Untitled Texas Attorney General Opinion ( 2005 )

ATTORNEYGENERALOF TEXAS
GREG ABBOTT
February 16,2005
The Honorable Will Hartnett Opinion No. GA-0305
Chair, Judiciary Committee
Texas House of Representatives Re: Whether a city may use a Tax Code chapter
Post Office Box 2910 311 tax increment fund to reimburse a private
Austin, Texas 78768-2910 developer for certain costs if the expenditures
have not been competitively bid (RQ-0262-GA)
Dear Representative Hartnett:
You ask whether a city may use a Tax Code chapter 3 11 tax increment fund to reimburse a
private developer for certain costs if the expenditures have not been competitively bid.’
I. Legal Background
A. Chapter 311 of the Tax Code
Chapter 3 11 of the Tax Code, the Tax Increment Financing Act, authorizes cities to
use tax increment financing to develop certain areas. See TEX. TAX CODE ANN. 5 3 11.001 (Vernon
2002) (short title). Section 3 11.003(a) authorizes the governing bodyofa municipalitybyordinance
to “designate a contiguous geographic area in the jurisdiction of the municipality to be a
reinvestment zone to promote development or redevelopment of the area if the governing body
determines that development or redevelopment would not occur solely through private investment
in the reasonably foreseeable future.” Id. 3 3 11.003(a). To be designated as a reinvestment zone,
the area must meet certain statutory criteria. See id. 5 3 11.005; see also Tex. Att’y Gen. Gp. No.
JC-0152 (1999) at 8 (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. See TEX. TAX CODE ANN. 5 3 11.003(b)-(c) (Vernon 2002). The
‘See Letter from Honorable Will Hamett, Chair, Judiciary Committee, Texas House of Representatives, to
Honorable Greg Abbott, Texas Attorney General (Aug. 23, 2004) (on tile with Opinion Committee, also availnbk at
http://www.oag.state.hi.us) [hereinafter Request Letter].
The Honorable Will Hartnett - Page 2 (GA-0305)
ordinance designating an area as a reinvestment zone must, among other things, describe the zone’s
boundaries, create a board of directors for the zone, and establish a tax increment fund. See id.
5 311,004(a)(l)-(2), (6).
Once a reinvestment zone has been created and a board of directors appointed, see id.
3 311.009 (board of directors), the board must adopt a project plan and a reinvestment zone
financing plan that is “as consistent as possible” with the preliminary plans. Id. 5 3 11 ,011 (a). The
project plan must include a map showing proposed improvements to real property in the zone and
a list of estimated nonproject costs. See id. 5 3 11 .Ol l(b). The reinvestment zone financing plan
must include a detailed list of the estimated project costs and a list of proposed public works or
improvements, See id. 5 311 .Ol l(c). After their adoption by the board, the municipal governing
body must by ordinance approve the plans, as well as any subsequent plan amendments. See id.
5 311.011(d)-(e).
A municipality may “exercise any power necessary and convenient to carry out this chapter”
including, for example, entering into agreements to implement project plans and constructing public
works and improvements consistent with the project plan. See id. 3 3 11,008@)(4)(B). The
governing body of the municipality “by ordinance or resolution may authorize the board to exercise
any of the municipality’s powers with respect to the administration, management, or operation ofthe
zone or the implementation ofthe project plan for the zone,“see id. 5 3 11 .Ol O(a), with the exception
of certain municipal powers, see id. 5 311.010(a), (d), and “may restrict any power granted to the
board” by chapter 3 11, id. 5 3 11 .Ol O(d). Thus, while chapter 3 11 provides a reinvestment zone
board with certain powers, and a city may delegate certain powers to a board, chapter 3 11 does not
vest powers in the board independent of the city.
