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Prison Lease Shortfalls and Shortcomings

Opinion Editorial
December 18, 2002

By Stephen Raher

It is no secret that Colorado government is experiencing a budget shortfall. The state would be in even worse straits were it not for Colorado’s statutory and constitutional restraints on taxing and spending. Yet the next legislative session will see a major push to exploit a loophole in the spending limits, in order to raise spending by tens of millions of dollars.

The state government is anticipating a revenue shortfall of several hundred million dollars. Standard & Poor has downgraded Colorado’s credit rating over the summer. In November S&P placed Colorado on a negative credit watch, specifically citing high levels of outstanding debt.

Coloradoans have consistently favored fiscal restraint in government. The Colorado Constitution requires voter approval to raise taxes or for the government to incur multi-year debt.

Despite these strict limits, the 2003 legislature is going to consider a bill for 80 million dollars of new debt – but without asking for voter approval. The money is for a proposed new 750-bed prison. According to the Office of State Planning and Budgeting, the prison would be financed through certificates of participation (COPs), which are essentially bonds that do not require voter approval.

The legal mechanism which exempts COPs from going before the voters is somewhat reminiscent of the accounting practices which led to the downfall of Enron. If the prison were to be built with COPs, a nonprofit shell corporation would own the prison (off Colorado’s books) and lease it to the state. The state would pay rent annually. The deceptive side of COPs lies in the fact that while the state can legally decide to stop making payments at any time, such action would significantly harm the state’s credit rating.

Unfortunately, the Colorado Supreme Court, which has been consistently hostile to the state’s constitution’s controls on government taxing, spending, and borrowing, invented a loophole by which Certificates of Participation and other forms of indirect public debt are not considered state government “debt,” legally speaking. In Re Colorado State Senate (1977).

COPs are the worst of both worlds: they carry higher interest rates (costing more taxpayer money) because they are not legally backed by tax dollars. Yet the state must continue to pay off the debt or face a reduced credit rating as a penalty for short-changing investors. Legislators in Louisiana this year discovered that while they were legally empowered to cancel a multi-year lease of a troubled juvenile prison in Tallulah, the increased debt service, which would result in the state’s slashed credit rating, would far outweigh the annual savings of $3.2 million.

State Treasurer Mike Coffman has warned the General Assembly that it must resist the desire to increase spending and debt during tight fiscal times. Coffman likened the 2002 Colorado budget process to “someone who has just been told he is approaching the limit on his credit card deciding to buy a new entertainment center. It is simply irresponsible.” The new prison proposal indicates that Coffman’s warning has yet to be heard by many of our elected officials.

Most of the Representatives and Senators in the Colorado legislature won election by campaigning as fiscal conservatives. They can honor their campaign promises by following the spirit of Colorado’s Constitution, and by declining to exploit a loophole that evades voter control. If the legislature believes that there is a true need to build a new prison, the legislature should put a referendum on the ballot, so that the voters can exercise their right to decide whether the taxpayers should assume a burden of eighty million dollars in additional debt.

Copyright 2002, Independence Institute

INDEPENDENCE INSTITUTE is a non-profit, non-partisan Colorado think tank. It is governed by a statewide board of trustees and holds a 501(c)(3) tax exemption from the IRS. Its public policy research focuses on economic growth, education reform, local government effectiveness, and Constitutional rights.

JON CALDARA is President of the Institute.

STEPHEN RAHER works for the Colorado Criminal Justice Reform Coalition (www.ccjrc.org ), and wrote this article for the Independence Institute.

ADDITIONAL RESOURCES on this subject can be found at: www.i2i.org

NOTHING WRITTEN here is to be construed as necessarily representing the views of the Independence Institute or as an attempt to influence any election or legislative action.

PERMISSION TO REPRINT this paper in whole or in part is hereby granted provided full credit is given to the Independence Institute.