Rising Fiscal Extremism At the Ballot Box

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If you wanted to shake up your state's political establishment and the Wall Street municipal finance world as well, you might start by proposing a series of reforms that would virtually shut down government borrowing and would severely reduce your state's tax base. Then you'd get those propositions on the ballot in November and watch the entire political establishment begin hyperventilating at even the remote prospect that voters might pass any of your proposals.

This is what's happening in Colorado, where a series of controversial ballot proposals by a group known as Colorado Tax Reform has sparked widespread opposition from strange bedfellows ranging from the state's teachers unions, to Wall Street firms, to the local chapter of Moveon.org, to the state's real estate agents.

What they are battling against might best be described as the nuclear option in municipal finance and taxation, which includes a proposition that would restrict the state's ability to levy certain taxes, an amendment to the constitution that would drastically reduce the state's property tax base, and another to severely limit borrowing. Reputedly, the force behind these initiatives is Douglas Bruce, a taxpayer advocate famous (or infamous, depending on your perspective) in Colorado for having engineered the 1992 campaign to pass a Taxpayer Bill of Rights, or TABOR.

Much is being made in this tumultuous campaign season about whether some candidates are ‘extremists' or just good old fashioned American revolutionaries. Yet the Colorado initiatives are evidence that the debate is also being carried out at the ballot box in the form of direct democracy. If any of the Colorado propositions pass, don't be surprised to see their type on ballots in other states next spring and fall.

Colorado might seem a strange place to lead this revolution. Its debt load compared to gross state product is not high relative to most states. And Colorado had for years what some fiscal experts consider the most effective TABOR among the states. Plus, say even some fiscal conservatives, the initiatives are impractical in that they would eliminate even the kinds of prosaic short-term borrowing that states and cities do to smooth out their cash flow while they wait for tax collections to arrive in the treasury.

Still, the controversial propositions garnered 36 percent support from voters in an early poll, which has been enough to spark a massive campaign against them. I have no doubt that over time that campaign will succeed in suppressing enthusiasm for the initiatives. The question, however, is what happens next?

If opponents of the ballot initiatives, who've dubbed their campaign Coloradans for Responsible Reform, merely proclaim ‘mission accomplished' and move on, they'll miss the message behind these controversial initiatives, which is real concern that Colorado is moving in the wrong direction, acting more and more like California and New Jersey, and less and less like the state that led the early 1990s tax reform movement with its cap on government growth.

Consider, for instance, Colorado's debt situation. Its rosy numbers look murkier when you add in other obligations beyond bonded debt, especially government employee pensions, which are another form of long-term obligation. As in many states, Colorado legislators enhanced pension benefits for government employees during the go-go budget years of the 1990s, and then when the costs of those benefits rose starkly after the stock market's long period of stagnation began in 2000, the state took the predictable way out. It reduced contributions to its pension system, skipping several billion dollars in payments. In fact, Colorado was one of only a handful of states to have reduced contributions to well below 70 percent of what's required.

A recent study by Joshua Rauh, a finance professor at Northwestern University's Kellogg School of Management, estimated the state's pension funds could begin running out of money as early as 2022, only a few years behind the day of reckoning for pension funds in fiscally unfit states like Illinois and New Jersey. So far, pension reform in Colorado has entailed reducing cost-of-living increases for retiree pensions from three and a half percent annually to two percent. That's not exactly radical when you consider that any annual cost-of-living clauses in pensions are rare in the private sector.

Moreover, by keeping its defined benefit plan in place for public employees, the state sets itself up for a new round of enhanced pension perks once times get good. That's what's happened time and time again in states ranging from California to New York, and it's why merely tweaking your current pension system isn't really reform.

In the meantime, Colorado state government has jumped on the budget gimmick express. It has pushed pay dates forward a few days into a new fiscal year to make it seem like government was cutting payroll costs, and it has swept money supposedly dedicated to special purposes, like construction projects, into its general budget to keep from cutting growth in government. The legislature has redefined some taxes as fees to make its levy increases seem more palatable and is even banking on cash from the state's new Medical Marijuana Program Cash Fund, financed by fees on patients who get cards to use medical pot, to close its current budget gap.

The rash of gimmicks and tax increases in the state prompted the Cato Institute to declare the state's governor, Bill Ritter, one of the country's five worst fiscal managers among state chief executives. "Bill Ritter of Colorado has focused on raising taxes and undermining the budget restraints built into the state's constitution," Cato noted.

It's not as if Colorado's government has been starved for resources. Though it has suffered from recent contractions in tax revenues, from 2002 through 2008 its state and local government spending increased from $26 billion to $42 billion, according to David Harsanyi of the Denver Post. That's 62 percent growth over a period of time that inflation and population in the state have increased by a combined 30 percent. I'll leave it to average Coloradans to judge whether they've noticed a coinciding uptick in the quality of government services from all that extra spending.

But I've stopped being surprised by prosperous states like Colorado that seem to want to imitate New York and California and New Jersey, despite the manifold woes visited upon the residents of these places. It's not a coincidence.

Prosperity brings higher standards of living, and as they rise, people begin to ask for more services from government and begin to expect government to do more for them and for society at large. Prosperity also brings with it a certain overconfidence. States like New York in the 1960s and California in the 1970s and 1980s came to imagine that businesses and people seeking opportunity had no choice but to do business with them. At some point in these places, government reached a tipping point and reform became difficult, if not impossible.

Now we talk about possible federal bailouts of New Jersey, the richest state in the country, and the Golden State, once known as California Inc. for its economic prowess.

The opponents of the Colorado initiatives call themselves Coloradans for Responsible Reform. But responsible reform will entail more than just defeating these ballot propositions.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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