Colorado Local Bond Measure Election Analysis


This year Colorado voters will be presented with approximately 1.5 billion in K-12 municipal issuance and mill levy overrides in 20 school districts, as well as Amendment B, a statewide ballot measure that would repeal the Gallagher Amendment, and Proposition 116 to reduce the state income tax rate. The Gallagher Amendment is a constitutional limit to the amount of property tax revenue Colorado residential property owners pay, currently 45%, compared to the 55% nonresidential property owners pay of the overall property tax revenue.

See Portfolio Manager Chris Johns’ comments on the Gallagher Amendment in a recent article  published in the Denver Post.

Property tax revenue supports public schools, county governments, special districts and municipal governments. The residential assessment rate is currently 7.15% for residential properties and fixed at 29% for nonresidential properties. A repeal of the Gallagher Amendment will keep the residential assessment rate at 7.15% for residential properties and will eliminate projected future reductions in the residential assessment rate, which could result in higher property taxes for residential taxpayers in the future. Proposition 116 is a statewide ballot issue that would reduce the state income tax rate from 4.63% to 4.55%. The passage of Proposition 116 could reduce state income tax revenue by $154 million in fiscal year 2021-22.

School Bond Issues

Unlike at the state level, where Colorado has experienced difficulty in passing tax increases, voters have historically shown a willingness to approve local bond issues. These measures are used to finance new schools and other capital improvements throughout the state. School district bond issues on the November ballot range in size from approximately $220,000 to as much as $795 million.


Pandemic Pressure on the Higher Education Sector in Colorado


The COVID-19 pandemic has caused the learning environment in Colorado’s higher education institutions to change dramatically. Students were forced to end the spring 2020 semester learning virtually, and Colorado universities plan on opening the fall 2020 semester learning on campus along with a hybrid approach of on campus and virtual learning.

According to Standard & Poor’s (S&P), “the COVID-19 pandemic and related economic and financial impacts exacerbate pressures already facing colleges and universities.” S&P’s ratings outlook has been negative for three straight years in the U.S. not-for-profit higher education sector. Moody’s lowered its rating outlook to negative for the higher education sector on March 18, 2020 due to “unprecedented enrollment uncertainty.”

To balance Colorado’s $3 billion revenue shortfall for its fiscal year 2020-21 budget, the state cut its support to the Department of Higher Education’s fiscal year 2020-21 budget by $493 million. However, the governor allocated $450 million from the Coronavirus Aid, Relief and Economic Stimulus Act (CARES) to the state’s public colleges and universities to help minimize the budget cuts.

Enrollment increased at most of Colorado’s universities in fiscal year 2020, but COVID-19 continues to present uncertainty for the fall semester. A resurgence of COVID-19 could reduce future enrollment at Colorado universities and impact revenues, as expenses increase due to a shift to an online learning environment. Currently, none of Colorado’s public universities have plans to raise tuition for fiscal year 2021.

Every institution of public higher education in Colorado was affected by the reduction in state funding. Public higher education institutions have instituted furloughs, hiring freezes, layoffs and other cost cutting strategies The one-time CARES support will soften the blow for fiscal year 2021, but fiscal year 2022 could be challenging if enrollments decline and state aid is further reduced. Currently, there are no plans for additional federal support to higher education institutions. The chart below demonstrates the current Fund holdings of higher education bonds and the amount of state aid reduction and CARES support received.

Higher education institutions represented 16% of Aquila Tax-Free Fund of Colorado’s portfolio as of June 30, 2020. Of this amount, almost 75% of the higher education bonds are insured, pre-refunded or part of the state’s intercept program, which makes debt service payments if the public higher education institution is unable. We will continue to monitor the Fund’s higher education portfolio holdings and their ability to withstand any potential uncertainty with a resurgence of COVID-19 and any future state aid reductions.

Before investing in a Fund, carefully read about and consider the investment objectives, risks, charges, expenses, and other information found in the Fund prospectus. All prospectuses are available on this site, from your financial advisor, and when you call 800-437-1020.

Information regarding holdings is subject to change and is not necessarily representative of the entire portfolio.

