Court challenge from Texas AG Ken Paxton could end Austin’s light-rail plans

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Austin's effort to build a high-frequency urban rail network is facing a challenge from Texas Attorney General Ken Paxton, whose legal arguments seek to dismantle the funding mechanism behind the voter-endorsed transit expansion.

In a court filing, Paxton slammed the city's payment plan for the 10-mile light-rail starter system. The financial strategy was designed to navigate the increasingly tight strictures the state Legislature has placed on how Texas cities raise money.

If a court sides with Paxton, it could kill the light-rail expansion known as Project Connect.

In November 2020, Austin voters approved a 21% increase in the maintenance and operations portion of their property tax rate to fund the project. The tax hike generates about $166 million a year and growing.

The city transfers tax money to the Austin Transit Partnership, an entity authorized by voters to build and finance light rail. ATP needs big loans to cover the high upfront construction costs. The tax cash helps ATP secure loans and then pay them off.

The estimated price tag of $4.7 billion in 2022 dollars could reach $7.1 billion by the time construction starts, according to a draft financial plan in ATP's application for federal grants. The estimate doesn't include interest payments on debt.

Federal grants could cover up to half the costs of the light-rail system, ATP executives say. But the agency is planning to borrow some $1.75 billion in bonds to kickstart construction, which wouldn't begin until 2027 at the earliest.

The politically conservative Texas attorney general, who's on track to be tried for felony fraud this spring, resurrected arguments he made in a legal opinion last year. Paxton said the maintenance and operations portion of a property tax bill can't be used to pay down public debt.

"The City attempted to create a contract with the voters that ... the Tax Code did not authorize," Paxton said in the filing, calling the funding plan "void at the time of its original execution."

Paxton's filing comes as ATP is asking the state court to remove any doubt about the local government corporation's ability to issue bonds. ATP and the city filed the so-called "bond-validation" lawsuit to preemptively stop the attorney general from blocking the sale of bond debt, a power he has over local government corporations like ATP.

"It’s part of an effort to protect this voter-approved, generational light rail project for generations to come," Mayor Kirk Watson said last month in his newsletter. "The statute includes an expedited timeline for the court to act so the litigation won’t drag on for years and years, imperiling the project."

In legal documents, ATP insists it is following state law. The city is allowed to collect revenue from the voter-approved tax increase and transfer the money to ATP. As a local government corporation, ATP has the authority to borrow money to carry out its purpose, the agency says in its filing.

If a court agrees with Paxton and finds ATP cannot borrow money, it could kill the light-rail project. That's exactly what a group of plaintiffs wants.

"You are seeing the beginning of the end of the biggest con job ever perpetrated on the taxpayers of Austin," said Bill Aleshire, an attorney representing plaintiffs in a separate suit over ATP's power to borrow. "When all is said and done, I expect the final court decision to result in a rollback of the almost 21% Austin property tax increase being used to [fund] Project Connect and a refund of hundreds of millions of those dollars that ATP has on hand, unspent," Aleshire said in an email.

Lawyers with ATP and the city are poring over Paxton's filing and plan to fire back.

“The City recently received the AG’s pleading," city spokesperson Michele Gonzalez said in a statement. "We disagree with the AG’s assertions and are certain the court will allow the City and ATP time to file responses."

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