The city could shut down two major tax reinvestment zones, a move that would flood city coffers with long untouchable tax money.
The consideration comes as the city seeks additional revenue sources in a heavy-spending year that has led to officials to tighten budgets and cut costs.
These special taxing areas, called tax increment reinvestment zones, or TIRZes, were meant to spur development but long have been a source of controversy and criticism.
In Tax Increment Reinvestment Zones, three of which are active on the island, developers advance money for public improvements such as water and sewer systems and roads and receive reimbursement, including interest, either from increased tax revenue in the zone or government-issued bonds. If the development fails, the developer doesn’t get paid, theoretically.
When such zones are created, the base value of the land is frozen. As a property’s value increases because of the development, the new taxes pay back the developer for infrastructure improvements. The base value of the raw land at the time of the zone’s creation continues to be taxed by all of the entities just as if the zone had never been developed.
Detractors argue it takes decades for residents at large to benefit from the expanded tax base because the increased tax revenue is plowed back into the zone, rather than into the city’s general fund.
As tax values in the area increase, the city, or other taxing jurisdiction, doesn’t see any additional tax revenue. Instead the new revenues go to pay the developer over a specified period of time.
Of the three active reinvestment zones in Galveston, TIRZ 12, which is from 51st to 81st streets north of Broadway, hadn’t generated the growth and revenue the city thought it would, Mayor Jim Yarbrough said.
“The north of Broadway TIRZ has never taken off like we hoped,” Yarbrough said.
Since 2001, when the taxing area was established, TIRZ 12 has generated about $4.2 million in revenues, according to a 2018 report on the city’s reinvestment zones.
That’s compared to the taxing area at the Beachtown neighborhood on Beachtown Drive, which has generated $7.4 million in revenues, and the area around Scholes International Airport, 2115 Terminal Drive, which has produced $15.6 million, according to the report.
“It’s time to shut it down,” Yarbrough said.
While the private development in the north of Broadway area already has been paid out, Galveston County, another partner in all these taxing areas, is still owed about $5.6 million plus $1.6 million in interest as of Sept. 30 for improvements it made in the area, according to the report.
But the county isn’t likely to get that money back because there isn’t likely to be much more area development, Yarbrough said.
That’s not unexpected, County Judge Mark Henry said.
“Unfortunately, that’s the standard, not the exception,” Henry said. “I’m not surprised.”
If the city is advocating for closure of TIRZ 12, the Galveston County Commissioners Court likely would be amenable to discussing the option, Henry said.
The city also is exploring shutting down TIRZ 14, which encompasses about 2,000 acres surrounding the airport, Yarbrough said.
This taxing area has spurred development like the Evia neighborhood, at 99th Street and Schaper Drive, and has helped the airport contribute local matches to major infrastructure projects, officials said.
If the city’s going to ask the county to shut down TIRZ 12, the county might be more interested if the entities also shut down TIRZ 14, and the county starts receiving more tax money from that area immediately, Yarbrough said.
The taxing area has been a big help to the airport, but discussions about closing it aren’t a surprise, Airport Director Mike Shahan said.
The airport has been working to expand its sources of revenue by building a warehouse or owning leasable hangar space, Shahan said.
The airport has a list of capital projects that need to happen, but those may be on a longer timeline without the taxing area’s contributions, Shahan said.
“We may have to slow it down a little bit,” Shanan said. “Hopefully, there are other options out there. Galveston is very unique. Most airports don’t have a TIRZ.”
Sullivan Interests, the developer of the Evia, doesn’t have a strong opinion on closing the taxing area because the developer’s improvements already been reimbursed, company Principal Billy Sullivan said.
In 2007, the city council voted unanimously to issue $7 million in bonds to repay local developer Sullivan Interests for public infrastructure improvements made in Tax Increment Reinvestment Zone 14.
The zone board and the Redevelopment Authority decided it would be better to issue bonds at 4.6 percent interest saving taxpayers more than $1 million in interest.
“From our perspective, TIRZ 14 has been as successful as originally planned and the benefits seem to be showing within the district,” Sullivan said.
Closing down a TIRZ means the taxing entities involved absorb whatever debt is left over, said David Hoover, a member of the Galveston Island Redevelopment Authority.
The redevelopment authority oversees the finances of the taxing areas and makes recommendations about them to the Galveston City Council, among other duties. The council would have the final authority on any decisions about shutting down the areas, Hoover said.
But closing a TIRZ also means those entities would start getting taxes for the current value of the properties, rather than the base value frozen at the TIRZ’s creation, Hoover said.
That would mean the city could use that money across the city, rather than only within that taxing area, Yarbrough said.
“It comes back into the city not as an increment, but as part of our tax collection revenue process we can use that for any project in the city,” Yarbrough said. “It generates more flexible dollars.”
This discussion comes as the city has been making efforts to tighten its budget this year, because of increased expenditures and an anticipated state-imposed cap on property tax revenue growth next year.
If the city council were to vote on closing down these two taxing areas, it could happen as early as this year, Yarbrough said.