Chapter 3 11 improvements are financed by the tax increment, either directly or as a revenue
source to retire tax increment bond indebtedness. After a reinvestment zone’s creation and 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. See id. § 311.013
(Vernon Supp. 2004-05).* In any particular tax year, the tax increment is calculated by subtracting
‘Whether and to what extent a particular taxing unit is required to pay the tax increment into the tax increment
fond will depend upon a number of factors. See, e.g., TEX. TAX CODE ANN. $5 3 11.0125(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 oE (1) the
tax increment of that taxing unit; or (2) that taxing unit’s deposit to the tax increment fond for the reinvestment zone.“);
3 11.013(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 sum of: (1) property taxes produced from the tax increments that are, by contract executed
before the designation ofthe area as a reinvestment zone, required to be paid by the unit to another political subdivision;
and (2) a portion, not to exceed 15 percent, of the tax increment produced by the unit as provided by the reinvestment
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); 3 11.013(f) (“A taxing unit is not required to pay into the tax increment fond any of its tax increment produced
from property located in a reinvestment zone designated under Section 3 11.005(a) or in an area added to a reinvestment
zone under Section 3 Il.007 unless the taxing unit enters into an agreement to do so with the governing body of the
(continued...)
The Honorable Will Hartnett - Page 3 (GA-0305)
“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.
JC-0300 (2000) at 8 n.8 (citing Tax Code section 311.012).
In addition, a municipality may issue tax increment bonds and notes, the proceeds of which
are used to pay project costs for the zone. See TEX. TAX CODE ANN. 9 311.015(a) (Vernon 2002).
Revenues from tax increment bond sales must be deposited in the tax increment fund, along with the
tax increments collected by participating taxing units. See id. 3 311.014(a).
The tax increment fund is used to finance improvements within the zone consistent with the
plans. See id. 5 311.014(a)-(c). Section 311.014(b) provides that “[mloneymay be disbursed from
the fund only to satisfy claims of holders of tax increment bonds or notes issued for the zone, to pay
project costs for the zone, or to make payments pursuant to an agreement made under Section
311.010(b) dedicating revenue from the tax increment fund.” Id. 5 311.014(b) (emphasis added).
For purposes of the Act, the term “project costs” means
the 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 ofpublic works orpublic improvements in the zone, plus other
costs incidental to those expenditures and obligations.
Id. 5 311.002(l) (emphasis added). The definition further provides that “project costs” include a
varietyofrelatedcosts. Seeid. 5 311.002(1)(A)-(K).’ Section 311.010(b) authorizes eitherthe board
‘(-continued)
municipality that created the zone. A taxing unit may enter into an agreement under 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 are binding on the taxing unit,
the municipality, and the board of directors of the zone.“).
3Specifica11y, subsections (A) through (K) of section 3 11.002( 1) include within project costs:
(A) capital costs, including the actual costs of the acquisition and construction of public
works, public improvements, newbuildings, stmctures, and fixtures; the actual costs ofthe acquisition,
demolition, alteration, remodeling, repair, or reconstruction of existing buildings, structures, and
fixtures; and the actual costs of the acquisition of land and equipment and the clearing and grading of
land;
(B) financing costs, including all interest paid to holders of evidences of indebtedness or
(continued...)
