A recent Denver Gazette article revived both awareness and concerns about Certificates of Participation (COPs), a funding mechanism designed to get around Taxpayer’s Bill Rights (TABOR), as well as other state constitutional provisions, restricting long-term government debt.  While the Gazette focused specifically on the Denver public school district’s abuse of COPs, it turns out there’s much more to the story.

COPs are a funding mechanism that technically shifts the responsibility for issuing bonds from the municipal government to a purpose-built company.  The government in question sells the building to the company for the principal of the bonds, and agrees to lease the buildings back from the company for an amount that matches the bond payments.  When the bonds are retired, ownership reverts back to the municipality.

This gives governments a way to issue multi-year debt without approval by voters, and usually unsecured by a dedicated revenue stream.

The rise of COPs

Denver Public Schools (DPS), for example, have issued nearly $1,000,000,000 in COPs, and taxpayers are still on the hook for nearly $850,000,000 in principal, all without asking their permission.  That amounts to nearly $2,000 per Denver taxpayer in principal.  The actual obligation is higher once interest is considered.

It’s hard to get an exact fix on how much in COPs is still outstanding in Colorado, but a quick search at the Municipal Securities Rulemaking Board provides some eye-opening results.  The principal amount at issuance of all outstanding COPs by governments in Colorado totals nearly $8.9 billion.  At about 3.8 million resident tax filers, that comes to about $2,340 per taxpayer.

Of that, roughly $3.7 billion was issued by Colorado state government (or its various departments,) about 42% of the total.  Of the remaining 58%, DPS issued almost exactly 10 percentage points.  Nobody else is even close.  Denver city government still owes about $350,000,000, or 4% of the statewide total.  This means that of the non-state issued COPs still in Colorado, roughly 1/6 are attributable to Denver schools.  All of which was issued without the consent of Denver taxpayers.

And the use of COPs is widespread, with dozens of governments and governmental organizations taking advantage of the legal loophole.  Just because the raw amount isn’t large compared to DPS’s behemoth doesn’t make them unimportant.  COPs still account for 13% of the Regional Transportation District’s (RTD) outstanding debt, and 21% of the City of Aurora’s long-term debt.

Some of the uses are outright scandalous.  In 2018, Denver Health issued COPs for a new parking facility that it still owes over $37,000,000 on.  These were rated BBB by both Fitch and S&P, or b-b-barely investment grade.  In other words, Denver Health’s precarious balance sheet was well-known to the markets in 2018.  This was before the fiscal catastrophe of opening the city’s arms to uninsured illegal immigrants to score political points.  After Denver voters approved Mayor Johnston’s proposed 0.5% sales tax hike for Denver Health, the bond rating agencies merely reiterated their BBB ratings.

Bypassing voters

Issuance of “debt by loan in any form” without a vote of the people has always been prohibited by the Colorado Constitution, Article XI, Section 3.  The Taxpayer’s Bill of Rights (TABOR), added a further prohibition against “multiple-fiscal year direct or indirect debt or other financial obligation whatsoever” to Article X, Section 20(4)(b).

There is currently a lawsuit against the DPS COPs, but color me pessimistic about its chances, despite the apparently clarity and comprehensiveness of TABOR’s language.

The state courts have already ruled that COPs do not violate the state Constitution.  Up until 1999, the courts had held that since TABOR did not explicitly define “debt” or “financial obligation,” anything that was permitted under Article XI should also be permitted under TABOR’s Article X amendments.  But in 1999, the State Supreme Court held that the state itself could not directly issue revenue anticipation notes for transportation projects that would qualify for federal aid, since that would constitute a multi-year obligation, and there was no collateral for the bond-holders in the event of default.

But in 2001, then-Attorney General Ken Salazar argued that those conditions could be satisfied for a lease-purchase agreement if 1) the vehicles to be leased and then purchased served as collateral and 2) a specially-created third party were the ones actually issuing the notes.  In theory, the government could not renew the leases on an annual basis, and so wouldn’t be lending its own credit-worthiness to the arrangement.  And in 2005, the Colorado Court of Appeals bought into that inventive logic.

The problem with the court’s reasoning is that nobody in the real world actually behaves as though it were true.

COPs obligations are treated by everyone in the process as belonging to the government taking advantage of them.  The credit markets don’t look at the creditworthiness of a purpose-built organization with no assets or credit history of its own; they look at the financial situation of the government.  The government involved lists the COPs on its own balance sheet and in the long-term debt section of its financial statements.  Failing to renew a lease would make it virtually impossible for that jurisdiction to issue COPs ever again, in much the same way that a debt default would ruin its credit rating.  And so the taxpayers of that jurisdiction are clearly, without any reasonable doubt, subject to a “financial obligation” that they had no say in.

By now, the problems with COPs should be obvious.

Obvious, that is, to everyone except the state’s judges who have allowed this end-run around the state Constitution and TABOR, and to whom the concept of limiting government power may as well be written in a foreign language.

Denver resident Joshua Sharf is a senior fellow in fiscal policy at the Independence Institute, and a regular contributor to Complete Colorado.