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Audit Finds School Districts Grant Tax Breaks With Little Oversight

A state audit released Friday found weak oversight and some conflicts of interests at school districts that approve large property tax breaks for businesses.

A wind farm outside Lorraine, Texas, on Aug. 10, 2006.

*Correction appended

Texas school districts have given out nearly $1 billion in property tax breaks to businesses without verifying those firms' claims about jobs they created, according to a harsh state audit released Friday.

Texas State Auditor John Keel examined the so-called 313 agreement program, named for the relevant chapter of the state tax code, which allows school districts to offer large property tax breaks for select manufacturing, technology and renewable-energy projects, with the state making up the difference. Wind farms, in particular, have made up a large portion of the agreements.

"The Legislature should consider requiring an independent verification of the information that businesses with agreements submit to school districts," the audit states. 

Between 2005 and 2013, school districts have lost $905.2 million in local tax revenue due to the tax breaks while the gains in local economic development are murky at best, according to the audit. Businesses stand to gain as much as $786 million in additional school property tax credits between 2014 and 2030 through the agreements. Total property tax revenue losses from the agreements are likely to be significantly higher than that.

The 313 agreements were first authorized by the Legislature in 2001. State lawmakers debated whether to continue allowing them in 2013 and ultimately approved their continuation, despite both conservative and liberal groups calling for doing away with the program entirely or beefing up its oversight.

Auditors closely studied the 313 agreements at four school districts: Austin, Fort Stockton, Palacios and Sterling City. The audit found all four districts routinely allowed companies to self-report key financial data including the number of jobs created. Neither the Texas Education Agency nor the state comptroller performed their own verifications because the school districts certified the information as accurate.

“Statute does not require school districts to verify that information, and the school districts audited did not perform verifications,” the audit read.

The audit also found multiple undisclosed conflicts of interests between school board members and companies that had received property tax breaks from those districts. Many school districts do not have policies in place requiring school board members or district employees disclose such conflicts before approving the incentives.

That was the case in Sterling City ISD in 2007, when district officials approved a property tax break for Goat Mountain Wind, LP that has since saved the company more than $1 million. Two years later, when the district enacted a conflict-of-interest disclosure process, three members of the school board revealed that they had interests in land covered by the agreement with Goat Mountain Wind, LP, according to the audit.

School districts involved in the audit responded by arguing that they were following state law, suggesting that lawmakers should change the program's requirements if they want to see it managed differently.

"In order to ensure uniformity in the administration of the program, this District does not feel it is authorized to impose new obligations on the recipients of the program," the Fort Stockton School District wrote in response to the audit.

The scathing report echoes one released by the state auditor two months ago on the higher profile Texas Enterprise Fund, which is run by the governor’s office. Taken together, the two audits suggest more than $2 billion in economic incentives may have been doled out to businesses since 2001 without state officials performing the due diligence to ensure that the firms were following through on their promises of job creation and investment.

Lawmakers are expected to take a close look at the state’s full suite of economic incentive programs during next year’s legislative session. Earlier this month, Gov.-elect Greg Abbott suggested the programs should be pared back or perhaps eliminated entirely.

“Government should not be in the business of picking winners and losers,” Abbott said.

Correction: An earlier version of this story mischaracterized the amount of property tax revenue that school districts are expected to lose, according to the audit.

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