Gift horses: Austin courts scrutinize local-government ‘gifts’

In April a judge struck down a special property-tax break for developers of 118 lakefront acres south of downtown Austin.

Austin courts have considered scrapping three local-government initiatives in the last two months. Each case involved plaintiffs alleging–among other things–that government officials violated the Texas Constitution’s gift clause. 

That provision says that local governments generally lack authority to give money to private individuals or entities. Related Texas Supreme Court rulings provide leeway for payments that serve a “legitimate public purpose” and deliver a “public benefit.” The shakeout from one gift-clause case already has killed a city-sponsored tax break for developers of prime property on Lady Bird Lake. Two pending cases could affect programs that provide those in need with health care and supplemental income payments.

Plaintiffs in Taxpayers Against Giveaways vs. City of Austin alleged that the city improperly offered special tax breaks to developers of 118 primo acres on Lady Bird Lake just south of downtown. That Tax Increment Reinvestment Zone (TIRZ) would allow developers to reinvest an estimated $354 million of future property-tax increases in their own backyards instead of paying into a general fund that pays for amenities and services for all Austinites. 

State law generally restricts these special tax zones to “blighted” areas. Plaintiffs argued that the Lady Bird Lake tract includes “some of the most valuable real estate in Austin.” They claimed that TIRZ projects that don’t redress blight lack a compelling public purpose, violating state constitutional provisions barring unfair taxation and  governmental gifts to private individuals or entities. Local state District Judge Jessica Mangrum ruled for the plaintiffs in a terse summary judgment on April 12 (case No. D-1-GN-23-002238). That tax break died when the defendants failed to appeal.

Not two weeks later the Texas Supreme Court ordered Harris County to temporarily suspend a pilot program to make supplemental payments of $500 a month to almost 2,000 lower-income residents. The high court has suspended the program as lower courts weigh Texas Attorney General Ken Paxton’s recent lawsuit challenging these checks, which he characterized as an “Illegal ‘Guaranteed Income’ Welfare Scheme.” 

“Harris County’s program to give public money away with no conditions, no control over expenditure of that money, and no guarantee of public benefit is prohibited,” Paxton’s media release says. Paxton has yet to challenge a similar program in Austin, which makes $1,000 monthly payments to 135 low-income families. As a home-rule city, Austin stands on somewhat firmer legal ground than does Harris County.

In another pending case, plaintiffs argue that Travis County’s Central Health hospital district improperly transfers county taxpayer dollars to the University of Texas at Austin’s Dell Medical School through an affiliation agreement. The plaintiffs, who are local taxpayers, say that the $35 million in annual transfers amount to improper gifts because the money is not restricted to Central Health’s limited purpose: to provide health care for lower-income people. Central Health counters that Dell Medical’s expenditures on the disputed educational, research and administrative expenses legitimately benefit Central Health’s lower-income clients. The opposing parties also disagree over whether or not the constitution’s gift clause applies to government payments to public entities such as the University of Texas.

In a May 9 hearing in the case, Birch et al v. Central Health et al (case D-1-GN-17-005824), Central Health asked the judge to dismiss this case on the grounds that the plaintiffs lack legal jurisdiction to file the claim. Plaintiffs asked the judge to issue a summary judgment forcing Central Health to just spend the disputed tax dollars directly on health care for lower-income people. As the Austin Bulldog first reported, local District Court Judge Amy Clark Meacham wrote counsel for both sides of the case on May 21 that her forthcoming ruling would not grant either side the slam-dunk victories that they had sought. That ruling tees up the case for appeals and a possible trial.

Parties to these three recent cases have clashed over the extent to which the alleged government gifts serve an authorized public purpose. Depending upon how the courts rule, the cases could have significant impacts on some Austinites. One ruling already has blocked tax breaks to some lakefront developers. A pending ruling could alter how Central Health provides care for lower-income locals (the parties differ on if this would improve or undermine those services). Lastly, Paxton’s case could end programs to supplement the incomes of a few needy families in Harris County and–possibly–in Austin. 

Different people see very different things when they look these gift horses in the mouth. Some see public-purposed gifts where others just see grift. The courts will decide.

Disclosures: Central Health plaintiff attorney Fred Lewis is an Austin Free Press donor. Austin Free Press advisory board member Bill Bunch was a plaintiff attorney in the TIRZ case. This paper’s editor, Andrew Wheat, worked at local nonprofit Texans for Public Justice when it filed a 2015 criminal complaint alleging that Attorney General Paxton violated state securities laws. Without admitting wrongdoing, Paxton settled those charges in March, agreeing to pay $271,000 in restitution, perform community service, and take legal ethics classes.

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