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Will lawsuit blow up Project Connect train tracks?

Plaintiffs, with help from the Texas attorney general, may be on the brink of derailing Project Connect because of alleged defects in its financing plan

HomeAustin Transit PartnershipWill lawsuit blow up Project Connect train tracks?

Plaintiffs in the lawsuit Dirty Martin’s et al v. Mayor Kirk Watson et al claim they’re victims of a bait-and-switch scheme because Project Connect will deliver improvements vastly inferior to what voters were promised when they approved Proposition A (Cause No. D-1-GN-23-008105).

Voters approved Proposition A on November 3, 2020, by a thumping 58-42 percent margin. In doing so, the 242,457 people who voted “yes” agreed that all City of Austin property owners would shoulder an extra 8.75 cents increase in property taxes per $100 valuation, which amounted to a 20.788 percent increase in the City’s Maintenance and Operations property tax. And carry that increased burden dedicated solely to pay for Project Connect improvements for decades.

Those nearly quarter-million voters bought into—and agreed all property owners should pay for—a $7.1 billion plan for a magnificent new comprehensive transit plan.

A 20-page, four-color brochure about Proposition A illustrated the vision for Project Connect. That included 27 miles of new rail service including two new rail lines, expanded bus service with an all-electric fleet, nine new park-and-ride facilities, and much more. Part of the proposal called for creating a downtown subway running through a tunnel with six underground stations featuring escalators, elevators, stores, restrooms, and other amenities.

Less than a year and a half after the election, in April 2022, that grand vision was dashed. That’s when Austin Transit Partnership, (ATP), the local government corporation jointly created by the City of Austin and Capital Metro to implement Project Connect, updated its financial estimates. The new figures showed the cost of the light rail portion had ballooned from $5.8 billion to $10.3 billion.

Because of the rising cost estimates, in May 2023 the light-rail implementation plan was whittled to fewer than 10 miles of track, all above ground. No subway. It wouldn’t even connect a rail line to Austin-Bergstrom International Airport—which was specifically mentioned in the ballot language for Proposition A.

ATP financing ‘illegal’ plaintiffs claim

Project Connect improvements were to be built under contracts authorized by ATP and funded by bond debt. The City was to collect the voter-approved property tax revenue and transfer it to ATP to pay that debt.

Legislation known as the “No Blank Checks Act,” which died in the last days of the 2023 regular session of the Texas Legislature, would have barred this method of bond financing.

House Bill 3899 as amended by the senate based on an Attorney General Opinion KP-0444, would have prohibited ATP, as a local government corporation, from issuing bonds to be repaid from Maintenance and Operations property taxes transferred to ATP from the City of Austin.

That’s because property tax revenue is subject to annual appropriation by the City Council and could be stopped altogether. The attorney general’s opinion stated that the Tax Code “does not authorize a municipality to ‘earmark’ use of a voter-approved increase in its maintenance and operations property tax revenue for debt service….”

Instead, ATP would have been allowed to issue bonds only if those bonds were approved by voters in an election held for that purpose, to include a plain language description of the purposes for which the bonds are to be authorized, the principal amount not be exceeded in bonds issued, and the maximum maturity date of the bonds not to exceed 40 years.

If HB 3899 had been enacted, Project Connect would have been halted until a new election was held and voter approval was gained specifically to issue bonds.

Picking up where the AG left off with the opinion criticizing ATP’s financing plan, plaintiffs Dirty Martin’s et al filed suit in November 2023.

ATP pushes for $150 million in bonds

Despite Dirty Martin’s potential threat to its financing plans, the ATP Board of Directors on February 16, 2024, adopted a 161-page Master Trust Agreement to establish a financing program not to exceed $5 billion.

The board that day also adopted a resolution to issue ATP’s initial bonds not to exceed $150 million “secured by a pledge of the Contract Revenue Payments received from the City under the Funding Agreement….”

In furtherance of ATP getting a court’s approval to issue those bonds, the City of Austin filed an 18-page petition for expedited declaratory relief February 20th. The petition seeks to validate the financing plan for the light rail components of Project Connect.

The City’s petition states that by passing Proposition A, voters authorized the City to increase the property tax rate and to dedicate the additional revenue to ATP to finance and implement Project Connect. The petition claims that the funding agreement was amended to address potential issues raised by Attorney General in May 2023 (i.e., Opinion KP-0444).

“[T]he Dirty Martin’s lawsuit is a direct challenge to the validity of the Funding Agreement, the Initial Bonds, and the Financial Program,” the petition states. “Nonetheless, this bond validation action may be maintained ‘regardless of whether another proceeding is pending in any court relating to a matter to be adjudicated’ in this lawsuit.”

The City’s petition asks that after a final hearing the court enter a judgment declaring the City can levy and collect taxes voters approved in Proposition A; that the City is authorized, subject to appropriation, to pay the Proposition A revenue to ATP; and ATP is authorized to pledge these payments as security for repayment of initial bonds.

Which raises an interesting situation: While future City Councils would not technically be bound to appropriate annual Project Connect Taxes that are needed to provide security for the $150 million in initial bonds, they might be honor bound to do so.

