The Unfortunate Demise of the Merrifield Proposal

David Kopel and Barry Poulson

February 5, 2003

Imagine that a salesman tried to convince you to buy a new refrigerator, and you said "no." A few days later, the salesman delivered the refrigerator to your home anyway, along with a bill that you had to pay -- in fact, you had to cut your medical spending and sell one of your cars. Any business that used such dishonest methods would get sued for violating Colorado's consumer protection laws. Yet government officials are currently allowed to practice similar tactics on citizens with impunity.

An especially egregious abuse by the El Paso County Commissioners finally provoked a state legislator to try to crack down on government scams.

Last year the El Paso County Commissioners put a property tax increase measure on the ballot to finance a courthouse extension and jail. The ballot measure was defeated by roughly two to one. Not to be thwarted by the citizen vote, the Commissioners pulled an end run around the Taxpayer Bill of Rights (TABOR), which requires citizen votes on tax increases.

Three days after losing the vote, the Commissioners issued Certificates of Participation (COPs) to finance the courthouse extension and jail through a lease-purchase agreement.

In normal bond financing, a county borrows money (the bond), uses the money to build something (i.e., a jail), and promises to pay the bond off through general tax revenues. Under the Colorado Constitution, all general revenue bonds require voter approval. A "Certificate of Participation" is a tricky type of financing which was invented, according to Investopedia.com, so that municipalities can evade "restrictions on the amount of debt that they can incur."

With a COP, the municipality doesn't sell a general revenue bond. Rather, a spin-off government agency (created purely for the COP) builds the jail, and then "leases" the jail to the county. The special agency sells "Certificates of Participation" which entitle the investor to a share of the lease revenues. The money from the sale of the COPs is used to build the jail.

Technically, the special agency, (whose only revenue is its lease income from the county), has the financial obligation to the COP-holders; the general revenues of the county are not formally obligated to pay back the bond.

As a practical matter, however, any county, which lets a COP program fail financially, would have its bond rating severely downgraded by the bond rating companies such as Moody's. The rating downgrade would significantly increase the county's cost of borrowing. So practically speaking, the county government does its best to make sure that COP's never get into financial trouble, so the net result is the same as with a normal bond: the taxpayers must shell out enough money in taxes so that the COP stays financially healthy.

The whole thing amounts to an elaborate sham so that county (or municipal or state) governments can borrow money without asking for voter permission.

Unfortunately, the Colorado Supreme Court is extremely hostile to our State Constitution's restrictions on government spending and borrowing, so the court has allowed governments to use COPs without a popular vote. In order to finance the El Paso construction COPs, the County Commissioners drastically reduced the budgets for the Health Department and Recreation Department. They also reduced funding for bus routes into the county from Colorado Springs. The cuts resulted in a loss of mobility for many people, including poor families, disabled citizens, and students, for whom the bus is their only mode of transportation. Finally, the Commissioners cut money for the Road and Bridges Fund to municipalities, after those communities had already drafted their annual budgets.

Despite objections from dozens of citizens who showed up to testify against the Certificates of Participation, the Commissioners issued them anyway. The ethical decision for the El Paso County Commissioner would have been to respect the people's vote. Either the citizens did not believe that there was truly a need for the courthouse extension and new jail, or the citizens wanted smaller projects with less tax burden.

For example, in Limon, city officials wanted to build a new government office building and jail. They placed a measure on the ballot asking for a tax increase to finance these projects, which the voters defeated. After several defeats at the ballot box, the officials came back with a scaled down version of these projects requiring a more modest tax increase; the voters approved the smaller project. The El Paso County Commissioners however, flagrantly defied the express will of the voters.

While the decision to issue COPs by El Paso County officials may be a fait accompli, Colorado House Representative Mike Merrifield (D-El Paso), introduced legislation (HB-1181) to protect Colorado citizens from such unethical practices. The Bill was titled 'Concerning the Use of Lease Purchase Agreements by Local Governments'. Although the Bill was defeated in a House Committee on Monday, Rep. Merrifield promises to keep up the fight in future years. Merrifield's proposal would have required that local governments include in their annual budgets information about each individual lease-purchase agreement to which the local government is a party. Merrifield's proposal also would state that if the voters of a county have rejected a tax increase, or bond issue, for a particular purpose, the county may not enter into a lease-purchase agreement for an identical or similar purpose for a period of three years after the election. The proposal would also have required a county to obtain voter approval before entering into a lease-purchase agreement involving the issuance of certificates of participation, if the total amount of payments required over the term of the agreement exceeded fifteen million dollars.

It would be even better if Merrifield's principles were also applied to the State government, although putting limits on Local government abuse would still be a constructive step.

Local government lobbyists worked very hard against the Merrifield bill. These same lobbyists who claim that local governments are so wonderful because they are so close to the people, turn right around and do their best to make sure that these governments keep the illegitimate power to defy the express will of the people. There is no substitute for the eternal vigilance of citizens to keep government officials honest in a republic.

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David Kopel is the Research Director at the Independence Institute.

Barry Poulson is a Senior Fellow at the Independence Institute.

 

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