DENVER -- A ong-awaited court decision on whether to allow a Colorado school district to raise taxes without voter approval included both a yes and no answer, with appeals likely on both sides.
Arapahoe County district Judge Kenneth Stuart disallowed Littleton, Colo., School District's 2 mill tax increase to raise $1.2 million for asbestos removal mandated by federal law. He held that the increase violated the state constitution's Amendment 1, which requires a popular vote before any tax rise that exceeds the inflation rate.
However, Stuart upheld a district tax increase offset budget deficits caused by decreased valuations of property within the district. The judge wrote that Amendment 1 impaired an existing contract -- the district's bond indentures.
The tax increases allowed by the judge totaled $1.5 million. The funds will be used to repay debt service of $5 million this year, instead of taking that money out of the $100 million operating budget.
Amendment 1 author Douglas Bruce said he would appeal Stuart's decision. The Littleton School District board has yet to vote on whether to appeal, but school officials said they will likely appeal.
The case is being closely watched by the industry because, market analysts say, it will show whether general obligation debt in Colorado should be considered a limited obligation given the necessity of voter approval on major tax increases. Moody's Investor Service has been the most aggressive rating agency on the subject, saying that until the courts rule, general obligation debt in Colorado will be considered limited obligations.
Since Amendment 1 passed in November 1992, Moody's has reviewed 40 credits, downgrading fewer than half. Exact numbers will be tallied in a report due later this month, said Moody's assistant regional director Dina Kennedy.
Kennedy warned that Moody's might not change its stance until appeals are satisfied. Moody's will issue a statement sometime before the end of the month.
"We have not yet had a chance to review the ruling," Kennedy said. "We are fully expecting there will be an appeal. Although the decision appears to be a move in the right direction as far as bond holders are concerned, we don't yet know what our response to the judgment's going to be."
Secondary trading in Colorado issues reflected indifference to the ruling, said Kemper Securities analyst Richard Haber.
"Trading went as most market players anticipated. If it went the other way, all hell would have broken loose," Haber said.
Haber said if the ruling stands in higher courts, which he believes it will, debt issued before Amendment 1 will be considered unlimited general obligations. Debt issued after Amendment 1 will be considered limited obligations and be rated on that basis, he said.
If Littleton loses the $1.2 million increase for asbestos abatement, the district will have to refund the taxes collected from property owners. The district will aso have to pay 10% interest and all the legal fees in the case, which to date total about $100,000.
Amendment 1 says that if there is a shortfall caused by lowered property value assessments, the district or local government can only raise the mill levy if debt service surpasses the operating budget, Bruce said. If the district is short, it must take the money out of the operating budget and cut expenses elsewhere, Bruce said.
"We are going to appeal," Bruce said. "The judge is just wrong. What he says is nonsense."
Bruce likened the situation to the individual whose car breaks down and must sacrifice other spending in order to repair the car. He said the same should be true for Littleton, which was hurt by property owners who successfully fought their assessed valuations in property court, therefore leaving the school district with less than anticipated revenues.
"Welcome to the real world," Bruce said. "Whenever expenses go up, they say taxes have to go up. We're not telling them how to spend it. If they choose to have debts, they will pay debts out of the existing revenue source."
But Dain Bosworth Inc. analyst Rudy Andras, whose firm is helping defend the school district, countered that Amendment 1 promised not to cut governmental revenues, just limit tax increases.
"Amendment 1 set up an inherent conflict that they would have to steal from the operating fund to pay debt service," Andras said.
The Cherry Creek, Adams County No. 12, and Aurora school districts are in situations similar to that of Littleton, Andras said.