The Honorable Will Hartnett - Page 4 (GA-0305)
of directors of a reinvestment zone or the governing body of the municipality that creates a
reinvestment zone to enter “into agreements as the board or the governing body considers necessary
or convenient to implement the project plan and reinvestment zone financing plan and achieve their
purposes.” Id. 9 311.010(b). It further identifies certain terms that may be included in such an
agreement:
An agreement may provide for the regulation or restriction of the use
of land by imposing conditions, restrictions, or covenants that run
with the land. An agreement may during the term of the agreement
dedicate, pledge, or otherwise provide for the use of revenue in the
tax increment fund to pay any project costs that benefit the
reinvestment zone, including project costs relating to the cost of
buildings, schools, or other educational facilities owned by or on
behalf of a school district, community college district, or other
political subdivision of this state, railroad or transit facilities,
affordable housing, the remediation of conditions that contaminate
public or private land or buildings, the preservation of the facade of
‘(-continued)
other obligations issued to pay for project costs and any premium paid over the principal amount of
the obligations because of the redemption of the obligations before maturity;
(C) real property assembly costs;
(D) professional service costs, including those incurred for architectural, planning,
engineering, and legal advice and services;
(E) imputed administrative costs, including reasonable charges for the time spent by
employees of the municipality in connection with the implementation of a project plan;
(F) relocation costs;
(Ci) organizational costs, including the costs of conducting environmental impact studies or
other studies, the cost ofpublicizing the creation of the zone, and the cost of implementing the project
plan for the zone;
(H) interestbefore andduring constructionandforoneyearaftercompletionofcons~ction~
whether or not capitalized,
(I) the cost of operating the reinvestment zone and project facilities;
(J) the amount of any contributions made by the municipality from general revenue for the
implementation of the project plan; and
(K) payments made at the discretion of the governing body of the municipality that the
municipality finds necessary or convenient to the creation of the zone or to the implementation of the
project plans for the zone.
TEX. TAX CODE ANN. 5 3 I I .002( 1) (Vernon 2002).
The Honorable Will Hartnett - Page 5 (GA-0305)
a private or public building, or the demolition of public or private
buildings.
Id. (emphasis added).
B. Chapter 252 of the Local Government Code
Municipalities are generally subject to the competitive procurement requirements set
out in chapter 252 of the Local Government Code. In addition to establishing procedures for
competitive bidding, chapter 252 permits a municipality to use alternate competitive procurement
procedures in certain circumstances. See, e.g., TEX. LOC. GOV’T CODE ANN. $5 252.021(a)(l)
(Vernon Supp. 2004-05) (competitive sealed bidding or competitive sealed proposals), (2) (reverse
auction procedure), (3) (methods prescribed by Local Government Code, chapter 271, subchapter
H); 252.0415 (requests for proposals). For simplicity’s sake, we refer to these procedures
collectively as competitive bidding requirements.
Pursuant to section 252.021, a municipality must comply with chapter 252’s competitive
bidding requirements before “enter[ing] into a contract that requires an expenditure of more than
$25,000 from one or more municipal funds.” Id. 5 252.021(a). Section 252.022 exempts
expenditures for certain goods and services from the chapter’s scope, see id. 5 252.022, such as “a
procurement necessary to preserve or protect the public health and safety” and “a procurement for
personal, professional, or planning services,” id. § 252,022(a)(2), (4).4
II. Analvsis
You ask two questions with respect to a city’s authority to make payments from the tax
increment fund:
1. May a city reimburse a private developer from the tax
increment fund for costs incurred by the developer for environmental
remediation, renovation, or facade preservation of a private or public
building in the reinvestment zone, if such project costs have not been
competitively bid in accordance with Chapter 252 of the Local
Government Code?
2. Do any eligible project costs to be reimbursed from the tax
increment fund have to be competitively bid?
%3xtain conflicting home-rule city charter provisions control over a provision of chapter 252. See TEX. LOC.
GOV’T CODE ANN. 5 252.002 (Vernon 1999) (“Any provision in the charter of a home-rule municipality that relates to
the notice of contracts, advertisement of the notice, requirements for the taking of sealed bids based on specifications
for public improvements or purchases, the manner of publicly opening bids or reading them aloud, or the manner of
letting contracts and that is in conflict with this chapter controls over this chapter unless the governing body of the
municipality elects to have this chapter supersede the charter.“).
The Honorable Will Hartnett - Page 6 (GA-0305)
Request Letter, supra note 1, at 2. Your questions raise three general issues: whether the tax
increment fund may be used to pay for environmental remediation, renovation, or facade
preservation costs; whether a city’s tax increment fund expenditures for project costs must be
competitively bid; and whether a city mayreimburse a private developer from the tax increment fund
for costs that have not been competitively bid.
