Coloradans decide to pay as they go - voters reject deficit financing without prior taxpayer approval

Insight on the News, May 31, 1993 by William Tucker

Summary: Facing the specter of a Rocky Mountain-size debt, Colorado taxpayers revolted at the ballot box, forcing state and local lawmakers to seek taxpayer approval for any deficit financing. Unable to flout bond issues whenever they please, officials now struggle to govern on a pay-as-they-go basis.

Two years ago, Colorado taxpayers were piling up debt faster than those in 47 other states - although few Centennial State residents realized it. By 1990, more than 40 special taxing districts were in bankruptcy to the tune of $500 million. While bond dealers along 17th Street in downtown Denver were toasting the excitement, municipal debt was spiraling out of control.

In the first quarter of 1993, however, not a single Colorado municipality or school district sold a bond issue - in marked contrast to last year's first quarter, in which there were 38 municipal issues, large and small, totaling $451.5 million. Many investment houses have had layoffs. Meanwhile, mayors and city council members are struggling with the idea that government will have to be run on a pay-as-you-go basis - and that voters will have to be consulted in the process.

What provoked such a turnaround? In November, Colorado voters gave resounding approval to Amendment 1, a ballot initiative that is easily the most ambitious antitax proposal since California's Proposition 13. In fact, many observers believe Amendment 1 surpasses Proposition 13 in the constraints it puts on government spending, carefully closing loopholes that the 1978 California referendum overlooked.

"Proposition 13 was aimed mainly at the local property tax"' says Phil Fox, chief lobbyist for the Colorado Association of School Executives, one of the principal opponents of the amendment. "But Amendment 1 affects every tax in the state. It's far more encompassing than anything California ever dreamed of."

Virtually every politician in the state agrees - although few are happy about it. "We're not going to argue any more about whether or not [Amendment 1] is a good thing," says Gov. Roy Romer, who tried hard to defeat the amendment. "The people have spoken, and it's our job to abide by it. We're now trying to figure out how to live with it."

Compared with states on the East or West coasts, Colorado is not highly taxed or deeply in debt. In fact, Colorado's Constitution forbids it from issuing general obligation bonds - debt instruments backed by the general taxing power of the government.

But population growth and rapid development during the 1980s led many observers to believe that Colorado was on the verge of becoming another California. Municipal debt rose 180 percent from 1980 to 1987, and by 1990 half the municipal bankruptcies in the country were in Colorado.

"The bond dealers and bankers treated this state like a gold mine," says Vern Bickel, chairman of the Colorado Union of Taxpayers. "They encouraged the formation of special districts and convinced the politicians that debt was a good thing. It was years before taxpayers realized who was paying the bill."

Most state and local governments - particularly in the West - have long had formal procedures that require voter approval of bond issues, an approach in which municipalities borrow money (or "sell bonds") to finance major capital projects. Politicians find the referendum process frustrating, however - mainly because voters are often unwilling to incur new debt.

Beginning in the 1970s, states and municipalities began finding ways to get around the public by creating special revenue districts that could contract debt "off-budget" without voter approval. This is done by issuing revenue bonds, which, rather than being backed by the general taxing power of the government, are tied to specific streams of revenue, such as toll-booth collections or rents at a public housing project.

"The whole purpose of these special revenue bonds is to avoid taxpayer review," says James T. Bennett, a professor of economics at George Mason University in Virginia and coauthor of the 1983 book Underground Government, a prescient analysis of off-budgeting. "If these projects are truly in the public interest, then why can't the public vote on them? "

Instead, the process has moved debt contracts further away from public scrutiny. In 1974, general obligation bonds constituted 57 percent of a $23 billion municipal bond market. In 1992, such bonds made up 35 percent of a $235 billion market.

Douglas Bruce, a California expatriate and Proposition 13 supporter who had moved to Colorado Springs to invest in real estate, decided to put an end to all this.

Colorado taxpayer groups had put tax-reduction measures on the ballot in 1986, 1988 and 1990, drawing a bigger vote each time. "The state attorney general kept us off the ballot until three weeks before the 1990 election, and we still got 49 percent of the vote," says Bruce. "We knew we'd win sometime."

In 1991, Bruce persuaded voters in Colorado Springs to amend the city charter with a tax-and-debt limitation that became the prototype for Amendment 1. Then, in November, while Colorado voters were pulling the lever for Bill Clinton and for Democrat Ben Nighthorse Campbell as senator, they adopted Amendment 1 with 54 percent of the vote.