DALLAS — Colorado voters could slam the door on public borrowing when they go to the polls in November, a possibility that has the bond community and government officials preparing for a worst-case scenario.
Three proposals that have been qualified for the ballot — amendments 60 and 61, and Proposition 101 — would curtail revenue and limit or forbid debt by all forms of government in the state. Proposition 61 would completely ban borrowing by the state, including tax and revenue anticipation notes that are used to smooth cash flows over the year.
“The general view of the bond community is that the passage of any of the three would be a disaster, and the passage of all three would be a tsunami,” said Dee Wisor, attorney and bond counsel at the Denver law firm Sherman & Howard.
If approved, the three proposals would amend the state constitution along the lines of the Taxpayer Bill of Rights that was pushed to passage in 1992 by tax reformer and former state legislator Douglas Bruce. However, the new amendments would go far beyond the restrictions of TABOR, which requires voter approval for local or state governments to retain any increases in tax revenue, even if it occurs without a a tax-rate increase.
In recent years, local governments and school districts have succeeded in winning “de-Brucing” elections that temporarily exempted them from TABOR provisions. However, Proposition 60 would overturn dozens of de-Brucing elections and set a four-year limit on the exemptions. Amendment 60 would also cut local mill levy property tax rates in half by 2020, set expiration dates for tax rate and revenue increases, and apply a 10-year limit on future property tax increases.
In addition to banning borrowing by the state — Colorado currently doesn’t issue general obligation bonds — Amendment 61 would require local governments to get voter approval for any loans and would limit debt maturities to 10 years.
Proposition 101 would take another deep revenue cut by ending all state and local taxes on vehicle rentals, specify that sales rebates are not taxable, cut vehicle fees to a maximum of $10 per year, phase in a $10,000 vehicle sales-tax exemption over four years, set the 2011 income tax rate at 4.5%, and require annual decreases.
The proposition would also repeal the state’s alternative minimum tax and specify that all added charges to telecommunication services apart from emergency 911 service are considered tax hikes.
With the threat of passage coming late in the year, government officials are making contingency plans for a sharp cut in revenue.
In Boulder, passage of the three proposals would cut revenue by $10 million, or 10%, according to finance director Bob Eichem. To cope with various scenarios based on some or all of the proposals passing, Eichem’s department is developing multiple budget contingencies.
“Certainly, we’re looking very carefully at this,” he said. “But we’re not panicking.”
Boulder will make its first disclosure about the implications of the potential new laws in a preliminary official statement for a $6 million storm-drainage refunding bond deal May 4. The city will also meet with rating agencies to lay out its contingency plans, Eichem said.
Under Amendment 61, refundings would require voter approval, even if they resulted in lower debt service.
Another provision would cost local governments tax revenue every time they paid off a revenue bond for a local project or enterprise. For example, if a city paid off a $1 million revenue bond for a parking garage, it would have to reduce its tax collections by that amount, even though no taxes were used to pay off the bond, Eichem said.
Amendment 60 would also require that only elected boards set tax increases. She said that would mean boards of business improvement districts and similar entities could not set rates. In cases where the city council serves as the board of a another government entity, the council might have to be elected to that secondary position before it could act, Eichem said.
Sherman & Howard has produced an analysis and Webinar for clients and others on how they might prepare for possible passage of the measures. Kutak Rock LLP, another law firm with a strong role in public finance, is also playing a leading role in advising its clients on the implications of the measures.
For example, issuers with strong interim financing should convert to permanent financing before the end of this year, according to Sherman & Howard. Those with bonds maturing next year should consider prepaying them this year or face a possible tax reduction in 2011.
Nonprofits or private issuers planning to use tax-exempt private-activity bonds should try to get deals done this year rather than waiting. Though private-activity bonds were considered exempt from TABOR limits, Amendment 61 could change that.
Marty Neilson, president of the Colorado Union of Taxpayers, which is promoting the proposals, says the threats to government are overstated and steep cuts to the schools are justified, considering the poor results schools have shown regarding student performance.
Though elected officials and those associated with public finance have warned of the implications of passage of the proposals, an ultra-conservative, anti-government movement is alive in Colorado. A recent Rasmussen poll showed that 18% of Colorado voters identify as Tea Party members, and 46% indicate they have positive views of the Tea Party movement, heavily promoted by Fox News and conservative radio talk shows.
Though no polls have reported on the likelihood of the proposals passing, Wisor says the tenor of the times is not encouraging for public finance.
“I think the worrisome thing about this is the whole national discussion about taxes and government by the Tea Party movement,” Wisor said. “It starts to feel a bit like 1992 to me, when TABOR passed. That’s when [former presidential candidate] Ross Perot was running his campaign against the federal deficit. Hopefully, voters will be a little more diligent this time.”
