Historical Overview of Economic Development Law
Article III, Section 52 – prohibiting lending of credit or giving grants of public money in aid of an individual, corporation or association, and Article XI, Section 3, prohibiting becoming a subscriber to the capital of any private corporation or association, or make any appropriation or donation to the same, or in any way loan its credit – were adopted as part of the Texas Constitution in 1876 to deprive political subdivisions of their powers under the 1869 Constitution to issue bonds secured by ad valorem taxes or otherwise donate money to induce railway companies to locate rail lines within a city in anticipation of economic benefits.

Many railroad ventures proved disastrous because railroads failed or never materialized leaving cities and counties obligated on bond debt and their citizens with taxes for which they had received no benefit. Many localities defaulted on these bonds resulting in the adoption of the constitutional restrictions against lending of public credit.

However, in 1979 the Development Corporation Act authorized certain political subdivisions to create non-profit corporations to issue revenue bonds on their behalf to finance manufacturing, industrial and commercial projects.

The Texas Attorney General upheld the constitutionality of the statute, since such bonds did not involve public money or the lending of credit within the meaning of Article III, Section 52 and Article XI, Section 3, because they are payable solely from revenues derived from private sources. These bonds qualify as tax-exempt obligations under the federal tax law, but are payable solely from the revenues of the “user” of the facility financed, and do not constitute a governmental debt or obligation.

Several other statutes have been passed authorizing financings to facilitate economic development. Under Article III, Section 52-a of the Texas Constitution and Article 835s, cities became authorized, subject to certain restrictions, to lend their credit and use public money to finance specific industrial and other business development projects. A similar provision, Article 725d, was enacted for use by counties.

Article 835s Financings
Article 835s authorized cities to issue bonds, payable from (1) revenues of a lease of the facilities; (2) ad valorem taxes; or (3) a combination, to acquire land and construct or acquire a building or other facility for the purpose of leasing them to a political subdivision or agency of the state or to an individual, private corporation or other entity for use in manufacturing or another commercial activity.

Bonds payable from ad valorem taxes must be approved by the voters.

Sales Tax Financings
Sections 4A and 4B of the Development Corporation Act also permit sales taxes to be levied, with voter approval, in support of bonds issued, and to fund economic development activities of such a corporation, and to be used to directly pay for certain eligible “costs” of “projects” or to pay the principal and interest on bonds which are used for eligible “costs” of “projects.”

Tax Increment Financings
A city may, through tax increment financing authorized in 1987 in Chapter 311 of the Tax Code, allocate a portion of ad valorem taxes on improvements within a designated area toward payment of bonds issued to finance authorized projects. It may issue tax increment bonds to pay project costs including: (1) costs of acquisition and construction of public works, public improvements, new buildings, structures and fixtures; (2) demolition, alteration, remodeling, repair or reconstruction costs of existing buildings; (3) operating costs; (4) professional services; (5) operating costs of the zone; and (6) contributions made by the municipality from general revenue for the implication of the project.

Texas Enterprise Zone Act Financings
The Texas Enterprise Zone Act authorizes cities and counties to designate an area as an enterprise zone to create jobs and spur private investment in such areas. Special local and state financial incentives may be provided within zones. Revenue bonds may be issued to finance projects within the zone, and it is also eligible for tax increment financing and for tax abatements.

Public Improvement District Financings
A city may finance improvements, which include acquiring real property, landscaping, erecting fountains, lighting and signs, streets, sidewalks, pedestrian malls, works of art, off street parking facilities, drainage, libraries, mass transportation facilities, wastewater, parks, support services including advertising expenses of administration and operation, in a “definable part” of the city by: (1) levying assessments against property in the district, (2) general funds, or (3) bonds. Revenue bonds may be payable from revenue derived from improvements within the district.

Hotel Tax Financings
A city may also issue revenue bonds, payable from the hotel occupancy tax, for certain tourist-related projects, including acquiring sites for, and construction, improvement, enlarging, equipping, repairing, operation and maintenance of, convention center facilities, encouragement, promotion, improvement and application of the arts and historical restoration and preservation projects.