In an anti-debt climate, one state aims to rein it in while another tries to uncap it.
Dean “Dino” Cortopassi, a wealthy Central Valley farmer, petitioned to put Prop. 53 on the ballot. (AP/Rich Pedroncelli)
In the post-recession era, "debt" is a four-letter word. State debt levels as a whole have been stagnant in recent years and, in 2014, actually recorded the first decline in the 28 years Moody's Investors Service has been tracking them.
It’s in this climate that voters in two states are considering nearly opposite proposals on debt.
California, which has one of the highest taxpayer debt burdens in the country, will decide whether to limit lawmakers’ ability to issue debt for major projects. Prop. 53 would require voter approval to issue more than $2 billion in revenue bonds.
In Arkansas, a ballot initiative proposes making it easier for the state to incur more debt. Issue 3 would eliminate the state's current 5 percent cap on debt related to economic development projects.
Each state's history with bond debt has a lot to do with these conflicting proposals.
In Arkansas’ case, in 1933 it was the first and only state to go bankrupt. That legacy has subtly shaped its fiscally conservative policymaking since then, including the establishment of a cap on economic development bonds in 2004. As a result, taking all types of government debt into account, Arkansas has the 13th lowest taxpayer burden in the country, with $1,400 in debt per resident.
While California never went bankrupt, it did infamously struggle to make ends meet during the Great Recession, issuing IOUs to vendors and then issuing more debt to cover its expenses. The practice led to multiple credit rating downgrades. Things have improved since then, but California still ranks among the lowest-rated states. And, taking all types of government debt into account, it also has the seventh highest taxpayer burden, owing $20,900 per resident.
It’s this fact that led Dean “Dino” Cortopassi, a wealthy Central Valley farmer, to put the measure on the ballot in the first place. Cortopassi previously bankrolled an ad campaign in 2014 that called Gov. Jerry Brown a “liar, liar, pants on fire” for claiming a balanced budget.
California doesn’t have a debt cap like Arkansas, but voter approval is required for general obligation debt, which is paid back through the government’s general tax revenue. Adding approval for major revenue bond projects, which are paid back from dedicated revenue streams like gas taxes, could tie up major transportation developments.
As such, Brown and the state Chamber of Commerce formed an unlikely duo in opposing the measure, which they say threatens the planned high-speed train from San Francisco to Los Angeles and a pair of giant tunnels to help ferry water across the state. The so-called Stop Blank Checks Initiative could also stand in the way of smaller infrastructure projects like bridges, roads and dams.
Meanwhile, proponents of Arkansas’ Issue 3 want the cap lifted so the state can be more competitive in attracting megaprojects. Arkansas has recently won a new steel mill and a new Chinese-owned paper mill but is getting perilously close to its debt cap.
Naysayers warn that lifting the cap could open the doors to megadeals like Nevada’s $1.3 billion package to Tesla Motors and Washington state’s $8.7 billion in incentives to Boeing. They also worry that eliminating the state’s debt cap entirely will lead it down a path similar to states like California.
But given Arkansas’ long history of fiscal conservatism, observers say it’s unlikely the state will embark upon a bond bonanza.
“Yes, it can be risky eliminating the debt cap but that doesn’t mean it can’t be managed,” said Bill Bergman, director of research for the fiscal transparency group, Truth in Accounting. “Informal mechanisms can be just as effective as formal ones.”
Read all of our coverage on 2016 ballot measures at governing.com/ballotmeasures.