Earlier this month, Ada County commissioners voted 2-1 to expand the Ada County Jail. Roughly $38 million of the $44 million required for expansion will come by means of a financing structure known as “certificates of participation.”
Calling this a financing structure, however, is putting it kindly. Certificates of participation are basically money-laundering schemes whereby local government entities saddle taxpayers with long-term debt without any resident input or voter approval.
In Idaho, it is supposed to be the case that whenever a local government entity takes on long-term debt, that is, indebtedness that exceeds that government entity’s fiscal year’s financial obligation, it must first obtain the approval of two-thirds of that jurisdiction’s voters. That voter-approval requirement is found in the Idaho Constitution, Article 8, Section 3, and is most commonly satisfied via an election which approves the issuance of bonds which pay for the project.
Certificates of participation, however, which have been increasing in popularity in recent decades, require no voter approval, despite their saddling residents with long-term debt. As such, local governments are now using them to spend as much as they want, as quickly as they want, and without voter input.
How is it legal in Idaho to use certificates of participation given the state Constitution’s voter-approval requirements?
In short, in sort of a disingenuous game of hot potato, government bodies pass any existing rights in a desired project to a private-sector entity. Once those rights are in the hands of the non-government entity, that entity then leases the use-and-control of the project back to the county, while financing the project by issuing certificates of participation to investors. This arrangement affords the government body the use and control of the project, but without ownership. The main purpose of this scheme: Cut voters out of the loop.
Despite recent Idaho Supreme Court precedent in 2015 greenlighting the use of certificates of participation, the constitutionality of this financing arrangement has not been exhaustively tested in Idaho. That said, certificates of participation are structured in a way that allows governmental bodies to argue that the new debt does not actually constitute long-term government debt. Additionally, because a lease arrangement exists under this form of financing, the assertion is made that the government body can walk away from the obligation at any time.
Specifically, the assertion is that being a lease arrangement, the debt is spread out over time. Thus, government bodies can claim this arrangement is not violating the constitutional requirement for voter approval, because the lease structure doesn’t incur a large debt obligation all at once. Additionally, government bodies commonly assert that, being leases, such arrangements are non-binding, because they can walk away from the lease at any time.
Such assertions are nothing more than legal fictions. To start, residents still end up footing the bill over time the same as if this financing mechanism were not being utilized. Further, it almost never makes any fiscal or logistical sense for government bodies to walk away from such arrangements once a lease begins.
What sense would it make, for example, for Ada County to walk away from the jail expansion being leased to them, in that case from Zions Bank? It’s certainly possible, but there would be few options for Zions Bank in utilizing that space if Ada County did that, and even fewer reasons for Ada County to do so. In reality, the distinctions between certificates of participation and referendum bonds only exist on paper. Certificates of participation are not practically or functionally different from referendum bonds.
Former Ada County Commissioner Rick Visser opined in a recent Boise Guardian commentary , “The end run by Commissioners Lachiondo and Kenyon to fund the construction of a new jail pod is a blatant affront to Ada County property tax payers.” He asked, “Why do two commissioners get to indebt county taxpayers? What is the difference between annual lease payments and annual bond payments?”
Ada County Commissioner Patrick Malloy, the lone vote against using certificates of participation to fund the jail expansion, shared Visser’s sentiment. He subsequently stated that the certificate of participation ”is a funding mechanism that takes the voters out of the equation, so instead of putting large bonds in front of the voters, [the certificate] allows the board to be the deciding factor.”
To be sure, certificates of participation are efficient : There are no votes to slow the process down, to voice opposition—and possibly prevent more government debt for being incurred. Such certificates are a dream come true for those who think public input is bothersome—but, it’s more a nightmare for the rest of us.
The Idaho Legislature would be wise to review certificates of participation during the 2021 session, before this scheme becomes even more pervasive than it already is. The ability under the Idaho Constitution to indebt the people of Idaho on a local level with long-term obligations properly resides with a two-thirds majority vote of those people. That vitally important check-and-balance requirement needs to be honored. Currently, it is not.