You have not provided us with any information about the city, reinvestment zone, or private
developer at issue, and we address these concerns in general terms and not with respect to any
particular fact situation. We note that you ask about a city’s authority to make expenditures from
a tax increment fund to pay costs for specific work performed; you do not ask about the city’s
authority to designate an area or particular property to be a reinvestment zone or to adopt a project
plan. We assume that the city at issue has already designated the area as a reinvestment zone and
has adopted a project plan. We do not address that authority.
A. Allowable Uses for the Tax Increment Fund
With respect to the first issue, section 311.014(b) of the Tax Code provides that
money may be disbursed from the tax increment fund “only to satisfy claims of holders of tax
increment bonds or notes issued for the zone, to pay project costs for the zone, or fo makepayments
pursuant to an agreement made under Section 311.01 O@)dedicating revenue from the tax increment
fund.” TEX. TAX CODE ANN. 3 3 11.014(b) (Vernon 2002) (emphasis added). Your letter suggests
that section 311.010(b) authorizes using a tax increment fund to pay a private developer for “costs
incurred by the developer for environmental remediation, renovation, or facade preservation of a
private or public building.” Request Letter, supra note 1, at 2.
Section 3 11 .Ol O(b) generally authorizes either the board of directors of a reinvestment zone
or the governing body ofthe municipality that creates a reinvestment zone to “enter into agreements
as the board or the governing body considers necessary or convenient to implement the project
plan and reinvestment zone financing plan and achieve their purposes,” TEX. TAX CODE ANN.
$J 311.010(b) (Vernon 2002) (emphasis added), and more specifically provides that such an
agreement may “dedicate, pledge, or otherwise provide for the use of revenue in the tax increment
fund topay anyproject costs that benefit the reinvestment zone, includingproject costs relating to
the cost of. . the remediation of conditions that contaminate public or private land or buildings, [or]
the preservation of the facade of a private or public building,” id. (emphasis added). Thus, while
section 3 11 .Ol O(b) specifically authorizes agreements dedicating tax increment fund revenues to pay
for environmental remediation and facade preservation costs, such costs must be project costs. See
id. For this reason, under section 3 11.014(b) or 3 11 .Ol O(b), tax increment fund expenditures, other
than payments to satisfy claims of holders of tax increment bonds or notes, must be to pay project
costs.
To constitute “project costs,” costs must fall within the section 3 11.002(l) definition of the
term. See id. 5 311.002(l). Under section 311,002(1),“project costs”must be “listed in the project
plan as costs of public works or public improvements in the zone” or constitute “other costs
incidental to those expenditures and obligations.” Id. 5 311.002(l). In addition, section
The Honorable Will Hartnett - Page 7 (GA-0305)
311,002(1)(K) provides that “project costs” include “payments made at the discretion of the
governing body of the municipality that the municipality finds necessary or convenient to the
creation ofthe zone or to the implementation ofthe project plans for the zone.” Id. 5 3 11.002(1)(K).
