Proposition 101 Will Prove to be Detrimental to the State of Colorado

Strategic Resources West, Inc. (SRW) studied the potential effects of Proposition 101 and will share a few thoughts as voters consider this measure. In general, I find this proposal to be detrimental to the State’s well-being.  The intent of this commentary is to point out the major issues and their ramifications and then provide suggestions about how to counter the voters who might support it.  The ballot initiative titled Proposition 101 is intended to drastically reduce a wide range of state and local taxes and fees.  According to the Bell Policy Center analysis, the wording is intended to repeal Referendum C passed in 2005 and to lower spending limits in all Colorado cities and counties.  The primary effect upon the State is the forced reduction of income tax rates from the current 4.63 percent to 4.5 percent in 2011 and then to 3.5 percent over a period of ten years.  This income tax rate reduction would decrease State revenues by $1.2 billion of the $1.7 billion total cutback.

Local governments will also lose considerable amounts of revenue, primarily those generated from specific ownership taxes and sales taxes on vehicles.  In fact, specific ownership taxes would be reduced to a level ($2 for new vehicles and $1 for used vehicles) that likely won’t even cover the administrative costs of levying the taxes.  This could well be the intent: to make them “go away.”

As with Amendments 60 and 61, Proposition 101 sounds good for the pockets of individual voters but the overarching effects will be much more significant.  For example, if you contend that specific ownership taxes are used, at least in part, to help cover the public costs of vehicle ownership and operation, what happens if they do in fact “go away”?  And, why these particular taxes and fees?  Taken in consort with the local property tax revenue reductions that would be required in Amendment 60, it appears that this proposition is simply trying to further cut local revenues without reasonable rationale.  Wouldn’t this be better resolved in the State legislature where the representatives and senators study income and expenditure issues and set the tax policy, also as directed by the State’s constitution?  And, yes, I understand the public’s frustration with elected officials, particularly at the national level.  But is that a good reason to vent frustrations on local governments where we have the best control and accountability?  One has to wonder what the real motivation is behind Proposition 101 and the accompanying Amendments 60 and 61.

Whether you like it or you don’t, government plays an important role in state and local economies.  To make such drastic negative changes to state and local government revenue sources, particularly in the current uncertain economy, could very well be counterproductive.  Could the State and many local governments improve efficiency and cost-effectiveness?  Certainly.  In fact, I challenge you to show me any private sector business that doesn’t have room for improvement.  We could all do better.  However, Proposition 101 is simply another attempt at “government by initiative” that is both unwarranted and ill-timed.  Regardless of how unresponsive or corrupt you may think “government” is, it’s still far better than piecemeal initiatives that sound good but aren’t fully understood regarding their potential effects.  Many people I know use the term government as if it was some foreign enemy.  Just ask this question: “Who is government?”  The answer is it’s “us”.  If it isn’t working the way we expect or believe it should then we (“us”) have to get involved and “fix it.”  As has been demonstrated in Colorado and elsewhere, piecemeal initiatives won’t fix the problem.  Only a comprehensive approach will work to funding required and publicly supported expenditures.  For more information on Prop 101, I encourage you to please refer to the Bell Policy Center’s assessment for a more thorough evaluation of the initiative’s potential effects.

Proposition 101 is not the answer to Colorado’s fiscal challenges – vote and take control of your local government where we have the most control.

The ballot initiative titled Amendment 60 has considerable long-term ramifications for the State of Colorado and ALL public taxing entities.  This initiative would:

Ø    Overturn property tax increases approved in local elections since 1992;

Ø    Require periodic re-approval of subsequent property tax increases;

Ø    Cut local school district property tax rates in half over 10 years;

Ø    Replace local school district property taxes with state revenue;

Ø    Require government owned businesses (e.g. community colleges) to pay property taxes, which MUST be offset by lower local property tax rates;

Ø    Allow electors to vote on property taxes in any district in which they own real property;

Ø    Require that elections on property taxes be held only in November;

Ø    Prohibit related tax and debt issues from being included in the same ballot measure; and

Ø    Permit voters to petition any local government to reduce property taxes.

