High Risk, Low Interest

In our search for money to balance the budget, some state senators suggested selling Colorado Water Conservation Board loans.

We have a lot of money tied up in them, but it's unlikely we could get much of the money out. The state lends the money to farmers, ranchers and local governments for water projects. They're relatively high-risk borrowers, and the state subsidizes the loans by keeping the interest rates low.

I doubt there's ever much of a market for high risk, low interest loans. Usually the higher the risk of a loan the higher the interest rate, to compensate the lender for taking the chance he won't get his money back.

In today's ultra-conservative market chances of selling the loans is even slimmer.

The idea is for the state to sell bonds secured with revenue from the CWCB loans. Dan Law, the executive director of the Colorado Water Resources and Power Development Authority, predicts we'd get about 50 cents on the dollar.

As an example, Law uses one of the higher-rated loans. CWCB loaned the City of Aurora $80 million for 30 years at an interest rate of 3.75%.

He estimates we could sell $47.5 million worth of bonds backed by the loan. That's if the bonds are taxable. We could get $63 million by selling tax-exempt bonds.

The bonds' tax status would depend on what we did with the money. Law says they'd likely be tax-exempt if we used the proceeds for capital projects; taxable if we used the money for operations.

The loan to Aurora is better than most in the CWCB portfolio. Most would sell as junk bonds and have to pay higher interest. At 15% interest, $80 million worth of loans would get us less than $30 million. That's assuming we could find buyers.

Selling the loans would also crimp the CWCP loan program. We use the income from current loans to make new loans. If we sold off parts of the portfolio and used the proceeds to balance the budget, that would leaves less money for future loans.

One advantage of the idea might be an environmental benefit. Subsidizing water projects makes water cheaper. That encourage people to use more of it. Weaning the state off subsidized loans for water projects would put a more realistic price on water and encourage us to conserve.