by Barry W. Poulson

Americans for Prosperity Distinguished scholar

TABOR is under attack where it all began. TABOR was first enacted in Colorado Springs in 1991, and then enacted at the state level the following year.(1) When TABOR was enacted in Colorado Springs critics argued that it would end local government as we know it. Critics are at it again, threatening to repeal the local TABOR. Before opponents put measures on the ballot to repeal the Colorado Springs TABOR they should understand the impact it has had.

The growth of city spending was limited to population growth and local growth, defined as the annual increase in assessed value of the city. The city could exceed this spending cap only with voter approval. Voter approval was also required to eliminate any tax exemption or issue any city bonds, including revenue bonds. The only bond exemption was for revenue bonds issued by a city owned enterprise that received less than 25 percent of its funding from all government sources. Voter approval was not required for increases in city fees. The city was also required to maintain an emergency reserve equal to three percent or more of its budget. The City Council could raise taxes if it declared an emergency with a two thirds vote, but only after it depleted the emergency reserve. Residents would then vote on the tax increase in the next election.(2)

Annual city property tax revenue growth is limited to the percentage change in the Denver/Boulder Consumer Price Index (CPI), plus local growth. Local growth is defined as the annual increase in assessed valuation of the city. The city cannot increase the mill levy without voter approval.

The following chart shows TABOR refunds over the period 1992 to 2009. Over the period as a whole the city has refunded a total of $34 million. Almost all of the refunds occurred during the period of rapid economic growth in the 1990s. The city refunded a small amount $.5 million in 2004. With that exception, revenue and spending in this decade have been well below the TABOR limit.

COS TABOR Revenue: Source: City of Colorado Springs, Budget Department, 2009 Budget, Expenditure Overview, page 1-22

Projected Colorado Springs TABOR Revenue Limits, 2003-2009: Source: City of Colorado Springs, Budget Department, 2009 Budget, Expenditure Overview, page 1-23

What we can infer from this evidence is that TABOR works exactly as it was intended. In periods of rapid economic growth, such as the 1990’s, the TABOR cap maintains a growth of revenue and spending below actual revenue growth. In periods of slower growth, such as the current decade, spending grows in line with actual revenue growth.

TABOR acts to stabilize the city budget over the business cycle. In the absence of the TABOR cap, spending in the 1990s would have increased to match actual revenue growth, in some years at double digit rates. When the city experienced a revenue shortfall in the recession of 2001, it would have been very difficult to balance the budget. There would have been tremendous pressure to raise taxes and issue more debt in order to sustain the higher levels of spending.

The Impact of TABOR on the Colorado Springs Economy.

When the Colorado Springs TABOR was enacted, critics predicted sharp cutbacks in essential services such as police and fire protection, elimination of road improvements and other capital projects, and environmental degradation. The only surprise in this debate over TABOR was endorsement by the Colorado Springs Gazette, a rarity in media coverage of TABOR battles.(3)

The immediate impact of the TABOR incorporated in the City Charter in 1991 was a more stringent budget constraint. The City Council approved a hiring freeze, a cut in operating expenses, and delays in capital improvement projects. However, there were no layoffs, pay cuts, or elimination of government services. TABOR forced the city to examine and prioritize more closely how it spends taxpayer money. The City found a number of areas where the budget could be cut without eroding government services. This included some egregious examples of waste and fraud.(4)

The City eliminated 50 positions and left 60 positions vacant. This was accomplished without layoffs, the reductions occurring through attrition and shifting personnel. Doomsayers predicted that TABOR would result in cuts in police and fire protection. In fact the City increased spending in both areas, hiring more policeman and fireman, and purchasing new fire equipment.(5)

Doomsayers predicted a major reduction in the city’s bond rating. There was an initial negative impact of TABOR on City bond ratings. Two national bond rating services lowered the City’s bond rating marginally from Aa to Aa1. This had a modest impact in higher interest payments on general obligation bonds.(6) The City has since recovered the higher bond rating it had before TABOR was enacted.

Doomsayers predicted that the city would never approve a tax increase; in fact the city has received approval for tax increases. In November 2001 the city received approval for a Public Safety Sales Tax (PSST). That measure provided increased revenue earmarked for public safety. It also required that the share of the General Fund Budget allocated to public safety should be at least equal to the percentage in the 2002 General Fund Budget. The 2009 General Fund Budget allocates 51.08 percent of total revenues for public safety, well above the share in 2002.(7)

Doomsayers predicted that the City would not be able to garner voter support for new debt issue. The year after TABOR was enacted voters approved revenue bonds to build a new terminal at the Colorado Springs Airport. Later voters turned down a ballot issue by El Paso County to build a new office and jail complex. The El Paso County officials responded by issuing Certificates of Participation to build the complex, which do not require voter approval.(8) The lesson here is that TABOR gives voters a new voice in approving increases in taxes or debt, but politicians are often successful in circumventing these constraints.

What TABOR has enabled the citizens of Colorado Springs to do is not only maintain stable growth in revenue and spending over the business cycle, but also, to approve increased taxes and debt for projects and services that they value. In short, TABOR has allowed citizens in Colorado Springs to get the government they want and are willing to pay for.

