DENVER - Colorado's sweeping tax and spending reform, Amendment 1, has just about killed the new-issue market in the state.
Dealers and underwriters are looking to the courts for relief, but the way things stand, 1994 could be a very difficult one for the industry.
And no one is happier about that than Amendment 1's author, Douglas Bruce, a former California prosecuter become landlord who lives in Colorado
"My goal is to see Colorado debt-free. Your readers can put that in their pipe and smoke it," Bruce said during a two-hour interview at the Denver Press Club.
Between 1990 and 1992, Colorado issuers brought $7.55 billion in new-money financings to market, according to Securities Data Co.
In 1993, the first year Amendment 1 was in effect, new-money issues totaled $249 million through November, with none of note afterward.
If not for $1.9 billion in refinancings. the industry centered on Denver's 17th Street would have been crippled. Higher rates and a slowdown in refinancings slow could give underwriters a very lean 1994. Much of the year will be spent sweating out key court decisions that will affect how local issuers conduct their business.
Issuers afraid of Amendment I went to market in droves in the second half of 1992, creating a bulge of offerings at the expense of 1993. But the big reasons for this year's slowdown, underwriters say, were Amendment 1's requirement that voters approve any new debt burdens and the threat of court challenges by Bruce and his supporters.
Even issues passed by voters in the 1993 fall elections are held up because of legal actions filed by Bruce's supporters. Joe Drew, an underwriter with Hanifen, Imhoff Inc. in Denver, points to 16 approved issues still in limbo because they need legal opinions. They include an $81 million bond issue passed by voters for schools in Douglas County, a fast-growing suburban area south of Denver.
The amendment told us people want to vote on tax increases. They did vote on Nov. 3, and their vote didn't count." Drew said.
Bond attorney's are waiting for a clear message from the courts. Any precedents set could be felt across the country: Bruce says 12 other states have similar movements. with proposals in Ohio and Washington most closely resembling the Colorado amendment.
So far, lower courts have favored issuers over Amendment 1. In one of the most closely watched cases. the Littleton School District voted to raise its mill levy because unexpectedly low assessed property values left district revenues behind projections. A Bruce supporter living in the district sued, citing Amendment 1's requirement that all tax or mill levy increases be approved by voters.
The lower court judge's ruling earlier this month allowed most but not all of the increase. The district must repay $1.2 million, plus 10% interest, that it spent on meeting federal asbestos removal mandates, but it can keep $1.5 million for bond payments.
Analysts and underwriters say that, pending appeal, the ruling settles the key question of "spending down." Amendment 1 says a local government has to exhaust, or spend down, all current revenues before it can raise taxes without a vote. But Arapahoe County District Judge Kenneth Stuart said that does not apply when money is needed for any obligations or programs in place before Amendment 1 was passed.
"The campaign materials prepared and distributed by the supporters of Amendment 1 stated that Amendment 1 would not lead to any loss of services," the judge wrote. "Contrary to those statements, those supporters intended that if assessed valuation decreased, the revenue to a district would also decrease and services would necessarily be cut."
Later the judge wrote in his ruling, "The evident public purpose of restraining the growth of government by holding taxes at their current level is not appropriately served by an amendment which either causes a reduction in government services or a default in public indebtedness- ... Restraining growth does not mean causing reduction and a reasonable restraint is one which is just and in harmony with existing law.""
Opponents of Amendment 1 were gratified. "It's not just my opinion that Amendment I was sold in a different manner than its author is trying to implement." said Hanifen Imhoff's Drew.
Bruce's answer is that there is nothing wrong with expecting government to cope: "Welcome to the real world. If your car breaks down on the way home, you have to adjust your budget somewhere else,."
But both Bruce and the bond community believe that the ruling cut against Amendment 1. That goes as well for a second closely watched case.
In November, Boulder city, county, and school voters approved bond issues. A Bruce supporter, Vern Bickel, chairman of the Colorado Union of Taxpayers, charged in a lawsuit that Boulder Valley School District improperly wording its successful $89 million debt issue.
Amendment 1 say ballot titles should have two votes: The first to ask voters whether they want to increase taxes and by how much; the second to incur the debt. Boulder schools made it one question. A lower court judge last week threw out Bickel's suit, saying that the two aspects of the question properly belonged together.
Bickel and other plaintiffs also argued that a separate election should be held because voters had not been asked to approve a mill levy increase. But the judge said the public effectively granted the mill increase by approving the debt and the tax increase.
