DALLAS - Standard & Poor's Corp. yesterday became the latest analysts to warn that a proposed tax and spending limitation before Colorado voters on Nov. 3 could be bad news for general obligation debt issuers.
Todd Whitestone, managing director at Standard & Poor's Corp., said that by limiting spending, taxes, revenues, and debt, the so-called Taxpayers Bill of Rights would create a one-size-fits-all plan for every governmental entity in Colorado.
"It's very rare to have a measure that covers all the four angles as this one does," he said in an interview on Friday. "It applies one set of rules for how to govern, and I think you're going to see winners and losers. We see long-term negative problems, but we don't think it will be universal."
Moody's Investors Service has also cautioned investors about the proposed constitutional amendment, which has a two-to-one margin of support in polls.
The proposal's author, Colorado Springs lawyer-landlord Douglas Bruce, said yesterday that the rating agencies are uninformed.
"Every time local voters want different spending limits, they can approve them under this amendment," he said.
In yesterday's edition of Credit Week Municipal, Whitestone says the amendment appears less stringent than the seven previous tax-limitation plans voters have rejected over the past two decades. However, he warns that the measure would likely have a long-term negative effect on local GO ratings.
"This imposition of spending, tax, and revenue limits could create serious imbalances between needs and resources," Standard & Poor's wrote. "Municipalities would be less able to react to changing circumstances and have to go to the voters on a host of issues."
Further, he writes that state officials will be less able to help local agencies the way California stepped in following the passage of the tax-cutting Proposition 13. The assistance and strong economic growth helped local governments deal with new limits in that state.
"I don't think you're going to see any cushioning of this," he said. "There's not going to be any help from the state because even though Colorado is doing well, it has its own problems."
The proposed amendment would limit the growth of government spending and taxes to a formula based on several economic factors, including population growth. Local taxpayers could vote to exceed the limits.
The measure would also require majority voter approval of all multiyear debt, including revenue and off-balance sheet securities that now do not require an election.
Whitestone said he does not believe the amendment would affect traditional revenue bonds, such as those sold for sewers or airports, because it would affect only enterprises that are government-owned businesses, are authorized to issue their own revenue bonds, and that receive less than 10% of their annual revenues from state and local grants.
"It is unclear what legally constitutes a government-owned business and whether the enterprise must have authority to issue revenue debt separate from that of the general government," he wrote.
Another key will be in determining whether the legal definition of a grant includes government payment for services. If so, he said, many issues rated by Standard & Poor's could be affected.
However, the agency advices that issues not affected by the constitutional amendment include bonds with ratings based on escrowed securities, any credit enhancement, housing issues, excise and sales tax bonds, and private nonprofit hospitals and university ratings.
Because the amendment requires virtually every obligation with a maturity beyond one-year to be approved by voters, Standard & Poor's said the measure could cause a vote for even traditional vendor leases for items such as copying machines.
Bruce said that was unlikely, though he agreed that a traditional equipment lease can exceed one year only if the government already has funds on hand.
"What they are saying isn't an interpretation, it's an outright distortion," he said. "What we're trying to do is have government on pay-as-you-go basis."
Like others who have studied the impact of the amendment, Whitestone predicted that local governments will have to change the way they do business if the measure becomes law.
"I think they can live with it, but this will constrain them and make things more difficult," he said. "It's going to make it much more difficult to provide the kinds of services people in Colorado are accustomed to."
Like Standard & Poor's and Moody's, Kemper Securities Group Inc., which operates in the state, has cautioned against the impact Bruce's amendment would have. While Fitch Investors Service does not plan a formal statement on the issue, the agency's recent Colorado ratings included a discussion of the impact th amendment could have if ratified.
"There's a lot of legal vagueness in it," said Amy S. Doppelt, a senior vice president at Fitch. "It's hard to say how it's going to play out, but clearly it's not a positive thing."