Mutual fund investing involves risk; loss of principal is possible. Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions. Fund performance could be more volatile than that of funds with greater geographic diversification.


Demographic Trends Affecting the Higher Education Sector


Vasilios Gerasopoulos is Vice President, Credit Analyst with Davidson Fixed Income Management, the sub-adviser to Aquila Tax-Free Fund of Colorado, doing business at Kirkpatrick Pettis Capital Management in Colorado. 


In recent years, skyrocketing tuition and declining enrollment rates have heightened concern around higher education bond issues. Approximately 30% of universities have rated bonds. Of those that are rated, 91% are investment grade and 66% are rated ‘AAA/AA’. As Portfolio Managers of Aquila Tax-Free Fund of Colorado, we continue to be selective of the higher education credits we are willing to hold, and we closely monitor the higher education holdings in the Fund, which currently comprise approximately 14% of the portfolio.

We recently attended the National Federation of Municipal Analysts Seminar on Higher Education. The Seminar took place in January 2020, and included investors, academics, practitioners and bond issuers who discussed concerns in higher education. One of the panels discussed future demographic challenges for higher education, including:

• Increasing high school graduation rates, but declines in the total numbers of graduates, which is magnified in certain geographic regions.
• Trends impacting enrollment, including immigration and migration within states and regions, and policy shifts.
• The changing racial and ethnic demographics of postsecondary students.
• Shifting environmental circumstances such as the demand for certain skills, job automation, and changing economic conditions.
• State and endowment funding challenges

Nationally, the increase in higher education costs continues to exceed the rate of growth for all other household expenditures. As a result, universities and colleges are looking to attract international students, and applicants from outside of their historical boundaries, through recruitment, remote campuses, and direct employer contracting. These efforts are expected to help mitigate the anticipated enrollment decline of traditional 18-22-year-old students. Read more “Demographic Trends Affecting the Higher Education Sector”


Colorado Local Bond Measure Election Results


The November 2019 midterm election was a mixed bag for the state. Proposition DD, a statewide ballot measure legalizing sports betting, passed with 51.4% of the vote and is set to effective in six months. The state was less fortunate on Proposition CC, a measure to end the cap on state tax revenue as required by the Taxpayer’s Bill of Rights. Compared to the November 2018 election, which approved $1.6 billion of bond issuance, this election was a success for local governments. Although results are preliminary and have yet to be certified, nearly $1.0 billion of general obligation bonds were approved by Colorado voters. By election measure, approximately 50% of issues were approved, which represents 72% of the total requested par amount.

There were more than 100 municipal measures on November ballots in Colorado. Ballot measures covered affordable housing, broadband, bond proposals for public improvements, economic development, governance, marijuana, tax increases, sports betting and transportation. All four TABOR over-ride ballot measures were approved by voters in addition to $124.4 million of city bond issues.

Colorado voters were faced with $1.2 billion of school bond issues and mill levy overrides in 22 school district elections, almost on par with the $1.4 billion school districts requested from voters in 2018. School district bond issues on the ballot ranged from $1.6 million to $400 million. Voters approved five of the twelve school district bond issues for $900 million that will fund new schools and capital improvements. In addition, voters also approved $27.0 million in school districts mill levy overrides.

Overall, voters continue to demonstrate a willingness to approve local bond issues, which provide new schools and other capital improvements throughout the state. The results of these elections will provide a significant source of additional supply to the Colorado bond market later this year and into 2020.


Colorado’s November Ballot – School Bonds


On November 5, 2019, Colorado voters will decide on approximately $1.2 billion of K-12 municipal issuance and mill levy overrides in 20 local elections, as well as Proposition CC, a statewide ballot measure that would end the cap on state tax revenue as required by the Taxpayer’s Bill of Rights (TABOR). TABOR is a constitutional limit to the amount of revenue that Colorado and local governments are able to retain and spend or save. Excess revenue collected over the TABOR limit must be refunded to taxpayers unless voters authorize retention of the excess amount.