In my opinion, the most disagreeable part of this proposed constitutional amendment is the fact that a statewide vote can completely overturn local rule.  I am vehemently opposed to relinquishing voters’ rights at the local level where the most control and best accountability are evident.  If passed, the first provision listed above would nullify every TABOR override approved in the last 18 years.  According to the Bell Policy Center’s analysis, “hundreds” of such elections have been approved, indicating that property tax levels would have to adjust to those existing prior to the overrides.  This seems to imply that the amendment’s author(s) know better than the local residents who are directly affected by those ballot items.  I beg to differ.

Perhaps nearly as disconcerting is the uncertainty presented by particular provisions that are not clear.  For example, the sentence in paragraph (b) of the Amendment that reads: “Property tax issues shall have November election notices and be separate from debt issues” could be construed to indicate that if you have a bond election to build a school, you can’t ask for a property tax increase to fund repayment of the bonds.  This is, of course, absolutely absurd but it certainly raises the specter of legal challenge.  And, think of the mayhem that would ensue until the issue is resolved in court: more classroom overcrowding; buildings not occupiable; the list could be quite distasteful.

Another issue of major concern is not just the halving of local property taxes but the absurd notion that the State could backfill lost school district revenue when the State would be required to reduce its income tax rate by about 30 percent.  Excluding federal funding, income taxes currently represent the State’s largest source of revenue.  So let’s see if I understand this – cut local property taxes in half and replace it with revenues from the State that are both declining and already short of overall budget requirements, e.g. Medicaid, higher education, transportation, et cetera.  Now there’s a recipe for disaster.  Should this Amendment pass I can only say one thing: “Beam me up, Scotty.  There is no intelligent life here.”

Colorado School Districts Need to Heed the Warning

Strategic Resources West, Inc. (SRW), a full-service K-12 educational facilities and master planning firm has reviewed the potential effects of Amendment 61 on Colorado School Districts.  SRW identifies the major issues and their ramifications and then provides example situations for voters who may not have considered all the implications.

The ballot initiative titled Amendment 61 would drastically change debt issuance, the primary way the State and local governments finance most capital improvements.  Specifically, this amendment would return fiscal policy to the original 1876 constitutional provisions of no borrowing for any purpose by the State.  The State currently cannot issue general obligation debt.  However, it does issue revenue anticipation notes to aid with cash flow and it uses Certificates of Participation (COP’s) to fund capital construction, this could cause substantial difficulties for many construction programs, for example university and college facilities as well as K-12 projects funded through the BEST program.

In a recent Denver Post article, state officials indicated: “We won’t be able to replace structurally deficient bridges. We won’t be able to replace aging school buildings, and we won’t be able to build modern facilities at our colleges and universities.”

Amendment 61 would also place more stringent restrictions on county, municipal, school district and other public entity borrowing.  First, it requires that all bonded debt be repaid within ten years, which imposes higher short-term borrowing costs and may adversely affect the ability of local governments to gain voter support.  Second, it would limit local government borrowing to ten (10) percent of assessed taxable value of real property.  This change appears more restrictive for counties and municipalities than for school districts and school district legal borrowing capacity is cut in half (a 60 percent cut if the school district qualifies as a fast growing district).

For example, local governments commonly use lease purchase agreements for larger equipment because of the high financial burden on budgets and cash flow difficulties.  Further, school districts often take advantage of interest-free, short-term loans from the State to finance operations because of the intermittent receipt of property tax revenues.  Both of these options would be banned if Amendment 61 passes.

Other provisions restrict debt from being continued past its original term and require that, after the debt is retired, tax rates decline by an amount equal to the average annual cost paid to retire the debt, even if property tax revenue is not used to repay the debt.

One concern that comes to mind is that since the State is already prohibited from issuing general obligation debt, why should we prohibit other less costly and commonly advantageous borrowing mechanisms? The shorter term borrowing (and lending to local governments) methods used by the State are very similar to those applied in everyday business to provide a reliable cash flow and bridge the gaps between steady expenditures and irregular income.

