Showdown looms in Austin light-rail bond dispute

Bonds

An attempt by Austin, Texas, officials to seek court validation for bonds to help finance a multi-billion-dollar light rail project faces a key test this month.

The eligibility of Austin Transit Partnership, a corporation created by the city and the regional Capital Metro Transportation Authority to spearhead Project Connect’s development and financing, to petition for expedited declaratory relief under Texas law has been called into question.

An April 25 Travis County District Court hearing will take up Texas Attorney General Ken Paxton’s stance that ATP lacks standing to bring the action under the state’s Expedited Declaratory Judgments Act.

A rendering shows a train in the planned light rail system in Austin, Texas. Opponents are challenging the Austin Transit Partnership’s authority to validate the bonds.

Austin Transit Partnership

“The definition of ‘issuer’ in the EDJA does not include a non-profit corporation created to act on behalf of a municipality,” Paxton’s March 15 court filing said.  

The city and ATP used the act to file their Feb. 20 petition to validate ATP’s ability to issue bonds, starting with $150 million of revenue bonds to reimburse itself for project costs. The debt would  be paid off with a portion of Austin’s operation and maintenance property taxes voters approved in November 2020.

Casey Burack, ATP’s vice president of business and legal affairs, said the agency looks forward to its day in court. 

“Austin Transit Partnership is confident in our standing to petition the court in a bond validation action,” she said in a statement.

Bill Aleshire, an attorney representing taxpayers who sued in November to block the bond issuance, said the petition could be brought to “a screeching halt” even if a judge decides ATP has standing, noting the attorney general can appeal such a ruling.

“That could easily take a year or more,” he said. “In the meantime, they can’t issue the bonds.” 

If a judge determines ATP lacks standing, the taxpayers’ lawsuit, which was consolidated with the petition in February, would continue and ATP would have to seek bond approval directly from the attorney general’s office, Aleshire added. 

The lawsuit claims money raised by the tax hike can only be used for Austin’s operational purposes and not for debt service, which is supposed to be paid with voter-approved interest and sinking fund property tax levies. The plaintiffs also seek to block a light-rail project that was downsized from what voters were promised in 2020.

Voters back then approved a tax hike to fund a 27-mile, 31-station light-rail project estimated to cost $7.1 billion with federal funding expected to cover 45% of the capital cost. The ballot measure did not include a bond issue.

With Project Connect’s price tag topping $11 billion, ATP last year chose a 9.8-mile, 15-station option estimated to cost $4.5 billion to $4.8 billion in 2022 dollars. ATP is currently estimating the cost at as much as $7.1 billion in 2033 dollars when factoring in future inflation and market conditions, saying it is on budget with the projected cost presented to voters in 2020.

“They’re giving voters less than half of what you told them you’d give for the same price,” Aleshire said. “I think that’s out of budget.” 

In their petition, ATP and the city argue that the terms of the 2020 election ordinance constitute “a contract with the voters” and that Texas law allows for discretionary changes to voter-approved projects. 

“Due to the drastic changes in the local and national economic environment and other developments discovered during design development, the original Project Connect System Plan presented to voters needed to be revised, and city council, in joint concurrence with the Capital Metro Board of Directors, exercised its duly reserved discretion to revise it,” the petition stated, adding that a “robust community engagement process” preceded the revision. 

As ATP commences environmental and federal grant processes, Aleshire said there is a good chance legislation aimed at its bond-issuing ability will be reintroduced in the Texas Legislature during the 2024 session that starts in January.

The first-of-its-kind funding model in Texas, along with escalating costs for the project caught the attention of state lawmakers, who advanced a bill during the 2023 session to require voter approval of bonds issued by local government-created corporations, like ATP, that are allowed to tap property tax revenue for specified projects.

House Bill 3899 passed both legislative chambers, but a last-minute Senate amendment to ban local government corporation issuance of bonds paid off with voter-approved property taxes transferred to the issuing entity by a municipality led to a point of order that stalled the measure.

Paxton had initially weighed in on the controversy with a May 2023 opinion that Texas law does not authorize a municipality to “earmark” a voter-approved increase in maintenance and operation property taxes for debt service. The opinion also questioned whether a municipality could transfer proceeds from that tax in perpetuity.

Austin would get a smaller version of light-rail than what was presented to voters in 2020 when they passed a property tax hike for the project.

Bloomberg News

In February, an agreement between the city and ATP was amended to subject the transfer of property tax revenue to annual appropriation by the Austin City Council.

At the same time, a 10-member pool of bond underwriters was tapped. The list includes four investment banks – BofA Securities, Wells Fargo, Morgan Stanley, and JP Morgan – that are under review by the Texas Attorney General’s office to determine their compliance with a 2021 state law that bars state and local government contracts with companies that boycott the fossil fuel industry.

Austin is trying to move ahead with Project Connect while mass transit nationwide remains under stress. S&P Global Ratings and Moody’s Ratings gave the mass transit sector negative outlooks for 2024 as ridership continues to lag pre-COVID-19 pandemic levels.  

“Remote work trends will continue to drag on public transit ridership, with our activity estimates showing public transit recapturing about 75% of pre-pandemic activity in 2024, 80% in 2025, and only about 85% in 2026,” S&P said in a March report.

Austin’s CapMetro reported that between February 2023 and 2024, boardings, which totaled 24.8 million, were up 14% over the prior 12-month period. Ridership this February was down 18.4% compared to February 2020.

Metropolitan Austin, along with Dallas and Houston, have generally outperformed other major areas of the nation in office attendance since March 2020, according to the Kastle Back to Work Barometer, which uses data from access control keycards, fobs and apps for buildings Kastle Systems secures in the top 10 cities averaged weekly.

Commercial real estate advisor Avison Young reported the city’s office vacancy rate was 23.3% in 2023’s fourth quarter, up 3.4% compared to the same period in 2022.

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