Goliad Investigation: Legislators to review development districts law
Sept. 15, 2013 at 4:15 a.m.
Updated Sept. 16, 2013 at 4:16 a.m.
TAX REVENUE COLLECTED
Through Municipal Development Districts in Texas
Fair Oaks Ranch:
Five Municipal Development Districts are starting in October: Azle Bertram, Cross Roads, Presidio and Rising Star
SOURCE: TEXAS COMPTROLLER'S OFFICE
Across Texas, local governments have collected more than $75 million to spur economic development through a program governed by few rules and little oversight.
Goliad, one of the state's 30 Municipal Development Districts, has spent about $1 million of that money in a program that has generated few results and operates with questionable ethics.
The Goliad Municipal Development District reports to the Goliad City Council, and the City Council requires no outside reporting.
Goliad residents Roney and Linda Powell have tried reporting what they believe to be negligence on the part of some Goliad staff, City Council members and development board members.
But because neither the Texas comptroller nor the attorney general has authority over the districts, the Powells said they felt stuck.
Bill Longley, legal counsel for the Texas Municipal League, said there is not an "enforcement mechanism" spelled out in the local government code.
Texas Sen. Glenn Hegar, R-Katy, who is a candidate for state comptroller, said his office is looking into the code governing Municipal Development Districts to see whether it needs to be changed.
State Rep. Geanie Morrison, R-Victoria, said the Victoria Advocate's investigative report has prompted her office to also research the districts.
"We have not had a chance to research this issue to the extent we eventually will, but at face value, some of these cases appear very suspect to the point of egregious. If a law was not broken here, I believe that, at the very least, the intent of the law was not followed," Morrison said in a statement.
Morrison said she will speak to the chairman of the House Committee on Special Purpose Districts to recommend that this incident be looked at during its upcoming interim hearings.
Hegar said the first step in determining whether the code governing Municipal Development Districts is flawed is to research the original purpose of the law and how it has evolved over the years.
Taxing for economic development
The first tax-funded economic development corporations were created in 1989 when the Legislature approved Economic Development Corporations.
The tax money can be used to build affordable housing; improve infrastructure; build sports complexes, parks and other public works; and issue loans or grants to private businesses, depending on the type of tax instituted.
By 1997, nearly 400 cities across Texas, including Victoria, were reaping the benefits of the sales tax.
Aransas Pass, however, was one of the few cities in the state not eligible for the tax.
Aransas Pass is located in three counties. Aransas County already had maxed out the sales tax that could be levied on residents, which meant the city could not add any additional taxes for development.
In 1997, the Texas Legislature created Municipal Development Districts through Local Government Code 377 for cities in more than one county.
With boundaries that can be defined separate from the city limits, the tax does not have to be levied against the entire city.
Municipal Development Districts also can tax in the extra territorial jurisdiction of the city, which is just outside the city limits.
Aransas Pass voted and approved a taxing district in Nueces and San Patricio counties and started its path to economic development.
Development districts expand
In 2005, the Legislature expanded the law to allow any city the ability to create a Municipal Development District.
State Sen. Troy Fraser, a Republican serving central Texas, authored the bill creating the expansion.
Janice McCoy, Fraser's chief of staff, said the senator was not available for comment.
A history of the bill provided by McCoy states, "most municipalities are forced to tax the entire city for an economic development or an infrastructure project that may largely benefit only a portion of the municipality. ... This requirement often results in a decision not to invest in economic and community development."
Any other background about the bill is unavailable, McCoy said, as at least one of the lobbyists who presented the bill is dead.
The key differences
Although the intent of Economic Development Corporations and Municipal Development Districts is the same - creating economic development - the codes governing the districts are different.
Economic Development Corporations are governed by about 100 pages of rules and regulations from the state, giving the cities that use the sales tax multiple layers of accountability.
The Municipal Development District Local Government Code is only nine pages and leaves the control of the districts solely in the hands of the local government.
Issuing grants for infrastructure, something Goliad has done on three occasions since 2008, is legal for both Municipal Development Districts and Economic Development Corporations.
For example, Goliad approved a grant for Texas Star Investments for $51,120 to move a sewer line to build a new store. Goliad will own the sewer system once it is complete so the city can operate and maintain it.
It also approved a grant for Texonian Development for $122,750 to add to the sewer system. These funds are committed funds until after the construction on the project is complete or up to two years, according to the Texonian contract.
However, the contract is not specific about what the developer will build on the property after the sewer system is complete, saying it will develop "certain residential, commercial and/or retail tracts."
How specific the terms of a contract need to be is not defined in the Local Government Code governing Municipal Development Districts.
On the other hand, the Local Government Code for Economic Development Corporations has specific requirements for performance agreements, saying they must include:
A schedule of additional payroll or jobs to be created.
The capital investment to be made by the business.
