The financing tools available to cities under state law to encourage economic development have increased over the last three decades.

Initially, Article III, §52 and Article XI, §3⁽¹⁾ were adopted as part of the Texas Constitution in 1876 to deprive municipalities and other political subdivisions of the power possessed by them under the 1869 Texas Constitution to issue bonds secured by ad valorem taxes or otherwise donate money to induce railway companies to locate rail lines within certain distances of a city or town in anticipation of economic benefits.⁽²⁾

Many of these railroad/municipal ventures proved disastrous for local communities because many of the railroads failed or never materialized leaving the cities and counties obligated on bond debt and leaving the citizenry with taxes for which they had received no benefit.

Many states and localities defaulted on these bonds creating an uncertainty in the public bond market and resulting in the adoption of the first constitutional restrictions against lending of public credit.⁽³⁾

¹Article 3, Sec. 52 "The Legislature shall have no power to authorize any county, city, town or other political corporation or subdivision of the 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...." Article XI Sec. 3 "No county, city, or other municipal corporation shall hereafter become a subscriber to the capital of any private corporation or association, or make any appropriation or donation to the same, or in anywise loan its credit."

²City of Cleburne v. Gulf C&S Railway Co., 1 S.W. 342 (Tex. 1886).

³Willatt, Constitutional Restrictions on Use of Public Money and Public Credit, 38 Tex B.J. 413 (1975).

However, in 1979, the Texas Legislature enacted the Development Corporation Act (Article 5190.6, Texas Civil Statutes), authorizing cities and other political subdivisions to create non-profit corporations to issue industrial development revenue bonds on behalf of the city or political subdivision to finance manufacturing, industrial and commercial projects.

The Texas Attorney General⁽⁴⁾ upheld the constitutionality of this statute, concluding that bonds issued pursuant to it did not involve public money or the lending of credit within the meaning of Article III, §52 and Article XI, §3 because such bonds are payable solely from revenues derived from private sources.

Since then several other statutes have been passed which authorize cities and counties to finance infrastructure improvements to facilitate economic development. Additionally, in 1987, with the enactment of Article III, §52-a of the Texas Constitution, cities and counties became authorized, subject to certain restrictions, to lend their credit and use public money to finance specific economic development projects.

⁽⁴⁾Op. Tex. Att'y Gen MW-85 (1979).

However, this development in the law gave rise to the question of what is an economic development project? In that respect Texas law does make a legal distinction between what is a "general municipal project," "community development project" and "economic development project."

General Municipal Project
A general municipal project is one which the city undertakes under authority of its general municipal powers for a general purpose for which a city exists, and without consideration to any other local, state, or federal policy objectives. Such projects include acquisition, construction, equipment and development of general municipal facilities, improvements, infrastructure, and buildings for use by the city, or a public or private entity on behalf of the city.

Community Development Project
A community development project is one which the city undertakes under state or federal authority along with its general municipal powers for the purpose of developing or improving a particular aspect of its social structure or physical facilities.

Such projects include development and operation various social and cultural programs, the provision of enhanced governmental services, and the acquisition, construction, equipment and development of both general municipal facilities and public or private facilities for use by the city, or a public or private entity for the purposes of enhancing the governmental and social services of the city.

Economic Development Project
An economic development project is one which the city undertakes under authority of state law for the purpose of promoting the development and expansion of new or expanded business enterprises.

Such projects include the acquisition of land, buildings, equipment and other facilities, and the construction of various types of industrial, commercial buildings and other facilities, and the construction of public infrastructure related to such commercial and industrial buildings and facilities, and projects of any other type authorized by law, for the purpose of attracting new business and assisting business with expansions, all of which promote creating jobs in the city and with no other governmental benefit to the city.

Economic Development Program not equal to Economic Development Project
State law distinguishes between an economic development "program" and a "project." That is, while many federal and state laws authorize cities to establish, undertake and administer various economic development activities, not all such activities qualify as "projects." Therefore, any attempts to identify economic development "projects" require review of statutes that authorize economic development activities to determine if they authorize a project or a program.

It should also be noted that a "community development program" is not an "economic development program"; although, an economic development project may be part of a community development program. At the same time, while "community development" is not necessarily "economic development," community development may include economic development.

Additionally, as noted above, a general municipal project is not an economic development project. Therefore, it should be noted that state law distinguished between "economic development infrastructure" and "general municipal infrastructure." That is while a street may be part of an economic development project, not every street is an economic development project, only those which serve an economic development purpose are economic development projects.

While there are a variety of laws that authorize a variety of economic development programs, projects, and activities, upon a review of the various laws, the economic development strategies authorized by each can be broken into the following general five economic development strategies: (i) business attraction, (ii) incentives to business, (iii) land and building purchase, lease, and upgrade, (iv) infrastructural upgrade and placement related to commercial areas, and (v) training and education.

Economic Development Nexus
It can be concluded, therefore, that to constitute an economic development "project", an "economic development nexus" must be established (i.e. business attraction/expansion) for that project.