Texas lawmakers want to crack down on 'daisy chain of loopholes' in controversial tax breaks

A little-known tool that provides huge tax breaks for housing development is stirring debate in Texas, including in the halls of the State Capitol.

Reform of what are known as public facility corporations has emerged as a key issue at the legislature, where a pair of comprehensive reform bills have made their way in front of House committees.

In Texas, PFCs can be created by public entities such as housing authorities and municipal utility districts. They have been around for decades but, under changes made by the legislature in 2015, have become an oft-use tool for incentivizing the development of affordable housing – some say at the expense of affordability.

PFCs partner with apartment developers to take workforce housing off the property tax rolls for 75 years, in exchange, broadly, for designating 50% of the units in a complex as affordable for renters making 80% of the local median income level.

Proponents say that is a worthwhile goal in a state with a ballooning population. Critics argue the PFC deals are sapping tax revenue from the very services needed to sustain that population, like police, firefighting and schools — often without adequate public oversight.

An Austin-based PFC controlled by what’s known as SH130 Municipal Management District No. 1 is in the middle of the fray, advocating for legislation that would preserve its ability to incentivize workforce housing projects while creating more transparency and reforming some of the more controversial policies surrounding PFCs. The district has also emerged as a target of legislators believe it has taken the PFC tool too far.

For more on how PFCs work and the local entities taking advantage of the program, follow this link.

One bill with momentum is Katy Republican Jacey Jetton’s House Bill 2071. Speaking to the House Urban Affairs committee on March 21, Jetton said that “some PFCs have abused the program by failing to provide the specified housing options, failing to disclose accurate information about rental or occupancy rates, or enter[ing] into the PFC agreements outside of their appropriate jurisdiction,” which he argued shifts the property tax burden onto surrounding homeowners and businesses.

Jetton said his bill would set guardrails while providing transparency and strict accountability for the program. Among other changes, the legislation would prohibit PFCs from taking properties off the tax rolls outside their geographic area and require notice to local municipalities and school districts, the absence of which is a sticking point with many critics.

In order for a buyer to take an acquired property off the tax rolls, Jetton’s bill would require 20% of its units to be reserved for those making 60% of the area median income, and 30% of its units for those at 80% AMI.

“It is the culmination of a lot of thoughts and ideas from a lot of stakeholders,” Jetton said.

By an 8-1 vote, Jetton’s bill on April 4 was reported to the full House with a recommendation to pass it.

In the Senate, Houston Republican Paul Bettencourt has emerged as a critic of PFCs. Bettencourt in February filed Senate Bill 805, which would repeal the section of the government code pertaining to PFCs. He noted that in Houston, PFCs have been used to take $5.1 billion off Harris County tax rolls.

Another Bettencourt bill, SB 2434, would dissolve the Austin-based SH130 Municipal Management District by the start of 2024.

In a February interview, Bettencourt said the district “seems to be in the PFC business” and that it is taking advantage of loopholes in the law that go against the intention of PFC legislation.

“This is like a daisy chain of loopholes,” Bettencourt added. “One loophole leads to another loophole, which leads to an even bigger loophole.”

Senate Bills 2434 and 805 have been referred to the Senate Local Government committee, which Bettencourt chairs, but they had not been taken up by April 4.

PFC critics say the program does not typically create the kind of affordable housing that’s attainable for working class Texans. Ben Martin, research director at low-income-housing advocacy group Texas Housers, believes a better alternative is House Bill 3568, proposed by Houston-area Republican Gary Gates. That bill would require a percentage of units in housing developments acquired or constructed after Jan. 1, 2024, to be reserved for those earning no more than 50% of an area’s media income level. For context, 50% of AMI for a family of four in Travis County was about $55,150 in 2022.

The lawmaker, who told ABJ he owns roughly 9,700 apartments throughout the Houston area, has become something of a crusader against current PFC legislation, which he decried as a “scam.”

However, Gates’ bill on April 4 failed to get an affirmative vote out of the Urban Affairs committee. It’s unclear what that means for the future of the legislation.

He had presented a version of his bill to the Urban Affairs committee March 28.

“The use of this tool is an example of the unintended consequences … if we fail as representatives to be gatekeepers between the private sector who seek to avoid property taxes for their own gain and our constituents, the taxpayers, who pick up the tab if it goes beyond intention,” Gates said. “We must fully vet every piece of legislation responsibly to ensure that every dollar paid for by our fellow Texans is used properly for the benefit of Texas.”

SH130 Municipal Management District President Mike Krusee agrees that the PFC program needs to require deeper affordability. But he cautioned that when cuts go too deep, “that gets to be tough.”

“It’s not so much whether it slows your deal counts … it’s whether you can do any deals or not,” Krusee said. “You don’t want to do so much good that you do no good at all.”

Gates said the legislature “failed its duties” in 2015 when it passed PFC reform “drafted by a lobbyist.” He said it was “creating a financial disaster in our state budget and our school funding of epic proportion. It’s already created a financial drain of billions of dollars in our future budgets, and few are aware of what’s coming.”

There are more than 200 PFC projects that won’t be paying property taxes for up to 99 years, Gates said. According to Gates, there is now a “feeding frenzy to get deals signed before the music stops,” as lawmakers consider reform.

Gates believes his bill would help stem the flow of bad deals by eliminating the practice of PFCs agreeing to direct payments to cities in lieu of taxes. His bill also would set a maximum of 30% income-to-rent ratio for the units deemed affordable in order to remove properties from the tax rolls, among other requirements.

Without change, the lawmaker believes sales taxes would need to be raised to cover the gap that’s starting to develop in property tax revenues.

“This is a financial Armageddon freight train that’s barreling down the tracks, and it’s going to be big,” Gates said. “There’s no such thing as getting something for free.”

During that March 28 hearing, Denton County Republican Richard Hayes told a story about a mayor in his jurisdiction who was very excited about a PFC deal using payments in lieu of taxes. The city was set to receive money upfront and for the 75 years of the agreement.

“They were very excited about the opportunity, but they were alert enough to understand it was maybe a problem,” Hayes said. “Since it was off the tax rolls, the schools get zero, the county gets zero.”

In the case of school districts, the state is on the hook to make up budget shortfalls, spreading the financial impact of PFCs across Texas.

“When a property is taken off the rolls, then the local collections go down … the state is going to fill in the gap,” Mike Meyer, deputy commissioner of finance with the Texas Education Agency, said at the Urban Affairs hearing. “Roughly speaking, for every $1 billion of property that comes off the rolls, that’s going to be about $8.7 million that the state’s going to be making up at the average maintenance and operations tax rate.”


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