Trial over Austin's Project Connect financing model halted by appeal from Texas AG (2024)

Lawyers in the Texas attorney general’s office filed an appeal in a Travis County courtroom Monday, halting the trial to determine whether the funding model for Austin’s planned multibillion-dollar light rail is allowed under state law.

Project Connect, which was approved by voters in 2020 with an increase of more than 20% in the city’s maintenance and operations property tax rate, originally was to include several transit projects and miles of light rail — the centerpiece of the proposition, which supporters lauded as a generational investment in Austin’s transit infrastructure.

Plans for the light rail portion of the project have since been scaled down to under 10 miles, and construction is estimated to cost more, city and Austin Transit Partnership leaders have said. The Austin Transit Partnership is a local government corporation established by the city and Capital Metro to plan and build the light-rail system.

The appeal from Texas Attorney General Ken Paxton's office means that rather than the three parties involved in the lawsuit making their cases on whether they believe the financing model is sound under Texas law to Judge Eric Sheppard, the Texas 3rd Court of Appeals is being asked to determine whether the lower court has jurisdiction to hear the case.

Here's what to know:

Who is involved in the Project Connect lawsuit?

Three parties are involved in the Project Connect lawsuit.

One is a group of people who sued City Council members and Austin Transit Partnership board members in late 2023, claiming the city misled voters about the multibillion-dollar transportation investment and property tax increase. The lawsuit sought to stop the collection of property tax money for the project and issuance of bonds without voter approval, the American-Statesman previously reported.

One of theattorneys representing the plaintiffs — the owner of the restaurant Dirty Martin's Place, a former Democratic state senator and others — is Bill Aleshire, a former Travis County judge and tax assessor-collector.

The city and the Austin Transit Partnership are the second party. They are attempting to protect their current financing model, which, in addition to the lawsuit, has come under attack by Republican state lawmakers who during the 2023 legislative session sought to prohibit the issuing of any future debt for Project Connect without first getting voter approval, the Statesman previously reported. The legislation died during the last week of the session.

The city and the transit partnership contend the proposed financing model stands on firm legal footing and have cast the legal and legislative challenges as efforts to undermine the will of Austin voters and undercut plans to expand public transportation options in the city.

The third party involved is Paxton’s office.

In Texas, the issuance of municipal bonds, which is at the core of the debate over Project Connect’s financing model, requires approval from the state’s attorney general.

This proved to be an obstacle for the city and the transit partnership as Paxton, in a nonbinding legal opinion during the 2023 legislative session, indicated his opposition to the light rail project, saying the financing model was probably illegal under state law and that Austin made “misstatements to the voters” in 2020, the Statesman previously reported.

In February, the city and the transit partnership filed a bond validation lawsuit, a move to skirt the process of approval from the attorney general and instead ask a judge to weigh in on the argument first.

The bond validation lawsuit and the lawsuit filed in late 2023, sometimes referred to as the Dirty Martin’s lawsuit, have been combined into one lawsuit, which was scheduled to be heard Monday.

Paxton in pretrial court documents argued that "the City impermissibly attempted to use a tax ratification election under section 26.07 outside the purposes for which it was designed" and that "the ballot language for Proposition A was necessarily defective and misleading."

The appeal by Paxton's office Monday morning asks the all-Democratic, Austin-based 3rd Court of Appeals to determine whether the court has authority to hear the case at all.

Sheppard had been previously asked by Paxton's office to rule on whether the court has jurisdiction to hear the bond validation lawsuit before the trial started. The attorney general's office is arguing that by letting the trial begin at 10 a.m. Monday, Sheppard implicitly denied the attorney general's claims regarding jurisdiction.

In court Monday, Sheppard said that despite these claims, he has not "expressly or explicitly ruled for or against" the issue of jurisdiction.

"As I've said before that there are certain areas in your pleading that would be enhanced by getting facts at trial, and I've asked that that happen," Sheppard said Monday.

But, with the appeal, all further trial proceedings are halted until the appeals court makes a decision on jurisdiction.

The city and the transit partnership planned to file an emergency motion to dismiss the appeal Monday, said Greg Canally, executive director of the partnership. He called the appeal from the attorney general a "delay tactic."

"We have the full faith that the 3rd Court of Appeals will act quickly," Canally said.

Aleshire said he agreed with the attorney general's arguments related to jurisdiction.

"It is time for leaders to rethink Project Connect and consider putting a bond election on the November ballot," Aleshire said.

What is the Project Connect financing model and what is at stake?

In addition to anticipated federal grant money, the transit partnership's issuing of municipal bonds represents a large portion of the light rail’s current financing plan. The current plan is that the local government corporation would pay back debt it takes on through a transfer of the tax revenue approved in 2020 from the city.

According to a city resolution, the tax transfer is to continue indefinitely until money is no longer required for “operations, maintenance, or state of good repair,” the Statesman previously reported.

The reason the legal and legislative attacks have posed such a risk to Project Connect is that they seek to stop, or delay, the transit partnership from issuing the bonds. The transit partnership’s current plan to establish the light-rail system relies on the agency's ability to issue bonds.

An adverse outcome in the courts would probably send the transit partnership and the city back to the drawing board.