DALLAS -- Moody's Investors Service yesterday warned that a proposed constitutional amendment to limit taxes and spending in Colorado could put local governments in fiscal straitjackets and might prompt rating downgrades.

Ditmar Kopf, assistant vice president at Moody's, said that while payments to existing bondholders would not be affected by the Nov. 3 proposal, judicial review may be necessary to clarify how the amendment will affect government.

Still, the agency said in a three-page statement that credit quality could be most affected by a provision of the so-called Taxpayer Bill of Rights that limits growth in spending to a complex formula of economic indicators.

"That's what we're most concerned about," Mr. Kopf said.

Limits on spending could first affect the ratings on debt secured by a revenue stream that also supports ongoing operations, such as lease revenue and certificates of participation, Mr. Kopf said.

Overall, the agency noted, "Passage could seriously erode the credit quality of local governments because of the severe financial and debt management restrictions which would be imposed, as well as the uncertainty created by portions of the proposal."

But Colorado Springs landlord Douglas Bruce, the author of the proposed amendment, yesterday criticized the statement as a distortion of his proposal.

"It's the same old garbage," he said. "Their purpose [at Moody's] is to affect the outcome of the election."

But Mr. Kopf said Moody's felt it was necessary to issue the statement two months before the election because many Colorado issuers are bringing deals to market.

"We wanted to get this out in the marketplace," he said. "We don't take a pro or con political position."

In the statement, Moody's also warned that the measure could affect capital planning because the amendment does not distinguish between recurring expenses and one-time costs such as street construction.

"This provision could severely disrupt long-term capital plans by linking annual capital expenditures to an inflation-based formula bearing no relationship to construction schedules and non-recurring capital needs," analysts wrote.

Moody's also warned that the measure could have unique implications for special districts, noting that the amendment would require voter approval of low-to-high refundings common among distressed issuers.

The analysts said another aspect of the measure that would require governments to create a reserve of 3% of their spending by 1995 could hurt Colorado schools "since the accounting basis for the calculation is not defined."

"Unless a school district held a successful election to increase property taxes levied for operations, drastic operational cutbacks would be necessary in some cases to accumulate the required reserves by 1995," the statement said.

While other rating agencies have not issued formula statements, officials at Fitch Investors Service and Standard & Poor's Corp. last week acknowledged that the amendment could have a negative impact on government operations.

Analysts are not the only ones envisaging problems for governments if the measure is approved in November.

"Definitely, it's the worst proposal we've had because it's both a spending limit and a tax limit," said Wayne Nielsen, first vice president and manager at Kirkpatrick, Pettis, Smith, Polian Inc. in Denver and president of the Colorado Municipal Bond Dealers Association. "The double-barrel effect creates more concerns than we've ever had."

The Bruce proposal would limit the growth of spending and taxes in government to a formula based on several economic factors. However, 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.

Bond dealers and local officials plan to attack what they see as ambiguities in the plank and warn that if passed, the Bruce amendment could drive up the cost of borrowing for taxpayers and drive down ratings.

"If it does pass, our concern is that we will have to pay higher interest on our debt," said Mr. Nielsen.

The municipal industry and other groups are planning a campaign against the amendment after the Colorado Association of Commerce and Industry failed to get a more moderate tax limitation proposal on the ballot.

"It's unfortunate we don't have an alternative proposal," said Sam Mamet, associate director of the Colorado Municipal League, which opposes the Bruce amendment. "But in terms of focusing our efforts against one proposal, it will help."

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