"The fact is that at the last general election the voters gave their approval for a new tax, tax rate increase or mill levy above that for the prior year when they voted in favor of Ballot Question 1," District Court Judge Richard McClean wrote.
Appeals have been promised in both cases. Bond underwriters and issuers are hoping for expedited cases so they can get back to work later this year.
The Bruce Watch
"We pretty well refunded everything" in 1993, said Alex Brown, senior vice president of public finance in George K. Baum & Co.'s Denver office. "If we get on a fast judicial filing we may get more new issues in the second half of the year."
Colorado citizens appear to like Amendment 1 so far, so it's not likely to go away soon. The vote, for the Amendment was 54%. A recent Poll showed the popularity of the measure stands at 59%.
Bruce said Amendment I has "forced governments to change." Citing Littleton's attempt to pass on to the taxpayers the cost of federally imposed asbestos removal, Bruce said, "Now the governments are fighting themselves instead of ganging up on the taxpayer."
Bruce said he sees examples of governments changing their ways, pointing to a failed effort by Wills County to give three companies $500,000 tax breaks if they would locate there. And in Arapahoe County, employees drove their own cars to work, saving $10,000 a year, Bruce said.
Besides keeping a watch on spending and tax-collecting activities of governments, Bruce is gunning for more taxes, including:
* Denvers's cultural and arts sales tax.
* Two telephone and one cable television local tax.
* The state's specific ownership tax, otherwise known as the vehicle tax.
* The state's business property tax.
Bruce is also planning a major election reform campaign for next fall. The proposals include limiting campaign contributions to $50 and allowing only individuals to make them.
The state's bond industry is starting to believe it has to mobilize against Bruce, whom Drew calls "a fanatic." Drew believes the industry erred last time by sitting back and letting elected officials carry the fight.
Bruce said, "I am doing more good to the taxpayers of Colorado than all the elected officials, government regulations, and laws and taxing districts have done since statehood."
Rudy Andras, a local government analyst with Dain Bosworth Inc. in Denver, said Bruce is shooting at the wrong target. He said Bruce ignores statistics that show state and local government tax burden as a ratio to personal income in Colorado has been level at 10.2% for 30 years while federal taxes have increased.
"It's really a question of is 10% of state and local taxes too much?" Andras asked.
Bruce noted anti-Amendment I campaign contributions by the bond industry, calling the industry's actions "reprehensible, immoral. They wanted to retain the power to put people into debt without their permission."
Bruce allowed that he and his cause are motivated by a distrust of elected officials.
Commented Drew: "Ameadment 1 is the first step toward getting rid of representative government in Colorado. It takes decision-making power away from politicians."
Bruce's answer: "It's all part of a repeal campaign and it's going to fall flat on its face. I'm not against representative government. I just wish we had some."
The Amendment in Question
The following are salient features of Colorado's Amendment 1, the county's first revenue and spending limitations measure. Also known as the Taxpayer's Bill of Rights, the measure that Colorado voters passed in 1992 has inspired similar efforts in at least 12 other states.
* Voter approval of any tax increase: "Districts must have voter approval in advance for any new tax, tax rate increase, mill levy above that for the prior year, valuation for assessment ratio increase for a property class or extension of an expiring tax or a tax policy change directly causing a net tax revenue gain to any district," the amendment reads.
Voters can be held only in state general elections, biennial local district elections, or on the first Tuesday of November in odd-numbered years.
The amendment also requires voter approval for certificates of participation or any other indirect debt except revenue debt.
* Spending limits: Local governments must obey spending limits that are set by adding up the year's percentage changes in inflation, state population, and local growth. For school districts, local growth is replaced by enrollment.
Calculations are based on the Denver-Boulder consumer price index and state population figures. Local growth is defined as "net percentage change in actual value of all property in a district from construction of taxable real property improvements minus destruction of similar improvements."
* Revenues above these limits must be refunded or the government in question faces a 10% interest penalty.
* Emergency reserves: Starting in 1995, governments must have a 3% emergency reserve fund. Emergency property taxes are banned, and other emergency taxes can be imposed only after reserves have been spent and only with a two-thirds vote of the government body. Any leftover emergency tax money must be refunded within 180 days after the emergency ends.
Source: The Bond Buyer, Taxpayer's Bill of Rights.