Amarillo businessman Alex Fairly’s testimony — including the above statement told to him by an unnamed Texas lawmaker — left the House Ways & Means Committee members aghast.
Fairly is suing Amarillo and its mayor, Ginger Nelson, over a maneuver of debt issuance without voter approval to renovate its civic center. Fairly said he’s poured a few hundred thousand dollars into this legal fight, a total he expects to reach half a million in the next month.
In 2020, Amarillo voters shot down a $275 million bond proposal to finance that project by an overwhelming margin. State law lays out a three-year moratorium on repeat bond proposals, meaning that the next time a similar plan could be put before voters is in 2024.
Rather than wait or scrap the project, Amarillo officials passed an ordinance on May 24, 2022 issuing $260 million in Tax Anticipation Notes (TAN) — one of multiple examples of non-voter-approved debt local governments may issue.
Under Texas Local Government Code Chapter 143, TANs may be issued for a contractual obligation incurred for “the construction of a public work; the purchase of materials, supplies, equipment, machinery, buildings, lands, and rights-of-way for the issuer’s authorized needs and purposes; a professional service, including a service by a tax appraisal engineer, engineer, architect, attorney, mapmaker, auditor, financial advisor, or fiscal agent; operating or current expenses; the issuer’s cumulative cash flow deficit.”
The item was buried in the dense meeting agenda, without specifying a fiscal note like other items, and passed by a 4 to 1 vote of the council. Just like that, the largest TAN in Texas history had been approved — the second largest being a $60 million TAN passed by San Antonio, a city that has seven times the population of Amarillo.
According to Fairly, what the council decided to do is issue the TAN after finding a bank that would underwrite the loan, and eventually refinance the debt with a long-term refunding bond, which requires a commensurate property tax increase to begin repayment of the debt.
This all took place without accounting for it in the city’s Maintenance & Operations rate or seeking voter approval of the tax hike. Fairly said that another end-around occurred when the city was able to secure the civic center and prospective arena into a “Tax Increment Reinvestment Zone” — a designation that would allow this new debt to be folded into the Interest & Sinking tax rate and thus not adherent to the Texas Legislature’s 3.5 percent voter approval line at which tax increases must be approved by voters.
The purpose of debt mechanisms like Certificates of Obligation (CO) or TANs is to provide funding for emergency spending needed quickly, such as for a new fire truck when one unexpectedly becomes defunct, or to bridge the gap between periods of incoming revenue.
“I recall hearing this story last May from one of my colleagues…and I sort of thought ‘No, that’s preposterous. I’m sure that’s not what occurred,” state Rep. Jim Murphy (R-Houston) said in response to Fairly’s testimony.
“[But] it’s that, and more.”
“The idea of TANs,” Murphy added, “is that it’s a bridge loan to get you to the day when all your revenues start coming in…and it can be paid off [in a short time]. So, this is a horse of a different color.”
State Rep. Hugh Shine (R-Temple) suggested it may even constitute an underwriter violation, describing TANs as “purely a cash flow instrument.”
“I have never heard of any entity in the municipal bond arena that has issued TANs for the purpose of coming around and financing them with some other form of indebtedness,” Shine added. “That’s, number one, not the intent, and I would think would be a violation of the covenant with the underwriter.”
“To me, there’s all kinds of red flags that go up on this deal. And my message to any municipality out there that’s thinking of pulling this stunt, I think they better be on guard because that’s something the [Attorney General’s Office] would be on top of pretty quick.”
Chairman Morgan Meyer (R-Dallas) told the committee, “Regardless of the outcome of [this] lawsuit, we are certainly going to address this issue [next session].”
“[Amarillo officials] tried to exploit a loophole and tried to go around a law that was passed and signed by the governor to explicitly make sure the voters had a say — and that cannot stand,” Meyer added. “Thank you Mr. Fairly for accepting our invite, and that was the purpose to make sure you had a big platform to shine a light on this Amarillo issue.”
Last year, the Texas Legislature passed House Bill 1869, which curtailed the ability of localities to issue COs. Legislators set their sights on this method of debt issuance due to various outlandish stories of COs used to pay for a variety of inessential projects — such as Amarillo’s $8 million CO to pay for a water park.
Shortly after that bill’s passage, but before it became effective on September 1, 2021, the Amarillo City Council tried to approve a $35 million CO to pay for the relocation of its city hall. The effort was eventually put on hold after a petition drive secured enough signatures to place the debt proposal before voters. Last year’s issue and this project are related as the land on which the city hall sits is earmarked for construction of the civic center renovation.
According to Fairly, who was involved in that fight too, the city then pivoted to a TAN to finance the relocation — just as it’s done with the larger project here.
In his lawsuit, Fairly alleges that the city did not provide sufficient public notice, a would-be violation of state law, in addition to abusing the spirit of the purpose of TANs.
“It’s amazing that people who work for the public think they never have to tell anyone anything,” Fairly told The Texan, criticizing the city’s attempts to avoid deposition in the ongoing lawsuit.
Amarillo rejects these allegations, saying it provided sufficient public notice and that the process it underwent issuing the TAN adheres fully to what is prescribed in state code. “[T]here is no requirement that the Ordinance contain a specific amount of taxes to be levied, or even a bracket of potential rates,” the city’s brief states, responding to criticism about its agenda lacking any fiscal note.
Amarillo Mayor Ginger Nelson declined to comment on this story.
During the legal proceedings, Amarillo filed for a $6 million surety bond “in an amount sufficient to cover the increased costs to Amarillo taxpayers for delays [Fairly] has caused [with the suit].” After Texas Attorney General Ken Paxton recommended rejecting this request, the judge denied Amarillo’s appeal.
In the committee hearing, Meyer did not hold back in criticizing that request by the City of Amarillo, calling it “ludicrous.”
“I think we’ve touched a nerve in Amarillo,” Fairly said in the phone interview, adding that Amarillo residents are “done with this mentality at city hall that they’re going to do whatever they want.”
A trial hearing in the case is set for early October in Potter County. But regardless of the lawsuit’s outcome, legislators appear keen on closing yet another loophole found and used in the vast expanse of state code.
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Brad Johnson is a senior reporter for The Texan and an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.