How much debt will the state of Arkansas accumulate to recruit private companies? Currently, Arkansas' Constitution mandates that the Arkansas Legislature cannot issue debt of more than 5 percent of state revenue for the purpose of economic development.
But Issue 3 of 2016 proposes to change that. Approving Issue 3 will completely remove the debt ceiling, allowing the Arkansas Legislature to issue an unlimited amount of public debt in an effort to recruit businesses to the state.
Proponents of Issue 3 claim that the ballot measure is a jobs amendment. Supporters say that by removing the cap on state debt, Arkansas will be able to issue enough incentives to attract companies unlikely to call Arkansas home without them. Sen. Jon Woods insists that the constitutional restriction on state debt means that Arkansas "can't pull the trigger [on some economic development projects] because our hands are tied."
With all the talk about potential jobs, few are asking an important question: Why does Arkansas' Constitution "tie" the hands of politicians when it comes to state debt? To answer this question, we must take a look at Arkansas' history.
Before the Arkansas Highway Commission was created in 1913, Arkansas road construction was handled at the local level. County governments oversaw city planning and road construction projects, and they planned their spending around their local needs. When the state started receiving federal money, priorities changed, and the Highway Commission was put in charge of managing road construction to meet the guidelines to receive federal aid.
One of the stipulations for receiving federal aid was that the state had to be working to develop road networks for interstate travel. Connecting the country was a federal priority and Arkansas was dangerously close to losing its funding. With federal money on the line, the commission had to drastically increase road creation. In 1915, the Alexander Road Improvement Law allowed local districts to issue bonds to pay for road improvement projects and tax themselves to pay off those bonds.
Between 1920 and 1925, Arkansas collected $91.5 million from state bonds to finance its highway construction projects. By the end of the 1920s, Arkansas had accumulated $160 million of debt from bonds. That is almost $3 billion when adjusted for inflation. The local districts couldn't afford to pay back their debts so the state stepped in, assuming all the debts of its local districts.
Still they couldn't pay, and in 1933, the state admitted defeat, making Arkansas the only state to go bankrupt during the Great Depression.
The state's bankruptcy caused Arkansas residents to lose their trust in government officials' ability to manage debt. Arkansans learned a painful lesson the hard way. When the 1934 general elections rolled around, voters approved Amendment 20 as a safety measure to prevent collecting new debts. Amendment 20 prohibited the state from issuing new bonds against state credit without voter approval.
However, subsequent amendments have slowly chipped away at the restrictions put in place by Amendment 20. For example, Amendment 82, passed in 2004 and amended in 2010, allows the state Legislature to issue bonds for economic development of up to 5 percent of the state's general revenues. This cap on debt currently provides some protection for Arkansas taxpayers, but Issue 3 would remove a major safeguard.
Giving the Arkansas General Assembly unlimited power to issue public debt would be the largest step away from the taxpayer protections of Amendment 20 in our history.
Issue 3 is in large part asking voters whether Arkansas should go back to the pre-1934 situation when there were few limits on the issuing of public debt. Supporters argue that untying the hands of politicians may lead to more jobs. Skeptics question whether the possible benefits are worth the risk of additional state debt.
Can voters trust that current and future legislators will be fiscally responsible with the credit of the state? Or will history repeat itself?
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Terra Aquia is a research assistant with the Arkansas Center for Research in Economics (ACRE) at the University of Central Arkansas.
Editorial on 11/04/2016