Because of the tax-limitation initiatives that will be on general-election ballots in Utah this November, Standard & Poor's has placed Utah's triple-A rated general-obligation bonds on its S&P CreditWatch with what the New York-based bond rating company termed "negative implications."
The negative implications are that, if the initiatives pass, the state's credit rating may be lowered, thus making future bonding more expensive.Besides the general-obligation bonds, 37 related bonds, mostly Utah Housing and Finance issues, are also affected, said S&P.
"Perhaps the state won't then be able to put the citizens of the state in bondage so easily," was the response of Greg Beesley, of the Utah Tax Limitation Coalition.
Beesley said the opinion of S&P "is an opinion only."
He said that about a year ago, the governor took an entourage to New York to check with another bonding company, "and that company said just the opposite."
Taxpayers for Utah, a group opposing the tax initiatives, said Utah gained its AAA bond rating - among the nation's highest - because for several years it has been "frugally managed."
"Standard and Poor's has just dashed cold water on that positioning, warning the state that if the initiatives pass, the credit rating will indeed be lowered, costing Utah taxpayers millions and millions of dollars."
Taxpayers For Utah said Utahns should take the S&P action seriously.
"Standard and Poor's does not respond to `scare tactics,' but rather deals in hard business facts. This demonstrates that the negative impact of the initiatives on the economy of the state is real."
State Treasurer Ed Alter agrees with that assessment.
"This development is not unexpected but it's very disappointing for two reasons," said Alter. "One, it means that the credit worthiness of the state is being called into question. We have always been a triple-A state, one of only seven, and that means the best of the best. Now that's been called into question.
"Two, it means that if the downgrading occurs, we have shot ourselves in the foot. We will simply no longer be the best. It also means that our borrowing costs for all future projects will increase. We will get less for our money so we will have to tax ourselves more to pay for the same project."
Alter said proponents of tax limitation have long said the action would strengthen Utah's bond rating. "Now we see they have either seriously misunderstood or seriously misrepresented this issue."
S&P said issues not affected are user-fee supported revenue bonds, including $5.7 billion of Intermountain Power Agency debt, refunded bonds whose ratings are based on escrowed securities, and bonds with ratings based on bond insurance.
Three tax-reform initiatives recently received enough signatures to appear on the November election ballot. S&P said two would "significantly restrict the financial flexibility of state and local governments in Utah, even though specific levies for debt service are exempted."
One initiative, the Peoples Tax Reduction Act would eliminate the 1987 increases in income, sales, gasoline and cigarette taxes that were adopted to cure the state's recurring revenue shortfalls.
Another, the Peoples Tax & Spending Limitation Amendments, would limit ad valorem property taxes to 0.75 percent of the fair market value of residential property and 1 percent for other property. It would also impose budgetary constraints on state and local governments.
Utah's Economic and Statistical Unit estimates the annual loss to the state because of the downgrading at $141.4 million, or about 10 percent of budget. The unit said an estimated $184.9 million would be lost by local governments, as much as a third of their operating budgets.
Proponents of the initiatives estimate a lesser impact on local governments.
According to S&P, the credit worthiness of the state was downgraded because the tax limitations, if passed, "would diminish the financial flexibility which allowed the state to maintain excellent financial operations despite a rather cyclical economy."
S&P said the actual impact on local governments cannot yet be determined due to "certain ambiguities" in the initiatives. These include effective dates and estimation mechanisms that will require legislative or judicial clarification.
Standard & Poor's said it will "continue to pursue information defining the parameters set forth in the initiatives and clarifying their application."
If that evaluation shows that passage of the tax measures would not significantly effect a specific bond issue, the rating company will remove that issue from CreditWatch.