Policy Documents

Debt is Debt: Taxpayers on Hook for TIFs Despite Rhetoric

Joseph Coletti –
November 19, 2007

Certificates of participation (COPs) have become a more common form of debt because they allow governments to borrow money without getting voter approval. These instruments pledge property as collateral for the loan. The final
state budget for Fiscal year 2008 included more than $500 million in COPs and COPs have been used by local governments to pay for stadiums and convention centers. The government offers as collateral a building that has been built or renovated using some of the proceeds. A lender has to do more to convert a fixed asset into liquidity, and the asset could fall in value, so lenders face greater risk that the loan will not be fully repaid if the project is not completed. More risk for the lender means higher cost for the borrower. Before Amendment One passed, COPs were sometimes structured so the government could put off repayment until the financed project produced new tax revenue for the issuing
government, much like happens with tax-increment financing. These specially structured COPs are called synthetic TIFs and commanded a premium above a standard COP because of the delay, though still below the premium for a standard TIF. Funds to repay a certificate of participation come either directly from the General Fund or from a special fund for the project.