington, Texas; and as City Attorney for the City of Denton, Texas. She is currently Of Counsel to Taylor, Olson, Adkins, Sralla & Elam, L.L.P., a Fort Worth law firm who serves as city attorney to 38 Texas municipalities. There, as well as in Taylor Olson s Denton office, Debra serves as City Attorney for the City of Ovilla, and represents other cities on economic development matters, land use issues, contract drafting and negotiations, and employment matters. Debra is a member of the State Bar of Texas and is a Fellow of the Texas Bar Foundation. She served as president of the Texas City Attorneys Association in 1989 and as Director of the Association from 1986 to 1993. She has served as president of the Denton County Bar Association and as Chair of the Municipal Contracts, Franchises and Technology Section of the International Municipal Lawyers Association. She has lectured on behalf of the Texas Municipal League, the Texas City Attorneys Association, the Texas Municipal Clerk's Association and other organizations. Debra authored supplements to the Municipal Law Manual from 1985 to 1992. In her spare time, Debra has served as a soccer mom, a baseball team mom, a hockey team mom, and as a member of the choir boosters, theatre boosters and other parent support groups.
A HITCHIKER S GUIDE TO THE GALAXY OF ECONOMIC DEVELOPMENT ENTRY 593: LIMITATIONS ON MUNICIPAL AUTHORITY RELATING TO ECONOMIC DEVELOPMENT If there were a Hitchhiker s Guide to the Galaxy of Economic Development, it would be full of exciting advice such as how to best choose a football stadium site and acquire by purchase or eminent domain the 100+ homes existing on the site. Also of interest would be guidance on funding the construction of a hippopotamus statue to promote economic development in the great City of Hutto, Texas. There would surely be an entry on how to establish a tax increment district to construct infrastructure for an old-fashioned, pedestrian-friendly downtown with upscale retailers, restaurants, and, of course, the prerequisite hotel. Such tales make for exciting reading and inspire the most cynical municipal officials in their quest to seek the holy grail of economic development. Nestled toward the back of the Guide would be an entry outlining the limitations on municipal authority relating to economic development in Texas. Some would question the need for such a boring topic, preferring instead the more glamorous aforementioned topics. However, this entry was included in the Guide on the advice of the Galaxy s attorneys. And if there was such an entry, this is what it would say. In the past 25 years, the Texas Legislature has enacted over 20 different incentives to promote local and state economic development, including: 1. The Development Corporation Act of 1979, Tex. Rev. Civ. Stat. Ann. art. 5190.6, which authorizes the creation of two different types of development corporations, Section 4A and Section 4B corporations, to promote the creation of new and expanded business, commercial, and manufacturing activity within the municipality and its vicinity. 2. Chapter 312 of the Texas Tax Code, which authorizes municipalities, counties, school districts and special districts to enter into tax abatement agreements with the owners of real and certain personal property. 3. Chapter 311 of the Texas Tax Code, which authorizes cities to establish reinvestment zones that provide for tax increment financing. 4. Chapter 380 of the Texas Local Government Code, which authorizes municipalities to administer programs, including programs for making loans and grants of public money and providing personnel and services of the municipality to promote economic development. 5. Chapter 372 of the Texas Local Government Code, which authorizes the creation of public improvement districts and allows a municipality to levy and collect special assessments on property to finance public improvements within the district.