Thus, with regard to the first issue you raise, a city may expend tax increment funds to pay
“costs incurred by the developer for environmental remediation, renovation, or facade preservation
of a private or public building,” Request Letter, supra note 1, at 2, only if the city determines that
the costs constitute “project costs” within the meaning of section 3 11.002( 1). In particular, the costs
must be listed in the project plan or constitute “other costs incidental to those expenditures and
obligations.” TEX. TAX CODE ANN. 5 311.002(l) (Vernon 2002). The costs may also constitute
“project costs” if the city governing body finds them “necessary or convenient to the creation of the
zone or to the implementation of the project plans for the zone.” Id. § 311.002(1)(K). Whether a
particular payment is for project costs involves questions of fact beyond the purview of an attorney
general opinion. Seegenerally Tex. Att’y Gen. Op. Nos. GA-0128 (2003) at 5 (a question requiring
resolution of particular facts is “not one in which this office ordinarily engages in the opinion
process”); GA-0106 (2003) at 7 (“[tlhis office cannot find facts or resolve fact questions in an
attorney general opinion”)
B. Competitive Bidding
You also ask whether a city’s authority to use the tax increment fund to pay a private
developer for costs for environmental remediation or facade preservation costs or other project costs
is limited by competitive bidding statutes. See Request Letter, supra note 1, at 2. Your questions
indicate that the city, not some other entity, is expending funds. See id. (“May a city reimburse a
private developer from the tax increment fund ?“) (emphasis added). Thus, we assume that the
city and the reinvestment zone board of directors have not delegated the authority to manage the
reinvestment zone to a local government corporation5
The legislature has adopted statutes that authorize governmental entities like cities and
counties to establish separate entities to expend tax funds and has provided, expressly or by clear
implication, that these separate entities and the money they control are not subject to competitive
bidding laws and similar statutes. In such cases, this office has concluded that statutes governing
the creating entity’s transactions do not apply. See, e.g., Tex. Att’y Gen. Op. Nos. JC-0335 (2001)
at 4 (concluding that “section 394.904(b) of the Local Government Code . excepts contracts of a
local government corporation from the Professional Services Procurement Act”); JC-0206 (2000)
at 4, 6 (concluding that Transportation Code section 431.101(e) exempts a local government
corporation from the competitive bidding provisions applicable to the county that created it);
JC-0109 (1999) at 2,6 (concluding that a section 4B corporation is not subject to the public notice
and bidding requirements of section 272.001(a) of the Local Government Code on the basis of
‘Section 311.010(f) provides that the board of directors of a reinvestment zone and the governing body of the
municipality “may enter into a contract with a local govemment corporation to manage the reinvestment zone or
implement the project plan and reinvestment zone fmancing plan for the term of the agreement.” TEX. TAX CODE ANN.
5 3 11 .Ol O(f) (Vernon 2002) (“In this subsection, ‘local government corporation’ means a local govemment corporation
created by the municipality under Chapter 43 1, Transportation Code.“).
The Honorable Will Hartnett - Page 8 (GA-0305)
section 22 of article 5190.6, which provides that a development corporation is not a political
subdivision or a political corporation); JC-0032 (1999) at 6-7 (concluding on basis of section 22 of
article 5 190.6 that a section 4A development corporation is not a political subdivision subject to the
prevailing wage law, Government Code chapter 2258).
As these opinions illustrate, whether a statutory requirement applies to a particular entity or
its transactions must be decided on the basis of the requirement’s scope and the specific statutes
governing the entity. You ask in particular whether project costs paid by a city from the tax
increment fund must be competitively bid under chapter 252 of the Local Government Code, see
Request Letter, supra note 1, at 2, and we limit our analysis to that statute. Neither chapter 252 nor
chapter 3 11 of the Tax Code expressly addresses whether tax increment fund expenditures are
subject to competitive bidding under chapter 252. And we have not located any judicial or attorney
general opinion resolving the question. Section 252.021 of the Local Government Code generally
requires a municipality to comply with certain competitive bidding procedures before entering into
a contract that requires an expenditure, over a certain dollar amount, “from one or more municipal
funds.” See TEX. Lot. GOV’T CODE ANN. 3 252.021(a) (Vernon Supp. 2004-05) (“Before a
municipality may enter into a contract that requires an expenditure ofmore than $25,000 from one
or more municipal funds, the municipality must .“). You ask about a city’s” authority to make
expenditures from the tax increment fund. Thus, the answer to your question depends upon whether
the tax increment fund is a municipal fund within the meaning of section 252.021.
Chapter 252 of the Local Government Code does not define the term “municipal fund,” nor
is the term defined in other statutes, cases, or attorney general opinions. Section 252.021(d) provides
that chapter 252 “does not apply to the expenditure of municipal funds that are derived from an
appropriation, loan, or grant received by a municipality from the federal or state government for
conducting a community development program established under Chapter 373 if under the program
items are purchased under the request-for-proposal process described by Section 252.042.” Id.
3 252.021(d). This section suggests that whether funds are “municipal funds” is determined by
whether the municipality possesses and controls the money rather than by the money’s source.
