Archive for November 28th, 2012

Your New Finance Committee Chairman

With the Democrats retaking the State House of Representatives, the time has come for them to name new committees, and new committee chairmen and vice chairmen.  Most of the designees make sense, at least from an expertise point of view.  While I may disagree vehemently with Max Tyler on energy issues, his district includes NREL, and he’s made a point of being vocal on things like wind and solar subsidies.

However, I draw the line at the appointment of Lois Court, my own State Representative, to be the Chairman of the House Finance Committee.  Court has spent most of her time agitating for the elimination of the Electoral College, opposing Voter ID, and trying to limit citizens’ petition rights.  So State, Veterans, and Military Affairs, where she’s served for four years as a member, would seem to be a natural fit for her interests.  (Full disclosure: I ran against Mrs. Court in 2008 and 2010 for the House seat.)

Instead, incoming Speaker Mark Ferrandino appointed a state rep whose main contribution to finance discussions has been to sue her own constituents, to seek the repeal of the Taxpayers’ Bill of Rights.  She has historically found its spending and taxation limits to be antithetical to the idea of representative government.  (Most of us see her opposition as a threat to the state’s solvency.)  With the governor’s TBD Initiative coming up this year, it may signal an intention on the part of the Dems to wage war on TABOR more openly.

And then, there’s Representative Court’s fluency with arithmetic:


Hint: Carry the two.  Three hundred twenty-five.

Ladies and Gentlemen, your new Finance Committee Chairman.  The state’s in the very best of hands.

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COPs, Cash Flows, and Taxes

We’ve pointed out some of the abuses of Certificates of Participation by the Denver and Jefferson County School Districts.  However, there are times when COPs are good.  One good use of COPs is as a cash management tool.  Municipal bonds are usually non-taxable, which means their yields are lower than Treasuries of an equal term, especially in longer-terms, say, 10 years and over.  Since a municipality doesn’t pay   income tax, it can lend at the higher Treasury rate, while borrowing at the lower municipal rate, assuming that its credit rating is good.  (I don’t care if Illinois has 30 years of gold stashed away, I’m not lending them a dollar for a hamburger to tide them over until next Tuesday.)  The municipality can make a little reliable money on the arbitrage.

In essence, this is a tax-shift.  The Treasury isn’t collecting income taxes that bond holders would normally pay, so that tax money is, in effect, shifted to the municipality.  It’s the reason that Treasury yields are higher in the first place.

Over the last couple of years, though, this hasn’t really been possible.  Municipal rates have stayed pretty steady, while long-term Treasuries have dropped precipitously as a result of all the various Quantitative Easings by the Fed.  This has deprived municipalities of a source of cash.  So while the stimulus was essentially a massive shift of debt from the states and municipalities to the Federal government, the feds are taking it back, inch by inch, by taking away this tax shift that had been available to the lower levels of government.

I don’t think it’s coincidence that one of the tax loopholes being mentioned for closure is the municipal bond interest.  The feds would like to make this tax shift permanent by pushing up municipal yields above Treasuries.  Most of the focus has been on the fact that this would make borrowing more difficult and expensive for municipalities.   But it would also close off this tax shift as well.  Both these facts will have the effect of making states and municipalities more dependent on federal funds.

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