Colorado Springs, like other Colorado cities, has been hard hit by recent events impacting the national economy. The recession in 2001 and the current recession have had a major impact on the high technology industries in the city. 9/11, and the Hurricanes Katrina and Rita, impacted tourism and travel to the city. The deployment of Fort Carson Troops to Iraq posed a significant challenge to the City. However, in the face of all these negative shocks the City has shown remarkable resilience. The City is projected to recover to a path of economic growth with increases in employment and investment. In fact Colorado Springs is projected to grow more rapidly than any other Colorado City over the next few years.(9)

The Current Controversy Over the Colorado Springs TABOR

The following table shows that the city is not projected to have a TABOR refund over the five year forecast period. At the same time emergency reserves are projected to increase from the current deficit, to a positive $2.4 million by the end of the forecast period. At no time over the forecast period will TABOR limit the revenue the city can keep and spend. The city will be able to build up the emergency reserve required by the TABOR Amendment.

City of Colorado Springs General Fund 2009-2014 5-year Financial Forecast: Source: City of Colorado Springs, Budget Department, 2009 Budget, Expenditure Overview, page 1-21

If TABOR will not constrain the projected revenue and spending over the forecast period, then how can critics argue that it straightjackets the city’s fiscal policies? Critics have come up with an even more devious way to attack TABOR. They argue that when the new administration comes up with a bailout that includes funding for local projects, Colorado Springs will not be able to benefit from the federal largess because it will put revenues over the TABOR cap.(10)

There are several flaws this current criticism of the Colorado Springs TABOR. First, most of the federal bailout money is expected to flow to the state rather than to local governments. The state exempts federal transfers from the TABOR limit. Since current and projected revenue is well below the cap imposed by the Colorado Springs TABOR there is ample room for federal bailout dollars to be retained and spent by the city. For example, this year the city could spend an additional $13 million without triggering the local TABOR limit.

Secondly, if the federal bailout dollars did cause revenue to exceed the Colorado Springs TABOR limit, and the city wanted to keep and spend the surplus revenue, all they would have to do is ask voters. Based on past ballot measures, if the city makes a good case for spending bailout money for a specific project, there is a good chance the voters will approve it. If the bailout money is earmarked for a specific transportation or infrastructure project, taxpayers have been receptive to such proposals.

However, taxpayers have not been receptive to proposals to keep and spend surplus revenue for some ambiguous project or service, especially in the middle of a recession. For example, the Sustainable Funding Committee now proposes that the city keep and spend $1.2 million in surplus property tax revenue in excess of the TABOR limit on property taxes.(11) The original estimate of this surplus property tax revenue was $800 thousand, but budget officials advised the city officials to ask for the larger amount in case the property tax revenue is larger than originally estimated. The money would be spent for some unspecified building project. Such ballot measures stand a snowballs chance in hell of passing; taxpayers in Colorado Springs are well able to distinguish between proposals to spend surplus revenue for priority projects, and a slush fund.

Conclusion

For more than a decade the City of Colorado Springs has learned to live with a local and state TABOR Amendment. The dire predictions that TABOR would end government as we know it in Colorado Springs have proven to be false. The fiscal constraints imposed by TABOR have kept the growth of City government in line with the growth of the local economy, positioning the City to achieve a high rate of economic growth and development. Other cities can learn a great deal from the city’s experience with a local and state TABOR Amendment.

The current controversy over federal bailout money in Colorado Springs reveals what a damaging impact federal bailout policies are having on state and local fiscal policy; and also how desperate critics are to gut the TABOR Amendment. Ronald Reagan recognized the damaging effects of these federal transfers to state and local governments and tried to reduce them and convert them into block grants. When the federal government dangles the carrot of federal money before state and local governments this inevitably leads to increased government spending. Even if those federal dollars don’t require matching funds, local officials use the money to fund ongoing programs that require more local revenue and spending down the road.

It is time for public officials in Colorado to take a principled stand against federal bailout money, as Rick Perry in Texas and Mark Sanford in South Carolina have done. Our city and state governments in Colorado have pursued prudent fiscal policies, largely due to TABOR. We have learned to balance budgets without raising taxes, creating one of the best business tax climates in the country.

Colorado taxpayers are tired of bailing out other state and local governments through federal transfers. We are not responsible for the ten of billions in debt run up by profligate state governments such as California and New York. We are not responsible for billions in unfunded liabilities incurred in bankrupt cities such as San Diego.

Colorado has a vibrant growing economy because we have avoided the fiscal disasters created by other state and local governments. Because of TABOR we have constrained the growth of government and kept taxes low, creating one of the best business tax climates in the nation. Indeed, the challenge of Colorado to the rest of the nation is to pass their own TABOR amendment so that they can begin to create a better business tax climate and compete with Colorado. We don’t need to go hat in hand for a bailout from Washington, as other state and local officials are doing. We certainly shouldn’t use federal bailout promises as an excuse to gut the TABOR Amendment.

ENDNOTES:

(1) Amendment 4 enacted at the same time required a tax phase-out.
(2) ‘Tax Limitation Working Well in Colorado Springs: Doomsayers on Defensive for Amendment 1 Vote’, Independence Issue Paper No. 8-92, Independence Institute, Golden, Colorado, September 18, 1992.
(3) Ibid.
(4)Op. Cit. ‘Tax Limitation Working Well in Colorado Springs’, pp. 6-10.
(5) Ibid.
(6) Ibid.
(7) City of Colorado Springs 2009 Budget, p.1-13
(8) David Kopel and Barry Poulson, ‘The Unfortunate Demise of the Merrifield Proposal’, Independence Institute Opinion Editorial February 5, 2003.
(9) Op. Cit. City of Colorado Springs 2006 Budget, pp 3-5 through 3-14
(10) Sean Paige, A Third Way, Local Liberty Online, January 8, 2009
(11) Perry Swanson, Panel Recommends Putting TABOR Repeal to a Vote, Colorado Springs Gazette, January 6, 2009