El Paso County crisis 20 years in the making

Colorado Springs Business Journal, Jun 6, 2008 by John Hazlehurst

Next Monday, the El Paso County Board of Commissioners is expected to ratify more than $9 million in budget cuts, constituting a 4 percent reduction in the county's $233 million budget.

The commissioners also will receive a presentation from Citizens for Effective Government which advocates asking the voters to approve a 1 percent sales tax increase. The proceeds, estimated at $70 million annually, would be divided among the county, the City of Colorado Springs and other cities and towns within El Paso County.

Mike Kazmierski, CEO of the Economic Development Corp. and chairman of the CEG, said that the tax increase is crucial if the county is to function effectively.

"We examined local government for over a year and we found that the budget forces the county to operate on a day-to-day basis, without investing for the future, without being able to operate efficiently," he said. "There are crucial health and public safety needs that aren't being met, and we've got to address them now or become a less attractive, less desirable place to live."

And while the county's revenue shortfall might be obvious, the underlying causes are not.

"The problems actually go back 20 years, to 1988, when county voters approved a sales tax," said Commissioner Jim Bensberg. "The then-commissioners told the taxpayers that, if the sales tax passed, they'd lower the property tax mill levy."

That was the first in a series of reductions. The present levy, 7.5 mills, is less than half of 1988's 15.3 mills.

"The sales tax is very unstable -- receipts can drop very quickly when the economy turns south," Bensberg said. "The property tax doesn't vary so much. It only rises or falls when there's a new assessment, which happens every two years, so you can plan ahead if you think assessments might be lower, instead of making emergency corrections."

When the sales tax was approved, the ratio of revenue was 41 percent from sales tax to 59 percent from property tax. The current ratio is 65 percent from sales tax and 35 percent from property tax.

The tax and revenue limitations contained in the Taxpayer Bill of Rights amendment, which was approved by Colorado voters during 1991, also have contributed to the county's woes.

Under TABOR, revenue from local sales and property taxes can only increase at an annual rate of "local growth plus inflation." Revenue in excess of the cap must be refunded to taxpayers, either by rebates or tax rate reductions.

Past county commissioners have chosen to make mill levy reductions in order to comply with TABOR, which also says that taxes may not be raised without voter approval.

Because the TABOR revenue base is always that of the previous year, if revenue falls by 20 percent during an economic downturn and then recovers to its previous level the next year, the county can only retain the gain as measured by "local growth plus inflation."

This so-called "ratchet" effect has wreaked havoc on many local governments and voters in many Colorado jurisdictions have chosen to opt out of TABOR's revenue caps.

While 53 of Colorado's 64 counties have wholly or partially rescinded the caps, El Paso County commissioners have never referred such a measure to voters.

During 1999, after years of steadily increasing county revenue, with substantial cash reserves and a booming regional economy, the commissioners eliminated the county's business personal property tax, foregoing more than $5 million annually.

"The commissioners thought they were doing everybody a favor," Bensberg said. "They lowered the mill levy and they got rid of a tax that local businesses hated and served as a disincentive for businesses to relocate here."

But past commissioners didn't count upon the double whammy of eroding tax revenue and soaring expenses.

Nicola Sapp, the county's financial services director, has identified two principal components in the projected 2008 shortfall:

Revenue decline of $4.6 million, including $2 million in sales taxes, $1.2 million in reduced interest earnings and $1.4 million in recording fees.

Unanticipated expenditures of $726,000 in motor vehicle fuel and $4.1 million in self-insurance costs (mainly related to health care costs).

"We're down to our (mandated) TABOR reserve of $3 million," Bensberg said. "The rest of our reserves are just real estate that we own. And I don't know that any county has ever had to dip into their TABOR reserve to balance the budget."

No commissioner has endorsed the proposed 1 percent sales tax increase, and Bensberg said a lesser tax might be a more appropriate solution.

"If you're going to address the county's needs, including funding for a new jail addition and other capital needs, a 0.55 percent tax is adequate," he said. "I'm not sure that (Colorado Springs) city officials want or will support a full 1 percent."

Commissioner Sallie Clark said the board will listen to what the CEG has to say and then decide what to do.

"But we'll have to go to the voters with something," she said. "And although the property tax is more stable, voters here seem to prefer the sales tax, especially older voters who may be on a fixed income."