During the 88th regular session, a legislative fight about how the Austin Transit Partnership (ATP) is financing a $7 billion + light rail project in Austin concluded with a sustained point-of-order brought by Representative John Bucy in the final days of the session. 

The bill, HB 3899, led by a bipartisan group in the House (Troxclair, Burrows, Bonnen, Meyer, Raymond) and Senator Bettencourt, seemed poised to pass easily. At least until an amendment on the Senate floor was made by Bettencourt to prohibit the use of maintenance and operations revenues from a tax-rate election to be used for debt service. The amendment was a response to the findings of Texas Attorney General Ken Paxton in KP-0444, and was the basis for Bucy’s procedural objection. 

The Summary of KP-0444 says: 

“[Texas Tax Code section 26.07] does not authorize a municipality to ‘earmark’ use of a voter-approved increase in its maintenance and operation property tax revenue for debt service. A court would likely conclude that an agreement wherein a municipality binds itself to transfer in perpetuity an increase in its maintenance and operations property tax and is not subject to an annual appropriation and is prohibited by article XI, section 5 as a pecuniary obligation by contract with no right to terminate at the end of each budget year.” 

Although the bill ultimately stalled on the procedural question, the Austin City Council and ATP amended their agreement in response to KP-0444 and the Texas Constitution, to say that the transfer of maintenance & operation tax revenue would be subject to annual appropriation by future city councils. 

At the time, Austin Mayor Kirk Watson, almost sarcastically, thanked Senator Bettencourt for “seeking this expedited opinion, which includes additional guidance on the path forward for light rail.” And ATP executive Vice President Casey Burack said ATP “will take this opinion into consideration,” appearing to diminish the legal prowess of the state’s top lawyer. 

Now, that opinion and the legal questions it considered are going to be tested in Texas’ judicial branch. On Friday, February 16, the Austin City Council and ATP will initiate a bond validation suit, a mechanism for a municipality to avoid seeking the approval of the Attorney General’s Public Finance Division for issuing long-term bonds. 

But, that raises one obvious question. How can the revenue to pay back long-term bonds be subject to annual appropriation? Further, is revenue from a maintenance and operation tax-rate increase a legal source of revenue to back bonds? 

These are two significant policy considerations that should get the attention of lawmakers in Texas before the proverbial “blueberry in the tomato soup” rewrites long standing norms on financing major infrastructure projects in Texas. 

This new financing mechanism has the potential to set a new precedent on how municipal public projects in Texas are financed. Texas municipalities typically ask voters to approve bonds, and the payback of those bonds falls on the debt service side of the tax rate and includes an interest and sinking (I&S) fund that is not subject to the whims of the local governing bodies budget priorities in a given year. Then, the municipality seeks AG approval of the bonds. None of this is happening in the  case of Project Connect, and we are not aware of any other project financed this way in Texas. 

Unsurprisingly, the City of Austin is now looking at whether they can use the same financing model in the 2024 election to fund major investments to address climate change. Surely, given the perpetual revenue source, rather than a limited one, more municipalities, counties, and even school districts in Texas will pursue this financing option if the legislature doesn’t provide clarity. 

For what it is worth, at the time the bill was being considered, Senator Bettencourt, who authored the changes to the tax-rate election laws during the 2019 session, seemed adamant that this financing scheme was not intended as part of his effort to reform those laws. We agree. If the intention of the legislature is to allow this in Texas, then the laws should be clarified through the legislative process, not by utilizing loopholes in the gray areas of state law or  legal maneuvers around Texas norms and best practices which are in place to protect Texas taxpayers.