CHICAGO -- Limited tax general obligation bonds are constitutional in Michigan, but they have been abused by some local governments, according to a recent report on compliance with the so-called Headlee Amendment to the Michigan Constitution.
The report, by the Headlee Blue Ribbon Commission appointed in 1993 by Gov. John Engler, recommended that the governments' use of limited tax GOs be restricted.
Limited tax debt was one of several issues examined by the commission, which also looked at local taxes, user fees, and other issues that fall under the 1978 amendment to the state constitution.
For years, limited tax debt has been the subject of unsuccessful lawsuits by taxpayers groups charging that the bonds violated the constitution and were merely a way for governments to avoid voter approval. Under the Headlee Amendment, all unlimited tax GO debt must be approved by voters.
However, municipal bond industry participants in the state have argued that limited tax bonds, unlike unlimited tax bonds, do not need voter approval because they do not require a government to increase taxes to pay for debt service. With limited tax bonds, only a government's existing revenues are pledged to pay off bonds.
Michigan chief deputy treasurer Nick Khouri, who worked with the commission, said that while a majority of the 12-member group felt that the debt practice is legal, the panel found that there have been abuses in areas such as disclosure.
Khouri said that on some official statements he has seen, it was "difficult to determine if the bonds are limited obligation bonds and not GO bonds."
Patrick Anderson, a deputy state budget director who served on the commission, also pointed to situations in which school districts turned to issuing limited tax debt for projects after voters turned down referendums to issue unlimited tax debt. Anderson wrote a minority opinion in the report asserting that limited-tax GO bonding is a creation of bond attorneys and violates the constitution.
The report recommends that the issuance of limited tax bonds be restricted to the "acquisition of tangible property" and not be used to fund operating expenses or fund services. It also calls for limiting the maturity of the bonds to the life of the tangible property that the bonds are funding and capping the amount of unvoted debt a government can have outstanding.
While most municipal bond professionals contacted in Michigan had not seen the report, they expressed relief that the commission sanctioned the use of limited tax bonds.
William Danhof, a bond attorney at Miller. Canfield, Paddock and Stone, said the practice of issuing limited-tax GOs is important because it lowers the cost of borrowing for local governments. He said that most governments already follow the restrictions called for in the report.
The report also took up the issue of taxes and user fees, recommending that the Michigan legislature make specific distinctions between the two to prevent governments from levying so-called mandatory user fees. The commission also called on the legislature to require retroactive local voter approval of a 1987 airport parking excise tax in Wayne County and certain hotel-motel taxes that were enacted by the state.
Engler appointed the Headlee Commission by executive order in February 1993. In his order, the governor pointed to "significant questions and legal challenges" that had arisen since 1978 concerning the Headlee Amendment's "scope, mandates, and implementation."
Earlier this month, Engler embraced most of the recommendations in the report and asked the state's treasurer, budget director, legal counsel to the governor's office, and legislative leaders to work on administrative and legislative responses to them.
House co-speaker Paul Hillegonds, R-Holland, has already put in requests to draft bills addressing the recommendations, according to a spokeswoman.
A spokesman for Senate Majority Leader Dick Posthumus, R-Alto, said Posthumus had not yet reviewed the report.
Gary Wolfram, a former deputy state treasurer and now a professor at Hillsdale College in Michigan who chaired the commission, said the commission found that the amendment "generally works in limiting" state government and state government mandates to local governments. He said the commission's recommendations are meant to deal with perceptions people had about the amendment and to fine-tune compliance.
Rating agency officials said they will have to take a close look at the report and see if any of the recommendations are implemented.
Mitch Savader, a vice president in the Great Lakes region at Moody's Investors Service, said that if some of the recommendations are enacted, they would have implications for certain issuers in Michigan.