The terms under which repayment must be made by the business, should the business fail to meet the requirements in the agreement.
These are the bare minimum requirements for Economic Development Corporations, but these requirements are not listed in the code for Municipal Development Districts.
Economic Development Corporations, not Municipal Development Districts, are also required to include tangible means for measuring whether the industry has met its obligations.
"Without these safeguards and a demonstrable benefit to the municipality, such incentives may not pass constitutional muster for serving a public purpose," according to the Economic Development Handbook by the Office of the Attorney General.
And unlike the nearly 600 Economic Development Corporations now across the state, the 30 Municipal Development Districts do not submit annual reports of their finances to the Texas state comptroller's office.
Municipal Development Districts are not required by state law to report their finances annually to the governing body, but Economic Development Corporations are.
Also, unlike Economic Development Corporations, no training is required in the code for directors for city staff operating a Municipal Development District.
Finally, Economic Development Corporations are more specific about how to measure success, putting a heavy emphasis on creating additional sales tax and primary jobs.
For example, the Goliad Municipal Development District and the Goliad City Council approved a loan and a grant to Goliad Funeral Home for the creation of jobs and sales tax.
However, funeral homes do not collect sales tax on items that are sold as part of a funeral service.
Longley said he does not know why Municipal Development Districts do not have the same standards as Economic Development Corporations.
"It is just a different statute that came around a little bit after, and that is just what the Legislature decided to do. It was a policy decision for the Legislature," Longley said.
Longley did say the main advantages of Municipal Development Districts are that they require only four board members, which is beneficial in small cities; the districts have fewer limitations on how they can spend the money; and the districts can tax in the extraterritorial jurisdiction.
Aransas Pass: A different approach
With a population of about 8,000 people, the little coastal town of Aransas Pass wanted to do something big.
A development district "was just a need," said Aransas Pass City Manager Sylvia Carrillo. "Aquatic centers and those kind of community centers are expensive ..."
When Municipal Development Districts were approved by the Texas Legislature in 1997, Aransas Pass jumped on board as the first town to start the program in 1998.
With voters approving the additional half-cent sales tax, the town sold bonds based on expected revenue.
By 2002, its $3.4 million aquatic center - the only one of its kind in the area - was completed.
Shortly after that, the city completed a state-of-the-art civic center, where Aransas Pass hosts events ranging from company training conferences to weddings.
From 2002, when the aquatic center was completed, through 2012, the money collected by the development board in sales tax increased by 70 percent.
It never occurred to the city to issue grants or loans to businesses, said Municipal Development District President Hope Comingore.
She said the town followed the law as literally as it could and implemented safeguards when they adopted the tax.
The Aransas Pass Municipal Development District is audited separately from the city and paid for from development funds. Auditing the funds separately is a check and balance on the government, Comingore said.
Goliad, however, includes the Municipal Development District in the city's audit. An itemized breakdown of the development district finances separate from the city budget is not available.
Similar to Goliad's setup, Aransas Pass City Council votes on board membership, and the council approves the development board's budget each year.
Unlike Goliad, the council receives monthly updates on board activities and finances from a council representative on the board.
Additionally, Aransas Pass has a separate bank account for all Municipal Development District funds. Revenues are deposited into the fund, and expenses are taken out of the fund, Carrillo said.
Carrillo said the practice is just good accounting, but it can also be interpreted as a necessity in the Local Government Code, she said.
One section of the code requires the city set up a "fund known as the development project fund. The district may establish separate accounts within the fund."
John Griffin, a Victoria attorney who represents governmental entities, said Goliad may have violated the law in depositing the economic development money into the general fund.
"There has to be a separate account for such a fund in order to trace the deposits and withdrawals from the fund, it appears to me. The fact that the statute provides that the district 'may establish separate accounts within the fund' shows that the 'fund' has to be in its own account," Griffin said in an email.
The funds for Goliad's Municipal Development District are run through the city's general fund. The city does not have a separate fund for the district, said City Administrator Larry Zermeno.
"The code is written specifically to protect the taxpayer interest, but it is our burden to make sure that is happening," Carrillo said.
Hegar agreed, saying much of the interpretation of the Local Government Code relies on common sense.
"Sometimes, we should use common sense, and that is the best regulation possible. Council members who are in default - that would be against common sense to vote on" development district matters, Hegar said about the Goliad City Council.
Hegar said legislators have to be careful about changing state law because changes could have unwanted ramifications and negatively affect those applying the law in good faith.
Both Morrison and Hegar have pledged to research the Municipal Development District code and determine whether the problem is statewide.
"To regain the trust of Goliad taxpayers, there is going to have to be a thorough investigation, and moving forward, there is going to have to be greater oversight regarding these funds," Morrison said.
Any proposed changes to the code would come in the 2015 legislative session.
"I am confident that if a bank operated in this manner, that bank would not be in business very long," Morrison said in a statement about Goliad.