Chapter 3 11 vests the city with possession and control over the tax increment fund. The tax
increment fund, which the city establishes by ordinance, consists of deposits of the “tax increment”
by the city and other participating units, revenue from the sale of tax increment bonds or notes, and
revenue from sales ofproperty acquired as part of the tax increment fund. See TEX. TAX CODE ANN.
$5 311.004(a)(6), ,012 (Vernon 2002), ,013 (Vernon Supp. 2004-05). Although other taxing units
may contribute taxes to the tax increment fund, the timd is expended according to plans approved
by the municipal governing body in a city ordinance. See id. 3 3 11 ,011 (Vernon 2002). Moreover,
‘See Request Letter, supra note 1, at 2. An attorney general opinion has concluded that a city agency or division
is subject to municipal competitive bidding requirements, see Tex. Att’y Gen. op. No. MW- 132 (1980) at 2 (concluding
thatcityand county housing authorities are subject to competitivebidding requirements applicable to cities and counties),
and it is likely that a reinvestment mne board is subject to chapter 252 as a municipal entity. Given that you ask about
city expenditures and that chapter 3 11 clearly Vests the creating municipal governing body with authority to expend the
tax increment fund, however, we need not resolve whether municipal competitive bidding requirements apply to
expenditures made by a reinvestment zcme board.
The Honorable Will Hartnett - Page 9 (GA-0305)
chapter 3 11 does not remove tax increment fund spending from the city’s control. Both the city and
the reinvestment zone board are expressly authorized to implement the project and financing plans
and to make agreements pledging tax increment fund revenues, see id. $5 3 11.008(b)(l) (powers of
the municipality to implement the plans), ,010 (powers of the board of directors), but the municipal
governing body may restrict any power granted to the board, id. 5 3 11 .OlO(d)( 1). Furthermore, the
governing body ofthe municipality is required to provide the other taxing units, the attorney general,
and the comptroller with financial information about the tax increment fund on a yearly basis. See
id. § 311.016. In addition, wenote that section 311.014(c)provides that, subject to the tax increment
bond and note holders’ agreement, “money in a tax increment fund may be temporarily invested in
the same manner as otherfunds of the municipality.” Id. 5 311.014(c) (emphasis added).
In sum, the legislature has not provided in chapter 3 11 that the tax reinvestment zone or its
board is an entity separate from the city, nor has it expressly provided that tax increment fund
expenditures are not subject to competitive bidding statutes and similar laws. Furthermore, the city
possesses the tax increment fund and controls its use, may commit fund revenues, and is accountable
for the fund’s use to other,entities. Taken as a whole, chapter 311 suggests that the tax increment
fund is a fund “of the municipality.” Id.
For these reasons, we conclude that a tax increment fund is a municipal fund within the
meaning of chapter 252 of the Local Government Code and that chapter 252 may apply to
expenditures from the tax increment fund. Whether a particular expenditure is subject to competitive
bidding will depend upon whether the expenditure falls within the terms of section 252.021. See
TEX. Lot. GOV’T CODEANN. 9 252.021(a) (Vernon Supp. 2004-05) (“Before a municipality may
enter into a contract that requires an expenditure of more than $25,000 from one or more municipal
funds, the municipality must [follow certain procedures.]“). In addition, a particular expenditure
may be exempt from chapter 252 under section 252.022. See id. 4 252.022(a) (“This chapter does
not apply to an expenditure for [certain goods and services].“).
We have received a brief that contends that chapter 252 should not apply to the tax increment
fund expenditures you ask about because private developers will have no incentive to improve their
property if they must compete with others for reinvestment zone funding to perform the work?
