Austin's voter-backed transit expansion faced a critical legal test Wednesday inside a courtroom on Guadalupe Street. Seated in front of a marble wall and flanked by Texas and U.S. flags, Travis County Judge Eric Shepperd presided as attorneys in dark suits clashed over the intricacies of state law and public finance.
At issue is whether the Austin Transit Partnership (ATP) — a local government corporation created to build the city's largest-ever expansion of public transit — has the authority to repay debt with city property taxes. Voters signed up for the transit tax hikes in 2020, but the Texas attorney general and a band of plaintiffs are challenging ATP's power to borrow under state law.
If they succeed, light-rail plans could die.
Without the power to take out loans and issue bonds, ATP would be hard-pressed to finance the high upfront costs of building a 9.8-mile light-rail system extending in three directions from downtown. The official price tag is under $5 billion, but ATP says after inflation, it would be over $7 billion. Construction is estimated to start in 2027 with transit planners saying people could hop on a train by 2033.
ATP's power to issue bonds is so pivotal to the project that the agency made a strategic decision to file a preemptive lawsuit asking a state judge to weigh in before the Texas attorney general could do so. The Attorney General's Office has to sign off on all bonds issued by local jurisdictions like cities, counties and local government corporations like ATP.
During a hearing on Wednesday, a lawyer for the attorney general dissected state law word-by-word to argue ATP doesn't even meet the definition of an entity that could file the so-called bond validation lawsuit, so the court shouldn't be involved in the case in the first place.
A lawyer for ATP accused the Texas Attorney General's Office of making "absurd" arguments in an attempt to starve Project Connect of bond money. Elliot Clark, an attorney with the law firm Winstead PC, said any ruling on whether ATP could file a bond validation lawsuit would be tied up for years in appeals.
"Delaying this case will be fatal to Project Connect," Clark said. "Delay costs taxpayers dearly. It costs them in increased construction costs, potentially rising interest rates, certainly as we see today, rising inflation."
To avoid that appeals process, lawyers for ATP and the city asked the judge not to rule on the jurisdiction issue, and instead allow the case to go to a trial scheduled for May 28. If the judge rules in ATP's favor after the trial, the agency would be in a stronger position to take on future legal challenges. Any appeals of that case would be fast-tracked.
The bond validation suit was combined with a lawsuit filed last year by West Campus burger joint Dirty Martin's Place. Plaintiffs include current and former elected Democrats like Travis County Commissioner Margaret Gómez, former state Senator Gonzalo Barrientos and ex-Austin City Council Member Ora Houston, who attended Wednesday's hearing.
Rick Fine, a lawyer for those Project Connect opponents, urged the court to rule quickly on the bond validation suit, saying it would be needlessly expensive to prepare for a trial if ATP doesn't even have the legal authority to file a lawsuit seeking the green light to issue bonds.
"We need to know which direction we're going. We're certainly not ready for trial," Fine told the judge. "Tremendous taxpayer money on behalf of the attorney general, the city and ATP and certainly the individual taxpayers on our behalf would be wasted for over a month only to find out that we had a trial we shouldn't have had to begin with."
The Dirty Martin's suit is challenging the legality of the Project Connect funding mechanism, an issue that would be addressed in the May 28 trial.
ATP and the city say they carefully crafted the financial structure of Project Connect to navigate the elaborate limits on local taxing authority imposed by state legislators worried about rising property taxes. Plaintiffs in the Dirty Martin's case accuse the city and ATP of exploiting a loophole designed to circumvent those limits.
When voters authorized a city property tax increase in 2020, they approved a rise in the maintenance and operations (M&O) rate — one of two percentages that add up to the city's overall property tax rate. The second tax rate, which is about a quarter the size, is exclusively for paying down debts. Raising the debt rate requires an election and can only be done for a fixed dollar amount.
The Dirty Martin's lawsuit argues M&O revenue would be used illegally to pay down debts.
The city says transferring M&O property tax revenue to a local government corporation like ATP changes what the money can legally be used for. Once ATP receives the cash, it is "contract revenue," they argue, and can be used to pay down debts.
The lawsuit also alleges voters were misled in the 2020 election when they approved a tax increase in exchange for a transit expansion.
The Project Connect campaign proposed a 20.2 mile light rail system and downtown subway for $5.8 billion. A year and a half after the election, ATP announced costs had almost doubled to $10.3 billion.
The agency blamed pandemic-fueled inflation for pushing up the cost of real estate to be expropriated by $940 million and raising construction costs by $380 million.
But more than two-thirds of the cost increase was the result of changes to the design — "scope refinement" in the words of ATP — like a proposal to extend the underground tunnel from 1.56 miles to 4.19 miles, raising the price tag by more than $2 billion. Other design changes added up to an additional $1.2 billion.
Over several months, ATP, the city and Capital Metro worked to trim down the rail plan to fit within the previous budget. ATP is moving forward with the 10-mile plan, dubbing it "Phase One," although the existing tax rate wouldn't be able to fund a second phase beyond design, ATP says.
Plaintiffs in the Dirty Martin's lawsuit say the changes to the light-rail map invalidate the Project Connect tax because voters weren't consulted on a fundamental change in the plans.
ATP and the city responded by pointing to language in a resolution passed by the Austin City Council before the 2020 election called a "Contract with the Voters", which says any changes to Project Connect require approval of the council, CapMetro and ATP board. All three bodies voted to approve the shorter, 9.8-mile map in 2023.
But those issues are separate from the narrow legal debate argued in the courtroom Wednesday. Judge Shepperd said he would make a decision on how to proceed "as soon as I can."
