Bruce Baker, Joshua Sharf, Local, Uncategorized, Westminster

Sharf: Westminster tries bypassing voters to finance courthouse

I’ve written before about Certificates of Participation (COPs) and their dangers as a funding mechanism for government. Unfortunately, the temptation proves too great for local governments and school districts all over the state. The latest example comes as the City of Westminster makes plans for a new courthouse.

From its beginning, the Colorado State Constitution has required a public vote to approve general obligation debt, that is, debt that is not tied to a particular revenue stream. The requirement prevents government officials from bankrupting the public treasury for the benefit of themselves and their friends.

The Taxpayers Bill of Rights (TABOR) built on that by requiring a public vote on any multi-year debt obligation, whether general obligation or tied to a specific tax stream. This makes sure that any long-term obligation, such as a building project or capital investment, receives appropriate public scrutiny.

Unfortunately, governments have made use of COPs as an end-run around that requirement. Rather than issue bonds, the government in question transfers the property to a purpose-built third-party. The third party then finances the construction through lease payments from the government, and issues COPs to investors, whereby they can participate in the lease payments.

Because the lease is a renewable one-year obligation, courts have held that it doesn’t constitute a multi-year obligation, shielding it from the scrutiny that would come with a public vote. Not only does this mean that a government can proceed with more projects, they can also pursue them with less fiscal responsibility. That certainly seems to be what has happened with the new Westminster courthouse.

In December, Westminster City Council was presented with an estimate of $33 million for new construction, and somewhere from $20-24 million for renovation. At its most recent meeting where the courthouse was discussed, the price tag had ballooned to $42 million. That was also the meeting where using COPs rather than debt financing was discussed. Not having a public vote was specifically mentioned as an advantage.

By comparison, Councilman Bruce Baker prefers to renovate the decommissioned Sheridan Green School. Beginning with the recent renovation of an old K-Mart by Moffat County for its new courthouse, Baker compared floorspace, construction costs, and the much more limited security requirements of a city courthouse compared to a county one. He arrived at a cost of around $8 million. Even if he is off by 50%, that would still only be $12 million, or less than 1/3 the estimated cost of new construction.

The City Council has not seriously considered such a renovation, but it might have, if the project had to go before the voters.

Because they are secured by lease payments, which are at least theoretically cancellable, COPs tend to carry a premium of about 1% return.  Assuming 20 year financing, even this 1% difference in interest rate would amount to $22,500 a month or nearly $5.4 million over the course of the loan, on the $42 million price tag. At the $8 million estimate, this would still mean over $1 million for the duration. Even assuming that the estimate was off by 50%, using COPs rather than a bond would cost the residents of Westminster over $1.5 million over 20 years.

What’s more, City Council proposes to defray some of the cost of the new courthouse by allowing a non-profit specializing in mental health, the Community Reach Center (CRC), to rent space there. The exact rent to be paid is unclear. While this might seem like a win-win, it would immediately make CRC the preferred mental health services provider for crime-related treatment, giving it a potentially unfair advantage over other providers.

This isn’t even a partisan issue. Westminster’s City Council has five Republicans and two Democrats, but the alleged party of fiscal responsibility doesn’t have enough confidence in its proposal to take it to the public for a vote.

Colorado has a fiscally responsible state Constitution.  Too bad that the courts have allowed less-than responsible local governments to side-step its requirements.

Joshua Sharf is a senior fellow in fiscal policy at the Independence Institute, a free market think tank in Denver.


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