Historically, the State has experienced difficulty passing funding for K-12 public schools and transportation projects. As a result, the State is requesting voters approve Proposition CC, which permits excess revenue to be distributed to public schools, higher education, roads, bridges and transit beginning in fiscal year 2019-20.This strategy has recently been successful at the local level, with Colorado cities exercising similar strategies to spend TABOR funds. If the measure passes, the increases in funding may benefit our holdings of public school, higher education and transportation bonds. However, TABOR funding is unpredictable and, therefore, difficult to budget. The Colorado Legislative Council Staff projects revenue exceeding the TABOR limit will be $428.5 million in 2019, $264.3 million in 2020 and $142.9 million in 2021.

Unlike at the State level, Colorado voters have historically shown a willingness to approve local bond issues. These measures are used to finance new schools and other capital improvements throughout the state. School district bond issues on the November ballot range in size from approximately $2.5 million to as much as $395 million. Depending upon voter sentiment, this election could potentially provide the Aquila Tax-Free Fund of Colorado with a broad opportunity to invest in a variety of projects as bonds are sold later this year and into 2020.


The Tax Cuts and Jobs Act has been Beneficial for Colorado


The Tax Cuts and Jobs Act (TCJA) has been positive for the supply and demand dynamic in the Colorado municipal bond market. TCJA eliminated tax-exempt advanced refunding, which has resulted in lower municipal bond issuance this year. The new law also limits state and local tax deductions to $10,000, which we expect will increase municipal bond demand from investors. Advanced refunding issues accounted for 18% to 29% of municipal bond supply from 2012-2017. The TCJA was the largest overhaul of the US tax code since 1986, and reduces individual and corporate income tax rates, which will affect most states by eliminating or reducing exemptions and deductions that were available prior to its passage. Individual and corporate income tax revenues in Colorado will increase by an estimated $196 to $340 million a year as a result.

The passage of TCJA is also expected to increase Colorado’s general fund by an estimated $309.3 million in fiscal year 2017-18, $207.3 million in fiscal year 2018-19 and $326.3 million in fiscal year 2019-20, according to the Colorado Office of State Planning and Budgeting’s December 2017 forecast. The substantial growth in fiscal year 2017-18 is a one-time increase, as investors postponed capital gain sales and corporations deferred tax liabilities in anticipation of federal tax law changes.

Colorado TCJA

While TCJA is a positive for the state, Colorado’s Public Employees’ Retirement Association’s (PERA) unfunded liability is still a concern that we are monitoring. Senate Bill 18-200 was passed in the Colorado Legislature on May 9, 2018, to make modifications to PERA to reduce its unfunded liability. The TCJA is expected to provide consumers with more disposable income and will continue to expand Colorado’s economy at lower levels due to higher costs of living, tight labor markets and inflationary pressures as interest rates increase.


Got Bonds? An update on Colorado municipal bond issuance


Colorado started 2017 by “running out of the gate” with strong supply of tax-exempt municipal bonds evidenced by net issuance hitting $1.28 billion in January, due primarily to a record $3.21 billion in general obligation bonds approved across the state during the November 2016 election. Net issuance is the difference between the volume of municipal bonds issued and the amount matured or called. More recently, net issuance in Colorado has declined by $1.54 billion in June, due to $1.82 billion of municipal bonds maturing or being called.

Colorado Bonds

Source: Bloomberg

Demand for Colorado bonds has strengthened in recent months due not only to the impact of declining net issuance, but also the increased dollars sitting on the sidelines as the result of bonds maturing or being called. We expect supply constraints and strong demand for municipal bonds will continue for at least the next several months as municipal bond issuance is unlikely to satisfy investor demand. Lipper US Fund Flows data released recently indicates municipal bond mutual funds have seen an average weekly year-to-date inflow of approximately $236 million as investors are facing increasing difficulty sourcing bonds. In addition, credit spreads between high and low investment grade municipal bonds have tightened to the point that investors are assuming measurable credit risk for the addition of only a few basis points.

Vasilios Gerasopoulos
Vice President, Municipal Bond Credit Analyst
Kirkpatrick Pettis Capital Management

Investments in bonds may decline in value due to rising interest rates, a real or perceived decline in credit quality of the issuer, borrower, counterparty, or collateral, adverse tax or legislative changes, court decisions, market or economic conditions.