According to certain State officials, limiting the State’s borrowing options could cause less financial stability and predictability as well as increase operating costs for both the State and local governments who often borrow from the State for a short period of time. Thus, the result may be the opposite of what most people would intend.

Considering direct local government effects, repaying debt within ten years sounds more fiscally sound until you consider that it would be more costly in the short-term and could effectively be prohibitive for smaller jurisdictions with relatively small tax bases.  These are the jurisdictions that would be most adversely affected and could least afford to lose those options.  The result would be more expensive operations, thus reducing service levels and driving up local taxpayer costs or just the opposite of what was intended.  Consider the effects of limiting home mortgages to ten years rather than the up to 30 years that most home borrowers use.  The higher short-term costs would drive many hopeful homebuyers out of the market and have a negative impact on the construction market as well as related housing industries.

For example, an unfavorable result of Amendment 61 for a school district could be delaying the purchase of new computers for a few years, or cancelling a building addition, or not being able to replace a heating unit that failed at an inopportune time.  All of these would have adverse effects on education and possibly on private vendors in the local economy.

While the proposed amendment looks appealing on its face, a more thoughtful analysis reveals its overall undesirability and the likely adverse effects it would have on the State’s already struggling economy.  Please refer to the Bell Policy Center’s assessment for a more thorough evaluation.

Strategic Resources West, Inc., is a full-service K-12 educational facilities and master planning firm with an emphasis on the effects of Colorado state law.  Strategic Resources West’s full-service approach to assisting school districts with their master planning needs leads to an effective, efficient process that creates optimal outcomes for all students.  Denny Hill leads the firm and has more than 20 years of experience with school districts in Colorado and several other states.

Lawsuit will not give the desired results proponents seek

Financial challenges for education date back more than 30 years in Colorado and continue today with the Lobato v State of Colorado litigation. The state has long been challenged regarding both “equitable” and “adequate” funding for both operating and capital needs. This and previous litigation have sought to resolve statutory inconsistencies that prevent some districts (weak local tax base, e.g.) from getting the funding needed to provide adequate spaces for students and to finance their education. Because these “low wealth” districts aren’t legally allowed to raise sufficient money locally, the idea is to get the state to cover the difference. While the cause is certainly worthy of support, one has to wonder: “What would happen if the challenge is either completely or partially successful?”
Two closely related cases represent the extremes regarding results and their effects upon school districts and children. Both Arizona and Wyoming had guiding legislation and financing mechanisms in statute that were nearly identical to those challenged in Colorado. In both cases, the states’ Supreme Courts ruled in favor of the plaintiffs, causing a substantial revamping of educational operating and capital funding. So what happened?
Wyoming experienced a very wide disparity in local property tax wealth because of their vast differences primarily due to mineral wealth, or lack thereof. Although many districts gained better funding, ALL school districts experienced genuine loss of control when the state provided full operational and capital facility funding. Further, capital facility funding underwent major changes. The state commissioned a thorough educational specification analysis and set standards for capacity, facility design, etc. that were quite generous but still dictated what schools would look like, their square footage and many other issues. Ample funding was available and the results were good. All is well, correct? Think again; school districts in Arizona did not fare so well. As the state took control of providing facilities, funding was lacking. In fact, a subsequent lawsuit was filed that (had it succeeded) would have required the state to restore funds withheld due to a state budget shortfall. School capacities became quite large relative to the norm in Colorado, lower quality buildings are very evident, AND local school districts had no options since that responsibility for constructing and maintaining facilities was solely the state’s. Arizona continues to struggle with finding adequate revenue streams and schools are among the lowest funded per pupil in the country. Sound familiar?
The question: “Does Colorado have adequate financing available from the state for both operating and capital construction as in Wyoming or are we lagging behind in funding with more similarity to Arizona?” Unfortunately, I believe it is the latter (see following table). If that is the case, Colorado school districts may end up in a worse position than they are currently. What’s the old saying? “Be careful what you wish for; you might just get it.”