6. Chapter 2303 of the Texas Government Code, the Enterprise Zone Act, which authorizes a municipality, or county, or both, to designate an area of pervasive poverty, unemployment and economic distress as an enterprise zone and grant numerous financial incentives to business enterprises in the zone. 7. Chapter 375 of the Texas Local Government Code, which authorizes a municipality to designate a municipal management district within an eligible commercial area to provide financing for infrastructure and services within the district. 8. Chapters 334 and 335 of the Texas Local Government Code, which authorize municipalities to finance economic development projects, as well as the construction of sports stadiums, by authorizing the establishment of a sales tax, a hotel occupancy tax, an event tax, and a venue facility use tax. 9. Chapter 431 of the Texas Transportation Code, which authorizes the funding of transportation facilities and systems. There are basic limitations which apply to all economic development incentives. An expenditure of funds to attract or expand business development must serve a public purpose and may not be a gratuitous payment to a private entity. Even though the Texas Constitution has been amended to provide that economic development is a public purpose, there still must be consideration for any incentive. In utilizing a statutory incentive, a municipality should condition the incentive upon achievement of measurable performance standards, such as the creation of employment, construction of improvements, continued operation in a city for a stated period, achieved minimum taxable values, or sales tax revenue. The purpose of this paper is to discuss the constitutional, statutory or case law limitations on several of the statutory tools most often used to stimulate local economic development. These are: 1. Tax abatements; 2. Tax increment financing; 3. Section 380 Programs; and 4. Section 4A Corporations and Section 4B Corporations created pursuant to Tex. Rev. Civ. Stat. Ann. art. 5190a. TAX ABATEMENTS Generally. A municipality may use tax abatements, alone or in conjunction with other development incentives, to attract business and industries and to promote expansion of existing businesses. The procedures governing the granting of abatements are found in Chapter 312 of the Texas Tax Code. Prerequisites for offering an abatement are fairly simple. The municipality must: 1. adopt a resolution indicating its intent to participate in tax abatement; and
2. adopt tax abatement guidelines and criteria. These guidelines may be as complex or as simple as politics dictate, but they must address the availability of abatement for both new facilities and structures and for the expansion of existing facilities and structures. TEX. TAX CODE ANN. 312.002(a) (Vernon 2002). Typically included in the criteria and guidelines for a project to qualify for abatement are: a. minimum thresholds for the creation and/or retention of a minimum number of jobs; abatement; b. minimum amount of capital investment in order to qualify for c. any limitations on the types of businesses which will qualify for abatement, i.e. certain types of industry, targeted enterprises, and/or certain types of operations; d. the maximum percentage of abatement permitted, and, if personal property tax abatement is authorized, the maximum percentage of permitted abatement; and e. the maximum permitted term of an abatement. The abatement policy should also include definitions for key terms, procedural guidelines (such as the application review process), and a confidentiality provision. Some cities either require or give priority to projects which propose to generate a minimum annual amount of sales tax revenues. Procedure. To grant an abatement, the municipality must: 1. give notice of a public hearing on the designation of the project property as a reinvestment zone. TEX.TAX CODE ANN. 312.201(d) (Vernon 2002); 2. find that the improvements sought are feasible and practical and would be a benefit to the land to be included in the zone and to the municipality after the expiration of the abatement agreement, and that the property meets one of the criteria to be designated as a reinvestment zone. Id.; 3. adopt an ordinance providing for the designation of the project property as a reinvestment zone, unless the area has already been designated as an enterprise zone under the Texas Enterprise Zone Act. To qualify for designation as a reinvestment zone, an area must: a. substantially arrest or 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 and use because of the presence of:
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) a substantial number of substandard, slum, deteriorated, or deteriorating structures; the predominance of defective or inadequate sidewalks or streets; faulty size, adequacy, accessibility, or usefulness of lots; unsanitary or unsafe conditions; the deterioration of site or other improvements; tax or special assessment delinquency exceeding the fair value of the land; defective or unusual conditions of title; conditions that endanger life or property by fire or other cause; or any combination of these factors; b. be predominantly open and, because of obsolete platting, deterioration of structures of site improvements, or other factors, substantially impair or arrest the sound growth of the municipality; c. be in a federally assisted new community located in a home-rule municipality or in an area immediately adjacent to a federally assisted new community located in a home-rule municipality; d. be located entirely in an area that meets the requirements for federal assistance under Section 119 of the Housing and Community Development Act of 1974; e. encompass signs, billboards, or other outdoor advertising structures designated by the governing body of the municipality for relocation, reconstruction, or removal for the purpose of enhancing the physical environment of the municipality, which the legislature declares to be a public purpose; or f. be reasonably likely as a result of the designation to contribute to the retention or expansion of primary employment or to attract major investment in the zone that would be a benefit to the property and that would contribute to the economic development of the municipality. Id. 312.202; 4. give at least seven days notice of its intent to enter into the abatement agreement to the presiding officer of each of the other taxing units in which the property is located. Id. 312.2041; and 5. approve the agreement by a majority vote of its governing body at a regularly scheduled meeting, after finding that the terms of the agreement and the property subject to the agreement meets the abatement guidelines. TEX. TAX CODE ANN. 312.204 (Vernon Supp. 2004-2005).