However, chapter 252 clearly applies to expenditures from municipal funds for real property
improvements made by private developers because it includes a limited exception for such
expenditures. Specifically, section 252.022(a)(ll) excepts from chapter 252 an expenditure for “a
payment under a contract by which a developer participates in the construction of a public
improvement as provided by Subchapter C, Chapter 212.” Id. 5 252.022(a)(ll). Subchapter C of
chapter 212 of the Local Government Code provides that “a municipality with 5,000 or more
inhabitants may make a contract with a developer of a subdivision or land in the municipality to
construct public improvements, not including a building, related to the development,” without
complying with chapter 252. Id. 5 212.071; see also id. § 212.072(a) (“Under the contract, the
‘see Brief from Bennett Sandlin, Legal Services Director, Texas Municipal League, to Nancy S. Fuller, Chair,
Opinion Committee, Office of Attorney General, at 1 (Sept. 24,2004) ( on file with Opinion Committee) [hereinafter
TML Brief].
The Honorable Will Hartnett - Page 10 (GA-0305)
developer shall construct the improvements and the municipality shall participate in their cost.“).’
Subchapter C also expressly provides that if the “contract does not meet the requirements of this
subchapter, Chapter 252 applies to the contract ifthe contract would otherwise be governed by that
chapter.” Id. 5 212.071.
C. Reimbursement
Finally, we consider whether a city may reimburse a private developer from the tax
increment fund for costs that have not been competitively bid.
You ask about a city’s authority to reimburse a private developer for project costs, but do not
provide specific facts. See Request Letter, supra note 1, at 2. By “reimbursement,” you could mean
that the city agreed in advance to pay the private developer for the costs upon completion ofthe work
and that the developer has performed the work and now seeks payment pursuant to the agreement.
In that case, the expenditure is permissible if it is authorized by chapter 3 11 and the agreement to
pay for the work was entered into pursuant to competitive bidding requirements, if applicable. On
the other hand, you could mean that the private developer seeks reinvestment zone funding for costs
for work the developer has already performed but that the city did not agree in advance to pay. We
assume you mean the latter.
As we have concluded, some tax increment fund expenditures will be subject to competitive
bidding under chapter 252 ofthe Local Government Code. Under chapter 252, a municipality must
comply with competitive bidding requirements before agreeing to pay municipal funds. See TEX.
LOC. GOV’T CODEANN. § 252.021(a) (Vernon Supp. 2004-05) (“Before a municipality may enter
into LIcontract that requires an expenditure ofmore than $25,000 from one or more municipal funds,
the municipality must [follow certain procedures.]“) (emphasis added). Moreover, competitive
bidding procedures contemplate potential contractors submitting bids to undertake work that has not
yet been performed, the city awarding a contract to the lowest responsible bidder, the successful
bidder performing the work, and the city then paying for the work pursuant to the contract. See, e.g.,
id. § 252.043. If a municipal expenditure is subject to chapter 252, the city would be precluded from
reimbursing a person for costs incurred for work not performed pursuant to a competitively bid
contract.
We have received a brief that contends that chapter 252 does not apply when a city
reimburses a private developer because chapter 252 applies to a city’s expenditures and does not
apply to private entities. See TML Brief, supra note 7, at 1. However, you do not ask about a city’s
authority to require a private developer to procure contracts by competitive bidding but rather about
*See aim TEX. Lot. GOV’T CODE ANN. 5 212.072(b) (Vernon Supp. 2004-05) (“The contract must establish
the limit of participation by the municipality at a level not to exceed 30 percent of the total contract price. In addition,
the contract may also allow participation by the municipality at a level not to exceed 100 percent of the total cost for any
oversizing of improvements required by the municipality, including but not limited to increased capacity of
improvements to anticipate other ii~ture development in the area. The municipality is liable only for the agreed payment
of its share, which shall be determined in advance either as a lump sum OI as a factor OI percentage of the total actual
cost as determined by municipal ordinance.“).
The Honorable Will Hartnett - Page 11 (GA-0305)
a city’s authority to pay a private developer for costs the developer has incurred. We conclude that
when chapter 252 competitive bidding requirements apply to an expenditure, a city is necessarily
precluded from reimbursing a private developer. This conclusion does not require a private
developer to comply with chapter 252 but rather limits a city’s authority to expend funds without
complying with chapter 252.