Per Pupil Funding: 2005-06*
State Operating Capital Interest on Debt Total
Arizona $ 6,515 $ 1,033 $ 201 $ 7,749
Colorado 8,166 1,319 411 9,896
Wyoming 11,437 1,993 42 13,472

Source: National Center for Educational Statistics web site.

Considering the recent budget news around the nation, we look ahead to a 2010 that promises even more challenges than 2009. Economic conditions have adversely affected every part of the economy, reducing revenues and creating uncertainty for the future. Nowhere is this more evident than in our school districts where the downturn has already forced substantial program cuts. We face 2010 with the prospect of even more budget cuts, deep cuts that may harm the quality of the education provided for our young people. Thus, the decisions we make now will exert a major influence on our students and our districts for several years to come.
Each adjustment that you make is scrutinized both publicly and privately; transparent accountability has never been more important. Even with major cuts, reducing costs does not reduce expectations from the School Board or the parents of the children in your district. The most important question then becomes: “How do we make budget decisions that are in the best long-term interests of our students and yet not viewed as arbitrary or without good rationale?” The answer lies in following the direction established by your strategic plan. True coherence with the district’s core values/beliefs and the entire strategic planning process provides the best key to positive results.
As you navigate through these difficult decisions, a strategic planning-based approach will guide you through analyzing the options, developing plausible strategies, determining feasible courses of action, and reporting on likely best actions. Denny Hill and Bill Reimer of Strategic Resources West, Inc. (SRW) will lead this discussion to illustrate how to use these tools to your best advantage. More importantly, SRW can illustrate how the varied options and alternatives relate to the district’s strategic plan and are consistent with the district’s long-term goals. It is our objective to bring people and decisions together based upon fact, not perception or emotion. The result would be a strategic approach to developing a strong accountability model that enables measuring results and weighing them against expectations as well as effectively communicating the results to constituents.

Situation 2: A fast growing school district was constantly challenged to provide space for the rapid influx of students. Enrollment was increasing at 10 percent to more than 16 percent annually with absolute growth in the number of students increasing every year. With this kind of growth, standard projection models could not accurately forecast enrollment for the next year’s staffing and budget. Further, commonly applied models, regression analyses or other approaches don’t provide insights into the number and type of schools ultimately required.

Although it may not be apparent from the outset, both school districts have a lot in common. First it’s important to make an accurate estimate of the ultimate number of students that will need to be served – not in five years – not in ten years, but after about 40 years, which is the typical purported life expectancy of a school. Any deviations from that needed capacity can be served by utilizing interim measures to ensure that overbuilding does not take place within the district. A thorough analysis of the correct data will provide the basis for this determination.

Second, How do school districts accurately predict enrollment for the next budget year in a rapid and accelerating growth environment? Standard cohort models likely won’t make the grade in this situation. This is when considerable additional work is necessary to make the realistic anticipations. Many factors have to be determined, such as:

• Where is growth most likely to occur? Will it shift to other areas?
• Which areas will grow fastest?
• How many students can be expected from different types and/or prices of housing?
• Will kids generate at the same pace as housing construction? Lead? Or lag behind?
• Will students enroll equally at all grade levels or be concentrated in a few?

The answers to these and other pertinent questions can be addressed with proper planning and forecasting models. Strategic Resources West employs the appropriate technological tools and approaches to accurately project enrollment, focusing on the specific needs of each district regardless of the challenge. If you need assistance with either of these contrasting yet similar situations, please contact us by clicking here.

Case in point: SRW met with a superintendent to develop a facility master plan. During the initial meeting, it was observed that the district’s mission statement, vision and goals were clearly posted in the Board room. Because SRW believes in tying all work to a district’s strategic plan, a copy of the entire strategic plan was requested to help SRW in aligning the facility master plan with the district’s strategic plan. It became apparent that the district was not fully engaged with a strategic plan when the superintendent pointed to the three posted items and said “That’s it.” Much more is entailed in developing a strategic plan, particularly one that aims to satisfy the Baldridge approach to quality and continuous improvement.

