DALLAS — Colorado will take bids on $230 million of education-tax revenue anticipation notes Tuesday as the legislature prepares to consider a steadily improving economy and unresolved litigation over school funding.
The competitive sale through financial advisor RBC Capital Markets is scheduled for 11 a.m. Eastern time in Denver. Kutak Rock serves as bond counsel. The deal is the largest competitive issue of the week for bonds or notes, according to Thomson Reuters.
The notes, designed to cover gaps in state revenue pledged to local school districts, will feature average maturities of five months and 16 days, according to preliminary data.
Colorado last issued $100 million of education Trans on July 14, 2011. Those notes, maturing on June 29, provided interest-free loans to 10 school districts.
The 2012 notes carry top ratings of SP-1-plus from Standard & Poor’s and MIG 1 from Moody’s Investors Service. Fitch Ratings does not rate the debt.
“The ratings reflect what we view as the state’s large pool of investments, which serve as backup liquidity for the notes in the event that the primary source of security — several pledges from a pool of school district borrowers for note principal and a pledge of state general fund monies for note interest — is insufficient to repay the notes,” S&P analyst David Hitchcock wrote.
Moody’s analyst Patrick Liberatore noted that his agency’s rating “also incorporates the strong overall credit quality of the rated participants, which mitigates the expected concentration risk from the largest borrowers as well as the anticipated high leveraging of pledged receipts by a few of the participating districts.”
Three school districts — Denver, Boulder Valley and Cherry Creek — are expected to account for more than 19% of the loans from the 2011 and 2012 notes, according to the preliminary official statement. Those districts are all in Denver or its suburbs.
Local school districts, which have faced intense budget pressure from state budget cuts and voter resistance to tax overrides, are now engaged in a court case that could have major ramifications for school finance in the state.
In the first ruling since litigation was consolidated under the heading Lobato v. State of Colorado in 2005, Denver State District Court Judge Sheila Rappaport ruled last month that Colorado’s school funding formula is unconstitutional.
“The uncontested evidence establishes that the Public School Finance Act statewide base per-pupil funding and factors created in 1994 and as adjusted every year since then are not now and have never been rationally related to the costs of providing the educational services mandated by the standards-based education system or any other measure of educational quality,” the court ruled.
Gov. John Hickenlooper, a Democrat who was elected to office in November 2010, announced plans to appeal the ruling.
“A final resolution of the constitutional and legal issues involved in the case require an appeal to the Colorado Supreme Court,” Hickenlooper said in a prepared statement. “The judge’s decision provided little practical guidance on how the state should fund a 'thorough and uniform’ system.”
Lead plaintiff’s attorney Kathleen Gephardt, whose nonprofit law center Children’s Voices represented 21 school districts, said she was disappointed in Hickenlooper’s decision to appeal the verdict and called on lawmakers to address the funding issues in the legislative session that begins Wednesday.
“We continue to invite the state to a robust discussion on how we solve this funding emergency, which will not change as long as the current funding system is in place,” Gebhardt said after the governor announced the appeal. “Significantly absent from Gov. Hickenlooper’s comments is any defense of the current system.”
Hickenlooper acknowledged that “there are more appropriate venues for a rigorous and informed public debate” than the court system, but the appeal is likely to keep any legislative action on hold.
“We look forward to a swift decision in this case so the people of Colorado and their elected representatives can participate in the school funding conversation,” he said.
The decision to appeal the ruling came after Hickenlooper announced that he would ask lawmakers to restore $89 million in education funding this year based on higher than anticipated state revenue.
Budget officials said revenue for fiscal 2013 is on track to come in at $231 million above projections.
Colorado is limited in how it allocates funds by constitutional provisions that include the Taxpayer Bill of Rights, or TABOR, requiring that any tax hike in Colorado must be approved by voters. An initiative presented to voters last November seeking to raise taxes to fund education failed in a landslide.
With a more optimistic view of revenues than he saw in his first state of the state address last year, Hickenlooper will address lawmakers on Thursday, a day after the General Assembly’s 2012 session opens.
In a letter last week to the legislature’s Joint Budget Committee chairwoman Cheri Gerou, Hickenlooper estimated that general fund revenues for the current fiscal year would be 3.2% higher than estimates in September.
“While the additional revenue reflects a welcome improvement in the economy in recent months, growth overall is still modest, and our modified budget reflects cautious optimism,” Hickenlooper wrote.
For the fiscal year ending June 30, 2012, state economists originally forecast a general-fund fiscal end reserve equal to 4% of appropriations.
However, the state’s quarterly forecast in December projects a 7% fiscal end reserve.
Colorado carries an issuer credit rating of AA from Standard & Poor’s and Aa1 from Moody’s, both with stable outlooks. In a report last week, S&P said states will see an average revenue increase of 5.6% in the third quarter of 2011.
“Despite a steady pace of economic recovery for most states through the first two quarters of fiscal 2012, we believe that economic prospects and federal fiscal consolidation present significant uncertainty that could translate into continued budget austerity,” Standard & Poor’s analysts wrote.