The Abatement Agreement. The terms of the abatement agreement must contain certain provisions mandated by 312.205(a) of the Texas Tax Code as well as comply with the municipality s abatement policy. Statutorily mandated terms include the following: 1. A description of the kind, number, and location of all proposed improvements of the property; 2. Provisions for access to and inspection of the property by municipal employees to ensure compliance with the terms of the agreement; 3. Any limitations on the uses of the property consistent with the general purpose of encouraging development or redevelopment of the zone during the term of the abatement; 4. Procedures for recapturing property tax revenue lost as a result of the agreement if the property owner fails to make the required improvements; 5. Inclusion of each term agreed to by the property owner; 6. A requirement for the owner to certify annually that it is in compliance with the terms of the agreement; and 7. A cancellation provision if the property owner should default. TEX. TAX CODE ANN. 312.205 (Vernon 2002). Limitations on Tax Abatement. 1. Term. The abatement has a maximum term of 10 years; Op. Tex. Att y Gen. No. JC-133 (1999). 2. Purpose. The abatement must be for repair or improvements to real property. Op. Tex. Att y Gen. No. JC-106 (1999). 3. Abatement Criteria. The abatement criteria are valid for a period of two years. During this period, the guidelines and criteria may be amended or repealed only by a vote of three-fourths of the members of the governing body. The city must update or readopt the abatement criteria every two years; TEX.TAX CODE ANN. 312.002(c). 4. Delinquent Taxes. A municipality is not authorized to abate delinquent taxes; Tex. Att y Gen. LO-95-090. 5. Mirror Requirements. Abatement agreements with owners of property in a reinvestment zone must contain identical terms for the portion of the value of the property that is to be exempt and the duration of the exemption. TEX. TAX CODE ANN. 312.204(b) (Vernon Supp. 2004-2005).
TAX INCREMENT FINANCING Generally. Tax increment financing allows a municipality to establish a reinvestment zone to fund public improvements in connection with economic development within the boundaries of the zone. Each taxing unit that levies taxes against the property then chooses to dedicate all, a portion of, or none of the tax revenue that is attributed to the increase in property values because of the improvements within the zone. This is referred to as the tax increment. The increment may be used to pay for project costs, i.e. expenditures made or obligations incurred by the municipality establishing a reinvestment zone that are listed in the project plan as costs of public works or public improvements. Requirements for Tax Increment Financing. The Tax Increment Financing Act, Chapter 311 of the Texas Tax Code, authorizes a municipality to establish a reinvestment zone of a contiguous geographic area in the jurisdiction of the municipality for tax increment purposes by one of two methods: by petition of owners of property that constitutes at least 50 percent of the appraised property value within the proposed zone, or upon the motion of the governing body of the municipality. In both cases, the governing body must determine that development or redevelopment would not occur solely through private investment in the reasonably foreseeable future. TEX.TAX CODE ANN. 311.003(a) (Vernon 2002). Designation of a Zone. The governing body may initiate the creation of the zone without a petition only if the area within the proposed zone meets at least one of the following criteria: 1. The area substantially arrests or impairs the sound growth of the municipality, retards the provision of housing accommodations, or constitutes an economic or social liability and a menace to the public health, safety, morals, or welfare in its present condition and use because of the presence of: a substantial number of substandard, slum, deteriorated, or deteriorating structures, inadequate sidewalks or street layout, faulty lot layouts, unsanitary or unsafe conditions, a tax or special assessment delinquency that exceeds the fair market value of the land, defective or unusual conditions of title, or conditions that endanger life or property by fire or other cause; or 2. the area is predominately open, and because of obsolete platting, deteriorating structures, or other factors, it substantially impairs the growth of the city; or 3. the area is in or adjacent to a federally assisted new community. TEX.TAX CODE ANN. 311.005 (Vernon 2002). Note that several bills have been introduced in the 78th Legislative Session to amend Chapter 311 to relax the threshold requirements for creation of a reinvestment zone. These include Senate Bill 771 which provides that a municipality may create a reinvestment zone if structures, other than single-family residential structures within the zone area, have been substantially vacant for at least five years. Also pending is House Bill 1188, which would repeal the obsolete platting requirements and allow cities of 100,000 or more to create a zone if 90 percent of the square footage of structure has been used for commercial, industrial, or
