In matters of municipal debt, the state of Idaho has built a castle with impenetrable walls — and a wide-open gate on the side.
Normally, large projects that can’t be paid for out-of-pocket are financed by issuing bonds. A city sells IOUs to investors with the promise that it will pay them back with interest over the next few decades. Since a city takes on debt in this arrangement, the Idaho Constitution requires that two-thirds of voters give approval.
But municipal bond investors have innovated their way around these requirements through a mechanism called “certificates of participation.” Investors agree to fund a project, with the understanding that a city will pay them back through a few decades of lease payments, after which investors will give over ownership to the city. These do not require a vote.
This is the option the Idaho Falls City Council has indicated it will opt for to build a $30 million police station, which will cost about $50 million when debt service is included.
As a technical, legal matter, certificates of participation are not debt, as the Idaho Supreme Court has ruled. But, in all the ways that count, they are.
Certificates of participation are so similar to bonds that agencies like Moody’s issue bond ratings for them. They’re so similar, in fact, that the annual payment and lifetime cost projections of the two options were essentially identical.
Bonds are essentially commitments of future tax revenue, constraints on what the city can do in the future. And that’s what certificates of participation do. The only difference is the vote.
There is a kernel of wisdom in the Idaho Constitution’s requirement that bonds get two-thirds support: Voters should be the ones who broadly guide the future of the political systems that derive their authority from them. The problem isn’t in the vote. It’s in the supermajority requirement, tied for the highest in the nation.
The voters should have a say in an investment this large, particularly because it involves more than just the financing of a building but a longlasting commitment in the direction of city policy.
And it isn’t without risk.
Councilman John Radford was right to raise the issue of political risk, in particular. Idaho’s conservative Legislature is likely to look askance at certificates of participation as they become more widespread.
For the same reason that certificates of participation aren’t counted as debt — the Council is allowed to stop making lease payments at any time, and if they do the investors own the building taxpayers have financed — they’re also exposed to greater political risk than bonds. If the Legislature decides to put constraints on or penalize the certificate of participation process, the city is more exposed because of the discretionary nature of its commitment.
There are many factors pushing the Council to use the certificates of participation mechanism. Construction costs are rising rapidly, so any delays would make the project even more expensive. And a system that allows a third of voters to override the overwhelming majority is profoundly flawed.
There should be a better process for voters to have effective input on major investments like these. But the Idaho Constitution has enshrined a system where the options are often either sure failure or strolling through the side door. It should be amended to fulfill Idaho’s founding idea: “All political power is inherent in the people” — not “one-third of the people.”
Because as long as the incentives are as badly warped as the Idaho Constitution has made them, someone will always find a side door.