Brian Rodgers

The precedent for doing so exists. Brian Rodgers sued the City of Austin and Endeavor Real Estate and reached a settlement in 2004 that said the agreement that gives millions of dollars in rebates of sales and property taxes for the high-end Domain shopping center would be strictly voluntary. The city was no longer obligated to fund the agreement, and Endeavor gave up its right to sue. The city chose, however, to continue paying.

Dirty Martin’s persists

In response to the City’s request for bond validation, plaintiffs Dirty Martin filed an amended 53-page petition March 14th. The petition provides extensive details to show how the scope of Project Connect’s implementation plan was vastly reduced.

“Now, most of Austin receives no rail service whatsoever but still require more than a 20 percent annual tax increase to pay for limited service elsewhere,” the petition states.

The petition again states that property taxes levied annually for the city’s maintenance and operations purposes cannot legally be used as security for ATP’s long-term debt.

Dirty Martin’s petition asks for injunctive relief to prohibit the City from continuing to assess or collect the Project Connect Tax and to prohibit the ATP from issuing bonded indebtedness.

In addition the plaintiffs ask that ATP return to the City any unencumbered Project Connect Tax funds on hand and require the City to refund those unspent Project Connect Tax funds to taxpayers via credit to reduce the 2024 City of Austin tax rate.

AG’s weighs in, favors Dirty Martin

Attorney General Ken Paxton filed an 11-page petition March 15th, stating that the funding agreement for the City of Austin to use Proposition A revenue to pay ATP is invalid and cannot be used as security for bonds.

The petition states, “The City attempted to create a contract with the voters that Section 26.07 of the Tax Code did not authorize. Section 26.07 is a truth-in-taxation statute, authorizing a higher maintenance tax rate upon voter approval; it is not a vehicle through which the City can funnel for unlimited duration a portion of its maintenance tax for a billion-dollar capital improvement project to pay debt service on its local government corporation’s bonds.”

Bill Aleshire

Plaintiffs’ attorney Bill Aleshire said in a March 15th email, “Today, the Office of the Attorney General of Texas filed a devastating rebuke to the validity of the Project Connect bonds and joined us in attacking the entire funding mechanism…

“You are seeing the beginning of the end of the biggest con job ever perpetrated on the taxpayers of Austin. When all is said and done, I expect the final court decision to result in a rollback of the almost 21 percent Austin property tax increase being used (for) Project Connect and a refund of hundreds of millions of those dollars that ATP has on hand, unspent.”

As of July 2023, according to Dirty Martin’s amended petition, the City has so far paid ATP $464.2 million collected from the Project Connect Tax.

“If Austin ‘leaders’ want mass transit in Austin, they should immediately stop Project Connect, cancel the illegal tax increase, and go back to the voters with an affordable plan, with an honest price tag, and see if voters will authorize bonds, i.e., the legal way taxpayer debt is incurred,” Aleshire said.

(Disclosure: Aleshire has represented The Austin Bulldog in three lawsuits, two of which were actions against the City of Austin for failure to comply with the Texas Public Information Act. He continues to represent the Bulldog in public information requests.) 

The City of Austin has a different opinion.

“The City just received the AG’s pleading,” a City spokesperson told the Bulldog. “We disagree with the AG’s assertions and are certain the court will allow the City and ATP time to file responses.”

This story was updated at 1:35pm March 18, 2024, to correct misstatements about: the tax increase approved by Proposition A, the prohibition on funds transferred to ATP, and the source of the statements about an ‘earmark.’

Trust Indicators: Ken Martin has been reporting on and investigating local governments since 1981. Contact him at [email protected].

Related Bulldog coverage:

Project Connect scope drastically scaled back, March 30, 2023

Austin Transit Partnership gears up for key decisions on light rail design, March 16, 2022

Price tag for CapMetro buses tops $1 million apiece, September 29, 2021

Austin Transit Partnership approves $312.8 million budget, September 17, 2021

Transit tax draws attack from the left, October 2, 2020

5 COMMENTS

  1. ProCON from its very inception was a flawed, exorbitantly expensive plan, that offered little benefit to our city. An unprecedented, multi-million TAX-dollar sales campaign, was employed to sell it to voters. That campaign included false images, false promises, a lack of specifics and the “house of cards” funding plan, that ultimately may be its undoing.

    Local media, for the most part, never asked critical questions or considered opposing points prior to the election. That resulted in an electorate that, with rare exception, knew very little about the project.

    Now the chickens are coming home to roost, people are beginning to understand how they have been deceived. This should provide a litmus test for local leaders; those in office at the time never asked hard questions and missed billions in funding gaps. I have no confidence in any local office holder that defends this “bait and switch’.

  2. “…20.788 percent increase in the City’s Maintenance and Operations property tax” – Article
    “..almost 21 percent Austin property tax increase” – Bill Aleshire

    Is it a 20% increase in overall property taxes for homeowners or a 20% increase in the Maintenance and Operations portion of property taxes?

Congratulations. It looks like you’re the type of person who reads to the end of articles. Now that you’re informed on this topic we want your feedback.

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