In the shadow of the upcoming U.S. presidential election, hundreds of statewide and local ballot initiatives will be up for consideration. For municipal bond investors, these initiatives represent a treasure trove of valuable information. In addition to deciding the next president, the outcomes of these elections could materially shape Colorado’s municipal market for years to come.
Across Colorado, cities, towns, and various other local municipalities are hoping for increased tax revenues and/or approval for new funding through the issuance of bonds to help finance various projects. Denver Public Schools, for example, is considering asking voters to approve a $795 million bond measure in addition to a $32 million mill levy override. Nearby, in the city of Longmont, council members are asking voters to authorize $80 million in bonds to finance various improvements to their water system.
At the state level, there are 11 ballot initiatives on the docket for November 2020, several of which would have significant impacts for both state and local municipalities. Highlighted below are several ballot amendments or propositions that we feel are the most impactful.
Amendment B: Gallagher Amendment Repeal
The Gallagher Amendment, passed in 1982, adjusts the residential assessment rate so that statewide residential property taxes are limited to 45% of total property tax revenue. As housing prices have increased over the past three decades, this has had the effect of reducing the residential assessment rate from 30% in 1982 to its current rate of 7.15% placing an ever increasing tax burden on commercial and other property types. Further reductions are expected unless a repeal of this amendment is passed in November.
All else equal, lower assessment rates result in lower property tax revenues. Municipalities that are more heavily reliant on residential property taxes will likely be most impacted. However, many districts have already ‘De-Gallagherized’ their mill levies minimizing the impact of lower assessment rates. If the repeal of the Gallagher Amendment does not pass, differentiating between which credits have ‘De-Gallagherized’ and which have not will be a key factor in analyzing municipal credits. School, fire, library, water, sewer, park and recreation, hospital and other special districts that rely on property taxes would likely benefit the most if the amendment is repealed.
Proposition 116: Income Tax Rate Reduction
This proposal would reduce Colorado’s individual come tax from 4.63% to 4.55%. Individual income taxes make up approximately 65% of Colorado’s total general fund revenues. A reduction in this rate could have a negative impact on revenue reducing the state’s ability to fund K-12 education and other essential services. Conversely, a lower income tax rate may make Colorado more competitive for businesses looking to relocate to our state. Attracting new business bringing more jobs to our state may offset the decline in the overall tax rate.
From a municipal bond investor’s point of view, a lower tax rate reduces the relative attractiveness of the tax-exempt status when purchasing a bond in Colorado. The decline of 0.08% likely would have minimal impact on overall valuations. For example, the tax-equivalent yield on a 2.0% yielding Colorado municipal bond for investors in the highest income tax bracket would decline from 3.67% to 3.66%.
Proposition 117: TABOR Initiative for New State Enterprises
This initiative would require voter approval for new state enterprises with estimated cumulative revenues greater than $100 million within the first five fiscal years. State enterprises are government-owned business such as the State Lottery, higher education institutions, state-owned toll roads, Parks and Wildlife, College Invest, and correctional industry programs, among others. Revenues from these enterprises include registration and licensing fees, tuition, and other charges that are not subject to the TABOR limit. This differs from other public services that are funded through taxes and are subject to TABOR.
Many enterprises utilize the municipal bond market to finance large capital projects. As an example, the Colorado High Performance Transportation Enterprise (HPTE) partly financed the construction of the toll road along the south section of C-470 with municipal bonds to help manage congestion on the highway. Interest on the bonds is paid by toll revenues and fees charged to passengers choosing to take the toll road.
Requiring voter approval to pass new enterprises, on one hand, would add an extra layer of protection for taxpayers and may limit the growth of the Colorado municipal bond market. On the other hand, it could make it more difficult to finance large infrastructure projects that help mitigate traffic congestion and provide updates to our aging infrastructure going forward.
I hope the above descriptions were helpful in determining how to think about the ballot initiatives from a municipal bond investor’s perspective. If you are interested in learning more about upcoming local elections, stay tuned for a follow-up piece coming in early October. If you would like to learn more about Equus, please call Matt Owings at (970) 963-5810.
Disclosure: This report is for informational purposes only and should not be considered a solicitation to buy or sell any security. Past performance is not indicative of future results. Neither Equus Private Wealth nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Nothing herein is intended to provide enough information to make an investment decision. Investing in securities exposes the investor the risk of loss of principle. Redistribution is prohibited without the express written consent of the Equus Private Wealth Management, LLC.