residential purposes during the preceding five years. By the time I present this paper, we will know to what extent, if any, the zone threshold criteria have been amended. As is the case with Chapter 312, a municipality s designation of an area as an enterprise zone under Chapter 2303 of the Government Code constitutes designation of the area as a reinvestment zone for purposes of tax increment financing. Id. 311.0031. City Procedures. A municipality must complete a number of procedural steps to create a reinvestment zone. The municipality must: 1. prepare a preliminary reinvestment zone financing plan and forward it to each taxing unit that levies taxes on real property within the zone. Id. 311.003(b); 2. give 60 days written notice to each of the other taxing entities of its intent to establish the zone, unless it has already been established as an enterprise zone. Id. 311.003(e); 3. make a formal presentation to the governing bodies of the county and school district that levies taxes in the proposed zone regarding the tentative plans for development or redevelopment of the zone, and an estimate of the general impact of the proposed zone on property values and tax revenues. Id. 311.003(f); 4. must, after giving at least seven days notice, hold a public hearing on the creation of the reinvestment zone. Id. 311.003(c); 5. must adopt the ordinance creating the zone, which must include provisions for the zone s boundaries, board of directors, termination date, name of the zone, and which must establish a tax increment fund for the zone. Id. 311.004; and 6. approve, together with the board of directors of the zone, a project plan and a financing plan for the zone. Id. 311.011. Only then can the city and/or the board of directors of the zone enter into an agreement with the developer of property within the zone to pay project costs. Project costs are defined as those expenditures made or estimated to be made and monetary obligations incurred or estimated to be incurred by the municipality establishing a reinvestment zone that are listed in the project plan as costs of public works or public improvements in the zone, plus other costs incidental to those expenditures and obligations. TEX.TAX CODE ANN. 311.002(1) (Vernon 2002). Responsibility of Taxing Units. Other taxing units which levy ad valorem taxes on the property within the proposed zone must: 1. designate representatives to meet with the municipality to discuss the proposed plan. Id. 311.003(g).
2. determine whether to participate in the tax increment fund and then enter into an agreement with the municipality if it determines to contribute its increment. TEX. TAX CODE ANN. 311.013 (Vernon Supp. 2004-2005). It often takes several years for the increment to reach a dollar amount sufficient to fund improvements. This makes it difficult because often the improvements must be constructed up front in order to complete the private development. This is especially true in when the construction of streets or utility extensions are included in the TIF project plan. For this reason, the developer may front the costs of constructing the improvements or the municipality may advance funds from other sources. Limitations on Tax Increment Financing. 1. Size of Zone. The reinvestment zone may not contain more than 15% of the total appraised value of real property within the city, or the county or school district. TEX. TAX CODE ANN. 311.006(a)(2), (c) (Vernon 2002). 2. Term of Zone. Op. Tex. Att y Gen. Nos. GA-0276 (2004), DM-390 (1996). 3. Bidding Requirements. The Attorney General recently opined that the tax increment fund created in a reinvestment zone is, for purposes of Tex. Local Government Code Section 252.021, a municipal fund. As such, expenditures from the fund are subject to competitive bidding requirements of Texas Local Government Code Chapter 252. See Op. Tex. Att y Gen. No. GA-305 (2005); 4. Payments from the TIF Fund. Money may be disbursed from the tax increment fund only to: (a) satisfy claims of holders of tax increment bonds or notes issued for the zone, (b) to pay project costs for the zone, or (3) to make payments pursuant to an agreement made under TEX. TAX CODE ANN. 311.010(b), dedicating revenue from the tax increment fund. 5. Sale of Real Property. The statute authorizes the city to acquire real property to implement project plans and sell that property on the terms and conditions and in the manner it considers advisable. TEX. TAX CODE ANN. 311.008(b)(2) (Vernon 2002); TEX. LOCAL GOV T CODE ANN. 272.001(b)(6) (Vernon Supp. 2004-2005). 6. Percentage of Property devoted to Residential Uses. There is a 10% cap on the percentage of property within a reinvestment zone that may be used for residential uses. TEX.TAX CODE ANN. 311.006(e) (Vernon 2002). 7. Personal Property Taxes. Property taxes on personal property are not eligible for contribution into the tax increment fund.
