The Taxpayer Bill of Rights (“TABOR”) is part of Article X of the Colorado Constitution. In general, TABOR requires voter approval before taxes can be raised by the state and local governments (collectively defined as “districts” in TABOR), requires voter approval before districts can issue debt, limits the amount of revenue districts can keep in each fiscal year, and bans certain forms of taxes from being levied.
TABOR’s voter approval requirement also impacts contracts between districts and private entities. TABOR bars the creation of any multiple-fiscal year direct or indirect district debt or other financial obligation whatsoever absent voter preapproval. The Colorado Court of Appeals addresses this impact in the recent case Center for Wound Healing & Hyperbaric Medicine, LLC of Burlington Colorado (“Center”) v. Kit Carson County Health Service District (“Health District”).
In 2018, the Center and the Health District entered into the Administrative Services Agreement ("ASA") for a term of seven years. Under the ASA, the parties agreed that the Center would establish and manage a hyperbaric oxygen therapy and wound care facility at the Health District’s hospital, and the Health District would operate that facility and compensate the Center for its services. Part of that compensation would flow through Medicare and Medicaid.
Between 2020 and 2021, the Health District received letters from Medicare and its affiliates identifying potential issues in Medicare billing patterns on behalf of the Center. Due to these compliance concerns, the Health District stopped submitting claims to Medicare for reimbursement. The Center subsequently notified the Health District that it had materially breached the ASA by failing to pay the Center. The Health District then informed the Center that it was terminating the ASA, effective immediately.
The Center alleged breach of contract and sought payment for the remaining three and a half years of the ASA based on an acceleration clause in the ASA. The district court and the Court of Appeals dismissed the Center’s complaint based on TABOR.
The ASA contained two pivotal clauses. First, the acceleration clause, which provided, “In the case of termination by [the Center], the [Health] District will pay an amount equal to the product of the average monthly Fee earned from the beginning of the Term to such date of termination, multiplied by the number of calendar months remaining until the end of the Term…” Second, the TABOR clause, which provided: “The parties acknowledge that [the Health District] believes that it is subject to Section 20 of Article X of the Constitution of Colorado. To that end, any provision of the Agreement … that requires payment of any nature in fiscal years subsequent to the current fiscal year, and for which there are no present cash reserves pledged irrevocably for purposes of the payment of such obligations shall be contingent upon future appropriations by [the Health District] of sufficient funds for purposes of payment of such obligations for any future fiscal year.” These two clauses are in direct conflict with one another.
As stated above, TABOR bars the creation of any multiple-fiscal year direct or indirect district debt or other financial obligation whatsoever absent voter approval. However, carveouts have been made to ensure TABOR does not prevent effective day-to-day governance. Multi-year contracts can avoid running afoul of TABOR by “making the government’s obligations contingent upon sufficient annual appropriation, and in the event of non-appropriation, termination of the contract without the payment of damages.” The Court of Appeals held that the TABOR clause in the ASA does exactly this, in that it allows the Health District the discretion to pledge or not pledge funds every fiscal year. The Court of Appeals held that this clause trumped the acceleration clause, resulting in no damages for the Center.
In previous cases, this same issue has been presented primarily in the lease context. For example, in Board of County Commissioners v. Dougherty (1994), a bank purchased a road grader and leased it to a county for a year, with four 1-year renewal terms. The county could choose to not renew the lease, and pursuant to its terms, if it was not renewed, it was terminated. The county did not receive voter approval to enter into the lease, but the Court of Appeals held that the lease was valid under TABOR due to the annual renewal provision. A similar result was reached in Colorado Criminal Justice Reform Coalition v. Ortiz (2005), involving proposed state lease-purchase agreements for criminal justice and educational facilities. Because the agreements were subject to discretionary annual appropriation by the state, the Court of Appeals held that the agreements were valid under TABOR.
This issue has also been raised in development agreements. In City of Golden v. Parker (2006), the Colorado Supreme Court held that the city had no obligation to annually appropriate funds to a developer in future years as tax incentives, and therefore the agreement did not require voter approval. In Center for Wound, the Court of Appeals compares the ASA to an option contract, in which the option contract does not become enforceable until the buyer chooses to exercise the option. In this case, the option is sufficient appropriation for the fiscal year. If the money is not appropriated, then the option has not been exercised and no enforceable contract has been created. Center for Wound represents the further extension of prior cases into other types of governmental contracts that require annual appropriation.
This case illustrates that TABOR’s voter approval requirements go beyond traditional bonds and debt. Any entity entering into a multiple-year contract with the state or a local government that has not been the subject of a TABOR election must use caution and consider the possibility that the state or local government will fail to appropriate funds in any year in which the contract is outstanding, even if the contract purports to extend beyond the current year.