Even if tax increment fund expenditures are not subject to competitive bidding (because they
fall under the section 252.021 threshold or are excepted under section 252.022), reimbursing a
private developer for work performed without the city’s prior agreement raises additional concerns.
First, chapter 3 11 of the Tax Code contemplates that the tax increment fund will be used to
pay for project costs outlined in advance in the project plan, WTEX. TAX CODEANN. $5 3 11.002( 1)
(Vernon 2002) (defining “project costs”), and pursuant to “agreements to implement the project
plan and reinvestment zone financing plan, “id. 5 311.010(b). Seegenerally id. 3 311.014(b) (Tax
increment fund “[mloney may be disbursed from the fund only to satisfy claims of holders of tax
increment bonds or notes issued for the zone, to payproject costs for the zone, or to make payments
pursuant to an agreement made under Section 311.01 O(b) dedicating revenue from the tax increment
fund.“) (emphasis added). In addition, money in a tax increment fund, taxes deposited by
participating taxing units, is public money subject to constitutional limitations on the use of public
funds. See TEX. CONST.art. III, 5 52 (“the Legislature shall have no power to authorize any county,
city, town or other political corporation or subdivision ofthe State to lend its credit or to grant public
money or thing of value in aid of, or to any individual, association or corporation whatsoever, or to
become a stockholder in such corporation, association or company”). Cf: Tex. Att’y Gen. Op. Nos.
GA-0264 (2004) at 1O-l 2, JC-0118 (1999) at 9 (concluding that sales and use tax proceeds collected
for economic development under the Development Corporation Act of 1979 are public funds subject
to article III, section 52). As a result, a city must ensure that tax increment fund expenditures are
supported by sufficient consideration and are not gratuitous payments. See Tex. Mun. League
Zntergov’tlRiskPoolv. Tex. Workers’ Camp. Comm ‘n, 74 S.W.3d 377,383 (Tex. 2002) (“[Slection
52(a)‘s prohibiting the Legislature from authorizing apolitical subdivision ‘to grant public money’
means that the Legislature cannot require gratuitous payments to individuals, associations, or
corporations. A political subdivision’s paying public money is not ‘gratuitous’ if the political
subdivision receives return consideration.“) (citations omitted). In making an expenditure ofpublic
funds that benefits a private person or entity, “a [political subdivision’s governing body] will avoid
violating article llI, section 52 if it (i) determines in good faith that the expenditure serves a public
purpose and (ii) places sufficient controls on the transaction, contractual or otherwise, to ensure that
the public purpose is carried out.” Tex. Att’y Gen. Op. No. GA-01 88 (2004) at 4.
Any city tax increment fund expenditure must be authorized by chapter 311 and must
comport with article III, section 52. However, before reimbursing a private developer for work
performed without the city’s prior agreement, we would advise a city to be especially careful to
consider whether the expenditure (i) is for a project cost authorized by the project plan and (ii) is a
gratuitous payment prohibited by article III, section 52, particularly given that the city is not
contractually obligated to pay.
The Honorable Will Hartnett - Page 12 (GA-0305)
SUMMARY
A city may use a Tax Code chapter 3 11 tax increment fund to
pay a private developer for environmental remediation, renovation,
or facade preservation costs if the costs constitute “project costs”
within the scope of section 3 11.002(l). A tax increment fund is a
municipal fund within the meaning of chapter 252 of the Local
Government Code, and chapter 252’s competitive bidding
requirements may apply to expenditures from the tax increment fund.
Whether a particular expenditure is subject to competitive bidding
will depend upon whether the expenditure falls within the terms of
section 252.021 and whether the expenditure is exempt from chapter
252 under section 252.022. If a municipal expenditure is subject to
chapter 252, the city would be precluded from reimbursing a person
for costs incurred for work not performed pursuant to a competitively
bid contract.
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