SRW has worked with school districts to complete the connection between strategic plans, required annual reports and district accreditation contracts. These three share many commonalities and, if successfully linked and aligned across all departments and schools, will provide a sound basis for solid, continual improvement:

SRW is dedicated to further aligning a district’s goals and vision with its strategic planning needs by building on a district’s strengths, resolving weaknesses, exploiting opportunities and avoiding threats.

A Nebraska School District needed to justify a new facility to replace a junior high built in 1917. The age of the building and its inadequate ability to accommodate a true middle school program were key factors in determining if the building should be remodeled or replaced. The fiscally conservative community had already defeated a bond issue to remodel due to public opinion that the old building already had enough space.

Strategic Resources West (SRW) recommended that a conditions assessment be completed to address the current needs of the seventh and eighth grade middle school configuration, as well as the chronic maintenance requirements of a  90+ year-old building. The recommendation also included a more comprehensive examination, which also considered the lack of space at the elementary level.

This analysis by Strategic Resources West revealed that moving the sixth graders up to the middle school in a new facility would resolve overcrowding issues at the elementary level through a “one school, rather than many” approach that clearly appealed to voters.

As part of the process, SRW facilitated a committee of well-respected, high profile community leaders to help educate and influence the public regarding the needs, options and consequences of not building a new middle school. The bond issue was fully supported by the committee, which led to a change in public opinion and a successful bond election. It was the first successful bond election passed by the community in many years.

Strategic Resources West facilitated the compelling process that was necessary to secure the success of one of the most important bond issues the community had seen in decades. The leadership, direction and comprehensive approach provided by SRW was the difference in assisting the school district with its needs.

Developing assumptions and methodology to determine land dedication or cash-in-lieu of land dedication (CIL) may seem pretty straightforward. For example, one of the first steps is to determine student yields. You examine the type of housing in the area, apply the number of students living in that type of housing, and presto! you have a student yield. But this type of estimation is not as simple as it seems. Further, mistaken assumptions can have a disastrous (read: costly) effect.

Actual case example impact on a school district.

A case in point comes from a school district that decided to exclude charter school enrollment from the student yields or calculation of school aged children generated by local housing. This information is critical in the pursuit of getting land dedication or cash-in-lieu of land granted by the pertinent county or municipality and resulted in a substantial undervaluation and lost funding as well. The argument was made that since the students were attending a charter school and not a traditional public school, they should be excluded from the counts. But, according to statute, they are attending a public school. Further, charter schools are financed, both in terms of operations and the cost of the facilities (lease or purchase), by public revenues. Additionally, should the charter school cease operations for whatever reason, the vast majority of those students would have to be absorbed within the traditional schools. As is evident, excluding fifteen percent of your students would have a significant negative impact on student yields and, therefore, the amount of land dedication or cash-in-lieu of land the District would receive.

Even if an omission is discovered it should be easy to rectify it, right? Probably not. Changing the methodology’s assumptions is relatively easy. The biggest question is: “Can we recoup this loss by reapplying to the county or municipality”? The answer is yes but it will be anything but easy to accomplish. It is important to recognize that once an agreement is reached with a county or city, it is highly unlikely that these decision makers would be receptive to changing the formula or dollar values, particularly if approached shortly after the initial approval at the lower amount. Remember, providing land dedication or CIL is permissive legislation, not mandatory. Even if the town of county would be receptive, our experience indicates that, because it is a complex issue, the school district would at best have a difficult time explaining the previous oversight and the subsequent change in assumptions.

What you can do.

It is imperative that a school district exercise keen judiciousness when making these calculations and make sure that all avenues and assumptions are reviewed to the maximum benefit. The example above is just one of the many errors that can be costly for your District.

Conclusion.

SRW is acutely aware of this importance and has a history of success in creating and defending these and similar methodologies, including to the State Supreme Court level. We would sincerely appreciate the opportunity to help you “get it right the first time”; a second chance may not transpire and even if it does, it could take a long time and much money would be lost. If you would like more information about this topic or any of the many cost-effective services we provide, please feel free to contact us.