The Role of the BUDGET and LEADERSHIP. in Addressing STATEWIDE BALLOT ISSUES BY BOB EICHEM

Transcription

1 The Role of the BUDGET and LEADERSHIP in Addressing STATEWIDE BALLOT ISSUES BY BOB EICHEM

2 Government finance departments have their hands full most of the time, but occasionally, a project comes along that is so important it becomes larger than any one organization. In early 2010, the City of Boulder, Colorado, took on such an assignment when its city manager asked for a white paper on three citizen-initiated tax issues that would be on the state ballot in November The initiatives two proposed state constitutional amendments and one proposition that would change state law had only recently hit the radar screen, and little was known about their local or statewide impact other than that they could potentially reduce tax revenues. Little did anyone realize what lay in store when the department started its analysis; this would be one of those times when it was absolutely necessary for the finance department to take a primary leadership role. held that these were not considered debt if they included an annual non-appropriation clause. Overall, some citizens felt that several of the court decisions had eroded the original meaning and purpose of TABOR, and many others thought the court rulings were correct and had appropriately clarified the language. While TABOR has been challenging for taxing entities in Colorado, each jurisdiction has the ability to ask its voters for permission to opt out of the revenue restrictions. In many cases, the voters across the state have approved such ballots. Some opt-outs had sunset dates and others did not. The three 2010 proposals would apply to all governmental entities in the state, regardless of what provisions voters in those jurisdictions had previously passed; there was no safe haven from the impact of these measures. PUTTING THE PROPOSALS IN PERSPECTIVE Colorado s requirements for citizeninitiated amendments to the state constitution are less stringent than those of many other states, so initiatives commonly appear on the statewide ballot. The 2010 initiatives were unusual because rather than presenting just one revenue issue, they contained multiple issues that would have financial impacts on all levels of government in the state. The state has had a constitutional amendment called the Taxpayer Bill of Rights (TABOR) in place since TABOR, which was brought forward as a citizen initiative and approved by the voters, requires that any tax increase or debt issue that will be paid off over multiple years by a taxing entity be voted on by the registered voters of the appropriate government, state or local. Enterprise operations that receive 90 percent of their revenues from fees can issue revenue bonds without a vote. Due to vagaries of the TABOR ballot language, the courts have needed to decide numerous aspects of the law. For instance, TABOR did not clarify the roles of certificates of participation (where individuals buy shares of the lease revenues rather than the bond being secured by those revenues) and capital leases, and the Colorado Supreme Court later Little did anyone realize what lay in store when the department started its analysis of the ballot initiatives; this would be one of those times when it was absolutely necessary for the finance department to take a primary leadership role. WHAT THE FINANCE STAFF DETERMINED The Boulder finance department analyzed the three proposed measures and came to the conclusions below. Proposition 101. This proposal would reduce transportation taxes and fees to 1919 levels and eliminate all telecommunication taxes. All other state and local taxes except those listed in the proposition would cease; any other charges would be considered taxes and could not be implemented until they were voted on. The major impact would be on fees charged for growth and governmental services. Amendment 60. This proposal would reduce property taxes to lower than 1992 levels, while imposing new and additional tax limitations on local and state governments. This meant that all the court cases that had been decided against TABOR would be reversed, and the amendment would further restrict what local governments could do to pass exemptions on TABOR limits. Amendment 60 s effects would have included: a sunset provision on all previous ballot issues that had passed measures to bypass TABOR restrictions; a four-year maximum limitation on future property tax opt-outs of TABOR; and a 10-year limitation on the duration of new property tax increases. Enterprise funds and authorities would have to pay taxes to all taxing entities they were part April 2012 Government Finance Review 41

