Use of the Nonprofit Supporting Foundation to Assist Governmental Districts After Amendment 1
| Jurisdiction | Colorado,United States |
| Citation | Vol. 04 No. 1993 Pg. 685 |
| Pages | 685 |
| Publication year | 1993 |
1993, April, Pg. 685. Use of the Nonprofit Supporting Foundation to Assist Governmental Districts After Amendment 1
On November 3, 1992, Colorado voters approved Amendment 1, which adds new § 20 to Article X of the Colorado Constitution. The purpose of this article is to discuss methods the state of Colorado and its local governments ("districts") may use to raise and spend funds without running afoul of the limitations on their power to tax, spend, incur debt and add revenues that are contained in Amendment 1.
This article emphasizes the use of a separate nonprofit supporting foundation to fund or provide governmental services. Such a foundation may be established by a district or by citizens in the private sector. The supporting foundation is not a new tool which has been created as a specific response to Amendment 1; rather, it is a mechanism that has been used successfully in the past to assist governmental entities in providing services to the public. Now, in the wake of Amendment 1, lawyers should be aware of the potential uses of the supporting foundation in counseling both their private and governmental clients.
A brief summary of the terms and principles of Amendment 1 is necessary to understand the use of supporting foundations.(fn1) Amendment 1 was passed by the Colorado voters on November 3, 1992, and, generally, went into effect December 31, 1992.(fn2) The stated purpose of the Amendment is to "reasonably restrain most the growth of government" [sic].(fn3) Amendment 1 prohibits "districts" from raising taxes without prior voter approval. Of greater potential impact are the spending, revenue and new debt limitations on districts. A district includes the state of Colorado or any local government, but excludes "enterprises."(fn4) An enterprise is a government-owned business authorized to issue its own revenue bonds and which receives under 10 percent of its annual revenue in grants from all Colorado state and local governments combined.(fn5) Although the terms "district" and "enterprise" are defined by Amendment 1, there is much speculation as to what these terms include. On December 10, 1992, the Colorado Supreme Court declined to review five interrogatories filed by Governor Roy Romer that sought clarification of the scope of Amendment 1. These interrogatories included requests for clarification of the terms "district" and "enterprise."(fn6)
Amendment 1 provides that new or increased transfer tax rates on real property are prohibited and no new state real property tax or local district income tax can be imposed. Further, the state is prohibited from increasing the income tax rate or providing a new definition of taxable income "before the next tax year."(fn7) Amendment 1 also requires that all income be taxed at one rate, thereby prohibiting a graduated tax.(fn8) Effective November 4, 1992, districts must have voter approval in advance of any new tax, tax rate increase, mill levy increase, valuation for assessment ratio increase for any property class, extension of an expiring
One exception to the requirement that there be voter approval in advance of raising taxes is that "emergency" taxes may be authorized by a two-thirds vote of the governing body of a district.(fn10) However, an "emergency" does not include economic conditions, revenue shortfalls, or district salary or fringe benefit increases.(fn11) There are several other restrictions relating to the use of the "emergency" tax exception.(fn12) For example, an "emergency tax" may not be in the form of a property tax.(fn13)
In addition to limiting a district's ability to increase taxes, Amendment 1 also limits the amount which may be spent by a district. Any increase in a district's "fiscal year spending" is generally tied to inflation and other factors. "Fiscal year spending" means all district expenditures and reserve increases except those made or resulting from refunds, gifts, federal funds, collections for another governmental entity, pension contributions made by employees and pension fund earnings, reserve transfers or expenditures, damage awards or property sales.(fn14) If economic conditions improve, district revenue may increase due to greater sales, income and property tax collections. However, the rate of inflation may decline during periods of improved economic conditions. As a result, district spending ceilings may not increase at the same rate as revenue collections.
The state of Colorado and its local governments may increase fiscal year spending each year by the amount of any revenue increase approved by the voters. Moreover, the state of Colorado may increase its fiscal year spending each year by inflation plus the percentage change in state population. Local districts may also increase their fiscal year spending each year by inflation plus annual "local growth." "Local growth" for districts other than school districts is the percentage change in actual value of all real property within a district. "Local growth" for school districts is the percentage change in student enrollment.(fn15)
Amendment 1 limits the amount of revenue a district may raise. The revenue limitations are also tied to the definition of "fiscal year spending." For purposes of the revenue limitations, "revenue" does not include revenues raised from sources excluded from the definition of "fiscal year spending." Revenue raised in excess of the amount a district may spend is required to be refunded to the taxpayers, unless the voters approve a corresponding revenue increase as an offset.(fn16) Subject to judicial review, districts may use any reasonable method for making refunds, including the use of temporary tax credits or rate reductions.(fn17) In addition to these overall revenue limitations, each district must apply a separate limitation to property tax revenues. Any annual percentage increase in property tax collections which exceeds inflation plus annual "local growth" must be refunded.(fn18)
For example, the new factory outlet stores in Castle Rock may increase that city's sales tax revenue by 12 percent this year. However, under the provisions of Amendment 1, Castle Rock's allowed spending will probably increase by only 6 or 7 percent.(fn19) Therefore, Castle Rock voters may be asked to approve a revenue increase. If a revenue increase is not approved, Castle Rock may be required to refund any excess revenues under the terms of Amendment 1.
"Gifts" and "federal funds" are excluded from the spending and revenue limitations of Amendment 1.(fn20) Amendment 1 does not define the term "gift." However, it is reasonable to assume that a transfer to a district without any expectation of a return benefit by the transferee will qualify as a "gift" for purposes of Amendment 1. Whether grants from the state of Colorado to local districts or grants between local districts qualify as excluded "gifts" is not clear.
The provisions of Amendment 1 affect the state of Colorado and all of its local governments. For example, at least fifty districts are already losing revenues because their assessed property valuation has fallen.(fn21) However, these districts cannot raise their mill levies to compensate for the decline in property values without prior voter approval. The taxing, spending and revenue limits, therefore, may result in cutbacks in government services. Colorado may see major changes in the next several years in education, prisons, state-mandated programs, such as social services, and other services.
Adequate funding for public schools was of great concern, even before Amendment 1. Administrative and teaching staff cutbacks are likely whenever there are reductions in funding. Teachers' salaries may be frozen or increases may be held to a minimum, class size may be increased, and sports and other activities may be reduced.
School districts generally obtain revenue directly from the state and from local property taxes. With the voters' adoption of Amendment 1 and their rejection of a proposed 1 percent state sales tax increase for schools, Colorado schools could be left with a substantial revenue shortfall.
Presently, the spending limitation, rather than the taxing limitation, represents the greater impediment to the ability of the state legislature to budget more money for schools. Under current projections, the increase in total state spending for fiscal year 1993-94 will be limited to approximately $272 million. However, schools alone will need an additional $328 million to fund education at its current level.(fn22)
Amendment 1 will allow school districts to increase fiscal year spending to reflect increased enrollment of approximately 17,000 pupils. However, property values have declined in much of the state,(fn23) and school districts cannot raise their mill levies without a local vote. Therefore, although local spending limits will increase, additional revenue may not be available from the state or from property taxes.
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