CHAPTER 380 AGREEMENTS Generally. Chapter 380 of the Texas Local Government Code is the crown jewel of incentives for local economic development. Like the federal community development block grant legislation, Chapter 380 authorizes a municipality to make a grant or gift of public monies, but only for two reasons: 1. to promote state or local economic development; and 2. to stimulate business and commercial activity in the municipality. Section 380.001 provides: (a) The governing body of a municipality may establish and provide for the administration of one or more programs, including programs for making loans and grants of public money and providing personnel and services of the municipality, to promote state and local economic development and to stimulate business and commercial activity in the municipality. (b) The governing body may: (1) administer a program by the use of municipal personnel; (2) contract with the federal government, the state, a political subdivision of the state, a nonprofit organization, or any other entity for the administration of the program; and (3) accept contributions, gifts, or other resources to develop and administer a program. Section 380.002(a) authorizes home-rule municipalities with a population of more than 100,000 to create programs for the grant of public money to a tax-exempt organization. Section 380.002(b) authorizes a home-rule municipality to contract with a 4A or 4B corporation to fund economic development. In 1987, the Legislature adopted this statute, subject to the approval of Texas voters of an amendment to Article III, Section 52 of the Texas Constitution. With the voters approval, Article III, Section 52-a, almost 200 years of Texas Constitutional law went out the window, and cities may legally make grants to private corporations, as long as the grant is made pursuant to a program that promotes the enumerated statutory purposes. There is no easier method for a city to grant a development incentive to a business entity. The requirements are simple: the municipality establishes, by resolution or ordinance, a program
providing for one or more development incentives, and executes, pursuant to the program, an agreement with the selected business entity. Requirements for Section 380 Agreements. The requirements for a valid economic development agreement pursuant to Section 380 are as follows: 1. The municipality must establish a program for economic development; 2. The program must serve a public purpose; 3. There must be consideration; and 4. The funds must be payable from current revenue or authorized debt. Establishing a Program. There are two methods of establishing a program. First, the municipality may adopt a program, or policy, of providing loans or grants. It may be adopted by ordinance or resolution, depending upon any applicable charter requirements. One example of such a program is a policy which provides for the municipality to participate in the funding of the construction of certain utility infrastructure, provided the economic development prospect meets certain criteria. Another example is a policy relating to providing assistance to small business incubators. An alternative method of establishing a Section 380 program is to adopt a separate resolution or ordinance for each program or grant the municipality authorizes. The conditions of the program, as it were, are set forth in the resolution or an agreement attached to the resolution. Terms of a Section 380 Agreement. The terms and conditions a municipality may include in a Section 380 agreement are essentially limited only by the creativity of the parties to the Agreement, the means of accomplishment of the public purpose (which the Constitution has already deemed the promotion of economic development), any applicable provisions of the city s charter, and last but not least, what is deemed politically correct. Utility infrastructure participation, sales tax rebates, and development fee rebates are three of the more often utilized 380 programs. A municipality may also use a 380 Agreement to create a TIF or an abatement without going through all the statutory prerequisites. Key issues that should be addressed in a Section 380 agreement include: 1. a sunset provision to limit the city s obligations if the development activity does not occur within a reasonable time; 2. precise definition of the project, or program to be achieved through the agreement; 3. performance standards by which the accomplishment of the public purpose is achieved. As in tax abatement criteria, these may include: a. creation of a minimum number of jobs; b. construction of a minimum assessed value of improvements; and/or
c. creation of a minimum value of annual payroll; 4. conditions precedent to payment by the municipality; and 5. a recapture provision in the event the business entity fails to meet the prescribed performance standards. Unfortunately, or fortunately, depending upon your client s wishes, there is a dearth of authority construing Chapter 380. The Attorney General has issued less than five opinions construing the statute and there are no reported court decisions. However, this may soon change as a Travis County District Court opinion, Save Our Springs Alliance, Inc. v. Village of Bee Cave, No. GN 400441 (250 th Dist. Ct. Travis County, Tex. Feb. 18, 2005), makes its way to the appellate court. Limitations on Section 380 Programs. 1. Bonds. Bonds issued pursuant to a Section 380 program must be approved by the voters. A municipality may not issue bonds under 380.001 unless the bonds are authorized by the city s charter and a majority of the duly qualified voters have approved the issuance. There is no authority for general law municipalities to issue bonds under this statute. 2. Debt Limitations. When Article III, Section 52-a of the Constitution was amended in 1987, Article II, Section 5 was not. This Article provides: No debt shall ever be created by any city, unless at the same time provision be made to assess and collect annually a sufficient sum to pay the interest thereon and creating a sinking fund of at least two per cent thereon. If Section 52-a does not supersede the requirements of Article II, a Section 380 Agreement obligating the City to make payments over a term of several years may be unconstitutional. And indeed, a Travis County District Court in Save Our Springs, declared a Section 380 agreement between the Village of Bee Cave and a developer unconstitutional. Note, however, that as of the date this paper is written, May 13, 2005, H.J.R. 80, a bill proposing to amend Section 52-a of Article III of the Texas Constitution to provide that a program does not constitute or create a debt for the purpose of any provision of the constitution or any other law, has passed the House. Upon passage in the Senate, this amendment will appear on the ballot at the November election. If not, this issue will be more addressed in more detail upon presentation of this paper in June. 3. Bidding Requirements. Although not directly on point, the recent opinion of the Attorney General that expenditures from a tax increment fund to reimburse a developer for infrastructure pursuant to a TIF agreement are subject to competitive bidding requirements may also affect requirements for reimbursement for infrastructure under Section 380 agreements. Op. Tex. Att y Gen. No. GA-305 (2005).
