CHICAGO — North Dakota public finance officials will halt all local general obligation bond deals conducted through the state starting Jan. 1 for at least the next six months as they await the outcome of a controversial measure to abolish property taxes.
The looming moratorium on local GO borrowing has sparked a small rush to market in December among governments that were planning to issue bonds to finance recovery efforts from last spring’s destructive floods or to finance new school buildings to accommodate a spike in enrollment prompted by the state’s oil boom.
Residents will head to the polls June 12 to weigh in on Measure 2, which would eliminate property taxes and require the state to replace the revenue. A group called Empower the Taxpayer initiated the resolution and gathered nearly 30,000 signatures to get the proposed constitutional amendment on the ballot.
The state attorney general recently ruled that the measure, if passed, would be retroactively effective as of Jan. 1, 2012, a decision that prompted state public finance officials to put the red light on issuing bonds backed by GO pledges from local subdivisions until at least next June. Many local borrowers that go to market on their own are also planning to suspend GO deals during the “grey period.”
North Dakota would be the first state to abolish property taxes, and the implications would be significant, market participants and state officials said.
“It’s going to disrupt public finance for decades if this measure passes,” said Terry Traynor, assistant director of the North Dakota Association of Counties, which is opposed to the issue. The association has recommended that counties halt GO issuances until the referendum.
Property taxes generate $800 million annually. Counties rely on the revenue for about 60% of their general fund budgets. Other local units, including cities and school districts, rely on the revenue for anywhere from 25% to 75% of their operating revenue.
The measure, if passed, would prohibit political subdivisions from issuing GO bonds.
Outstanding property-tax backed debt, however, would likely be treated as a contract under the state constitution and continue to be paid, according to attorneys who work for the Legislature, which has held a series of hearings on the potential fiscal impact of the measure. That means local units could maintain a sufficient property tax levy to pay debt service for the life of a unit’s outstanding debt, counsel said.
Two weeks ago, the North Dakota Public Finance Authority said it would no longer allow political subdivisions to issue GO bonds after Dec. 31 until the results of the June election are known.
“We see this as the first domino to fall in Measure 2,” Traynor said of the authority’s announcement. “We aren’t even close to the election yet, and it’s already disrupting what we need to do.”
The authority made the policy decision after the North Dakota Industrial Commission, which oversees nearly all state agencies, including the Bank of North Dakota, adopted a resolution Nov. 21 to not accept GO bonds from local political subdivisions during the “grey period” between Jan. 1 and June 12, 2012, according to DeAnn Ament, the PFA’s executive director.
The three-member commission is made up of Gov. Jack Dalrymple, Attorney General Wayne Stenehjam, and agriculture commissioner Doug Goehring. Ament recommended the resolution to the commission.
“To me, it was good public practice to make sure we had secure debt,” Ament said.
For the finance authority, the borrowers most affected are the local units that were planning to issue bonds to finance local matches for federal disaster grants in the wake of this summer’s devastating floods. Unless they come to market within the month, those borrowers will have few ways to come up with the money, Ament said.
“If they don’t have that money set aside to be able to pay their local share, those that need to borrow will be unable to do so,” Ament said. “It’s not clear if GO bonds will be in existence in North Dakota at the local or county level. I don’t even know what kind or form of bond we’d come up with.
“People need to know that implementation of something like this is not going to be easy, and it will not be overnight,” she said. “Heaven forbid we have another disaster next spring.”
School districts represent another group of affected borrowers as they grapple with enrollment spikes because of the state’s rising population, particularly in the western counties, the heart of the oil boom.
At least four school districts are planning to come to market this month to beat the Jan. 1 deadline, according to market participants.
“We’re hoping that it will fall on its face,” Jerry Coleman, director of school finance for the North Dakota Department of Public Instruction, said of the property tax abolition measure. “But if it doesn’t, it will mean an upheaval for the way we do business here.”
Among the most controversial aspects of the measure is the provision requiring the Legislature to replace the revenue, which is estimated at $800 million annually.
The measure lists several revenue sources the state would be able to tap for replacement dollars, including state sales taxes, individual and corporate income taxes, oil and gas production and extraction taxes, tobacco taxes, lottery revenues, financial institutions taxes, and other resources.
Lawmakers — most of whom appear opposed to the measure — will hold off considering new revenue until after the election, according to Sen. Dwight Cook, R-Mandan, who chairs the Senate Finance Committee.
Cook pointed out that the retroactive nature of the measure means that local governments would be deprived of six months’ worth of revenue that they had expected to see in 2012.
“If this passes, the Legislature will have to immediately go into special session to start finding the revenue streams that would be necessary to replace the revenue,” Cook said. “The Legislature would have to determine to what degree these taxes are used, raised, and determine some sort of formula to send this money out.”
The senator predicted a flurry of lawsuits from local governments and other affected entities, and said the measure would spawn a host of other unintended consequences.
“The worst thing about this whole thing is that the Legislature would have to approve every local subdivision’s budget,” Cook said, noting that state revenue would replace local revenue. “If a school district wanted a new school building, they would have to come to the Legislature.”
The drop in revenue and lack of local tax stream to back bonds could also pressure local governments’ ratings, said Moody’s Investors Service analyst Katie Gregory.
“Will the property tax revenue that cities rely on be replaced by other revenue, or will it be a potential pressure on operations?” Gregory said. “That’s an unknown right now, so it’s something we’ll be watching really closely. It could pressure operations for some entities.”
Proponents of the property tax abolition measure noted that North Dakota is enjoying the largest and most lucrative oil boom in its history, which is expected to generate $682 million through 2013 for the current two-year budget that totals $9.9 billion.
The elimination of property taxes will put $800 million back in the pockets of residents, free up dollars now spent on tax assessors, and raise the value of homes by shifting to a market-value based system from taxable property, they said.
But critics like Cook say the oil boom is generating false security. “They look at that money as the golden egg that’s going to pay for everything,” he said. “I can tell you the oil industry will come and go. Put a moratorium on fracking, and we’d be broke in six months.”
The federal Environmental Protection Agency is considering regulating the practice of so-called hydraulic fracking, which is how nearly all of the North Dakota industry extracts its oil.
The state has vowed to go to court over the matter, and last month passed a bill that sets aside $1 million for a possible lawsuit.
A coalition of powerful business groups, including the North Dakota Chamber of Commerce, will launch a major campaign early next year urging voters to reject the measure.
“If I had a crystal ball, I would say I don’t think it’s going to pass,” Cook said. “But I get awful nervous when I think about voters being asked if they want property taxes to be eliminated.”