3 of. Electors who owned property within a taxing entity would be able to vote on any property tax change, even if they did not live within the boundaries of the entity. Proposed tax increases that were passed would have to state how much money the proposal would bring in annually, and if revenues in any year exceeded that amount, the difference would have to be refunded. The changes in Amendment 60 also had a hidden impact that would change the way government services were funded. When enterprises and authorities began to pay taxes, the receiving tax entity would have to reduce its current tax revenues by the same amount received. For example, if a city s water fund had to pay property tax of $1 million to the city (as opposed to making no payment, as there was no payment in lieu of taxes), then the city s general fund would have to reduce its property tax or other tax revenues by $1 million. This meant that the increased water rates caused by the tax would be passed on to the school districts, counties, federal laboratories in the city boundaries, and all non-profit users of the water system. However, none of these entities would see a corresponding reduction in their tax bills because they did not pay property taxes. At the same time, commercial and industrial businesses in the city limits would see an increase in their water rates, but they would also receive a much larger reduction in their property tax rates. Amendment 61. This amendment would prohibit any borrowing (as the amendment was worded) by state government in other words, bonds, leases, and perhaps purchasing or credit cards and voters would not be able to give the state that right through a statewide election. Any type of borrowing or refunding would have to be approved by the voters, and when any borrowing was paid off, taxes would have to be reduced by the amount of the average annual payments on the borrowing. This would also apply to any borrowing that was not paid off by a tax increase. The maximum timeframe for borrowing would be ten years (the longest period that could be approved diverse. by voters), and the maximum amount that could be borrowed was 10 percent of the assessed taxable value of The complexity of the undertaking was not in the development or use of the templates, but in the originality and innovation needed to develop a template that could be used by any type of government in the state, as funding and revenues streams may be quite One proposal would have reduced transportation taxes and fees to 1919 levels and eliminated all telecommunication taxes. One amendment would have reduced property taxes to lower-than 1992 levels, while imposing new and additional tax limitations on local and state governments; the other would have prohibited any borrowing (as the amendment was worded) by state government in other words, bonds, leases, and perhaps purchasing or credit cards. real property in the jurisdiction (the limits at the time were 3 percent of actual assessed value of real property). The Bell Policy Center, a Colorado think tank, provided an example of the impact in its preliminary analysis of Amendment 61. Under law at the time, Arapahoe County was able to borrow about $1.9 billion, and the amendment would reduce that amount to approximately $780 million. The 10 percent limit meant several of the school districts in the state would already be over the limit and would not be able to issue any additional debt until the amount outstanding fell below the 10 percent limit. If the amendment were to be approved by the voters, some of its effects would take place in the calendar year following the vote (within two months), and some would be phased in over a three-year period. The City of Boulder would face an estimated $21.8 million drop in revenue in the first year and $25.5 million by year three decreases of 15 to 17 percent. The recessions that hit the state hard in 2001 and 2008 had already decreased budgets radically, and the economy had not recovered to 2000 pre-recession levels. Therefore, if any of the ballot proposals passed, major additional budget reductions would be required, and they would have to occur within a few weeks of when the measure passed. SHARING INFORMATION AND RESOURCES The city shared its analysis of the ballot measures with the city council in early 2010, and the city manager also shared the information with her 42 Government Finance Review April 2012

4 peers around the state. Finance staff contacted the Colorado Municipal League (CML) to relay the findings and volunteer to help if any local government input was needed, and CML set up a working group and asked if the Colorado Government Finance Officers Association (CGFOA) would want to be involved. Boulder staff then contacted the CGFOA board, which concluded that it would be helpful to develop a financial template that entities across the state could use. Since the Boulder staff was further along in its analysis process than many other entities, they offered to create the standardized templates, the design of which was completed in conjunction with CML. (See Exhibit 1.) Testing was done by several finance officers from different types of local governments in the state. The goal was to provide local governments, special districts, and authorities statewide with a consistent method for analyzing the impact of the three statewide initiatives. At the first meeting of the working group, CML, CGFOA board members, and City of Boulder employees met, along with approximately 60 interested individuals, to clarify the impacts of the measures, gain a common understanding of the terminology, and explain how the templates could be used, from both a technical and communications standpoint. The templates were distributed statewide through CGFOA, CML, and CML s counterparts such as the Colorado Association of School Boards, Colorado Counties Inc, and the Colorado Special Districts Association, and newsletter articles explained how to use them. The working group also created a qualitative tool to gather information on the impact the measures would have on services and programs around the state. CML headed up the coalition of local government interests by organizing several dozen meetings over the months leading up to the election, attracting hundreds of elected officials, who were trained to localize and personalize the impacts. In partnership with CGFOA, the league co-sponsored a series of technical workshops to help finance personnel understand the specific details of the measures and analyze fiscal effects on individual local governments. Once the statewide impact of the measures was quantified, it was clear that they would reduce budgets by billions of dollars. Local governments were facing estimated average revenue reductions of 10 to 20 percent. Once the statewide impact of the measures was quantified, it was clear that they would reduce budgets by billions of dollars. Local governments were facing estimated average revenue reductions of 10 to 20 percent. The Colorado Department of Transportation determined the measures would lead to a nearly 26 percent reduction in revenues, and distributions to local governments from the gasoline tax would be reduced by nearly 38 percent. The impact on the state government was estimated at $2.1 billion annually. Under state law, when ballot language becomes final, government employees are not allowed to comment on the measure and can only provide factual information that was already available for distribution. The information from the technical analysis and templates was distributed widely, and CML continued to provide a lead role. Numerous private institutions and non-profit organizations around the state stepped to the forefront to provide opportunities for ongoing dialog and polling data. COST AND COMPLEXITY All the technical work to design and finalize the templates was originated and completed by City of Boulder finance staff. The chief financial officer, deputy director, and budget analysis manager each designed and tested one of the three templates. Finance staff members from other entities in the state tested the combined templates before they were released statewide. The amount of staff time spent developing the templates was approximately 40 hours, including in-house testing. It took approximately 30 more hours to answer start-up questions from those doing the testing around the state. The complexity of the undertaking was not in the development or use of the templates, as the actual spreadsheets were not unique. It was in the originality and innovation needed to develop a template that could be used by any type of government in the state, as funding and revenues streams may be quite diverse. The finance department took great pride in rising to the occasion and helping with this important effort. April 2012 Government Finance Review 43