4. Sale of Real Property. While a Section 380 grant may take the form of a transfer of real property, it is silent as to whether the requirements for notice and bidding under Texas Local Government Code Section 272.001, are applicable. See also TEX. LOC. GOV T CODE ANN. 253.009, 272.001(b)(4) (Vernon Supp. 2004-2005). 5. Budgetary Requirements. As expenditures pursuant to a Section 380 Agreement will presumably be made from one or more municipal funds, consideration should be given to addressing any statutory or charter requirements for budgeted expenditures. See TEX.LOC.GOV T CODE ANN. 102.009 (Vernon 1999). 6. Other Limitations. A 380 Agreement does not authorize a city to: a. guarantee a loan made by the Texas Department of Commerce, or b. forgive delinquent ad valorem taxes. Section 4A and 4B Corporations. The Development Corporation Act of 1979 authorized municipalities to create nonprofit corporations to promote the creation of new and expanded industry and manufacturing activity within the municipality and its vicinity. However, in the ensuing years, not much activity occurred as cities could not legally fund these corporations because the Texas Constitution prohibited the expenditure of public funds to promote private business activity. As discussed above, Article III, Section 52 was amended in 1987 to provide that expenditures for economic development serve a public purpose and are permissible. Thereafter, in 1989, the Legislature added Section 4A to the Development Corporation Act to authorize the imposition of a local sales and use tax to fund a development corporation. The following legislative session, Section 4B was added to the Development Corporation Act, authorizing another sales tax to be used for economic development. The two types of corporations differ in the eligibility to adopt the taxes, permitted uses of the tax proceeds, and methods of amending the tax rate. In 2003, due to allegations of abuse of the expenditure of sales tax monies by 4A and 4B corporations, the Texas Legislature enacted severe restrictions on the use of the sales tax funds. House Bill 2912 amended the definition of projects eligible for funding and imposed other requirements on economic development projects. Now, two years later, in classic Texas Legislature fashion, the Legislature is considering a panoply of bills which would loosen the restrictions. Because the limitations on projects eligible for expenditure of sales tax funds by 4A and 4B corporations will likely be modified, those changes will be addressed at the time of presentation by addendum to this paper.
CONCLUSION Other than observation of procedural requirements, there are few limitations on a municipality s authority to promote economic development through a reinvestment zone, a tax abatement or a Section 380 Agreement. There remains little case law in this area. However, since the enactment of the Development Corporation Act in 1979, the Texas Legislature, with the exception of the enactment of House Bill 2912, has repealed almost every statutory impediment to a municipality s authority to promote economic development. This trend has never been so evident as during this session, when over 20 bills were introduced to ease the obstacles a city faces when expending funds to promote economic development. Often, the Legislature has utilized a similar approach to overrule, or at least clarify, any opinion of the Texas Attorney General which interprets restrictions on municipal authority to grant incentives. Notwithstanding legislative action, three limitations remain constant: no matter which statutory incentive a municipality chooses to utilize to attract or expand business development, an expenditure of funds must serve a public purpose and may not be a gratuitous payment to a private entity and must comply with any applicable statutory requirements. To avoid this, a city should ensure that there is consideration for any incentive. But as is stated in bold and conspicuous print on the cover of the Hitchhiker s Guide to the Galaxy, Don t Panic. A municipality may easily overcome these limitations by conditioning any grant payments upon the creation of employment, construction of improvements, continued operation in a city for a stated period, achieved minimum taxable values, or sales tax revenue.