5 Exhibit 1: Template for Determining the Fiscal Impact of Amendment 61 10% LIMITATION OF DEBT Except for enterprises, the borrowing limit total of all borrowings issued will not exceed 10% of the assessed taxable value of the real property in the jurisdiction. This limit is not just for the amount of bonds. It is a limit that applies to all kinds of debt and borrowing and the 10% limit is of assessed real property. Therefore, it does not include the personal property portion of assessed valuation (which can be obtained from the abstract of assessment for your entity). The amount of personal property varies widely for each local government entity. Total assessed valuation Less assessed valuation that is not for real property Assessed valuation on real property $ - 10% of assessed value on real property $ - Total amount of all borrowing outstanding at this time (do not include enterprises) Difference over (under) maximum 10% limit $ - REQUIRED REDUCTION OF TAX RATES Except for enterprise borrowing, when a borrowing is repaid, tax rates must decline in an amount equal to the average of the annual payment that was made to pay off the borrowing. Therefore, you will need to know both the total amount of borrowings per year and the average annual debt service. This includes all types of borrowings (bonds, tax anticipation notes, certificates of participation, other short-term leases, revenue bonds, or any other type of borrowing no matter the length of time outstanding) that are not tied to a tax that will end when the debt will be paid off Base Year Outstanding Debt Total outstanding for the borrowings not paid by a tax that ends when the debt is paid off. Average annual borrowing debt service for the borrowings not paid by a tax that ends when the debt is paid off. Amount that taxes of some type will have to be reduced $ - $ - $ - $ - when the borrowing is paid off. DEBT TERM LIMIT OF 10 YEARS In the following calculator, enter the estimated amount you intend to borrow in 2011 and enter your interest rates for a 10-year issue and a 20-year issue, if known. The formulas in this example use level amortization and default interest rates of 3.45% for a10-year term and 4.2% for a 20-year term for a AA rated bond. For a more customized calculation, contact your financial advisor to obtain your specific borrowing rates. While a 10-year term will reduce the total amount of interest paid when compared to a 20-year term, it will also mean higher cash flows will be needed to make the higher payments. This calculator will help you estimate the potential impact on your budget of these increases in debt (borrowing) service requirements resulting from this decrease in the maturity of the borrowing. Estimated amount your entity plans to borrow in the coming year Interest rate over 10 years (enter your own or leave blank) 3.45% Interest rate over 20 years (enter your own or leave blank) 4.20% Average 10-year debt (borrowing) service, level amortization $ - Average increase in debt (borrowing) service cash flow per year $ - This spreadsheet is protected to prevent unintended modification of formulas. However, the sheet is not password protected so users can deactivate the cell protection as needed. In Excel 2002, protection can be found under the tools menu. 44 Government Finance Review April 2012

6 CONCLUSIONS The templates and the work done on the initiatives proved beneficial for a number of reasons. In bond rating calls with the rating agencies, Boulder finance officials were able to use this information to summarize what was going on locally and at the state level in a concise and straightforward manner, and convey contingency plans for dealing with any reductions. When contacted by members of the media who were interested in the impact of the initiatives, the department could say how the information was gathered and explain that the methodology was consistent across the state. Some entities also used the information to prepare contingency budgets in case any or all of the initiatives passed. The two proposed constitutional amendments were defeated by a margin of nearly 3 to 1, and the proposition was defeated by over 2 to 1. The government finance officials in Colorado who stepped to the forefront to lead and inform their elected policymakers, appointed officials, and voters about the impact of these initiatives have much to be proud of. You never know when the next project that comes in the door may be the one that requires you to step forward to take a strong leadership role. Training classes through GFOA, networking with your peers, developing staff members, and implementing best practices are all ways to be ready when the time comes. y BOB EICHEM is chief finance officer of the City of Boulder and a member of the Government Finance Officers Association Executive Board. He can be contacted at eichemb@bouldercolorado.gov. April 2012 Government Finance Review 45